Negotin Notes by Angel

NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES

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NOTES FOR WEEK #1 • General characteristics: the order or command to pay; drawer/maker;
drawee
JUNE 12 - 16, 2007
CHECK
INTRODUCTION TO NEGOTIABLE INSTRUMENTS  A bill of exchange drawn on a bank payable on demand
CHECK BILL OF EXCHANGE
PURPOSE OF CODIFICATION
Always drawn upon a bank or May or may not be drawn upon a
 Chief purpose was to produce uniformity in the laws of the different
banker bank
states upon this important subject, so that the citizens of each state
Not necessary to present for Necessary
might know the rules which would be applied to their notes, checks,
and other negotiable paper in every other state in which the law was acceptance
enacted, since it is an absolute impossibility for the commercial Drawn on a deposit Not drawn
purchaser Death of drawer revokes the Does not revoke
 Second purpose was to preserve the law as nearly as possible as it authority of banker to pay
then existed Must be presented for payment May be presented for payment
within a reasonable time after its within a reasonable time after its
LAW EMBRACES SUBTANTIVE AND ADJECTIVE LAW issue last negotiation
MOST COMMON FORMS OF NEGOTIABLE INSTRUMENTS

1. Promissory notes
2. Bills of exchange
TO WHOM INSTRUMENTS MAY BE PAYABLE
3. Checks, which are also bills of exchange, but of a special kind
1. Bearer
2. Order
PROMISSORY NOTE, SECTION 184
3. To a specified person
 “A negotiable promissory note, within the meaning of this act, is an
unconditional promise in writing by one person to another, signed by
WHEN IS IT PAYABLE TO BEARER?
the maker (1), engaging to pay on demand or at a fixed or
1. When it is expressed to be so payable
determinable future time (2), a sum certain in money (3) to order or
2. When it is payable to a person named therein or bearer
to bearer (4). Where a note is drawn to the maker’s own order, it is
not complete until indorsed by them.”
WHEN IS IT PAYABLE TO ORDER?
 Essentially a promise in writing to pay a sum certain in money
1. When it is expressed to be payable to the order of a specified person
 The promise is to pay on demand or on a fixed or determinable future
2. To a specified person or his order
time
 General characteristics: amount; place where contract to pay is
WHEN IS IT PAYABLE TO A SPECIFIED PERSON?
executed; due date; absolute promise to pay something; payable to
 When the instrument is payable to a specified person named in the
order/bearer; payee; maker of the note
instrument and no other
BILL OF EXCHANGE, SECTION 126
PARTIES TO A PROMISSORY NOTE
• “A bill of exchange is an unconditional order in writing addressed by
1. Maker—the person who executes the written promise to pay
one person to another signed by the person giving it (1), requiring the
2. Payee, if the instrument is payable to order—the person in whose
person to whom it is addressed to pay on demand or at a fixed or
favor the promissory note is made payable
determinable future time (2) a sum certain in money (3) to order or to
3. Bearer, if the instrument is payable to bearer
bearer (4).”
PARTIES TO A BILL OF EXCHANGE
BY: MA. ANGELA LEONOR C. AGUINALDO

ATENEO LAW 2D BATCH 2010
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1. Drawer—the person who executes the written order to pay  First delivery of the instrument, complete in form to a person who
2. Payee, if the instrument is payable to order—the person in whose takes it as a holder
favor a bill of exchange is drawn payable
3. Bearer, if the instrument is payable to bearer DELIVERY
4. Acceptor—the drawee who signifies his assent to the order of the  Consists principally of placing the transferee in possession of the
drawer. It is only when he accepts the bill that he becomes a party instrument, but it must be accompanied by the intent to transfer title
thereto and liable thereon.  “every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving
OTHER PARTIES TO NEGOTIATED INSTRUMENTS effect thereto”
1. Indorser and
2. Indorsee, in the case of instruments payable to order NEGOTIATION
3. Persons negotiating by mere delivery • Transfer of an instrument from one person to another as to constitute
4. Persons to whom the instrument is negotiated by delivery the transferee the holder of the instrument
• Mode of transferring an instrument
INDORSER AND INDORSEE • Effect is to make the transferee the holder of the instrument
 When the negotiation is by indorsement completed by delivery, the
parties added are the indorser and indorsee HOW INSTRUMENT PAYABLE TO BEARER IS NEGOTIATED
 Indorser—the one who negotiates the instrument  May be negotiated by mere delivery
 Indorsee—the one to whom the instrument is negotiated by
indorsement HOW INSTRUMENT PAYABLE TO ORDER IS NEGOTIATED
 Must be negotiated by indorsement completed by delivery
WHERE INSTRUMENT IS PAYABLE TO BEARER  Indorsement is necessary to make the transferee the indorsee and
• Where the instrument is payable to bearer, it can be negotiated by delivery is necessary to place the transferee in possession of the
mere delivery without necessity of indorsement instrument
HOLDER INDORSEMENT
 The payee or indorsee of a bill or note, who is in possession of it, or  Legal transaction, effected by the writing of one’s own name on the
the bearer thereof back of the instrument or upon a paper attached thereto, with or
 If the instrument is payable to order, he who is the payee or indorsee without additional words specifying the person to whom or to whose
and who is in possession thereof order the instrument is to be payable whereby one not only transfers
 If the instrument is payable to bearer, he who is in possession thereof one’s full legal title to the paper transferred but likewise enters into an
implied guaranty that the instrument will be duly paid
INCIDENTS IN THE “LIFE” OF A NEGOTIABLE INSTRUMENT
1. Issue SPECIAL INDORSEMENT
2. Negotiation  Specifies the person to whom or to whose order the instrument is to
3. Presentment for acceptance, in certain kinds of bills of exchange be payable
4. Acceptance
5. Dishonor by non-acceptance BLANK INDORSEMENT
6. Presentment for payment  One that doesn’t specify the person to whom or to whose order the
7. Dishonor by non-payment instrument is to be payable
8. Notice of dishonor
9. Payment NEGOTIATION, INDORSEMENT, DELIVERY, COMPARED.
1. Indorsement is merely the first step in the process of negotiating
ISSUE an instrument which is payable to order

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2. Where the instrument is payable to order, neither is delivery

equivalent to negotiation SECONDARY LIABILITY OF DRAWER
3. But where the instrument is payable to bearer, delivery is • By the mere drawing of the instrument, the drawer assumes the
equivalent to negotiation liability stated in Section 61
• The general tenor of the liability of the drawer is that he will pay the
PRESENTMENT FOR ACCEPTANCE bill if the drawee doesn’t accept or pay the bill.
 Exhibiting the bill to the drawee and demanding that he accept it, that • In other words, he is not absolutely required to pay the bill—if the
is, signify his assent to the order or command of the drawer drawee pays, then he is not required to pay. It is only when the
drawee doesn’t pay that he will be required to pay.
ACCEPTANCE
 Signification of the drawee of his assent to the order of the drawer SECONDARY LIABILITY OF INDORSER
 He will pay the instrument if the person primarily liable will not pay.
DISHONOR BY ACCEPTANCE
 Where the bill is presented for acceptance, and acceptance is refused SECONDARY LIABILITY OF ONE NEGOTIATING BY DELIVERY
by the drawee, or cannot be obtained, or where presentment for  By merely delivering an instrument payable to bearer, without saying
acceptance is excused, and the bill is not accepted anything more, the person negotiating by mere delivery assumes the
liability mentioned in Section 65.
PRESENTMENT FOR PAYMENT  Under said section, the general tenor of liability is similar to that of an
 Consists of exhibiting the instrument to the person primarily liable indorser
thereon and demanding payment form him on the date of maturity
IN PROMISSORY NOTES
DISHONOR BY NON-PAYMENT  The maker is primarily liable
 Where the instrument is presented for payment and payment is  Agreement of the maker is that he will pay the instrument according to
refused or cannot be obtained, or where presentment for payment is the tenor
excused and the instrument is overdue and unpaid
FUNCTION OF NEGOTIABLE INSTRUMENTS
NOTICE OF DISHONOR 1. Substitute for money
 When an instrument has been dishonored by non-payment or non- 2. Increase the purchasing medium in circulation
acceptance
PAYMENT BY NEGOTIABLE INSTRUMENTS
DISCHARGE  W/N the giving and taking of a promissory note or bill of exchange is
• An instrument is discharged by payment in due course by or on behalf prima facie absolute payment as in the case of money or merely a
of the principal debtor prima facie conditional payment?
 The delivery of the promissory notes payable to order, or bills of
PARTIES PRIMARILY AND SECONDARILY LIABLE exchange or other mercantile documents shall produce the effect of
• Under the NIL, the person primarily liable on an instrument is the payment only when they have been cashed, or when, through the fault
person who by the terms of the instrument is absolutely required to of the creditor, they have been impaired
pay the same
• All other parties are secondarily liable PRINCIPAL FEATURES OF NEGOTIABLE INSTRUMENTS
1. Negotiability
IN BILLS OF EXCHANGE 2. Accumulation of secondary contracts as they are transferred from one
• The acceptor is the one primarily liable person to another
• He is absolutely required to pay the instrument as he engages that he
will pay it according to the tenor of his acceptance NEGOTIABILITY

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 Attribute or property whereby a bill, note or check passes or may pass person to whom it is addressed to pay on demand or at a fixed or
from hand to hand similar to money, so as to give the holder in due determinable future time a sum certain in money to order or to
course the right to hold the instrument and collect the sums payable bearer.
for himself free from defense.
TYPES OF BILLS OF EXCHANGE
PRIMARY PURPOSE OF NEGOTIABILITY 1. Draft
 To allow bills and notes the effect which money, in the form of 2. Trade acceptance
government bills or notes, supplies in the commercial world 3. Banker’s acceptance
4. Treasury warrants
ACCUMULATION OF SECONDARY CONTRACTS 5. Money orders
 Most important characteristic of negotiable instruments is the 6. Clean bills of exchange
accumulation of secondary contracts which they pick up and carry with 7. Documentary bill of exchange
them as they are negotiated from one person to another 8. D/A bills of exchange
 Advantage: they improve as they pass from hand to hand, as more 9. D/P bills of exchange
debtors are added 10. Time or usance bills
11. Bills in set
NEGOTIABILITY VS. ASSIGNABILITY 12. Inland bills
ASSIGNABILITY NEGOTIABILITY 13. Foreign bills
More comprehensive term and Pertains only to a special class of
pertains to contracts in general contracts—negotiable instruments DRAFT
Subject to the defenses obtaining Takes it free from personal defenses  Common term for all bills of exchange and they are used
among the original parties available among the parties synonymously
It was necessary to allege and Consideration is presumed and need
prove consideration to maintain an not be alleged and proved IN BANK DRAFTS, DRAWER AND DRAWEE BANK ARE LIABLE TO
action on a common law instrument PURCHASER OF DRAFT FOR NOT COMPLYING WITH HIS INSTRUCTIONS
Indorser is not liable on his  The drawee bank acting as “payor” bank is solely liable for acts not
indorsement unless there be done in accordance with the instructions of the drawer bank or of the
presentment for payment at purchaser of the draft
maturity and prompt notice of  The drawee bank has the burden of proving that it didn’t violate
dishonor in case of dishonor
Assignor in good faith doesn’t General indorser is secondarily TRADE ACCEPTANCE
warrant the solvency of the debtor liable for any cause for which the  A bill of exchange payable to order and at a certain maturity, drawn by
unless it has been expressly party primarily liable on a a seller against the purchaser of goods as drawee, for a fixed sum of
stipulated or unless the insolvency negotiable instrument doesn’t or money, showing on its face the acceptance of the purchaser of goods
was prior to the assignment and of cannot pay. and that it has arisen out of a purchase of goods by the acceptor
common knowledge He warrants the solvency of the  A draft drawn by the seller on the purchaser of goods sold and
person primarily liable. The accepted by such purchaser
qualified indorser and the person  States upon its face that the obligation of the acceptor arises out of
negotiating by mere delivery have a purchase of goods from the drawer
limited secondary liability  Arises from credit obligations arising from the sale of goods and must
have a definite maturity
Sec. 126. Bill of exchange, defined.
A bill of exchange is an unconditional order in writing addressed by BANKER’S ACCEPTANCE
one person to another, signed by the person giving it, requiring the

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 Draft of which the acceptor is a bank or banker engaged generally in

the business of granting banker’s acceptance credit CLASSES OF BONDS
 Similar to a trade acceptance 1. Mortgage bonds
 Drawn against the bank instead of the buyer 2. Equipment bonds
3. Collateral trust bonds
TRUST RECEIPT 4. Guaranteed bonds
 The written or printed document signed by the entrustee in favor of 5. Debentures
the entruster containing terms and conditions substantially complying 6. Income bonds
with the provisions of this decree 7. Convertible
 The legal title to the matter entrusted remains in the entruster but the 8. Redeemable
entruster gives to the trustee a form of title which is good and legal 9. Registered bonds
against everybody except the entruster 10. Coupon bonds
 Entrustee—the person having or taking possession of goods,
documents or instruments under a trust receipt transaction, and any Section 1. Form of negotiable instruments.
successor in interest of such person for the purpose or purposes An instrument to be negotiable must conform to the following
specified in the trust receipt agreement requirements:
 Entruster—person holding title over the goods, documents, or
instruments subject of a TRA and any successor-in-interest of such (a) It must be in writing and signed by the maker or drawer;
person (b) Must contain an unconditional promise or order to pay a sum
certain in money;
Sec. 184. Promissory note, defined. (c) Must be payable on demand, or at a fixed or determinable
A negotiable promissory note within the meaning of this Act is an future time;
unconditional promise in writing made by one person to another, (d) Must be payable to order or to bearer; and
signed by the maker, engaging to pay on demand, or at a fixed or (e) Where the instrument is addressed to a drawee, he must be
determinable future time, a sum certain in money to order or to named or otherwise indicated therein with reasonable certainty.
bearer. Where a note is drawn to the maker's own order, it is not
complete until indorsed by him. REQUISITES AS TO A NEGOTIABLE NOTE
1. It must be in writing and signed by the maker
SPECIAL TYPES OF PROMISSORY NOTES 2. It must contain an unconditional promise to pay a sum certain in
1. Certificate of deposit money
2. Bonds 3. It must be payable on demand, or at a fixed or determinable
3. Bank notes future time
4. Due bills 4. It must be payable to order or to bearer
CERTIFICATE OF DEPOSIT REQUISITES AS TO A NEGOTIABLE BILL

 Written acknowledgement by a bank of the receipt of money on 1. It must be in writing and signed by the maker
deposit which the bank promises to pay to the depositor, bearer, or to 2. It must contain an unconditional order to pay a sum certain in
some other person or order money
3. It must be payable on demand, or at a fixed or determinable
BONDS future time
 A promise, under seal to pay money 4. It must be payable to order or to bearer
 More formal in character 5. The drawee must be named or otherwise indicated therein with
 Runs for a longer period of time reasonable certainty
 Issued under different legal circumstances

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THE INSTRUMENT MUST BE IN WRITING SUM PAYABLE MUST BE DEFINITE AND CERTAIN
 There must be a writing of some kind, for if the instrument were not in  The amount of money to be paid must be determinable by inspection
writing, there would be nothing to be negotiated or passed from hand and must be stated plainly on the face of the instrument, and like the
to hand denomination of money, must be started in the body of the instrument
THE INSTRUMENT MUST BE SIGNED BY THE MAKER OR DRAWER SUM MUST BE PAYABLE IN MONEY ONLY
 Full name must be written  Money is the one standard of value in actual business or more stable
 At least the surname should appear and generally, the signature standard of value
usually is by writing the signer’s name  Legal tender—that kind of money which the law compels the creditor
 But, where the name is not signed, the holder must prove that what is to accept in payment of his debt when tendered by the debtor in the
written is intended as a signature of the person sought to be charged right amount
 Commonly, it is found in the lower part of the instrument. It could  But if authorized by law or consent of creditor, cash may be
also be signed anywhere as long as the maker or drawer acknowledges substituted by other means, or may be check
the signature to be his own.  Instrument need not be payable in legal tender
IF A BILL, IT MUST CONTAIN AN ORDER TO PAY INSTRUMENT MUST SPECIFY DENOMINATION

• It is an instrument demanding right  Instruments should express the specific denomination of money when
• Any words which are equivalent to order or which show the drawer’s it is payable in the money of a foreign country in order that the courts
will that the money should be paid, are sufficient to make the may be able to ascertain its equivalent value; otherwise, it is non-
instrument a bill of exchange negotiable
AN INSTRUMENT WITH AN EFFECT OF MERE AUTHORITY TO PAY PAYABLE ON DEMAND OR ON A FIXED OR DETERMINABLE FUTURE TIME
 It is not negotiable because it is not an order to pay  On demand
 “I hereby authorize you to pay P1000 to Pedro Cruz”  At a fixed or determinable future time
EFFECT OF MERE REQUEST TO PAY WHERE NO YEAR IS SPECIFIED

 The instrument is not negotiable as it is not an order to pay but a  Neither payable on demand or on a fixed or determinable future time
mere request to pay  Time of payment is not determinable as the year is not stated
 “Please to let the bearer have P70 and place to my account and you
will oblige” THE INSTRUMENT MUST BE PAYABLE TO ORDER OR TO BEARER
 An instrument is not negotiable unless made payable to a person or
EFFECT OF MERE WORDS OF CIVILITY his order or bearer or unless words of the similar or equivalent import
 The mere fact that it contains words of civility or courtesy doesn’t are used such as assigns or assignees or holder
make it non-negotiable
WHERE PAYABLE TO THE ORDER OF BEARER
WHERE INSTRUMENT IS A NOTE, IT MUST CONTAIN A PROMISE TO PAY  Also negotiable
1. It is enough that words of equivalent meaning are used  This was held to be payable to order
2. The promise is implied from promissory words contained in the  The payee of such an instrument is the bearer and it can only be
instrument negotiated by his indorsement
THE PROMISE OR ORDER TO PAY MUST BE UNCONDITIONAL WHERE PAYABLE TO A CERTAIN PERSON
 It must not be subject to a condition  Where the instrument is payable to a specified person, it’s not payable
 It must be unconditional and absolute to order
 Payable to a certain person or his agent

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 Where payable to “bearer B”

HELD:
THE DRAWEE MUST BE NAMED Considering the nature of the money market transaction, Article 1249 of
 Requirement that refers only to bills of exchange the CC is the applicable provision should be applied. A money market has
 Drawee’s name may be omitted and be filled in under implied authority been defined to be a market dealing in standardized short-term credit
like any other blank instruments where lenders and borrowers don’t deal directly with each
 An acceptance may supply the omission of the designation other but through a middleman or dealer in the open market. In a money
market transaction, the investor is the lender who loans his money to a
IMPORTANCE OF FORMALITIES borrower through a middleman or dealer.
 Essential for the security of the mercantile transactions
 Distinguish the negotiable instrument from the ordinary non- In the case at bar, the transaction is in the nature of a loan. Petitioner
transferrable written contract accepted the check but when he tried to encash it, it was dishonored. The
holder has an immediate recourse against the drawer, and consequently
NECESSITY OF COMPLIANCE WITH PROVISIONS could immediately file an action for the recovery of the value of the check.
 Where the instrument doesn’t conform with the requirements laid Further, in a loan transaction, the obligation to pay a sum certain in money
down in Section 1, then it is not governed by NIL may be paid in money, which is the legal tender or, by the use of a check.
A check is not legal tender, and therefore cannot constitute valid tender of
DETERMINATION OF NEGOTIABILITY payment.
 By the provisions of the NIL, particularly Section 1 thereof
 By considering the whole of the instrument 2 ROMAN CATHOLIC OF MALOLOS V. IAC
 By what appears on the face of the instrument and not elsewhere 191 SCRA 411
SECTION 1: CASE DIGESTS FACTS:

Petitioner was the owner of a parcel of land. It then entered into a
1 CEBU INTERNATIONAL V. CA contract of lease agreement with Robes-Fransisco Realty for the parcel of
316 SCRA 488 land. The agreement was that there would be downpayment plus
installments with interest. Robes-Fransisco was then in default. Knowing
FACTS: that it was in its payment of the installments, it requested for the
Petitioner is a quasi-banking institution involved in money market restructuring of the installment payments but was denied. It then asked
transactions. Alegre invested with petitioner P500,000. Petitioner issued for grace period to pay the same and tendered a check thereafter. Such
then a promissory note, which would mature approximately after a month. was refused and the contract was cancelled.
The note covered for Alegre’s placement plus interest. On the maturity of
the note, petitioner issued a check payable to Alegre, covering the whole HELD:
amount due. It was drawn from petitioner’s current account in BPI. When A check whether a manager’s check or ordinary check is not legal tender
the wife of Alegre tried to deposit the check, the bank dishonored the and an offer of a check in payment of a debt is not valid tender of payment
check. Petitioner was notified of this matter and Alegre demanded the and may be refused receipt by the obligee or creditor. As this is the case,
immediate payment in cash. In turn, petitioner promised to replace the the subsequent consignation of the check didn't operate to discharge
check on the impossible premise that the first issued be returned to them. Robes-Fransisco from its obligation to petitioner.
This prompted Alegre to file a complaint against petitioner and petitioner in
turn, filed a case against BPI for allegedly unlawfully deducting from its 3 BPI EXPRESS CARD CORPORATION V. CA
account counterfeit checks. The trial court decided in favor of Alegre. 292 SCRA 260
ISSUE: W/N NIL is applicable to the money market transaction held FACTS:
between petitioner and Alegre?

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Marasigan was the holder of a BPI credit card. Due to his delinquency in Petitioner was authorized to sell tickets of Northwest Airlines-Japan, but
payment, immediate demand was given by BPI to pay account. Marasigan failed to remit the proceeds. This prompted NWA to file suit against
issued a postdated check. The check was thereafter kept in custiody by petitioner in Tokyo and judgment was rendered in its favor. Thereafter,
BPI and card was temporarily suspended. And on a relevant date, the RTC issued a writ of execution for foreign court’s decision. The
Marasigan after eating in Café Adriatico tried to use his card to pay but it petitioner filed for certiorari, asserting it has already made partial
was dishonored. payments. The CA lowered the amount to be paid and included in its
decision that the amount may be paid in local currency at rate prevailing at
HELD: time of payment.
The issuance of the postdated check was not effective payment on the part
of Marasigan and thus, the bank was justified in suspending temporarily his HELD:
use of the credit card. A check is only a substitute for money and not Under RA 529, stipulations on the satisfaction of obligations in foreign
money, and the delivery of such instrument doesn't itself operate as currency are void. Payments of monetary obligations, subject to certain
payment. exceptions, shall be discharged in the currency which is the legal tender of
the Philippines. But since the law doesn't provide for the rate of exchange
4 DEVELOPMENT BANK OF RIZAL V. SIMA WEI for the payment of foreign currency obligations incurred after its
219 SCRA 736 enactment, jurisprudence held that the exchange rate should be the
prevailing rate at time of payment. This law has been amended, allowing
FACTS: payments for obligations to be made in currency other than Philippine
Sima Wei executed a promissory note in consideration of a loan secured currency but then again, it failed to state what the exchange rate that
from petitioner bank. She was able to pay partially for the loan but failed should be used. This being the case the jurisprudence regarding the use of
to pay for the balance. She then issued two checks to pay the unpaid the exchange rate at time of payment shall be used.
balance but for some unexplainable reason, the checks were not received
by the bank but ended up in the hands of someone else. The bank 6 TIBAJIA V. CA
instituted actions against Sima Wei and other people. The trial court 223 SCRA 163
dismissed the case and the CA affirmed this decision.
FACTS:
HELD: Tan filed a suit against spouses Tibaija. Decision was rendered in her
A negotiable instrument, of which a check is, is not only a written evidence favor. She then filed a motion of execution for the amount deposited and
of a contract right but is also a species of property. Just as a deed to a the cashier of RTC was garnished for the amount deposited therein by the
piece of land must be delivered in order to convey title to the grantee, so spouses. This prompted the spouses to deliver cash and check but Tan
must a negotiable instrument be delivered to the payee in order to refused to accept.
evidence its existence as a binding contract. Section 16 provides that
every contract on a negotiable instrument is incomplete and revocable until HELD:
delivery of the instrument for the purpose of giving effect thereto. Thus, A check is not valid legal tender and the creditor may validly refuse
the payee of the negotiable instrument acquires no interest with respect payment by check.
thereto until its delivery to him. Delivery of an instrument from the drawer
to the payee, there can be no liability on the instrument. Moreover, such 7 CALTEX V. CA
delivery must be intended to give effect to the instrument. 12 SCRA 448
5 CF SHARP & CO., INC. V. NORTHWEST AIRLINES, INC. FACTS:

381 SCRA 314 Security bank issued Certificates of Time Deposits to Angel dela Cruz. The
same were given by Dela Cruz to petitioner in connection to his purchase of
FACTS: fuel products of the latter. On a later date, Dela Cruz approached the bank
manager, communicated the loss of the certificates and requested for a

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reissuance. Upon compliance with some formal requirements, he was "BEARER" stamped on the space provided for the name of the depositor in
issued replacements. Thereafter, he secured a loan from the bank where each CTD. On the wordings of the documents, therefore, the amounts
he assigned the certificates as security. Here comes the petitioner, deposited are repayable to whoever may be the bearer thereof. Thus,
averred that the certificates were not actually lost but were given as petitioner's aforesaid witness merely declared that Angel de la Cruz is the
security for payment for fuel purchases. The bank demanded some proof depositor "insofar as the bank is concerned," but obviously other parties
of the agreement but the petitioner failed to comply. The loan matured not privy to the transaction between them would not be in a position to
and the time deposits were terminated and then applied to the payment of know that the depositor is not the bearer stated in the CTDs. Hence, the
the loan. Petitioner demands the payment of the certificates but to no situation would require any party dealing with the CTDs to go behind the
avail. plain import of what is written thereon to unravel the agreement of the
parties thereto through facts aliunde. This need for resort to extrinsic
SECURITY BANK evidence is what is sought to be avoided by the Negotiable Instruments
AND TRUST COMPANY Law and calls for the application of the elementary rule that the
6778 Ayala Ave., Makati No. 90101 interpretation of obscure words or stipulations in a contract shall not favor
Metro Manila, Philippines the party who caused the obscurity.
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT The next query is whether petitioner can rightfully recover on the CTDs.
Rate 16% This time, the answer is in the negative. The records reveal that Angel de
la Cruz, whom petitioner chose not to implead in this suit for reasons of its
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____ own, delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for
This is to Certify that B E A R E R has deposited in this Bank the sum of petitioner, although the CTDs are bearer instruments, a valid negotiation
PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & thereof for the true purpose and agreement between it and De la Cruz, as
00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. ultimately ascertained, requires both delivery and indorsement. For,
after date, upon presentation and surrender of this certificate, with interest although petitioner seeks to deflect this fact, the CTDs were in reality
at the rate of 16% per cent per annum. delivered to it as a security for De la Cruz' purchases of its fuel products.
Any doubt as to whether the CTDs were delivered as payment for the fuel
(Sgd. Illegible) (Sgd. Illegible) products or as a security has been dissipated and resolved in favor of the
latter by petitioner's own authorized and responsible representative
—————————— ——————————— himself.
AUTHORIZED SIGNATURES In a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These
HELD: certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
CTDs are negotiable instruments. The documents provide that the amounts guarantee his purchases of fuel products." This admission is conclusive
deposited shall be repayable to the depositor. And who, according to the upon petitioner, its protestations notwithstanding. Under the doctrine of
document, is the depositor? It is the "bearer." The documents do not say estoppel, an admission or representation is rendered conclusive upon the
that the depositor is Angel de la Cruz and that the amounts deposited are person making it, and cannot be denied or disproved as against the person
repayable specifically to him. Rather, the amounts are to be repayable to relying thereon
the bearer of the documents or, for that matter, whosoever may be the
bearer at the time of presentment. 8 TRADERS ROYAL BANK V. CA
269 SCRA 15
If it was really the intention of respondent bank to pay the amount to
Angel de la Cruz only, it could have with facility so expressed that fact in FACTS:
clear and categorical terms in the documents, instead of having the word

Page 10 of 190
Filriters through a Detached Agreement transferred ownership to A promissory note was issued by petitioner together with 2 others jointly
Philfinance a Central Bank Certificate of Indebtedness. It was only through and severally, to make them liable to PBC. Thereafter was a default on the
one of its officers by which the CBCI was conveyed without authorization payment of the note. PBC proceeded against Inciong and in the action filed
from the company. Petitioner and Philfinance later entered into a by the bank, the court decided in its favor.
Repurchase agreement, on which petitioner bought the CBCI from
Philfinance. The latter agreed to repurchase the CBCI but failed to do so. HELD:
When the petitioner tried to have it registered in its name in the CB, the Where the promissory note expressly states that the three signatures
latter didn't want to recognize the transfer. therein are jointly and severally liable, any one or some or all of them may
be proceeded against for the entire obligation—the choice is left to the
HELD: solidary creditor to determine against whom he will enforce collection.
The CBCI is not a negotiable instrument. The instrument provides for a
promise to pay the registered owner Filriters. Very clearly, the instrument 10 FIRESTONE TIRE V. CA
was only payable to Filriters. It lacked the words of negotiability which 353 SCRA 601
should have served as an expression of the consent that the instrument
may be transferred by negotiation. FACTS:
Fojas Arca and Firestone Tire entered into a franchising agreement wherein
The language of negotiability which characterize a negotiable paper as a the former had the privilege to purchase on credit the latter’s products. In
credit instrument is its freedom to circulate as a substitute for money. paying for these products, the former could pay through special withdrawal
Hence, freedom of negotiability is the touchstone relating to the protection slips. In turn, Firestone would deposit these slips with Citibank. Citibank
of holders in due course, and the freedom of negotiability is the foundation would then honor and pay the slips. Citibank automatically credits the
for the protection, which the law throws around a holder in due course. account of Firestone then merely waited for the same to be honored and
This freedom in negotiability is totally absent in a certificate of paid by Luzon Development Bank. As this was the circumstances,
indebtedness as it merely acknowledges to pay a sum of money to a Firestone believed in the sufficient funding of the slips until there was a
specified person or entity for a period of time. time that Citibank informed it that one of the slips was dishonored. It
wrote then a demand letter to Fojas Arca for the payment and damages
The transfer of the instrument from Philfinance to TRB was merely an but the latter refused to pay, prompting Firestone to file an action against
assignment, and is not governed by the negotiable instruments law. The it.
pertinent question then is—was the transfer of the CBCI from Filriters to
Philfinance and subsequently from Philfinance to TRB, in accord with HELD:
existing law, so as to entitle TRB to have the CBCI registered in its name The withdrawal slips, at the outset, are non-negotiable. Hence, the rule on
with the Central Bank? Clearly shown in the record is the fact that immediate notice of dishonor is non-applicable to the case at hand. Thus,
Philfinance’s title over CBCI is defective since it acquired the instrument the bank was under no obligation to give immediate notice that it wouldn't
from Filriters fictitiously. Although the deed of assignment stated that the make payment on the subject withdrawal slips. Citibank should have
transfer was for ‘value received‘, there was really no consideration known that withdrawal slips are not negotiable instruments. It couldn't
involved. What happened was Philfinance merely borrowed CBCI from expect then the slips be treated like checks by other entities. Payment or
Filriters, a sister corporation. Thus, for lack of any consideration, the notice of dishonor from respondent bank couldn't be expected immediately
assignment made is a complete nullity. Furthermore, the transfer wasn't in in contrast to the situation involving checks.
conformity with the regulations set by the CB. Giving more credence to
rule that there was no valid transfer or assignment to petitioner. In the case at bar, Citibank relied on the fact that LDB honored and paid
the withdrawal slips which made it automatically credit the account of
9 INCIONG V. CA Firestone with the amount of the subject withdrawal slips then merely
257 SCRA 578 waited for LDB to honor and pay the same. It bears stressing though that
Citibank couldn't have missed the non-negotiable character of the slips.
FACTS: The essence of negotiability which characterizes a negotiable paper as a

Page 11 of 190
credit instrument lies in its freedom to be a substitute for money. The this however, the jewelry was redeemed by a Tomasa de Leon who
withdrawal slips in question lacked this character. presented the pawnshop ticket.
The withdrawal slips deposited were not checks as Firestone admits and HELD:
Citibank generally was not bound to accept the withdrawal slips as a valid Having been informed by the petitioner and the police that jewelry pawned
mode of deposit. Nonetheless, Citibank erroneously accepted the same as to it was either stolen or involved in an embezzlement of the proceeds of
such and thus, must bear the risks attendant to the acceptance of the the pledge, pawnbroker became duty bound to hold the things pledged and
instruments. Firestone and Citibank could not now shift the risk to LDB for to give notice to the petitioner and authorities of any effort to redeem
their committed mistake. them. Such a duty was imposed by Article 21 of the CC. The circumstance
that the pawn ticket stated that the pawn was redeemable by the bearer,
11 SESBRENO V. CA didn’t dissolve this duty. The pawn ticket wasn’t a negotiable instrument
222 SCRA 466 under the NIL, nor was it a negotiable document of title under Article 1507
of the CC.
FACTS:
Petitioner made a placement with Philfinance. The latter delivered to him Sec. 2. What constitutes certainty as to sum.
documents, some of which was a promissory note from Delta Motors and a The sum payable is a sum certain within the meaning of this Act,
post-dated check. The post-dated checks were dishonored. This prompted although it is to be paid:
petitioner to ask for the promissory note from DMC and it was discovered
that the note issued by DMC was marked as non-negotiable. As Sesbreno (a) with interest; or
failed to recover his money, he filed case against DMC and Philfinance. (b) by stated installments; or
(c) by stated installments, with a provision that, upon default in
HELD: payment of any installment or of interest, the whole shall become
The non-negotiability of the instrument doesn’t mean that it is non- due; or
assignable or transferable. It may still be assigned or transferred in whole (d) with exchange, whether at a fixed rate or at the current rate; or
or in part, even without the consent of the promissory note, since consent (e) with costs of collection or an attorney's fee, in case payment
is not necessary for the validity of the assignment. shall not be made at maturity.
In assignment, the assignee is merely placed in the position of the WITH INTEREST
assignors and acquires the instrument subject to all the defenses that  The fact that the sum payable is to be paid with interest doesn’t render
might have been set up against the original payee. the sum uncertain
 Amount can easily be computed
12 SERRANO V. CA  When interest is stipulated but not specified, the legal interest shall be
196 SCRA 107 used
 Where there is no stipulation, the legal rate shall be paid when the
FACTS: debtor incurs delay
Serrano bought some jewelry from Ribaya. Due to need of finances, she  Interest due shall earn legal interest from the time it is judicially
decided to have the jewelry pawned. She instructed her secretary to do so demaned, although the instrument may be silent upon this point
for her, which the secretary did but absconded after receiving the
proceeds. It is to be noted that the pawnshop ticket indicated that the ESCALATION AND DEESCALATION CLAUSE—FORMER VALID IF
jewelry was redeemable “by presentation by the bearer.” Afterwards, ACCOMPANIED BY THE LATTER
there was a lead on where the jewelry was pawned. An investigation was  May stipulate that the rate of interest agreed upon may be increased
done to verify the suspicion. The jewelry was to be sold in a public auction in the event that the applicable maximum rate of interest is increased
then. The petitioner and police authorities informed the pawnshop owner by law or by the MB
not to sell the jewelry as she was the rightful owner thereof. Despite of

Page 12 of 190
 Deescalation clause—stipulation in the agreement that the rate of SECTION 2: CASE DIGESTS
interest agreed upon shall be reduced if the maximum rate of interest
is decreased by law or by the MB 13 MEDEL V. CA
299 SCRA 481
BY STATED INSTALLMENTS
1. Must be stated FACTS:
2. The maturity of each installment must be fixed or determinable— Four loans were involved in this case.
required in order to comply with the requisite that the instrument, if
not payable on demand, must be payable on a fixed or determinable The first loan was secured by the spouses Medel from Gonzales in the
future time amount of P50,000 wherein P3,000 was withheld by the latter as advance
interest. This was secured by a P/N.
BY STATED INSTALLMENTS, WITH ACCELERATION CLAUSE
 Acceleration clause—“upon default in the payment of any installment, The second loan obtained was for P90,000. The spouses only received
the whole sum payable shall become due” P84,000.
 It hastens the payment of the whole note
The third loan was for P300,000 and this was secured by a real estate
WITH EXCHANGE mortgage.
 While the rate of exchange is not always the same and while it is
technically true that the resort must be had to extrinsic evidence to The spouses failed to pay for the aforementioned three loans. This was
ascertain what it is, yet the current rate of exchange between two consolidated into one loan in the amount of P500,000. An additional
places at a particular date is a matter of common commercial P60,000 was loaned to make the payable P500,000. This was covered with
knowledge, or at least easily ascertained by anyone so that the parties a promissory note containing an accelaration clause. Again the spouses
can always, without difficulty, ascertain the exact amount necessary to failed to pay.
discharge the paper
 Applies only to instruments drawn in one country and payable in The appellate court modified the interest to be paid by saying that that the
another interest should be 5.5% per month.
EXCHANGE HELD:
 Difference in value of the same amount of money in different countries The interest was exorbitant, iniquitous, and unconscionable and hence, it
 Current rate or fixed rate contrary to morals, if not the law.
WITH COSTS AND ATTORNEY’S FEES The interest should be lowered down.
 An instrument may thus stipulate that costs of collection and
attorney’s fees shall be paid by the debtor in addition to the principal 14 RADIOWEALTH FINANCE V. INTERNATIONAL CORPORATE
in case the instrument shall not be paid in maturity BANK
 Although the stipulation will make the sum after maturity uncertain, it 182 SCRA 862
will not affect the certainty of the sum payable at maturity and
therefore, will not affect the negotiability of the instrument in which it FACTS:
is stipulated The petitioner entered into a Credit Facilities agreement with Interbank.
This is secured by a promissory note, trust receipts, security
arrangements, which included provisions on payment of attorney’s fees and
NOTES FOR WEEK 2
costs of collection in case of default. The petitioner failed to pay. A
JUNE 18 - 23, 2007 compromise agreement was entered into by the parties but this agreement

Page 13 of 190
failed to include the attorney’s fees and costs of collection. The trial court
reduced the percentage of attorney’s fees in its decision. But an order or promise to pay out of a particular fund is not
unconditional.
HELD:
The courts may modify the attorney’s fees previously agreed upon where APPLICATION OF SECTION
the amount appears to be unconscionable and unreasonable. For the law  Whether or not the indication of a particular fund or particular account,
recognizes the validity of stipulations included in documents such as or the statement of the transaction which gives rise to the instrument,
negotiable instruments and mortgages with respect. The fees in this case would make the promise or order conditional
are reasonable and fair.
INDICATION OF A PARTICULAR FUND
15 BACHRACH V. GOLINGCO  First case, the particular fund is not the direct source of the payment,
39 PHIL 139 only the source of reimbursement
 Unconditional—drawee pays the payee from his own funds and
FACTS: afterwards, the drawee pays himself from the particular fund indicated
Bachrach sold a truck to Golingco, which was secured by a promissory note
and a chattel mortgage on the truck. The promissory note provided that  But an order or promise to pay out of a particular fund is not
there would be payment of 25% attorney’s fees. unconditional—particular fund is the direct source of payment
 Conditional—where the payment to the payee is directly from the
HELD: funds indicated, the payment is the subject to the condition that the
It may lawfully be stipulated in favor of the creditor that in the event that it funds indicated are sufficient
becomes necessary, by reason of the delinquency of the debtor, to employ
counsel to enforce payment of the obligation, a reasonable attorney’s fee PARTICULAR ACCOUNT TO BE DEBITED
shall be paid by the debtor, in addition to amount due of principal and  The instrument is to be paid first and afterwards, the particular
interest. The legality of this stipulation, when annexed to the negotiable account indicated will be debited
instrument, is recognized by the NIL.  The payment is not subject to the sufficiency or adequacy of the
particular account to be debited
The courts have the power to limit the amount recoverable under a special
provision in a promissory note, whereby the debtor obligates himself to pay STATEMENT OF TRANSACTION
a specified amount, or a certain per centum of the principal debt, in  Instruments are not issued without any transaction upon which they
satisfaction of attorney’s fees for which the creditor would become liable in are based
suing upon the note.  Generally negotiable but a statement of transaction will render the
instrument non-negotiable where the promise or order to pay is made
*Normally, if there is absence of any agreement as to attorney’s fees, then subject to the conditions and terms of the transactions stated, then
the court would only grant nominal amounts. the instrument is rendered non-negotiable
Sec. 3. When promise is unconditional. AS PER CONTRACT NOTES

An unqualified order or promise to pay is unconditional within the  The appearance of words “as per contract” on the face of the
meaning of this Act though coupled with: instruments in any position doesn’t affect the negotiability of the
instrument
(a) An indication of a particular fund out of which reimbursement is
to be made or a particular account to be debited with the amount; CHATTEL NOTES
or  A promissory note given for a chattel and stipulating that the title to
(b) A statement of the transaction which gives rise to the the chattel shall remain in the vendor-payee until the note is paid, is
instrument. not conditional

Page 14 of 190
Gomez opened an account with Golden Savings bank and deposited 38

REFERENCE TO MORTGAGES treasury warrants. All these warrants were indorsed by the cashier of
 Provisions in the mortgage doesn’t affect the negotiability of the Golden Savings, and deposited it to the savings account in a Metrobank
instrument it secures branch. They were sent later on for clearing by the branch office to the
 Where a note otherwise negotiable contains the words “this note is principal office of Metrobank, which forwarded them to the Bureau of
secured by a mortgage” and the mortgage contains clauses promising Treasury for special clearing. On persistent inquiries on whether the
to do many acts other than the payment of money, it was held that warrants have been cleared, the branch manager allowed withdrawal of the
the note is not rendered non-negotiable warrants, only to find out later on that the treasury warrants have been
dishonored.
WHEN REFERENCE TO A MORTGAGE RENDERS INSTRUMENT NON-
NEGOTIABLE HELD:
 When there is uncertainty in amount or when such provisions become The treasury warrants were not negotiable instruments. Clearly, it is
part of the note, even though they aren’t in the note itself, the indicated that it was non-negotiable and of equal significance is the
instrument is also rendered non-negotiable indication that they are payable from a particular fund, Fund 501. This
indication as the source of payment to be made on the treasury warrant
SECTION 3: CASE DIGESTS makes the promise to pay conditional and the warrants themselves non-
negotiable.
16 ABUBAKAR V. AUDITOR GENERAL
81 PHIL. 359 Metrobank then cannot contend that by indorsing the warrants in general,
GS assumed that they were genuine and in all respects what they purport
FACTS: it to be, in accordance to Section 66 of the NIL. The simple reason is that
The auditor general refuses to authorize the payment of the treasury the law isn’t applicable to the non-negotiable treasury warrants. The
warrant issued in the name of Placido Urbanes, now in the hands of indorsement was made for the purpose of merely depositing them with
Benjamin Abubakar. The auditor general refuses to do so because, first, Metrobank for clearing. It was in fact Metrobank which stamped on the
the money available for redemption of treasury warrants was appropriated back of the warrants: “All prior indorsements and/or lack of endorsements
by law and the subject warrant doesn’t fall within the purview of the law; guaranteed…”
second, one of the requirements was not complied with, which is it must be
sworn that the holders of the warrant covering payment or replenishment Sec. 4. Determinable future time; what constitutes. - An instrument
of cash advances for official expenditures received them in payment of is payable at a determinable future time, within the meaning of this
definite government obligations. Act, which is expressed to be payable:
HELD: (a) At a fixed period after date or sight; or

Petitioner holds that he is a holder in good faith and for value of a
negotiable instrument and is entitled to the rights and privileges of a holder (b) On or before a fixed or determinable future time specified
in due course, free from defenses. But this treasury warrant is within the therein; or
scope of the NIL. For one thing, the document bearing on its face the
words “payable from the appropriation for food administration”, is actually (c) On or at a fixed period after the occurrence of a specified
an order for payment out of a particular fund, and is not unconditional, and event, which is certain to happen, though the time of happening be
doesn’t fulfill one of the essential requirements of a negotiable instrument. uncertain.
17 METROPOLITAN BANK V. CA An instrument payable upon a contingency is not negotiable, and

194 SCRA 169 the happening of the event does not cure the defect.
FACTS: “AFTER SIGHT”

Page 15 of 190
 After the drawee has seen the instrument upon presentment for b. It is rendered non-negotiable when the whole condition is
acceptance lodged to the holder—middle ground is so long as the basis is
dependent on factors not within the control of the holder,
I promise to pay B or his order P100 ten days after then it would still be negotiable
sight. WORD USED IS AFTER
Signed A  The word used in the law is “after” and not before
ACCELARATION NOTES Sec. 5. Additional provisions not affecting negotiability. - An

 There are certain notes which contain acceleration provisions instrument which contains an order or promise to do any act in
 Make it possible for the maker to pay the instrument at an earlier date addition to the payment of money is not negotiable. But the
or make it possible for the holder to require payment of the instrument negotiable character of an instrument otherwise negotiable is not
at an earlier date affected by a provision which:
(a) authorizes the sale of collateral securities in case the

I promise to pay B or order P100 on or before July 1, instrument be not paid at maturity; or
2007.
Signed A (b) authorizes a confession of judgment if the instrument be
not paid at maturity; or
*Type of acceleration note wherein the option to accelerate belongs to the
maker, in the above case is A. (c) waives the benefit of any law intended for the advantage or
protection of the obligor; or
EXAMPLES OR ILLUSTRATIONS OF ACCELARATION NOTES
1. That contain acceleration clauses on the maker’s default in payment of (d) gives the holder an election to require something to be done
installments or of interest, or on the happening of an extrinsic event in lieu of payment of money.
2. Or contain, in notes secured by collateral, a provision that the maker
shall supply additional collateral in case of depreciation in the value of But nothing in this section shall validate any provision or
the original deposit, with the holder’s right to declare the note due stipulation otherwise illegal.
immediately on failure to make good the depreciation
a. Non-negotiable—time for payment becomes uncertain and GENERAL RULE AS TO THE ADDITIONAL ACT
indefinite  The general rule is that an instrument must not contain an order or
b. It doesn’t render it non-negotiable—that from the standpoint promise to do any act in addition to the payment of money.
of expediency as encouraging circulation and of business Otherwise, the instrument wouldn’t be negotiable.
custom on account of their common acceptance by the
commercial world, such clauses should be interpreted as not FOUR EXCEPTIONS TO THE GENERAL RULE
affecting negotiability 1. SALE OF COLLATERAL SECURITIES if the instrument be not paid at
3. Or contain provisions for acceleration when holder deems himself maturity
insecure 2. Authorizes CONFESSION OF JUDGMENT if the instrument be not paid
a. It is rendered non-negotiable where it is payable at a fixed at maturity
and future time, but with an option on the part of the holder 3. WAIVER OF BENEFIT OF LAW for the protection and benefit of the
to declare it due and demandable before maturity whenever obligor
he deems it insecure but to hold them non-negotiable is a 4. Gives the HOLDER an election to require something to be done in lieu
spurious construction of the Act of payment of money

Page 16 of 190
PROMISE TO FURNISH ADDITIONAL SECURITY In the Philippines, a confession of judgment is considered void as it is
 A promise of the maker to render additional collateral will render the against public policy--
note non-negotiable, as that would be an additional act to the promise 1. Because they enlarge the field for fraud
to pay money 2. Because under this treatment, the promissory bargains away his right
 However, they are to be distinguished from those instruments in which to a day in court
the holder may demand collateral, and failure to furnish it accelerates 3. Because the effect of the instrument is to strike down the right to
the instrument which are clearly negotiable, but merely accelerable on appeal accorded by statute
the non-performance of an optional act
WAIVER OF BENEFIT
SALE OF COLLATERAL SECURITIES  Waives the benefit of any law intended for the advantage and
 The law gives exceptions to the general rule that “an instrument which protection of the obligor
contains an order or promise to do any act in addition to the payment  Examples: presentment for payment, notice of dishonor, protest
of money is non-negotiable”
 Sometimes, the obligation arising from the transaction which gives rise ELECTION OF HOLDER TO REQUIRE SOME OTHER ACT
to the instrument is secured by a mortgage or pledge  Fourth exception to the rule
 The additional act to be performed is to be executed after the date of  Even if there is an additional act, the instrument still remains to be
maturity, when the instrument c eases to be negotiable in the full negotiable provided that the right to choose between payment of
commercial sense money or the performance of the additional act is in the hands of the
 Before date of maturity, however, the sale of collateral securities holder
would render the instrument non-negotiable
CASE DIGESTS: SECTION 5
CONFESSION OF JUDGMENT
 Must be after the date of maturity 18 NATIONAL BANK V. MANILA OIL REFINING
 Second exception to the rule 43 PHIL 444
TWO CLASSES OF CONFESSION OF JUDGMENT FACTS:

1. Cognovit actionem—a written confession of an action by the Manila Oil has issued a promissory note in favor of National Bank which
defendant, subscribed but not sealed, and irrevocably authorizing any included a provision on a confession of judgment in case of failure to pay
attorney of any court of record to confess judgment and issue obligation. Indeed, Manila Oil has failed to pay on demand. This prompted
execution usually for the sum named. It is given in order to save the bank to file a case in court, wherein an attorney associated with them
expense and differs from a warrant of attorney, which is given to an entered his appearance for the defendant. To this the defendant objected.
expressly designated attorney before the commencement of any action
and is under seal. HELD:
2. Confession relicta verificatione—confession of judgment made after Warrants of attorney to confess judgment aren’t authorized nor
plea is pleaded contemplated by our law. Provisions in notes authorizing attorneys to
appear and confess judgments against makers should not be recognized in
WARRANT OF ATTORNEY our jurisdiction by implication and should only be considered as valid when
 Instrument in writing addressed to one or more attorneys named given express legislative sanction.
therein, authorizing them, generally to appear in court, or in some
specified court on behalf of the person giving it, and to confess ATTY. MERCADO’S QUESTIONS:
judgment in favor of some particular person named therein in an 1. What are the arguments for the validity of a confession of judgment?
action for debt 2. One of the arguments is that the NIL acknowledges the validity of a
stipulation for a confession of judgment. Is this sufficient? The
EFFECT OF CONFESSION OF JUDGMENT IN THE PHILIPPINES answer is no.

Page 17 of 190
(c) does not specify the place where it is drawn or the place
19 TRADERS INSURANCE V. DY ENG BIOK where it is payable; or
104 PHIL 806
(d) bears a seal; or
FACTS:
Dy Eng Giok was a provincial sales agent of distillery corporation, with the (e) designates a particular kind of current money in which
responsibility of remitting sales proceeds to the principal corporation. He payment is to be made.
has a running balance and to satisfy payment, a surety bond was issued
with petitioner as guarantor, whereby they bound themselves liable to the But nothing in this section shall alter or repeal any statute
distillery corporation. requiring in certain cases the nature of the consideration to be
stated in the instrument.
More purchases was made by Dy Eng Giok and he was able to pay for
these additional purchases. Nonetheless, the payment was first applied to EFFECT OF OMISSION OF DATE
his prior payables. A remaining balance still is unpaid. Thus, an action  Even where the instrument is not dated, still the instrument is not
was filed against sales agent and surety company. Judgment was rendered non-negotiable
rendered in favor of the corporation.  There are however instances, wherein the date is needed for the
instrument to become negotiable
HELD:  When are these instances?
The remittances of Dy Eng Giok should first be applied to the obligation o When it is payable in a period after date or after sight
first contracted by him and covered by the surety agreement. First, in the o When it is allowed to write the date… (Section 13)
absence of express stipulation, a guaranty or suretyship operates
prospectively and not retroactively. It only secures the debts contracted ATTY. MERCADO: “WHEN IS DATING REQUIRED TO COMPLETE THE
after the guaranty takes effect. To apply the payment to the obligations INSTRUMENT?”
contracted before the guaranty would make the surety answer for debts
outside the guaranty. The surety agreement didn't guarantee the payment EFFECT OF OMISSION OF VALUE
of any outstanding balance due from the principal debtor but only he would  Usually, what is stated in the instrument is that it is being used for
turn out the sales proceeds to the Distileria and this he has done, since his “value received” without specifying what that value is
remittances exceeded the value of the sales during the period of the  Nevertheless, the absence of value given, doesn’t render the
guaranty. instrument non-negotiable
Second, since the Dy Eng Biok’s obligations prior to the guaranty were not PARTICULAR KIND OF MONEY
covered, and absent any express stipulation, any prior payment made  Even if the money in which the instrument is to be payable is not legal
should be applied to the debts that were guaranteed since they are to be tender, provided that it is current money or foreign money which has a
regarded as the more onerous debts. fixed value in relation to the money in the country in which the
instrument is payable, still the negotiability of the instrument is not
Sec. 6. Omissions; seal; particular money. - The validity and affected, as the instrument still is considered payable in money
negotiable character of an instrument are not affected by the fact
that: Sec. 7. When payable on demand. - An instrument is payable on
demand:
(a) it is not dated; or
(a) When it is so expressed to be payable on demand, or at
(b) does not specify the value given, or that any value had been sight, or on presentation; or
given therefor; or
(b) In which no time for payment is expressed.

Page 18 of 190
 Pay the payee or the person designated by the payee

Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or NECESSITY OF NAMING THE PAYEE
indorsing it, payable on demand.  The law requires that the payee must be named or otherwise indicated
with reasonable certainty
EXPRESSED TO BE PAYABLE ON DEMAND  Must be a person in being, whether natural or legal, and ascertained at
 An instrument is payable on demand where it is expressed to be the time of issue
payable on demand, on sight, or on presentation  If there is no named payee, where the instrument is payable to order,
 It is payable on demand also when no date of payment is specified no one could indorse the instrument. Consequently, it is useless to
 It is payable on demand when the time of payment is left blank or consider it as negotiable.
unfilled
WHERE THE BLANK FOR NAME OF PAYEE UNFILLED
INSTRUMENT ON DEMAND ONLY AS BETWEEN THE PARTIES  Not payable to order because the payee is not named neither is he
 That after the date of maturity, the instrument can no longer be designated with reasonable certainty
negotiated as to make the parties who acquire the instrument after the
date of maturity holders in due course because they become holders Pay to Y or order the amount of P100.
thereof with notice that it is already overdue, as this can be Sgd. A
determined from the face of the instrument itself
To: X
Sec. 8. When payable to order. - The instrument is payable to order
where it is drawn payable to the order of a specified person or to
him or his order. It may be drawn payable to the order of: Pay to the order of the President of Ateneo de Manila University on
June 20, 2010.
(a) A payee who is not maker, drawer, or drawee; or Sgd. A
(b) The drawer or maker; or To: X Corporation
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or CASE DIGESTS: SECTION 8
(f) The holder of an office for the time being.
20 SALAS V. CA
Where the instrument is payable to order, the payee must be 181 SCRA 296
named or otherwise indicated therein with reasonable certainty.
FACTS:
WORDS OF NEGOTIABILITY Petitioner bought a car from Viologo Motor Sales Company, which was
 Among others, for an instrument to be negotiable, it should contain secured by a promissory note, which was later on indorsed to Filinvest
words of negotiability Finance, which financed the transaction. Petitioner later on defaulted in
 There are only 2 ways by which an instrument and the bill or note is to her installment payments, allegedly due to the fraud imputed by VMS in
be paid to the person designated in the instrument or to any person to selling her a different vehicle from what was agreed upon. This default in
whom he has indorsed or delivered the same payment prompted Filinvest Finance to initiate a case against petitioner.
 Without the words “or order” or “to order of”, the instrument is The trial court decided in favor of Filinvest, to which the appellate court
payable only to the person designated therein and therefore, is non- upheld by increasing the amount to be paid.
negotiable
MEANING OF THE PHRASE “TO ORDER”

Page 19 of 190
It is the contention of petitioner that since the agreement between her and Thereafter, a collection suit was filed against petitioner for the payment of
the motor company was inexistent, none had been assigned in favor of the promissory note.
private respondent.
HELD:
HELD: It is patent that the seller is liable for the breach in warranty against the
Petitioner’s liability on the promissory note, the due execution and petitioner. This liability as a general rule extends to the corporation to
genuineness of which she never denied under oath, is under the foregoing whom it assigned its rights and interests unless the assignee is a holder in
factual milieu, as inevitable as it is clearly established. due course of the promissory note in question, assuming the note is
negotiable, in which case, the latter’s rights are based on a negotiable
The records reveal that involved herein is not a simple case of assignment instrument and assuming further that the petitioner’s defense may not
of credit as petitioner would have it appear, where the assignee merely prevail against it.
steps into the shoes of, is open to all defenses available against and can
enforce payment only to the same extent as, the assignor-vendor. The promissory note in question is not a negotiable instrument. The
promissory note in question lacks the so-called words of negotiability. And
The instrument to be negotiable must contain the so-called words of as such, it follows that the respondent can never be a holder in due course
negotiability. There are only 2 ways for an instrument to be payable to but remains merely an assignee of the note in question. Thus, the
order. There must always be a specified person named in the instrument petitioner may raise against the respondents all defenses available to it
and the bill or note is to be paid to the person designated in the instrument against the seller.
or to any person to whom he has indorsed and delivered the same.
Without the words “or order” or “to the order of”, the instrument is payable 22 GSIS V. CA
only to the person designated therein and is thus non-negotiable. Any 170 SCRA 533
subsequent purchaser thereof will not enjoy the advantages of being a
holder in due course but will merely step into the shoes of the person FACTS:
designated in the instrument and will thus be open to the defenses Two deeds of mortgages were issued by spouses Racho in favor of GSIS as
available against the latter. security for two loans obtained by them. They also executed a promissory
note. Due to the failure to comply with the terms of the mortgage, the
In the case at bar, the promissory notes is earmarked with negotiability mortgages were extrajudicially foreclosed. The foreclosure was being
and Filinvest is a holder in due course. assailed by the spouses as they alleged that the mortgage contracts were
signed not as guarantees or sureties but merely gave their common
21 CONSOLIDATED PLYWOOD V. IFC property for the sole benefit of the other spouses. Both sides of the case
149 SCRA 448 used the provisions on accommodation parties in the NIL.
FACTS: The trial court dismissed the action but this was reversed by the appellate
Petitioner bought from Atlantic Gulf and Pacific Company, through its sister court.
company Industrial Products Marketing, two used tractors. Petitioner was
issued a sales invoice for the two used tractors. At the same time, the HELD:
deed of sale with chattel mortgage with promissory note was issued. Both parties rely on the NIL but this is misplaced. The promissory note
Simultaneously, the seller assigned the deed of sale with chattel mortgage and the deeds of mortgage are not negotiable instruments as they lack the
and promissory note to respondent. The used tractors were then delivered fourth requisite which is it must be payable to order or bearer.
but barely 14 days after, the tractors broke down. The seller sent
mechanics but the tractors were not repaired accordingly as they were no 23 PECO V. SORIANO
longer serviceable. Petitioner would delay the payments on the promissory 39 SCRA 587
notes until the seller completes its obligation under the warranty.
FACTS:

Page 20 of 190
Montinola purchased money orders from the postal office. He issued a Equitable is not liable to Nell. Nell should bear the loss as it was through
personal check to pay for the money orders and since it is irregular to have its own acts, which put it into the power of Casals and Casville Enterprises
checks as payments, he was advised to see the Chief of the Money Order to perpetuate the fraud against it.
Division. He didn’t do so but left the office with the money orders and the
check. A notice was thereafter issued to all post offices as well as the Bank The check wasn’t initially non-negotiable. Neither was it cross-checked.
of America, about the irregularly issued money orders and the order not to The rubber-stamping transversally on the face of the check was only made
accept such orders. the bank teller in accordance with customary bank practice, and not by Nell
as the drawer of the check, and simply meant that thereafter the same
Plaintiff was one of those who received the subject money orders and check could no longer be negotiated.
encashed it with the Bank of America. At first, it was given the money but
later on, his account was debited in pursuance of the letter given by the The payee was not indicated with reasonable certainty in contravention of
Chief. Section 8. As worded, it could be accepted as deposit to the account of the
party named therein after the symbols of A/C, or payable to the bank as
HELD: trustee, or as an agent, for Casville with the latter being the ultimate
Postal money orders are not negotiable instruments. In establishing and beneficiary.
operating a postal money order system, the government is not engaged in
commercial transactions but merely exercises a governmental power for Sec. 9. When payable to bearer. - The instrument is payable to
the public benefit. Moreover, some restrictions imposed money orders by bearer:
postal laws and regulations are inconsistent with the character of
negotiable instruments. (a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
24 EQUITABLE BANKING V. IAC (c) When it is payable to the order of a fictitious or non-existing
161 SCRA 518 person, and such fact was known to the person making it so
payable; or
FACTS: (d) When the name of the payee does not purport to be the
Nell Company issued a check to help Casals and Casville Enterprises obtain name of any person; or
a letter of credit from Equitable Banking in connection with equipment, a (e) When the only or last indorsement is an indorsement in
garrett skidder, which Casals and Casville were buying from Nell. Nell blank.
indicated the payee as follows “EQUITABLE BANKING CORPORATION A/C
CASVILLE ENTERPRISES INC.” PAYABLE TO THE ORDER OF A FICTITIOUS OR NON-EXISTENT PERSON
1. The payee named must be fictitious or non-existent
Casals deposited the check with the bank and the bank teller accepted the 2. The one making the instrument so payable must know him to be
same and in accordance with customary bank practice, stamped in the fictitious or non-existing
check the words “non-negotiable”. The amount was withdrawn after the
deposit. FICTITIOUS PERSON
 Not limited to persons having no real existence
This prompted Nell to file a case against the bank, Casals and Casville.  To be a person who has no right to the instrument because the drawer
While the instant case was being tried, Casals and Casville assigned the or maker of it so intended, and therefore, it doesn’t matter whether
garrett skidder to plaintiff which credited in favor of defendants the amount the name of the payee used by the drawer or drawee be that of the
of P450,000, as partial satisfaction of its claim against them. living or the dead, or one who never existed
HELD: EXISTING PAYEE INTENDED TO RECEIVE PROCEEDS; NOT PAYABLE TO

BEARER

Page 21 of 190
 A negotiable paper made payable to the name of an existing person  It has been held to be payable to bearer
known or believed by the maker or drawer to be existing, with intent  Agbayani: estate is a juridical person in a limited way and thus it
that he should receive it or its proceeds, or that it be paid to him or shouldn’t be payable to bearer
upon his indorsement, IS NOT PAYABLE TO A FICTITIOUS PAYEE OR
TO BEARER, although as a matter of fact such person has no interest CASE DIGESTS: SECTION 9
in the paper and it was procured by fraud of a third person or of the
maker’s or drawer’s employee or agent whose knowledge or intent is 25 ANG TEK LIAN V. CA
not imputable to the principal or employer, and cashed by the person 87 PHIL 383
having possession upon the forged instrument of the payee
FACTS:
NON-EXISTING PAYEE, OR ONE WITHOUT INTEREST, BUT BELIEVED Knowing he had insufficient funds, Ang Tek Lian issued a check for P4000,
EXISTING OR WITH INTEREST, AND INTENDED TO RECEIVE PROCEEDS; payable to cash. This was given to Lee Hua Hong in exchange for cash.
NOT PAYABLE TO BEARER Upon presentment of the check, it was dishonored for having insufficient
funds. It is argued that the check, being payable to cash, wasn’t indorsed
NON-EXISTING PAYEE, OR ONE WITHOUT INTEREST, KNOWN OR by the defendant, and thus, isn’t guilty of the crime charged.
BELIEVED NON-EXISTING NOT INTENDED TO RECEIVE PROCEEDS;
PAYABLE TO BEARER HELD:
A check drawn to the order of “cash” is payable to bearer, and the bank
PERSON TO WHOM THE FICTITIOUS OR NON-EXISTING CHARACTER OF may pay it to the person presenting it for payment without the drawer’s
PAYEE MUST BE KNOWN indorsement. Of course, if the bank is not sure of the bearer’s identity or
 The drawer drawing a bill or the maker making a note is the person to financial solvency, it has the right to demand for identification and/or
whom the fictitious or non-existing character of the payee must be assurance against possible complications—for instance, forgery of the
known drawer’s signature, loss of the check by the rightful owner, raising the
 Where the instrument is drawn or made by an agent or prepared by an amount payable, etc. The bank therefore, requires for its protection that
employee with the maker or drawer signing only, the question arises the indorsement of the drawer—or some other persons known to it—be
as to whose intent should control obtained. A check payable to bearer is authority for payment to the
 Another difficulty: who is the person who makes the instrument holder. Where a check is in the ordinary form and is payable to bearer so
payable to the payee—the clerk or the treasurer? that no indorsement is required, a bank to which it is presented for
 Agbayani’s view: that the signer does after all create the instrument payment need not have the holder identified, and is not negligent in failing
and should determine who owns it to do so.
WHERE AGENT HAS NO AUTHORITY TO EXECUTE INSTRUMENT Sec. 10. Terms, when sufficient. - The instrument need not follow
 The knowledge of the principal or employer is controlling, and if he the language of this Act, but any terms are sufficient which clearly
doesn’t have any knowledge of the fictitious or non-existing character indicate an intention to conform to the requirements hereof.
of the payee, the knowledge of the employee or the agent will not
avail to call into application as to fictitious payees and the instrument CASE DIGESTS: SECTION 10
will not be considered as payable to bearer
26 JIMENEZ V. BUCOY
NAME OF PAYEE NOT NAME OF PERSON 103 PHIL 40
 Pay to cash
 Pay to the order of money FACTS:
 Pay to the order of cash In the intestate of the estate of spouses Young, Jimenez presents a
promissory note signed by Pacita Young for different amounts totaling
WHERE PAYABLE TO THE ESTATE OF A DEAD PERSON P21,000. The administrator is willing to pay the promissory note on the

Page 22 of 190
premise that the amount be adjusted. Claimant assails the adjustment and payable accordingly. The insertion of a wrong date does not avoid
hence, she instituted a case for collection of sum of money. the instrument in the hands of a subsequent holder in due course;
but as to him, the date so inserted is to be regarded as the true
*Note: “6 months after the war” date.
HELD: WHEN DATE NECESSARY

The administrator calls attention to the fact that the notes contained no  Under Section 6, the insertion of date is unnecessary
express promise to pay for a certain amount. This is without merit. An  However, it may be necessary to determine the date of maturity
acknowledge may become a promise to pay by the addition of words by  In the following cases, the date is also necessary:
which a promise of payment is naturally implied, such as “payable”, o Where interest is stipulated, to determine when interest is to
“payable” on a given date, “payable on demand”, “paid…when called for”. run, but not to make the instrument negotiable
o To determine where a party has acted within a reasonable
To constitute a good promissory note, no precise words of contract are time, but not make the instrument negotiable
necessary, provided they amount, in legal effect, a promise to pay.
INSTRUMENT PAYABLE AT A FIXED PERIOD AFTER DATE
Sec. 11. Date, presumption as to. - Where the instrument or an
acceptance or any indorsement thereon is dated, such date is (UNDATED)
deemed prima facie to be the true date of the making, drawing, I PROMISE TO PAY TO B OR ORDER P1000, 60 DAYS AFTER DATE.
acceptance, or indorsement, as the case may be. SGD. A
APPLICATION OF SECTION 11
1. The instrument contains the date of issue—prima facie the true date of
the making or drawing of the instrument EFFECT OF INSERTION OF WRONG DATE
2. In an accepted bill of exchange, the acceptance is dated—prima facie  Knowingly inserting the wrong date in an undated instrument will
the date of acceptance avoid it as to the party so inserting the wrong date
3. An instrument is indorsed, and the indorsement is dated—prima facie  It is implied that the instrument void as to the person who knowingly
date of indorsement inserted the wrong date
 Also, under Section 12, it is void for ante-dating an instrument for
PRIMA FACIE fraudulent purposes
 Evidence produces for the time being a certain result but that result  To a holder in due course, the instrument is not void, after the
may be repealed by contrary evidence instrument is indorsed to him. The insertion of the wrong date doesn’t
 Apparent, as it first appears avoid the instrument in the hands of a holder in due course.
Sec. 12. Ante-dated and post-dated. - The instrument is not invalid CASE DIGESTS: SECTIONS 12 TO 13
for the reason only that it is ante-dated or post-dated, provided
this is not done for an illegal or fraudulent purpose. The person to 27 PACHECO V. CA
whom an instrument so dated is delivered acquires the title thereto 319 SCRA 595
as of the date of delivery.
FACTS:
Sec. 13. When date may be inserted. - Where an instrument Due to dire financial needs of petitioner spouses who were engaged in the
expressed to be payable at a fixed period after date is issued construction business, they secured loans from Vicencio. At every loan
undated, or where the acceptance of an instrument payable at a secured, the lender compelled the spouses to issue an undated check
fixed period after sight is undated, any holder may insert therein despite the admission of spouses that their bank account has insufficient
the true date of issue or acceptance, and the instrument shall be funds or as on a later date, already closed. Lender assured them that the

Page 23 of 190
issuance of the check was only evidence of indebtedness, that it would not  For it to be enforceable against the next holder, the completion must
be presented to the bank, and it would be for formalities only. On the date be strictly in accordance with the authority given and within a
wherein there was an unpaid balance to the loans secured by the spouses, reasonable time.
the lender had them place a date on two of the later checks issued.
Surprised later on, the spouses were charged with estafa as the checks ILLUSTRATION #2
were presented for encashment and was dishonored.  One sees Manny Pacquiao in person and has a blank sheet of paper
signed by Pacquiao. He then filled it up to show the following:
HELD:
BY MUTUAL AGREEMENT OF THE PARTIES, THE NEGOTIABLE CHARACTER
OF A CHECK MAY BE WAIVED AND THE INSTRUMENT BE SIMPLY TREATED I promise to pay Jonathan Nepomuceno or order P10,000.
AS PROOF OF AN OBLIGATION. There cannot be deceit on the part of the
spouses because they agreed with the lender at the time of the issuance Sgd. Manny Pacquiao
and postdating of the checks that the same shall not be encashed or
presented to the bank. As per assurance of the lender, the checks are  For the above to be a valid negotiable instrument, it should have been
nothing but evidence of the loan or security thereof in lieu of and for the delivered by the person signing the instrument with the intent of
same purpose as a promissory note. converting the blank paper into a negotiable instrument.
Sec. 14. Blanks; when may be filled. - Where the instrument is SCOPE OF SECTION 14
wanting in any material particular, the person in possession  There are 2 steps in the execution of a negotiable instrument—
thereof has a prima facie authority to complete it by filling up the o The act of writing the instrument completely and in
blanks therein. And a signature on a blank paper delivered by the accordance with Section 1 of the NIL
person making the signature in order that the paper may be o The delivery of the instrument with the intention of giving
converted into a negotiable instrument operates as a prima facie effect to it
authority to fill it up as such for any amount. In order, however,
that any such instrument when completed may be enforced against THE MATERIAL PARTICULAR REFERRED TO IN THIS PROVISION MAY BE—
any person who became a party thereto prior to its completion, it 1. A particular the omission of which will render the instrument non-
must be filled up strictly in accordance with the authority given and negotiable
within a reasonable time. But if any such instrument, after 2. A particular the omission of which will not render the instrument non-
completion, is negotiated to a holder in due course, it is valid and negotiable
effectual for all purposes in his hands, and he may enforce it as if it
had been filled up strictly in accordance with the authority given FACTS FROM WHICH PRIMA FACIE AUTHORITY PRESUMED
and within a reasonable time. 1. Want of a material particular in the instrument
2. Possession thereof by a person, a third fact
ILLUSTRATION 3. That such person had authority to fill up the blank
 Authority was only to fill in the blank for an amount not more than
P100; before it was complete, the instrument was given to B. THE LAW PRESUMES THE EXISTENCE OF AUTHORITY TO FILL THE
INSTRUMENT UP TO ANY AMOUNT FROM THE FOLLOWING FACTS
1. A signature on blank paper
I promise to pay B or order P400 on June 20, 2010. 2. That the person signing in blank delivers it in order that the paper may
be converted into a negotiable instrument
Sgd. A
REQUISITES TO HOLD PRIOR PARTIES LIABLE
1. The blank must be filled strictly in accordance with the authority given
2. It must be filled up within a reasonable time

Page 24 of 190
the obligations. Later, the bank instituted an action for collection of

RIGHT OF HOLDER OF DUE COURSE WHERE BLANK WRONGFULLY FILLED money, impleading also the two officers. The trial court held the two
 First view: One who is not a holder in due course cannot enforce the officers personally liable also.
instrument if the same is not filled up strictly in accordance with the
authority given or within reasonable time HELD:
 Second view: the holder can enforce the instrument accordance with Canlass is solidarily liable on each of the promissory notes to which his
the authorized tenor signature appears. The promissory notes in question are negotiable
 According to Agbayani, the better view is the first view is the better instruments and thus, governed by the NIL.
view to have. The law provides that in order be one who is not a
holder in due course may enforce mechanically incomplete but Under the NIL, persons who write their names in the instrument are
delivered instrument, the two requisites must exist. The implication is makers are liable as such. By signing the note, the maker promises to pay
that one or both are not present, the instrument may not be enforced. to the order of the payee or any holder the tenor of the obligation. Based
on the above provisions of the law, there is no denying that Canlass is one
REASONABLE TIME of the co-makers of the promissory note.
 Regard is had to the nature of the instrument, the usage of trade or
business with respect to such instrument and the facts of the particular Sec. 15. Incomplete instrument not delivered. - Where an
case incomplete instrument has not been delivered, it will not, if
 Term is very relative completed and negotiated without authority, be a valid contract in
the hands of any holder, as against any person whose signature
PERSONAL DEFENSE was placed thereon before delivery.
 Defense available only to holders who are not holders in due course
APPLICATION OF PROVISION
SUMMARY OF RULES WHEN INSTRUMENT IS INCOMPLETE BUT DELIVERED  Section applies to an incomplete and undelivered instrument
1. Where the holder is a holder in due course, he can enforce the
instrument as completed against parties prior or subsequent to the INSTRUMENT NOT VALID AGAINST PARTY BEFORE DELIVERY
completion  Situation: A signs a blank check, which was subsequently stolen by B
2. Where the holder is not a holder in due course, he can enforce the and fills up the amount and a fictitious name as payee. He then
instrument as completed as against the parties subsequent to the indorses the same to C, C to D, D to E, and E to F. Can F enforce the
completion but not against those prior thereto instrument against A?
 The answer is NO, because against A, whose signature was placed on
NOTES FOR WEEK #3 : the check prior to delivery, the instrument is not valid.
 The answer would still be the same in case F was a holder in due
JUNE 26 - JUL Y 1, 2007
course. Why? The law doesn’t discriminate on what kind of holder.
 However, the invalidity of the instrument is only with reference to
CASE DIGESTS: SECTION 14 parties whose signature appears in the same prior to delivery. As to
parties whose signature appears after delivery, it may be valid.
28 REPUBLIC PLANTERS BANK V. CA
219 SCRA 736 IT IS A REAL DEFENSE
 The possible defense of a party whose signature appears on an
FACTS: instrument prior to delivery is that, as against him, the instrument is
Yamaguchi and Canlas are officers of the Worldwide Garment not valid for having been incomplete and undelivered
Manufacturing, which later changed its name to Pinch Manufacturing. They  Want of delivery of a mechanically incomplete instrument—defense
were authorized to apply for credit facilities with the petitioner bank. The that cannot only be interposed against one who is not a holder in due
two officers signed the promissory notes issued to secure the payment of course but also a holder in due course

Page 25 of 190
DELIVERY IS NOT CONCLUSIVELY PRESUMED WHERE INSTRUMENT IS OUTLINE OF RULES ON DELIVERY OF NEGOTIABLE INSTRUMENTS
INCOMPLETE 1. Delivery is essential to the validity of any negotiable instrument
 Section 15 and 16 read together 2. As between immediate parties, or those in like cases, delivery must
have been with the intention of passing title
BUT DELIVERY PRESUMED PRIMA FACIE 3. An instrument signed by the drawer/maker but not completed by him
 But where an incomplete and undelivered instrument is in the hands of and retained in his own custody, is invalid as to him for want of
a holder in due course, there is prima facie presumption of delivery delivery, even though stolen or negotiated to a holder in due course
which the maker may rebut by proof of non-delivery 4. But when the instrument mentioned above is in the hands of a holder
 Where the custody of an incomplete instrument has been entrusted to of due course, there is prima facie presumption of delivery which the
another, who wrongfully completes and negotiates it to a holder in due maker/drawer may rebut by proof of non-delivery
course, delivery to an agent or custodian is a sufficient delivery to bind 5. Where the custody of the incomplete instrument has been entrusted to
the drawer or maker. another, who wrongfully completes and negotiates it to a holder in due
course, delivery to an agent or custodian is sufficient delivery to bind
Sec. 16. Delivery; when effectual; when presumed. - Every contract the drawer or maker
on a negotiable instrument is incomplete and revocable until 6. Where maker or drawer executes a complete instrument which is
delivery of the instrument for the purpose of giving effect thereto. found in the possession of another other than a holder in due course,
As between immediate parties and as regards a remote party other there is a prima facie presumpton of delivery—but subject to rebuttal
than a holder in due course, the delivery, in order to be effectual, 7. Where the instrument mentioned above is in the hands of a holder in
must be made either by or under the authority of the party making, due course, there is a conclusive presumption of delivery
drawing, accepting, or indorsing, as the case may be; and, in such 8. Delivery of the instrument may be made on a parol condition or for a
case, the delivery may be shown to have been conditional, or for a special purpose not inconsistent with its written terms, where the
special purpose only, and not for the purpose of transferring the validity of the instrument is to arise out of the performance of the
property in the instrument. But where the instrument is in the condition or consummation of the purpose. But such condition or
hands of a holder in due course, a valid delivery thereof by all specification or purpose doesn't affect the rights of a holder in due
parties prior to him so as to make them liable to him is conclusively course. Such conditions is a condition precedent, and is to be sharply
presumed. And where the instrument is no longer in the possession distinguished from a condition subsequent, the happening or non-
of a party whose signature appears thereon, a valid and intentional happening of which is to defeat or qualify the instrument. Such
delivery by him is presumed until the contrary is proved. condition subsequent contradicts the written terms and may not be set
up by parol evidence.
SCOPE OF SECTION
 Applies to an instrument mechanically complete but undelivered RIGHT TO REVOKE
 Before delivery, the maker or drawer can revoke, cancel, or tear up
UNDELIVERED INSTRUMENT IS INCOMPLETE the instrument
 Every contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving effect thereto LITERAL MEANING OF IMMEDIATE AND REMOTE PARTIES
 The drawer and payee are immediate parties to one another
DELIVERY AND ISSUE  Maker and payee are immediate parties to one another
 As between immediate parties and as regards a remote party other  Indorser and indorsee are also immediate parties to one another
than a holder in due course, the delivery, in order to be effectual, must
be made either by or under the authority of the party making, BROAD MEANING OF IMMEDIATE AND REMOTE PARTIES
drawing, accepting, or indorsing as the case may be  Immediate parties are confined to “those who are immediate, in the
 Issue—the first delivery of the instrument, complete in form, to a sense of knowing or being held to know the conditions or limitations
person who takes it as a holder placed upon the delivery of the instrument—privity and not proximity

Page 26 of 190
 Criterion: W/N the party in question knows of the conditions or IT IS A PERSONAL DEFENSE IF IT IS AVAILABLE ONLY
limitations placed upon the delivery of the fact that the instrument was AGAINST A PERSON WHO IS NOT A HOLDER IN DUE
not delivered but stolen.. COURSE.
o If the party in question knows, he is an immediate party even
if he is not physically remote IT IS A REAL DEFENSE IF IT IS AVAILABLE AGAINST ANY
o If he doesn’t know, he is not an immediate party even if he is HOLDER.
the next party immediately
PRESUMPTION OF VALID DELIVERY AS TO IMMEDIATE PARTY OR REMOTE CASE DIGESTS: SECTION 16

PARTY NOT HOLDER IN DUE COURSE
 Where the instrument is no longer in the possession of a party whose 29 MANUEL LIM V. COURT OF APPEALS
signature appears thereon, a valid and intentional delivery by him is 251 SCRA 408
presumed until the contrary is proved
 Presumption is however rebuttable FACTS:
Spouses Lim were charged with estafa and violations of BP22 for allegedly
DELIVERY FOR SPECIAL PURPOSES purchasing goods from Linton Commercial Corporation and issuing checks
 For safekeeping or for collection only as payment thereof. The checks when presented to the bank were
dishonored for insufficiency of funds or the payment for the checks has
PRESUMPTION OF DELIVERY AS TO HOLDER IN DUE COURSE been stopped.
 Conclusively presumed
 There is conclusive presumption where the contrary proof is barred HELD:
It is settled that venue in criminal cases is a vital ingredient of jurisdiction.
PERSONAL DEFENSE It shall be where the crime or offense was committed or any one of the
 The possible defense of a party sought to be charged is that the essential ingredients thereof took place. In determining the proper venue
instrument wasn't delivered, or if delivered, the delivery wasn't for these cases, the following are material facts—the checks were issued at
authorized or only on a condition or for a special purpose the place of business of Linton; they were delivered to Linton at the same
 “Want of delivery of a mechanically complete instrument” defense place; they were dishonored in Kalookan City; petitioners had knowledge of
 It can however be interposed against an immediate party and the insufficiency of funds in their account.
remote parties not holders in due course inasmuch as the
presumption of valid and intentional delivery is only rebuttable as Under Section 191 of the NIL, issue means the first delivery of the
to immediate parties and to remote parties who are not holders in instrument complete in its form to a person who takes it as holder. The
due course term holder on the other hand refers to the payee or indorsee of a bill or
 Only personal defense note who is in possession of it or the bearer thereof. The important place
to consider in the consummation of a negotiable instrument is the place of
CONCLUSIVE PRESUMPTION NOT APPLICABLE TO INCOMPLETE delivery. Delivery is the final act essential to its consummation as an
INSTRUMENTS obligation.
DEFENSES UNDER THE SECOND SENTENCE OF SECTION 16 30 PEOPLE V. GROSPE

1. It wasn’t delivered either by or under the authority of the party 157 SCRA 154
making, delivering, accepting or indorsing the instrument
2. It was for a conditional purpose FACTS:
3. It was for a special purpose only Parolan was an authorized wholesale dealer of SMC. He was charged with
violations of BP22 and estafa for allegedly issuing checks in favor of SMC
but when the check was presented, it was dishonored for having

Page 27 of 190
insufficiency funds. This is even more aggravated by the allegation that incomplete and revocable until delivery of the instrument for the purpose
Paralan failed to make good the check to the prejudice of SMC. of giving effect thereto. As ordinarily understood, delivery means the
transfer of the possession of the instrument by the maker or drawer with
HELD: intent to transfer title to the payee and recognize him as the holder
Estafa by postdating or issuing a bad check may be a transitory or thereof.
continuing offense. Its basic elements of deceit and damage may arise
independently in separate places. In this case, it did and jurisdiction may The petitioner is the custodian of the checks. Inasmuch as said checks
be conferred in any of the two places wherein the two elements arose. were in the custody of the petitioner and not yet delivered to Mabanto,
they didn't belong to him and still had the character of public funds. The
For while the subject check was issued in Bulacan, it wasn't completely salary check of a government officer or employee doesn't belong to him
drawn thereat, but in Pampanga. What is of decisive importance is the before it has been physically delivered to him. Until that time the check
delivery thereof. The delivery of the instrument is the final act essential to belongs to the government. Accordingly, before there is actual delivery of
its consummation as an obligation. For although the check was received the check, the payee has no power over it, he cannot assign it without the
by the SMC Supervisor in Bulacan, that was not delivery in the consent of the government.
contemplation of law. The rule is that the issuancve as well as the delivery
of the check must be to a person who takes it as a holder, which means *If public funds would be allowed to be garnished, then basic services of
the payee or indorser of a bill or note, who is in possession of it, or the the government may be hampered.
bearer thereof. The said representative had to forward the check to the
SMC regional office, who thereafter forwarded it to the Finance Officer and 32 DEVELOPMENT BANK OF RIZAL V. SIMA WEI
later on to the depository bank. 219 SCRA 736
31 DELA VICTORIA V. BURGOS FACTS:

245 SCRA 374 Sima Wei executed a promissory note in consideration of a loan secured
from petitioner bank. She was able to pay partially for the loan but failed
FACTS: to pay for the balance. She then issued two checks to pay the unpaid
Sesbreno filed a case against Mabanto Jr. among other people wherein the balance but for some unexplainable reason, the checks were not received
court decided in favor of the plaintiff, ordering the defendants to pay by the bank but ended up in the hands of someone else. The bank
former a definite amount of cash. The decision had become final and instituted actions against Sima Wei and other people. The trial court
executory and a writ of execution was issued. This was questioned in the dismissed the case and the CA affirmed this decision.
CA by the defendants. In the meanwhile, a notice of garnishment was
issued to petitioner who was then the City Fiscal. She was asked to HELD:
withhold any check or whatnot in favor of Mabanto Jr. The CA then A negotiable instrument, of which a check is, is not only a written evidence
dismissed the defendant’s petition and the garnishment was commenced of a contract right but is also a species of property. Just as a deed to a
only to find out that petitioner didn't follow instructions of sheriff. She is piece of land must be delivered in order to convey title to the grantee, so
now being held liable. must a negotiable instrument be delivered to the payee in order to
evidence its existence as a binding contract. Section 16 provides that
HELD: every contract on a negotiable instrument is incomplete and revocable until
Garnishment is considered as the species of attachment for reaching delivery of the instrument for the purpose of giving effect thereto. Thus,
credits belonging to the judgment debtor owing to him from a stranger in the payee of the negotiable instrument acquires no interest with respect
litigation. Emphasis is laid on the phrase belonging to the judgment debtor thereto until its delivery to him. Delivery of an instrument from the drawer
since it is the focal point of resolving the issues raised. to the payee, there can be no liability on the instrument. Moreover, such
delivery must be intended to give effect to the instrument.
As Assistant City Fiscal, the source of Mabanto’s salary is public funds.
Under Section 16 of the NIL, every contract on a negotiable instrument is

Page 28 of 190
Sec. 17. Construction where instrument is ambiguous. - Where the *In this case, the sum payable is P12,345, following the rule that when the
language of the instrument is ambiguous or there are omissions words are ambiguous or uncertain, reference may be had to the figures to
therein, the following rules of construction apply: fix the amount.
I promise to pay B or order the sum of one two three four five (P12,345)
(a) Where the sum payable is expressed in words and also in on June 27, 2008 with interest.
figures and there is a discrepancy between the two, the sum
denoted by the words is the sum payable; but if the words are Sgd. AA
ambiguous or uncertain, reference may be had to the figures to fix
the amount; *The interest should run on the date of instrument but if it is undated, then
it will reckon on the date of issue.
(b) Where the instrument provides for the payment of interest,
without specifying the date from which interest is to run, the
interest runs from the date of the instrument, and if the instrument
is undated, from the issue thereof; CASE DIGESTS: SECTION 17
(c) Where the instrument is not dated, it will be considered to 33 PEOPLE V. ROMERO
be dated as of the time it was issued; 306 SCRA 90
(d) Where there is a conflict between the written and printed FACTS:
provisions of the instrument, the written provisions prevail; Complainant was a radio commentator who interviewed the two accused
regarding their marketing business, which solicits funds from the general
(e) Where the instrument is so ambiguous that there is doubt public, promising an 800% profit. The latter induced the complainant to
whether it is a bill or note, the holder may treat it as either at his invest in the business, in the process thereof, issued a postdated check
election; wherein the amount in figures was P1,200,000 and the amount in words
was P1,000,200. The check when presented in the bank was dishonored
(f) Where a signature is so placed upon the instrument that it is and the accused refused to redeem or pay the check. This prompted the
not clear in what capacity the person making the same intended to complainant to file a case of estafa against the accused to which they were
sign, he is to be deemed an indorser; found guilty of.
(g) Where an instrument containing the word "I promise to HELD:

pay" is signed by two or more persons, they are deemed to be Accused tried to contend that if the trial court followed the admission and
jointly and severally liable thereon. stipulation of facts submitted by them, it would prove that there was
sufficient funds. The check had a discrepancy between the amount in
WHEN SECTION APPLICABLE figures and in words. Following NIL, the check was issued for
 Rules stated in this section shall not be availed of if the terms of the P1,000,200—meaning that this could be validly supported by their
instrument in question is clear and admit of no doubt business’ funds. Nonetheless, this is misplaced since this rule of
 Applicable only when the instrument in question is ambiguous, interpretation finds no room in this case. The agreement was perfectly
doubtful or obscure, or when there are omissions therein that the clear that at the end of 21 days, the investment of complainant would
increase by 800% or P1,200,000.
I promise to pay B or order the sum of one two three four five (P12,345) 34 PNB V. CONCEPCION MINING
Sgd. AA 115 PHIL 723
FACTS:

Page 29 of 190
A case for collection of a sum of money was filed against defendants in  A person whose signature doesn’t appear on the instrument is not
connection with a promissory note they issued with others. The liable
defendants move that since their co-makers have died, claim should be
also against the estates of such. This was denied by the court. EXCEPTIONS TO THE GENERAL RULE
1. Where a duly authorized agent signs for a person, the person is liable
HELD: 2. Where a person sought to be charged forges the signature of another
Where an instrument containing the words “I promise to pay” is signed by person, the forger is liable even if his signature doesn’t appear thereon
two or more persons, they are deemed to be jointly and severally liable 3. Where a person sought to be charged signs on a paper separate from
thereon. By virtue of this provision found in Section 17, and as the the instrument itself, as in an allonge, although the allonge may be
promissory note was executed jointly and severally by the parties, the considered a part of the instrument, or where an acceptance is written
payee of the promissory note had the right to hold any one of the them on a paper other than the bill itself
responsible for the payment of the amount of the note. 4. Where the person uses an assumed name or trade name—one may
become a party to a negotiable instrument by any designation he
35 REPUBLIC PLANTERS BANK V. COURT OF APPEALS desires
216 SCRA 738
Sec. 19. Signature by agent; authority; how shown. - The signature
FACTS: of any party may be made by a duly authorized agent. No particular
Yamaguchi and Canlas are officers of the Worldwide Garment form of appointment is necessary for this purpose; and the
Manufacturing, which later changed its name to Pinch Manufacturing. They authority of the agent may be established as in other cases of
were authorized to apply for credit facilities with the petitioner bank. The agency.
two officers signed the promissory notes issued to secure the payment of
the obligations. Later, the bank instituted an action for collection of SIGNATURE THROUGH AGENT, FORM
money, impleading also the two officers. The trial court held the two  The party may sign personally or through an agent
officers personally liable also.  Agency may be written or oral
 No particular form required by the law and the agency may be proved
HELD: through oral or written evidence, unless specific provisions of the law,
Canlass is solidarily liable on each of the promissory notes to which his such as the Statute of Frauds, requires otherwise
signature appears. The promissory notes in question are negotiable
instruments and thus, governed by the NIL. Sec. 20. Liability of person signing as agent, and so forth. - Where
the instrument contains or a person adds to his signature words
Under the NIL, persons who write their names in the instrument are indicating that he signs for or on behalf of a principal or in a
makers are liable as such. By signing the note, the maker promises to pay representative capacity, he is not liable on the instrument if he was
to the order of the payee or any holder the tenor of the obligation. Based duly authorized; but the mere addition of words describing him as
on the above provisions of the law, there is no denying that Canlass is one an agent, or as filling a representative character, without disclosing
of the co-makers of the promissory note. his principal, does not exempt him from personal liability.
Sec. 18. Liability of person signing in trade or assumed name. - No REQUISITES FOR AGENT TO ESCAPE LIABILITY
person is liable on the instrument whose signature does not appear 1. Be duly authorized
thereon, except as herein otherwise expressly provided. But one 2. Add words to his signature indicating that he signs as an agent, that
who signs in a trade or assumed name will be liable to the same is, for or on behalf of a principal, or a representative capacity
extent as if he had signed in his own name. 3. Disclose his principal
GENERAL RULE AS TO LIABILITY OF PERSON WHOSE SIGNATURE IS NOT CASE DIGESTS: SECTION 19 AND 20
ON INSTRUMENT

Page 30 of 190
36 REMO V. COURT OF APPEALS and proved that after the money was withdrawn from the bank, it passed
172 SCRA 405 to the drug company which thus suffered no loss.
FACTS:
The Board of Directors of Akron, which includes petitioner Remo, 38 JAI ALAI V. BPI
authorized the purchase of 13 trucks to be used in the business through a 66 SCRA 29
resolution. The president then of the corporation purchased from private
respondent the trucks evinced by a deed of absolute sale, with terms of FACTS:
payment as follows—downpayment, balance payable within 60 days from Checks were deposited by petitioner in its current account with the bank.
date of execution of agreement. It was also agreed upon that until said These checks were from a certain Ramirez, a consistent better in its
balance, the downpayment shall constitute as rentals for the trucks. And if games, who was a sales agent from Inter-Island Gas. Inter-Island later
there would be failure of payment, the balance shall constitute as chattel found out that of the forgeries committed in the checks and thus, it
mortgage lien. This is further secured by a promissory note—that the informed all the parties concerned. Upon the demands on the bank as the
balance would be paid from a loan to be obtained from a bank. After collecting bank, it debited the account of petitioner. Thereafter, petitioner
several days, private respondent made several demands but the tried to issue a check for payment of shares of stock but such was
corporation failed to pay. This prompted the private respondent to file a dishonored for insufficient funds. It filed a complaint against the bank.
complaint. Meanwhile, petitioner sold his shares to Coprada and the name
of the corporation was modified. HELD:
Respondent bank acted within legal bounds when it debited the account of
HELD: petitioner. When the petitioner deposited the checks to its account, the
If the private respondent is the victim of fraud in this transaction, it has relationship created was one of agency still and not of creditor-debtor. The
not been clearly shown that petitioner had any part or partcipation in the bank was to collect from the drawees of the checks with the corresponding
perpetration of the same. Fraud must be established by clear and proceeds.
convincing evidenced. If at all, the principal character on whom fault
should be attributed is the president Coprada, whom private respondent Bank may have the proceeds already when it debited the account of
dealt with personally all through out. petitioner. Nonetheless, there is still no creditor-debtor relationship.
37 INSULAR DRUGS V. PNB Following Section 23, a forged signature is wholly inoperative and no right
55 PHIL 634 to discharge it or enforce its payment can be acquired through or under the
FACTS: forged signature except against a party who cannot invoke its forgery or
Foerster was a collector for Insular Drugs. Upon collection of checks for want of authority. It stands to reason that as a collecting bank which
payment to the company, he deposited the checks in his own personal indorsed the checks to the drawee-banks for clearing, should be liable to
account. This came to the knowledge of the company and upon the latter for reimbursement for the indorsements on the checks had been
investigation, the salesman committed suicide thereafter. Insular Drugs forged prior to their delivery to the petitioner. The payments made by the
filed an action against the bank, to credit to its account the amount drawee banks to respondent were ineffective—the creditor-debtor
Foerster and his wife took from them. The indorsements took various relationship hadn’t been validly effected.
forms.
39 PNB V. PICORNELL
HELD: 46 PHIL 716
When a bank accepts the indorsements on checks made out to the
company and the indorsements of the salesman’s wife and clerk, and FACTS:
credits to the personal account of the salesman and his wife, allowing them Picornell followed the instructions of Hyndman, Tavera and Venutra by
to make withdrawals, the bank makes itself responsible to the drug buying bales of tobacco. He was able to obtain in National Bank a sum of
company for the amounts represented by the checks, unless it is pleaded money together with his commission. He drafted a bill of exchange against

Page 31 of 190
the firm and in favor of the bank. It was received by National Bank and collect payments from the GSIS. Further, they opened an account with a
was accepted thereafter by the firm. However, on alleged conditions of the bank from which checks would be issued by Fransisco and the GSIS
tobacco, the bill of exchange was not paid. president.
HELD: HCCC later on filed a complaint for the unpaid balance in pursuance to its
This action for recovery is for the value of the bill of exchange. The firm agreement with AFRDC. However, an amicable settlement ensued, which
accepted the bill unconditionally but did not pay it at maturity, wherefore was embodied in a Memorandum of Agreement. It was embodied in said
its responsibility to pay the same is clear. The question whether or not the agreement that GSIS recognizes its indebtedness to HCCC and that HCCC
tobacco was worth the value of the bill doesn’t concern the bank. Such would also pay its obligations to AFRDC.
partial want of consideration if it was, doesn’t exist with respect to the
bank which paid Picornell the full value of the said bill of exchange. The A year later, it was found out that Diaz and Fransisco had drawn checks
bank was a holder in due course, and was such for value full and complete. payable to Ong. Ong denied accepting said checks and it was further found
The firm cannot escape liability. out that Diaz entrusted the checks to Fransisco who later forged the
signature of Ong, showing that he indorsed the checks to her and then she
40 PHILIPPINE BANK OF COMMERCE V. ARUEGO deposited the checks to her personal savings account. This incident
102 SCRA 530 prompted Ong to file a complaint against Fransisco.
FACTS: HELD:
Aruego, on behalf of World Current Events, entered into a Credit Ong’s signature was found to be forged by Fransisco.
Agreement with PBCom, for the publication of the company’s periodicals.
At every printing endeavor by the printing press, a bill of exchange is Fransisco’s contention that he was authorized to sign Ong’s name in her
drawn against PBCom. The instruments are signed by Aruego, without any favor giving her authority to collect all the receivables of HCCC from GSIS.
indication that he is an agent of World Current Events. When he was being This contention is bereft of any merit. The NIL provides that when a
held liable by PBCom, he averred that he only signed the instrument in the person is under obligation to indorse in a representative capacity, he may
capacity of agent of the company. indorse in such terms as to negative personal liability. An agent, when so
signing, should indicate that he is merely signing as an agent in behalf of
HELD: the principal and must disclose the name of his principal. Otherwise, he
An inspection of the drafts accepted by the defendant would show nowhere will be held liable personally. And assuming she was indeed authorized,
that he has disclosed that he was signing in representation of the Philippine she didn't comply with the requirements of the law. Instead of signing
Education Foundation Company. He merely signed his name. For failure to Ong’s name, she should have signed in her own name as agent of HCCC.
disclose his principal, Aruego was personally liable for the drafts he Thus, her contentions cannot support or validate her acts of forgery.
accepted.
42 ASTRO ELECTRONICS CORP. V. PHIL. EXPORT
41 FRANSISCO V. COURT OF APPEALS 411 SCRA 462
319 SCRA 354
FACTS:
FACTS: Astro obtained loans from Philtrust Bank, secured by promissory notes that
A. Fransisco Realty and Development and Herby Commercial and were signed by Roxas, both as President of Astro Electronics and in his
Construction Corporation entered into a Land Development and personal capacity. Thereafter, PhilGuarantee bound itself as a guarantor.
Construction Contract. Fransisco was the president of AFRDC while Ong At default of Astro, PhilGuarantee paid the obligation. It then filed an
was the president of HCCC. It was agreed upon that HCCC would action for collection of money from Astro and Roxas.
undertake the construction of housing units and the development of a large
parcel of land. The payment would be on a turnkey basis. To facilitate the HELD:
payment, AFDRC executed a Deed of Assignment to enable the HCCC to

Page 32 of 190
Under the NIL, persons who write their names on the face of promissory  “Luis Martin Tan, Per Procuration: Ryan Teehankee” on which Luis Tan
notes are makers, promising that they will pay to the order of the payee or is the principal while Ryan Teehankee is the agent
any holder according to its tenor.
EFFECT OF SIGNATURE PER PROCURATION
At the study of the instrument, the allegations of Roxas are bereft of any  Constitutes a warning that an agent has a limited authority
merit—that is, the words “in his personal capacity” were added after he  A person who takes the instrument so signed is bound at his peril to
signed the instrument. inquire into the extent and nature of the agent’s authority, and this
applies to every person
43 SOLIDBANK CORPORATION V. MINDANAO FERROALLOY
CORPORATION Sec. 22. Effect of indorsement by infant or corporation. - The
GR 153535, JULY 28, 2005 indorsement or assignment of the instrument by a corporation or
by an infant passes the property therein, notwithstanding that from
FACTS: want of capacity, the corporation or infant may incur no liability
Mindanao Ferroalloy corporation is the fruit of a joint venture agreement thereon.//
between a Filipino corporation and Korean Corporation. In its operations,
its liabilities ballooned over its assets that it had to secure loans from INDORSEMENT OF MINOR OR CORPORATION
petitioner Solidbank. The loans were later consolidated and restructured,  If a minor or corporation indorses an instrument, the indorsee acquires
evinced by a promissory note. The promissory note was signed by Cu and title to it and can enforce it against the maker or acceptor or other
Hong, both officers of the corporation. The corporation, through the same parties prior to the minor
officers also executed a deed of assignment. Thereafter, the corporation  Such prior parties cannot escape liability by setting a defense the
stopped its operations and the loan was left unpaid. The bank was incapacity of the indorser
prompted to file a complaint against the corporation, and with it,  Also applies to other incapacitated persons
impleading the officers who signed the agreement and promissory notes.
The trial court held in favor of the bank but didn't adjudge liability of the
officers. Both the trial court and CA held that there was no solidary liability A (INCOMPLETE, UNDELIVERED)  B  C  D  E (MINOR)  F
on the part of the officers impleaded by the bank.
*F cannot enforce against A the instrument, following Section 15 of the NIL
HELD: *General rule in an indorsement by an infant or corporation: it shall be
Though Hong and Cu signed above the “maker/borrower” and the printed enforceable against the maker, acceptor, or other parties prior to the minor
name of the corporation, without the word “by” preceding their signatures,
the fact that they signed in their personal capacities is negated by the facts
that name and address of the corporation also appeared on the space
provided for in the “maker/borrower” and their signatures only appeared NOTES FOR WEEK #4:
once when it should be twice if indeed it was in their personal capacities. July 2, 2007 - July 7, 2007
Further, they didn't sign on the portion allocated for the co-maker, and
there was also indicia of it being signed as authorized representatives. Sec. 23. Forged signature; effect of. - When a signature is forged or
made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the
Sec. 21. Signature by procuration; effect of. - A signature by instrument, or to give a discharge therefor, or to enforce payment
"procuration" operates as notice that the agent has but a limited thereof against any party thereto, can be acquired through or
authority to sign, and the principal is bound only in case the agent under such signature, unless the party against whom it is sought to
in so signing acted within the actual limits of his authority. enforce such right is precluded from setting up the forgery or want
of authority.
HOW SIGNATURE PER PROCURATION IS MADE

Page 33 of 190
FORGERY, DEFINED AND EXPLAINED Sgd. A

 Counterfeit making or fraudulent alteration of any writing, and may To X Bank Alabang (drawee)
consist in the signing of another’s name, or the alteration of an
instrument, in the name, amount, description of the person and the Additional fact: B has account with RCBC Makati.
like, with the intent to defraud
 Section 23 only applies to forged signatures or signatures made *Process is that RCBC will send the check to X Bank for clearing and X
without the authority of the person whose signature purports it to be Bank would consequently debit the account of A.
*What if the signature of A is forged? What is the recourse of A? The
FRAUD AMOUNTING TO FORGERY recourse is for A to approach X Bank and demand to credit the his
 Fraud in factum or fraud in esse contractus account. X Bank was the proximate cause of the loss of A and it should
 There is no intention to issue an instrument know the drawer’s signature. Generally, X Bank is liable when the drawer’s
signature is forged and his account was debited.
FRAUD IN FACTUM FRAUD IN INDUCEMENT
FRAUDULENT IMPERSONATION
Does amount to forgery Doesn’t amount to forgery
• Suppose X represents himself as Juan Cruz when he is not to Y. Due
Real defense Personal defense
to such misrepresentation, he obtained from Y a note payable to the
A sells to B what he represents as a
order of Juan Cruz. If Y intends that the proceeds of the note will go
diamond ring, when it is actually
to the real Juan Cruz and not X, but to whom Y issued the note on the
made of glass. B issues a check.
belief that X was Juan Cruz, would be a forgery.
The fraud is in inducing B to issue
DOUBLE INTENT IN FRAUDULENT IMPERSONATION
the check.
1. He intends to make the instrument payable to the person before him
or to the person writing at the other end of the line, in case the
negotiation is by correspondence
Promissory notemaker 2. He intends to make the instrument payable to the person whom he
indorser believes the stranger to be
Bill of Exchangedrawer GENERAL RULE IN FRAUDULENT IMPERSONATION

indorser • The first one is the controlling intent except where the name of the
payee was already known to the maker or drawer or was particularly
identified in some manner
I promise to pay B or order P100,000
REASON FOR RULE: THEORY OF ACTUAL INTENT
Sgd. A • Throws the loss on the drawer
• In the absence of anything to show that the drawer had any doubt as
*Suppose that B forged A’s signature. Is the instrument valid? It is totally to the identity of the person to whom he delivered the paper as
inoperative. payee—the drawee, in paying the paper, or the holder, in taking it
*If ABCDE, and B’s signature was forged, it is totally inoperative upon the indorsement of the impostor in the name of which the payee
and ineffectual against A and B. C and D are precluded to set up the was described, carries out the intention that the drawer entertained at
defense of forgery since as indorsers, they warrant the validity of the the time of delivery of the paper to the impostor, although that
instrument. intention was conceived in consequence of the fraud of the impostor as
to his identity and ownership of the property which represented the
Pay to the order of B P100,000 consideration

Page 34 of 190
ANOTHER REASON FOR THE RULE: THEORY OF ESTOPPEL 2. That it was unauthorized, as in the case of an agent signing for his
• As between two innocent persons, the one whose act was the cause of principal, or one signing on behalf of a partnership or corporation or
the loss should bear the consequences that in case of the latter, that the corporation was not authorized
• It was the drawer’s duty to use diligence to ascertain the identity of under its charter to sign the instrument
the party with whom he has dealt. Failing to make this discovery, he 3. That the party charged signed the instrument in some other capacity
became the victim of the fraud. The impostor having succeeded in this than that alleged in the pleading setting it out
first and essential step in the practice of the fraud, the next was
comparatively an easy one. FAILURE TO IDENTIFY PROMISSORY NOTE WILL NOT NECESSARILY
DEFEAT CLAIM
RULE IS QUALIFIED WHERE IMPOSTOR REPRESENTS HIMSELF AS AGENT
OF PAYEE EFFECT OF FORGERY IN GENERAL
• There is a distinction between cases where the paper is delivered to 1. That the signature forged or made without authority is wholly
the impostor as payee, in the belief that he is the person to whom the inoperative
instrument it would be paid, and cases where the paper is delivered to 2. That no right to retain the instrument, or to give discharge thereof, or
the impostor upon his representation, in the belief that he is agent of to enforce payment thereof against any party thereto, can be acquired
the person named as payee through or under such a signature forged or made without authority
• The loss falls on the drawee or purchaser, as the case may be, rather 3. That nevertheless, as against a party precluded from setting up the
than on the drawer where the impostor upon whose indorsement the forgery or want of authority, the signature forged or made without
paper was purchased or paid, represented himself to be the agent of authority is operative, and rights to retain the instrument, to give
the payee and not the payee himself discharge therefore, or to enforce payment thereof, can be acquired
through or under the signature forged or made without authority
ADMISSION OF GENUINENESS AND DUE EXECUTION
• When an action or defense is founded upon a written instrument such EXTENT OF THE EFFECT OF THE FORGERY
as a negotiable instrument, copied in or attached to the corresponding 1. Only the signature forged or made without authority is stated by the
pleading, the genuineness and due execution of the instrument shall law to be inoperative but neither the instrument itself is, nor the
be deemed admitted unless specifically denied under oath by the genuine signatures are, rendered inoperative
adverse party 2. The instrument can be enforced by holders to whose title over the
• Consequently, the genuineness and due execution of the written instrument the forged signature is not necessary, such as, the
instrument or document copied in or attached to the opponent’s indorsement of an instrument which on its face is payable to bearer
pleading as the basis of his claim or defense, should be denied 3. The instrument can be enforced against those who are precluded from
specifically under oath, otherwise they are deemed admitted. setting up the defense of forgery, even against those whose signatures
have been forged
MEANING OF ADMISSION OF GENUINENESS AND DUE EXECUTION
1. That he signed it or that it was signed by another for him and with his PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY
authority 1. Those who warrant or admit to the genuineness of the signature in
2. That at the time it was signed, it was in words and figures exactly as question—indorsers, persons negotiating by delivery, and acceptors
set out in the pleading of the party relying upon it, 2. Those who, by their acts, silence or negligence, are estopped from
3. That any formal requisites required by law, such as swearing and setting up the defense of forgery
acknowledgment, or revenue stamp which it requires, are waived by
him INDORSERS AS WARRANTORS
• Whether general or qualified
DEFENSES CUT OFF BY ADMISSION OF GENUINENESS, ETC. • Warrant that the instrument indorsed by them is genuine in all
1. The defense that the signature is a forgery respects what it purports it to be

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PERSONS NEGOTIATING BY DELIVERY AS WARRANTORS • It is not prejudiced by the delay where at no time after the discovery
• Persons negotiating by mere delivery also warrant that the instrument of the forgery did the cashier have any property with which to
negotiated by them is genuine and in all respects what it purports to indemnify the bank
be
• They are consequently precluded from setting up the defense of ESTOPPEL BY NEGLIGENCE IN DELIVERY
forgery • A drawer may be precluded from defense of forgery of the payee’s
indorsement if delivery by him to the payee is negligent
ACCEPTORS AS WARRANTORS
• A drawee, by accepting the bill, admits the genuineness off the CASES OF FORGERY IN GENERAL
signature of the drawer 1. Forgery of promissory notes which may be further subdivided into—
forgery of indorsement in the note; forgery of the maker’s signature
PRECLUDED 2. Forgery of bills of exchange which may be further classified into—
• Includes those cases where they are estoppels against the party forgery of an indorsement on the bill; forgery of the drawer’s
desiring to set up the forgery signature, either with acceptance by the drawee, or without such
acceptance but the bill is paid by the drawee
ESTOPPEL AS TO FORGERY OF INSTRUMENTS
• Whenever a party has, by his own declaration, act, or omission, RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN NOT PAYABLE TO
intentionally and deliberately led another to believe that his or ORDER
another’s signature in an instrument is genuine, and to act upon such Where the indorsement is forged and the note is payable to order, the
belief, he cannot, in any litigation arising out of such declaration, act, party whose indorsement is forged and parties prior to him including the
or omission, be permitted to set up the forgery of such signature/s maker cannot be held liable by the holder, whether that holder is a holder
• Estoppel may arise from a declaration, act or omission/negligence in due course or not:
1. The reason is that, inasmuch as the indorsement is forged, it is
UNREASONABLE DELAY inoperative. But since the note is payable to order, it can be
• Unreasonable delay, after his discovery of the forgery, on the part of negotiated only by indorsement completed by delivery, and therefore,
one having the opportunity and duty to speak, in disclosing the forgery the forged instrument is the only means one could acquire any rights
upon commercial paper to the one who ought to be apprised thereof, to it or its proceeds
estops the former from thereafter asserting the forgery as against the 2. The law further provides that no right to retain the note, give
latter where the latter is prejudiced by such delay or failure discharge thereof, or enforce payment thereof, could be acquired
• Requisites: through and under the forged signature. Hence the holder didn’t
o That the delay be unreasonable acquire at least those rights as against the party whose signature is
o That the one who ought to be apprised of the forgery has forged and parties prior to him, including the maker
been prejudiced 3. The forger usually obtains possession of the note by fraudulent or
other unlawful means and therefore, he has no right whatsoever in the
REASONABLY PROMPT NOTICE note
• Depends upon the circumstances of the case, and the situation of the
parties with reference to the remedies against any party is a proper RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN A NOTE PAYABLE
element to enter into the estimate of the reasonableness of the notice TO BEARER
• May be held liable by a holder in due course but not by the one who is
WHEN PREJUDICED AND WHEN NOT PREJUDICED not a holder in due course
• A bank is prejudiced—at the time one discovered that his attorney • Provided that the note was mechanically complete before the forgery
forged his indorsement to a draft in his favor, it had assets of the • Forged instrument is not necessary to the title of a holder since
attorney in its possession to protect itself but at the time it was instruments payable by bearer can be negotiated by mere delivery
notified of the forgery, it has parted with such assets

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RIGHTS OF PARTIES IN FORGERY OF MAKER’S SIGNATURE COLLECTING BANK BOUND TO SCRUTINIZE CHECKS DEPOSITED WITH IT
• Where the maker’s signature is forged, he cannot be held liable by any TO DETERMINE GENUINENESS AND REGULARITY
holder, whether the holder is in due course or not
• Purported maker is not a party to the instrument as his forged CONVERSION
signature is inoperative and no right to retain, enforce, or discharge • An unauthorized assumption and exercise of the right of ownership
the note, may be acquired against him over goods or personal chattels belonging to another, to the alteration
of their condition or exclusion of the owner’s right
DRAWEE CANNOT CHARGE ACCOUNT OF DRAWER
• In an action by the drawee against the drawer for the amount charged AS AFFECTED BY QUESTION OF DELIVERY TO PAYEE
by the drawee against the account of the drawer where the drawee • The checks didn’t reach the hands of the payee. The bearing of such
paid a check on a forged indorsement, the drawee has no defense absence of delivery is considered in some cases and held not to be
against the drawer and the drawer may recover from the drawee for material
an instrument paid on a forged indorsement • Where there is no delivery to the payee and no title vests upon him,
• Depository owes to the depositor an absolute and contractual duty to he ought not to be allowed to recover on the ground that he lost
pay the check only to the person to whom it is made payable or upon nothing because he never became owner of the check and still retained
his genuine indorsement his claim against the drawer
DRAWER CANNOT RECOVER FROM THE COLLECTING BANK PAYEE CANNOT RECOVER FROM THE DRAWEE
• Drawer has no right to recover the amount paid from the collecting • An action cannot be maintained by a payee of a check against the
bank as the duty of the collecting to exercise care in collection is due bank on which it is drawn unless the check has been certified or
only to the payee, and as the drawer suffers no loss since it can accepted by the bank on which it is drawn, without acceptance or
recover the amount paid from the drawee bank which has no right to certification, as provided by the statute, there is no privity of contract
charge the drawer’s account between the drawee bank and the payee, or holder of the check
DRAWEE CAN RECOVER FROM COLLECTING BANK RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN BILL PAYABLE TO
• The drawee may recover from the recipient of payment, such as the BEARER
collecting bank, under a forged indorsement • Holder may recover if he is a holder in due course
• Rule allowing the payee to recover from the recipient of the payment
under a forged indorsement RIGHTS OF PARTIES IN FORGERY OF DRAWER’S SIGNATURE WHERE
DRAWEE HASN’T ACCEPTED BILL BUT PAID IT
PAYEE CAN RECOVER FROM RECEIPT OF PAYMENT • In the case of the payment of a forged check even without former
• According to the general rule, a bank or other corporation or an acceptance, the drawee cannot recover from a holder in due course
individual, who has obtained possession of a check, upon an not chargeable with any act or negligence or disregard of duty
unauthorized or forged indorsement of the payee’s signature and who • As between equally innocent parties, the drawee who pays money on a
collects the amount of the check from the drawee, is liable for the check the signature to which is forged, cannot recover the money from
proceeds thereof to the payee or other owner, notwithstanding that the one who received it
they have been paid to the person whom the check was obtained
• The possession of the check on the forged indorsement is wrongful and BUT PAYMENT NOT EQUIVALENT TO ACCEPTANCE OR CERTIFICATION
when the money had been collected on the check, the bank or other • The payment of a forged check doesn’t include or imply its acceptance
person or corporation, can be held as far as moneys had and received in the sense that this word is used in Section 62 of NIL
and the proceeds are held for the rightful owners of the payment and • Basis of the general rule is not that the drawee is precluded from
may be recovered by them setting up forgery because, by paying the check, it has accepted the
check and therefore admitted the genuineness of the drawer’s
signature

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• By paying the check the drawer is presumed negligent or deemed

constructively negligent PAPER FORWARDED FOR COLLECTION
• The fact that the paper wasn’t cashed and indorsed with unrestricted
NEGLIGENCE IN FORGERY OF INDORSEMENTS IN BILL indorsement but was taken for collection and forwarded for that
• It presupposes that the drawer himself wasn’t negligent or guilty of purpose under an indrosement giving notice of that fact, may place a
such conduct as would estop him from asserting the forged character greater burden upon the drawee than it would otherwise bear
of the indorsement as against the depository and that if he was
negligent or guilty of such conduct, the loss must fall on him FORGERY OF SIGNATURE IN INSTRUMENT IS FALSIFACTION OF PRIVATE
DOCUMENT
WHERE A DEPOSITOR IS USING ITS OWN PERSONALIZED CHECKS, ITS
FAILURE TO PROVIDE ADEQUATE SECURITY MEASURES TO PREVENT FORGER NEED NOT IMITATE GENUINE SIGNATURE
FORGERIES OF ITS CHECKS CONSTITUTES GROSS NEGLIGENCE AND • One who signs in the name of another without the latter’s authority, as
BARS IT FROM SETTING UP THE DEFENSE OF FORGERY drawer in a check, and thereby makes it appear falsely that the
alleged drawer of the check was a real party thereto, when as a matter
BUT FAILURE OF DEPOSITOR TO MAKE PROMPT RECONCILIATION OF THE of fact he didn’t participate in the transaction, is guilty of falsification
MONTHLY BANK STATEMENTS FURNISHED BY THE BANK CONSTITUTES
NEGLIGENCE FOR WHICH THE BANK CANNOT BE BLAMED IN CASE COMMERCIAL DOCUMENTS
DEPOSITOR’S CASE ARE FORGED • Documents or instruments which are used by businessmen or
merchants to promote or facilitate trade or credit transactions
BUT DRAWER NOT GENERALLY NEGLIGENT WHERE HIS CHECK IS STOLEN
PAYEE’S NEGLIGENCE IN FORGERY OF DRAWER’S SIGNATURE (FORGED SIGNATURE OF DRAWER)
• The payee in a check may be supposed to have knowledge of the
circumstances under which it is drawn and generally, of the person 44 SAN CARLOS MINING V. BPI
drawing it, and is in a better position to judge the genuineness of the 59 PHIL 59
paper than are indorsees.
• And there is a tendency to place greater responsibility upon him and FACTS:
he is much more likely to be required to return the proceeds of the Wilson, a principal employee of petitioner, together with Wilson, a
paper than are the indorsees messenger-clerk, conspired to withdraw cash from the petitioner’s account
through forgery of a check, in the name of the agent authorized to sign the
INDORSER’S NEGLIGENCE check.
• After a draft or check has once been negotiated so that it is in
circulation, there is little opportunity for negligence on the part of While the authorized agent of petitioner was on vacation, Wilson and
those through whose hands it passes; but as to them, in most cases, Dolores sent a cablegram to China Banking for the transfer of $100,000.
the rule will apply that, as between innocent parties, the loss must fall On the contract, the name of Baldwin was forged and it was indicated
on the drawee therein that a certified check be issued. Thereafter, this was received and
deposited with the BPI. Upon deposit, an indorsement in the name of
DUTY OF PURCHASER OF CHECK OR BILL Baldwin was placed. The bank account was credited. Later, a letter was
• One who purchases a bill or check is bound to satisfy himself that the sent to the bank, purporting to be signed by Baldwin asking that it be
paper is genuine; and that by indorsing or presenting it for payment or withdrawn. This was done in supervision of Dolores. Dolores and Wilson
putting it in circulation before presentation, he impliedly asserts that then was able to get the money. This eventually came to the knowledge of
he has performed his duty and the drawee who has without actual plaintiff who filed an action against China Banking and BPI. The trial court
negligence on his part, paid the forged demand, may recover the dismissed the case.
money paid from such negligent purchaser

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HELD: former pertains to a promise to perform an act while the latter is the actual
A bank is bound to know the signatures of its customers and if it pays a performance of the act.
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 PNB had also been negligent with the particularity that it had been guilty of
the depositor whose name was forged. a greater degree of negligence because it had a previous and formal notice
from GSIS that the check had been lost, with the request that payment be
There is no act of the plaintiff that led the bank astray. If it was in fact stopped. Just as important is that it is its acts, which are the proximate
lulled into the false sense of security, it was by the effrontery of Dolores, cause of the loss.
the messenger to whom it entrusted this large sum of meny.
47 MWSS V. CA
The proximate cause of the loss must therefore be due to the negligence of 143 SCRA 20
the bank in honoring and cashing the two forged checks.
FACTS:
45 PNB V. QUIMPO MWSS had an account from PNB. Its treasurer, auditor, and General
158 SCRA 582 Manager are the ones authorized to sign checks. During a period of time,
23 checks were drawn and debited against the account of petitioner.
FACTS: Bearing the same check numbers, the amounts stated therein were again
While Gozon was in the bank with Santos left in the car, the latter stole a debited from the account of petitioner. The amounts drawn were deposited
check and forged the signature of the former. He was able to encash the in the accounts of the payees in PCIB. It was found out though that the
check. He was later apprehended by the police authorities and he admitted names stated in the drawn checks were all fictitious. Petitioner demanded
to stealing the check. The court decided in favor of Gozon. The bank now the return of the amounts debited but the bank refused to do so. Thus, it
posed the issue on whether Gozon’s act of leaving his checkbook in the car filed a complaint.
the proximate cause of the loss.
HELD:
HELD: There was no categorical finding that the 23 checks were signed by
Where the private respondent’s check was removed and stolen without his persons other than those authorized to sign. On the contrary, the NBI
knowledge and consent, he cannot be considered negligent in this case. reports shows that the fraud was an “inside job” and that the delay in the
reconciliation of the bank statements and the laxity and loss of records
46 PNB V. CA control in the printing of the personalized checks facilitated the fraud. It
25 SCRA 693 further doesn’t provide that the signatures were forgeries.
FACTS: Forgery cannot be presumed. It should be proven by clear, convincing and

Lim deposited in his PCIB account a GSIS check drawn against PNB. positive evidence. This wasn’t done in the present case.
Following standard banking procedures, the check was sent to petitioner
for clearing. He didn’t return said check but paid the amount to PCIB as The petitioner cannot invoke Section 23 because it was guilty of negligence
well as debited it against the account of GSIS. Thereafter, a demand was not only before the questioned checks but even after the same had already
received from GSIS asking for the credit of the amount since the been negotiated.
signatures found in the check were forged. This was done by PNB and it
now comes after PCIB but the latter wouldn’t want to return the money. 48 REPUBLIC V. EQUITABLE BANK
10 SCRA 8
HELD:
Acceptance is not required for checks, for the same are payable on FACTS:
demand. Acceptance and payment are distinguished with each other. The The corporation had acquired 24 treasury warrants by accommodating its
former trusted employee who asked the corporation to cash the warrants,

Page 39 of 190
alleging it was difficulty to do directly with the government and that his checks because from the moment it is paid, it is withdrawn from
wife expected a sort of commission for the encashment. The corporation circulation. When the drawee banks cashes or pays a check, the cycle of
acceded to the request provided that it be first cleared and that the negotiation is terminated and it is illogical thereafter to speak of
corporation would receive the amount before paying for it. The warrants subsequent holders who can invoke the warrant against the drawee.
were then cleared but later on, at different periods of time, the treasurer
returned 24 warrants to the CB on the ground that they have forged. The Further, in determining the relative rights of a drawee who under a mistake
bank refused to return the cash. of fact, has paid, a holder who has received such payment, upon a check to
which the name of the drawer has been forged, it is only fair to consider
The clearing of the checks, it should be noted, was in accordance to the the question of diligence and negligence of the parties in respect thereto.
24-hour clearing rule by the CB. The responsibility of the drawee who pays a forged check, for the
genuineness of the drawer’s signature is absolute only in favor of one who
HELD: has not, by his own fault or negligence, contributed to the success of the
The warrants were cleared and paid by the Treasurer, in view of which fraud or to mislead the drawee.
Equitable and PI bank credited the corresponding amounts to the
respective depositors of the warrants and then honored the checks for said According to the undisputed facts, National City Bank in purchasing the
amounts. Thus, the treasury had not been only negligent in clearing its papers in question from unknown persons without making any inquiry as to
own warrants but had already thereby induced the banks to pay the the identity and authority of said persons negotiating and indorsing them,
amounts thereof to said depositors. This gross negligence becomes more acted negligently and contributed to the constructive loss of PNB in failing
apparent when each of the warrants were valued for more than the to detect the forgery. Under the circumstances of the case, if the appellee
authority of the treasurer to approve. bank is allowed to recover, there will be no change in position as to the
injury or prejudice of the appellant.
49 PNB V. NATIONAL CITY BANK OF NY
63 PHIL 711 DRAWER: PANGASINAN
PAYEE: IASMOTOR SERVICE
FACTS: DRAWEE: PNB
Unknown persons negotiated with Motor Services Company checks, which COLLECTING BANK: NATIONAL CITY BANK OF NEW YORK
were part of the stipulation in payment of automobile tires purchased from
the latter’s store. It purported to have been issued by Pangasinan
Transportation Company. The said checks were indorsed at the back by 50 METROPOLITAN BANK V. CA
said unknown persons, the Motor company believing at that time that the 194 SCRA 169
signatures contained therein were genuine. The checks were later
deposited with the company’s account in National City Bank of NY. The FACTS:
said checks were consequently cleared and PNB credited National City Bank Gomez opened an account with Golden Savings bank and deposited 38
with the amounts. Thereafter, PNB discovered that the signatures were treasury warrants. All these warrants were indorsed by the cashier of
forged and it demanded the reimbursement of the amounts for which it Golden Savings, and deposited it to the savings account in a Metrobank
credited the other bank. branch. They were sent later on for clearing by the branch office to the
principal office of Metrobank, which forwarded them to the Bureau of
HELD: Treasury for special clearing. On persistent inquiries on whether the
A check is a bill of exchange payable on demand and only the rules warrants have been cleared, the branch manager allowed withdrawal of the
governing bills of exchanges payable on demand are applicable to it. in warrants, only to find out later on that the treasury warrants have been
view of the fact that acceptance is a step necessary insofar as negotiable dishonored.
instruments are concerned, it follows that the provisions relative to
acceptance are without application to checks. Acceptance impies HELD:
subsequent negotiation of the instrument, which is not true in the case of

Page 40 of 190
The treasury warrants were not negotiable instruments. Clearly, it is Commissioner, the checks were diverted and encashed for the envetual
indicated that it was non-negotiable and of equal significance is the distribution among members of the syndicate.
indication that they are payable from a particular fund, Fund 501. This
indication as the source of payment to be made on the treasury warrant Pursuant to this, it is vital to show that the negotiation is made by the
makes the promise to pay conditional and the warrants themselves non- perpetrator in breach of faith amounting to fraud. The person negotiating
negotiable. the checks must have gone beyond the authority given by his principal. If
the principal could prove that there was no negligence in the performance
Metrobank then cannot contend that by indorsing the warrants in general, of his duties, he may set up the personal defense to escape liability and
GS assumed that they were genuine and in all respects what they purport recover from other parties who, through their own negligence, allowed the
it to be, in accordance to Section 66 of the NIL. The simple reason is that commission of the crime.
the law isn’t applicable to the non-negotiable treasury warrants. The
indorsement was made for the purpose of merely depositing them with It should be resolved if Ford is guilty of the imputed contributory
Metrobank for clearing. It was in fact Metrobank which stamped on the negligence that would defeat its claim for reimbursement, bearing in mind
back of the warrants: “All prior indorsements and/or lack of endorsements that its employees were among the members of the syndicate. It appears
guaranteed…” although the employees of Ford initiated the transactions attributable to
the organized syndicate, their actions were not the proximate cause of
51 PCIB V. CA encashing the checks payable to CIR. The degree of Ford’s negligence
350 SCRA 446 couldn’t be characterized as the proximate cause of the injury to parties.
The mere fact that the forgery was committed by a drawer-payor’s
FACTS: confidential employee or agent, who by virtue of his position had unusual
Ford Philippines filed actions to recover from the drawee bank Citibank and facilities for perpetrating the fraud and imposing the forged paper upon the
collecting bank PCIB the value of several checks payable to the bank, doesn’t entitle the bank to shift the loss to the drawer-payor, in the
Commissioner of Internal Revenue which were embezzled allegedly by an absence of some circumstance raising estoppel against the drawer.
organized syndicate. What prompted this action was the drawing of a
check by Ford, which it deposited to PCIB as payment and was debited Note: not only PCIB but also Citibank is responsible for negligence.
from their Citibank account. It later on found out that the payment wasn’t Citibank was negligent in the performance of its duties as a drawee bank.
received by the Commissioner. Meanwhile, according to the NBI report, It failed to establish its payments of Ford’s checks were made in due
one of the checks issued by petitioner was withdrawn from PCIB for alleged course and legally in order.
mistake in the amount to be paid. This was replaced with manager’s check
by PCIB, which were allegedly stolen by the syndicate and deposited in 52 ILLUSORIO V. CA
their own account. 393 SCRA 89
The trial court decided in favor of Ford. FACTS:

Petitioner was a prominent businessman who, because of different business
ISSUE: commitments, entrusted to his then secretary the handling of his credit
Has Ford the right to recover the value of the checks intended as payment cards and checkbooks. For a material period of time, the secretary was
to CIR? able to encash and deposit in her personal account money from the
account of petitioner. Upon knowledge of her acts, she was fired
HELD: immediately and criminal actions were filed against her. Thereafter,
The checks were drawn against the drawee bank but the title of the person petitioner requested the bank to restore its money but the bank refused to
negotiating the same was allegedly defective because the instrument was do so.
obtained by fraud and unlawful means, and the proceeds of the checks
were not remitted to the payee. It was established that instead paying the HELD:

Page 41 of 190
The petitioner doesn’t have a course of action against the bank. To be

entitled to damages, petitioner has the burden of proving negligence on the *Loss borne by proximate cause of negligence
part of the bank for failure to detect the discrepancy in the signatures on
the checks. It is incumbent upon petitioner to establish the fact of forgery. 54 CITIBANK N.A V. CABAMONGAN
Curiously though, petitioner failed to supply additional signature specimens 488 SCRA 517
as requested by the NBI. The bank was not also remiss in performance of
its duties, it practices due diligence in encashing checks. The bank didn’t FACTS:
have any hint of the modus operandi of Eugenio as she was a regular Spouses Cabamongan opened a joint and/or foreign currency time deposit
customer, designated by the petitioner himself to transact on his behalf. in favor of their two children with Citibank. On a material date, a person
who claimed to be Carmelita sought the pretermination of the account.
It was petitioner who was negligent in this case. He failed to examine his She presented identification cards to ascertain her identity to the then
bank statements and this was the proximate cause of his own damage. account officer. When she left with the money, she left an identification
Because of this negligence, he is precluded from setting up the defense of card. The account officer then called up the address. The spouses and
forgery with regard the checks. their family knew of the incident. They were presently residing in the US
and there was a prior incident wherein they got robbed in their house with
53 BPI V. CASA MONTESORRI INTERNATIONALE the jewelry box and cards stolen. Spouses made several demands for the
430 SCRA 261 return of the amount but Citibank refused to do so.
FACTS: HELD:
CASA has a current account with BPI. It was discovered that for a material Citibank was negligent. First, the “depositor” didn’t present the Certificate
period of time, several checks were encashed by a certain Sonny Santos, of Deposit. Second, from the internal memorandum issued by the Account
who eventually was known to be a fictitious name used by the external Officer, he admitted to the fact that the specimen signature was different
auditor of CASA. The external auditor admitted forging the signature of from the one who misrepresented herself as Carmelita. Third, the bank
CASA’s president to be able to encash the checks. The trial court held the kept in its records pictures of its depositors. It is inconceivable how the
bank liable but this was modified. The modified decision apportioned the bank was duped by an imposter.
loss between BPI and CASA.
HELD: (FORGED INDORSEMENT)
A forged signature is a real and absolute defense, and a person whose
signature appears on a negotiable instrument is forged is deemed to never 55 GREAT EASTERN LIFE V. HSBC
have become a party thereto and to have never consented to the contract 43 PHIL 678
that allegedly gave rise to it.
FACTS:
The counterfeiting of any writing, consisting in the signing of another’s The plaintiff is an insurance corporation, which drew a check in favor of
name with intent to defraud, is forgery. Melicor. This was stolen by Maasim, forged the signature of Melicor and
deposited the check to his account in PNB. Thereafter, PNB endorsed the
First, there was really a finding of forgery. The forger admitted even in his check to HSBC who later debited the account of plaintiff. Plaintiff believed
affidavit of his forgery. all along that Melicor received the payment. Upon knowledge of the debit
HSBC did on its account, it demanded that the same amount be credited.
Second, there was a finding by the police laboratory that indeed the
signatures were forged. HELD:
The banks are liable. The money was in deposit with the bank and it had
Furthermore, the negligence is attributable to BPI alone. Its negligence no legal right to pay it out to anyone except the plaintiff or its order.
consisted in the omission of the degree of diligence required of a bank.

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The only remedy of the bank paying a check to a person who has forged statements, she didn't carefully examine the same to double-check her
the name of the payee is against the forger. payments. Petitioner didn't exercise reasonable diligence which eventually
led to the fruition of her bookkeeper’s fraudulent schemes.
56 GEMPESAW V. CA
218 SCRA 682 57 BANCO DE ORO SAVING V. EQUITABLE
157 SCRA 188
FACTS:
Gempensaw was the owner of many grocery stores. She paid her suppliers FACTS:
through the issuance of checks drawn against her checking account with BDO drew checks payable to member establishments. Subsequently, the
respondent bank. The checks were prepared by her bookkeeper Galang. checks were deposited in Trencio’s account with Equitable. The checks
In the signing of the checks prepared by Galang, Gempensaw didn't bother were sent for clearing and was thereafter cleared. Afterwards, BDO
herself in verifying to whom the checks were being paid and if the discovered that the indorsements in the back of the checks were forged. It
issuances were necessary. She didn't even verify the returned checks of then demanded that Equitable credit its account but the latter refused to
the bank when the latter notifies her of the same. During her two years in do so. This prompted BDO to file a complaint against Equitable and PCHC.
business, there were incidents shown that the amounts paid for were in The trial court and RTC held in favor of the Equitable and PCHC.
excess of what should have been paid. It was also shown that even if the
checks were crossed, the intended payees didn't receive the amount of the HELD:
checks. This prompted Gempensaw to demand the bank to credit her First, PCHC has jurisdiction over the case in question. The articles of
account for the amount of the forged checks. The bank refused to do so incorporation of PHHC extended its operation to clearing checks and other
and this prompted her to file the case against the bank. clearing items. No doubt transactions on non-negotiable checks are within
the ambit of its jurisdiction. Further, the participation of the two banks in
HELD: the clearing operations is submission to the jurisdiction of the PCHC.
Forgery is a real defense by the party whose signature was forged. A party
whose signature was forged was never a party and never gave his consent Petitioner is likewise estopped from raising the non-negotiability of the
to the instrument. Since his signature doesn’t appear in the instrument, checks in issue. It stamped its guarantee at the back of the checks and
the same cannot be enforced against him even by a holder in due course. subsequently presented it for clearing and it was in the basis of these
The drawee bank cannot charge the account of the drawer whose signature endorsements by the petitioner that the proceeds were credited in its
was forged because he never gave the bank the order to pay. clearing account. The petitioner cannot now deny its liability as it assumed
the liability of an indorser by stamping its guarantee at the back of the
In the case at bar the checks were filled up by petitioner’s employee checks.
Galang and were later given to her for signature. Her signing the checks
made the negotiable instruments complete. Prior to signing of the checks, Furthermore, the bank cannot escape liability of an indorser of a check and
there was no valid contract yet. Petitioner completed the checks by which may turn out to be a forged indorsement. Whenever a bank treats
signing them and thereafter authorized Galang to deliver the same to their the signature at the back of the checks as indorsements and thus logically
respective payees. The checks were then indorsed, forged indorsements guarantees the same as such there can be no doubt that said bank had
thereon. considered the checks as negotiable.
As a rule, a drawee bank who has paid a check on which an indorsement A long line of cases also held that in the matter of forgery in
has been forged cannot debit the account of a drawer for the amount of endorsements, it is the collecting bank that generally suffers the loss
said check. An exception to this rule is when the drawer is guilty of because it had the dutyh to ascertain the genuineness of all prior
negligence which causes the bank to honor such checks. Petitioner in this indorsements considering that the act of presenting the check for payment
case has relied solely on the honesty and loyalty of her bookkeeper and to the drawee is an assertion that the party making the presentment has
never bothered to verify the accuracy of the amounts of the checks she done its duty to ascertain the genuineness of the indorsements.
signed the invoices attached thereto. And though she received her bank

Page 43 of 190
58 BPI V. CA The acts of BPI employees was the proximate cause to the loss.
216 SCRA 51 Nevertheless, the negligence of the employees of CBC should be taken also
into consideration. They closed their eyes to the suspicious large amount
FACTS: withdrawals made over the counter as well as the opening of the account.
Someone who identified herself to be Fernando called up BPI, requesting
for the pre-termination of her money market placement with the bank. 59 JAI ALAI V. BPI
The person who took the call didn't bother to verify with Fernando’s office if 66 SCRA 29
whether or not she really intended to preterminate her money market
placement. Instead, he relied on the verification stated by the caller. He FACTS:
proceeded with the processing of the termination. Thereafter, the caller Checks were deposited by petitioner in its current account with the bank.
gave delivery instructions that instead of delivering the checks to her These checks were from a certain Ramirez, a consistent better in its
office, it would be picked up by her niece and it indeed happen as such. It games, who was a sales agent from Inter-Island Gas. Inter-Island later
was found out later on that the person impersonated Fernando and her found out that of the forgeries committed in the checks and thus, it
alleged niece in getting the checks. The dispatcher also didn't bother to informed all the parties concerned. Upon the demands on the bank as the
get the promissory note evincing the placement when he gave the checks collecting bank, it debited the account of petitioner. Thereafter, petitioner
to the impersonated niece. This was aggravated by the fact that this tried to issue a check for payment of shares of stock but such was
impersonator opened an account with the bank and deposited the subject dishonored for insufficient funds. It filed a complaint against the bank.
checks. It then withdrew the amounts.
HELD:
The day of the maturity of the money market placement happened and the Respondent bank acted within legal bounds when it debited the account of
real Fernando surfaced herself. She denied preterminating the money petitioner. When the petitioner deposited the checks to its account, the
market placements and though she was the payee of the checks in issue, relationship created was one of agency still and not of creditor-debtor. The
she didn't receive any of its proceeds. This prompted the bank to bank was to collect from the drawees of the checks with the corresponding
surrender to CBC the checks and asking for reimbursement on alleged proceeds.
forgery of payee’s indorsements.
Bank may have the proceeds already when it debited the account of
HELD: petitioner. Nonetheless, there is still no creditor-debtor relationship.
The general rule shall apply in this case. Since the payee’s indorsement
has been forged, the instrument is wholly inoperative. However, Following Section 23, a forged signature is wholly inoperative and no right
underlying circumstances of the case show that the general rule on forgery to discharge it or enforce its payment can be acquired through or under the
isn’t applicable. The issue as to who between the parties should bear the forged signature except against a party who cannot invoke its forgery or
loss in the payment of the forged checks necessitates the determination of want of authority. It stands to reason that as a collecting bank which
the rights and liabilities of the parties involved in the controversy in indorsed the checks to the drawee-banks for clearing, should be liable to
relation to the forged checks. the latter for reimbursement for the indorsements on the checks had been
forged prior to their delivery to the petitioner. The payments made by the
The acts of the employees of BPI were tainted with more negligence if not drawee banks to respondent were ineffective—the creditor-debtor
criminal than the acts of CBC. First, the act of disclosing information about relationship hadn’t been validly effected.
the money market placement over the phone is a violation of the General
Banking Law. Second, there was failure on the bank’s part to even
compare the signatures during the termination of the placement, opening 60 REPUBLIC V. EBRADA
of a new account with the specimen signature in file of Fernando. And 65 SCRA 680
third, there was failure to ask the surrender of the promissory note
evidencing the placement. FACTS:

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Ebrada encashed a “Back Pay Check” issued by the Bureau of Treasury at NOTES FOR WEEK #5:
the Republic Bank in Escolta Manila. The Bureau of Treasury advised the
JULY 10 - 15, 2007
Republic Bank that the instrument was forged. It informed the bank that
the original payee of the check died 11 years before the check was issued.
Therefore, there was a forgery of his signature. 61 MANILA LIGHTER TRANS V. CA
182 SCRA 251
This is the sequence:
FACTS:
Martin Lorenzo The deceased person, original
Perez was able to collect the checks payable to petitioner. The petitioner
“payee”, where the forgery
wasn't able however to receive the checks. Instead, the payee’s signatures
happened
therein were forged and was able to land in the hands of third persons who
Ramon Lorenzo
deposited the same to their account in China bank. Petitioner sued
Delia Dominguez
Chinabank for the sum of money. The trial court held that there was equal
Mauricia Ebrada Defendant-appelant
negligence on the part of petitioner and bank but the appellate court held
that the bank had no liability whatsoever.
Ebrada refuses to return the proceeds of the check claiming that she
already gave it to Delia Dominguez. She also claims that she is a HDC HELD:
(holder in due course) and that the bank is already estopped. Since the petitioner had no account with the bank and wasn't a client
thereof, the latter had no way of ascertaining the authenticities of its
HELD: indorsements on the checks which were deposited in the accounts of the
third party defendants in said bank. Respondent bank wasn't negligent
Ebrada should return the proceeds of the check to Republic Bank. As an because, in accordance with banking practice, it caused the checks to pass
indorser of the check, she was supposed to have warranted that she has through the clearing house before it allowed their proceeds to be
good title to said check. See Section 65. withdrawn by the depositors.
Section 23: When the signature is forged or made without the authority of 62 ASSOCIATED BANK V. CA
the person whose signature it purports to be, it is wholly inoperative, and 208 SCRA 465
no right to retain the instruments, or to give a discharge thereof against
any party thereto, can be acquired through or under such signature unless FACTS:
the party against whom it is sought to enforce such right is PRECLUDED Reyes was engaged in the RTW business and held transactions with
from setting up the forgery or want of authority. different department stores. She was about to collect payments from the
department stores when she was informed that the payments had already
It is only the negotiation based on the forged or unauthorized signature been made, through crossed checks issued in her business’ name and the
which is inoperative. Therefore: same were deposited with the bank. The bank consequently allowed its
transfer to Sayson who later encashed the checks. This prompted Reyes to
Martin Lorenzo Signature inoperative sue the bank and its manager for the return of the money. The trial and
Ramon Lorenzo To Dominguez: operative appellate court ruled in her favor.
Delia Dominguez To Ebrada: operative
Mauricia Ebrada HELD:
There is no doubt that the checks were crossed checks and for payee’s
Drawee bank can collect from the one who encashed the check. If Ebrada account only. Reyes was able to show that she has never authorized
performed the duty of ascertaining the genuiness of the check, in all Sayson to deposit the checks nor to encash the same; that the bank had
probability, the forgery wouyld have been detected and the fraud defeated. allowed all checks to be deposited, cleared and paid to one Sayson in
violation of the instructions in the said crossed checks that the same were

Page 45 of 190
for payee’s account only; and that Reyes maintained a savings account indorsements. This prompted the provincial treasurer to ask for
with the bank which never cleared the said checks. reimbursement from PNB and thereafter, PNB from Associated Bank. As
the two banks didn't want to reimburse, an action was filed against them.
Under accepted banking practice, crossing a check is done by writing two
parallel lines diagonally on the top left portion of the checks. The crossing HELD:
is special where the name of a bank or a business institution is written There is a distinction on forged indorsements with regard bearer
between the two parallel lines, which means that the drawee should pay instruments and instruments payable to order.
only with the intervention of the company. The crossing is general where
the words written in between are “And Co.” and “for payee’s account only”, With instruments payable to bearer, the signature of the payee or holder is
as in the case at bar. This means that the drawee bank should not encash unnecessary to pass title to the instrument. Hence, when the indorsement
the check but merely accept it for deposit. is a forgery, only the person whose signature is forged can raise the
defense of forgery against holder in due course.
The effects of crossing a check are as follows:
1. That the check may not be encashed but only deposited in the In instruments payable to order, the signature of the rightful holder is
bank essential to transfer title to the same instrument. When the holder’s
2. That the check may be negotiated only once—to one who has an signature is forged, all parties prior to the forgery may raise the real
account with a bank defense of forgery against all parties subsequent thereto. In connection to
3. That the act of crossing the check serves as a warning to the this, an indorser warrants that the instrument is genuine. A collecting
holder that the check has been issued for a definite purpose so bank is such an indorser. So even if the indorsement is forged, the
that he must inquire if he has received the check pursuant to the collecting bank is bound by his warranties as an indorser and cannot set up
purpose the defense of forgery as against the drawee bank.
The subject checks were accepted for deposit by the bank for the account Furthermore, in cases involving checks with forged indorsements, such as
of Sayson although they were crossed checks and the payee wasn't Sayson the case at bar, the chain of liability doesn't end with the drawee bank.
but Reyes. The bank stamped thereon its guarantee that all prior The drawee bank may not debit the account of the drawer but may
endorsements and/or lack of endorsements guaranteed. By such generally pass liability back through the collection chain to the party who
deliberate and positive act, the bank had for all legal intents and purposes took from the forger and of course, the forger himself, if available. In
treated the said checks as negotiable instruments and accordingly assumed other words, the drawee bank can seek reimbursement or a return of the
the warranty of the endorser. amount it paid from the collecting bank or person. The collecting bank
generally suffers the loss because it has te duty to ascertain the
When the bank paid the checks so endorsed notwithstanding that title has genuineness of all prior endorsements considering that the act of
not passed to the endorser, it did so at its peril and became liable to the presenting the check for payment to the drawee is an assertion that the
payee for the value of the checks. party making the presentment has done its duty to ascertain the
genuineness of the indorsements.
63 ASSOCIATED BANK V. CA
252 SCRA 620 With regard the issue of delay, a delay in informing the bank of the
forgery, which deprives it of the opportunity to go after the forger, signifies
FACTS: negligence on the part of the drawee bank and will preclude it from
The province of Tarlac maintains an account with PNB-Tarlac. Part of its claiming reimbursement. In this case, PNB wasn't guilty of any negligent
funds is appropriated for the benefit of Concepcion Emergency Hospital. delay. Its delay hasn't prejudiced Associated Bank in any way because
During a post-audit done by the province, it was found out that 30 of its even if there wasn't delay, the fact that there was nothing left of the
checks weren’t received by the hospital. Upon further investigation, it was account of Pangilinan, there couldn't be anymore reimbursement.
found out that the checks were encashed by Pangilinan who was a former
cashier and administrative officer of the hospital through forged 64 WESTMONT BANK V. ONG

Page 46 of 190
373 SCRA 212 FACTS:

RPN, IBC and BBC were all assessed for tax by the BIR. To pay the
FACTS: assessed taxes, they bought manager’s checks from petitioner bank. None
Ong was supposed to be the payee of the checks issued by Island of these checks were paid to the BIR. They were found to have been
Securities. Ong has a current account with petitioner bank. He opted to deposited in the account of a third person in Security Bank. As the taxes
sell his shares of stock through Island Securities. The company in turn remained unpaid, the BIR issued a levy, distraint and garnishment against
issued checks in favor of Ong but unfortunately, the latter wasn't able to the three networks. An action was filed wherein it was decided that the
receive any. His signatures were forged by Tamlinco and the checks were networks should be reimbursed for the amounts of the checks by petitioner
deposited in his own account with petitioner. Ong then sought to collect bank and the latter in turn, must be reimbursed by Security Bank. In the
the money from the family of Tamlinco first before filing a complaint with appellate court, it was held that Traders Bank should be the only bank
the Central Bank. As his efforts were futile to recover his money, he filed liable.
an action against the petitioner. The trial and appellate court decided in
favor of Ong. HELD:
Petitioner ought to have known that where a check is drawn payable to the
HELD: order of one person and is presented for payment by another and purports
Since the signature of the payee was forged, such signature should be upon its face to have been duly indorsed by the payee of the check, it is
deemed inoperative and ineffectual. Petitioner, as the collecting bank, the primary duty of the petitioner to know that the check was duly
grossly erred in making payment by virtue of said forged signature. The indorsed by the original payee, and it pays the amount of the check to the
payee, herein respondent, should therefore be allowed to collect from the third person, who has forged the signature of the payee, the loss falls upon
collecting bank. the petitioner who cashed the check. Its only remedy is against the person
to whom it paid the money.
It should be liable for the loss because it is its legal duty to ascertain that
the payee’s endorsement was genuine before cashing the check. As a It should be further noted that one of the checks was a crossed check. The
general rule, a bank or corporation who has obtained possession of a check crossing of the check should have put petitioner on guard; it was duty-
with an unauthorized or forged indorsement of the payee’s signature and bound to ascertain the indorser’s title to the check or the nature of his
who collects the amount of the check other from the drawee, is liable for possession.
the proceeds thereof to the payee or the other owner, notwithstanding that
the amount has been paid to the person from whom the check was Sec. 124. Alteration of instrument; effect of. - Where a negotiable
obtained. instrument is materially altered without the assent of all parties
liable thereon, it is avoided, except as against a party who has
DOCTRINE OF DESIRABLE SHORT CUT—plaintiff uses one action to reach, himself made, authorized, or assented to the alteration and
by desirable short cut, the person who ought to be ultimately liable as subsequent indorsers.
among the innocent persons involved in the transaction. In other words, But when an instrument has been materially altered and is in the
the payee ought to be allowed to recover directly from the collecting bank, hands of a holder in due course not a party to the alteration, he
regardless of whether the check was delivered to the payee or not. may enforce payment thereof according to its original tenor.
On the issue of laches, Ong didn't sit on his rights. He immediately sought RIGHTS OF ONE NOT HOLDER IN DUE COURSE
the intervention of Tamlinco’s family to collect the sum of money, and later • Where an instrument has been materially altered, it is avoided in the
the Central Bank. Only after exhausting all the measures to settle the hands of one who is not a holder in due course as against a prior party
issue amicably did he file the action. who has not assented to the alteration
65 TRADERS ROYAL BANK V. RPN WHERE INSTRUMENT NOT AVOIDED AS TO HOLDER NOT IN DUE COURSE
390 SCRA 608 1. A party who has made the material alteration
2. A party who has authorized the material alteration

Page 47 of 190
3. A party who has assented to the material alteration

4. Any subsequent indorsers (f) Or which adds a place of payment where no place of
payment is specified, or any other change or addition which alters
RIGHTS OF HOLDER IN DUE COURSE the effect of the instrument in any respect, is a material alteration.
• He may enforce the instrument in its original tenor
• He could recover the altered tenor to any party who has made, CASE DIGESTS: SECTIONS 124 AND 125
authorized or assented the alteration, or any subsequent indorser of
the instrument 66 HSBC V. PEOPLE’S BANK
35 SCRA 140
NO DISTINCTION BETWEEN FRAUDULENT AND INNOCENT ALTERATION
FACTS:
RIGHT TO COLLECT ORIGINAL CONSIDERATION People’s Bank is sought to be liable for the amount involved in checks
• When the alteration wasn't fraudulently done, the holder may recover subject of this case. This arose from the following facts:
the original consideration
PLDT drew a check on HSBC with the latter being the payee. The check
WHERE DRAWEE BANK PAYS ALTERED AMOUNT, DRAWER HAS THE RIGHT landed in the hands of a third person who successfully substituted his
TO HAVE HIS ACCOUNT DEBITED WITH CORRECT AMOUNT ONLY name as payee and deposited the check with the People’s Bank. Upon
knowledge of this, reimbursement was being sought from the People’s
BANKS ARE BOUND BY THE 24-HOUR CLEARING HOUSE RULE AND MUST Bank and it refused to do so. This prompted to an action against it.
NOTIFY THE COLLECTING BANKS WITHIN 24 HOURS OF ALTERATION OF
CHECKS HELD:
The entire case of HSBC relied on the indorsement that has been
SECTION 23 SECTION 124 AND 125 heretofore copied—namely, a guarantee of all prior indorsements made by
Forgery with regard the signature of Forgery on any other material in the People’s Bank and since such an indorsement carries with it a concomitant
the drawer or indorser instrument guarantee of genuineness, the People’s Bank is liable to HSBC for alteration
Real defense Personal defense—the instrument is of the name of the payee. On the other hand, the People’s Bank relied on
not avoided when it comes to a the 24-hour regulation of the Central Bank that required after a clearing,
holder in due course; the holder that all cleared items must be returned not later than 24 hours. It should
may enforce the original tenor still be noted that the checks were returned by HSBC 27 days later. Dismissal
of the instrument of its complaint was therefore called for.
67 REPUBLIC BANK V. CA
Sec. 125. What constitutes a material alteration. - Any alteration 196 SCRA 100
which changes:
FACTS:
(a) The date; SMC issued a dividend check in favor of Delgado and the check was drawn
against FBTC. Delgado was able to alter the check, increased the amount
(b) The sum payable, either for principal or interest; of the same and deposited it with his account in Republic Bank. RB
indorsed it with FBTC. The SMC notified FBTC of the alterations made and
(c) The time or place of payment: demanded for reimbursement. Republic Bank then didn't want to
reimburse. The trial court held it liable.
(d) The number or the relations of the parties;
HELD:
(e) The medium or currency in which payment is to be made;

Page 48 of 190
The 24-hour clearing rule is a valid rule applicable to commercial banks. It In view of the foregoing, the embassy as the drawer of the 3 checks in
is true that when an indorsement is forged, the collecting bank or last question cannot be held liable. It is apparent that the said 3 checks were
indorser, as a general rule, bears the loss. But the unqualified (fraudulently altered) by Boncan as to their accounts and therefore wholly
endorsement of the collecting bank of the checks should be read together inoperative (note: should be “avoided”).
with the 24-hour regulation on clearing house operation. Thus, when a
drawee bank fails to return the forged check to the collecting bank within 69 PNB V. CA
the 24-hour clearing rule, the collecting bank is absolved from liability. 256 SCRA 491
68 BANCO ATLANTICO V. AUDITOR GENERAL FACTS:

81 SCRA 335 DECS issued a check in favor of Abante Marketing containing a specific
serial number, drawn against PNB. The check was deposited by Abante in
FACTS: its account with Capitol and the latter consequently deposited the same
Boncan was the Finance Officer of the Philippine Embassy in Madrid who on with its account with PBCOM which later deposited it with petitioner for
many occasions negotiated with Banco Atlantico checks, allegedly endorsed clearing. The check was thereafter cleared. However, on a relevant date,
to her by the embassy. On these occasions, the bank allowed the payment petitioner PNB returned the check on account that there had been a
of the checks, notwithstanding the fact that the drawee bank has not yet material alteration on it. Subsequent debits were made but Capitol cannot
cleared the checks for collection. This was premised on the finding that debit the account of Abante any longer for the latter had withdrawn all the
Boncan had special relations with the employees of the bank. And that money already from the account. This prompted Capitol to seek
upon presentment to the drawee bank, the checks were dishonored due to reclarification from PBCOM and demanded the recrediting of its account.
non-acceptance allegedly on the ground that the drawer has ordered the PBCOM followed suit by doing the same against PNB. Demands unheeded,
stoppage of payment. This prompted Banco Atlantico to collect from the it filed an action against PBCOM and the latter filed a third-party complaint
Philippine Embassy for the funds released to Boncan but the latter refused. against petitioner.
This eventually led to filing of money claim of the bank with the Auditor
General. HELD:
An alteration is said to be material if it alters the effect of the instrument.
HELD: It means an unauthorized change in the instrument that purports to modify
On whether or not Banco Atlantico was a holder in due course, it is not. in any respect the obligation of a party or an unauthorized addition of
Following the decision of the Auditor General in denying the claim of the words or numbers or other change to an incomplete instrument relating to
bank, the checks were demand notes. It should have been put on guard the obligation of the party. In other words, a material alteration is one
when Boncan negotiated the checks with them and subsequently deposited which changes the items which are required to be stated under Section 1 of
the same to her account. Even though it were demand notes, she the NIL.
instructed the bank that the same be not presented for collection till a later
date. The fact that the amount was quite big and it was the payee herself In this case, the alleged material alteration was the alteration of the serial
who made the request that the same be not presented for collection until a number of the check in issue—which is not an essential element of a
fixed date in the future was proof of a glaring infirmity or defect in the negotiable instrument under Section 1. PNB alleges that the alteration was
instrument. It loudly proclaims “Take me at your own risk.” It was material since it is an accepted concept that a TCAA check by its very
obvious by then that the bank had knowledge of the infirmity or defect of nature is the medium of exchange of governments, instrumentalities and
the checks. Furthermore, what it did when it allowed payment before agencies. As a safety measure, every government office or agency is
clearing is beyond the normal and ordinary banking practice especially assigned checks bearing different serial numbers.
when the bank involved is a foreign bank and the amounts involved were
large. Boncan wasn't even a client of the bank but was someone who had But this contention has to fail. The check’s serial number is not the sole
special relations with its officers. indicia of its origin. The name of the government agency issuing the check
is clearly stated therein. Thus, the check’s drawer is sufficiently identified,
rendering redundant the referral to its serial number.

Page 49 of 190
signature of Wolff and that the statement “payment guaranteed xxx” was
Therefore, there being no material alteration in the check committed, PNB not written on said indorsement at the time it signed the firm name.
could not return the check to PBCOM. It should pay the same.
HELD:
ATTY. MERCADO’S QUESTION: HOW DO YOU RECONCILE THE OPINION An examination of the alleged indorsement of Macondray & Co. which
OF VITUG WITH AGBAYANI’S RE: MATERIAL ALTERATION? appeared upon the said bill of exchange at the time of the trial, and the
Vitug only refers to innocent alterations not affecting negotiability and indorsement of said company at the time of the protest of said bill of
those under Section 124 and 125 exchange, shows beyond peradventure of doubt that the contention of the
defendant is true, and that part of the indorsement which says "Payment
70 AMERICAN BANK V. MACONDRAY guaranteed. Protest, demand, and notice of nonpayment waived" was
4 PHIL 695 added by some person after the signature of the defendant, Macondray &
Co., and after the protest of said bill. The indorsement made by Macondray
FACTS: & Co. was changed, after said indorsement by said company, by adding
MANILA, P. I., August 12, 1902. thereto the statement "Payment guaranteed. Protest, demand, and notice
of nonpayment waived," and that the indorsement actually made by
$300.00 Macondray & Co. was in the following form:
At sight pay to my order three hundred dollars, value received, and charge V. S. Wolff. The signature is O. K. Macondray & Co.
to my account.
The liability of an indorser of a bill of exchange, after due protest and
V. S. WOLFF. 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
To F. H. TAYLOR & Co., contract by the holder of the same, without the consent of the obligor, will
Louisville, Kentucky. relieve such obligor from all liability thereon.
No ................................ The original indrosement then of the company was for the purpose only of
assuring the American Bank that the signature of Wolff was genuine—that
[Indorsements.] is to say, that the person whom he represented himself to be. It was an
indorsement for identification of the person only and not for the purpose of
V. S. Wolff. The signature is O. K. payment guaranteed. Protest, demand, incurring liability to the payment of such bill of exchange.
and notice of nonpayment waived. Macondray & Company.
71 MONTINOLA V. PNB
Pay to First National Bank of San Francisco, or order. American Bank, 88 PHIL 178
Manila, P. I. H. B. Mulford, cashier.
FACTS:
Pay to 3rd National Bank or order. The First National Bank of San Ramos, as a disbursing officer of an army division of the USAFE, made cash
Francisco. James K. Lynch, cashier. advancements w/ the Provincial Treasurer of Lanao. In exchange, the
Prov’l Treasurer of Lanao gave him a P500,000 check. Thereafter, Ramos
presented the check to Laya for encashment. Laya in his capacity as
American Bank claims the right to recover from Wolff the amount of the bill Provincial Treasurer of Misamis Oriental as drawer, issued a check to
of exchange upon the theory that Macondray guaranteed the payment of Ramos in the sum of P100000, on the Philippines National Bank as drawee;
the instrument. This was refuted by Macondray by saying that it didn't the P400000 value of the check was paid in military notes.
guarantee the payment of the instrument. Instead, it only certified the

Page 50 of 190
Ramos was unable to encash the said check for he was captured by the The alterations in the checks were made on its serial numbers. This has
Japanese. But after his release, he sold P30000 of the check to Montinola been long decided in a previous case involving PNB, the same bank in this
for P90000 Japanese Military notes, of which only P45000 was paid by the case. An alteration on the serial number is not to be considered as a
latter. The writing made by Ramos at the back of the check was to the material alteration. A material alteration is one which changes the items
effect that he was assigning only P30000 of the value of the document with relating to any of the essential requisites mentioned in Section 1.
an instruction to the bank to pay P30000 to Montinola and to deposit the
balance to Ramos's credit. This writing was, however, mysteriously There is no need to rule on the 24-hour clearing period since there was no
obliterated and in its place, a supposed indorsement appearing on the back material alteration to speak of. PNB had no right to dishonor the checks
of the check was made for the whole amount of the check. At the time of and return them to petitioner. Thus, PNB is liable for the value of the
the transfer of this check to Montinola, the check was long overdue by checks.
about 2-1/2 years.
**Modification of the 24-hour clearing rule. Now, its notice after 24 hours
Montinola instituted an action against the PNB and the Provincial Treasurer of discovering the fraud or material alteration.
of Misamis Oriental to collect the sum of P100,000, the amount of the
aforesaid check. There now appears on the face of said check the words in 73 METROBANK V. CABLIZO
parenthesis "Agent, Phil. National Bank" under the signature of Laya 510 SCRA 259
purportedly showing that Laya issued the check as agent of the Philippine
National Bank. FACTS:
Cablizo maintained an account with petitioner. It drew a check payable to
HELD: cash payable to a certain Marquez, for the latter’s sales commission. The
The words "Agent, Phil. National Bank" now appearing on the face of the check was subsequently deposited in Westmont bank and the latter
check were added or placed in the instrument after it was issued by the submitted it with Metrobank for clearing. The check was cleared.
Provincial Treasurer Laya to Ramos. The check was issued by only as
Provincial Treasurer and as an official of the Government, which was under Thereafter, the bank’s representative asked Cablizo if he issued a check for
obligation to provide the USAFE with advance funds, and not as agent of P91,000. The answer was in the negative. This prompted Cablizo to call
the bank, which had no such obligation. The addition of those words was Metrobank and ask for the recrediting of P90,000 but petitioner failed to
made after the check had been transferred by Ramos to Montinola. The recredit the amount prompting Cablizo to file an action against it.
insertion of the words "Agent, Phil. National Bank," which converts the
bank from a mere drawee to a drawer and therefore changes its liability, HELD:
constitutes a material alteration of the instrument without the consent of An alteration is said to be material if it alters the effect of the instrument.
the parties liable thereon, and so discharges the instrument It means an unauthorized change in the instrument that purports to modify
in any respect the obligation of a party or an unauthorized addition of
72 THE INTERNATIONAL CORPORATE BANK V. CA AND PNB words or numbers or other change to an incomplete instrument relating to
501 SCRA 20 the obligation of the party. In other words, a material alteration is one
which changes the items which are required to be stated under Section 1 of
FACTS: the NIL.
Here comes again the Ministry of Education issuing checks drawn against
PNB. It was deposited with petitioner bank and the latter consequently The check in issue was materially altered when its amount was increased
submitted the checks to PNB for clearing. After the 24-hour clearing period from P1000 to P91000. Cablizo was not the one who authorized or made
without any reply from the latter, the petitioner bank credited the account such increase. There is no showing that he was negligent in exercising
with the values of the checks. Thereafter, PNB returned the checks without what was due in a prudent man which could have otherwise prevented the
clearing them for allegedly being materially altered. loss. Cablizo was never remiss in the preparation and issuance of the
check.
HELD:

Page 51 of 190
The doctrine of equitable estoppel is inapplicable against Cablizo. This 48 PHIL 5

doctrine states that when one of the two innocent person, each guiltiness
of an intentional or moral wrong, must suffer a loss, it must be borne by FACTS:
the one whose erroneous conduct, either by omission or commission, was Laguna Coconut Oil Company executed the following promissory note in
the cause of the injury. Negligence is never presumed. favor of the Philippine Vegetable Oil Company:
Metrobank was actually the one remiss in its duties. The CA took into P50,000.00.
consideration that the alterations were actually visible in the eye and yet
the bank allowed someone not acquainted with the examination of checks One month after date we promise to pay to the Philippine Vegetable Oil
to do the same. Furthermore, it cannot rely on the indorsement of Company, Inc., or order at City of Manila, Philippine Islands, the sum of
Westmont Bank of the check. It should have exercised meticulous care in fifty thousand pesos (P50,000), Philippine currency; value received.
handling the affairs of its clients especially if the client’s money is involved.
In case of non-payment of this note at maturity, we are to pay interest at
II. CONSIDERATION the rate of nine per cent (9%) per annum on the said amount and the
further sum of P5,000 in full, without any deduction as and for costs,
Sec. 24. Presumption of consideration. - Every negotiable expenses and attorney's fees for collection whether actually incurred or
instrument is deemed prima facie to have been issued for a not.
valuable consideration; and every person whose signature appears
thereon to have become a party thereto for value. Manila, Philippine Islands, April 26, 1920.
PRESUMPTION OF CONSIDERATION IS DISPUTABLE LAGUNA COCONUT OIL CO.

• One of the disputable presumptions laid down by our Rules of Court is By BALDOMERO COSME
that a negotiable instrument was given or indorsed for a sufficient President
consideration
CONSIDERATION NEED NOT ALLEGED OR PROVED After a month, Fidelity & Surety Company of the Philippine Islands made
• In an action based on a negotiable instrument, it is unnecessary to the following notation on the note:
aver or prove consideration for it is imported and presumed from the
fact that it is a negotiable instrument For value received, we hereby obligate ourselves to hold the Laguna
Cocoanut Oil Co. harmless against loss for having discounted the foregoing
MERE INTRODUCTION OF INSTRUMENT SUFFICIENT note at the value stated therein.
• The mere introduction of the instrument sued on in evidence, prima
facie entitles the plaintiff of a recovery and unless such prima facie Philippine Vegetable Oil Company indorsed the note to BPI, which at
case is overcome by evidence produced by the defendant the plaintiff maturity date demanded payment from both Laguna Oil and Fidelity
is entitled to recover Surety. Both having failed to pay, BPI instituted actions against them. PNB
pleaded the note with its indorsements by copy and alleged that the
EFFECT OF LACK OF CONSIDERATION Fidelity & Surety Company by having undertaken to hold the Laguna Oil
• The same is without legal effect and the payment for the note is not harmless for having discounted the note, contracted the obligation to pay
demandable said note on behalf of the Laguna Oil and to be surety for the latter. The
trial court held against Fidelity and Surety and demanded it to pay the
CASE DIGESTS: SECTION 24 note. The trial court also held that the words “BPI” should have been
placed in the indorsement rather than “Laguna Oil”.
74 BANK OF THE PHILIPPINE ISLANDS V. LAGUNA COCONUT
OIL HELD:

Page 52 of 190
The trial court underestimated the importance of pleading the supposed

mistake in the complaint. The judgment as it stands clearly involves a FACTS:
reformation of the contract of guaranty and it is elementary that the facts Petitioner was a travel agency involved in ticket sales on a commission
upon which relief by reformation is sought must be put in issue by the basis for and on behalf of different airline companies. Miranda has a
pleadings. Jurisprudence states that a court of equity cannot reform an revolving credit line with the company. He procured tickets on behalf of
instrument except on allegations, which make out a case for the equitable others and derived commissions from it.
remedy asked. The allegations must show that the instrument sought to be
reformed fails to express the real agreement or transaction between the Petitioner filed a collection suit against Miranda for the unpaid amount of
parties by reason of their mutual mistake or on account of fraud of one six checks. Petitioner alleged that Miranda procured tickets from them
them or fraud or inequitable condition on one side and mistake on the which he paid with cash and checks but the checks were dishonored upon
other. presentment to the bank. This was being refuted by Miranda by saying
that he actually paid for his obligations, even in the excess. He argued
The indorsement upon which this action is brought does not in terms show that the checks were for accommodation purposes only. The company
any obligation in favor of PNB and the action can only be maintained upon needed to show to its Board of Directors that its accounts receivable was in
the theory that the writing does not express the true intent of the parties. good standing. The RTC and CA held Miranda not to be liable.
It could be speculated that the guarantee in question was intended for the
benefit of the party who subsequently discounted the note, but this cannot HELD:
be certain. The note may have been merely an accommodation not and the Reliance by the lower and appellate court on the company’s financial
guarantee may have been intended for the protection of the maker in the statements were wrong, to see if Miranda was liable or not. This financial
event of the discounting of the note or its transfer to a third party. The statements were actually not updated to show that there was indebtedness
appellee contends that this hypothesis is negatived by the fact that the on the part of Miranda. The best evidence that the courts should have
words "value received" appear in the note as quoted in the stipulation of looked at were the checks itself. There is a prima facie presumption that a
facts. But that proves nothing definitely or conclusively. Unless otherwise check was issued for valuable consideration and the provision puts the
stated in the instrument, a negotiable promissory note implied prima facie burden upon the drawer to disprove this presumption. Miranda was unable
valuable consideration moving to the maker whether the words "value to relieve himself of this burden.
received" appear in it or not.
Only clear and convincing evidence and not mere self-serving evidence of
An accommodation note showing on its face in express terms that it had drawer can rebut this presumption. The company was entitled to the
been issued for no consideration would be of little or no use to the payee, benefit conferred by the statutory provision. Miranda failed to show that
and for that reason, if for no other, practically all accommodation notes are the checks weren’t issued for any valuable consideration. The checks were
so drawn as to either express or imply a valuable consideration prima facie. clear by stating that the company was the payee and not a mere
There is therefore nothing in the note here in question to distinguish it accommodated party. And also, notice was given to the fact that the
from an ordinary accommodation note. This being so and the guarantee of checks were issued after a written demand by the company regarding
the Fidelity & Surety Company by its terms being in favor of the maker of Miranda’s unpaid liabilities.
the note, there is at least a possibility that the Fidelity, if called upon to do
so, might have been able to prove that the note was given as an 76 PINEDA V. DELA RAMA
accommodation to the Vegetable Oil Company. This possibility existing, the 121 SCRA 671
court was not justified in virtually reforming the document by mere
construction without proper pleadings. In this connection it should be borne FACTS:
in mind that contracts of suretyship and guarantee are strictly construed in Pineda was caught in a case against the NARIC for his alleged
favor of the surety or guarantor. misappropriation of many cavans of palay. He hired Atty. Dela Rama to
delay the filing of the complaint against him, on alleged representation of
75 TRAVEL ON V. CA the lawyer that he is a friend of the NARIC administrator.
210 SCRA 351

Page 53 of 190
Pineda then issued a promissory note in favor of dela Rama to pay for the • Not limited to one who is known to have given valuable
advances that the lawyer made to the administrator to delay the filing of consideration for the instrument he holds—it refers to any holder
the complaint. Dela Rama on the other hand contended that the of an instrument for which value has been given at any time
promissory note was for the loan advanced to Pineda by him. Dela Rama
filed an action against Pineda for the collection of the amount of the note. Sec. 27. When lien on instrument constitutes holder for value. —
Where the holder has a lien on the instrument arising either from
HELD: contract or by implication of law, he is deemed a holder for value to
The presumption that a negotiable instrument was issued for valuable the extent of his lien.
consideration is a rebuttable presumption. It can be rebutted by proof to
the contrary. APPLICATION OF SECTION 27
• Suppose that A makes a note in the sum of P1000 payable to the order
In the case at bar, the claims of dela Rama that the promissory note was of B. B owes C P600. C is said to have a lien on the note to the
for a loan advanced to Pineda is unbelievable. The grant of a loan by a extent of P600 only, and to that extent, he is a holder for value.
lawyer to a moneyed client and whom he has known for only 3 months can • Can C as indorsee collect the whole amount of P1000 from A, or only
not be relied on. Pineda had actually just purchased numerous properties. P600? It depends. If A maker, has defenses against B indorser, such
It is highly illogical that he would loan from dela Rama P9500 for 5 days as absence of consideration, C, even if a holder in due course can
apart. collect only P600 from A, the extent of his lien.
• Reason for the rule: C is actually a holder in due course for P600 only.
Furthermore, the note was void ab initio because the consideration given He is a holder in due course for such as he is a holder for value for
was to influence the administrator to delay charges against Pineda. The only P600. For the balance of P400 he is not a holder for value, and
consideration was void for being against law and public policy. since being a holder for value is one of the requisites of a holder in due
course, he cannot be a holder in due course as far as the P400 is
Sec. 25. Value, what constitutes. — Value is any consideration concerned.
sufficient to support a simple contract. An antecedent or pre- • If A has personal defenses, he cannot use such as far as the P600 is
existing debt constitutes value; and is deemed such whether the concerned.
instrument is payable on demand or at a future time. • If A on the other hand has real defenses, C cannot collect anything.
• But if A maker doesn't have any defenses at all against B indorser,
VALUABLE CONSIDERATION, IN GENERAL then C can collect the whole amount of P1000 and hold the P400 for
• Consideration is the inducement—cause or impelling influence which the benefit of B.
induces a contracting party to enter into the contract
• Valuable consideration may in general terms be said to consist either NOTES FOR WEEK #6:
in some right, interest, profit or benefit accruing to the party who
JULY 16 - JU LY 20, 2007
makes the contract, or some forbearance, detriment, loss or some
responsibility to act, or labor, or service given, suffered, or undertaken
by the other side Sec. 28. Effect of want of consideration. - Absence or failure of
consideration is a matter of defense as against any person not a
Sec. 26. What constitutes holder for value. - Where value has at holder in due course; and partial failure of consideration is a
any time been given for the instrument, the holder is deemed a defense pro tanto, whether the failure is an ascertained and
holder for value in respect to all parties who become such prior to liquidated amount or otherwise.
that time.
ABSENCE OF CONSIDERATION
MEANING OF A HOLDER FOR VALUE • It is total lack of any valid consideration
• One who gives valuable consideration for an instrument issued or • Examples—note for future illicit cohabitation; note of husband to wife,
negotiated to him is a holder for value upon promise of wife to withdraw all opposition to proceedings of

Page 54 of 190
divorce instituted by him; a note given in consideration of an • When the accommodation parties make payment to the holder of the
agreement to stifle or hinder a public prosecution for a felony; notes, they have the right to sue the accommodated party for
consideration for commercial paper is clearly fraudulent reimbursement since the relation between them is in effect that of a
• Embraces transactions where no consideration was intended to pass principal and sureties, the accommodation parties being the sureties
FAILURE OF CONSIDERATION ACCOMODATED PARTY CANNOT RECOVER FROM ACCOMODATION PARTY

• It is the neglect or failure of one of the parties to give, to do or • Absence of consideration is a defense
perform the consideration agreed upon • In fact as between them, the understanding is that the accommodated
• Implies that the giving of valuable consideration was contemplated but party either is to
that it failed to pass 1. To reimburse the amount which the accommodation party may be
obliged to pay
ABSENCE AND FAILURE OF CONSIDERATION AS DEFENSES 2. To pay the instrument directly to the holder
• Matter of defense against persons who are not holders in due course
• They are personal defenses LIABILITY OF THE ACCOMODATION PARTY
• The accommodation party is liable on the instrument to a holder in
EFFECT OF WANT OF CONSIDERATION BETWEEN THE DRAWER AND value, notwithstanding such holder at any time of the taking of the
ACCEPTOR AS TO HOLDER instrument knew him to be only an accommodation party
• The drawee, by accepting unconditionally the bill, becomes liable to • The accommodation party doesn't receive any valuable consideration
the holder, and cannot allege want of consideration between him and for the instrument he signs but he is liable to a holder for value as if
drawer the contract wasn't for accommodation
• Holder is a stranger to the transaction between the drawer and drawee
CORPORATIONS ARE NOT LIABLE AS ACCOMODATION PARTIES EVEN TO
Sec. 29. Liability of accommodation party. - An accommodation HOLDERS FOR VALUE
party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the OFFICERS SIGNING FOR CORPORATION AS ACCOMODATION PARTY
purpose of lending his name to some other person. Such a person is WITHOUT AUTHORITY TO DO SO FOR THEIR INDIVIDUAL DEBTS OR
liable on the instrument to a holder for value, notwithstanding such TRANSACTIONS ARE PERSONALLY LIABLE THEREON
holder, at the time of taking the instrument, knew him to be only
an accommodation party. HOLDER MUST OTHERWISE BE A HOLDER IN DUE COURSE
ACCOMODATION PARTY: REQUISITES ACCOMODATION PARTY MAY ACCOMMODATE ONE WHO IS NOT A PARTY
• One who has signed the instrument as maker, drawer, indorser, TO THE INSTRUMENT
acceptor, without receiving any value therefore and for the purpose of
lending his name to some other person ACCOMMODATION PARTY CAN INTERPOSE DEFENSE OF WANT OF
• Requisites: CONSIDERATION AGAINST ONE NOT HOLDER IN DUE COURSE.
1. He must be a party to the instrument, signing as maker, acceptor,
indorser, or drawer CASE DIGESTS: SECTION 29
2. He must not receive any value therefore
3. He must sign for the purpose of lending his name or credit 77 CLARK V. SELINER
42 PHIL 384
RIGHTS AND LEGAL POSITION OF AN ACCOMODATION PARTY
• The accommodation party is generally regarded as a surety for the FACTS:
party accommodated Sellner with two other persons, signed a promissory note solidarily binding
themselves to pay to the order of R.N Clark. The note matured but the

Page 55 of 190
amount wasn't paid. The defendant alleges that he didn't receive any
amount of the debt; that the instrument wasn't presented to him for Gueson in his answer alleged that he was just an accommodation party in
payment and being an accommodation party, he is not liable unless the favor of Caneda. This was denied by Caneda.
note is negotiated, which wasn't done.
The trial court held that Gueson was indeed an accommodation party in
HELD: favor of Caneda; that there was a novation in the form of substitution of
On the first issue, the liability of Sellner as one of the signers of the note, debtors when Caneda executed the undertaking assuming the liability of
is not dependent on whether he has or has not, received any part of the Gueson in favor of FNCB; that the phrase “with recourse to Gueson in case
debt. The defendant is really and expressly one of the joint and several of default” found in the undertaking was inserted only after Caneda and
debtors of the note and as such he is liable under the provisions of Section FNCB had already signed the undertaking and without the knowledge of
60 of the NIL. Gueson and that Caneda was in bad faith when it tried to evade payment
of a justly-secured legal obligation.
As to the presentment for payment, such action is not necessary in order
to charge the person primarily liable, as is the defendant Sellner. HELD:
As to the merits of the case, it is undisputed that Gueson executed a
As to whether or not Sellner is an accommodation party, it should be taken promissory note in favor of Caneda, secured by a chattel mortgage on a
into account that by putting his signature to the note, he lent his name, not Toyota Jiffy jeep as collateral; which promissory note and chattel mortgage
to the creditor, but to those who signed with him placing him in the same was assigned by Caneda in favor of FNCB evidently to secure his obligation
position and with the same liability as the said signers. It should be noted with said company, with the knowledge and consent of Gueson. The
that the phrase”without receiving value therefore” as used in section 29 records also clearly established that FNCB tried to collect from Gueson,
means “without receiving value by virtue of the instrument” and not, as it Caneda consented and affixed his signature in an undertaking thereby
apparently is supposed to mean, “without receiving payment for lending his acknowledging indebtedness in favor of FNCB.
name.” It is immaterial as far as the creditor is concerned, whether one of
the signers has or has not received anything in payment for the use of his As between Gueson and Caneda, it is obvious that whether private
name. In this case, the legal situation of Sellner is that of a joint surety agreement between them is binding on them alone and not on FNCB whose
who upon the maturity of the note, pay the debt, demand the collateral only concern in the whole transaction is the repayment of the loan it has
security and dispose of it to his benefit. As to the plaintiff, he is a holder extended.
for value.
As regards FNCB, Caneda is the real debtor of the company and Gueson is
78 CANEDA V. CA only an accommodation party of Caneda. The trial court held that there
181 SCRA 762 was novation as there was substitution of debtors when Caneda executed
the undertaking. But the CA is correct, by saying that there was no
FACTS: novation. Novation is never presumed. It must be explicitly stated.
Gueson for value received, executed a promissory note in favor of Caneda, Caneda merely confirmed that he was the real debtor of FNCB in the
promising to pay monthly installments with interest per annum. That to undertaking signed, while Gueson merely accommodated Caneda in signing
secure the obligation, he executed a chattel mortgage and used a Toyota the promissory note and executing the chattel mortgage. Thus, it has been
Jiffy jeep as collateral; that it is expressly provided for in the promissory ruled that one who signs as maker, drawer, acceptor or indorser, without
note that in case of default in any installment would deem that whole receiving value therefore, and for the purpose of lending his name to some
obligation demandable. This promissory note was later assigned to FNCB. other person is liable to the instrument to a holder for value,
Gueson then defaulted in his obligation and had an outstanding balance. notwithstanding the fact that such holder at the time of the taking the
Despite demands on Gueson, he failed and refused to pay. This prompted instrument knew him to be only an accommodation party. Nonetheless,
FNCB to file an action for replevin and sum of money, and in the after paying the holder, he is entitled to obtain reimbursement from the
alternative, prayed for the payment of the outstanding balance plus party accommodated.
interest.

Page 56 of 190
Likewise, it is no defense to state that Caneda and Gueson didn't receive 28 PHIL 640
any value for the promissory note executed, both claiming to be
accommodation parties. A third person advances the face value of the FACTS:
note to the accommodated party at the time of the creation of the note, This is an appeal from a judgment of the Court of First Instance of the city
the consideration for the note as regards the maker is the money advanced of Manila in favor of the plaintiff for the sum of P3,000, with interest
to the accommodated party, and it cannot be said that the note is lacking thereon at the rate of 11⁄2 per cent month from September 5, 1912,
in consideration as to the accommodating party just becaue he himself together with the costs.
received some of the money. It is enough that the value given for the note
at the time of its creation. The action was brought by the plaintiff upon the contract of indorsement
alleged to have been made in his favor by the defendant upon the following
79 TOWN SAVINGS AND LOAN BANK V. CA promissory note:
223 SCRA 459
3,000. Due 5th of September, 1912.
FACTS: We jointly and severally agree to pay to the order of Don Antonio G.
Spouses Hipolito applied for and was granted a loan by the bank, which Serrano on or before the 5th day of September, 1912, the sum of three
was secured by a promissory note. For failure to pay their monthly thousand pesos (P3,000) for value received for commercial operations.
payments, they were declared in default. Notice and protest renounced. If the sum herein mentioned is not
completely paid on the 5th day of September, 1912, this instrument will
The spouses denied having any liability. They stated that the real party-in- draw interest at the rate of 11⁄2 per cent per month from the date when
interest is the sister of the husband, Pilarita Reyes. The spouses, not due until the date of its complete payment. The makers hereof agree to
having received part of the loan, were mere guarantors of Reyes. As such, pay the additional sum of P500 as attorney's fees in case of failure to pay
they protested against being dragged into the litigation. the note.
The trial court held that they were liable as accommodation parties to the Manila, June 5, 1912.
promissory note. This was reversed by the Court of Appeals.
(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For
HELD: Jose Padern, by F. Moreno. Angel Gimenez.
An accommodation party is one who has signed the instrument as maker,
drawer, indorser, without receiving value therefore and for the purpose of
lending his name to some other person. Such person is liable on the The note was indorsed on the back as follows:
instrument to a holder for value, notwithstanding such holder, at the time
of the taking of the instrument knew him to be an accommodation party. Pay note to the order of Don Fernando Maulini, value received. Manila,
In lending his name to the accommodated party, the accommodation party June 5, 1912. (Sgd.) A.G. Serrano.
is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no HELD:
part of the consideration for the instrument but assumes liability to the 1. The accommodation to which reference is made in Section 29 is
other parties thereto because he wants to accommodate another. not one to the person who takes the note but one to the maker or
indorser of the note. It is true, that in the case at bar, it was an
In the case at bar, it is indisputable that the spouses signed the promissory accommodation to the plaintiff, in the popular sense, to have the
note to enable Reyes to secure a loan from the bank. She was the actual defendant indorse the note; but it wasn't the accommodation
beneficiary of the loan and the spouses accommodated her by signing the described in the law but rather a mere favor to him and one which
note. in no way bound Serrano. In cases of accommodation
indorsement, the indorser makes the indorsement for the
80 MAULINI V. SERRANO accommodation of the maker. Such an indorsement is generally

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for the purpose of better securing the payment of the note—that

is, he lends his name to the maker and not the holder. M. G. VELOSO.
2. Parol evidence is admissible for the purposes named. The
prohibiton against parol evidence is to prevent alteration, change, Witness:
modification, or contradiction of the term of a written instrument,
admittedly existing, by the use of some parol evidence except in Sgd.) MODESTO ALBERTO
cases specifically named in the action. The case at bar is not one
where the evidence offered varies, alters, modifies, or contradicts
the terms of the indorsement admittedly existing. The evidence The sale of the property ensued. It was found out that the property has
was not offered for that purpose. The purpose was to show that already been encumbered by a mortgage with Shanghai Life. And as the
the contract of indorsement ever existed; that the minds of the value of the property was more than the property mortgaged by Xavier,
parties never met on the terms of such contract; that they never Gonzales demanded another second mortgage.
mutually agreed to enter into such contract; and that there never
existed a consideration upon which such an agreement could be A foreclosure proceeding took place and while the result of such was
founded. pending, the note was transferred to the hands of Acuna who filed an
action against Veloso and Xavier, both of which denied liability. Xavier
81 ACUNA V. VELOSO posed the special defense that he had executed a second mortgage to
50 PHIL 241 secure the note and that he already sold the mortgaged property and
another has assumed the indebtedness.
FACTS:
At the time of execution of the note, Xavier was the agent of Veloso in the The trial court decided that Veloso and Xavier were solidarily liable to
management of the latter’s real property in Manila. Though lacking in Acuna/Gonzales. Nonetheless, Veloso was held to be an accommodation
capital, Xavier was engaged in real estate trading, so far as his credit party, who has a right to reimbursement from Xavier for whatever he may
permitted, upon his own account. His attention was then attracted to a pay for the note.
piece of property, which was then on the market. Xavier communicated to
his principal his desire to acquire the property and at the same time HELD:
requested that Veloso assist him in the matter. Veloso was later convinced The case being cited by defendants is not applicable to the case at bar.
to help out Xavier. Thereafter, Gonzales lent a helping hand by advancing The case of Rylee v. Wilkinson contemplates a situation wherein an
the money needed by Xavier, on the condition that a note should be issued accommodation maker executes a note in favor of an accommodated party.
jointly and severally by Xavier and Veloso; and that Xavier should agree to In the case at bar, the accommodation party and accommodated party
purchase ½ interest from Gonzales which the latter possessed in a execute a note jointly and severally to a person who advances the face
mortgage credit. value of the note to one of its makers at the very time of its creation. The
consideration for the note is the money advanced to Xavier. Value was
given for the note and that is enough. In equity as between Veloso and
MANILA, ................................................. Xavier, Veloso is entitled to the rights as a surety and Xavier is the real
debtor; but as to the creditor who gave value for the note at the time of its
On or before six months after date we will jointly and severally pay in creation, both of Veloso and Xavier are mere joint and several makers.
Manila to the order of ........................... the sum of twenty-five thousand
pesos (P25,000), Philippine currency, for value received of the same in 82 PNB V. MAZA AND MECENAS
cash, for commercial operations, and with interest at 10 per cent per 48 PHIL 207
annum, payable monthly.
FACTS:
Protest waived. Maza and Macenas executed a total of five promissory notes. These were
not paid at maturity. And to recover the amounts stated on the face of the
(Sgd.) N XAVIER

Page 58 of 190
promissory notes, PNB initiated an action against the two. The special construction company. This notwithstanding, the Bureau with approval of
defense posed by the two is that the promissory notes were delivered to the bank, conditioned however that they should be for labor and materials,
them in blank by a certain Enchaus and were made to sign the notes so made three payments to the company. The last request was denied by the
that the latter could secure a loan from the bank. They also alleged that bank, averring that the account was long overdue, the remaining balance
they never negotiated the notes with the bank nor have they received any of the contract price should be applied to the loan.
value thereof. They also prayed that Enchaus be impleaded in the
complaint but such was denied. The trial court then held in favor of the The company abandoned the work and as consequence, the Bureau
bank. rescinded the contract and assumed the work. Later on, the appellants
wrote to the PNB that since the latter has authorized payments to the
HELD: company instead of on account of the loan guaranteed by the mortgage,
The defendants attested to the genuineness of the instruments sued on. there was a change in the conditions of the contract without the knowledge
Neither did they point out any mistake in regard to the amount and of appellants, which entitled the latter to cancel the mortgage contract.
interest that the lower court sentenced them to pay. Given such, the
defendants are liable. They appear as the makers of the promissory notes The trial court held them still liable together with their co-makers. It has
and as such, they must keep their engagement and pay as promised. also been held that if the judgment is not satisfied within a period of time,
the mortgaged properties would be foreclosed and sold in public auction.
And assuming that they are accommodation parties, the defendants having
signed the instruments without receiving value thereof, for the purpose of In their appeal, petitioners contend that as accommodation makers, the
lending their names to some other person, are still liable for the promissory nature of their liability is only that of mere sureties instead of solidary co-
notes. The law now is such that an accommodation party cannot claim no debtors such that a material alteration in the principal contract, effected by
benefit as such, but he is liable according to the face of his undertaking, the creditor without the knowledge and consent of the sureties, completely
the same as he himself financially interest in the transaction. It is also no discharges the sureties from all liabilities on the contract of suretyship.
defense to say that they didn't receive the value of the notes. To fasten
liability however to an accommodation maker, it is not necessary that any HELD:
consideration should move to him. The accommodation which supports the There is no question that as accommodation makers, petitioners would be
promise of the accommodation maker is that parted with by the person primarily and unconditionally liable on the promissory note to a holder for
taking the note and received by the person accommodated. value, regardless of whether they stand as sureties or solidary co-debtors
since such distinction would be entirely immaterial and inconsequential as
83 PRUDENCIO V. CA far as a holder for value is concerned. Consequently, the petitioners
143 SCRA 7 cannot claim to have been released from their obligation simply because at
the time of payment of such obligation was temporarily deferred by the
FACTS: PNB without their knowledge and consent. There has to be another basis
Appellants are the owners of a property, which they mortgaged to help for their claim of having been freed from their obligation. It has to be
secure a loan of a certain Domingo Prudencio. On a later date, they were determined if PNB was a holder for value.
approached by their relative who was the attorney-in-fact of a construction
company, which was in dire need of funds for the completion of a municipal A holder for value is one who meets the requirement of being a holder in
building. After some persuasion, the appellants amended the mortgage due course except the notice for want of consideration. In the case at bar,
wherein the terms and conditions of the original mortgage was made an PNB may not be considered as a holder for value. Not only was PNB an
integral part of the new mortgage. The promissory note covering the immediate party or privy to the promissory note, knowing fully well that
“second loan” was signed by their relative. It was also signed by them, petitioners only signed as accommodation parties, but more importantly it
indicating the request that the check be released by the bank. was the Deed of Assignment which moved the petitioners to sign the
promissory note. Petitioners also relied on the belief that there will be no
After the amendment of the mortgage was executed, a deed of assignment alterations to the terms of the agreement. The deed provided that there
was made by Toribio, assigning all the payments to the Bureau to the will no further conditions which could possibly alter the agreement without

Page 59 of 190
the consent of the petitioner such as the grant of greater priority to the record shows is that only after the check was deposited and
obligations other than the payment of the loan. This notwithstanding, the dishonored, petitioner came into possession of it in some way and was able
bank approved the release of payments to the Company instead of the to give it in evidence at the trial of the civil case it has instituted against
same to the bank. This was in violation of the deed of assignment and the drawers of the check.
prejudiced the rights of petitioners. The bank was not in good faith—a
requisite for a holder to be one in due course. 85 ANG TIONG V. TING
22 SCRA 713
84 STELCO MARKETING V. CA
210 SCRA 51 FACTS:
Ting issued a PBCom check payable to cash or bearer. This was indorsed
FACTS: by Ang at the back and it was received by plaintiff. Upon encashment of
Petitioner was engaged in the distribution and sale of structiural steel bars. the check, the same was dishonored. Plaintiff moved that the two make
RYL bought on several occasion large quantities of steel bars but the same good the value of the check but despite demands, he was unheeded,
were never paid for despite several demands by petitioner. prompting him to file a complaint. The trial court decided in his favor.
On a relevant date, RYL gave to Armstrong Industries a check in payment HELD:

of its obligations. The check was drawn by Steelweld Corporation— Even on the assumption that the appellant was an accommodation
allegedly the owner of RYL persuaded the president of Steelweld to indorser, as he professes to be, he is nevertheless by the clear mandate of
accommodate the former in its obligation. The check, when deposited was section 29, liable on the instrument to a holder for value, notwithstanding
thereafter dishonored due to insufficient funds. A case ensued for that such holder at the time of taking the instrument knew him to be an
violations of BP22 but the case was dismissed as the check was held to be accommodation party. And assuming that he was an accommodation
for accommodation purposes only. party, he may obtain security from the maker to protect himself against
the danger of insolvency of the latter but this doesn't affect his liability to
Thereafter a complaint was filed by petitioner against RYL and Steelweld the appellee, as the said remedy is a matter of recourse between him and
for the recovery of sum of money in payment of the steel bars ordered. the maker.
RYL was nowhere to be found that is why the proceedings commenced as
against Steelweld only. The trial court decided in favor of petitioner but 86 SADAYA V. SEVILLA
this was reversed by the CA. 19 SCRA 924
HELD: FACTS:
Petitioner contends that the acquittal of Lim and Tianson didn't operate to Sadaya, Sevilla and Varona signed solidarily a promissory note in favor of
release Steelweld from its liability as an accommodation party. Noteworthy the bank. Varona was the only one who received the proceeds of the note.
is that neither said pronouncement nor any other part of the judgment of Sadaya and Sevilla both signed as co-makers to accommodate Varona.
acquittal declared it liable to petitioner. To be sure, as regards an Thereafter, the bank collected from Sadaya. Varona failed to reimburse.
accommodation party, the condition of lack of notice of any infirmity or
defect in title of the persons negotiating it is of no application since the law Consequently, Sevilla died and intestate estate proceedings were
preserves the right of recourse of a holder for value against an established. Sadaya filed a creditor’s claim on his estate for the payment
accommodation party notwithstanding knowledge that at the time of taking he made on the note. The administrator resisted the claim on the ground
the instrument, knew him only as an accommodation party. that Sevilla didn't receive any proceeds of the loan. The trial court
admitted the claim of Sadaya though tis was reversed by the CA.
Further, there is no evidence to show that petitioner possessed the check
before the instrument’s presentment and dishonor. In what transpired HELD:
during the transactions involving the check, evidence and facts show that Sadaya could have sought reimbursement from Varona, which is right and
there was any participation or intervention on the part of petitioner. What just as the latter was the only one who received value for the note

Page 60 of 190
executed. There is an implied contract of indemnity between Sadaya and Petitioner Soriano signed as maker the promissory notes payable to the
Varona upon the former’s payment of the obligation to the bank. bank. However, the petitioners failed to pay the obligations as they were
due. During that time, the bank was in financial distress and this
Surely enough, the obligations of Varona and Sevilla to Sadaya cannot be prompted it to endorse the promissory notes for collection. The bank gave
joint and several. For indeed, had payment been made by Varona, Varona ample time to petitioners then to satisfy their obligations.
couldn't had reason to seek reimbursement from either Sadaya or Sevilla.
After all, the proceeds of the loan went to Varona alone. The trial court held in favor of the bank. It didn't find merit to the
contention that Wonderland was the one to be held liable for the
On principle, a solidary accommodation maker—who made payment—has promissory notes.
the right to contribution, from his co-accomodation maker, in the absence
of agreement to the contrary between them, subject to conditions imposed HELD:
by law. This right springs from an implied promise to share equally the First, there was no contract of sale that materialized. The original
burdens thay may ensue from their having consented to stamp their agreement was that Wonderland would pay cash and petitioner would
signatures on the promissory note. deliver possession of the farmlands. But this was changed through an
addendum, that petitioner would instead secure a loan and the settlement
The following are the rules: of the same would be shouldered by Wonderland.
1. A joint and several accommodation maker of a negotiable
promissory note may demand from the principal debtor Petitioners became liable as accommodation parties. They have the right
reimbursement for the amount that he paid to the payee after paying the instrument to seek reimbursement from the party
2. A joint and several accommodation maker who pays on the said accommodated, since the relation between them has in effect became one
promissory note may directly demand reimbursement from his co- of principal and surety.
accommodation maker without first directing his action against the
principal debtor provided that Furthermore, as it turned out, the contract of surety between Woodland
a. He made the payment by virtue of a judicial demand and petitioner was extinguished by the rescission of the contract of sale of
b. A principal debtor is insolvent. the farmland. With the rescission, there was confusion in the persons of
It was never shown that there was a judicial demand on Sadaya to pay the the principal debtor and surety. The addendum thereon likewise lost its
obligation and also, it was never proven that Varona was insolvent. Thus, efficacy.
Sadaya cannot proceed against Sevilla for reimbursement.
88 CRISOLOGO JOSE V. CA
87 AGRO CONGLOMERATES V. SORIANO 177 SCRA 594
348 SCRA 450
FACTS:
FACTS: The president of Movers Enterprises, to accommodate its clients Spouses
Petitioner sold to Wonderland Food Industries two parcels of land. They Ong, issued a check in favor of petitioner Crisologo-Jose. This was in
stipulated under a Memorandum of Agreement that the terms of payment consideration of a quitclaim by petitioner over a parcel of land, which the
would be P1,000,000 in cash, P2,000,000 in shares of stock, and the GSIS agreed to sell to spouses Ong, with the understanding that upon
balance would be payable in monthly installments. Thereafter, an approval of the compromise agreement, the check will be encahsed
addendum was executed between them, qualifying the cash payment. accordingly. As the compromise agreement wasn't approved during the
Instead of cash payment, the vendee authorized the vendor to obtain a expected period of time, the aforesaid check was replaced with another one
loan from the financier on which the vendee bound itself to pay for. This for the same value. Upon deposit though of the checks by petitioner, it
loan was to cover for the payment of P1,000,000. This addendum was not was dishonored. This prompted the petitioner to file a case against Atty.
notarized. Bernares and Santos for violation of BP22. Meanwhile, during the
preliminary investigation, Santos tried to tender a cashier’s check for the
value of the dishonored check but petitioner refused to accept such. This

Page 61 of 190
was consigned by Santos with the clerk of court and he instituted charges
against petitioner. The trial court held that consignation wasn't applicable ASSIGNMENT
to the case at bar but was reversed by the CA. • Method of transferring a non-negotiable instrument whereby the
assignee is merely placed in the position of the assignor and acquires
HELD: the instrument subject to all defenses that might have been setup
Petitioner averred that it is not Santos who is the accommodation party to against the original payee
the instrument but the corporation itself. But assuming arguendo that the
corporation is the accommodation party, it cannot be held liable to the MODE OF ASSIGNMENT
check issued in favor of petitioner. The rule on accommodation party • Differs in no respect from that of any other contract
doesn't include or apply to corporations which are accommodation parties. • Although some sort of written instrument is customarily employed, it
This is because the issue or indorsement of another is ultra vires. Hence, may be written either on the instrument itself or on a separate piece of
one who has taken the instrument with knowledge of the accommodation paper
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 EFFECT OF ASSIGNMENT OF A NON-NEGOTIABLE INSTRUMENT
transaction, is such as to charge the indorsee with the knowledge that the • The effect of the assignment is that the party holding the right drops
issue or indorsement of the instrument by the corporation is for the out of the contract and another takes his place
accommodation of another, he cannot recover against the corporation • The assignee is substituted in place of the assignor
thereon. • The assignee and every subsequent person to whom the instrument
comes by assignment may be considered as the person who made the
By way of exception, an officer or agent of a corporation shall have the instrument in the first instance and as having said and done
power to execute or indorse a negotiable paper in the name of the everything in making the instrument which the original assignor did or
corporation for the accommodation of a third party only is specifically said.
authorized to do so. Corollarily, corporate officers have no power to • Each assignee takes his chance as to the exact position in which any
execute for mere accommodation a negotiable instrument of the party making an assignment of it stands
corporation for their individual debts and transactions arising frm or in • And as it is called in law, the assignee takes the contract subject to
relation to matters in which the corporation has no legitimate concern. equities, that is, to defenses to the contract which would avail in favor
Since such accommodation paper cannot be enforced against the of the original party up to the time the notice of the assignment is
corporation, the signatories thereof shall be personally liable therefore, as given to the person against whom the contract is sought to be
well as the consequences arising from their acts in connection therewith. enforced
III. NEGOTIATION ASSIGNMENT OF A NEGOTIABLE INSTRUMENT

• A person taking a negotiable instrument by assignment in a separate
Sec. 30. What constitutes negotiation. - An instrument is piece of paper takes it subject to the rules applying to assignment
negotiated when it is transferred from one person to another in • And where the holder of a bill payable to order transfers it without
such manner as to constitute the transferee the holder thereof. If indorsement, it operates an equitable assignment
payable to bearer, it is negotiated by delivery; if payable to order, it
is negotiated by the indorsement of the holder and completed by TRANSFER BY OPERATION OF LAW
delivery. 1. By the death of his holder where the title vests in his personal
representative, or
METHOD OF TRANSFER 2. By the bankruptcy of the holder, where title vests in his assignee
1. By assignment or trustee
2. By operation of law 3. Upon the death of a joint payee or indorsee in which case the
3. By negotiation, which may be completed by indorsement completed by general rule is that the title vests at once in the surviving payee or
delivery or by mere delivery trustee

Page 62 of 190
NEGOTIATION This is to Certify that B E A R E R has deposited in this Bank the sum of
• Transfer of the instrument from one person to another in such a PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 &
manner as to constitute the transferee the holder thereof 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days.
• May either be by indorsement completed by delivery or by mere after date, upon presentation and surrender of this certificate, with interest
delivery at the rate of 16% per cent per annum.
IS DELIVERY TO PAYEE A NEGOTIATION? (Sgd. Illegible) (Sgd. Illegible)

• First view: no because negotiation refers to an existing negotiable
instrument and before delivery to the payee, the instrument is —————————— ———————————
incomplete.
• Second or better view: under this section and section 191, an AUTHORIZED SIGNATURES
instrument is negotiated when it is delivered to the payee or to an
indorsee
HELD:
CASE DIGESTS: SECTION 30 CTDs are negotiable instruments. The documents provide that the amounts
deposited shall be repayable to the depositor. And who, according to the
89 CALTEX V. CA document, is the depositor? It is the "bearer." The documents do not say
212 SCRA 448 that the depositor is Angel de la Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are to be repayable to
FACTS: the bearer of the documents or, for that matter, whosoever may be the
Security bank issued Certificates of Time Deposits to Angel dela Cruz. The bearer at the time of presentment.
same were given by Dela Cruz to petitioner in connection to his purchase of
fuel products of the latter. On a later date, Dela Cruz approached the bank If it was really the intention of respondent bank to pay the amount to
manager, communicated the loss of the certificates and requested for a Angel de la Cruz only, it could have with facility so expressed that fact in
reissuance. Upon compliance with some formal requirements, he was clear and categorical terms in the documents, instead of having the word
issued replacements. Thereafter, he secured a loan from the bank where "BEARER" stamped on the space provided for the name of the depositor in
he assigned the certificates as security. Here comes the petitioner, each CTD. On the wordings of the documents, therefore, the amounts
averred that the certificates were not actually lost but were given as deposited are repayable to whoever may be the bearer thereof. Thus,
security for payment for fuel purchases. The bank demanded some proof petitioner's aforesaid witness merely declared that Angel de la Cruz is the
of the agreement but the petitioner failed to comply. The loan matured depositor "insofar as the bank is concerned," but obviously other parties
and the time deposits were terminated and then applied to the payment of not privy to the transaction between them would not be in a position to
the loan. Petitioner demands the payment of the certificates but to no know that the depositor is not the bearer stated in the CTDs. Hence, the
avail. situation would require any party dealing with the CTDs to go behind the
plain import of what is written thereon to unravel the agreement of the
parties thereto through facts aliunde. This need for resort to extrinsic
SECURITY BANK evidence is what is sought to be avoided by the Negotiable Instruments
AND TRUST COMPANY Law and calls for the application of the elementary rule that the
6778 Ayala Ave., Makati No. 90101 interpretation of obscure words or stipulations in a contract shall not favor
Metro Manila, Philippines the party who caused the obscurity.
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT The next query is whether petitioner can rightfully recover on the CTDs.
Rate 16% This time, the answer is in the negative. The records reveal that Angel de
la Cruz, whom petitioner chose not to implead in this suit for reasons of its
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

Page 63 of 190
own, delivered the CTDs amounting to P1,120,000.00 to petitioner without to consider in the consummation of a negotiable instrument is the place of
informing respondent bank thereof at any time. Unfortunately for delivery. Delivery is the final act essential to its consummation as an
petitioner, although the CTDs are bearer instruments, a valid negotiation obligation.
thereof for the true purpose and agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery and indorsement. For, Sec. 31. Indorsement; how made. - The indorsement must be
although petitioner seeks to deflect this fact, the CTDs were in reality written on the instrument itself or upon a paper attached thereto.
delivered to it as a security for De la Cruz' purchases of its fuel products. The signature of the indorser, without additional words, is a
Any doubt as to whether the CTDs were delivered as payment for the fuel sufficient indorsement.
products or as a security has been dissipated and resolved in favor of the
latter by petitioner's own authorized and responsible representative NATURE OF AN INDORSEMENT
himself. • It is not only a mode of transfer
• It is also a contract
In a letter dated November 26, 1982 addressed to respondent Security • Every indorser is a new drawer and the terms are found on the face of
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These the bill or note
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to • The indorsement of the bill or not implies an undertaking from the
guarantee his purchases of fuel products." This admission is conclusive indorser to the person in whose favor it is made and to every other
upon petitioner, its protestations notwithstanding. Under the doctrine of person to whom the bill or note may afterwards be transferred, exactly
estoppel, an admission or representation is rendered conclusive upon the similar to that which is implied by drawing a bill except that, in the
person making it, and cannot be denied or disproved as against the person case of drawing a bill, the stipulations with respect to the drawer’s
relying thereon responsibility and undertaking don't apply
• The general indorser in effect, states to every person who follows
90 MANUEL LIM V. CA him—this instrument will be paid by the maker, if a note, or accepted
251 SCRA 408 b the drawee or paid by the acceptor, if a bill. If it is dishonored by
non-payment or non-acceptance, and you give me notice thereof, I will
FACTS: pay it.
Spouses Lim were charged with estafa and violations of BP22 for allegedly
purchasing goods from Linton Commercial Corporation and issuing checks WHERE THE INDORSEMENT IS WRITTEN
as payment thereof. The checks when presented to the bank were • The indorsement may be written on the instrument itself or upon a
dishonored for insufficiency of funds or the payment for the checks has paper attached thereto
been stopped. • Allonge: paper attached to the instrument
HELD: MAY ALLONGE BE USED WHERE THERE IS ROOM ON INSTRUMENT FOR

It is settled that venue in criminal cases is a vital ingredient of jurisdiction. INDORSEMENT?
It shall be where the crime or offense was committed or any one of the • It has been held that the use of an allonge is allowable only when
essential ingredients thereof took place. In determining the proper venue there is a physical impossibility of writing the indorsement on the
for these cases, the following are material facts—the checks were issued at instrument itself, and an indorsement on a separate piece of paper
the place of business of Linton; they were delivered to Linton at the same where there is sufficient space on the instrument for indorsement will
place; they were dishonored in Kalookan City; petitioners had knowledge of be considered as a mere assignment and not a negotiation
the insufficiency of funds in their account. • Agbayani: Questionable view however
Under Section 191 of the NIL, issue means the first delivery of the HOW INDORSEMENT WRITTEN?
instrument complete in its form to a person who takes it as holder. The • Means must show that there is indorsement
term holder on the other hand refers to the payee or indorsee of a bill or
note who is in possession of it or the bearer thereof. The important place

Page 64 of 190
Sec. 32. Indorsement must be of entire instrument. - The which provides that the indorsement must be an indorsement of the entire
indorsement must be an indorsement of the entire instrument. An instrument. An indorsement which purports to transfer to the indorsee a
indorsement which purports to transfer to the indorsee a part only part only of the amount payable doesn't operate as a negotiation of the
of the amount payable, or which purports to transfer the instrument. Montinola may therefore be not regarded as an indorsee. At
instrument to two or more indorsees severally, does not operate as most he may be regarded as a mere assignee of the P30,000 sold to him.
a negotiation of the instrument. But where the instrument has been In which case, as an assignee, he is subject to the defenses available to
paid in part, it may be indorsed as to the residue. the drawer Provincial Treasurer.
INDORSEMENT MUST BE OF THE WHOLE INSTRUMENT Sec. 33. Kinds of indorsement. - An indorsement may be either
• The general rule is that the instrument must be of the entire special or in blank; and it may also be either restrictive or qualified
instrument or conditional.
• Accordingly, an indorsement of a part of the instrument doesn't
operate as a negotiation thereof KINDS OF INDORSEMENT
1. Special
EFFECT OF PARTIAL INDORSEMENT 2. In blank
• It doesn't operate as an indorsement 3. Absolute
• It may constitute a valid assignment though binding between the 4. Conditional
parties 5. Restrictive
• The person to whom the instrument is indorsed would not be 6. Qualified
considered an indorsee but merely an assignee and would therefore 7. Joint
take the instrument subject to the defenses available between the 8. Successive
original parties 9. Irregular
10. Facultative
EXCEPTION
• But where the instrument has been paid in part, it may be indorsed as Sec. 34. Special indorsement; indorsement in blank. - A special
to the residue indorsement specifies the person to whom, or to whose order, the
instrument is to be payable, and the indorsement of such indorsee
TRANSFER TO TWO OR MORE INDORSEES SEVERALLY is necessary to the further negotiation of the instrument. An
• An indorsement which purports to transfer the instrument to two or indorsement in blank specifies no indorsee, and an instrument so
more indorsees severally, doesn't operate as a negotiation of the indorsed is payable to bearer, and may be negotiated by delivery.
instrument
SPECIAL AND BLANK INDORSEMENT
HOW FURTHER NEGOTIATED
91 MONTINOLA V. PNB 1. Where the instrument is originally payable to order and it is
88 PHIL 178 negotiated by the payee by special indorsement, it can be further
negotiated by the indorsee of the instrument completed by
FACTS: delivery
*Remember the case with the Japanese occupation and the mutilated 2. Where the instrument is originally payable to order and it is
check. negotiated by the payee in blank indorsement, it can be further
negotiated by the holder by mere delivery. The reason is that the
HELD: effect of a blank indorsement is to make the instrument payable
Where the indorsement of the check was only for a part of the amount to bearer
payable, it is not legally negotiated within the meaning of Section 32,

Page 65 of 190
3. Where the instrument is originally payable to bearer, it can be • Known as the agency-type of indorsement
further negotiated by mere delivery, even if the original bearer
negotiated it by special indorsement “Pay to C for collection”
(Sgd.) B
Sec. 35. Blank indorsement; how changed to special indorsement. -
The holder may convert a blank indorsement into a special
indorsement by writing over the signature of the indorser in blank • Hence, any action the indorsee may file is subject to defenses
any contract consistent with the character of the indorsement. available against the indorser such as lack of consideration
• Thus, where the proof tends to show that the plaintiff holds the draft
APPLICATION OF SECTION 35 for collection only, and that the acceptance of it by defendants was
• Suppose that A makes a note with B as payee. It is indorsed as conditional, and that after such an acceptance, the defendants refused
follows: to accept the goods evidenced by the draft, which were returned to
o (Indorsement in blank) (Sgd.) B. and accepted by the plaintiff, who agreed to release the defendants
• Delivery was then made to C. C may place above the signature of B, from any liability, plaintiff thereafter cannot recover
“Pay to C.” so as to make the indorsement thus:
o Pay to C. (Sgd.) B. INDORSEMENTS FOR DEPOSIT
• This converts the blank indorsement to a special indorsement • An indorsement for deposit constitutes the indorsee the agent of the
indorser
LIMITATION UPON CONVERSION OF BLANK INDORSEMENT • “Pay to C for deposit (Sgd.) B”—such an indorsement, like an
• Holder must not write any contract not consistent with the indorsement for collection, constitutes a relation of title in the
indorsement, that is, the contract so written must not change the depositor in the absence of any practice or agreement to the contrary
contract of the blank indorser • In any event, a restrictive indorsement of an instrument for collection
• The following has been held to be inconsistent with the contract of or deposit, or to the use of the indorser and for his benefit, in the
blank indorsement—“pay to X and Y”, “Demand and notice waived”, “I absence of any other circumstances, will not divest the indorser of his
guaranty payment”, “Without recourse” title thereto until the money is paid
• Indorsements for deposits are usually informal
Sec. 36. When indorsement restrictive. - An indorsement is
restrictive which either: VESTS TITLE IN INDORSEE IN TRUST FOR ANOTHER
1. Pay to X in trust for C
(a) Prohibits the further negotiation of the instrument; or 2. Pay to X for use of C
(b) Constitutes the indorsee the agent of the indorser; or CAN THE MAKER SET UP AGAINST THE INDORSEE HIS DEFENSES
AGAINST THE RESTRICTIVE INDORSER?
(c) Vests the title in the indorsee in trust for or to the use of There are two views to this question:
some other persons. 1. Sulbrason-Dickinson v. Hopkins: an indorsement to A for the
benefit of B was held restrictive under Section 47 of the NIL,
But the mere absence of words implying power to negotiate does making the indorsee and its successors subject to the good
not make an indorsement restrictive. defenses against the restrictive indorser
2. Some learned writers held this view to be unsound. Thus, it has
PROHIBITION OF FURTHER NEGOTIATION been held that the indorsee of a check indorsed in trust for a third
1. Pay to C only person who is a holder in due course could recover from the
2. Pay to C and no other person drawer who had a defense of failure of consideration, for while the
restrictive indorsement creating a trust gives notice of this trust to
INDORSEE AGENT OF THE INDORSER

Page 66 of 190
subsequent purchasers, it did not give notice of defenses (c) to transfer his rights as such indorsee, where the form of
obtaining between prior parties. the indorsement authorizes him to do so.
• TO MAKE IT EASIER TO UNDERSTAND—first, you have to make a
distinction between what kind of restrictive indorsement was But all subsequent indorsees acquire only the title of the first
made. Was it a trust type or an agency type? If it was an agency indorsee under the restrictive indorsement.
type, the indorsee just fills in the shoes of the restrictive indorser.
And thus, he is susceptible and open to the defenses that the RESTRICTIVE INDORSEE MAY RECEIVE PAYMENT
maker can have against the indorser. It is different if it is trust • A restrictive indorsement confers upon the indorsee the right to
type because the indorsee does not step inside the shoes of the receive payment of the instrument
indorser and thus, the maker can no longer set up against the
indorsee his defenses against the indorser. RESTRICTIVE INDORSEE MAY BRING AN ACTION
• A restrictive indorsement confers upon the indorsee the right to bring
PRESUMPTION OF CONSIDERATION IN RESTRICTIVE INDORSEMENTS any action thereon that the indorser could bring
• As a general rule, an indorsement of a negotiable bill which purports to • In a restrictive indorsement “for deposit”, can the indorsee such as B
pass the title to the bill to the indorsee, imports a consideration and in the illustration, bring an action against the indorser, such as A? Yes
the burden of proving want of consideration rests upon the party if the indorser received value for said indorsement
alleging it
• The restrictive indorsements which are held to negative the RESTRICTIVE INDORSEE MAY TRANSFER HIS RIGHTS
presumption of a consideration are such as to indicate that they are • It is stated in the interpretation of the clause in Section 47 declaring a
intended to pass title but merely to enable the indorsee to collect for paper negotiable in its origin to continue negotiable until it has been
the benefit of the indorser, such as indorsements “for collection” or restrictively indorsed, is that the words “until it has been restrictively
others showing that the indorser is entitled to the proceeds indorsed” don't contemplate every restrictive indorsement but a
• But an indorsement to one person for the use or benefit of another, restrictive indorsement that prohibits the further negotiation of the
affords no such indication. The indorser parts with the whole title to instrument under subdivision 1 of Section 36
the bill and the presumption is that he done so for a consideration. • Section 46 didn't mean to declare the effects of a restrictive
• The only effect of such an indorsement, by way of restriction, is to give indorsement but to preserve as far as possible the negotiability of an
notice of the rights of the beneficiary named in the indorsement and instrument negotiable in its origin and that the implication of Section
protect him against misappropriation 47 should not be taken as destroying negotiability of an instrument
heretofore universally accepted as negotiable
EFFECT OF OMISSION OF WORDS OF NEGOTIABILITY
• The mere absence of words of negotiability doesn't make the EXTENT OF NEGOTIABILITY AFTER RESTRICTIVE INDORSEMENT
indorsement restrictive • That all forms of restrictive negotiability impose some degree of
• While the omission of words in the indorsement doesn't affect limitation on negotiability
negotiability of the instrument, such omission in the body thereof will • That they don't all impose the same degree of limitation
render the instrument non-negotiable • That the indorsement itself discloses the extent of the limitation in the
particular case
Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A
restrictive indorsement confers upon the indorsee the right: LIMITATION ON TRANSFER OF RIGHT: ILLUSTRATION
• But all subsequent indorsees acquire only title of the first indorsee
(a) to receive payment of the instrument; under the restrictive indorsement
• Illustrations of this rule:
(b) to bring any action thereon that the indorser could bring; o In the indorsement, “pay to A for collection,” the rights of the
subsequent indorsees are subject to the restrictive
indorsement—namely, he can collect only for being a

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restrictive indorsee, he acquires only the title of the first

indorsee whose right is merely to collect CASE DIGESTS: SECTION 38
o Suppose the P1000 note is indorsed as “Pay to B for deposit
only. (Sgd.) A” and that B owes Y P1000, B cannot transfer 92 METROPOL V. SAMBOK MOTORS CO.
the note to Y for said debt. Or suppose B transfers the note 120 SCRA 864
to another person for P1000, B cannot use the P1000 for his
own personal expenses. He must safely keep the money for Sec. 39. Conditional indorsement. - Where an indorsement is
the benefit of A. conditional, the party required to pay the instrument may disregard
o “Pay to A for account of B”—gives notice that the instrument the condition and make payment to the indorsee or his transferee
cannot be negotiated by A for his own debt or benefit whether the condition has been fulfilled or not. But any person to
whom an instrument so indorsed is negotiated will hold the same,
Sec. 38. Qualified indorsement. - A qualified indorsement or the proceeds thereof, subject to the rights of the person
constitutes the indorser a mere assignor of the title to the indorsing conditionally.
instrument. It may be made by adding to the indorser's signature
the words "without recourse" or any words of similar import. Such ABSOLUTE INDORSEMENT
an indorsement does not impair the negotiable character of the • One by which the indorser binds himself to pay upon no other
instrument. condition than the failure of prior parties to do so and upon due notice
to him of such failure
HOW QUALIFIED INDORSEMENT IS MADE
• By adding to the indorser’s signature the words “without recourse”, CONDITIONAL INDORSEMENT
“Sans recours”, “indorser not holden”, or “with intent to transfer title • An indorsement subject to a contingent event, that is, an event that
only and not to incur liability as indorser”, “at indorsee’s own risk” may or may not happen, or a past event unknown to the parties
• Suppose a note for P1000 with A maker, and B payee. It is then
EFFECT OF QUALIFIED INDORSEMENT indorsed as follows “Pay to Y if he passes the bar examinations. (Sgd.)
• Constitutes the indorser a mere assignor of the title to the instrument B”—this is a conditional indorsement as Y may or may not pass the bar
• One who indorses without recourse states that all parties to the paper examination.
are genuine; I am the lawful owner of the paper and I have title to it
and know of no reason why you could not recover on it as a valid OBLIGATION OF CONDITIONAL INDORSEE
instrument, but on thing I don't guarantee; I don't guarantee the • Y indorsee holds the note or the proceeds thereof, if he is paid by A,
financial responsibility on that paper but I do say that I hold the title subject to the rights of B
the same as any other personal property • If A disregards the condition and pays Y without waiting for the
condition to be fulfilled, Y doesn't immediately acquire ownership of
QUALIFIED INDORSER HAS LIMITED SECONDARY LIABILITY the sum
• He is secondarily liable on his warranties as an indorser under Section • Y must hold in trust while the condition is not fulfilled
65, that is, the qualified indorser is liable if the instrument is • It is upon the fulfillment of the condition that such ownership over the
dishonored by non-acceptance or non-payment due to: proceeds of the note is absolutely acquired by the conditional indorsee
1. Forgery Y
2. Lack of good title on the part of the indorser
3. Lack of capacity to indorse on the part of the prior parties A CONDITIONAL INDORSEMENT DOESN'T RENDER AN INSTRUMENT NON-
4. The fact that, at the time of the indorsement, the instrument was NEGOTIABLE
valueless or not valid and he knew of that fact
Sec. 40. Indorsement of instrument payable to bearer. - Where an
A QUALIFIED INDORSEMENT DOESN'T IMPAIR THE NEGOTIABLE instrument, payable to bearer, is indorsed specially, it may
CHARACTER OF THE INSTRUMENT nevertheless be further negotiated by delivery; but the person

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indorsing specially is liable as indorser to only such holders as

make title through his indorsement. HOW INDORSEMENT OF JOINT PAYEES MADE
• Where the instrument is payable to two or more payees, all payees
APPLICATION OF SECTION 40 must each indorse in order to negotiate the instrument
• Section applies only to instruments which are originally payable to • If only one indorses, he passes only his part of the instrument—such
bearer an indorsement wouldn't operate as such because it would not be an
• Cannot apply where the paper is originally made payable to order and indorsement of the whole instrument
indorsed in blank; for by Section 9, a note or bill which is payable to • Exceptions to the rule:
order becomes payable only when the last indorsement is in blank; 1. Where the payee or person indorsing has authority to indorse for
and hence, when a blank indorsement is followed by a special the others
indorsement, the instrument is not within the terms of Section 9. 2. Where the payee or indorsees are partners
NEGOTIATION OF INSTRUMENT PAYABLE TO BEARER BUT SPECIALLY Sec. 42. Effect of instrument drawn or indorsed to a person as
INDORSED cashier. - Where an instrument is drawn or indorsed to a person as
• Where an instrument payable to bearer is indorsed, it may "cashier" or other fiscal officer of a bank or corporation, it is
nevertheless be further negotiated by delivery deemed prima facie to be payable to the bank or corporation of
• An instrument which is originally payable to bearer is always payable which he is such officer, and may be negotiated by either the
to bearer indorsement of the bank or corporation or the indorsement of the
• Hence, even when it has been specially indorsed, it is still payable to officer.
bearer
APPLICATION OF SECTION 42
EFFECT ON LIABILITY OF SPECIAL INDORSER Pay P1000 to the order of cashier, Lyceum of the Philippines.
Pay P1000 to bearer
(Sgd.) A (Sgd.) A
*C is bearer and he delivered to D
*D specially indorsed it to E • Presumption is that the note is payable to Lyceum, not to the cashier
*E specially indorsed it to F personally
*F delivered to G, bearer. • And the note may be indorsed by any duly authorized officer of
• Is D liable to G being the first who specially indorsed the instrument? Lyceum other than the cashier
No, because G didn't take title through D’s indorsement but through
delivery of D DISPUTABLE PRESUMPTION
• To whom D is liable? To E and F, because they acquired the title to the
instrument through the special indorsement of D. Had F merely Sec. 43. Indorsement where name is misspelled, and so forth. -
indorsed the instrument to G, D would be liable also to G for the same Where the name of a payee or indorsee is wrongly designated or
reason. misspelled, he may indorse the instrument as therein described
adding, if he thinks fit, his proper signature.
Sec. 41. Indorsement where payable to two or more persons. -
Where an instrument is payable to the order of two or more payees APPLICATION OF SECTION 43
or indorsees who are not partners, all must indorse unless the one • An instrument drawn or indorsed to “Juan Dytuco” whose real name is
indorsing has authority to indorse for the others. “Juan Dyjuco” may be indorsed as follows:
o Pay to Y (Sgd.) Juan Dytuco Juan Dyjuco
APPLICATION OF SECTION 41 o Or (Sgd.) Juan Dyjuco
• Applies only to instruments payable to two or more payees jointly

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Sec. 44. Indorsement in representative capacity. - Where any

person is under obligation to indorse in a representative capacity, NEGOTIABILITY AFTER DATE OF MATURITY
he may indorse in such terms as to negative personal liability. • FIRST VIEW: negotiability ceases in the full commercial sense after
maturity and negotiability ceases by default of the maker in his
HOW AGENT MUST INDORSE? payment
1. He must add words describing himself as agent • SECOND VIEW: negotiability continues even after maturity
2. At the same time, disclose his principal • RECONCILIATION OF THE TWO: the mercantile character of the
3. He must be duly authorized instrument as a negotiable paper and of the contracts of the several
parties to it, continues after maturity and until it is paid except: that
Sec. 45. Time of indorsement; presumption. - Except where an an indorsee or a transferee after maturity takes the instrument subject
indorsement bears date after the maturity of the instrument, every to defenses between original parties, because after maturity such
negotiation is deemed prima facie to have been effected before the subsequent parties take the instrument after it becomes overdue and
instrument was overdue. therefore, under paragraph b of Section 52, they are not holders in
due course
DISPUTABLE PRESUMPTION • After maturity, an instrument originally negotiable continues to be
negotiable in the sense that the contracts of the parties to it continue
IMPORTANCE OF THIS PROVISION and are governed by the NIL
• This provision becomes importance when considered in connection • After maturity the instrument ceases to be negotiable in the sense that
with Section 52 (b) a transferee after maturity is not a holder in due course and therefore
• Under the provision, in order that one may become a holder in due not free from defenses obtaining between prior parties
course, the instrument must be negotiated to him before it becomes
overdue LEGAL POSITION OF HOLDER TAKING OVERDUE INSTRUMENT
• The indorsement without date establishes a prima facie presumption • He is a holder with notice. He may or may not be a holder for value
that the instrument was indorsed before maturity and one who denies and his rights will be regulated accordingly. He takes a bill which on
that the holder of such instrument is a holder in due course has the the face of it, ought to have been paid.
burden of proof • He is bound to make two inquiries—has what ought to have been done
really have been done? And if not, why not?
Sec. 46. Place of indorsement; presumption. - Except where the
contrary appears, every indorsement is presumed prima facie to RIGHT OF HOLDER NOT IN DUE COURSE
have been made at the place where the instrument is dated. • He can recover checks in his possession but the only disadvantage is
that the negotiable instrument is subject to the defenses as if it were
IMPORTANCE OF PLACE OF INDORSEMENT non-negotiable
• The place of indorsement is sometimes material because an
indorsement is governed by the laws of the state where it is indorsed, Sec. 48. Striking out indorsement. - The holder may at any time
although the instrument is drawn or made in a different state strike out any indorsement which is not necessary to his title. The
indorser whose indorsement is struck out, and all indorsers
Sec. 47. Continuation of negotiable character. - An instrument subsequent to him, are thereby relieved from liability on the
negotiable in its origin continues to be negotiable until it has been instrument.
restrictively indorsed or discharged by payment or otherwise.
WHEN HOLDER MAY OR MAY NOT STRIKE OUT INDORSEMENT
WHEN NEGOTIABLE INSTRUMENT RENDERED NON-NEGOTIABLE • But where the instrument is transferred by special indorsement, the
1. Restrictive indorsement which further prohibits the further holder has no right to strike out the name of the person mentioned in
negotiation of an instrument such indorsement and insert his own name in place thereof; nor can
2. By a discharge thereof by payment or otherwise

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he strike out such name and convert such special indorsement into a merit in the demands of Templonuevo, the bank then froze the account of
blank indorsement the engineering firm as the account of Salazar was already closed or had
• The holder who acquires title subsequent to the succeeding special insufficient funds. Failure of any settlement between Templonuevo and
indorsement must trace his title not only through the blank Salazar, this prompted the bank to debit the account of Salazar and give
indorsement but through the special indorsement as well back the money to Templonuevo through cashier’s check. The account of
Salazar was also debited for whatever charges incurred for the issuance of
EFFECT OF STRIKING OUT the cashier’s check.
1. The indorser whose indorsement is struck out is relieved from his
liability on the instrument The trial court held in favor of Salazar.
2. All subsequent indorsers are also relieved from their liability on
the instrument ISSUE: does a collecting bank, over the objections of its depositor, have
the authority to withdraw unilaterally from such depositor’s account the
Sec. 49. Transfer without indorsement; effect of. - Where the amount it had previously paid upon certain unendorsed order instruments
holder of an instrument payable to his order transfers it for value deposited by the depositor to another account that she later closed?
without indorsing it, the transfer vests in the transferee such title
as the transferor had therein, and the transferee acquires in HELD:
addition, the right to have the indorsement of the transferor. But In the present case, the records do not support the finding made by the CA
for the purpose of determining whether the transferee is a holder and the trial court that a prior arrangement existed between Salazar and
in due course, the negotiation takes effect as of the time when the Templonuevo regarding the transfer of ownership of the checks. This fact is
indorsement is actually made. crucial as Salazar’s entitlement to the value of the instruments is based on
the assumption that she is a transferee within the contemplation of Section
APPLICATION OF SECTION 49 49 of the Negotiable Instruments Law.
• Applies only to instruments payable to order
• Contemplates a case wherein delivery and payment of value but there Transferees in this situation do not enjoy the presumption of ownership in
was no indorsement favor of holders since they are neither payees nor indorsees of such
• One element lacking for the negotiation of the instrument instruments. The weight of authority is that the mere possession of a
negotiable instrument does not in itself conclusively establish either the
RIGHTS OF TRANSFEREES FOR VALUE right of the possessor to receive payment, or of the right of one who has
1. The transferee acquires only the rights of the transferor. This made payment to be discharged from liability. Thus, something more than
means that if a defense is available against the transferor, that mere possession by persons who are not payees or indorsers of the
defense is also available against the transferees instrument is necessary to authorize payment to them in the absence of
2. The transferee has also the right to require the transferor to any other facts from which the authority to receive payment may be
indorse the instrument inferred.
CASE DIGESTS: SECTION 49 Even if the delay in the demand for reimbursement is taken in conjunction
with Salazar’s possession of the checks, it cannot be said that the
93 BPI V. COURT OF APPEALS presumption of ownership in Templonuevo’s favor as the designated payee
GR 136202, JANUARY 25, 2007 therein was sufficiently overcome. This is consistent with the principle that
if instruments payable to named payees or to their order have not been
FACTS: indorsed in blank, only such payees or their indorsees can be holders and
Templonuevo demanded payment from petitioner of a sum of money entitled to receive payment in their own right.
representing the aggregate value of three checks which were allegedly
payable to him but which were deposited with the petitioner to Salazar’s The presumption that a negotiable instrument was given for a sufficient
account, without his knowledge and corresponding endorsement. Finding consideration will not inure to the benefit of Salazar because the term

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“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 More importantly, however, solely upon the prompting of Templonuevo,
instrument refers to the manner in which such instrument may be and with full knowledge of the brewing dispute between Salazar and
negotiated. Templonuevo, petitioner debited the account held in the name of the sole
proprietorship of Salazar without even serving due notice upon her. This
It is an exception to the general rule for a payee of an order instrument to ran contrary to petitioner’s assurances to private respondent Salazar that
transfer the instrument without indorsement. Precisely because the the account would remain untouched, pending the resolution of the
situation is abnormal, it is but fair to the maker and to prior holders to controversy between her and Templonuevo.
require possessors to prove without the aid of an initial presumption in For the above reasons, the Court finds no reason to disturb the award of
their favor, that they came into possession by virtue of a legitimate damages granted by the CA against petitioner. This whole incident would
transaction with the last holder. Salazar failed to discharge this burden, have been avoided had petitioner adhered to the standard of diligence
and the return of the check proceeds to Templonuevo was therefore expected of one engaged in the banking business. A depositor has the right
warranted under the circumstances despite the fact that Templonuevo may to recover reasonable moral damages even if the bank’s negligence may
not have clearly demonstrated that he never authorized Salazar to deposit not have been attended with malice and bad faith, if the former suffered
the checks or to encash the same. Noteworthy also is the fact that mental anguish, serious anxiety, embarrassment and humiliation
petitioner stamped on the back of the checks the words: "All prior
endorsements and/or lack of endorsements guaranteed," thereby making Sec. 50. When prior party may negotiate instrument. - Where an
the assurance that it had ascertained the genuineness of all prior instrument is negotiated back to a prior party, such party may,
endorsements. Having assumed the liability of a general indorser, subject to the provisions of this Act, reissue and further negotiable
petitioner’s liability to the designated payee cannot be denied. the same. But he is not entitled to enforce payment thereof against
any intervening party to whom he was personally liable.
Consequently, petitioner, as the collecting bank, had the right to debit
Salazar’s account for the value of the checks it previously credited in her RIGHT OF PARTY PRIOR TO NEGOTIATE; ILLUSTRATION
favor. However, the issue of whether it acted judiciously is an entirely • Suppose that A makes a note for P1000 with B as payee
different matter. As businesses affected with public interest, and because • Indorsement from: B to C; C to Jose Soriano; C to D; D to E; E to F; F
of the nature of their functions, banks are under obligation to treat the back to Jose Soriano
accounts of their depositors with meticulous care, always having in mind • Can Jose Soriano negotiate the note? Under this section, he may do
the fiduciary nature of their relationship. In this regard, petitioner was so.
clearly remiss in its duty to private respondent Salazar as its depositor.
EFFECT OF NEGOTIATION TO PRIOR PARTIES
To begin with, the irregularity appeared plainly on the face of the checks. • Jose Soriano cannot enforce the payment of the note against C, D, E
Despite the obvious lack of indorsement thereon, petitioner permitted the and F to whom he is liable
encashment of these checks three times on three separate occasions. This • This is to avoid circuity of suits
negates petitioner’s claim that it merely made a mistake in crediting the
value of the checks to Salazar’s account and instead bolsters the conclusion NOTES FOR WEEK #7
of the CA that petitioner recognized Salazar’s claim of ownership of checks
JULY 23 - 27, 2007
and acted deliberately in paying the same, contrary to ordinary banking
policy and practice. It must be emphasized that the law imposes a duty of
diligence on the collecting bank to scrutinize checks deposited with it, for IV. RIGHTS OF THE HOLDER
the purpose of determining their genuineness and regularity. The collecting
bank, being primarily engaged in banking, holds itself out to the public as Sec. 51. Right of holder to sue; payment. - The holder of a
the expert on this field, and the law thus holds it to a high standard of negotiable instrument may to sue thereon in his own name; and
conduct. The taking and collection of a check without the proper payment to him in due course discharges the instrument.
indorsement amount to a conversion of the check by the bank.

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RIGHTS OF A HOLDER IN GENERAL • Any holder proved to have taken an instrument with one of the
1. He may sue on the instrument in his own name conditions enumerated lacking is not a holder in due course
2. He may receive payment and if the payment is in due course, the
instrument is discharged ACQUISITION BEFORE THE INSTRUMENT IS OVERDUE
• The holder of the instrument must have become the holder before the
RIGHT TO SUE instrument has become overude
• Holder of a negotiable instrument may sue on his own name, even if • Illustrations—
he be a holder only for collection or as a pledge of the instrument o One who has purchased 2 promissory notes without the
necessary indorsement on the part of the holder after
RIGHT OF TRANSFEREE OF UNINDORSED INSTRUMENT payment thereof had already been one year overdue and
• Such possessor may sue in his own name if his transferor could have without having made inquiries about the solvency of the
done so makers cannot be considered as a holder in due course
• Under Section 49, a transfer for value, but without indorsement, of an o One taking past due paper is chargeable with notice of all
instrument is payable to order vests in the transferee such title as the equities between the original parties but nbt with equities
transferor had therein. between intermediate indorsers
o If the instrument is overdue, it is also a notice that it has
EFFECT OF PAYMENT TO THE HOLDER been dishonored
• The payment in due course to the holder of the instrument discharges
the instrument WHEN INSTRUMENT IS OVERDUE
• It is in due course if it is made at or after the maturity of the • When it after the date of maturity
instrument; or to the holder thereof; in good faith and without notice • On the date of maturity, the instrument is not overdue and a holder
that his title is defective who acquires the instrument on that date is a holder in due course
• If the instrument is overdue, there might be something wrong with the
Sec. 52. What constitutes a holder in due course. - A holder in due instrument
course is a holder who has taken the instrument under the
following conditions: AS TO ACCELERATED INSTRUMENTS
• When the instrument contains an acceleration clause, knowledge of
(a) That it is complete and regular upon its face; the holder at the time of acquisition thereof that one installment or
interest, or both, as the case may be, is unpaid, is notice that the
(b) That he became the holder of it before it was overdue, and instrument is overdue
without notice that it has been previously dishonored, if such was
the fact; AS TO INTEREST
• One who purchases in good faith an instrument upon which the
(c) That he took it in good faith and for value; interest is overdue is a holder in due course
• But where by the terms of the instrument, the principal was to become
(d) That at the time it was negotiated to him, he had no notice due upon default of the payment of instrument, then one who takes
of any infirmity in the instrument or defect in the title of the person the instrument upon which the interest is overdue is not a holder in
negotiating it. due course
PRESUMPTION HOLDER IN DUE COURSE WHAT IS AN ACQUISITION IN GOOD FAITH?

• Generally, every holder is prima facie a holder in due course • Good faith refers to the indorsee or transferee and not to the seller of
• Any one, therefore, who claims otherwise must prove that the holder the paper
in question acquired the instrument with one or more of the conditions
lacking

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• Taking in good faith means that he doesn't have any knowledge of fact o Acquisition of the instrument by fraud
which would render it dishonest for him to take a particular piece of o Acquisition of the instrument by force, duress or fear
negotiable paper o Acquisition of the instrument by unlawful means
o Acquisition of the instrument by for an illegal consideration
MEANING OF HOLDER IN GOOD FAITH o Negotiation of the instrument in breach of faith
• Holder without knowledge or notice of equities of any sort which could o Negotiation of the instrument under circumstances which
be set up against a prior holder of an instrument amount to fraud
EFFECT OF FAILURE TO MAKE INQUIRY DEFENSES

• Ordinarily, failure to inquire after notice merely sufficient to cause a • Include those common law defenses outside those covered in Section
person of ordinary prudence to make inquiry as to an infirmity in a 55
negotiable instrument and defect in the holder’s title, is not evidence • These include mistake, absence and failure of consideration covered in
of purchaser’s bad faith so as to bar him from recovery Section 28, minority and other forms of incapacity, lack of authority of
• TEST OF HONESTY—whether or not his purpose is dishonest? an agent
WHEN FAILURE TO MAKE INQUIRY IS INDICIA OF BAD FAITH? INFIRMITIES

• Failure to make inquiry when circumstances strongly indicate defect, • Things that are wrong with the instrument itself
renders the holder not a holder in due course • What are these?
o Wrong date inserted where the instrument is expressed to be
ACQUISITION FOR VALUE payable at a fixed period after sight is undated
• Where the holder gave no valuable consideration for the transfer of the o Filling up a blank instrument not strictly in accordance with
instrument to him, he cannot be a holder in due course the authority given or not within authority given or not within
• Discounting of a negotiable instrument is still considered to be taking the reasonable time, where it was delivered wanting in a
for value material alteration
o Filling up without authority an incomplete and undelivered
EFFECT OF INADEQUACY OF INSTRUMENT instrument
• Generally, lesion or inadequacy of cause shall not invalidate a contract, o Lack of valid and intentional delivery
unless there has been fraud, mistake or undue influence o Forgery
• It may be an evidence of fraud o Material alteration
• An amount paid for an instrument if a trifling sum should be a red flag
and may by itself establish notice MAY A PAYEE BE A HOLDER IN DUE COURSE?
• Yes, if he satisfies the requirements as set forth in Section 52
ACQUISITION WITHOUT NOTICE OF DEFECT OF TITLE OR OF INFIRMITY
• The following may be chargeable with notice—one taking an MAY A DRAWEE BE A HOLDER IN DUE COURSE?
instrument which is overdue; and one acquiring an instrument for a • A holder refers to one who has taken the instrument as it passes along
grossly inadequate consideration in the course of negotiation towards the drawee and not the drawee,
who, on the acceptance and payment of the instrument, thereby strips
GOOD FAITH MEANS LACK OF NOTICE OF DEFECT OR INFIRMITY the instrument of all negotiability and reduces it to a mere voucher or
proof of payment
DEFECTS OF TITLE
• All those situations which at common law were known as equitable Sec. 53. When person not deemed holder in due course. - Where an
defenses and also to cover those equities of ownership where there instrument payable on demand is negotiated on an unreasonable
was breach of faith in negotiation length of time after its issue, the holder is not deemed a holder in
• Examples? due course.

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• While mere suspicion is not enough, where there is knowledge of

WHAT CONSTITUTES UNREASONABLE LENGTH OF TIME? suspicious circumstances, coupled with means of verifying them,
• Jurisprudence doesn't state an exact period, nonetheless, there is taking the instrument may amount to bad faith
practically no authorities hold that a reasonable time for negotiating a
demand note could be extended beyond a year Sec. 57. Rights of holder in due course. - A holder in due course
holds the instrument free from any defect of title of prior parties,
Sec. 54. Notice before full amount is paid. - Where the transferee and free from defenses available to prior parties among
receives notice of any infirmity in the instrument or defect in the themselves, and may enforce payment of the instrument for the full
title of the person negotiating the same before he has paid the full amount thereof against all parties liable thereon.
amount agreed to be paid therefor, he will be deemed a holder in
due course only to the extent of the amount therefore paid by him. RIGHTS OF A HOLDER IN DUE COURSE
1. He may sue on the instrument in his won name
Sec. 55. When title defective. - The title of a person who negotiates 2. He may receive payment and if the payment is in due course, the
an instrument is defective within the meaning of this Act when he instrument is discharged
obtained the instrument, or any signature thereto, by fraud, 3. He holds the instrument free from any defect of title of prior
duress, or force and fear, or other unlawful means, or for an illegal parties and free from defenses available to prior parties among
consideration, or when he negotiates it in breach of faith, or under themselves
such circumstances as amount to a fraud. 4. And he may enforce payment of the instrument for the full
amount thereof against all parties liable thereto
DEFECTIVE TITLE IN GENERAL
• In the acquisition or negotiation thereof LEGAL AND EQUITABLE DEFENSES
• The holder in due course is free from equitable defenses only
Sec. 56. What constitutes notice of defect. - To constitutes notice of
an infirmity in the instrument or defect in the title of the person AN ALTERATION MAY BE A REAL OR PERSONAL DEFENSE. WHY?
negotiating the same, the person to whom it is negotiated must • An alteration irrespective of original tenor, it can be enforced—real
have had actual knowledge of the infirmity or defect, or knowledge • Irrespective of difference between original and altered tenor, can
of such facts that his action in taking the instrument amounted to collect only limited amount—personal
bad faith.
EQUITABLE OR PERSONAL DEFENSES
NOTICE OF DEFECT IN GENERAL • Those which grow out of the agreement or conduct of a particular
To constitute a notice of defect or infirmity, the holder must have actual person in regard to the instrument which renders it inequitable for
knowledge either: him, though holding legal title, to enforce it against the defendant, but
1. Of the defect or infirmity which are not available against bona fide purchasers for value without
2. Or of facts that his action in taking the instrument amounts to bad notice
faith
LEGAL OR REAL DEFENSE
ACTUAL KNOWLEDGE • Attach to the instrument itself and can be set up against the whole
• Actual knowledge is required and not mere suspicion, surmise or fear world, including a holder in due course
• The right sought to be enforced has never existed or ceased to exist
TAKING AMOUNTING TO BAD FAITH • Defense against everybody
• Bad faith consists in guilty knowledge, or willful ignorance, showing a
vicious or evil mind THE INSTRUMENT SUBJECT TO A REAL DEFENSE CAN STILL BE
ENFORCED. IT CANNOT BE ENFORCED WITH REGARD THE PERSON TO
WHOM THE LEGAL DEFENSE IS AVAILABLE.

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BETWEEN WHOM DEFENSE CAN BE RAISED IN NOTES WHERE THE CORPORATION IS ABSOLUTELY PROHIBITED FROM ISSUING
• In general, the defense of want of consideration may only be raised ANY NEGOTIABLE INSTRUMENT, THE PAPER CANNOT BE ENFORCED EVEN
between immediate parties BY A HOLDER IN DUE COURSE
• But this could be raised in the instance that the holder has notice of
the want in consideration WHERE THE CONTRACT OR INSTRUMENT ITSELF IS MADE VOID BY
STATUTE, THE ILLEGALITY OF THE INSTRUMENT IS A REAL DEFENSE
BETWEEN WHOM DEFENSE MAY BE RAISED IN BILLS
• The want or failure of consideration may be interposed in an action Sec. 58. When subject to original defense. - In the hands of any
brought by the payee against the drawer or by the indorsee against holder other than a holder in due course, a negotiable instrument is
the payee indorsing, or by the drawer against the acceptor, but not in subject to the same defenses as if it were non-negotiable. But a
an action between the payee and acceptor holder who derives his title through a holder in due course, and
• In the latter case, the defense is available only if there is no who is not himself a party to any fraud or illegality affecting the
consideration received by the defendant for his liability and plaintiff instrument, has all the rights of such former holder in respect of all
must have given no consideration for his title parties prior to the latter.
WANT OF DELIVERY OF COMPLETE INSTRUMENT RIGHTS OF A HOLDER NOT IN DUE COURSE

• Where the instrument is mechanically complete and is not wanting in 1. He may sue on his own name
any material particular, want of delivery is an equitable defense 2. He may receive payment and if the payment is in due course, the
• As against holders not in due course, it can be shown that no delivery instrument is discharged
was made, or that the delivery was conditional or for a special purpose 3. He holds the instrument subject to the same defenses as if it were
• Where the instrument is stolen, the defense is also equitable non-negotiable
• But where the instrument is payable to order, it is a real defense—for 4. But a holder not in due course who derives his title from a holder
the person would have to commit forgery on the instrument in due course and who isn’t a party himself to any fraud or
illegality affecting the instrument, has all the rights of such former
FRAUD IN INDUCEMENT IS A PERSONAL OR EQUITABLE DEFENSE holder in respect of parties prior to the latter
• Relates to the quantity, quality, value or character of the consideration
of the instrument THE HOLDER ACQUIRING FROM A HOLDER IN DUE COURSE HAS THE
BURDEN OF PROOF TO SHOW PREDECESSOR IS INDEED A HOLDER IN
FOR MISTAKE TO INVALIDATE CONSENT DUE COURSE
• It should refer to the substance of the thing which is the object of the
contract, or those conditions which have principally moved one or both Sec. 59. Who is deemed holder in due course. - Every holder is
parties to enter into the contract deemed prima facie to be a holder in due course; but when it is
shown that the title of any person who has negotiated the
FRAUD IN FACTUM OR FRAUD IN ESSE CONTRACTUS IS A LEGAL DEFENSE instrument was defective, the burden is on the holder to prove that
• This fraud exists in those cases which a person without negligence has he or some person under whom he claims acquired the title as
signed an instrument which was in fact a negotiable instrument but holder in due course. But the last-mentioned rule does not apply in
was deceived as to the character of the instrument and without favor of a party who became bound on the instrument prior to the
knowledge of it acquisition of such defective title.
• Essential element is that the maker or indorser, as the case may be,
must have exercised ordinary diligence and in no manner contributed IN WHOSE FAVOR PRESUMPTION ARISES
negligently to the imposition • In order to be a holder, he must be in possession of the note or the
bearer thereof
MINORITY IS A LEGAL DEFENSE ONLY AVAILABLE TO THE MINOR

Page 76 of 190
WHEN PRESUMPTION ACCRUES she didn't indicate. Most probably, as the trial court surmised, she
• It is presumed that the holder acquired the note under all the acquired them after they have been dishonored.
circumstances required under Section 52
• Before the presumption arises, he must prove that he is the holder of Chan Wan is then not a holder in due course. Nonetheless, it doesn't mean
the instrument, that is, that he is the indorsee in possession of the that she couldn't collect on the checks. He can still collect against Tan Kim
instrument, as it is payable to order if the latter has no valid excuse for refusing payment. The only
disadvantage for Chan Kim is that she is susceptible to defenses of Tan
WHEN BURDEN IS SHIFTED Kim but what are the defenses of latter? This has to be further deliberated
• When it is shown that the title of any person who has negotiated the by the trial court.
instrument was defective, the burden is on the holder to prove that he
or some under whom he claims, acquired the title as holder in due 95 STELCO MARKETING V. CA
course 210 SCRA 51
THE PRESUMPTION IS NOT APPLICABLE WHEN THE HOLDER’S TITLE WAS FACTS:
DEFECTIVE OR SUSPICIOUS Petitioner was engaged in the distribution and sale of structiural steel bars.
RYL bought on several occasion large quantities of steel bars but the same
NOTES FOR WEEK #8 were never paid for despite several demands by petitioner.
JULY 30 - AUG US T 4, 2007
On a relevant date, RYL gave to Armstrong Industries a check in payment
of its obligations. The check was drawn by Steelweld Corporation—
CASE DIGESTS: SECTIONS 51 TO 59 allegedly the owner of RYL persuaded the president of Steelweld to
accommodate the former in its obligation. The check, when deposited was
94 CHAN WAN V. TAN KIM thereafter dishonored due to insufficient funds. A case ensued for
109 PHIL 706 violations of BP22 but the case was dismissed as the check was held to be
for accommodation purposes only.
FACTS:
Tam Kim issued 11 checks payable to cash or bearer. Chan Wan presented Thereafter a complaint was filed by petitioner against RYL and Steelweld
these for payment but were dishonored for insufficiency of funds. This for the recovery of sum of money in payment of the steel bars ordered.
prompted Chan Wan to institute an action against Tam Kim. She didn't RYL was nowhere to be found that is why the proceedings commenced as
take the witness stand and merely presented the checks for payment. Tan against Steelweld only. The trial court decided in favor of petitioner but
Kim on the other hand alleged that the checks were for mere receipts only. this was reversed by the CA.
The trial court dismissed the complaint as Chan Wan failed to show that
she wa a holder in due course. HELD:
Petitioner contends that the acquittal of Lim and Tianson didn't operate to
HELD: release Steelweld from its liability as an accommodation party. Noteworthy
Eight of the checks were crossed checks specially to Chinabank and should is that neither said pronouncement nor any other part of the judgment of
have been presented for payment by Chinabank and not by Chan Wan. acquittal declared it liable to petitioner. To be sure, as regards an
Inasmuch as Chan Wan didn't present them for payment himself, there accommodation party, the condition of lack of notice of any infirmity or
was no proper presentment, and the liability didn't attach to the drawer. defect in title of the persons negotiating it is of no application since the law
preserves the right of recourse of a holder for value against an
The facts show that the checks were indeed deposited with Chinabank and accommodation party notwithstanding knowledge that at the time of taking
were by the latter presented for collection to the drawee bank. But as the the instrument, knew him only as an accommodation party.
account had no sufficient funds, they were unpaid and returned, some of
them stamped “account closed”. How it reached the hands of Chan Wan,

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Further, there is no evidence to show that petitioner possessed the check the delivery of the bales of tobacco leaves which King failed to do. There
before the instrument’s presentment and dishonor. In what transpired being failure of consideration, SIHI is not a holder in due course.
during the transactions involving the check, evidence and facts show that
there was any participation or intervention on the part of petitioner. What 97 STATE INVESTMENT HOUSE V. IAC
the record shows is that only after the check was deposited and 175 SCRA 310
dishonored, petitioner came into possession of it in some way and was able
to give it in evidence at the trial of the civil case it has instituted against FACTS:
the drawers of the check. New Sikatuna requested for a loan from Spouses Chua. Latter issued post-
dated crossed checks in favor of former. Thereafter, Sikatuna sold checks
96 BATAAN CIGAR V. CA to SIHI which upon deposit, checks were dishonored. The trial court
230 SCRA 642 decided the case in favor of SIHI.
FACTS: HELD:
Bataan Cigar has engaged one of its suppliers, George King, to deliver Jurisprudence provides the following effects of crossing a check:
bales of tobacco leaves. Petititoner then issued postdated crossed checks 1. The check may not be encashed but only deposited in the bank
in favor of King. This was continued despite the failure to deliver the bales. 2. The check may be negotiated only once—to one who has an
Simultaneous to these transactions was the discounting of King of the account with a bank
checks to State Investment House. Bataan then stopped payment and 3. The act of crossing the check serves the warning to the holder
SIHI tried to collect. that the check has been issued for a definite purpose so that he
must inquire if he has received the check pursuant to that
HELD: purpose, otherwise, he is not a holder in due course.
The negotiability of the check isn’t affected by it being crossed, whether
specially or generally. It may be legally negotiated from one person to The checks in issue were crossed generally and issued payable to New
another as long as the one who encashes the check with the drawee bank Sikatuna Wood which could only mean that the drawer has intended the
or if its specially crossed, by the bank mentioned between the parallel same for deposit only by the rightful person. Apparently, it was not the
lines. payee who presented the same for payment and therefore, there was no
proper presentment and the liability didn't attach to the drawer. Thus, in
Jurisprudence provides the following effects of crossing a check: the absence of due presentment, the drawer didn't become liable.
1. The check may not be encashed but only deposited in the bank Consequently, no right of recourse is available to petitioner against the
2. The check may be negotiated only once—to one who has an drawer of the subject checks considering that the petitioner is the proper
account with a bank party authorized to make presentment of the checks in question.
3. The act of crossing the check serves the warning to the holder
that the check has been issued for a definite purpose so that he Nonetheless, the holder could still collect from New Sikatuna if the latter
must inquire if he has received the check pursuant to that doesn't have a valid excuse from refusing payment.
purpose, otherwise, he is not a holder in due course.
98 STATE INVESTMENT HOUSE V. CA
The check should placed the holder in inquiry and upon him devolves the 217 SCRA 32
duty to ascertain the indorser’s title to the check or the nature of his
possession. Failing in this respect, the holder is declared guilty of gross FACTS:
negligence amount to legal absence of good faith. Moulic issued checks as security to Victoriano, for pieces of jewelry to be
sold on commission. Moulic failed to sell the pieces of jewelry, so she
In the present case, petitioner’s defense in stopping payment is as good to returned them to Victoriano. The checks however could not be recovered
SIHI as it is to King because really the consideration for the checks were by Moulic as these have been discounted already in favor of petitioner.
Consequently, before the maturity dates, Moulic withdrew her funds from

Page 78 of 190
her account. Thereafter, petitioner presented the checks for payment but HELD:
these were dishonored. This prompted the petitioner to initiate an action On whether or not Banco Atlantico was a holder in due course, it is not.
against Moulic. Following the decision of the Auditor General in denying the claim of the
bank, the checks were demand notes. It should have been put on guard
HELD: when Boncan negotiated the checks with them and subsequently deposited
A prima facie presumption exists that a holder of a negotiable instrument is the same to her account. Even though it were demand notes, she
a holder in due course. The burden of proving that State is not a holder in instructed the bank that the same be not presented for collection till a later
due course is upon Moulic. In this regard, she failed to do so. date. The fact that the amount was quite big and it was the payee herself
who made the request that the same be not presented for collection until a
The evidence shows that the dated checks were complete and regular; fixed date in the future was proof of a glaring infirmity or defect in the
petitioner bought the checks from Victoriano before their due dates; it took instrument. It loudly proclaims “Take me at your own risk.” It was
the checks in good faith and for value; and it was never informed nor made obvious by then that the bank had knowledge of the infirmity or defect of
aware that these checks were merely issued to payee as security. the checks. Furthermore, what it did when it allowed payment before
clearing is beyond the normal and ordinary banking practice especially
Consequently, State is a holder in due course. Moulic cannot set up the when the bank involved is a foreign bank and the amounts involved were
defense that there was failure or want of consideration. It can only invoke large. Boncan wasn't even a client of the bank but was someone who had
the defense if State was a privy to the purpose for which they were issued special relations with its officers.
and therefore is not a holder in due course.
In view of the foregoing, the embassy as the drawer of the 3 checks in
Furthermore, the mere fact that the checks were issued as security is not question cannot be held liable. It is apparent that the said 3 checks were
sufficient ground to discharge the instrument as against a holder in due (fraudulently altered) by Boncan as to their accounts and therefore wholly
course. inoperative (note: should be “avoided”).
And also, Moulic was responsible for the dishonor of her checks. She 100 SALAS V. CA
withdrew her funds from her account and could not have expected her 181 SCRA
checks to be honored by then.
FACTS:
99 BANCO ATLANTICO V. AUDITOR GENERAL Petitioner bought a car from Viologo Motor Sales Company, which was
81 SCRA 335 secured by a promissory note, which was later on indorsed to Filinvest
Finance, which financed the transaction. Petitioner later on defaulted in
FACTS: her installment payments, allegedly due to the fraud imputed by VMS in
Boncan was the Finance Officer of the Philippine Embassy in Madrid who on selling her a different vehicle from what was agreed upon. This default in
many occasions negotiated with Banco Atlantico checks, allegedly endorsed payment prompted Filinvest Finance to initiate a case against petitioner.
to her by the embassy. On these occasions, the bank allowed the payment The trial court decided in favor of Filinvest, to which the appellate court
of the checks, notwithstanding the fact that the drawee bank has not yet upheld by increasing the amount to be paid.
cleared the checks for collection. This was premised on the finding that
Boncan had special relations with the employees of the bank. And that It is the contention of petitioner that since the agreement between her and
upon presentment to the drawee bank, the checks were dishonored due to the motor company was inexistent, none had been assigned in favor of
non-acceptance allegedly on the ground that the drawer has ordered the private respondent.
stoppage of payment. This prompted Banco Atlantico to collect from the
Philippine Embassy for the funds released to Boncan but the latter refused. HELD:
This eventually led to filing of money claim of the bank with the Auditor Petitioner’s liability on the promissory note, the due execution and
General. genuineness of which she never denied under oath, is under the foregoing
factual milieu, as inevitable as it is clearly established.

Page 79 of 190
negotiable, in which case, the latter’s rights are based on a negotiable

The records reveal that involved herein is not a simple case of assignment instrument and assuming further that the petitioner’s defense may not
of credit as petitioner would have it appear, where the assignee merely prevail against it.
steps into the shoes of, is open to all defenses available against and can
enforce payment only to the same extent as, the assignor-vendor. The promissory note in question is not a negotiable instrument. The
promissory note in question lacks the so-called words of negotiability. And
The instrument to be negotiable must contain the so-called words of as such, it follows that the respondent can never be a holder in due course
negotiability. There are only 2 ways for an instrument to be payable to but remains merely an assignee of the note in question. Thus, the
order. There must always be a specified person named in the instrument petitioner may raise against the respondents all defenses available to it
and the bill or note is to be paid to the person designated in the instrument against the seller.
or to any person to whom he has indorsed and delivered the same.
Without the words “or order” or “to the order of”, the instrument is payable 102 DE OCAMPO V. GATCHALIAN
only to the person designated therein and is thus non-negotiable. Any 3 SCRA 596
subsequent purchaser thereof will not enjoy the advantages of being a
holder in due course but will merely step into the shoes of the person FACTS:
designated in the instrument and will thus be open to the defenses Gatchalian was interested in buying a car and for this reason, Gonzales
available against the latter. offered and shown to her the same. He represented himself to be
authorized by the owner of the car to sell the same. After negotiation,
In the case at bar, the promissory notes is earmarked with negotiability Gatchalian agreed to buy the car and wanted Gonzales to bring the
and Filinvest is a holder in due course. certificate of registration so that her husband could verify it. Gonzales
excused himself from bringing said certificate as allegedly the owner
101 CONSOLIDATED PLYWOOD V. IFC LEASING wanted to be secure that the buyer would be in good faith. This led to him
149 SCRA 448 asking Gatchalian to issue a check as evidence of good faith. He promised
that said check wouldn't be deposited but merely shown to the owner.
FACTS: Relying on this promise, she issued the check but Gonzales failed to show
Petitioner bought from Atlantic Gulf and Pacific Company, through its sister up the next day. She ordered the stoppage of payment of the check,
company Industrial Products Marketing, two used tractors. Petitioner was which the plaintiff didn't knew about. The plaintiff accepted the check from
issued a sales invoice for the two used tractors. At the same time, the Gonzales as payment for hospitalization later on.
deed of sale with chattel mortgage with promissory note was issued.
Simultaneously, the seller assigned the deed of sale with chattel mortgage HELD:
and promissory note to respondent. The used tractors were then delivered The stipulation of facts would show that De Ocampo wasn't aware of the
but barely 14 days after, the tractors broke down. The seller sent circumstances that led to the issuance of the check. Nonetheless, he
mechanics but the tractors were not repaired accordingly as they were no should have been placed into inquiry, with the showing that the check was
longer serviceable. Petitioner would delay the payments on the promissory crossed—that the check could only be deposited and not encashed. He
notes until the seller completes its obligation under the warranty. should have made an inquiry as to why Gonzales had with him the check
and not deposited in account. He had the duty to ascertain that Gonzales
Thereafter, a collection suit was filed against petitioner for the payment of had legal title to the instrument. Having failed in this accord, he was
the promissory note. grossly negligent in not finding out the nature of the title and possession of
Gonzales, amounting to legal absence of good faith.
HELD:
It is patent that the seller is liable for the breach in warranty against the In taking an instrument with a defect or infirmity, it could not be said that
petitioner. This liability as a general rule extends to the corporation to the holder took it as a holder in due course.
whom it assigned its rights and interests unless the assignee is a holder in
due course of the promissory note in question, assuming the note is 103 MONTINOLA V. PNB

Page 80 of 190
88 PHIL 178 Petitioner bank issued a manager’s check in favor of Makati Bel-Air as
purchased by Altiura as payment for a condominium unit. Thereafter,
FACTS: Altiura requested the bank to hold payment as there was a discrepancy
*Remember the case with the Japanese occupation and the mutilated between the areas of the unit purchased to what has been agreed upon.
check. The bank then told Makati Bel-Air of this request. This request happened
two times. On the second time, Bel-Air denied such request, which
HELD: prompted the bank to file a complaint-interpleader so that the two other
Montinola could not be considered as a holder in due course. Why? For parties could settle their claims with one another. This led to a civil case
one to be a holder in due course, one should take the instrument before it and another. Altiura filed for rescission of the contract between him and
has become overdue. Remember that in this case, Montinola took the Bel-Air. Bel-Air filed counterclaims against the bank and Altiura. During
check which has long become overdue. He cannot even be in the slightest the pendency of these actions, the bank moved that it first deposit the
be considered as a holder because the NIL defines a holder as being the amount of the check in a special account, which was approved by the trial
payee or the indorsee of the negotiable instrument. In this case, he wasn't court. Later on, it moved for the dismissal of the complaint it filed for the
the payee nor was he the indorsee of the check in issue. reason that there is no more conflict between Altiura and Bel-Air. Bel-Air
returned the check to the bank. In resolving the motion to withdraw, the
104 PEOPLE V. MANIEGO court held that the motion is rendered moot and academic by its earlier
148 SCRA 30 order ordering the bank to return the amount to Altiura. This was
appealed by the bank.
FACTS:
The accused were charged and later on found guilty of committing HELD:
malversation. Ubay was the disbursing officer in the Office of the Chief of Makati Bel-Air was a party to the contract of sale of the office condominium
Finance in a military camp and together with his co-accused, were able to unit to Altiura. Accordingly, it was aware that at the time it had received
take personal checks drawn against the PNB and BPI, of which Pamintuan the manager’s check, that there was or had arisen at least partial failure of
was the drawer and Maniego was the indorser. The checks were encashed consideration since it was unable to comply with its obligation to deliver
and used, to the prejudice of the government. the office space to Altiura. Makati Bel-Air was also aware that the bank
had been informed of the claimed defect in its title to the check or of its
Maniego averred that the trial court erred in adjudging her as liable as an right to the proceeds thereof. Vis a vis both Altiura and the bank, Makati
indorser to the government. Bel-Air cannot be considered as a holder in due course.
HELD: 106 YANG V. COURT OF APPEALS

The contention of Maniego that as a mere indorser, she may not be liable 409 SCRA 159
on account of the dishonor of the checks indorsed by her is untenable. The
holder or last indorsee of a negotiable instrument has the right to enforce FACTS:
payment of the instrument for the full amount thereof and against all Yang and Chandimari entered into an agreement that the latter would issue
parties liable thereon. Among the parties liable thereon is the indorser to the former a manager’s check in exchange for two checks that Yang has
unless he clearly indicates that his intention to be bound in some other payable to the order of David. The difference in amount would be the
capacity. Maniego may also be considered as an accommodation party and profit of the two of them. It was further agreed upon that Yang would
as such, is liable to a holder for value notwithstanding if the holder knew secure a dollar draft, which Chandimari would exchange with another dollar
that she was only an accommodation party. draft to be secured from a Hong Kong bank. At the agreed time of
rendezvous, it was reported by Yang’s messenger that Chandimari didn't
105 UCPB V. IAC show up and the drafts and checks were allegedly stolen. This wasn't true
183 SCRA 38 however. Chandimari was able to get hold of the drafts and checks. He
was even able to deliver to David the two checks and was able to get
FACTS: money in return. Consequently, Yang asked for the stoppage of payment

Page 81 of 190
of the checks she believed to be lost, relying on the report of her for the stoppage of payment which he did. He executed also an affidavit of
messenger. The stoppage order was eventually lifted by the banks and the loss as well as reported it to the police.
drafts and checks were able to be encashed. Yang then filed an action for
injunction and damages against the banks, Chandimari and David. The The bank then received the check twice for clearing. For these two times,
trial court and CA held in favor of David as a holder in due course. they dishonored the payment by saying that payment has been stopped.
After the second time, a lawyer contacted it demanding payment. He
HELD: refused to disclose the name of his client and threatened to sue. Later, the
Every holder of a negotiable instrument is presumed to be a holder in due name of Mesina was revealed. When asked by the police on how he
course. This is specially true if one is a holder because he is the payee or possessed the check, he said it was paid to him Lim. An information for
indorsee of the instrument. In the case at bar, it is evident that David was theft was then filed against Lim.
the payee of the checks. The prima facie presumption of him being a
holder in due course is in his favor. Nonetheless, this presumption is A case of interpleader was filed by the bank and Go moved to participate
disputable. On whether he took the check under the conditions set forth in as intervenor in the complaint for damages. Mesina moved for the
Section 52 must be proven. Petitioner relies on two arguments on why dismissal of the case but was denied. The trial court ruled in the
David isn’t a holder in due course—first, because he took the checks interpleader case ordering the bank to replace the cashier’s check in favor
without valuable consideration; and second, he failed to inquire on of Go.
Chandimari’s title to the checks given to him.
HELD:
The law gives rise to the presumption of valuable consideration. Petitioner Petitioner cannot raise as arguments that a cashier’s check cannot be
has the burden of debunking such presumption, which it failed to do so. countermanded from the hands of a holder in due course and that a
Her allegation that David received the checks without consideration is cashier’s check is a check drawn by the bank against itself. Petitioner
unsupported and devoid of any evidence. failed to substantiate that he was a holder in due course. Upon
questioning, he admitted that he got the check from Lim who stole the
Furthermore, petitioner wasn't able to show any circumstance which should check. He refused to disclose how and why it has passed to him. It simply
have placed David in inquiry as to why and wherefore of the possession of means that he has notice of the defect of his title over the check from the
the checks by Chandimari. David wasn't a privy to the transactions start. The holder of a cashier’s check who is not a holder in due course
between Yang and Chandimari. Instead, Chandimari and David had the cannot enforce payment against the issuing bank which dishonors the
agreement between themselves of the delivery of the checks. David even same. If a payee of a cashier’s check obtained it from the issuing bank by
inquired with the banks on the genuineness of the checks in issue. At that fraud, or if there is some other reason why the payee is not entitled to
time, he wasn't aware of any request for the stoppage of payment. Under collect the check, the bank would of course have the right to refuse
these circumstances, David had no obligation to ascertain from Chandimari payment of the check when presented by payee, since the bank was aware
what the nature of the latter’s title to the checks was, if any, or the nature of the facts surrounding the loss of the check in question.
of his possession.
108 ASIA BANKING CORPORATION V. TEN SEN GUAN
107 MESINA V. IAC 44 PHIL 511
145 SCRA 497
FACTS:
FACTS: Ten Sen Guan ordered from Snow’s Ltd. ten cases of mercerized bastite to
Jose Go purchased from Associate Bank a Cashier’s Check, which he left on be shipped from New York to Manila. Upon the arrival of the merchandise,
top of the manager’s desk when left the bank. The bank manager then a draft drawn by Snow’s Ltd. against Ten Sen Guan was presented to them
had it kept for safekeeping by one of its employees. The employee was for acceptance. The delivery of the bill of lading and other documents were
then in conference with one Alexander Lim. He left the check in his desk being put on hold pending acceptance of the draft that is why Ten Sen
and upon his return, Lim and the check were gone. When Go inquired Guan accepted the same. When the cases were opened however, it was
about his check, the same couldn't be found and Go was advised to request found out that the merchandise wasn't bastite but instead were burlap.

Page 82 of 190
Ten Sen Guan then was prompted to return the bill of lading and other Fernandez Hermanos to show that indeed the chain was defective. But as
documents and requested Asia Banking Corporation, the agent of Snow the trial court found out, there was a failure of proof.
Ltd. to cancel its acceptance, which the corporation promised to do so.
However it didn't do good its promise since it sued Ten Sen Guan for the **WEEK 9: MID TER MS WEEK
amount of the draft. The trial court however ruled in favor of Ten Sen
Guan.
NOTES FOR WEEK 10
HELD: AUG UST 20 - 25, 2007
It is undisputed that the defendants placed the order with Snow Ltd. for 10
cases of mercerized bastite and that the draft was drawn from the V. LIABILITIES OF PARTIES
corresponding value of 10 cases of mercerized bastite including incidental
expenses. That when the cases were examined it was found out that it Sec. 60. Liability of maker. - The maker of a negotiable instrument,
wasn't bastite but instead were burlap, of which the corporation was by making it, engages that he will pay it according to its tenor, and
notified and that Ten Sen Guan refused to refused the goods. The admits the existence of the payee and his then capacity to indorse.
corporation alleges that it is a holder for value but it failed to prove such
allegation. If indeed it was a holder for value, it could have easily proven MAKER PRIMARILY LIABLE
such fact by competent evidence but it failed to do so. It wasn't able to • Engagement of the maker is to pay absolutely for the note according
give an authentic account of the transactions. It being a fact that it is not to its tenor
a holder for value, it is susceptible to any defenses available to Ten Sen • His liability is primarily and unconditional
Guan. • One who has signed an instrument as a maker is presumed to have
acted with care and to have signed the instrument with full knowledge
According to the findings, the acceptance was conditional. The draft was of its contents, unless of course, if fraud is proved
for collection and also, the evidence established that the corporation has
released Ten Sen Guan from liability from the draft. MAKER MUST PAY ACCORDING TO THE TERMS OF THE NOTE
• The maker bound himself to pay personally. He cannot shift the
109 FOSSUM V. FERNANDEZ obligation without the consent of the payee. He cannot allege that he
44 PHIL 675 spend the money on expenses which should be charged to a trust
administered by a creditor because it is not the payee’s concern to
FACTS: know how the proceeds should be spent. That is the sole concern of
Fernandez Hermanos placed an order with the products company for the the maker. The payee’s interest is merely to see that the note is paid
manufacturing of a chain given a set of specifications. The chain was duly according to its term.
prepared and delivered. A draft was drawn by the company and was
accepted by Fernandez Hermanos. Thereafter, the draft was negotiated LIABILITY OF 2 OR MORE MAKERS
with Fossum who demanded payment on the instrument but was refused • When 2 or more makers sign jointly or severally, each of them is
by Fernandez on alleged failure of the chain delivered to satisfy the individually liable for the payment of the full amount of their obligation
specifications given. even if one of them didn’t receive part of the value given therefor, as
he would be considered as an accommodation party
HELD:
It devolved around Fernandez Hermanos to allege and prove its claim that PAYEE’S EXISTENCE, ETC.
which was delivered and received didn't comply with the specifications and • The maker also admits of the existence of the payee and his then
didn't answer the purposes for which it was intended. It alleged that the capacity to indrose
chain didn't meet the specifications given by the contract. Nonetheless, • He is precluded from setting up the following defenses:
there was failure to identify the so-called defects of the chain. It was upon o That the payee is a fictitious person because by making the
note, he admits that the payee exists

Page 83 of 190
o That the payee was insane, a minor, or a corporation acting Perez executed a promissory note in favor of Araneta. Perez failed to pay
ultra vires because by making the note, he admits the then upon maturity of the note and despite demands, still failed to pay. Araneta
capacity of the payee to indorse was then prompted to file a case against him. As defense, he alleged that
the proceeds were used to pay for the medical treatment of his daughter
CASE DIGESTS: SECTION 60 who was then the beneficiary of the trust then administered by Araneta.
Perez was adjudged to pay Araneta. And by virtue of this judgment, Perez
110 PNB V. MAZA AND MACENAS filed a case against Araneta for reimbursement for his alleged advances for
48 PHIL 207 the medical treatment of his daughter.
FACTS: HELD:
Maza and Macenas executed a total of five promissory notes. These were Perez bound himself to pay personally said promissory note which he
not paid at maturity. And to recover the amounts stated on the face of the cannot shift to another without the consent of the payee. Such is the
promissory notes, PNB initiated an action against the two. The special undertaking of the maker. The maker of a negotiable instrument by
defense posed by the two is that the promissory notes were delivered to making it engages that he will pay it according to the tenor and admits the
them in blank by a certain Enchaus and were made to sign the notes so existence of the payee and his then capacity to indorse. Given such, Perez
that the latter could secure a loan from the bank. They also alleged that could not now escape his liability by alleging that he spent the money for
they never negotiated the notes with the bank nor have they received any the treatment of his daughter since it is not the concern of the payee how
value thereof. They also prayed that Enchaus be impleaded in the the said proceeds would be spent. This is the sole concern of the maker.
complaint but such was denied. The trial court then held in favor of the The interest of the payee is the payment of the instrument.
bank.
112 TAN SIN V. YU BIAO
HELD: 56 PHIL 707
The defendants attested to the genuineness of the instruments sued on.
Neither did they point out any mistake in regard to the amount and FACTS:
interest that the lower court sentenced them to pay. Given such, the Plaintiff were the heirs of Sontuan while the defendant is the partnership to
defendants are liable. They appear as the makers of the promissory notes which he belonged. After his death, there was dispute over the share of
and as such, they must keep their engagement and pay as promised. the heirs correlative the share of the deceased partner in the partnership.
An agreement was made between the surviving partners and heirs. There
And assuming that they are accommodation parties, the defendants having was liquidation of the deceased’s share. The share was then retained in
signed the instruments without receiving value thereof, for the purpose of the hands of the partnership in the nature of a loan, which was secured by
lending their names to some other person, are still liable for the promissory a promissory note. The partnership defaulted in payment and this
notes. The law now is such that an accommodation party cannot claim no prompted the heirs to file a case against them. Judgment was rendered
benefit as such, but he is liable according to the face of his undertaking, against the partnership and the other solidary maker. The solidary maker
the same as he himself financially interest in the transaction. It is also no appealed and averred that he signed the note by mistake only.
defense to say that they didn't receive the value of the notes. To fasten
liability however to an accommodation maker, it is not necessary that any HELD:
consideration should move to him. The accommodation which supports the Inasmuch as the appellant is a businessman and is of age, he is presumed
promise of the accommodation maker is that parted with by the person to have acted with due care, and to have signed the document in question
taking the note and received by the person accommodated. with full knowledge of its contents. And this presumption of law is not
overcome by the evidence adduced by the appellant, consisting in his own
111 ARANETA V. PEREZ testimony. There being no evidence of fraud, and the appellant having
14 SCRA 498 admitted to the genuineness of his signature, the same must be given legal
effects.
FACTS:

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Sec. 61. Liability of drawer. - The drawer by drawing the • By adding words such as “without recourse” or “I shall not be liable in
instrument admits the existence of the payee and his then capacity case of non-payment or non-acceptance”
to indorse; and engages that, on due presentment, the instrument
will be accepted or paid, or both, according to its tenor, and that if CASE DIGESTS: SECTION 61
it be dishonored and the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the holder or to any 113 PNB V. PICORNELL
subsequent indorser who may be compelled to pay it. But the 46 PHIL 706
drawer may insert in the instrument an express stipulation
negativing or limiting his own liability to the holder. FACTS:
Picornell followed the instructions of Hyndman, Tavera and Venutra by
DRAWER SECONDARILY LIABLE buying bales of tobacco. He was able to obtain in National Bank a sum of
• He engages merely that the bill will be accepted or paid or both, money together with his commission. He drafted a bill of exchange against
according to its tenor, and that he will pay only when the firm and in favor of the bank. It was received by National Bank and
1. It is dishonored was accepted thereafter by the firm. However, on alleged conditions of the
2. And the necessary proceedings of dishonor are duly taken tobacco, the bill of exchange was not paid.
• The liability of the drawer is subject to the two conditions and attaches
only upon their fulfillment HELD:
• The drawer, by merely drawing the bill and signing his name in the bill This action for recovery is for the value of the bill of exchange. The firm
as such drawer, without more, impliedly engages to be so secondarily accepted the bill unconditionally but did not pay it at maturity, wherefore
liable, as if he has incorporated the provisions of Section 61 in the bill its responsibility to pay the same is clear. The question whether or not the
• If the bill is not paid, accordingly, if a bill is not paid, the drawer tobacco was worth the value of the bill doesn’t concern the bank. Such
becomes liable for the payment of its value to the holder provided that partial want of consideration if it was, doesn’t exist with respect to the
notice of dishonor is given bank which paid Picornell the full value of the said bill of exchange. The
bank was a holder in due course, and was such for value full and complete.
TO WHOM DRAWER IS SECONDARILY LIABLE The firm cannot escape liability.
1. The holder
2. Or if any of the indorsers intervening between the holder and the 114 BANCO ATLANTICO V. AUDITOR GENERAL
drawer is compelled to pay by the holder, the drawer, will be liable 81 SCRA 335
to that indorser so compelled to pay
FACTS:
IS DRAWER OF UNACCEPTED BILL PRIMARILY LIABLE? Boncan was the Finance Officer of the Philippine Embassy in Madrid who on
• Yes many occasions negotiated with Banco Atlantico checks, allegedly endorsed
• It was held that until the bill has been accepted, the drawer is the to her by the embassy. On these occasions, the bank allowed the payment
principal debtor and after acceptance, the drawee or acceptor is the of the checks, notwithstanding the fact that the drawee bank has not yet
principal debtor and the drawer becomes secondarily liable cleared the checks for collection. This was premised on the finding that
Boncan had special relations with the employees of the bank. And that
PAYEE’S EXISTENCE upon presentment to the drawee bank, the checks were dishonored due to
• Like the maker, the drawer admits to the existence of the payee and non-acceptance allegedly on the ground that the drawer has ordered the
his capacity to indorse stoppage of payment. This prompted Banco Atlantico to collect from the
Philippine Embassy for the funds released to Boncan but the latter refused.
NEGATIVES HIS LIABILITY This eventually led to filing of money claim of the bank with the Auditor
• The law allows the drawer to negative or limit his liability by express General.
stipulation
HELD:

Page 85 of 190
On whether or not Banco Atlantico was a holder in due course, it is not. • Where being unable to pay certain bills of exchange which the drawee
Following the decision of the Auditor General in denying the claim of the has accepted, the latter makes a mortgage in favor of the holder of
bank, the checks were demand notes. It should have been put on guard said bills upon certain merchandise the value of which is sought to be
when Boncan negotiated the checks with them and subsequently deposited collected through said bills, in order to secure the payment of said
the same to her account. Even though it were demand notes, she amount if the merchandise is sold and the integrity thereof while the
instructed the bank that the same be not presented for collection till a later sale is not effected, the execution of said mortgage doesn’t constitute
date. The fact that the amount was quite big and it was the payee herself a Novation of the obligation represented by said accepted bills unless it
who made the request that the same be not presented for collection until a is expressly stated in the mortgage
fixed date in the future was proof of a glaring infirmity or defect in the
instrument. It loudly proclaims “Take me at your own risk.” It was ACCEPTOR TO PAY ACCORDING TO TENOR OF HIS ACCEPTANCE
obvious by then that the bank had knowledge of the infirmity or defect of • While the maker of a note engages to pay according to the tenor of the
the checks. Furthermore, what it did when it allowed payment before note, an acceptor engages to pay according to the tenor of his
clearing is beyond the normal and ordinary banking practice especially acceptance, not of the bill he accepts
when the bank involved is a foreign bank and the amounts involved were • Tenor of his acceptance may be different from the tenor of the bill, as
large. Boncan wasn't even a client of the bank but was someone who had the acceptor may accept the bill with qualifications
special relations with its officers. • If his acceptance is general, the tenor of then bill is the same tenor as
the tenor of his acceptance
In view of the foregoing, the embassy as the drawer of the 3 checks in
question cannot be held liable. It is apparent that the said 3 checks were WHERE ORIGINAL TENOR IS ALTERED BEFORE ACCEPTANCE
(fraudulently altered) by Boncan as to their accounts and therefore wholly • Suppose the bill is originally for P1000. Before the drawee X accepts
inoperative (note: should be “avoided”). it, it is altered by the payee B to P4000. Then X accepts it. How much
is X liable to a holder in due course?
Sec. 62. Liability of acceptor. - The acceptor, by accepting the • According to one view, X is liable for P4000 and not P1000. The
instrument, engages that he will pay it according to the tenor of his reason is that the tenor of X’s acceptance is for P4000.
acceptance and admits:
EFFECT OF SECTION 124
(a) The existence of the drawer, the genuineness of his • Under the first view, what is the effect of Section 124 which provides
signature, and his capacity and authority to draw the instrument; that a holder in due course can recover only the original tenor of the
and instrument?
• It seems that this refers to the original tenor of instrument taken from
(b) The existence of the payee and his then capacity to indorse. the standpoint of the person primarily liable, in X’s standpoint. In
other words, the original tenor of the instrument is P4000, which is the
ACCEPTOR PRIMARILY LIABLE tenor of X’s acceptance.
• Acceptor engages to pay absolutely according to the tenor of its • If after his acceptance, a subsequent indorsee alters the bill to read
acceptance P9000, then X could be liable for P4000 only, the original tenor of his
• His liability is not subject to any condition acceptance, even as to a holder of due course.
• The acceptor is the drawee who accepts the bill
• His acceptance immediately places a legal liability on him for the ADMISSION OF DRAWER’S EXISTENCE, ETC.
payment of the bill in favor of one who became a holder thereof after • Drawer’s existence
acceptance, and if he wants to escape liability, it is up to him to show • The genuineness of the drawer’s signature
that he is a mere agent of the drawer, or allege and prove any other • The capacity and authority of the drawer to draw the instrument
defense which he has to the liability • He doesn’t admit the genuineness of the indorser’s signatures
EFFECT OF MORTGAGE EXECUTED BY ACCEPTOR EFFECT OF ACCEPTOR’S ADMISSIONS

Page 86 of 190
1. Acceptor consequently precluded from setting up the defense that Lim deposited in his PCIB account a GSIS check drawn against PNB.
the drawer is non-existent or fictitious because of his admission of Following standard banking procedures, the check was sent to petitioner
the drawer’s existence for clearing. He didn’t return said check but paid the amount to PCIB as
2. Neither can he claim the drawer’s signature is a forgery because well as debited it against the account of GSIS. Thereafter, a demand was
he admits the genuineness of the drawer’s signature received from GSIS asking for the credit of the amount since the
3. Neither can the drawee escape liability by alleging want of signatures found in the check were forged. This was done by PNB and it
consideration between him and the drawer as by accepting the now comes after PCIB but the latter wouldn’t want to return the money.
bill, he admits the capacity and authority of the drawer to draw
the bill HELD:
Acceptance is not required for checks, for the same are payable on
CASE DIGESTS: SECTION 62 demand. Acceptance and payment are distinguished with each other. The
former pertains to a promise to perform an act while the latter is the actual
115 FOSSUM V. FERNANDEZ performance of the act.
64 PHIL 675
PNB had also been negligent with the particularity that it had been guilty of
FACTS: a greater degree of negligence because it had a previous and formal notice
Fernandez Hermanos placed an order with the products company for the from GSIS that the check had been lost, with the request that payment be
manufacturing of a chain given a set of specifications. The chain was duly stopped. Just as important is that it is its acts, which are the proximate
prepared and delivered. A draft was drawn by the company and was cause of the loss.
accepted by Fernandez Hermanos. Thereafter, the draft was negotiated
with Fossum who demanded payment on the instrument but was refused 117 PNB V. NATIONAL CITY BANK
by Fernandez on alleged failure of the chain delivered to satisfy the 63 PHIL 711
specifications given.
FACTS:
HELD: Unknown persons negotiated with Motor Services Company checks, which
It devolved around Fernandez Hermanos to allege and prove its claim that were part of the stipulation in payment of automobile tires purchased from
which was delivered and received didn't comply with the specifications and the latter’s store. It purported to have been issued by Pangasinan
didn't answer the purposes for which it was intended. It alleged that the Transportation Company. The said checks were indorsed at the back by
chain didn't meet the specifications given by the contract. Nonetheless, said unknown persons, the Motor company believing at that time that the
there was failure to identify the so-called defects of the chain. It was upon signatures contained therein were genuine. The checks were later
Fernandez Hermanos to show that indeed the chain was defective. But as deposited with the company’s account in National City Bank of NY. The
the trial court found out, there was a failure of proof. said checks were consequently cleared and PNB credited National City Bank
with the amounts. Thereafter, PNB discovered that the signatures were
**Fernandez Hermanos accepted the instrument and thus, made certain forged and it demanded the reimbursement of the amounts for which it
warranties regarding the same. These warranties have many effects and credited the other bank.
one of it is being precluded from raising the defense of want of
consideration. In case he raises the said defense, he should be able to HELD:
present evidence to support such allegation. Failure to do so would make A check is a bill of exchange payable on demand and only the rules
the presumption still subsisting. governing bills of exchanges payable on demand are applicable to it. in
view of the fact that acceptance is a step necessary insofar as negotiable
116 PNB V. CA instruments are concerned, it follows that the provisions relative to
25 SCRA 693 acceptance are without application to checks. Acceptance impies
subsequent negotiation of the instrument, which is not true in the case of
FACTS: checks because from the moment it is paid, it is withdrawn from

Page 87 of 190
circulation. When the drawee banks cashes or pays a check, the cycle of
negotiation is terminated and it is illogical thereafter to speak of ADMISSIBILITY OF PAROL EVIDENCE
subsequent holders who can invoke the warrant against the drawee. • The statutory command that the legal effect of a blank instrument
cannot be changed by parol proof or by evidence from other source
Further, in determining the relative rights of a drawee who under a mistake • The intent to be bound in some other capacity than as an indorser
of fact, has paid, a holder who has received such payment, upon a check to must be indicated in the indorsement or on the face of the instrument
which the name of the drawer has been forged, it is only fair to consider and cannot be shown by parol
the question of diligence and negligence of the parties in respect thereto.
The responsibility of the drawee who pays a forged check, for the CASE DIGESTS: SECTION 63
genuineness of the drawer’s signature is absolute only in favor of one who
has not, by his own fault or negligence, contributed to the success of the 118 ANG TIONG V. TING
fraud or to mislead the drawee. 22 SCRA 713
According to the undisputed facts, National City Bank in purchasing the Ting issued a PBCom check payable to cash or bearer. This was indorsed
papers in question from unknown persons without making any inquiry as to by Ang at the back and it was received by plaintiff. Upon encashment of
the identity and authority of said persons negotiating and indorsing them, the check, the same was dishonored. Plaintiff moved that the two make
acted negligently and contributed to the constructive loss of PNB in failing good the value of the check but despite demands, he was unheeded,
to detect the forgery. Under the circumstances of the case, if the appellee prompting him to file a complaint. The trial court decided in his favor.
bank is allowed to recover, there will be no change in position as to the
injury or prejudice of the appellant. HELD:
There is nothing in the check in question indicates that the appellant is not
DRAWER: PANGASINAN a general indorser.
PAYEE: IASMOTOR SERVICE
DRAWEE: PNB When a person placing his signature upon an instrument otherwise than a
COLLECTING BANK: NATIONAL CITY BANK OF NEW YORK maker, drawer, or acceptor, he is deemed to be a general indorser, unless
he clearly indicates by appropriate words his intention to be bound in some
other capacity, which he did not do so.
Sec. 63. When a person deemed indorser. - A person placing his
signature upon an instrument otherwise than as maker, drawer, or Even on the assumption that the appellant was an accommodation
acceptor, is deemed to be indorser unless he clearly indicates by indorser, as he professes to be, he is nevertheless by the clear mandate of
appropriate words his intention to be bound in some other section 29, liable on the instrument to a holder for value, notwithstanding
capacity. that such holder at the time of taking the instrument knew him to be an
accommodation party. And assuming that he was an accommodation
WHEN PERSON DEEMED INDORSER party, he may obtain security from the maker to protect himself against
• In the absence of any indication in what capacity a person whose the danger of insolvency of the latter but this doesn't affect his liability to
signature is written on the instrument intends to be bound, he shall be the appellee, as the said remedy is a matter of recourse between him and
deemed as an indorser the maker.
INDICATION TO BE BOUND OTHERWISE THAN INDORSER 119 TUAZON V. HEIRS OF BARTOLOME RAMOS
• Will not be deemed as an indorser if he indicates by appropriate words 463 SCRA 408
his intention to be bound in some other capacity
• But anyone who assumes the responsibility of identifying the payee of FACTS:
a check is answerable to the bank cashing the check if the bank pays Respondents alleged that on a relevant date, spouses Tuazon purchased
its amount to such payee so identified from their predecessor-in-interest cavans of rice. That on the total number

Page 88 of 190
of cavans, only a certain portion has been paid for. In payment thereof,
checks have been issued but on presentment, the checks were dishonored. IRREGULAR INDORSEMENT
Respondents alleged that since spouses anticipated the forthcoming suit • An irregular indorser is one who not otherwise a party to an
against them, they made fictitious sales over their properties. As defense, instrument, places his signature thereon his signature in blank before
the spouses averred that it was the wife of Bartolome who effected the sale delivery
and that Maria was merely her agent in selling the rice. The true buyer of
the cavans was Santos. The spouses further averred that when Ramos got IRREGULAR INDORSEMENT
the check from Santos, she took it in good faith and didn't knew that the • Its an indorsement in an unusual, peculiar, or singular manner
same were unfunded. • His name appears where he would naturally expect another name
HELD: BEFORE DELIVERY

First, there is no contract of agency. • It means the initial delivery
• Provision doesn’t apply if the signature was placed after delivery
If it was truly the intention of the parties to have a contract of agency,
then when the spouses sued Santos on a separate civil action, they should PAY TO X OR HIS ORDER P1000
have instituted the same on behalf and for the respondents. They didn't do SGD. B
so. The filing in their own names negate their claim that they acted as
mere agents in selling the rice.
SGD. Y
Second, the spouses are liable on the check. PAY TO D SGD. X
PAY TO E SGD. D
As indorser, Tuazon warranted that upon due presentment, according to
their tenor, and that in case they were dishonored, she would pay the Sec. 65. Warranty where negotiation by delivery and so forth. —
corresponding amount. After the instrument is dishonored by non- Every person negotiating an instrument by delivery or by a
payment, indorsers cease to be merely secondarily liable. They became qualified indorsement warrants:
principal debtors whose liability becomes identical to that of the original
obligor. The holder of a negotiable instrument need not even proceed (a) That the instrument is genuine and in all respects what it
against the maker before suing the indorser. Santos is not an purports to be;
indispensable party to the suit against the spouses.
(b) That he has a good title to it;
Sec. 64. Liability of irregular indorser. - Where a person, not
otherwise a party to an instrument, places thereon his signature in (c) That all prior parties had capacity to contract;
blank before delivery, he is liable as indorser, in accordance with
the following rules: (d) That he has no knowledge of any fact which would impair
the validity of the instrument or render it valueless.
(a) If the instrument is payable to the order of a third person,
he is liable to the payee and to all subsequent parties. But when the negotiation is by delivery only, the warranty extends
in favor of no holder other than the immediate transferee.
(b) If the instrument is payable to the order of the maker or
drawer, or is payable to bearer, he is liable to all parties The provisions of subdivision (c) of this section do not apply to a
subsequent to the maker or drawer. person negotiating public or corporation securities other than bills
and notes.
(c) If he signs for the accommodation of the payee, he is liable
to all parties subsequent to the payee. APPLICATION OF SECTION 65

Page 89 of 190
1. A person negotiating by mere delivery A qualified indorsement constitutes the indorser a mere assignor of the title
2. A person negotiating by qualified indorsement to the instrument. It may be made by adding to the indorser's signature
LIABILITY OF PERSON NEGOTIATING BY DELIVERY the words "without recourse" or any words of similar import. Such an
I promise to pay P1000 to bearer. indorsement relieves the indorser of the general obligation to pay if the
instrument is dishonored but not of the liability arising from warranties on
Sgd. A the instrument as provided in Section 65 of the Negotiable Instruments
Law already mentioned herein. However, appellant Sambok indorsed the
*A delivers the note to B. note "with recourse" and even waived the notice of demand, dishonor,
*B negotiates the note to C by mere delivery. protest and presentment.
• A person negotiating by mere delivery becomes liable to the holder "Recourse" means resort to a person who is secondarily liable after the
only when the holder cannot obtain payment by reason of the fact that default of the person who is primarily liable. 3 Appellant, by indorsing the
any of the warranties of the person negotiating by delivery is or note "with recourse" does not make itself a qualified indorser but a general
becomes false 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
I promise to pay B or bearer P1000. appellant. The effect of such indorsement is that the note was indorsed
without qualification. A person who indorses without qualification engages
Sgd. A that on due presentment, the note shall be accepted or paid, or both as the
case may be, and that if it be dishonored, he will pay the amount thereof
to the holder. 4 Appellant Sambok's intention of indorsing the note without
Sgd. B qualification is made even more apparent by the fact that the notice of
To D Sgd. C demand, dishonor, protest and presentment were an waived. The words
To E Sgd. D added by said appellant do not limit his liability, but rather confirm his
(blank) Sgd. E obligation as a general indorser.
*E negotiated the note to F.
F negotiated to G. Sec. 66. Liability of general indorser. - Every indorser who indorses
• E is not liable to G. G’s right didn’t derive from the indorsement of F without qualification, warrants to all subsequent holders in due
• F is liable to G. course: (holders in good faith)
CASE DIGESTS: SECTION 65 (a) The matters and things mentioned in subdivisions (a), (b),
and (c) of the next preceding section; and
120 METROPOL V. SAMBOK MOTORS CO.
120 SCRA 864 (b) That the instrument is, at the time of his indorsement, valid
and subsisting;
FACTS:
Dr. Villareal issued a promissory note in favor of Sambok, which was And, in addition, he engages that, on due presentment, it shall be
payable in monthly installments. The promissory note was then indorsed accepted or paid, or both, as the case may be, according to its
to Metropol. Villareal defaulted payment and this prompted Metropol to tenor, and that if it be dishonored and the necessary proceedings
run after Sampol. Sampol alleged that it is not liable since it was a on dishonor be duly taken, he will pay the amount thereof to the
qualified indorser through the wordings it inserted in its indorsement—with holder, or to any subsequent indorser who may be compelled to
recourse. pay it.
HELD: APPLICATION OF SECTION 66

Page 90 of 190
• Deals with the liability or warranties of one negotiating by general he will pay the amount to the holder, or to any subsequent indorser
indorsement, as distinguished from qualified indorsers or persons who may be compelled to pay it
negotiating by mere delivery
• It has been held that this section includes an indorser for collection GENERAL INDORSER IS SECONDARILY LIABLE
• Secondary liability not confined to the four warranties
LIABILITY OF GENERAL INDORSER • He is liable if for any reason, the person primarily liable cannot pay, as
1. That the instrument is genuine and in all respects what it purports distinguished from the limited secondary liability of the qualified
to be indorser or of the person negotiating by mere delivery
2. That he has a good title to it • The reason for dishonor need not be established. As long as there was
3. That all prior parties had capacity to contract dishonor, this is sufficient.
4. And that the instrument is, at the time of his indorsement, valid
and subsisting SUMMARY OF DISTINCTIONS BETWEEN LIABILITIES OF PERSONS
NEGOTIATING
FOURTH WARRANTY OF GENERAL INDORSER AND QUALIFIED INDORSER, GENERAL QUALIFIED NEGOTIATING
DISTINGUISHED INDORSER INDORSER BY MERE
• While the qualified indorser or person negotiating by delivery warrants DELIVERY
that he is ignorant of any fact that will render the instrument valueless EXTENSION OF All subsequent All subsequent Immediate
or impair its validity, the general indorser warrants that the instrument WARRANTY parties parties—who transferee
he is indorsing is valid and subsisting regardless of whether he is acquire title
ignorant of that fact or not through their
indorsement
THE WARRANTIES OF A GENERAL INDORSER EXTEND TO THE FOLLOWING FOURTH Warrants that Warrants that the instrument is
1. Holders in due course WARRANTY the instrument valid and subsisting
2. Persons who derive their title from holders in due course is valid and
3. Immediate transferees even if they are not holders in due course subsisting
WHEN DOES HE Engages to pay Doesn’t engage to pay the
WARRANTIES DON’T EXTEND TO DRAWEE PAY? the holder or instrument if it is dishonored by
• The indorser of a check doesn’t warrant the genuineness of the any intervening non-acceptance or non-payment
drawer’s signature to the drawee who pays it since the drawee is not a party who may except when such dishonor arises
holder in due course be compelled to from his four warranties
• The warranties provided do not run in favor of the drawee in respect to pay if the
the genuineness of the drawer’s signature but only in favor of instrument is
subsequent holders in due course dishonored
either by non-
A  B  C  D (FORGED)  E  F acceptance or
non-payment
*Is C liable? No. LIABILITY OF ASSIGNOR

• The vendor in good faith shall be responsible for the existence and
legality of the credit at the time of the sale unless it should have been
OTHER LIABILITTY OF GENERAL INDORSER
sold as doubtful but not for the solvency of the debtor unless it has
• He engages that, on due presentment, it shall be accepted or paid, or
been so expressly stipulated or unless the insolvency was prior to the
both, as the case may be, according to its tenor, and that if it be
sale and of common knowledge
dishonored and the necessary proceedings of dishonor be duly taken,

Page 91 of 190
CASE DIGESTS: SECTION 66 indication that they are payable from a particular fund, Fund 501. This
indication as the source of payment to be made on the treasury warrant
121 PEOPLE V. MANIEGO makes the promise to pay conditional and the warrants themselves non-
148 SCRA 30 negotiable.
FACTS: Metrobank then cannot contend that by indorsing the warrants in general,
The accused were charged and later on found guilty of committing GS assumed that they were genuine and in all respects what they purport
malversation. Ubay was the disbursing officer in the Office of the Chief of it to be, in accordance to Section 66 of the NIL. The simple reason is that
Finance in a military camp and together with his co-accused, were able to the law isn’t applicable to the non-negotiable treasury warrants. The
take personal checks drawn against the PNB and BPI, of which Pamintuan indorsement was made for the purpose of merely depositing them with
was the drawer and Maniego was the indorser. The checks were encashed Metrobank for clearing. It was in fact Metrobank which stamped on the
and used, to the prejudice of the government. back of the warrants: “All prior indorsements and/or lack of endorsements
guaranteed…”
Maniego averred that the trial court erred in adjudging her as liable as an
indorser to the government. 123 PRUDENCIO V. CA
143 SCRA 7
HELD:
The contention of Maniego that as a mere indorser, she may not be liable FACTS:
on account of the dishonor of the checks indorsed by her is untenable. The Appellants are the owners of a property, which they mortgaged to help
holder or last indorsee of a negotiable instrument has the right to enforce secure a loan of a certain Domingo Prudencio. On a later date, they were
payment of the instrument for the full amount thereof and against all approached by their relative who was the attorney-in-fact of a construction
parties liable thereon. Among the parties liable thereon is the indorser company, which was in dire need of funds for the completion of a municipal
unless he clearly indicates that his intention to be bound in some other building. After some persuasion, the appellants amended the mortgage
capacity. Maniego may also be considered as an accommodation party and wherein the terms and conditions of the original mortgage was made an
as such, is liable to a holder for value notwithstanding if the holder knew integral part of the new mortgage. The promissory note covering the
that she was only an accommodation party. “second loan” was signed by their relative. It was also signed by them,
indicating the request that the check be released by the bank.
122 METROPOLITAN BANK V. CA
194 SCRA 169 After the amendment of the mortgage was executed, a deed of assignment
was made by Toribio, assigning all the payments to the Bureau to the
FACTS: construction company. This notwithstanding, the Bureau with approval of
Gomez opened an account with Golden Savings bank and deposited 38 the bank, conditioned however that they should be for labor and materials,
treasury warrants. All these warrants were indorsed by the cashier of made three payments to the company. The last request was denied by the
Golden Savings, and deposited it to the savings account in a Metrobank bank, averring that the account was long overdue, the remaining balance
branch. They were sent later on for clearing by the branch office to the of the contract price should be applied to the loan.
principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing. On persistent inquiries on whether the The company abandoned the work and as consequence, the Bureau
warrants have been cleared, the branch manager allowed withdrawal of the rescinded the contract and assumed the work. Later on, the appellants
warrants, only to find out later on that the treasury warrants have been wrote to the PNB that since the latter has authorized payments to the
dishonored. company instead of on account of the loan guaranteed by the mortgage,
there was a change in the conditions of the contract without the knowledge
HELD: of appellants, which entitled the latter to cancel the mortgage contract.
The treasury warrants were not negotiable instruments. Clearly, it is
indicated that it was non-negotiable and of equal significance is the

Page 92 of 190
The trial court held them still liable together with their co-makers. It has $300.00
also been held that if the judgment is not satisfied within a period of time,
the mortgaged properties would be foreclosed and sold in public auction. At sight pay to my order three hundred dollars, value received, and charge
to my account.
In their appeal, petitioners contend that as accommodation makers, the
nature of their liability is only that of mere sureties instead of solidary co- V. S. WOLFF.
debtors such that a material alteration in the principal contract, effected by
the creditor without the knowledge and consent of the sureties, completely To F. H. TAYLOR & Co.,
discharges the sureties from all liabilities on the contract of suretyship. Louisville, Kentucky.
HELD: No ................................
There is no question that as accommodation makers, petitioners would be
primarily and unconditionally liable on the promissory note to a holder for [Indorsements.]
value, regardless of whether they stand as sureties or solidary co-debtors
since such distinction would be entirely immaterial and inconsequential as V. S. Wolff. The signature is O. K. payment guaranteed. Protest, demand,
far as a holder for value is concerned. Consequently, the petitioners and notice of nonpayment waived. Macondray & Company.
cannot claim to have been released from their obligation simply because at
the time of payment of such obligation was temporarily deferred by the Pay to First National Bank of San Francisco, or order. American Bank,
PNB without their knowledge and consent. There has to be another basis Manila, P. I. H. B. Mulford, cashier.
for their claim of having been freed from their obligation. It has to be
determined if PNB was a holder for value. Pay to 3rd National Bank or order. The First National Bank of San
Francisco. James K. Lynch, cashier.
A holder for value is one who meets the requirement of being a holder in
due course except the notice for want of consideration. In the case at bar,
PNB may not be considered as a holder for value. Not only was PNB an American Bank claims the right to recover from Wolff the amount of the bill
immediate party or privy to the promissory note, knowing fully well that of exchange upon the theory that Macondray guaranteed the payment of
petitioners only signed as accommodation parties, but more importantly it the instrument. This was refuted by Macondray by saying that it didn't
was the Deed of Assignment which moved the petitioners to sign the guarantee the payment of the instrument. Instead, it only certified the
promissory note. Petitioners also relied on the belief that there will be no signature of Wolff and that the statement “payment guaranteed xxx” was
alterations to the terms of the agreement. The deed provided that there not written on said indorsement at the time it signed the firm name.
will no further conditions which could possibly alter the agreement without
the consent of the petitioner such as the grant of greater priority to HELD:
obligations other than the payment of the loan. This notwithstanding, the An examination of the alleged indorsement of Macondray & Co. which
bank approved the release of payments to the Company instead of the appeared upon the said bill of exchange at the time of the trial, and the
same to the bank. This was in violation of the deed of assignment and indorsement of said company at the time of the protest of said bill of
prejudiced the rights of petitioners. The bank was not in good faith—a exchange, shows beyond peradventure of doubt that the contention of the
requisite for a holder to be one in due course. defendant is true, and that part of the indorsement which says "Payment
guaranteed. Protest, demand, and notice of nonpayment waived" was
124 AMERICA BANK V. MACONDRAY added by some person after the signature of the defendant, Macondray &
4 PHIL 695 Co., and after the protest of said bill. The indorsement made by Macondray
& Co. was changed, after said indorsement by said company, by adding
FACTS: thereto the statement "Payment guaranteed. Protest, demand, and notice
of nonpayment waived," and that the indorsement actually made by
MANILA, P. I., August 12, 1902. Macondray & Co. was in the following form:

Page 93 of 190
There is no doubt that the checks were crossed checks and for payee’s
V. S. Wolff. The signature is O. K. Macondray & Co. account only. Reyes was able to show that she has never authorized
Sayson to deposit the checks nor to encash the same; that the bank had
The liability of an indorser of a bill of exchange, after due protest and allowed all checks to be deposited, cleared and paid to one Sayson in
notice of nonpayment and dishonor, is the same as that of the original violation of the instructions in the said crossed checks that the same were
obligors on such a contract, and any material alteration in the terms of this for payee’s account only; and that Reyes maintained a savings account
contract by the holder of the same, without the consent of the obligor, will with the bank which never cleared the said checks.
relieve such obligor from all liability thereon.
Under accepted banking practice, crossing a check is done by writing two
The original indrosement then of the company was for the purpose only of parallel lines diagonally on the top left portion of the checks. The crossing
assuring the American Bank that the signature of Wolff was genuine—that is special where the name of a bank or a business institution is written
is to say, that the person whom he represented himself to be. It was an between the two parallel lines, which means that the drawee should pay
indorsement for identification of the person only and not for the purpose of only with the intervention of the company. The crossing is general where
incurring liability to the payment of such bill of exchange. the words written in between are “And Co.” and “for payee’s account only”,
as in the case at bar. This means that the drawee bank should not encash
125 VELASCO V. TAN LIVAN the check but merely accept it for deposit.
43 PHIL 196
The effects of crossing a check are as follows:
FACTS: 1. That the check may not be encashed but only deposited in the
Defendant issued to Soo 4 promissory notes. Later, Soo drew a bill of bank
exchange in favor of PNB. The latter refused at first to encash the bill, 2. That the check may be negotiated only once—to one who has an
which made Velasco indorse it so that it would be encashed. When it was account with a bank
encashed, Velasco didn't receive a single penny and it was claimed that the 3. That the act of crossing the check serves as a warning to the
proceeds was received instead by Tan Liuan. In the ordinary course of holder that the check has been issued for a definite purpose so
business, the draft was dishonored when presented, and later Velasco was that he must inquire if he has received the check pursuant to the
required to make a promissory note in favor of PNB. purpose
HELD: The subject checks were accepted for deposit by the bank for the account
of Sayson although they were crossed checks and the payee wasn't Sayson
126 ASSOCIATED BANK V. CA but Reyes. The bank stamped thereon its guarantee that all prior
208 SCRA 465 endorsements and/or lack of endorsements guaranteed. By such
deliberate and positive act, the bank had for all legal intents and purposes
FACTS: treated the said checks as negotiable instruments and accordingly assumed
Reyes was engaged in the RTW business and held transactions with the warranty of the endorser.
different department stores. She was about to collect payments from the
department stores when she was informed that the payments had already When the bank paid the checks so endorsed notwithstanding that title has
been made, through crossed checks issued in her business’ name and the not passed to the endorser, it did so at its peril and became liable to the
same were deposited with the bank. The bank consequently allowed its payee for the value of the checks.
transfer to Sayson who later encashed the checks. This prompted Reyes to
sue the bank and its manager for the return of the money. The trial and 127 GULLAS V. PNB
appellate court ruled in her favor. 62 PHIL 519
HELD: FACTS:

Page 94 of 190
The US government issued a warrant payable to the order of Bacos. Gullas be enforced properly. This is the question to be resolved in this case—on
and Lopez appeared as indorsers of the warrant. It was then encashed by whether the remedy was properly exercised by the bank.
the PNB. Subsequently, the warrant was dishonored by the Insular
Treasurer. Upon learning of the dishonor, notices were sent to Gullas by It is undisputed that purportedly as an act of accommodation to a valued
the bank but it wasn’t receive by Gullas as he was currently not within the client, petitioner allowed the withdrawal of the face value of the check prior
vicinity. In the said notices served to Gullas and Lopez, it was indicated to its clearing. That act certainly disregarded the clearance requirement of
therein that since there was dishonor of the warrant, their corresponding the banking system. Such a practice is unusual, because a check is not
accounts have been charged. It was only after the return of Gullas in Cebu legal tender or money and its value can be properly transferred to a
when he received the notices. This caused prior inconvenience to Gullas. depositor’s account only after the check has been cleared by the drawee
First, he wasn’t able to pay for his insurance due to the lack of credit in his bank.
bank account and second, the incident was given prominence in Cebu to
the great mortification of Gullas. Under ordinary banking practice, after receiving a check for deposit, the
bank either credits the amount to a depositor’s account or infuse value to
HELD: that account only after the drawee bank shall have paid the amount.
The general indorser of a negotiable instrument engages that if it be Before clearance, the collecting bank can only assume the risk that the
dishonored and the necessary proceedings of dishonor be duly taken, he check would be cleared and paid out. In this case, bank shouldn’t have
will pay the amount thereof to the holder. In this connection, it has been allowed Tan to withdraw as it exceeded his outstanding account balance.
held by a long line of authorities that notice of dishonor is necessary in
order to charge an indorser and that the right of action against him doesn’t Furthermore, there was failure to show immediate notice to Tan. Notice
accrue until the notice is given. was proper and ought to be expected given that Tan was a valued client.
Also, as a general indorser, a notice of dishonor should have been first
As a general rule, a bank has a right of setoff of the deposits in its hands served upon him. And lastly, the deposit made by Tan was not unusual for
for payment of any indebtedness on the part of a depositor but this should a reputed businessman like Tan who ordinarily takes note of the amount of
be enforced properly. It is undeniable in this case that PNB didn’t enforce money he takes and releases to immediately deposit money in his current
its right properly. It made used of the money in the account of Gullas prior account to answer for the postdated checks he had issued.
to its sending of notice of dishonor.
129 GONZALES V. RCBC
128 ASSOCIATED BANK V. TAN 508 SCRA 459
446 SCRA 282
FACTS:
FACTS: Gonzales’ mother received a foreign check from the US, drawn by a certain
Tan deposited with the bank a check issued to him by Cheng. The check doctor on behalf of a medical group. Since the bank gives special
was reflected in the bank record and consequently, after being informed accommodations to its employees to receive the full value of a check
that the check has been cleared, Tan withdrew an amount from his without awaiting the clearing period, Gonzales presented the foreign check
account. He then deposited money again to his account to make good the to Gomez, the head of Retail Banking. After examining the same, Gonzales
value of the checks he issued to his suppliers. To his surprise, his suppliers was asked to indorse it and so she did. Gomez then acquiesced to the
went back to him and told him that the checks he issued all bounced due to early encashment of the check, signed the check but indicated therein her
insufficient funds. He demanded the bank to take positive steps about the authority of “up to P17500 only”. Afterwards, Gonzales was asked to
incident but the bank didn’t do anything. procure from another employee his signature and she was good to go. She
did what she was asked to do and she received the value of the check.
HELD: Thereafter, the check was dishonored due to having an irregular
As a general rule, a bank has the right of setoff of the deposits in its hands indorsement. Gonzales was informed about this. The first arrangement
for payment of any indebtedness on the part of a depositor but this should was that the value of the check would be deducted from her salary.
Thereafter, she was asked to pay the check but she didn’t.

Page 95 of 190
Furthermore, the provision in the deposit slip on the right of reservation by

HELD: the bank applies only when there is actual receipt of current funds or
The warranties for which Alviar and Gonzales are liable as general solvent credits. But as earlier on indicated, the transfer on account of the
indorsers in favor of subsequent indorsers extend only to the state of the checks were ineffectual because it was made under the mistaken and valid
instrument at the time of their indorsements, specifically that the assumption that the indorsements of the payee thereon were genuine.
instrument is genuine and in all respects what it purports to be; that they
have good title thereto; that all prior parties had capacity to contract; and Sec. 68. Order in which indorsers are liable. - As respect one
that the instrument, at the time of their endorsements, is valid and another, indorsers are liable prima facie in the order in which they
subsisting. This however cannot be used by someone which introduced the indorse; but evidence is admissible to show that, as between or
defect in the instrument, such as the bank in this case, which qualifiedly among themselves, they have agreed otherwise. Joint payees or
indorsed the same, to hold prior parties liable on the instrument because it joint indorsees who indorse are deemed to indorse jointly and
results to an absurd situation whereby a subsequent party may render an severally.
instrument useless and inutile and let innocent parties bear the loss while
he himself gets away scot-free. It cannot be overstressed that had it not APPLICATION OF SECTION
been for the qualified indorsement of Gomez, there would have been no • Applies only with respect to an indorser as against another but not as
reason for the dishonor of the check. against a holder in due course
• Every indorser is liable to all indorsers subsequent to him but not
Sec. 67. Liability of indorser where paper negotiable by delivery. — those prior to him whom he in turn makes liable
Where a person places his indorsement on an instrument
negotiable by delivery, he incurs all the liability of an indorser. JOINT AND SEVERAL LIABILITY OF JOINT PAYEES
• Joint payees or joint indorsees are deemed to indorse solidarily
EFFECT OF LACK OF NOTICE OF DISHONOR, ETC.
130 JAI ALAI V. BPI • One of the joint indorsers cannot escape liability because proper notice
66 SCRA 29 of dishonor wasn’t given to his joint indorser
FACTS: Sec. 69. Liability of an agent or broker. - Where a broker or other

Checks were deposited by petitioner in its current account with the bank. agent negotiates an instrument without indorsement, he incurs all
These checks were from a certain Ramirez, a consistent better in its the liabilities prescribed by Section Sixty-five of this Act, unless he
games, who was a sales agent from Inter-Island Gas. Inter-Island later discloses the name of his principal and the fact that he is acting
found out that of the forgeries committed in the checks and thus, it only as agent.
informed all the parties concerned. Upon the demands on the bank as the
collecting bank, it debited the account of petitioner. Thereafter, petitioner APPLICATION OF SECTION 69
tried to issue a check for payment of shares of stock but such was • Instruments payable to bearer
dishonored for insufficient funds. It filed a complaint against the bank. • To escape personal liability as a party negotiating by delivery, the
agent must disclose his principal and state that he is acting only as an
HELD: agent
Considering that the petitioner indorsed the said checks when it deposited
them with the respondent, the petitioner as an indorser guaranteed the VI. PRESENTATION FOR PAYMENT
genuineness of all prior indorsements thereon. The respondent which
relied upon the petitioner’s warranty should not be held liable for the Sec. 70. Effect of want of demand on principal debtor. -
resulting loss. Presentment for payment is not necessary in order to charge the
person primarily liable on the instrument; but if the instrument is,
by its terms, payable at a special place, and he is able and willing

Page 96 of 190
to pay it there at maturity, such ability and willingness are

equivalent to a tender of payment upon his part. But except as NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE
herein otherwise provided, presentment for payment is necessary • Presentment for payment must be made within the period required to
in order to charge the drawer and indorsers. the person primarily liable unless excused
• If the note is dishonored by non-payment, notice of dishonor by non-
MEANING OF PRESENTMENT FOR PAYMENT payment must be given to the person secondarily liable unless excused
• Production of a bill of exchange to the drawee for his acceptance, or to
the drawee or acceptor for payment or the production of the CASE DIGESTS: SECTION 70
promissory note to the person liable for payment of the same
1. Personal demand for payment at the proper place 131 CLARK V. SELLNER
2. With the bill or note in readiness to exhibit it as required and 42 SCRA 384
to receive payment and surrender it if the debtor is willing to
pay FACTS:
Sellner with two other persons, signed a promissory note solidarily binding
PRESENTMENT FOR PAYMENT NOT NECESSARY TO CHARGE PERSONS themselves to pay to the order of R.N Clark. The note matured but the
PRIMARILY LIABLE amount wasn't paid. The defendant alleges that he didn't receive any
• It cannot be validly claimed that it is presentment of the bill which is amount of the debt; that the instrument wasn't presented to him for
the operative act that makes the acceptor liable under his acceptance payment and being an accommodation party, he is not liable unless the
note is negotiated, which wasn't done.
PAYABLE AT A SPECIAL PLACE
• If the bill is payable at the PNB, is it necessary to make presentment HELD:
for payment to X in order to charge him? No, the rule is the same. On the first issue, the liability of Sellner as one of the signers of the note,
The only effect is that if, X is able and willing to pay the bill at the PNB is not dependent on whether he has or has not, received any part of the
at maturity, it is equivalent to a tender of payment on the part of debt. The defendant is really and expressly one of the joint and several
drawee X. debtors of the note and as such he is liable under the provisions of Section
60 of the NIL.
PRESENTMENT NECESSARY TO CHARGE PERSONS SECONDARILY LIABLE
As to the presentment for payment, such action is not necessary in order
NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE IN BILLS to charge the person primarily liable, as is the defendant Sellner.
OF EXCHANGE
1. In the three steps required by law, presentment for acceptance to As to whether or not Sellner is an accommodation party, it should be taken
the drawee or negotiation within reasonable time after acquisition into account that by putting his signature to the note, he lent his name, not
unless excused to the creditor, but to those who signed with him placing him in the same
2. If the bill is dishonored by non-acceptance, notice of dishonor by position and with the same liability as the said signers. It should be noted
non-acceptance must be given to persons secondarily liable that the phrase”without receiving value therefore” as used in section 29
unless excused and in case of foreign bills, protest for dishonor means “without receiving value by virtue of the instrument” and not, as it
by non-acceptance must be made unless excused apparently is supposed to mean, “without receiving payment for lending his
3. But if the bill is accepted, or if the bill isn’t required to be name.” It is immaterial as far as the creditor is concerned, whether one of
presented for acceptance, it must be presented for payment to the signers has or has not received anything in payment for the use of his
the persons primarily liable unless excused name. In this case, the legal situation of Sellner is that of a joint surety
4. If the bill is dishonored by non-payment, notice of dishonor by who upon the maturity of the note, pay the debt, demand the collateral
non-payment must be also be given to person secondarily liable security and dispose of it to his benefit. As to the plaintiff, he is a holder
unless excused, and in case of foreign bills, protest for dishonor for value.
by non-pay7ment must be made unless excused

Page 97 of 190
Sec. 71. Presentment where instrument is not payable on demand

and where payable on demand. - Where the instrument is not Notice may be given as soon as instrument has been dishonored and
payable on demand, presentment must be made on the day it falls unless delay is excused must be given within the time fixed by law.
due. Where it is payable on demand, presentment must be made
within a reasonable time after its issue, except that in the case of a In this case, presentment and notice of dishonor were not made within
bill of exchange, presentment for payment will be sufficient if made reasonable time.
within a reasonable time after the last negotiation thereof.
September 1960—date when the check was drawn
WHEN PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME March 1964—presented to drawee bank
• The presentment must be made at the date of maturity April 1968—notice of dishonor
WHEN PAYABLE ON DEMAND IN CASE OF NOTES 133 REPUBLIC V. PNB

• The time for presentment depends upon whether the instrument is a 3 SCRA 851
bill or a note
• If it is a note, it must be presented for payment within reasonable time FACTS:
for issue The government filed a complaint for escheat of certain unclaimed bank
• If it is a bill, it must be presented for payment within reasonable time deposits balances pursuant to a law, which provides that unclaimed
from last negotiation and not for issue, as in the case of notes balances—credits, money, bullion, security or other evidence of
indebtedness of any kind, and interest with banks—shall be deposited with
CASE DIGESTS: SECTION 71 the government if it remains to be unclaimed within a period of 10 years of
more.
132 FAR EAST REALTY INVESTMENT V. CA
166 SCRA 256 One of the banks against the complaint has been filed is First National City
Bank. Although it concedes that the government had the right to claim the
FACTS: unclaimed deposit balances, it seeks to exclude some which, according to
Private respondents approached petitioner and asked the latter to extend it, are not within the purview of credits and deposits as defined in law. the
to them an accommodation loan. They proposed to pay with interest. trial court held in favor of the bank, excluding from the claim the
They even gave a check, signed by Tat, drawn against Chinabank, and manager’s checks and other demand drafts.
signed at the back by the private respondents. They said that they will
change the check with cash after one month and if not, the check could be HELD:
presented for payment and it would be paid. The loan was actually Credit is a sum credited on the books of a company to a person who
extended but when the check was presented for payment, it was appears to be entitled to it. it presupposes a creditor-debtor relationship
dishonored—the account on which it is drawn has long been closed. The and may be said to imply ability, by reason of property or estates, to make
trial courts held in favor of petitioner but this was reversed by the appellate a promised payment. It is correlative to indebtedness, and that which is
court by ruling that the check has passed through other hands before due to any person, as distinguished to that which he owes.
reaching the petitioner and the said check wasn’t presented within
reasonable time and after its issuance. Do demand drafts and telegraphic orders come within the purview of
credits or deposits employed in the law?
HELD:
Where the instrument is not payable on demand, presentment must be Since the demand drafts herein involved have not been presented either
made on the day it falls due. Where it is payable on demand, presentment for acceptance or payment, the inevitable consequence is that the bank
must be made within a reasonable time after issue, except that in case of a never had the chance of accepting or receiving them. Verily, the bank
bill of exchange, presentment for payment is sufficient if made within never became a debtor of the payee concerned and as such the aforesaid
reasonable time after the last negotiation thereof.

Page 98 of 190
drafts cannot be considered as credits subject to escheat within the And on the ancillary issue of the case, which is the relevant issue for the
meaning of the law. subject, whether or not the spouses should replace the check they paid to
the bank after it became stale, the answer is yes. It appeared that the
Further, a demand draft is different from a cashier’s check for this is a check has not been encashed. The delivery of the manager’s check did not
primary obligation of the bank which issues it and constitutes a written constitute payment. The original obligation to pay still exists. Indeed, the
promise to pay upon demand. It is an order to a third party purporting to circumstances that caused the non-presentment of the check should be
be drawn upon a deposit of funds. considered to determine who should bear the loss. In this case, ICB held
on the check and refused to encash the same because of the controversy
If there is any consolation, the telegraphic orders can be escheated in favor surrounding the signing of the joint motion to dismiss. There is no bad faith
of the government. The agreement to remit creates a contractual or negligence on the part of ICB.
obligation and has been termed a purchase and sale transaction. The
purchaser of a telegraphic transfer upon making payment completes the A stale check is one which has not been presented for payment within a
transaction insofar as he is concerned, though insofar as the remitting reasonable time after its issue. It is valueless and, therefore, should not be
bank is concerned the contract is executory until the credit is established. paid. A check should be presented for payment within a reasonable time
after its issue. Here, what is involved is a manager’s check, which is
The drawer bank has already been paid the value of the telegraphic order. essentially a bank’s own check and may be treated as a PN with the bank
It appears in the books of the bank that the amounts represented by the as a maker. Even assuming that presentment is needed, failure to present
orders appear in the names of respective payees. If the latter choose to for payment within a reasonable time will result to the discharge of the
demand payment, the bank had the obligation to pay them. drawer only to the extent of the loss caused by the delay—but here there is
no loss sustained. Still, such failure to present on time does not wipe out
134 THE INTERNATIONAL CORPORATE BANK V. SPOUSES liability.
GUECO
351 SCRA 516 Sec. 72. What constitutes a sufficient presentment. - Presentment
for payment, to be sufficient, must be made:
FACTS:
Gueco spouses obtained a loan from ICB (now Union Bank) to purchase a (a) By the holder, or by some person authorized to receive
car. In consideration thereof, the debtors executed PNs, and a chattel payment on his behalf;
mortgage was made over the car. As the usual story goes, the spouses
defaulted in payment of their obligations and despite the lowering of the (b) At a reasonable hour on a business day;
amount to be paid, they still failed to pay. Thereafter, they tendered a
manager’s check in favor of the bank. Nonetheless, the car was still (c) At a proper place as herein defined;
detained for the spouses refused to sign the joint motion to dismiss. The
bank averred that the joint motion to dismiss is part of standard office (d) To the person primarily liable on the instrument, or if he is
procedure to preclude the filing of other claims. Because of this, the absent or inaccessible, to any person found at the place where the
spouses filed an action for damages against the bank. And by the time the presentment is made.
case was instituted, the check had become stale in the hands of the bank.
APPLICATION OF SECTION
HELD: • Establishes the requisites for a sufficient presentment for payment
The main issue though unrelated to NIL in this case was whether or not the
signing of the joint motion to dismiss a part of the compromise agreement WHO MAKES PRESENTMENT
between the spouses and the bank. The answer is no, it is not a part of • Presentment for payment must be made by the holder of the
the compromise agreement entered by the parties. And thus, the signing instrument or by some person authorized to receive payment on his
is dispensible in releasing the car to the spouses. behalf

Page 99 of 190
TIME FOR MAKING PRESENTMENT (b) Where no place of payment is specified but the address of
• At a reasonable hour on a business day the person to make payment is given in the instrument and it is
there presented;
(c) Where no place of payment is specified and no address is
135 STATE INVESTMENT HOUSE V. IAC given and the instrument is presented at the usual place of
175 SCRA 310 business or residence of the person to make payment;
FACTS: (d) In any other case if presented to the person to make

New Sikatuna requested for a loan from Spouses Chua. Latter issued post- payment wherever he can be found, or if presented at his last
dated crossed checks in favor of former. Thereafter, Sikatuna sold checks known place of business or residence. (ORDER OF PREFERENCE)
to SIHI which upon deposit, checks were dishonored. The trial court
decided the case in favor of SIHI. Sec. 74. Instrument must be exhibited. - The instrument must be
exhibited to the person from whom payment is demanded, and
HELD: when it is paid, must be delivered up to the party paying it.
Jurisprudence provides the following effects of crossing a check:
1. The check may not be encashed but only deposited in the bank NECESSITY OF EXHIBITION OF INSTRUMENT
2. The check may be negotiated only once—to one who has an • Presentment includes not only demand for payment but also the
account with a bank exhibition of the instrument
3. The act of crossing the check serves the warning to the holder • Purpose is to enable the debtor to determine the genuineness of the
that the check has been issued for a definite purpose so that he instrument and the right of the holder to receive payment and to
must inquire if he has received the check pursuant to that enable him to retain possession upon payment
purpose, otherwise, he is not a holder in due course.
A DEMAND BY TELEPHONE IS INSUFFICIENT
The checks in issue were crossed generally and issued payable to New
Sikatuna Wood which could only mean that the drawer has intended the WHEN EXHIBITION EXCUSED
same for deposit only by the rightful person. Apparently, it was not the 1. When the debtor doesn’t demand to see the instrument but
payee who presented the same for payment and therefore, there was no refuses payment on some other grounds
proper presentment and the liability didn't attach to the drawer. Thus, in 2. When the instrument is lost or destroyed
the absence of due presentment, the drawer didn't become liable.
Consequently, no right of recourse is available to petitioner against the CASE DIGESTS: SECTION 74
drawer of the subject checks considering that the petitioner is the proper
party authorized to make presentment of the checks in question. 136 ANSALDO V. CA
177 SCRA 8
Nonetheless, the holder could still collect from New Sikatuna if the latter
doesn't have a valid excuse from refusing payment. FACTS:
TFC issued promissory notes in favor of PCIB. At about the same time,
Sec. 73. Place of presentment. - Presentment for payment is made TFC extended loans to Ansaldo and Reyes. These loans were evidenced by
at the proper place: promissory notes, each waiving demand, presentment, protest, and notice
of protest and non-payment. TFC then paid part of its obligation with
(a) Where a place of payment is specified in the instrument and PCIB. To pay for its outstanding balance, it endorsed the notes issued by
it is there presented; Ansaldo and Reyes. Claiming that the notes have matured without
payment by Ansaldo and Reyes, the bank instituted actions against them.

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HELD: Sec. 78. Presentment to joint debtors. - Where there are several
The contention of Ansaldo that the instrument should have been first persons, not partners, primarily liable on the instrument and no
presented to him is bereft of merit. place of payment is specified, presentment must be made to them
all.
First, it couldn’t be first raised on appeal.
SECTIONS 76 TO 78 NOT APPLICABLE WHERE PLACE SPECIFIED
Second, it is a petty issue for if according to him, such an exhibition was • Applies only where there is no place specified
needed to give him opportunity to determine the genuineness of the
instrument, this was rendered unnecessary not only by his omission to WHERE PERSON PRIMARILY LIABLE DEAD
contest it, but also by his admission of the authenticity of the note implicit • Presentment must be made to the executor or administrator if there is
from his averment that he made substantial payments thereon and second, one and if he can be found
he made a waiver of demand, presentment, etc. • The holder must use diligence to find the personal representative if
there be one
Sec. 75. Presentment where instrument payable at bank. - Where • The person primarily liable is dead, there is a personal representative,
the instrument is payable at a bank, presentment for payment must and no place of payment indicated in the instrument—if there is a
be made during banking hours, unless the person to make payment place indicated, then presentment should be done there
has no funds there to meet it at any time during the day, in which
case presentment at any hour before the bank is closed on that day WHERE PERSONS PRIMARILY LIABLE ARE PARTNERS THE PRESENMENT
is sufficient. MUST BE MADE TO ANY ONE OF THEM
I PROMISE TO PAY B P1000 AT RCBC ROCKWELL. WHERE PERSONS PRIMARILY LIABLE ARE JOINT DEBTORS, PRESENTMENT
MUST BE MADE TO ALL OF THEM
SGD. A
Sec. 79. When presentment not required to charge the drawer. -
• This gives rise to the presumption that A has an account with RCBC Presentment for payment is not required in order to charge the
Rockwell and the bank would pay on account of A. drawer where he has no right to expect or require that the drawee
or acceptor will pay the instrument.
NOTES FOR WEEK #11
AUG UST 27 - SEPTEM BER 1, 2007 Sec. 80. When presentment not required to charge the indorser. -
Presentment is not required in order to charge an indorser where
the instrument was made or accepted for his accommodation and
Sec. 76. Presentment where principal debtor is dead. - Where the
he has no reason to expect that the instrument will be paid if
person primarily liable on the instrument is dead and no place of presented.
payment is specified, presentment for payment must be made to
his personal representative, if such there be, and if, with the APPLICATION OF SECTION 79 AND 80
exercise of reasonable diligence, he can be found.
• These provisions give exceptions to the general rule that if no
presentment for payment is made, the persons primarily liable are
Sec. 77. Presentment to persons liable as partners. - Where the
discharged
persons primarily liable on the instrument are liable as partners
and no place of payment is specified, presentment for payment
WHERE DRAWER NEED NOT BE GIVEN NOTICE
may be made to any one of them, even though there has been a • Where A withdraws his funds from X, drawee bank, so that they are
dissolution of the firm. not sufficient to pay the bill, he has no right to expect or require that
the drawee or acceptor would pay the instrument

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• Accordingly, where F holder doesn’t make a presentment to X, A • Overwhelming calamity, malignant diseases, interruption of trade
drawer would not be discharged by such failure negotiations by political circumstances, etc.
PRESENTMENT IS NOT REQUIRED TO CHARGE THE DRAWER IN THE Sec. 82. When presentment for payment is excused. - Presentment
FOLLOWING CASES for payment is excused:
1. In case the check upon which payment has been stopped
2. Where the drawer’s balance is less than the amount of the check. (a) Where, after the exercise of reasonable diligence,
The mere fact however that the drawer has no funds with drawee presentment, as required by this Act, cannot be made;
at the time he draws, doesn’t render presentment unnecessary if
he still has reasonable grounds to believe that the instrument will (b) Where the drawee is a fictitious person;
be paid, particularly when provision has been made for payment
of any bill drawn by the drawer on the drawee (c) By waiver of presentment, express or implied.
3. Where the drawer of a bill containing the words “Pay from
balance” had no money on deposit with the drawee but expected APPLICATION OF SECTION 82
to arrange with the broker to cover drafts • What is excused is failure to make presentment for payment and not
mere delay
WHEN INDORSER NEED NOT BE GIVEN NOTICE
• A makes a note for the accommodation of B, payee. WAIVER MAY BE EXPRESS OR IMPLIED
I promise to pay B P1000. IMPLIED WAIVER

• Implied waiver of presentment may be manifested by any language or
Sgd. A conduct or any agreement between the parties reasonably calculated
to lead the holder to believe that presentment is waived or to mislead
BC or prevent him from treating the bill as he otherwise would
CD
DE SUMMARY OF RULES AS TO PRESENTMENT FOR PAYMENT
EF 1. Presentment for payment is not necessary to charge persons primarily
liable
• F need not make presentment for payment to A in order to charge B 2. But it is necessary to charge a person secondarily liable except
indorser a. As to drawer, under Section 79
• B didn’t give any value to A b. As to indorser, under Section 80
• B has no reason to expect that the note will be paid upon presentment c. When dispensed with under Section 82
• B is considered to be the ultimately liable party since he is the
d. When the instrument has been dishonored by non-acceptance
accommodated party
• With regard C and D, presentment for payment is still required
Sec. 83. When instrument dishonored by non-payment. - The
Sec. 81. When delay in making presentment is excused. - Delay in instrument is dishonored by non-payment when:
making presentment for payment is excused when the delay is
caused by circumstances beyond the control of the holder and not (a) It is duly presented for payment and payment is refused or
imputable to his default, misconduct, or negligence. When the cannot be obtained; or
cause of delay ceases to operate, presentment must be made with
reasonable diligence. (b) Presentment is excused and the instrument is overdue and
unpaid.
EXCUSES FOR DELAY
WHEN PAYMENT REFUSED, ETC.

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• The instrument must be duly presented for payment and payment is The appellate court reversed the lower court in its decision. It ruled that
either refused or cannot be obtained the bank was guilty of unreasonably retaining and withholding the check,
and that the delay in the presentment was inexcusable, so that respondent
WHEN PRESENTMENT IS EXCUSED thereby was discharged from liability.
• Presentment for payment is excused
• Instrument is overdue HELD:
• It is unpaid Section 84 is applicable, nonetheless, it should be read in correlation with
Section 186, which says that presentment should be within reasonable
Sec. 84. Liability of person secondarily liable, when instrument time.
dishonored. - Subject to the provisions of this Act, when the
instrument is dishonored by non-payment, an immediate right of Sec. 85. Time of maturity. - Every negotiable instrument is payable
recourse to all parties secondarily liable thereon accrues to the at the time fixed therein without grace. When the day of maturity
holder. falls upon Sunday or a holiday, the instruments falling due or
becoming payable on Saturday are to be presented for payment on
AFTER DISHONOR, INDORSERS, ETC. ARE PRIMARILY LIABLE the next succeeding business day except that instruments payable
• As to holder, after an instrument is dishonored by non-payment , the on demand may, at the option of the holder, be presented for
persons secondarily liable thereon ceases to be secondarily liable payment before twelve o'clock noon on Saturday when that entire
• They become principal debtors and their liability becomes the same as day is not a holiday.
that of the principal obligors—provided a notice of dishonor has been
given to them Sec. 86. Time; how computed. - When the instrument is payable at
• If no notice is given, they are discharged a fixed period after date, after sight, or after that happening of a
• If they are charged by dishonor and notice, while it is true that they specified event, the time of payment is determined by excluding
become principal debtors as to the holder, yet as among themselves, the day from which the time is to begin to run, and by including the
persons secondarily liable are presumed liable in the order that they date of payment.
become parties to the instrument
Sec. 87. Rule where instrument payable at bank. - Where the
CASE DIGEST: SECTION 84 instrument is made payable at a bank, it is equivalent to an order
to the bank to pay the same for the account of the principal debtor
137 PNB V. SEETO thereon.
91 SCRA 757
EFFECT OF FAILURE TO MAKE PRESENTMENT FOR PAYMENT—BUT
FACTS: SUPPOSE THAT B OR ANY SUBSEQUENT HOLDER FAILS TO MAKE A
Seeto called at a branch of bank and presented a check payable to cash or PRESENTMENT FOR PAYMENT AT THE PNB, IS A DRAWER DISCHARGED?
bearer, and drawn by Kiao against PBC. After consultation with the • There is a conflict of authorities
employees, Seeto made a general and qualified indorsement of the check. • Agbayani’s view: A is not discharged because he is primarily liable
He was then paid the amount of the check by bank. The check was
consequently dishonored, a letter was sent to Seeto and was asked to Sec. 88. What constitutes payment in due course. - Payment is
refund the money given to him. A second letter was sent to him and he made in due course when it is made at or after the maturity of the
averred that case against him be deferred while he inquired about why the payment to the holder thereof in good faith and without notice that
check was dishonored. Thereafter, he refused to pay, alleging that the his title is defective.
account against the check was drawn had sufficient funds when the check
was drawn and if the bank didn’t delay in clearing the check, there would REQUISITES FOR PAYMENT IN DUE COURSE
have been sufficient funds. 1. Payment must be made at or after the date of maturity
2. Payment must be to the holder

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3. Payment must be made by the debtor in good faith and without • When an instrument is dishonored by NON-ACCEPTANCE or NON-
notice that his title is defective PAYMENT, notice of such dishonor must be given to persons
• If payment is made before maturity, it would constitute a negotiation secondarily liable, as the case may be. Otherwise, such parties are
back to the person primarily liable and he can renegotiate it. Payment discharged
doesn’t discharge the instrument.
• Payment to indorsee who is not in possession of the instrument is not I PROMISE TO PAY F OR ORDER.
payment to a person other than the holder is at the risk of the party so
paying if the person wasn’t authorized by the holder to receive SGD. A
payment. So also, the payment to the original payee after the note *BCDEF
had been transferred by him to a holder in due course doesn’t
discharge the note *F makes presentment for payment to A, maker, on the date of maturity.
• Payment to a person by the debtor who knows that such person stole A refuses to pay.
it, is not payment in due course, as such payment is not in good faith. *If F doesn’t give notice of dishonor to B, C, D and E and prove the same,
The maker of a note or the acceptor of a bill must satisfy himself, they are discharged and F cannot file an action against them.
when it is presented for payment, that the holder traces his title
through genuine indorsements, and if there is a forged indorsement, it BURDEN OF PROOF
is a nullity and no right passes by it • It is upon the plaintiff who seeks to enforce the defendant’s liability
upon a negotiable instrument as indorser to establish said liability by
PAYMENT MUST BE MADE TO POSSESSOR OF INSTRUMENT proving that notice was given to the defendant within the time and in
• The party making payment must insist on the presentment of the the manner required by the law that the instrument in question had
paper by the party demanding payment in order to make sure that it is been dishonored
at the time in his possession and not outstanding in another • Where these facts are not proven, the plaintiff doesn’t sufficiently
• A receipt taken is no protection establish the defendant’s liability
• If at the time he makes payment, it is outstanding and in the hands of • Where there is no proof in record tending to show that the plaintiff
a holder in due course, he must pay it again gave any notice whatsoever to the defendant that the instrument in
• Possession of notes by the maker is presumptive evidence question had been dishonored, said plaintiff hasn’t established its
cause of action
VII. NOTICE OF DISHONOR PERSONS PRIMARILY LIABLE NEED NOT BE NOTIFIED
Sec. 89. To whom notice of dishonor must be given. - Except as DOES FAILURE TO GIVE NOTICE OF DISHONOR OF A PREVIOUS
herein otherwise provided, when a negotiable instrument has been INSTALLMENT TO PERSONS SECONDARILY LIABLE ALSO DISCHARGE
dishonored by non-acceptance or non-payment, notice of dishonor THEM ON THE SUCCEEDING INSTALLMNETS?
must be given to the drawer and to each indorser, and any drawer • It depends on whether the instrument contains an acceleration clause
or indorser to whom such notice is not given is discharged.
RULE WHERE THERE IS NO ACCELERATION CLAUSE
MEANING OF NOTICE • Where the instrument contains no acceleration clause, failure to give
• By notice of dishonor is meant bringing either verbally or by writing, to notice of dishonor on previous installment doesn’t discharge drawers
the knowledge of the drawer or indorser of an instrument, the fact that and indorsers as to the succeeding installments, and therefore, the
a specified negotiable instrument, upon proper proceedings taken, has holder can file an action against them for such succeeding
not been accepted or hasn’t been paid, and that the party notified is installments, notice is given
expected to paid it • The reason is that each separate installment is equivalent to another
note
NECESSITY AND PURPOSE OF NOTICE

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RULE WHERE THERE IS AN ACCELERATION CLAUSE Fojas Arca and Firestone Tire entered into a franchising agreement wherein
• It depends whether the clause is optional or automatic the former had the privilege to purchase on credit the latter’s products. In
• If it is automatic, failure to give notice of dishonor as to a previous paying for these products, the former could pay through special withdrawal
installment will discharge the persons secondarily liable as to the slips. In turn, Firestone would deposit these slips with Citibank. Citibank
succeeding installments would then honor and pay the slips. Citibank automatically credits the
• If it is optional and it is not exercised, the rule would be the same as account of Firestone then merely waited for the same to be honored and
where there is no acceleration clause paid by Luzon Development Bank. As this was the circumstances,
Firestone believed in the sufficient funding of the slips until there was a
EXCEPTIONS TO REQUIREMENT OF NOTICE time that Citibank informed it that one of the slips was dishonored. It
• The law provides for exceptions on failure to give notice would wrote then a demand letter to Fojas Arca for the payment and damages
discharge drawer or indorsers but the latter refused to pay, prompting Firestone to file an action against
it.
HELD:
139 ASIA BANKING CORPORATION V. JAVIER The withdrawal slips, at the outset, are non-negotiable. Hence, the rule on
44 PHIL 777 immediate notice of dishonor is non-applicable to the case at hand. Thus,
the bank was under no obligation to give immediate notice that it wouldn't
FACTS: make payment on the subject withdrawal slips. Citibank should have
Chaves drew 2 checks on different occasions against PNB in favor La known that withdrawal slips are not negotiable instruments. It couldn't
Insular. These checks were indorsed by the limited partners of La Insular expect then the slips be treated like checks by other entities. Payment or
and subsequently deposited by Chaves in his account with Asia Bank. notice of dishonor from respondent bank couldn't be expected immediately
These were then presented for payment by Asia Bank but was dishonored in contrast to the situation involving checks.
by PNB on reason that there was insufficient funds. This prompted Asia
Bank to file a case against one of the partners of La Insular for payment. In the case at bar, Citibank relied on the fact that LDB honored and paid
the withdrawal slips which made it automatically credit the account of
HELD: Firestone with the amount of the subject withdrawal slips then merely
When a negotiable instrument is dishonored by non-payment or non- waited for LDB to honor and pay the same. It bears stressing though that
acceptance, notice thereof must be given to the drawer and each of the Citibank couldn't have missed the non-negotiable character of the slips.
inodrsers, and those who are not notified shall be discharged from liability, The essence of negotiability which characterizes a negotiable paper as a
except where this act provides otherwise. According to this, the indorsers credit instrument lies in its freedom to be a substitute for money. The
are not liable unless they are notified that the instrument is dishonored. withdrawal slips in question lacked this character.
Then, under the general principle of law on procedure, it will be incumbent
upon plaintiff, who seeks to enforce the defendant’s liability upon these The withdrawal slips deposited were not checks as Firestone admits and
checks as indorser, to establish said liability by proving that notice was Citibank generally was not bound to accept the withdrawal slips as a valid
given within the time and in the manner required by law. if these facts are mode of deposit. Nonetheless, Citibank erroneously accepted the same as
not proven, the plaintiff has not sufficiently established the defendant’s such and thus, must bear the risks attendant to the acceptance of the
liability. There is no proof in record to show that plaintiff has indeed gave instruments. Firestone and Citibank could not now shift the risk to LDB for
any notice to defendant that the checks had been dishonored. Therefore their committed mistake.
there is no cause of action established.
WHAT IF THE SLIPS WERE NEGOTIABLE?
140 FIRESTONE V. CA • Citibank would be the holder, LDB the drawee, Fojas Arca the drawer
353 SCRA 601 and Firestone would be indorser
• Applying the rules on notice of dishonor, Citibank as the “holder”
FACTS: should have sent the notices of dishonor to Fojas Arca and Firestone,

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being the drawer and indorser respectively. Another, Firestone may 3. Any party to the instrument who may be compelled to pay it to
have sent the notice to Fojas Arca. the holder—against any party whom he has a right of
reimbursement should such party giving notice pay the instrument
141 GULLAS V. PNB 4. Another person in behalf of such party
62 PHIL 519
Sec. 91. Notice given by agent. - Notice of dishonor may be given
FACTS: by any agent either in his own name or in the name of any party
The US government issued a warrant payable to the order of Bacos. Gullas entitled to given notice, whether that party be his principal or not.
and Lopez appeared as indorsers of the warrant. It was then encashed by
the PNB. Subsequently, the warrant was dishonored by the Insular NOTICE OF AGENT
Treasurer. Upon learning of the dishonor, notices were sent to Gullas by • Notice may be given by the agent and it is not necessary that the
the bank but it wasn’t receive by Gullas as he was currently not within the agent be authorized by the principal
vicinity. In the said notices served to Gullas and Lopez, it was indicated • He may give the notice in his name or in the name of his principal
therein that since there was dishonor of the warrant, their corresponding • A collecting bank may give notice, and where it has done so, no notice
accounts have been charged. It was only after the return of Gullas in Cebu from the owner is necessary
when he received the notices. This caused prior inconvenience to Gullas. • And where the cashier of the drawee bank which had refused to pay a
First, he wasn’t able to pay for his insurance due to the lack of credit in his check gave the check to a notary to protest, which was done, it was
bank account and second, the incident was given prominence in Cebu to held that the possession of the check by the cashier was evidence of
the great mortification of Gullas. his agency of the holder to present it for protest
HELD: Sec. 92. Effect of notice on behalf of holder. - Where notice is given
The general indorser of a negotiable instrument engages that if it be by or on behalf of the holder, it inures to the benefit of all
dishonored and the necessary proceedings of dishonor be duly taken, he subsequent holders and all prior parties who have a right of
will pay the amount thereof to the holder. In this connection, it has been recourse against the party to whom it is given.
held by a long line of authorities that notice of dishonor is necessary in
order to charge an indorser and that the right of action against him doesn’t MEANING OF BENEFIT
accrue until the notice is given. • Benefit refers to the right to charge the person secondarily liable who
received notice
As a general rule, a bank has a right of setoff of the deposits in its hands • The party to whom this benefit inures can charge the party receiving
for payment of any indebtedness on the part of a depositor but this should notice of dishonor, even if himself didn’t give the notice
be enforced properly. It is undeniable in this case that PNB didn’t enforce
its right properly. It made used of the money in the account of Gullas prior INURES TO THE BENEFIT OF THE FOLLOWING
to its sending of notice of dishonor. 1. All parties prior to the holder, who have a right of recourse
against the party to whom the notice is given
Sec. 90. By whom given. - The notice may be given by or on behalf 2. All holders subsequent to the holder giving notice
of the holder, or by or on behalf of any party to the instrument who
might be compelled to pay it to the holder, and who, upon taking it I PROMISE TO PAY B OR ORDER P1000.
up, would have a right to reimbursement from the party to whom
the notice is given. SGD.A
NOTICE MAY BE GIVEN BY *BCDEF

1. The holder *F notifies B, C, D, E
2. Another in behalf of the holder 1. The notice of F to B inures to the benefit of C, D and E, as they
are parties prior to F, who have a right of recourse against B

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2. The notice of F to C inures to the benefit of D and E but not for Sec. 96. Form of notice. - The notice may be in writing or merely
the benefit of B oral and may be given in any terms which sufficiently identify the
3. The notice of F to D inures to the benefit of E but not to B and C instrument, and indicate that it has been dishonored by non-
4. Suppose that after notice given by F, further negotiation was acceptance or non-payment. It may in all cases be given by
made to G; GHI. The notice given by F inures to the benefit of delivering it personally or through the mails.
all of them. And they don’t need to give another notice of
dishonor to B, C, D, and E to make them liable. FORM AND CONTENTS OF NOTICE
• It may be oral or in writing
Sec. 93. Effect where notice is given by party entitled thereto. - • Whether oral or in writing, it must contain
Where notice is given by or on behalf of a party entitled to give 1. SUFFICIENT DESCRIPTION OF THE INSTRUMENT TO IDENTIFY IT,
notice, it inures to the benefit of the holder and all parties and
subsequent to the party to whom notice is given. 2. A STATEMENT THAT IT HAS BEEN PRESENTED FOR PAYMENT AND
FOR ACCEPTANCE, AND THAT IT HAS BEEN DISHONORED, and
APPLICATION OF THIS SECTION 3. A STATEMENT THAT THE PARTY GIVING NOTICE INTENDS TO
• Follows the same principle as the preceding section but this time, the LOOK FOR THE PARTY ADDRESSED FOR PAYMENT
person giving notice is not the holder but a party to the instrument
who might be compelled to pay it to the holder, and who, upon taking EFFECTS OF DEFECTS IN NOTICE
it up, would have a right of reimbursement from the party to whom • If the notice is not signed, it will not invalidate it
notice is given • If the notice is written and doesn’t contain #2 and #3, it can be
supplemented by oral communication stating the things lacking
Sec. 94. When agent may give notice. - Where the instrument has • If there is misdescription, it would only vitiate the notice if the person
been dishonored in the hands of an agent, he may either himself is misled thereby
give notice to the parties liable thereon, or he may give notice to
his principal. If he gives notice to his principal, he must do so NOTICE BY PHONE
within the same time as if he were the holder, and the principal, • This could be done however it must be shown that the party to be
upon the receipt of such notice, has himself the same time for notified was really communicated with, that is, fully identified as to the
giving notice as if the agent had been an independent holder. party at the receiving end of the line
WHEN AGENT’S NOTICE MUST BE GIVEN MANNER OF GIVING NOTICE

• When an instrument is dishonored in the hands of an agent, he can do • May be given by personal delivery or by mail
either of the following
o Directly give notice to the persons secondarily liable thereon Sec. 97. To whom notice may be given. - Notice of dishonor may be
o Give notice to his principal given either to the party himself or to his agent in that behalf.
• If the agent decides to give notice to the principal, he must give notice
within the time allowed by law as if he were a holder NOTICE MAY BE GIVEN
• The principal has also the same time to give notice to the persons 1. To the party himself
secondarily liable 2. To his agent in his behalf
• An accommodation indorser is entitled to notice
Sec. 95. When notice sufficient. - A written notice need not be • An irregular indorser must also be given notice if he is to be charged
signed and an insufficient written notice may be supplemented and • And if notice is given to an agent, he must be duly authorized to
validated by verbal communication. A misdescription of the receive the notice of dishonor
instrument does not vitiate the notice unless the party to whom the
notice is given is in fact misled thereby. AGENT DISTINGUISHED FROM PERSON PRESENT IN ABSENCE OF PARTY

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• Notice to agent must be distinguished from notice attempted to be • In such cases, notice be given to the party himself or his trustee or
given to party himself where he is absent at his place of business or assignee
residence. In such a case, the notice may be left with anyone found in
charge therein Sec. 102. Time within which notice must be given. - Notice may be
given as soon as the instrument is dishonored and, unless delay is
Sec. 98. Notice where party is dead. - When any party is dead and excused as hereinafter provided, must be given within the time
his death is known to the party giving notice, the notice must be fixed by this Act.
given to a personal representative, if there be one, and if with
reasonable diligence, he can be found. If there be no personal MAY NOTICE OF DISHONOR BE GIVEN BEFORE THE DATE OF MATURITY
representative, notice may be sent to the last residence or last • No, such notice would be insufficient because an instrument cannot be
place of business of the deceased. said to be dishonored for non-payment unless presented and
presentment must be made on the date of maturity unless of course,
REQUISITES FOR NOTICE TO REPRESENTATIVE presentment is excused
1. Death is known to the party giving notice • But even in such cases, the instrument cannot be said to be
2. There is a personal representative dishonored by non-payment unless it is overdue and unpaid
3. If with reasonable diligence he could be found • Notice of dishonor can be given only after the instrument has been
actually dishonored, and notice given before the paper due is
WHEN NOTICE MAY BE SENT TO THE LAST RESIDENCE OR PLACE OF premature and insufficient, regardless of the indorser’s knowledge that
BUSINESS the maker was in default
1. If his death is not known to the party giving notice
2. Or although his death is known to the party giving notice but MAY NOTICE OF DISHONOR BE GIVEN ON THE DATE OF MATURITY?
there is no personal representative • Yes, provided that the instrument has been presented for payment and
3. If there be one but he cannot be found with reasonable diligence is has been dishonored
• But if the instrument is payable at a bank, it is not dishonored if the
Sec. 99. Notice to partners. - Where the parties to be notified are maker deposits the amount of the instrument before the close of
partners, notice to any one partner is notice to the firm, even banking hours. Hence, notice of dishonor must be given after the
though there has been a dissolution. close of banking hours on the date of maturity
Sec. 100. Notice to persons jointly liable. - Notice to joint persons PURPOSE OF PROMPT NOTICE
who are not partners must be given to each of them unless one of • To give the persons secondarily liable every opportunity to secure
them has authority to receive such notice for the others. themselves such as to enable the party to be charged to preserve and
protect his rights against prior parties
PROVISION WOULD APPLY ONLY TO JOINT DRAWERS
Sec. 101. Notice to bankrupt. - Where a party has been adjudged a
bankrupt or an insolvent, or has made an assignment for the 142 FAR EAST REALTY INVESTMENT V. CA
benefit of creditors, notice may be given either to the party himself 166 SCRA 256
or to his trustee or assignee.
FACTS:
APPLICATION OF SECTION Private respondents approached petitioner and asked the latter to extend
1. Where the party secondarily liable has been declared a bankrupt to them an accommodation loan. They proposed to pay with interest.
or an insolvent They even gave a check, signed by Tat, drawn against Chinabank, and
2. Where he has made an assignment of his properties for the signed at the back by the private respondents. They said that they will
benefits of creditors change the check with cash after one month and if not, the check could be

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presented for payment and it would be paid. The loan was actually 2. That the check is made or drawn or issued to apply on account or
extended but when the check was presented for payment, it was for value
dishonored—the account on which it is drawn has long been closed. The 3. That the person who makes or draws and issues the check knows
trial courts held in favor of petitioner but this was reversed by the appellate at the time of issue that he doesn’t have sufficient funds or in
court by ruling that the check has passed through other hands before credit with the drawee bank for the payment of such check in full
reaching the petitioner and the said check wasn’t presented within upon its presentment
reasonable time and after its issuance. 4. That the check is subsequently dishonored by the drawee for
insufficiency of funds or credit, or would have been dishonored for
HELD: the same reason had not the drawer, without any valid reason,
Where the instrument is not payable on demand, presentment must be ordered the bank to stop payment.
made on the day it falls due. Where it is payable on demand, presentment
must be made within a reasonable time after issue, except that in case of a In the present case, the fact alone that petitioner was a signatory to the
bill of exchange, presentment for payment is sufficient if made within checks subsequently dishonored merely engenders the prima facie
reasonable time after the last negotiation thereof. presumption that she knew of the insufficiency of funds, but it doesn’t
render her automatically guilty of violating BP22. The prosecution has the
Notice may be given as soon as instrument has been dishonored and burden of proof to prove all the elements of the crime. If such knowledge
unless delay is excused must be given within the time fixed by law. of insufficiency of funds is proven to be actually absent or non-existent, the
accused shouldn’t be held liable for the offense defined under the first
In this case, presentment and notice of dishonor were not made within paragraph of BP22. Although the offense is mala prohibitum, the
reasonable time. prosecution thereby is not excused from its responsibility of proving
beyond reasonable doubt all the elements of the crime, one of which is
September 1960—date when the check was drawn knowledge of insufficiency of funds.
March 1964—presented to drawee bank
April 1968—notice of dishonor Lao didn’t have actual knowledge of the insufficiency of funds from the
time she drew the checks up to the time that the checks were subsequently
143 LINA LIM LAO V. CA dishonored by the bank. Further, the scope of Lao’s duties didn’t
274 SCRA 572 encompass the funding of the corporation’s checks, her duties were limited
to the marketing department of the Binondo branch. It was further found
FACTS: out in the trial court that when Lao drew the checks, she signed the check
Lao was a junior officer of Premier Investment House. She was authorized blank as to the name of the payee and the amount to be drawn, and
to sign checks in behalf of the corporation. On a relevant date, she met Fr. without knowledge of the transaction for which they were issued.
Palijo, the provincial treasurer for the Society of the Divine World. Palijo
was authorized to invest donations with Premiere and had been investing Furthermore, there was no notice of dishonor sent to Lao. The notice of
the Society’s money with Premiere. Thereafter, he was issued checks by dishonor may be sent by the offended party or the drawee bank. The trial
Premiere, signed by its authorized officers, one of them being Lao. Upon court itself found that there was absence of any personal notice of dishonor
presentment however for encashment, said checks were dishonored as served upon Lao by the drawee bank. The notice, if any consolation, was
they were drawn on insufficient funds. Palijo immediately made demands given to the main office of Premiere and not on its branch office. Nor was
to Premiere but to no avail. Premiere was then placed under receivership. there any notice sent to Lao by the offended party.
This prompted Palijo to file cases against Lao and Asprec who was the then
head of operations. Because no notice was sent, the prima facie presumption of knowledge
cannot be applied in this case.
HELD:
The following are the elements of the first paragraph of BP22: 144 BETTY KING V. PEOPLE
1. That a person makes or draws or issues any check 319 SCRA 666

Page 109 of 190
FACTS: Sec. 104. Where parties reside in different places. - Where the
On several occasions, King discounted with Fernando several checks person giving and the person to receive notice reside in different
amounting to P1,070,000 for the amount of P1,000,000. Upon places, the notice must be given within the following times:
presentment for encashment however, these checks were dishonored for
being drawn on insufficient funds. Despite demands, King wasn’t able to (a) If sent by mail, it must be deposited in the post office in
make good the checks. This prompted Fernando to file a case against King time to go by mail the day following the day of dishonor, or if there
for violation of BP22. be no mail at a convenient hour on last day, by the next mail
thereafter.
HELD:
The elements of the crime are as follows: (b) If given otherwise than through the post office, then within
1. The accused makes, draws, issues any check to apply for account the time that notice would have been received in due course of
or for value mail, if it had been deposited in the post office within the time
2. The check is subsequently dishonored by the drawee bank for specified in the last subdivision. (TO REACH HIM IN USUAL COURSE
insufficiency of funds or credit, or it would have been dishonored THE DAY FOLLOWING)
for the same reason had not the drawer, without any valid reason,
ordered the bank to stop payment TIME FOR GIVING NOTICE IN GENERAL
3. The accused knows at the time of the issuance that he doesn’t • The law provides for a different period for giving notice of dishonor
have sufficient funds or credit with the drawee bank for the depending on whether—the party giving notice and the party to
payment of the check in full upon presentment receive notice reside in the same place; or the party giving notice and
the party to receive reside in different places
Among the elements, to show that there is prima facie presumption of
knowledge of insufficiency of funds, it should be shown that he received a MEANING OF “THE SAME PLACE”
notice of dishonor and within 5 banking days thereafter, failed to satisfy • Refers to the corporate limits of a town or city where the presentment
the amount of the check or make arrangement for its payment. is made or where the holder resides
To prove the knowledge of King, it was shown that a letter was sent by EFFECT OF NOTICE GIVEN OUT OF TIME
Fernando. Nonetheless, it wasn’t proven that indeed King received the • Unless excused, notice given out of time would be considered not to
demand letter. The letter was even shown to have been returned to have been given
sender. • Hence, the party to receive notice would be discharged
Sec. 103. Where parties reside in same place. - Where the person Sec. 105. When sender deemed to have given due notice. - Where
giving and the person to receive notice reside in the same place, notice of dishonor is duly addressed and deposited in the post
notice must be given within the following times: office, the sender is deemed to have given due notice,
notwithstanding any miscarriage in the mails.
(a) If given at the place of business of the person to receive
notice, it must be given before the close of business hours on the APPLICATION OF SECTION 105
day following. • A party giving notice is deemed to have given due notice where the
notice of dishonor is duly addressed and deposited in the post office,
(b) If given at his residence, it must be given before the usual even when there is miscarriage of mail
hours of rest on the day following.
CONCLUSIVE PRESUMPTION
(c) If sent by mail, it must be deposited in the post office in
time to reach him in usual course on the day following.

Page 110 of 190
Sec. 106. Deposit in post office; what constitutes. - Notice is 2. After omission to give due notice
deemed to have been deposited in the post-office when deposited
in any branch post office or in any letter box under the control of IMPLIED WAIVER
the post-office department. • Waiver may be implied from acts, declarations, or silence
DEPOSIT IN LETTER BOX Sec. 110. Whom affected by waiver. - Where the waiver is
• The letter box must be under the control of the post office department embodied in the instrument itself, it is binding upon all parties; but,
• Otherwise, notice wouldn’t deemed to have been deposited in the post where it is written above the signature of an indorser, it binds him
office only.
• Thus, a notice of protest properly addressed and left in a place in a
notary’s office where mail was usually collected by his postman was WHOM AFFECTED BY WAIVER IN GENERAL
held not a mailing of the notice as required by the statute • The persons affected by waiver depends upon whether the waiver is in
the instrument itself or is written above the signature of the indorser
Sec. 107. Notice to subsequent party; time of. - Where a party • If the waiver is embodied in the instrument itself, it is binding upon all
receives notice of dishonor, he has, after the receipt of such notice, parties
the same time for giving notice to antecedent parties that the • If the waiver is written above the signature of an indorser, it binds him
holder has after the dishonor. only
Sec. 108. Where notice must be sent. - Where a party has added an Sec. 111. Waiver of protest. - A waiver of protest, whether in the
address to his signature, notice of dishonor must be sent to that case of a foreign bill of exchange or other negotiable instrument, is
address; but if he has not given such address, then the notice must deemed to be a waiver not only of a formal protest but also of
be sent as follows: presentment and notice of dishonor.
(a) Either to the post-office nearest to his place of residence or WHERE PROTEST IS WAIVED, THE FOLLOWING ARE INCLUDED AND ARE
to the post-office where he is accustomed to receive his letters; or DEEMED WAIVED ALSO
1. Presentment
(b) If he lives in one place and has his place of business in 2. Notice of dishonor
another, notice may be sent to either place; or • Where presentment for payment is waived, notice of dishonor is also
waived
(c) If he is sojourning in another place, notice may be sent to • But where notice of dishonor is waived, presentment for payment is
the place where he is so sojourning. not waived
But where the notice is actually received by the party within the Sec. 112. When notice is dispensed with. - Notice of dishonor is
time specified in this Act, it will be sufficient, though not sent in dispensed with when, after the exercise of reasonable diligence, it
accordance with the requirement of this section. cannot be given to or does not reach the parties sought to be
charged.
Sec. 109. Waiver of notice. - Notice of dishonor may be waived
either before the time of giving notice has arrived or after the WHEN NOTICE EXCUSED
omission to give due notice, and the waiver may be expressed or • When political disturbances interrupt and obstruct the ordinary
implied. negotiations of trade, they constitute a sufficient excuse for want of
presentment or notice, upon the same principle that controls in cases
WHEN WAIVER MAY BE MADE of military operations or interdictions of commerce
1. Before the time of giving notice, such as express waiver in the • Prevalence of a malignant, contagious, infectious disease…
body of the instrument or added to the signature of the party

Page 111 of 190
Sec. 113. Delay in giving notice; how excused. - Delay in giving The evidence shows that the dated checks were complete and regular;
notice of dishonor is excused when the delay is caused by petitioner bought the checks from Victoriano before their due dates; it took
circumstances beyond the control of the holder and not imputable the checks in good faith and for value; and it was never informed nor made
to his default, misconduct, or negligence. When the cause of delay aware that these checks were merely issued to payee as security.
ceases to operate, notice must be given with reasonable diligence.
Consequently, State is a holder in due course. Moulic cannot set up the
Sec. 114. When notice need not be given to drawer. - Notice of defense that there was failure or want of consideration. It can only invoke
dishonor is not required to be given to the drawer in either of the the defense if State was a privy to the purpose for which they were issued
following cases: and therefore is not a holder in due course.
(a) Where the drawer and drawee are the same person; Furthermore, the mere fact that the checks were issued as security is not
sufficient ground to discharge the instrument as against a holder in due
(b) When the drawee is fictitious person or a person not having course.
capacity to contract;
And also, Moulic was responsible for the dishonor of her checks. She
(c) When the drawer is the person to whom the instrument is withdrew her funds from her account and could not have expected her
presented for payment; checks to be honored by then.
(d) Where the drawer has no right to expect or require that the 146 GREAT ASIAN SALES V. CA
drawee or acceptor will honor the instrument; 381 SCRA 488
(e) Where the drawer has countermanded payment. FACTS:

Great Asian Sales was a business engaged in the selling and buying of
CASE DIGESTS: SECTION 114 merchandise. In 2 of its board resolutions, it first authorized Arsenio, its
treasurer, to secure a loan from Bancasia as well as to sign any pertinent
145 STATE INVESTMENT HOUSE V. CA documents related to such. Second, it authorized Arsenio to obtain from
217 SCRA 32 Bancasia a discounting line. Pursuant to these, deeds of assignments were
issued by Great Asian in favor of Bancasia for receivables—specifically
FACTS: checks. Almost all the checks assigned by Great Asian were dishonored.
Moulic issued checks as security to Victoriano, for pieces of jewelry to be Notice of dishonor was sent by the bank and its lawyer to Tan Chong Lin.
sold on commission. Moulic failed to sell the pieces of jewelry, so she Later, Great Asian filed for insolvency and in its petition, Bancasia was one
returned them to Victoriano. The checks however could not be recovered of those listed as its creditors. In the meanwhile, a complaint was filed
by Moulic as these have been discounted already in favor of petitioner. against Great Asian and Tan Chong Lin because of the surety agreement it
Consequently, before the maturity dates, Moulic withdrew her funds from signed in favor of Bancasia.
her account. Thereafter, petitioner presented the checks for payment but
these were dishonored. This prompted the petitioner to initiate an action HELD:
against Moulic. First, under the 2 board resolutions, indeed Arsenio was authorized to
obtain a loan and sign any document related to the securing of the loan.
HELD: The question is whether the deeds of assignment signed by Arsenio was
A prima facie presumption exists that a holder of a negotiable instrument is within the ambits of his authority.
a holder in due course. The burden of proving that State is not a holder in
due course is upon Moulic. In this regard, she failed to do so. The deeds of assignment enabled Great Asian to generate instant cash,
with checks which were not due and demandable then.

Page 112 of 190
In the financing industry, a discounting line means a credit facility with a

financing bank or company, which allows a business entity to sell, on a (b) Where the indorser is the person to whom the instrument is
continuing basis, its accounts receivable at a discount. The term discount presented for payment;
means the sale of a receivable at less than its face value. The purpose of
discounting line is to enable a business entity to generate instate cash out (c) Where the instrument was made or accepted for his
of its receivables which are still to mature at future debts. The financing accommodation.
company or bank which buys the receivables makes its profits out of the
difference between the face value of the receivable and the discounted WHEN NOTICE RELATIVELY EXCUSED
price. 1. Where he has knowledge of the dishonor by means other than
through a formal notice, as when he is both the drawee and
Clearly, the discounting arrangements entered into by Arsenio were the drawer or when presentment is made to him
same arrangements authorized under the board resolutions. 2. Where he has no reason to expect that the instrument will be
honored, as when he has countermanded payment or where the
Second, on the issue of breach of contract, Bancasia alleged that Great drawee is fictitious or without capacity to contract
Asian committed a breach. In the deeds of assignment, it was stipulated
that there is a vital suspensive condition—in case the drawers fail to pay NO RIGHT TO EXPECT OR REQUIRE PAYMENT AS TO DRAWER
the checks on maturity, Great Asian obligated itself to pay Bancasia the full 1. Where the drawer of the check has no account with the drawee
face value of the dishonored checks, including penalties and other costs. bank
Failure to pay would give rise to the obligation to pay Bancasia. 2. When the drawer of a check payable abroad has no funds with the
drawee bank to meet it
Great Asian and Bancasia agreed on this specific with recourse stipulation, 3. When the knowledge that previous drafts on the same consignee
despite that the receivables were negotiable instruments. The contracting had been dishonored.
parties are allowed such stipulation in addition to the warranties of an • In the foregoing, the drawer has no right to receive notice of dishonor
indorser under the NIL. The explicit with recourse stipulation against Great
Asian enlarges the liability of Great Asian beyond that of a mere indorser of DRAWER HAS COUNTERMANDED PAYMENT
a negotiable instrument. Thus, whether or not Bancasia gives notice of • A drawer tells drawee B not to pay the bill. F holder need not give
dishonor to Great Asian, the latter remains liable because of the with notice to A drawer. An allegation that payment of a check had been
recourse stipulation. countermanded is sufficiently set out where the check was set forth
with the indorsement across the face “Payment stopped”
The recourse of Bancasia to file an action for breach of contract doesn’t
leave Great Asian with an empty bag. It is then subrogated back as DRAWEE FICTITIOUS, ETC. MUST BE MADE KNOWN AS TO INDORSERS
creditor of the receivables. Great Asian can now proceed against the • The indorser must be aware of the fact that the drawee is fictitious or
drawers who issued the checks. Even if there was no timely notice of not having capacity to contract. Otherwise, notice of dishonor must be
dishonor, Great Asian is not prejudiced. A notice of dishonor is not given to such indorser to charge him. But the fact that that the
required if the drawer has no right to expect or require the bank to honor indorser knew the maker to be insolvent or that the instrument was
the check, or if the drawer has countermanded payment. dishonored doesn’t dispense with the necessity of notice
Sec. 115. When notice need not be given to indorser. — Notice of Sec. 116. Notice of non-payment where acceptance refused. -
dishonor is not required to be given to an indorser in either of the Where due notice of dishonor by non-acceptance has been given,
following cases: notice of a subsequent dishonor by non-payment is not necessary
unless in the meantime the instrument has been accepted.
(a) When the drawee is a fictitious person or person not having
capacity to contract, and the indorser was aware of that fact at the ILLUSTRATION
time he indorsed the instrument; • Note is payable on December 31, 1950

Page 113 of 190
• F the holder presents it for acceptance to X drawee on December 1, f. As to a holder in due course without notice
1950
• X refuses to accept the bill Sec. 118. When protest need not be made; when must be made. -
• F then gives notice of dishonor to drawer A and to the indorsers B, C, Where any negotiable instrument has been dishonored, it may be
D and E protested for non-acceptance or non-payment, as the case may be;
• Under section 151, there is no necessity for presentment for payment but protest is not required except in the case of foreign bills of
and under this section, need not give a notice of dishonor by non- exchange.
payment
• But suppose X drawee accepts the bill on December 15. F must then WHEN PROTEST NECESSARY
present the bill for payment to X on December 31. If X refuses to pay, • Protest is necessary with regard foreign bills of exchange
F must give notice of dishonor to A, B, C, D, and E in order to charge • Mere fact of protest is not conclusive upon the dishonor of the
them, as in the meantime the instrument has been accepted. instrument and due notice to the indorser; other evidence is
competent on these questions
Sec. 117. Effect of omission to give notice of non-acceptance. - An • While protest is not required in cases of promissory notes and inland
omission to give notice of dishonor by non-acceptance does not bills, it is usual to protest these instruments also when dishonored
prejudice the rights of a holder in due course subsequent to the since the notary’s certificate of protest is the most convenient and
omission. certain mode of proving the facts
ILLUSTRATION
NOTES FOR WEEK #11
PAY TO B OR ORDER P1000.
SEPTEMBER 3 - 7, 2007
SGD. A
TO: X VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS
*BCDEFG (holder in due course)
*F, when the instrument was still in his hands, presented the bill for Sec. 119. Instrument; how discharged. - A negotiable instrument is
acceptance to X and the latter refuses to accept the bill. F fails to give discharged:
notice to B, C, D, and E.
*B, C, D, E are not discharged with regard to G because omission to give (a) By payment in due course by or on behalf of the principal
notice of dishonor by non-acceptance doesn’t prejudice the rights of a debtor;
holder in due due course subsequent to the omission.
(b) By payment in due course by the party accommodated,
SUMMARY AS TO NOTICE OF DISHONOR where the instrument is made or accepted for his accommodation;
1. Like presentment for payment, notice of dishonor need not be
given to persons primarily liable in order to charge them (c) By the intentional cancellation thereof by the holder;
2. But aside from presentment for payment to persons primarily
liable, notice of dishonor to persons secondarily liable is necessary (d) By any other act which will discharge a simple contract for
to charge the latter except— the payment of money;
a. When notice is waived
b. When dispensed with under Section 112 (e) When the principal debtor becomes the holder of the
c. As to drawer, under Section 114 instrument at or after maturity in his own right.
d. As to indorser, under Section 115
e. Where due notice of dishonor by non-acceptance has PAYMENT BY PRINCIPAL DEBTOR
been given

Page 114 of 190
• In order to discharge the instrument, the payment must be a payment must be specified; and that an objection to tender on one ground is a
in due course, and second, a payment made by the principal debtor waiver of all other objections which could have been made at that time
• If payment is made before the date of maturity, the instrument is not • It is ordinarily required of one to whom payment is offered in the form
discharged as the payment is not in due course of a check, that he makes his objection at the time of the offer of by
• Where payment is made by a party who is not a primary obligor or an check instead of an offer of payment in money
accommodation party, his payment only conceals his own liability and • Reason for the rule—to afford the debtor the opportunity to secure the
those who are obligated after him. All prior parties primarily or specific money which the law prescribes shall be accepted in payment
secondarily liable on the bill, are liable to such a payer, and the payer of debts
may cancel indorsements subsequent to his own and reissue the
paper, and it will be valid as against the prior parties PAYMENT BY ACCOMMODATED PARTY
• The one ultimately liable on the accommodation instrument is the
PAYMENT BY THIRD PERSONS latter
• If payment is made by a third person, the instrument is not discharged • Hence, his payment in due course discharges the instrument as if
because payment is not made by the person principally liable payment was made by the principal debtor under paragraph (a)
• Not any one who desires may pay the instrument and then recover of
the maker. He must be a person who has in some way made himself INTENTIONAL CANCELLATION
liable for the payment of the instrument. • The cancellation must be intentional and made by the holder
• Exception: where an instrument has been protested and someone • There must be an intention to cancel a negotiable instrument by the
voluntarily makes payment supra protest or for honor. And if the holder thereof as such intention is an essential element of discharge
instrument was to give money in payment, the instrument is on a negotiable instrument and a negotiable note in a torn condition is
discharged. presumed cancelled by the holder thereof
SUMMARY OF DISCHARGE BY PAYMENT WILL AN EXTENSION OF TIME GRANTED BY THE HOLDER TO THE DEBTOR
1. Payment by a person ultimately liable, whatever his position in the DISCHARGE THE INSTRUMENT?
paper, is a discharge of the instrument • No, according to the majority view
2. Payment by an accommodation party isn’t a discharge of the • Because while it isn’t omitted in Section 120, it is omitted in Section
instrument, whatever his position thereon and whether the 119
indorsement be regular or anomalous • Shows the legislative intent to that an extension of time by the holder
3. Payment by the drawer or indorser is not a discharge of the instrument will not discharge the instrument
PRINCIPAL DEBTOR PRINCIPAL DEBTOR ACQUIRES INSTRUMENT

• Person ultimately bound to pay the debt • Reacquisition must be by the principal debtor and in his own right at or
after the date of maturity
PAYMENT BY CHECK OR OTHER NEGOTIABLE PAPER • In his own right—not in a representative capacity
1. When they actually have been cashed or
2. When, through the fault of the creditor, they have been impaired WHEN INSTRUMENT REACQUIRED BEFORE MATURITY
• A creditor isn’t bound to accept a check in satisfaction of his demand • A reacquisition by the principal debtor in his own right but before
because a check, even if good when offered, doesn’t meet the maturity will not discharge the instrument
requirements of legal tender • It will merely be a negotiation back to the principal debtor
WAIVER OF OBJECTION TO TENDER OF PAYMENT BY CHECK DISCHARGE BY OPERATION OF LAW

• It is the general rule that an object to a tender must, to be available to
the creditor, be made in good time and that the grounds for objection CASE DIGESTS: SECTION 119

Page 115 of 190
147 STATE INVESTMENT HOUSE V. CA The note covered for Alegre’s placement plus interest. On the maturity of
217 SCRA 32 the note, petitioner issued a check payable to Alegre, covering the whole
amount due. It was drawn from petitioner’s current account in BPI. When
FACTS: the wife of Alegre tried to deposit the check, the bank dishonored the
Moulic issued checks as security to Victoriano, for pieces of jewelry to be check. Petitioner was notified of this matter and Alegre demanded the
sold on commission. Moulic failed to sell the pieces of jewelry, so she immediate payment in cash. In turn, petitioner promised to replace the
returned them to Victoriano. The checks however could not be recovered check on the impossible premise that the first issued be returned to them.
by Moulic as these have been discounted already in favor of petitioner. This prompted Alegre to file a complaint against petitioner and petitioner in
Consequently, before the maturity dates, Moulic withdrew her funds from turn, filed a case against BPI for allegedly unlawfully deducting from its
her account. Thereafter, petitioner presented the checks for payment but account counterfeit checks. The trial court decided in favor of Alegre.
these were dishonored. This prompted the petitioner to initiate an action
against Moulic. ISSUE: W/N NIL is applicable to the money market transaction held
between petitioner and Alegre?
HELD:
A prima facie presumption exists that a holder of a negotiable instrument is HELD:
a holder in due course. The burden of proving that State is not a holder in Considering the nature of the money market transaction, Article 1249 of
due course is upon Moulic. In this regard, she failed to do so. the CC is the applicable provision should be applied. A money market has
been defined to be a market dealing in standardized short-term credit
The evidence shows that the dated checks were complete and regular; instruments where lenders and borrowers don’t deal directly with each
petitioner bought the checks from Victoriano before their due dates; it took other but through a middleman or dealer in the open market. In a money
the checks in good faith and for value; and it was never informed nor made market transaction, the investor is the lender who loans his money to a
aware that these checks were merely issued to payee as security. borrower through a middleman or dealer.
Consequently, State is a holder in due course. Moulic cannot set up the In the case at bar, the transaction is in the nature of a loan. Petitioner
defense that there was failure or want of consideration. It can only invoke accepted the check but when he tried to encash it, it was dishonored. The
the defense if State was a privy to the purpose for which they were issued holder has an immediate recourse against the drawer, and consequently
and therefore is not a holder in due course. could immediately file an action for the recovery of the value of the check.
Further, in a loan transaction, the obligation to pay a sum certain in money
Furthermore, the mere fact that the checks were issued as security is not may be paid in money, which is the legal tender or, by the use of a check.
sufficient ground to discharge the instrument as against a holder in due A check is not legal tender, and therefore cannot constitute valid tender of
course. payment.
And also, Moulic was responsible for the dishonor of her checks. She Sec. 120. When persons secondarily liable on the instrument are
withdrew her funds from her account and could not have expected her discharged. - A person secondarily liable on the instrument is
checks to be honored by then. discharged:
(a) By any act which discharges the instrument;

148 CEBU INTERNATIONAL V. CA
316 SCRA 488 (b) By the intentional cancellation of his signature by the
holder;
FACTS:
Petitioner is a quasi-banking institution involved in money market (c) By the discharge of a prior party;
transactions. Alegre invested with petitioner P500,000. Petitioner issued
then a promissory note, which would mature approximately after a month. (d) By a valid tender or payment made by a prior party;

Page 116 of 190
money which he considers and admits to be due, in satisfaction of

(e) By a release of the principal debtor unless the holder's right such claim or demand without any stipulation or condition
of recourse against the party secondarily liable is expressly
reserved; RELEASE OF PRINCIPAL DEBTOR
• If the holder F discharges A maker, the parties secondarily liable, B, C,
(f) By any agreement binding upon the holder to extend the D, E are also discharged, as this discharges the instrument and two, it
time of payment or to postpone the holder's right to enforce the deprives them of their right of recourse against A maker.
instrument unless made with the assent of the party secondarily • But if on releasing A, F reserves his right of recourse against the
liable or unless the right of recourse against such party is expressly indorsers, then they are not discharged. The effect of such reservation
reserved. is the implied reservation of their right of recourse against A. In other
words, while the holder cannot hold A liable, he can hold B, C, D, and
EFFECT OF SECTION 120 IS A SURETYSHIP E liable, but they in turn can hold A liable should any of them be made
• Generally the courts regard this provision as exclusive, as a complete to pay F. This reservation of the right of recourse cannot be implied
codification of the law of discharge of secondary parties by the six from acts and conduct but must be express.
methods therein set forth
RELEASE MUST BE ACT OF HOLDER
ACTS DISCHARGE INSTRUMENT
• Any of the acts that will discharge an instrument under Section 119 RELEASE MUST BE FOR VALUE
will discharge a party secondarily liable thereon, such as payment in
due course by the maker. This will discharge the indorsers in the note. EFFECT OF RELEASE ON ACCOMMODATION MAKER OR ACCEPTOR
• General rule is that he is not discharged by the holder’s release of the
INTENTIONAL CANCELLATION principal debtor even if the release be made with knowledge or true
• A, maker B, payee relation of the parties and, conversely, the release of the
• BCDEF accommodation maker or acceptor doesn’t discharge the principal
• F then successively cancels the signature of D. D is discharged. debtor through the latter occupies the position of a party secondarily
• No consideration is necessary to support a discharge by intentional liable on the instrument
cancellation of an indorser’s signature by the holder.
EXTENSION OF TIME
DISCHARGE OF PRIOR PARTY • If the holder agrees to extend the time of payment, the indorsers are
• The intentional cancellation of D’s signature also discharges E, as D is discharged
a prior party to E • However, where the extension of time is consented to by the party
• And according to this paragraph, the discharge of a prior party secondarily liable, he is not discharged. Also, where the holder
discharges parties subsequent thereto. expressly reserves his right of recourse against the party secondarily
liable, the latter is not discharged.
DISCHARGE BY OPERATION OF LAW IS NOT INCLUDED
1. Discharge by reason of bankruptcy REQUISITES OF AGREEMENT FOR EXTENSION OF TIME
2. Discharge of a party not given due notice of dishonor 1. It must be a binding contract, supported by valuable consideration
3. Discharge by the statute of limitations and for a definite period
2. It must be made with the principal debtor and not with a third
VALID TENDER OF PAYMENT party
• If D an indorser validly tenders payment and F unjustifiably
refuses to do accept, D is discharged Sec. 121. Right of party who discharges instrument. - Where the
• Tender of payment: act by which one produces and offers to a instrument is paid by a party secondarily liable thereon, it is not
person holding a claim or demand against him the amount of discharged; but the party so paying it is remitted to his former

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rights as regard all prior parties, and he may strike out his own and or after its maturity. An absolute and unconditional renunciation of
all subsequent indorsements and against negotiate the instrument, his rights against the principal debtor made at or after the maturity
except: of the instrument discharges the instrument. But a renunciation
does not affect the rights of a holder in due course without notice.
(a) Where it is payable to the order of a third person and has A renunciation must be in writing unless the instrument is
been paid by the drawer; and delivered up to the person primarily liable thereon.
(b) Where it was made or accepted for accommodation and has APPLICATION OF SECTION 122
been paid by the party accommodated. 1. Applies only to renunciation by the unilateral act of the holder without
consideration and in cases where the instrument is not delivered up to
ILLUSTRATION OF SECTION 121 the person intended to be released
• A is the drawer of the bill addressed to X, drawee, payable to the order 2. Renunciation—act of surrendering a right or claim without recompense
of B. but it can be applied with equal propriety to the relinquishing of a
• BCDEF demand upon an agreement supported by a consideration
• Suppose D pays the bill. What are the effects?
o The first effect: instrument is not discharged but it discharges FORM OF RENUNCIATION
D.  It must be in writing and must be express
o Second effect: D is remitted to his former rights against
parties prior to him, such as A, B and C. If D was formerly a TIME FOR MAKING RENUNCIATION
holder in due course, even if at the time of payment he had 1. Before maturity
already notice of defects of title, he can enforce his rights 2. At maturity
against any of them free from defenses, as he is remitted to 3. After maturity
his former rights. But it is a well-known rule of law that if the
original payee of a note unenforceable for lack of WHEN RENUNCIATION DISCHARGES INSTRUMENT
consideration repurchases the instrument after transferring it 1. Renunciation discharges the instrument when it is absolute and
to a holder in due course, the paper again becomes subject in unconditional
the payee’s hands to the same defenses to which it would 2. It is made in favor of the person primarily liable
have been subject if the paper had never passed through the 3. It is made at or after maturity
hands of a holder in due course.
o Third effect: D can strike out his indorsement and the Sec. 123. Cancellation; unintentional; burden of proof. - A
subsequent indorsements of E and F cancellation made unintentionally or under a mistake or without
o Fourth effect: D can renegotiate the instrument the authority of the holder, is inoperative but where an instrument
or any signature thereon appears to have been cancelled, the
EXCEPTIONS TO RIGHT TO RENEGOTIATE burden of proof lies on the party who alleges that the cancellation
1. If instead of D, it is A drawer who pays and as the bill is payable was made unintentionally or under a mistake or without authority.
to the order of a third person, B, A can no longer negotiate the
instrument MEANING OF CANCELLATION
2. Or if B payee is an accommodated party, and B pays, he cannot  Signifies not only the drawing of criss-cross lines but also tearing,
negotiate the bill, as B is the ultimate party to pay it, and he obliterations, erasures or burning
doesn’t have a right of recourse against either X drawee or A  It may be made by any other means by which the intention to cancel
drawer the instrument may be evident
Sec. 122. Renunciation by holder. - The holder may expressly WHEN CANCELLATION IS INOPERATIVE
renounce his rights against any party to the instrument before, at, 1. When made unintentionally

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2. When made under mistake  A draft drawn by the seller on the purchaser of goods sold and
3. When made without the authority of the holder accepted by such purchaser
 States upon its face that the obligation of the acceptor arises out of
BURDEN OF PROOF IS UPON THE PERSON WHO CLAIMS THAT THE purchase of goods from the drawer
CANCELLATION IS INOPERATIVE  Arises from credit obligations arising from the sale of goods and must
have a definite maturity
Sec. 126. Bill of exchange, defined.
A bill of exchange is an unconditional order in writing addressed by HOW TRADE ACCEPTANCE HANDLED
one person to another, signed by the person giving it, requiring the  The seller sends with the goods or the invoice a filled-in trade
person to whom it is addressed to pay on demand or at a fixed or acceptance form, often in duplicate to enable the buyer to retain a
determinable future time a sum certain in money to order or to copy for his files
bearer.  The buyer accepts the bill by signing his name across its face, with
date, designating the bank where it is payable
TYPES OF BILLS OF EXCHANGE  It is returned to the seller who may hold it at maturity or may discount
1. Draft it at the bank
2. Trade acceptance  At maturity, it is collected exactly as if it were a check
3. Banker’s acceptance  Usually, the buyer of goods is given a cash discount and other options
4. Treasury warrants beside the acceptance privilege
5. Money orders
6. Clean bills of exchange BANKER’S ACCEPTANCE
7. Documentary bill of exchange  Draft of which the acceptor is a bank or banker engaged generally in
8. D/A bills of exchange the business of granting banker’s acceptance credit
9. D/P bills of exchange  Similar to a trade acceptance
10. Time or usance bills  Drawn against the bank instead of the buyer
11. Bills in set
12. Inland bills ILLUSTRATIONS OF THE USE OF BANKER’S ACCEPTANCE
13. Foreign bills 1. B importer makes an application with PNB for the issuance to A
exporter of a letter of credit, if the PNB is satisfactory to A
DRAFT exporter. B the originator of the letter of credit is variously called
 Common term for all bills of exchange and they are used the accredited buyer, consignee, or the account of the importer.
synonymously The PNB is called the opening bank while A is termed the
beneficiary.
IN BANK DRAFTS, DRAWER AND DRAWEE BANK ARE LIABLE TO 2. If PNB is willing, it issues the letter either by mail or by cable. If
PURCHASER OF DRAFT FOR NOT COMPLYING WITH HIS INSTRUCTIONS by cable, PNB instructs its correspondent bank in NYC to notify A.
 The drawee bank acting as “payor” bank is solely liable for acts not Such respondent bank is called the notifying bank. If by mail,
done in accordance with the instructions of the drawer bank or of the PNB can send directly to A or B.
purchaser of the draft 3. A then draws a draft or bill of exchange against the PNB pursuant
 The drawee bank has the burden of proving that it didn’t violate to the letter of credit. When A ships the goods to B, A receives
the bill of lading from the shipping company. He attaches this
TRADE ACCEPTANCE document to the draft or bill of exchange. The draft with the
 A bill of exchange payable to order and at a certain maturity, drawn by document attached is called the documentary bill and so long as
a seller against the purchaser of goods as drawee, for a fixed sum of the document is attached to the bill, the holder of the bill has title
money, showing on its face the acceptance of the purchaser of goods to the goods and is protected to the value thereof.
and that it has arisen out of a purchase of goods by the acceptor

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TRUST RECEIPT  Documents against acceptance bill: is a time bill to which are attached
 The written or printed document signed by the entrustee in favor of documents to be delivered and surrendered to the drawee when he
the entruster containing terms and conditions substantially complying accepts the bill
with the provisions of this decree
 The legal title to the matter entrusted remains in the entruster but the TIME OR USUANCE BILLS
entruster gives to the trustee a form of title which is good and legal  Sight bills are bills which are payable upon presentation or at sight or
against everybody except the entruster demand
 Entrustee—the person having or taking possession of goods,  Time or usuance bills are bills which are payable at a fixed furture time
documents or instruments under a trust receipt transaction, and any or at a determinable future time
successor in interest of such person for the purpose or purposes
specified in the trust receipt agreement CASE DIGESTS: SECTION 126
 Entruster—person holding title over the goods, documents, or
instruments subject of a TRA and any successor-in-interest of such 149 CITYTRUST BANKING CORPORATION V. CA
person 196 SCRA 553
TREASURY WARRANTS FACTS:

 Bearing on its face the words payable from the appropriation for food Samara purchased from Cititrust a bank draft, the payee being Thai
administration is actually an order for payment out of a particular fund Airways and the corresponding bank in the US is Marine Midland. Later on,
and is not unconditional and doesn’t fulfill one of the essential Samara executed a stop payment order of the bank draft, instructing
requirements of a negotiable instrument Citytrust to inform Marine Midland about the order through telex. Cititrust
informed Marine Midland the next day and followed it up by cable, which
MONEY ORDER the latter bank acknowledged to have received the order and stopped
 Species of draft drawn by the post office upon another for the amount payment of the bank draft. Thereafter, the account of Samara was
of money deposited at the first office by the person purchasing the credited but was debited again after knowing that Midland had debited its
money order and payable at the second office to a payee named in the account. This is despite that it admitted to not have paid the bank draft.
order
 Being under the restrictions and limitation which postal laws and On the first appeal on a different issue, it was held that petitioner and
regulations place on them and which are inconsistent with the Midland were solidarily liable to Samara but it was Midland which was
character of negotiable instruments, postal money orders are not ultimately liable to pay for damages—it had to reimburse petitioner for
negotiable whatever amount it would pay Samara.
CLEAN AND DOCUMENTARY BILLS OF EXCHANGE HELD:

 Clean bill of exchange is one to which are not attached documents of The defenses of petitioner and Marine Midland are distinct with each other.
title to be delivered to the person against whom the bill is drawn when They were not in privity with each other in a transaction involving payment
he either accepts or pays the bill of a bank draft. A bank draft is a bill of exchange drawn by a bank upon
 Documentary bill of exchange is one to which are attached documents its corresponding bank issued at the solicitation of a stranger who
of title to be delivered and surrendered to the drawee when he accepts purchases and pays therefor. It is also defined as an order for payment of
or pays the bill money.
D/A AND D/P BILLS OF EXCHANGE In the case at bar, petitioner from which Samara purchased the bank draft,
 Documents against payment bill: is a sight or time bill to which are was the drawer of the draft through which it ordered Marine Midland, the
attached documents to be delivered and surrendered to the drawee drawee bank to pay the amount of $40,000 in favor of Thai Airways. The
when he has paid the corresponding bill drawee bank acting as a payor bank is solely liable for acts not done in
accordance with the instructions of the drawer bank or of the purchaser of

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the draft. The drawee bank has the burden of proving that it didn’t violate. SEPTEMBER 10 - 14, 2007
Meanwhile, the drawer, if sued by the purchaser of the draft is liable for
the act of debiting the customer’s account despite an instruction to stop LETTERS OF CREDIT
payment. The drawer has the duty to prove that he complied with the
order to inform the drawee. NATURE AND IMPORTANCE
 A letter of credit is a financial device developed by merchants as a
Meanwhile, if the drawer is sued by the purchaser of the draft, he is liable convenient and relatively safe mode of dealing with sales of goods to
for the act of debiting the customer’s account despite an instruction to stop satisfy the seemingly irreconcilable interests of the seller, who refuses
payment. The drawer has the burden of proving that he complied with the to part with his goods before he is paid, and a buyer, who wants to
order to inform the drawee to stop payment. So, we see that the liabilities have control of the goods before paying
and obligations of the two parties are different, and their defenses are also  To break the impasse, the buyer may be required to contract a bank to
different. issue a letter of credit, the issuing bank can authorize the seller to
draw drafts and engage to pay them upon their presentment
Since their rights are not so interwoven, the appeal by Marine Midland of simultaneously with the tender of documents required by the letter of
the decision cannot generally affect the case as regards Citytrust, which credit. The buyer and seller agree on what documents are to be
failed to appeal. As a matter of strict procedure, therefore, the decision on presented for payment, but ordinarily they are documents of title
the appeal by Marine Midland should not apply to Citytrust. evidencing or attesting to the shipment of the goods to the buyer
 Once the letter of credit is established, the seller ships the goods to
However, the SC made an exception in this case and allowed the Marine the buyer and in the process secures the required shipping documents
Midland decision to apply to Citytrust as a matter of justice and equity, and documents of title. To get paid, the seller executes a draft and
since it would lead to an absurd situation wherein Samara can claim an presents it together with the required documents to the issuing bank
even bigger amount if it chooses to collect from Citytrust who was not even  The issuing bank redeems the draft and pays cash to the seller if it
the proximate cause of the loss. finds that the documents submitted by the seller conform with what
the letter of credit requires. The bank then obtains possession of the
150 PHIL. BANK OF COMMERCE V. ARUEGO documents upon paying the seller. The transaction is completed when
102 SCRA 530 the buyer reimburses the issuing bank and acquires the documents
entitling him to the goods. The seller gets paid only if he delivers the
FACTS: documents of title over the goods while the buyer acquires the said
Aruego, on behalf of World Current Events, entered into a Credit documents and control over the goods only after reimbursing the
Agreement with PBCom, for the publication of the company’s periodicals. bank.
At every printing endeavor by the printing press, a bill of exchange is
drawn against PBCom. The instruments are signed by Aruego, without any INDEPENDENCE PRINCIPLE
indication that he is an agent of World Current Events. When he was being  What characterizes letters of credit, as distinguished from other
held liable by PBCom, he averred that he only signed the instrument in the accessory contract, is the ENGAGEMENT OF THE ISSUING BANK TO
capacity of agent of the company. PAY THE SELLER ONCE THE DRAFT AND THE REQUIRED SHIPPING
DOCUMENTS ARE PRESENTED TO IT. In turn, this arrangement
HELD: ASSURES THE SELLER OF PROMPT PAYMENT, INDEPENDENT OF ANY
An inspection of the drafts accepted by the defendant would show nowhere BREACH OF THE MAIN SALES CONTRACT.
that he has disclosed that he was signing in representation of the Philippine
Education Foundation Company. He merely signed his name. For failure to LAWS GOVERNING A LETTER OF CREDIT TRANSACTION
disclose his principal, Aruego was personally liable for the drafts he  Uniform Customs and Practice for Documentary Credits (UCP) issued
accepted by the International Chamber of Commerce
NOTES: WEEK #12 PARTIES TO A LETTER OF CREDIT TRANSACTION

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1. Buyer—procures the letter of credit and obliges himself to jointly, thus giving the beneficiary or a holder for value of drafts drawn
reimburse the issuing bank upon receipt of the documents of title. under the credit, the right to proceed against either or both banks, the
He is the one initiating the operation of the transaction as buyer of moment the credit instrument has been breached.
the merchandise and also of the credit instrument. His contract  The paying bank on which the drafts are to be drawn it may be the
with the bank which is to issue the instrument and is represented issuing bank or the advising bank. If the beneficiary is to draw and
by the Commercial Credit Agreement form which he signs, receive payment in his own currency, the advising bank may be
supported by the mutually made promises contained in the indicated as the paying bank also. When the draft is to be paid in this
agreement manner, the paying bank assumes no responsibility but merely pays
2. Opening bank—usually the buyer’s bank which issues the letter of the beneficiary and debits the payment immediately to the account
credit and undertakes to pay the seller upon receipt of the draft which the issuing bank has with it. IF THE ISSUING BANK HAS NO
and proper documents of titles to surrender the documents to the ACCOUNT WITH THE PAYING BANK, the paying bank reimburses itself
buyer upon reimbursement. As it is the one issuing the by drawing a bill of exchange on the issuing bank, in dollars, for the
instrument, it should be a strong bank, well known and well equivalent of the local currency paid to the beneficiary, at the buyeing
regarded in international trading circles. rate for dollar exchange. The beneficiary is entirely out of the
3. Seller—in compliance with the contract of sale, ships the goods to transaction because his draft is completely discharged by the payment,
the buyer and delivers the documents of title and draft to the and the credit arrangement between the paying bank and issuing bank
issuing bank to recover payment. He is also the beneficiary of the doesn’t concern him.
credit instrument because the instrument is addressed to him and  If the draft contemplated by the credit instrument, is to be drawn on
is in his favor. While the bank cannot compel the seller to ship the issuing bank or on other designated banks not in the city of the
the goods and avail of the benefits of the instruments, however, seller, any bank in the city of the seller which buys or discounts the
the seller may recover from the bank the value of his shipment is draft of the beneficiary becomes a negotiating bank. As a rule,
made within the terms of the instrument, even though he hasn’t whenever, the facilities of an advising or notifying bank are used, the
given the bank any direct consideration for the bank’s promises beneficiary is apt to offer his drafts to the advising bank for
contained in the instrument negotiation, thus giving the advising bank the character of a
4. Correspondent bank/advising bank—to convey to the seller the negotiating bank becomes an endorser and bona fide holder of the
existence of the credit or a confirming bank which will lend drafts and within the protection of the credit instrument. It is also
credence to the letter of credit issued by the lesser known issuing protected by the drawer’s signature, as the drawer’s contingent
bank or paying bank which undertakes to encash the drafts drawn liability, as drawer, continues until discharged by the actual payment
by the exporter. Furthermore, another bank known as the of the bills of exchange.
negotiating bank may be approached by the buyer to have the
draft discounted instead of going to the place of the issuing bank LIABILITY IN COMMERCIAL CREDIT TRANSACTIONS
to claim payment  A commercial bank which departs from what has been stipulated under
the letter of credit, as when it accepts a faulty tender, acts on its own
RESPONSIBILITIES OF BANKS IN COMMERCIAL CREDIT TRANSACTIONS risk, and it may not thereafter be able to recover from the buyer or
 If the beneficiary is to be advised by the issuing bank by cable, the issuing bank, as the case may be, the money thus paid to the
services of an ADVISING OR NOTIFYING BANK must always be utilized beneficiary
 The responsibility of the NOTIFYING BANK is merely to convey or  In the case of a discounting arrangement, wherein a negotiating bank
transmit to the seller or beneficiary the existence of the credit. pays the draft of a beneficiary of a letter of credit in order to save such
However, if the beneficiary requires that the obligation of the issuing beneficiary from the hardship of presenting the documents directly to
bank shall also be made the obligation of the bank to himself, there is the issuing bank, the negotiating bank can seek reimbursement of
what is known as a CONFIRMED COMMERCIAL CREDIT and the bank what has been paid to the beneficiary who as drawer of the draft
notifying the beneficiary of the credit shall become a CONFIRMING continues to assume a contingent liability thereon. Thus, the
BANK. In this case, the liability of the confirming bank is primary and negotiating bank has the ordinary right of recourse against the seller
it is as if the credit were issued by the issuing and confirming banks or beneficiary in the event of dishonor by the issuing bank.

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the buyer’s credit standing transmits a letter of credit by

PROTOTYPE EXPORT TRANSACTION cable to the confirming bank. This confirming bank will
1. PROFORMA INVOICE—all the particulars for the proposed then deliver to seller a document advising the latter that
shipment which are then known to the buyer the issuing bank opened a letter of credit in its favor and
2. PRICE QUOTATION FAS AND CIF—FAS stands for “free along side” adding the confirming bank’s confirmation. In this
which means that the seller will be responsible for the cost and arrangement, the seller is assured of payment of its sight
risks of the goods “along side” an overseas vessel at the stated drafts drawn on the confirming bank in the amount of the
location: the buyer bears the costs and risks from that point. CIF total amount of the sale, provided it presents the
on the other hand means “cost, freight and insurance”, that in documents called for in the letter of credit. An
exchange for this stated price, the seller undertakes not only to examination of the letter of credit will also reveal that the
supply the goods but also to obtain and pay for insurance and bill of lading is to be consigned to the order of the buyer’s
bear the freight charges to the stated pointy. bank, thereby giving the bank control over the goods,
3. BUYER’S PURCHASE ORDER with the consequent security for its claim against the
4. LETTER OF CREDIT buyer.
a. One way for a seller to be assured of payment is to ship 5. ACCEPTANE; SHIPMENT
goods under a negotiable bill of lading and arrange for a a. On the receipt of the confirmed letter of credit, the seller
bank in buyer’s city to hold the bill of lading until the will send the order acknowledgment. This document will
buyer pays the draft in the usual foreign sale this repeat the description and price of the goods which has
arrangement for securing payment of the price is not also appeared on the proforma invoice and states the
adequate number and expiration date of the letter of credit.
b. In some situations, sellers may need assurance of b. Further, the arrival of the letter of credit is the go-signal
payment even before the time of payment. This problem for the seller to send the goods. The seller then prepares
arises in contracts which call for the manufacture of the COMMERCIAL INVOICE which provides a complete
goods to the buyer’s specifications. record of the transaction and is an important source of
c. Although the proforma invoice may not specify, the seller information to such interested parties as a bank
will expect the letter of credit to be confirmed by the discounting a draft or an underwriting extending
local bank in its location. But why does a local bank issuance.
confirm rather than issue a letter of credit? The bank c. As the time of shipment approaches, the seller will
that issues the letter of credit needs assurance that it will contact its forwarder and give its shipping instructions. It
be reimbursed by the buyer, on whose behalf it pays the will inform that to comply with the requirements of the
seller. The buyer’s bank can take steps to minimize or letter of credit, the bill of lading must be made to the
remove the hazards. It will receive the negotiable bill of order of the issuing bank. It will also send copies of the
lading controlling the goods which will provide security commercial invoice, a packing list, and a Shipper’s export
for the customer’s obligation to reimburse the bank; in declaration. When the forwarder receives these
addition, the buyer’s own bank can judge in the light of documents, he takes over all further documentation as
its knowledge of his financial standing whether added the agent of the shipper, the latter merely has to
security is needed and can insist on such security before dispatch the goods from the factory in accordance with
it issues the letter of credit the forwarder’s instructions.
d. To meet the seller’s letter of credit requirements, the d. The seller will then send the truck to the pier where they
buyer will request its bank to arrange for the issuance of are delivered to the ocean carrier’s receiving clerk who
a letter of credit which will comply with the terms of the signs the dock receipt. The dock receipt is a form
proforma invoice. The buyer will then sign a detailed supplied by the ocean carrier which contains information
application and agreement for commercial credit relevant to the shipping of the bearings such as the
prepared by the bank. The issuing bank, after approving number of the pier, and the name of the ship. The dock

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receipt is NON-NEGOTIABLE and serves as a temporary ARTICLE 1: Application of UCP

receipt for the goods until they are loaded on board.
e. The ocean carrier is soon ready to receive the cargo. The Uniform Customs and Practice for Documentary Credits, 1993
When the goods are loaded on board, the steamship line Revision, ICC Publication No. 50O, shall apply to all Documentary Credits
issues a bill of lading which, to comply with the letter of (including to the extent to which they may be applicable, Standby Letter(s)
credit, is CONSIGNED TO ORDER OF THE ISSUING BANK. of Credit) where they are incorporated into the text of the Credit. They are
The bill of lading is initially prepared by the forwarder on binding on all parties thereto, unless otherwise expressly stipulated in the
a form supplied by the ocean carrier, it sets forth the Credit.
markings and numbers of the packages, description of
the goods, and the number and weight of the packages. ARTICLE 2: Meaning of Credit
On its dorsal side, it will state that the goods are received
for shipment, but a statement FREIGHT PREPAID ON For the purposes of these Articles, the expressions "Documentary
BOARD is initiated by a representative of the steamship Credit(s)" and "Standby Letter(s) of Credit" (hereinafter referred to as
line after loading. The forwarder then delivers the bill of "Credit(s)"), mean any arrangement, however named or described,
lading and the commercial invoice to the seller. whereby a bank (the "Issuing Bank") acting at the request and on the
6. INSURANCE instructions of a customer (the "Applicant") or on its own behalf,
7. PAYMENT; THE DRAFT.
a. The confirming bank stated in their letter that the i. is to make a payment to or to the order of a third party (the
estimated CIF price would be “available by your drafts on "Beneficiary"), or is to accept and pay bills of exchange (Draft(s)) drawn by
us at sight” when accompanied by the listed documents the Beneficiary,
b. Seller accordingly draws a sight draft on the confirming
bank. The sight draft together with the commercial or
invoice, insurance certificate, full set of bills of lading,
and the packing list are presented to the confirming ii. authorizes another bank to effect such payment, or to accept and pay
bank. When the bank receives these documents, it such bills of exchange (Draft(s)),
issues its bank draft to seller’s order and transmits the
documents by air mail to issuing bank, which will or
reimburse the confirming bank.
c. The documents, sent by airmail, will reach the buyer’s iii. authorizes another bank to negotiate, against stipulated document(s),
bank well ahead of the ocean shipment. The time for provided that the terms and conditions of the Credit are complied with.
release of the documents to buyer and reimbursement to
the bank will depend upon the arrangement which was For the purposes of these Articles, branches of a bank in different countries
made between the bank and buyer when the letter of are considered another bank.
credit was initially established.
d. If the buyer plans to resell the goods, he may not be able ARTICLE 3: Credits v. Contracts
to reimburse the bank until the goods arrive and he
resells the goods. In this event, the issuing bank may A. Credits, by their nature, are separate transactions from the sales or
need to take further steps to secure its claim against the other contract(s) on which they may be based and banks are in no way
buyer. concerned with or bound by such contract(s), even if any reference
whatsoever to such contract(s) is included in the Credit. Consequently, the
ICC UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or
CREDITS (UCP 500) to fulfill any other obligation under the Credit, is not subject to claims or
defenses by the Applicant resulting from his relationships with the Issuing
GENERAL PROVISIONS AND DEFINITIONS Bank or the Beneficiary.

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ARTICLE 8: Revocation of a Credit

B. A Beneficiary can in no case avail himself of the contractual relationships
existing between the banks or between the Applicant and the Issuing Bank. A. A revocable Credit may be amended or canceled by the Issuing Bank at
any moment and without prior notice to the Beneficiary.
ARTICLE 4: Documents v. Goods/Services/Performances
B. However, the Issuing Bank must:
In Credit operations all parties concerned deal with documents, and not
with goods, services and/or other performances to which the documents i. reimburse another bank with which a revocable Credit has been made
may relate. available for sight payment, acceptance or negotiation for any payment,
acceptance or negotiation made by such bank prior to receipt by it of
FORM AND NOTIFICATION OF CREDITS notice of amendment or cancellation, against documents which appear on
their face to be in compliance with the terms and conditions of the Credit;
ARTICLE 6: Revocable v. Irrevocable Credits
ii. reimburse another bank with which a revocable Credit has been made
A. A Credit may be either available for deferred payment, if such a bank has, prior to receipt by it of
notice of amendment or cancellation, taken up documents which appear on
i. revocable, their face to be in compliance with the terms and conditions of the Credit.
or ARTICLE 9: Liability of Issuing and Confirming Banks
ii. irrevocable. A. An irrevocable Credit constitutes a definite undertaking of the Issuing

Bank, provided that the stipulated documents are presented to the
B. The Credit, therefore, should clearly indicate whether it is revocable or Nominated Bank or to the Issuing Bank and that the terms and conditions
irrevocable. of the Credit are complied with:
C. In the absence of such indication the Credit shall be deemed to be i. if the Credit provides for sight payment to pay at sight;
irrevocable.
ii. if the Credit provides for deferred payment to pay on the maturity
ARTICLE 7: Advising Bank's Liability date(s) determinable in accordance with the stipulations of the Credit; iii. if
the Credit provides for acceptance;
A. A Credit may be advised to a Beneficiary through another bank (the
"Advising Bank") without engagement on the part of the Advising Bank, but a. by the Issuing Bank to accept Draft(s) drawn by the Beneficiary on the
that bank, if it elects to advise the Credit, shall take reasonable care to Issuing Bank and pay them at maturity,
check the apparent authenticity of the Credit which it advises. If the bank
elects not to advise the Credit, it must so inform the Issuing Bank without or
delay.
b. by another drawee bank to accept and pay at maturity Draft(s) drawn
B. If the Advising Bank cannot establish such apparent authenticity it must by the Beneficiary on the Issuing Bank in the event the drawee bank
inform, without delay, the bank from which the instructions appear to have stipulated in the Credit does not accept Draft(s) drawn on it, or to pay
been received that it has been unable to establish the authenticity of the Drafts(s) accepted but not paid by such drawee bank at maturity;
Credit and if it elects nonetheless to advise the Credit it must inform the
Beneficiary that it has not been able to establish the authenticity of the iv. if the Credit provides for negotiation to pay without recourse to drawers
Credit. and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or
document(s) presented under the Credit. A Credit should not be issued

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available by Draft(s) on the Applicant. If the Credit nevertheless calls for D. i. Except as otherwise provided by Article 48, an irrevocable Credit can
Draft(s) on the Applicant, banks will consider such Draft(s) as an additional neither be amended nor canceled without the agreement of the Issuing
document(s). Bank, the Confirming Bank, if any, and the Beneficiary.
B. A confirmation of an irrevocable Credit by another bank (the "Confirming ii. The Issuing Bank shall be irrevocably bound by an amendment(s) issued
Bank") upon the authorization or request of the Issuing Bank, constitutes a by it from the time of the issuance of such amendment(s). A Confirming
definite undertaking of the Confirming Bank, in addition to that of the Bank may extend its confirmation to an amendment and shall be
issuing Bank, provided that the stipulated documents are presented to the irrevocably bound as of the time of its advice of the amendment. A
Confirming Bank or to any other Nominated Bank and that the terms and Confirming Bank may, however, choose to advise an amendment to the
conditions of the Credit are complied with: Beneficiary without extending its confirmation and if so, must inform the
Issuing Bank and the Beneficiary without delay.
i. If the Credit provides for sight payment to pay at sight;
iii. The terms of the original Credit (or a Credit incorporating previously
ii. if the Credit provides for deferred payment to pay on the maturity accepted amendment(s)) will remain in force for the Beneficiary until the
date(s) determinable in accordance with the stipulations of the Credit; Beneficiary communicates his acceptance of the amendment to the bank
that advised such amendment. The Beneficiary should give notification of
iii. if the Credit provides for acceptance: acceptance or rejection of amendment(s). If the Beneficiary fails to give
such notification, the tender of documents to the Nominated Bank or
a. by the Confirming Bank to accept Draft(s) drawn by the Beneficiary on Issuing Bank, that conform to the Credit and to not yet accepted
the Confirming Bank and pay them at maturity, amendment(s), will be deemed to be notification of acceptance by the
Beneficiary of such amendment(s) and as of that moment the Credit will be
or amended.
b. by another drawee bank to accept and pay at maturity Draft(s) drawn iv. Partial acceptance of amendments contained in one and the same
by the Beneficiary on the Confirming Bank, in the event the drawee bank advice of amendment is not allowed and consequently will not be given any
stipulated in the Credit does not accept Draft(s) drawn on it, or to pay effect.
Draft(s) accepted but not paid by such drawee bank at maturity;
ARTICLE 10: Types of Credit
iv. if the Credit provides for negotiation to negotiate without recourse to
drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or A. All Credits must clearly indicate whether they are available by sight
document(s) presented under the Credit. A Credit should not be issued payment, by deferred payment, by acceptance or by negotiation.
available by Draft(s) on the Applicant. If the Credit nevertheless calls for
Draft(s) on the Applicant, banks will consider such Draft(s) as an additional B. i. Unless the Credit stipulates that it is available only with the Issuing
document(s). Bank, all Credits must nominate the bank (the "Nominated Bank") which is
authorized to pay, to incur a deferred payment undertaking, to accept
C. i. If another bank is authorized or requested by the Issuing Bank to add Draft(s) or to negotiate. In a freely negotiable Credit, any bank is a
its confirmation to a Credit but is not prepared to do so, it must so inform Nominated Bank.
the Issuing Bank without delay.
Presentation of documents must be made to the Issuing Bank or the
ii. Unless the Issuing Bank specifies otherwise in its authorization or Confirming Bank, if any, or any other Nominated Bank.
request to add confirmation, the Advising Bank may advise the Credit to
the Beneficiary without adding its confirmation. ii. Negotiation means the giving of value for Draft(s) and/or document(s)
by the bank authorized to negotiate. Mere examination of the documents
without giving of value does not constitute a negotiation.

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C. Unless the Nominated Bank is the Confirming Bank, nomination by the ARTICLE 14: Discrepant Documents and Notice
Issuing Bank does not constitute any undertaking by the Nominated Bank
to pay, to incur a deferred payment undertaking, to accept Draft(s), or to A. When the Issuing Bank authorizes another bank to pay, incur a deferred
negotiate. Except where expressly agreed to by the Nominated Bank and payment undertaking, accept Draft(s), or negotiate against documents
so communicated to the Beneficiary, the Nominated Bank's receipt of which appear on their face to be in compliance with the terms and
and/or examination and/or forwarding of the documents does not make conditions of the Credit, the Issuing Bank and the Confirming Bank, if any,
that bank liable to pay, to incur a deferred payment undertaking, to accept are bound:
Draft(s), or to negotiate.
i. to reimburse the Nominated Bank which has paid, incurred a deferred
D. By nominating another bank, or by allowing for negotiation by any bank, payment undertaking, accepted Draft(s), or negotiated,
or by authorizing or requesting another bank to add its confirmation, the
Issuing Bank authorizes such bank to pay, accept Draft(s) or negotiate as ii. to take up the documents.
the case may be, against documents which appear on their face to be in
compliance with the terms and conditions of the Credit and undertakes to B. Upon receipt of the documents the Issuing Bank and /or Confirming
reimburse such bank in accordance with the provisions of these Articles. Bank, if any, or a Nominated Bank acting on their behalf, must determine
on the basis of the documents alone whether or not they appear on their
LIABILITIES AND RESPONSIBILITIES face to be in compliance with the terms and conditions of the Credit. If the
documents appear on their face not to be in compliance with the terms and
ARTICLE 13: Standard for Examination of Documents conditions of the Credit, such banks may refuse to take up the documents.
A. Banks must examine all documents stipulated in the Credit with C. If the Issuing Bank determines that the documents appear on their face
reasonable care, to ascertain whether or not they appear, on their face, to not to be in compliance with the terms and conditions of the Credit, it may
be in compliance with the terms and conditions of the Credit. Compliance in its sole judgment approach the Applicant for a waiver of the
of the stipulated documents on their face with the terms and conditions of discrepancy(ies). This does not, however, extend the period mentioned in
the Credit, shall be determined by international standard banking practice sub Article 13 (b).
as reflected in these Articles. Documents which appear on their face to be
inconsistent with one another will be considered as not appearing on their D. i. If the Issuing Bank and/or Confirming Bank, if any, or a Nominated
face to be in compliance with the terms and conditions of the Credit. Bank acting on their behalf, decides to refuse the documents, it must give
notice to that effect by telecommunication or, if that is not possible, by
Documents not stipulated in the Credit will not be examined by banks. If other expeditious means, without delay but no later than the close of the
they receive such documents, they shall return them to the presenter or seventh banking day following the day of receipt of the documents. Such
pass them on without responsibility. notice shall be given to the bank from which it received the documents, or
to the Beneficiary, if it received the documents directly from him.
B. The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank
acting on their behalf, shall each have a reasonable time, not to exceed ii. Such notice must state all discrepancies in respect of which the bank
seven banking days following the day of receipt of the documents, to refuses the documents and must also state whether it is holding the
examine the documents and determine whether to take up or refuse the documents at the disposal of, or is returning them to, the presenter.
documents and to inform the party from which it received the documents
accordingly. iii. The Issuing Bank and/or Confirming Bank, if any, shall then be entitled
to claim from the remitting bank refund, with interest, of any
C. If a Credit contains conditions without stating the document(s) to be reimbursement which has been made to that bank.
presented in compliance therewith, banks will deem such conditions as not
stated and will disregard them.

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E. If the Issuing Bank and/or Confirming Bank, if any, fails to act in strikes or lockouts. Unless specifically authorized, banks will not, upon
accordance with the provisions of this Article and/or fails to hold the resumption of their business, pay, incur a deferred payment undertaking,
documents at the disposal of, or return them to the presenter, the Issuing accept Draft(s) or negotiate under Credits which expired during such
Bank and/ or Confirming Bank, if any, shall be precluded from claiming that interruption of their business.
the documents are not in compliance with the terms and conditions of the
Credit. ARTICLE 18: Disclaimer for Acts of an Instructed Party
F. If the remitting bank draws the attention of the Issuing Bank and/or A. Banks utilizing the services of another bank or other banks for the
Confirming Bank, if any, to any discrepancy(ies) in the document(s) or purpose of giving effect to the instructions of the Applicant do so for the
advises such banks that it has paid, incurred a deferred payment account and at the risk of such Applicant.
undertaking, accepted Draft(s) or negotiated under reserve or against an
indemnity in respect of such discrepancy(ies), the Issuing Bank and/or B. Banks assume no liability or responsibility should the instructions they
Confirming Bank, if any, shall not be thereby relieved from any of their transmit not be carried out, even if they have themselves taken the
obligations under any provision of this Article. Such reserve or indemnity initiative in the choice of such other bank(s).
concerns only the relations between the remitting bank and the party
towards whom the reserve was made, or from whom, or on whose behalf, C. i. A party instructing another party to perform services is liable for any
the indemnity was obtained. charges, including commissions, fees, costs or expenses incurred by the
instructed party in connection with its instructions.
ARTICLE 15: Disclaimer on Effectiveness of Documents
iu. Where a credit stipulates that such charges are for the account of a
Banks assume no liability or responsibility for the form, sufficiency, party other than the instructing party, and charges cannot be collected, the
accuracy, genuineness, falsification or legal effect of any document(s), or instructing party remains ultimately liable for the payment thereof.
for the general and/or particular conditions stipulated in the document(s)
or superimposed thereon; nor do they assume any liability or responsibility D. The Applicant shall be bound by and liable to indemnify the banks
for the description, quantity, weight, quality, condition, packing, delivery, against all obligations and responsibilities imposed by foreign laws and
value or existence of the goods represented by any document(s), or for the usages.
good faith or acts and/or omissions, solvency, performance or standing of
the consignors, the carriers, the forwarders, the consignees or the insurers UNIFORM COMMERCIAL CODE
of the goods, or any other person whomsoever. ARTICLE 5 LETTERS OF CREDIT
§ 5-102. Definitions.
ARTICLE 16: Disclaimer on the Transmission of Messages
(a) In this article:
Banks assume no liability or responsibility for the consequences arising out
of delay and/or loss in transit of any message(s), letter(s) or document(s), (1) "Adviser" means a person who, at the request of the issuer, a
or for delay, mutilation or other error(s) arising in the transmission of any confirmer, or another adviser, notifies or requests another adviser to notify
telecommunication. Banks assume no liability or responsibility for errors in the beneficiary that a letter of credit has been issued, confirmed, or
translation and/or interpretation of technical terms, and reserve the right amended.
to transmit Credit terms without translating them.
(2) "Applicant" means a person at whose request or for whose account a
ARTICLE 17: Force Majeure letter of credit is issued. The term includes a person who requests an
issuer to issue a letter of credit on behalf of another if the person making
Banks assume no liability or responsibility for the consequences arising out the request undertakes an obligation to reimburse the issuer.
of the interruption of their business by Acts of God, riots, civil commotions,
insurrections, wars or any other causes beyond their control, or by any

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(3) "Beneficiary" means a person who under the terms of a letter of credit (11) "Nominated person" means a person whom the issuer (i) designates
is entitled to have its complying presentation honored. The term includes a or authorizes to pay, accept, negotiate, or otherwise give value under a
person to whom drawing rights have been transferred under a transferable letter of credit and (ii) undertakes by agreement or custom and practice to
letter of credit. reimburse.
(4) "Confirmer" means a nominated person who undertakes, at the (12) "Presentation" means delivery of a document to an issuer or
request or with the consent of the issuer, to honor a presentation under a nominated person for honor or giving of value under a letter of credit.
letter of credit issued by another.
(13) "Presenter" means a person making a presentation as or on behalf of
(5) "Dishonor" of a letter of credit means failure timely to honor or to take a beneficiary or nominated person.
an interim action, such as acceptance of a draft, that may be required by
the letter of credit. (14) "Record" means information that is inscribed on a tangible medium,
or that is stored in an electronic or other medium and is retrievable in
(6) "Document" means a draft or other demand, document of title, perceivable form.
investment security, certificate, invoice, or other record, statement, or
representation of fact, law, right, or opinion (i) which is presented in a (15) "Successor of a beneficiary" means a person who succeeds to
written or other medium permitted by the letter of credit or, unless substantially all of the rights of a beneficiary by operation of law, including
prohibited by the letter of credit, by the standard practice referred to in a corporation with or into which the beneficiary has been merged or
Section 5-108(e) and (ii) which is capable of being examined for consolidated, an administrator, executor, personal representative, trustee
compliance with the terms and conditions of the letter of credit. A in bankruptcy, debtor in possession, liquidator, and receiver.
document may not be oral.
(b) Definitions in other Articles applying to this article and the sections in
(7) "Good faith" means honesty in fact in the conduct or transaction which they appear are:
concerned.
"Accept" or "Acceptance" Section 3-409
(8) "Honor" of a letter of credit means performance of the issuer's
undertaking in the letter of credit to pay or deliver an item of value. "Value" Sections 3-303, 4-211
Unless the letter of credit otherwise provides, "honor" occurs (i) upon
payment,(ii) if the letter of credit provides for acceptance, upon acceptance (c) Article 1 contains certain additional general definitions and principles of
of a draft and, at maturity, its payment, or(iii) if the letter of credit construction and interpretation applicable throughout this article.
provides for incurring a deferred obligation, upon incurring the obligation
and, at maturity, its performance. § 5-108. Issuer's Rights and Obligations
(9) "Issuer" means a bank or other person that issues a letter of credit, (a) Except as otherwise provided in Section 5-109, an issuer shall honor a
but does not include an individual who makes an engagement for personal, presentation that, as determined by the standard practice referred to in
family, or household purposes. subsection (e), appears on its face strictly to comply with the terms and
conditions of the letter of credit. Except as otherwise provided in Section
(10) "Letter of credit" means a definite undertaking that satisfies the 5-113 and unless otherwise agreed with the applicant, an issuer shall
requirements of Section 5-104 by an issuer to a beneficiary at the request dishonor a presentation that does not appear so to comply.
or for the account of an applicant or, in the case of a financial institution, to
itself or for its own account, to honor a documentary presentation by (b) An issuer has a reasonable time after presentation, but not beyond the
payment or delivery of an item of value. end of the seventh business day of the issuer after the day of its receipt of
documents:

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(1) to honor,
(1) is entitled to be reimbursed by the applicant in immediately available
(2) if the letter of credit provides for honor to be completed more than funds not later than the date of its payment of funds;
seven business days after presentation, to accept a draft or incur a
deferred obligation, or (2) takes the documents free of claims of the beneficiary or presenter;
(3) to give notice to the presenter of discrepancies in the presentation. (3) is precluded from asserting a right of recourse on a draft under
Sections 3-414 and 3-415;
(c) Except as otherwise provided in subsection (d), an issuer is precluded
from asserting as a basis for dishonor any discrepancy if timely notice is (4) except as otherwise provided in Sections 5-110 and 5-117, is precluded
not given, or any discrepancy not stated in the notice if timely notice is from restitution of money paid or other value given by mistake to the
given. extent the mistake concerns discrepancies in the documents or tender
which are apparent on the face of the presentation; and
(d) Failure to give the notice specified in subsection (b) or to mention
fraud, forgery, or expiration in the notice does not preclude the issuer from (5) is discharged to the extent of its performance under the letter of credit
asserting as a basis for dishonor fraud or forgery as described in Section 5- unless the issuer honored a presentation in which a required signature of a
109(a) or expiration of the letter of credit before presentation. beneficiary was forged.
(e) An issuer shall observe standard practice of financial institutions that CASE DIGESTS: LETTERS OF CREDIT
regularly issue letters of credit. Determination of the issuer's observance
of the standard practice is a matter of interpretation for the court. The 152 PETRA INTERNATIONAL BANKING CORP. V. FIRST
court shall offer the parties a reasonable opportunity to present evidence of AMERICAN BANK OF VIRGINIA
the standard practice. 758 F. SUPP. 1120
(f) An issuer is not responsible for: FACTS:

Dameron ordered t-shirts from National Marketing, which was based in
(1) the performance or nonperformance of the underlying contract, Amman, Jordan. To facilitate the transaction, Dameron sought the
arrangement, or transaction, issuance of 2 letters of Credit from First American Bank of Virginia.
Dameron executed an application and agreement for international
(2) an act or omission of others, or commercial letter of credit, as well as signed two commercial notes, to
secure the letters of credit. Consequently, Dameron executed continuing
(3) observance or knowledge of the usage of a particular trade other than guaranties to further secure any debts it owed to First American. First
the standard practice referred to in subsection (e). American issued then its irrevocable letters of credit. These letters stated
that they were in favor of National Marketing and for the account of
(g) If an undertaking constituting a letter of credit under Section 5- Dameron. These letters authorized drafts to be drawn on First American
102(a)(10) contains nondocumentary conditions, an issuer shall disregard within 30 days of submission to First American of specific, listed
the nondocumentary conditions and treat them as if they were not stated. documents. At the request of National Marketing and Petra bank, the
letters were amended to provide that the drafts under the letters could be
(h) An issuer that has dishonored a presentation shall return the drawn directly on Petra International in Washington DC, Petra’s American
documents or hold them at the disposal of, and send advice to that effect affiliate. In this transaction, PIBC became the confirming bank, First
to, the presenter. American is the issuing bank, Dameron is the account customer, and
National was the beneficiary.
(i) An issuer that has honored a presentation as permitted or required by
this article:

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One of the required documents to be submitted is the certification of the requirements, it “shall be precluded from claiming that the documents are
quality of the shirts by an independent inspection company and statement not in accordance with the terms and conditions of the credit.” In the
by the beneficiary. instant case, First American received the documents on or about October
25, 1988. Not only did it fail to note any discrepancies or to hold the
The shirts were received by Dameron and PIBC made the corresponding documents at PIBC's disposal, it transferred the documents to its account
payments to National Marketing. Another shipment was made and customer and formally notified PIBC on November 16, 1988 that “the
National demanded payment. Dameron was informed that there was transaction was accepted and, at maturity, we will remit proceeds....” First
discrepancies on the documents submitted, specifically the one pertaining American did not mention any discrepancies to PIBC until more than one
to the inspection of the quality of the shirts. This was waived by Dameron year after receipt of the documents. In the interim, it made several
and payment would be subsequently made. promises to pay in exchange for extensions of time. First American is
therefore precluded by Article 16 from asserting noncompliance.
Dameron was subsequently dissatisfied with the quality of the shirts
shipped. It then undertook negotiations with National about the payment. The full text of Article 16 of the UCP is as follows:
Dameron then undertook to get extensions of time for payment. It then
informed First American that it didn’t want to pay National for the defective (a) If a bank so authorized effects payment, or incurs a deferred payment
shirts. Negotiations were made but were unfruitful. Dameron was able to undertaking, or accepts or negotiates against documents which appear on
obtain from court an order of attachment, precluding First American from their face to be in accordance with the terms and conditions of a credit, the
making payments to PIBC. It then filed a suit against National, which party giving such authority shall be bound to reimburse the bank which has
ended in a compromise agreement between the two—Dameron was able to effected payment, or incurred a deferred payment undertaking, or has
keep the shirts and was paid an amount by National. The order of accepted or negotiated, and to take up the documents.
attachment was subsequently lifted. PIBC demanded then payment from
First American but the latter refused, alleging that PIBC overlooked the (b) If, upon receipt of the documents, the issuing bank considers that they
lack of statement of the beneficiary as part of the documents. Dameron in appear on their face not to be in accordance with the terms and conditions
turn refused to pay First American. of the credit, it must determine, on the basis of the documents alone,
whether to take up such documents, or to refuse them and claim that they
HELD: appear on their face not to be in accordance with the terms and conditions
On First American’s obligation to pay PIBC… of the credit.
PIBC requests summary judgment on Count I of its Complaint, which (c) The issuing bank shall have a reasonable time in which to examine the
alleges that First American wrongfully refused to honor the Letters and pay documents and to determine as above whether to take up the documents
the $95,904 plus interest to PIBC. First American contends that PIBC's or to refuse the documents.
failure to note the missing Statement of the Beneficiary relieves it of any
obligation to honor the drafts drawn under the Letters. The threshold issue (d) If the issuing bank decides to refuse the documents, it must give notice
is the choice of governing law. The Letters state on their face that they are to that effect without delay by telecommunication or, if that is not possible,
to be governed by the Uniform Customs and Practices for Documentary by other expeditious means, to the bank from which it received the
Credits (1983 Revision), International Chamber of Commerce Publication documents (the remitting bank), or to the beneficiary, if it received the
No. 400 (“the UCP”). Given this, the Court finds that the UCP should be documents directly from him. Such notice must state the discrepancies in
applied in this case. respect of which the issuing bank refuses the documents and must also
state whether it is holding the documents at the disposal of, or is returning
The pertinent UCP provision is Article 16, which states that if an issuing them to, the presentor (remitting bank or the beneficiary, as the case may
bank desires to “refuse documents,” it must do so “without delay” by be). The issuing bank shall then be entitled to claim from the remitting
stating the discrepancies it has found and “holding the documents at the bank any refund of any reimbursement which may have been made to that
disposal of, or ... returning them to, the presentor (remitting bank or the bank.
beneficiary, as the case may be).” If the issuing bank fails to perform these

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(e) If the issuing bank fails to act in accordance with the provisions of letter of credit.” Fundamental to letter of credit transactions is the principle
paragraphs (c) and (d) of this article and/or fails to hold the documents at that both the letter of credit and also the separate agreement between
the disposal of, or to return them to, the presentor, the issuing bank shall account customer and issuing bank are transactions in documents entirely
be precluded from claiming that the documents are not in accordance with independent from the underlying sale of goods. This principle compels the
the terms and conditions of the credit. conclusion that an account customer who has failed to reject documents in
timely fashion and, instead, has used them to obtain the goods is deemed
to have waived any claim of documentary inconsistencies. Even if the
The abovementioned Article 16 of the UCP reflects commercial practices Court were to accept the notion that an account customer should be able to
and the rules developed in the preceding common law of letters of credit. accept documents and goods and then sue for direct damages resulting
Article 16, when interpreted according to the plain meaning of its terms, from a bank's acceptance of nonconforming documents, it would not permit
adequately provides for the insertion of one or more confirming banks Dameron to reduce the payment owed to First American by any damages
between the issuing bank and the beneficiary. As each bank, including the stemming from National Marketing's delivery of faulty goods. Such
issuer, receives a documentary draft, it must reject it “expeditiously” if it damages stem from the seller's breach, not First American's. Moreover,
finds inconsistencies. It must then hold the documents at the disposal of even if the court were to hold that an account customer could receive
the prior holder in the chain, or be bound to pay the draft and keep the damages from the issuing bank stemming from the receipt of faulty goods,
documents. If the documentary draft is dishonored by one party, the Dameron has already been compensated for such receipt through its
preceding party, who has already bound itself to pay the draft by not itself settlement with National Marketing. There is no reason in this case for
rejecting the draft in timely fashion, is still bound to honor the draft. The Dameron not to reimburse First American for the full amount First
preceding party nevertheless receives the documents, and hence has a American paid for the goods.
claim on the goods underlying the transaction, which it can use to
compensate itself for having paid for the goods. 153 UNION EXPORT COMPANY V. NIB INTERMARKET
756 S.W.2D 628
On the obligation of Dameron to First American…
FACTS:
Having found that PIBC has a legal right to payment from First American, The facts in this case are undisputed. Sometime prior to August 26, 1986,
but not from Dameron, the Court turns next to First American's claim that Union, a Nashville based company, agreed to purchase 1500 metric tons of
Dameron must reimburse it for any amount it must pay PIBC under the calcium chloride, a chemical used in snow removal, from N.I.B., a Swedish
Letters. First American relies on the Agreements executed by Dameron to exporter. In order to guarantee payment, Union had First American issue
obtain the Letters. In the Agreements, Dameron pledged to indemnify First N.I.B. an irrevocable letter of credit in the amount of $345,000. The letter
American for the latter's acts with respect to the Letters as long as such of credit required the presentment of a draft payable 150 days after sight
acts were taken in good faith. And, First American correctly notes that along with certain other documents.
Dameron has not shown any bad faith on the part of First American with
respect to accepting the documents. Dameron argues, however, that the On December 1, 1986, First American received from Skanska Banken
good faith standard in the Agreements violates Virginia law and hence is (Skanska) a $345,000 time draft, drawn and endorsed in blank by N.I.B.,
void. Therefore, Dameron continues, First American's failure to note the together with other documents, all of which complied with the letter of
missing Statement of the Beneficiary, though not a breach of good faith, credit. First American accepted the draft on December 1, 1986 by affixing
nevertheless relieves Dameron of any obligation to reimburse First its signature thereto, and on the next day, December 2, sent notice of its
American. acceptance by Telex to Skanska. The acceptance had a maturity date of
April 30, 1987.
A review of the few existing, apposite cases indicates that under the
common law of letters of credit an account customer, by accepting Upon receiving notice of the acceptance, Skanska made two loans to N.I.B.
documents from the issuing bank and subsequently “surrendering the totaling $345,000, taking as security N.I.B.'s claim under the letter of
documents [to shippers or customs officials] and accepting a substantial credit.
portion of the goods ... waive [s] its right to seek strict enforcement of the

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In February, 1987, Union notified First American that the shipment of The issuing bank accepted two drafts drawn under a letter of credit. The
chemicals it purchased from N.I.B. was defective. Because First American drafts were payable after sight in 60 days. After acceptance, but before
indicated it would pay its acceptance when it matured, Union commenced payment, the customer discovered fraud in the transaction, and the trial
this action. court enjoined the issuer from payment. The intermediate appellate court
reversed and vacated the injunction, and the Court of Appeals affirmed,
HELD: both acting under § 4-303.
A commercial letter of credit transaction involves three separate
contractual relationships: (1) the underlying contract between the buyer In addition to holding that § 4-303 prevailed by its own terms, the Court
(in this case, Union) and the seller (N.I.B.); (2) the agreement between noted the following policy reason supporting the result:
the issuer (First American) and its customer (Union) in which the issuer
agrees to issue the letter of credit in return for the customer's promise to Important policy considerations suggest the result also. Letters of credit
reimburse it and pay a commission; and (3) the letter of credit itself which provide a quick, economic and predictable means of financing transactions
is an engagement by the issuer that it will honor drafts presented by the for parties not willing to deal on open accounts by permitting the seller to
beneficiary or a transferee beneficiary upon compliance with the terms and rely not only on the credit of the buyer but also on that of the issuing bank.
conditions specified in the letter of credit. By its terms, the credit often reflects a conscious negotiation of risk
allocation between customer and beneficiary and its utility rests heavily on
The fundamental principle governing these transactions is the doctrine of strict adherence to the agreed terms and the doctrine of independent
independent contracts, which provides that the issuing bank's obligation to contract ( see, J. White & R. Summers, Handbook on Uniform Commercial
honor drafts drawn on a letter of credit by the beneficiary is separate and Code § 18-1, at 704-08 [2d ed.] ). It is this predictability of credit
independent from any obligation of its customer to the beneficiary under arrangements which permits not only the financing of sale of goods
the sale of goods contract and separate as well from any obligation of the transactions between widely separated parties in different jurisdictions but
issuer to its customer under their agreement. also has permitted the development of a market in trade or bankers'
acceptances of time drafts. Once a draft payable in the future is accepted
In the case at bar, both the trial court and the Court of Appeals found that by a bank, it becomes known as a bankers' *632 acceptance, and such
the injunction against payment under the letter of credit was proper under acceptances can be, and regularly are, sold in conjunction with letter of
the limited exception to the doctrine of independence found at Tenn.Code credit transactions to obtain financing prior to the date of maturity in a
Ann. § 47-5-114(2). market sanctioned by the Federal Reserve Board ( see, 12 U.S.C. § 372;
PLI, Letters of Credit and Bankers' Acceptances 231-34, 236). If the courts
Under the general rule the issuer must honor the draft when the intervene to enjoin issuing banks from paying drafts they have previously
documents presented comply with the terms of the letter of credit, accepted they seriously undermine this market and limit the use of
however, when a required document does not conform to the necessary acceptances as a financing tool.
warranties, is forged, is fraudulent, or there is fraud in the transaction, an
issuer acting in good faith is not required to, but may honor a draft drawn The same policy considerations apply in Tennessee. We therefore hold that,
under a letter of credit if the documents presented appear on their face to under Tenn.Code Ann. § 47-4-303(1), Union's injunction against payment
comply with the terms of the letter of credit. In addition, a court may of the time draft drawn pursuant to the letter of credit was untimely
enjoin an issuer from honoring such a draft if the issuer fails to do so on its because it was issued after First American had already accepted the draft.
own. Notwithstanding this exception, if the person presenting a draft drawn We therefore reverse the decision of the Court of Appeals, and we order
on a letter of credit is a holder in due course (Tenn.Code Ann. § 47-3-302), the injunction vacated.
the issuer must pay the draft, whether or not it has notice of forgery or
fraud. 154 ANDINA COFFEE V. NATIONAL WESTMINSTER BANK
160 A.D.2D 104
In this case, the element of fraud is undisputed. Now, on the issue of
whether or not Skanska is a holder in due course. FACTS:

Page 133 of 190
Plaintiff Andina Coffee, Inc., a New York corporation, was engaged in the BCCC accepted from Gonchecol its draft and accompanying *107
importation of coffee from defendant Gonchecol, Ltda., at one time a major documents. These documents included truck bills of lading which were
Columbian exporter of coffee. To pay for its purchases, Andina delivered to dated August 22, 1986, almost six weeks after the date submitted to
Gonchecol letters of credit which it obtained from a number of commercial BCCC, and purported to show that 8,000 bags of coffee had been delivered
banks in New York, including defendants National Westminster Bank USA to a trucking company for transport to a Colombian port. BCCC sent the
(NatWest) and Cooperatieve Centrale Raiffeisenboerenleenbank B.A. draft and documents to NatWest with a cover letter dated July 15, 1986.
(Rabobank). As the beneficiary of *106 the letters of credit, Gonchecol By telex dated July 22, 1986, NatWest advised BCCC that it would not pay
apparently used all or some of the funds to borrow money from defendant under the letter of credit because of four enumerated discrepancies in the
Banco Credito y Commercio de Columbia (BCCC) and other Colombian documents, including the fact that the draft and documents were presented
banks in order to finance its business operations. In June 1986, BCCC prior to the earliest date mentioned in the letter of credit and that the truck
advanced $2,100,000 to Gonchecol in exchange for which it was to be bills of lading were postdated.
reimbursed through a $2,100,000 check drawn on a Panamanian bank.
However, Gonchecol's check bounced, and BCCC was left with an unpaid BCCC thereupon requested that the bills of lading and other documents be
$2,100,000 loan. According to NatWest and Rabobank, this event could returned to it by mail. It then reviewed the documents received under the
only have served to confirm what BCCC had already learned from its own other three letters of credit and perceived that the bills of lading in those
sources; that is, that Gonchecol had already lost millions of dollars and was instances were similarly postdated. Consequently, it sent all of the bills of
experiencing severe financial difficulties. As was the situation with most of lading back to Gonchecol so that the exporter could revise the dates to
the moneys made available by BCCC to Gonchecol, the source of comply with the letters of credit. Indeed, some of the changes were made
repayment would have to be proceeds from the letters of credit provided to twice in an attempt to bring the documents into conformity with both the
Gonchecol from the issuing banks. form and date mandates of the letters of credit. Thus, it appears that the
documents were designed more to effect payment under the letters of
Beginning in May of 1986, coffee financed under the various letters of credit than to reflect accurately the business transactions that they were
credit, which were to be paid on the presentation of interior truck bills of intended to evince. In any event, by the time that the documents had been
lading, failed to materialize. Consequently, representatives of the New York altered and realtered, the full extent of Gonchecol's fraud had been
banks were dispatched to Colombia in August of 1986 when it was detected, and payment was rejected by NatWest and Rabobank on the
discovered that Gonchecol had caused fraudulent truck bills of lading to be ground that, in part, the bills of lading were postdated and fraudulent.
furnished for large quantities of coffee which were, in fact, never shipped,
thereby resulting in substantial financial losses to New York banks. The HELD:
four letters of credit involved here are the last outstanding instruments The mere fact that the documents presented in connection with the letters
which were not drawn against prior to the disclosure of the exporter's of credit may have been complete forgeries and that no coffee was
dishonest practices. In that regard, NatWest and Rabobank had each delivered to the trucker for export is insufficient to avoid payment under
supplied two of the letters of credit, one for $2,104,000 and the other the letter of credit (see, First Commercial Bank v Gotham Originals, 64
three in the amount of $1,000,000, pursuant to which they agreed to make NY2d 287; Barclay Knitwear Co. v king'swear Enters., supra). What is
payment upon the presentation within a specified period of time of drafts critical is whether the bills of lading complied with the requirements of the
and certain documents, among which were to be the "original railroad letters of credit or whether BCCC possessed actual knowledge of the fraud
and/or truck bill of lading". The bill of lading was supposed to show that (see, Chemical Bank v Haskell, 51 NY2d 85) or otherwise acted in bad
the coffee was actually in existence, that it had left the control of the faith. Thus, according to the Court of Appeals in First Commercial Bank v
growers and that it was in the hands of the shipper and en route from the Gotham Originals (supra, at 295): "Under the general rule the issuer must
interior of Colombia to a seaport. honor the draft when the documents presented comply with the terms of
the letter of credit (Uniform Commercial Code § 5-114 [1]). But when a
On July 9, 1986, 15 days after BCCC had already advanced $2,100,000 to required document does not conform to the necessary warranties or is
Gonchecol against the latter's bad check, it received from NatWest a letter forged or fraudulent or there is fraud in the transaction, an issuer acting in
of credit in the amount of $2,104,000. The following day, almost six weeks good faith may, but is not required to, refuse to honor a draft under a
before the earliest possible date for presentment under that instrument, letter of credit when the documents *110 presented appear on their face to

Page 134 of 190
comply with the terms of the letter of credit. Further than that, a customer in due course has the burden of establishing that he or some person under
may also enjoin an issuer from honoring such a draft if the issuer fails to whom he claims is in all respects a holder in due course" (Uniform
do so on its own .... Notwithstanding this exception, if the person Commercial Code § 3-307 [3]). Since NatWest and Rabobank have
presenting a draft drawn on a letter of credit is a holder in due course ... demonstrated a viable defense with respect to the letters of credit, BCCC
the issuer must pay the draft, whether it has notice of forgery or fraud or must now prove that it is a holder in due course, and, consequently,
not". summary judgment in its favor is not warranted.
It is settled that New York law mandates strict compliance with the terms A South American bank which accepted drafts drawn upon letters of credit
of a letter of credit (United Commodities-Greece v Fidelity Intl. Bank, 64 is not a holder in due course of the letters as a matter of law and, thus,
NY2d 449, 455; Eximetals Corp. v Pinheiro Guimaraes, 73 AD2d 526, affd may not compel the issuing banks to make payment under the letters
51 NY2d 865). The postdating of bills of lading is not only a departure from where the accompanying documents, whose presentation was necessary to
the requirements of the letters of credit but also constitutes a form of trigger payment, consisted of postdated bills of lading, since New York law
fraudulent practice. Contrary to the Supreme Court's characterization that mandates strict compliance with the terms of a letter of credit and the
the objections to the accompanying documents raised by NatWest and *105 postdating of bills of lading is not only a departure from the
Rabobank were frivolous and highly technical, the discrepancies were, in requirements of the letters of credit, but also constitutes a form of fraud.
reality, material. At the very least, they would have had the effect of The discrepancies in the bills of lading were material, having the effect of
concealing the actual shipment dates (even assuming that they had concealing actual shipment dates, and did not, as required by the letters,
represented genuine, and not fictitious, transactions) and, in fact, did not, evidence shipment of the goods for which payment was intended under the
as required by the letters of credit, "evidence shipment" of the coffee. letters. Failure of the issuing banks to assert an objection on a previous
Further, while there is authority that by its previous acceptance of occasion merely presents a question of fact as to whether there was a
nonconforming documents, as admittedly occurred herein, the issuing bank waiver of the right to reject future defects. Moreover, in light of the fact
does not waive the right to reject future defects (Courtaulds N. Am. v that the South American bank played an active role in revising the bills of
North Carolina Natl. Bank, 528 F2d 802; Texpor Traders v Trust Co. Bank, lading, particularly after it had proof of the financial instability of the
720 F Supp 1100; Far E. Textile v City Natl. Bank & Trust Co., 430 F Supp beneficiary of the letters in the form of a bad check issued by the
193), and the preclusion rule contained in the UCP (Uniform Customs and beneficiary, raises questions of fact as to whether it was acting in good
Practice for Documentary Credits) is by no means absolute, at most the faith and without actual knowledge of the beneficiary--exporter's fraud, the
failure to assert an objection on a previous occasion presents a question of intended goods having never been shipped.
fact as to whether there was a waiver (see, Eximetals Corp. v Pinheiro
Guimaraes, supra).
155 BANK OF AMERICA V. CA
Unless the postdating was expressly allowed under the letters of credit, 228 SCRA 357
and there is no indication that this is the situation, or the parties' prior
course of conduct conclusively demonstrates otherwise, the documents FACTS:
provided under the letters of credit did not comply with the terms thereof, Petitioner Bank of America received by mail an Irrevocable Letter of Credit
and BCCC may not compel payment. Equally significant is the BCCC's purportedly issued by Bank of Ayudhya for the account of General
apparently active role in obtaining the revisions of the documents, Chemicals of Thailand in the amount of $2.7M to cover the sale of plastic
particularly after it was confirmed with definite proof of Gonchecol's ropes and "agricultural files," with the petitioner as advising bank and
financial instability in the form of a bad check, raises questions of fact as to private respondent Inter-Resin Industrial Corporation as beneficiary. Bank
whether it was acting in good faith and without actual knowledge of the of America then wrote Inter-Resin informing the latter of the foregoing and
exporter's *111 fraud. The record of the present matter clearly presents transmitting, along with the bank's communication, the letter of credit.
sufficient unresolved matters precluding summary judgment as to whether Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent
BCCC participated in a scheme whereby the bills of lading were altered Atty. Tanay to Bank of America to have the letter of credit confirmed. The
simply to render them in conformity with the letters of credit. Once it has bank did not; the bank employee in charge of letters of credit explained to
been "shown that a defense exists a person claiming the rights of a holder Atty. Tanay that there was no need for confirmation because the letter of

Page 135 of 190
credit would not have been transmitted if it were not genuine. Inter-Resin The letter of credit is an engagement of the issuing bank, not the advising
sought to partially avail under the letter of credit by submitting to Bank of bank, to pay the draft. As an advising or notifying bank, Bank of America
America invoices, the corresponding packing list, export declaration and bill did not incur any obligation more than just notifying Inter-Resin of the
of lading. After being satisfied that Inter-Resin's documents conformed letter of credit issued in its favor, let alone to confirm the letter of credit
with the conditions expressed in the letter of credit, Bank of America issued The bare statement of the bank employee in responding to the inquiry
in favor of Inter-Resin a Cashier's Check for P10M, the Peso equivalent of made by Atty. Tanay, Inter-Resin's representative, on the authenticity of
the draft drawn by Inter-Resin. This check was picked up by Inter-Resin's the letter of credit certainly did not have the effect of novating the letter of
Executive Vice-President Barcelina Tio. Thereafter, the Bank of America credit and Bank of America's letter of advise, nor can it justify the
wrote Bank of Ayudhya advising the latter of the availment under the letter conclusion that the bank must now assume total liability on the letter of
of credit and sought the corresponding reimbursement therefor. credit. Bringing the letter of credit to the attention of the seller is the
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the primordial obligation of an advising bank. The view that Bank of America
documents for the second availment under the same letter of credit should have first checked the authenticity of the letter of credit with Bank
consisting of a packing list, bill of lading, invoices, export declaration and of Ayudhya, by using advanced mode of business communications, before
bills in set, evidencing the second shipment of goods. Upon receipt of a dispatching the same to Inter-Resin is not supported in U.C.P w/c states
telex from Bank of Ayudhya declaring the letter of credit fraudulent, Bank that: "Banks assume no liability or responsibility for the consequences
of America stopped the processing of Inter-Resin's documents and sent a arising out of the delay and/or loss in transit of any messages, letters or
telex to its branch office in Bangkok, Thailand, requesting assistance in documents, or for delay, mutilation or other errors arising in the
determining the authenticity of the letter of credit. Bank of America kept transmission of any telecommunication . . ."
Inter-resin informed of the developments. Sensing a fraud, Bank of
America sought the assistance of the NBI. The latter discovered that the As advising bank, Bank of America is bound only to check the apparent
vans exported by Inter-Resin did not contain ropes but plastic strips, authenticity of the letter of credit, which it did.
wrappers, rags and waste materials. NBI also investigated Inter-Resin's
President and Executive Vice President Barcelina who, thereafter, were As to the issue on whether or not Bank of America can recover on the
criminally charged for estafa through falsification of commercial letter of credit, the answer is yes.
documents. Bank of America sued Inter-Resin for the recovery of P10M,
the peso equivalent of the draft on the partial availment of the now The transaction in issue is a discounting arrangement. Bank of America,
disowned letter of credit. Inter-Resin claimed that not only was it entitled has acted independently as a negotiating bank, thus saving Inter-Resin
to retain P10M on its first shipment but also to the balance covering the from the hardship of presenting the documents directly to Bank of Ayudhya
second shipment. to recover payment. As a negotiating bank, Bank of America has a right of
recourse against the issuer bank and until reimbursement is obtained,
HELD: Inter-Resin, as the drawer of the draft, continues to assume a contingent
Bank of America cannot be held liable. liability thereon. While Bank of America failed to allege material facts in its
complaint that might have likewise warranted the application of the
Bank of America has only been an advising bank, not confirming, as Negotiable Instruments Law and possibly then allowed it to even go after
reflected by the provisions of the letter of credit itself, the petitioner bank's the indorsers of the draft, this failure does not preclude petitioner bank's
letter of advice, its request for payment of advising fee, and the admission right (as a negotiating bank) of recovery from Inter-Resin itself. Inter-
of Inter-Resin that it has paid the same. It was the one that asked Inter- Resin admits having received P10M from Bank of America on the letter of
Resin to submit documents required by the letter of credit and eventually credit transaction and in having executed the corresponding draft. That
has paid the proceeds thereof, did not obviously make it a confirming bank. payment to Inter-Resin has given Bank of America the right of
The fact, too, that the draft required by the letter of credit is to be drawn reimbursement from the issuing bank, Bank of Ayudhya which, in turn,
under the account of General Chemicals (buyer) only means that the same could then seek indemnification from the buyer (the General Chemicals of
had to be presented to Bank of Ayudhya (issuing bank) for payment. Thailand). Since Bank of Ayudhya disowned the letter of credit, however,
Bank of America may now turn to Inter-Resin for restitution.

Page 136 of 190
156 FEATI BANK AND TRUST COMPANY V. CA bank—that the correspondent bank gives an absolute assurance to the
196 SCRA 576 beneficiary that it will undertake the issuing bank’s obligation as its own
according to the terms and conditions of the credit. A notifying bank
FACTS: assumes no liability except to notify and/or transmit to the beneficiary the
Villaluz sold lauan logs to Christiansen. After inspecting the logs, buyer existence of the LOC. A negotiating bank, buys or discounts a draft under
issued a purchase order. Christiansen later on made arrangements with the LOC. Whereas a confirming bank assumes a direct obligation to the
Hanmi Trade. Hanmi caused Security Pacific National Bank to issue an seller and its liability is a primary one as is it in itself issued the LOC. The
Irrevocable Letter of Credit available at sight in favor of Villaluz for the instructions upon FEATI clearly indicate that it is merely a notifying bank.
logs. The LOC was mailed to FEATI with the instruction that the enclosed
letter of credit be forwarded to the beneficiary. The LOC further provided Since FEATI is merely a notifying bank, it is not a privy to the contract
that the draft to be drawn should be accompanied with certain documents between buyer and seller. Unless it is shown that FEATI has confirmed the
(i.e. Signed Commercial Invoice, Tally sheets. Ocean Bills of Lading; LOC, Villaluz has no cause of action against it.
Certification by Christiansen). The logs, as loaded on the shipping vessel
were inspected and found to be in good condition. But Christiansen refused In any event, even if Villaluz tenders all the documents required under the
to issue a certification despite the requests of Villaluz. And because of the LOC, FEATI may refuse to negotiate or accept the draft drawn thereunder
absence of this certification, FEATI refused to advance the payment on the and it will not be held liable for its only engagement is to notify and/or
LOC. The logs arrived in Korea and were received by Hanmi. It later sold transmit to the seller the LOC. If however, FEATI is a confirming bank, it
the logs to Taisung Lumber. Meanwhile, Villaluz instituted an action for still cannot pay the amount as there was a failure on the part of Villaluz to
mandamus and specific performance against Christiansen and FEATI. comply with the terms of the LOC.
While the case is pending, Christiansen left the country so Villaluz sought Though there is injustice caused to seller, the court is constrained to apply
to have FEATI be solidarily liable. what the law is...dura lex sed lex.
HELD: 157 KENG HUA PAPER PRODUCTS V. CA

FEATI cannot be held liable on the LOC due to the non-compliance with the 286 SCRA 257
terms by the beneficiary.
FACTS:
In commercial transactions involving letters of credit, the documents Sea land Service is a shipping company. On a relevant date, it received in
tendered must strictly conform to the terms of the LOC. The tender of its Hong Kong terminal a sealed container with 76 bales of unsorted waste
documents by the beneficiary (seller) must include all documents required paper. A bill of lading was issued for this. On the next month, this
by the letter. The Uniform Customs and Practice for Documentary Credit shipment was discharged in Manila. Notices of arrival were transmitted to
(UCP) further provided that the bank may only negotiate, accept or pay, if Keng Hua but the shipment remained in Sea land's container. After 481
the documents tendered to it are on their face in accordance with the days, the shipment was unloaded from the container. Keng Hua refuses to
terms and conditions of the documentary credit. The absence of any settle its obligation because the shipment was 10 metric tons more than it
required document justifies a refusal of payment. asked from Ho Kee (seller).
FEATI was just a notifying bank (in contrast to being a confirming bank). Keng Hua contends that first, it did not consent to the shipment as
When FEATI accepted the obligation to notify Villaluz that the irrevocable evidenced by the "Notice of Refused or On Hand Frieght" which it received
credit has been transmitted to it, such does not amount to a confirmation from Sea land. Second, acceptance of the shipment would amount to
of the letter. An irrevocable credit is not synonymous to a confirmed credit. smuggling. And third the amount of the demurrage ballooned from 37K to
The former refers to the duration of the letter of credit—it simply means 67K.
that the issuing bank may not without the consent of the beneficiary and
the buyer revoke his undertaking under the letter. Whereas a confirmed HELD:
credit pertains to the kind of obligation assumed by the correspondent

Page 137 of 190
Keng Hua received the bill of lading immediately after the arrival of the contract has in fact been broken and regardless of the loss actually
shipment. It had every opportunity to show its dissent, however, it was suffered by the beneficiary
only after six months that it sent a letter to Sea land informing the latter
that it could not accept the shipment. Such inaction conveys the clear A CONCISE DEFINITION: DEMAND GUARANTEES
inference that it accepted the terms of the bill of lading.  Undertaking given for payment of a stated or maximum sum of money
on presentation to the party giving the undertaking of a demand or
Moreover, the letter merely proves the petitioner's refusal to pick up the payment and such other documents as may be specified in the
cargo and not its rejection to the bill of lading. First, the notice of refused guarantee within the period and in conformity with the other
or on hand freight has no value because it was not made by Keng Hua. It conditions of the guarantee
was sent by Sea Land to the former. Its significance is to highlight the fact  Procured by the seller in favor of the buyer for the latter to be paid in
that Keng Hua failed to object to the bill of lading. Second, mere case the seller doesn’t comply with contract provisions. The economic
apprehension of violating said laws without a clear demonstration that burder is upon the party who breaches the contract
taking delivery of the shipment has become impossible cannot defeat
petitioner's contractual oblifation under the bill of lading. Third, the TYPICAL USES OF DEMAND GUARANTEES
discrepancy was a result of the variance in the dates when such claims  Employed typically in construction contracts and contracts for
were made. Of course, the longer the cargo remained unclaimed, the international sale of goods
higher the demurrage.  Demand guarantees are intended to safeguard the other party against
non-performance or late or defective performance by the supplier or
Any discrepancy between the amount of the goods in the commercial contractor
invoice and the amount allowed in the letter of credit will not affect the
validity of the contract of carriage. The carrier is not expected to go GUARANTEE STRUCTURES AND TERMINOLOGY: DIRECT (3RD PARTY)
beyond the representations of the shipper in the bill of lading. The contract GUARANTEES
was under the arrangement of Shippers Load and Count. Hence, Ho Kee is  Involves a minimum of three parties
responsible for the loading and Sea land was oblivios to the contents of the 1. Account party/principal—party to the underlying contract
shipment. Keng Hua's remedy is against Ho Kee. whose performance is required to be covered by the
guarantee and who gives instruction for its
STANDBY LETTERS OF CREDIT OR GUARANTEES 2. Issuer/guarantor—the bank or other party issuing the
guarantee on behalf of the customer the principal
HISTORY AND PURPOSE 3. The beneficiary—the other party to the underlying contract, in
 Sometime ago, it is common in international dealings to require the whose favor the guarantee is issued
furnishing of a cash deposit as security, but with the expansion of  Usually the guarantee in the 3-party structure is the principal’s bank
international trade this became prohibitively expensive for the and carries on business in the same country as the principal, whilst the
counterparty and in due course gave way to a more convenient beneficiary carries on business in a foreign country
safeguard, the provision of a written undertaking by a bank in favor of  Known as direct guarantees because the guarantee is issued to directly
the buyer or employer payable on demand by the principal’s bank, not by the local bank in the beneficiary’s
 Demand guarantees as substitute for cash are designed to provide the country
beneficiary with a speedy monetary remedy against the counterparty P (ENGLAND)CONSTRUCTION OF A PLANT IN SAUDI ARABIAB (S.A.)
to the underlying contract and to that end are primary in form and
documentary in character. BENEFICIARY
 The demand guarantee is expressed to be payable solely on BANK DEMAND GUARANTEE
presentation of a written demand and any other specified documents.
Accordingly, any demand within the maximum amount stated must in
principle be paid by the guarantor, regardless whether the underlying G BANK (GUARANTY)

Page 138 of 190
1. Tender or bid guarantee

 G bank may decide to have the guarantee advised and transmitted to a. Where tenders are invited it is often a condition of
B by LB, a local bank in buyer’s location. LB’s function in this case is consideration of the tender that the tenderer undertakes
limited to the checking that the signatures on the guarantee appear to to sign the contract if its awarded to him, to procure the
be genuine and advising and transmitting the guarantee issued by G issue of any performance or other guarantee required by
bank. It incurs no liability under the guarantee itself unless it is the guarantee and not to modify or withdraw his tender
requested and agrees to confirm it. in the meantime
 There are three distinct contracts b. Purpose—safeguard the beneficiary against breach of
1. Underlying contract between P and B such an undertaking
2. The counter-indemnity or reimbursement contract between P c. If the tenderer is successful and fails to sign the contract
and G bank and to furnish the requisite performance or other
3. Contract established by the guarantee issued by G guarantee, or withdraws his tender before its expiry, the
beneficiary can call upon the guarantor to pay a specified
INDIRECT OR 4-PARTY GUARANTEES sum designed to compensate him for the trouble and
 Where the beneficiary requires the guarantee to be issued by a bank in expense he suffered in reawarding the contract, as well
his own country and the principal doesn’t bank with such a bank, the as any additional cost of the contract
principal asks his bank to arrange for the issue of the guarantee by the 2. Performance guarantee
local bank a. Guarantee of the central performance of the contract
 Instructions are then given by the principal’s bank/instructing party to from commencement to completion
a bank in the beneficiary’s country to issue a guarantee against a b. Given for a specified percentage of the contract sum
counter-guarantee by the instructing party, who in turn is entitled to c. But there are stages in the relationship between the
an indemnity from its customer, the principal. parties which precede and follow the central
 Its an indirect guarantee because instead of P’s bank issuing it directly performance, and there may be distinct segments of
to B as in the direct guarantee structure, that bank as instructing party liability to be covered within that performance
arranges for its issue by C bank against a counter-guarantee 3. Advance payment or repayment guarantee
 In this structure, there are 4 distinct contracts a. Underlying contract may entitle the principal to payment
1. The underlying contract between P and B of stated sums in advance of performance
2. Counter-indemnity or reimbursement contract between P and b. The advance payment guarantee is designed to secure
IP bank the beneficiary’s right to repayment of the advance if the
3. Counter-guarantee issued by IP bank to C bank performance to which it relates is not furnished
4. Guarantee issued by C bank to B 4. Retention guarantee
a. Construction contracts usually provide for stage
payments against architect’s or engineer’s certificate and
P (ENGLAND)CONSTRUCTION OF PLANT IN SAUDI ARABIAB (SAUDI A.) for a specified percentage of the amount certified in each
certificate to be retained by the employer for a specified
period of time as safeguard against defects
b. The employer may be willing to release such retention
moneys against a retention guarantee securing
repayment of the released retention moneys if defects
IP BANK (INSTRUCTING PARTY) G BANK (GUARANTEE) are later found or if the contractor fails to complete the
contract
5. Maintenance or warranty guarantee
a. Construction contracts usually provide that on completion
PRINCIPAL TYPES OF DEMAND GUARANTEES part of the retention moneys are to be retained for a

Page 139 of 190
specified period to cover the cost of any defects or the presentation of a demand and other documents specified in the
malfunction which become manifest during that period guarantee in the manner of and within the period of the guarantee
 THE GUARANTOR HAS NO CONCERN WITH THE UNDERLYING
GUARANTEES NOT GUARANTEED BY UNDERLYING CONTRACT CONTRACT AND IF DEMAND IS DULY PRESENTED, PAYMENT MUST BE
 Not all guarantees are meant to be in favor of a party in the underlying MADE DESPITE ALLEGATIONS BY THE PRINCIPAL HAS FULLY
contract PERFORMED THE CONTRACT—IN THE ABSENCE OF ESTABLISHED
 For example are customs guarantees which are issued to the customs FRAUD OR OTHER EVENT CONSTITUTING GROUND FOR NON-
to cover any duty that may become payable when imported goods PAYMENT
which would be exempt from duty if reexported within a specified time
are not in fact reexported within that time STANDBY LETTERS OF CREDIT
 Undertaking primary in form but intended to be used only as a fallback
THE LEGAL NATURE OF A DEMAND GUARANTEE in the event of default by the principal under the underlying contract
 A demand guarantee is an abstract payment undertaking that is, a  Standby credit in legal perspective is simply another term for demand
promise of payment which, though intended to preserve the guarantees
beneficiary from loss in connection with the underlying transaction is  The standby credit has developed into an all-purpose financial support
detached from the underlying contract between principal and instrument embracing a much wider range of uses than the normal
beneficiary and is in form a primary undertaking between the demand guarantee. Thus, standby credits are used to support
guarantor and beneficiary which becomes binding solely by virtue of its financial and non-financial obligations of the principal and to provide
issue credit enhancement for the primary financial undertaking
 A secondary guarantee is both secondary in form and intent. The
intention of the parties is that the guarantor will be called upon to pay KEY ELEMENTS IN A DEMAND GUARANTEE
only if the principal defaults in performance, and then only to the 1. The parties
extent of the principal’s liability and subject to any defenses available 2. A reference to the underlying contract
to the principal 3. The amount or maximum amount of the guarantee and any
 A documentary credit is both primary in intent and form. The parties agreement for reduction or increase
to the underlying contract intend that the bank issuing the credit is a 4. The currency of payment
to be the first port of call for payment, and this is the effect of the 5. The documents, if any, to be presented for the purpose of a
agreement between them. Whereas in the case of a suretyship demand or of reduction or expiry
guarantee, the beneficiary cannot look to the guarantor without 6. The expiry date or other expiry provisions as well as any
establishing default by the principal, the reverse is true of the agreement for extension
documentary credit. The parties have designated payment by the  Where it is intended that the guarantee shall not commence until
bank as the primary payment method and only if it fails without fault presentation of a particular document, this fact should be specified
on the part of the beneficiary is entitled to resort to the buyer under  Direct guarantee: principal, guarantor, and beneficiary should be
the contract of sale. identified
 DEMAND GUARANTEE STANDS BETWEEN THE SURETYSHIP  Indirect guarantee: principal, instructing party, beneficiary, and
GUARANTEE AND THE DOCUMENTARY CREDIT—SECONDARY IN counter-guarantee
INTENT AND PRIMARY IN FORM. Performance is due in the first  Central to the demand guarantee is its documentary character: the
instance from the principal, and the guarantee is intended to be rights and obligations it creates are to be determined solely from the
resorted to only if the principal has failed to perform. But though this terms of the guarantee and from any document presented in
is the intent of the parties, the guarantee isn’t in form linked to default accordance with the guarantee, without the need to ascertain external
under the underlying contract, nor there is any question of facts
performance to hold the beneficiary harmless up to the agreed
maximum; and the sole condition of the guarantors payment liability is DISTINCT NATURE OF CONTRACTUAL RELATIONSHIPS

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 Guarantor’s commitment to the beneficiary arises solely by virtue of 5. Requirement of compliance of the demand with the terms of
the issue of the guarantee and his duty to pay is conditioned only on the guarantee
presentation of demand and other specified documents in conformity 6. Guarantor’s duty of examination limited to apparent good
with the terms and within the duration of the guarantee order of the document
 Principal is not concerned with the contract between the guarantor and 7. Guarantor’s duty limited the exercise of good faith and
beneficiary reasonable care
 Beneficiary has no concern with the contract between the principal and 8. Independence of counter-guarantee from guarantee
guarantor 9. Independence of counter-guarantee from mandate received
 The relationship of principal and guarantor has an internal mandate— from instructing party
the guarantor is obliged to act in accordance with the terms of the
contract, failing which he may forfeit his right to reimbursement but UNITED NATIONS CONVENTION ON INDEPENDENT GUARANTEES
those terms are of no concern to the beneficiary, whose right to AND STAND-BY LETTERS OF CREDIT
payment depends solely on his acting on conformity with the terms of
the guarantee CHAPTER I. SCOPE OF APPLICATION
 In indirect contracts, there is an additional mandate which has 2
facets—the mandate from the instructing party to the guarantor as to Article 2
the issue of the guarantee, which the guarantor as mandatory must Undertaking
comply with if he accepts the instruction; and two, the counter-
guarantee which the guarantor exacts from the instructing party as a 1. For the purposes of this Convention, an undertaking is an independent
precondition of issuing the guarantee and which is separate from the commitment, known in international practice as an independent guarantee
mandate or as a stand-by letter of credit, given by a bank or other institution or
1. Abstract character of the payment undertaking—binding persons ("guarantor/issuer") to pay to the beneficiary a certain or
solely by virtue of issue of the guarantee, subject to the determinable amount upon simple demand or upon demand accompanied
beneficiary not rejecting it by other documents, in conformity with the terms and any documentary
2. Independence of the guarantee from the underlying conditions of the undertaking, indicating, or from which it is to be inferred,
transaction that payment is due because of a default in the performance of an
 Guarantee is separate from that contract and the obligation, or because of another contingency, or for money borrowed or
rights and obligations created by the guarantee are advanced, or on account of any mature indebtedness undertaken by the
independent of those arising under the underlying principal/applicant or another person.
contract
 In the absence of established fraud by the 2. The undertaking may be given:
beneficiary, the guarantor is not entitled to refuse
payment and the principal is not entitled to have (a) At the request or on the instruction of the customer
payment restrained merely because of a dispute ("principal/applicant") of the guarantor/issuer;
between the principal and beneficiary
3. Independence of the guarantee from the principal-guarantor (b) On the instruction of another bank, institution or person
relationship—the guarantee is separate from the contract ("instructing party") that acts at the request of the customer
between the principal and the guarantor is not entitled to ("principal/applicant") of that instructing party; or
invoke a breach of that contract
4. Documentary character of guarantee—amount and duration of (c) On behalf of the guarantor/issuer itself.
the duty to pay, the conditions of payment and termination of
payment obligation depend solely on the terms of the 3. Payment may be stipulated in the undertaking to be made in any form,
guarantee itself and presentation of required documents including:

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(a) Payment in a specified currency or unit of account; (c) "Counter-guarantee" means an undertaking given to the
(b) Acceptance of a bill of exchange (draft); guarantor/issuer of another undertaking by its instructing party and
(c) Payment on a deferred basis; providing for payment upon simple demand or upon demand accompanied
(d) Supply of a specified item of value. by other documents, in conformity with the terms and any documentary
conditions of the undertaking, indicating, or from which it is to be inferred,
4. The undertaking may stipulate that the guarantor/issuer itself is the that payment under that other undertaking has been demanded from, or
beneficiary when acting in favour of another person. made by, the person issuing that other undertaking;
Article 3 (d) "Counter-guarantor" means the person issuing a counter-

Independence of undertaking guarantee;
For the purposes of this Convention, an undertaking is independent where (e) "Confirmation" of an undertaking means an undertaking added to
the guarantor/issuer's obligation to the beneficiary is not: that of the guarantor/issuer, and authorized by the guarantor/issuer,
(a) Dependent upon the existence or validity of any underlying providing the beneficiary with the option of demanding payment from the
transaction, or upon any other undertaking (including stand-by letters of confirmer instead of from the guarantor/issuer, upon simple demand or
credit or independent guarantees to which confirmations or counter- upon demand accompanied by other documents, in conformity with the
guarantees relate); or terms and any documentary conditions of the confirmed undertaking,
without prejudice to the beneficiary's right to demand payment from the
(b) Subject to any term or condition not appearing in the undertaking, or guarantor/issuer;
to any future, uncertain act or event except presentation of documents or
another such act or event within a guarantor/issuer's sphere of operations. (f) "Confirmer" means the person adding a confirmation to an
undertaking;
CHAPTER II. INTERPRETATION
(g) "Document" means a communication made in a form that provides
Article 5 a complete record thereof.
Principles of interpretation
CHAPTER III. FORM AND CONTENT OF UNDERTAKING
In the interpretation of this Convention, regard is to be had to its
international character and to the need to promote uniformity in its Article 7: Issuance, form and irrevocability of undertaking
application and the observance of good faith in the international practice of
independent guarantees and stand-by letters of credit. 1. Issuance of an undertaking occurs when and where the undertaking
leaves the sphere of control of the guarantor/issuer concerned.
Article 6
Definitions 2. An undertaking may be issued in any form which preserves a complete
record of the text of the undertaking and provides authentication of its
For the purposes of this Convention and unless otherwise indicated in a source by generally accepted means or by a procedure agreed upon by the
provision of this Convention or required by the context: guarantor/issuer and the beneficiary.
(a) "Undertaking" includes "counter-guarantee" and "confirmation of an 3. From the time of issuance of an undertaking, a demand for payment
undertaking"; may be made in accordance with the terms and conditions of the
undertaking, unless the undertaking stipulates a different time.
(b) "Guarantor/issuer" includes "counter-guarantor" and "confirmer";
4. An undertaking is irrevocable upon issuance, unless it stipulates that it
is revocable.

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CHAPTER IV. RIGHTS, OBLIGATIONS AND DEFENCES 1. The guarantor/issuer shall examine the demand and any accompanying
documents in accordance with the standard of conduct referred to in
Article 13: Determination of rights and obligations paragraph 1 of article 14. In determining whether documents are in facial
conformity with the terms and conditions of the undertaking, and are
1. The rights and obligations of the guarantor/issuer and the beneficiary consistent with one another, the guarantor/issuer shall have due regard to
arising from the undertaking are determined by the terms and conditions the applicable international standard of independent guarantee or stand-by
set forth in the undertaking, including any rules, general conditions or letter of credit.
usages specifically referred to therein, and by the provisions of this
Convention. 2. Unless otherwise stipulated in the undertaking or elsewhere agreed by
the guarantor/issuer and the beneficiary, the guarantor/issuer shall have
2. In interpreting terms and conditions of the undertaking and in settling reasonable time, but not more than seven business days following the day
questions that are not addressed by the terms and conditions of the of receipt of the demand and any accompanying documents, in which to:
undertaking or by the provisions of this Convention, regard shall be had to
generally accepted international rules and usages of independent (a) Examine the demand and any accompanying documents;
guarantee or stand-by letter of credit practice.
(b) Decide whether or not to pay;
Article 14: Standard of conduct and liability of guarantor/issuer
(c) If the decision is not to pay, issue notice thereof to the beneficiary.
1. In discharging its obligations under the undertaking and this
Convention, the guarantor/issuer shall act in good faith and exercise The notice referred to in subparagraph (c) above shall, unless otherwise
reasonable care having due regard to generally accepted standards of stipulated in the undertaking or elsewhere agreed by the guarantor/issuer
international practice of independent guarantees or stand-by letters of and the beneficiary, be made by teletransmission or, if that is not possible,
credit. by other expeditious means and indicate the reason for the decision not to
pay.
2. A guarantor/issuer may not be exempted from liability for its failure to
act in good faith or for any grossly negligent conduct. Article 17: Payment
Article 15: Demand 1. Subject to article 19, the guarantor/issuer shall pay against a demand
made in accordance with the provisions of article 15. Following a
1. Any demand for payment under the undertaking shall be made in a determination that a demand for payment so conforms, payment shall be
form referred to in paragraph 2 of article 7 and in conformity with the made promptly, unless the undertaking stipulates payment on a deferred
terms and conditions of the undertaking. basis, in which case payment shall be made at the stipulated time.
2. Unless otherwise stipulated in the undertaking, the demand and any 2. Any payment against a demand that is not in accordance with the
certification or other document required by the undertaking shall be provisions of article 15 does not prejudice the rights of the
presented, within the time that a demand for payment may be made, to principal/applicant.
the guarantor/issuer at the place where the undertaking was issued.
Article 18: Set-off
3. The beneficiary, when demanding payment, is deemed to certify that
the demand is not in bad faith and that none of the elements referred to in Unless otherwise stipulated in the undertaking or elsewhere
subparagraphs (a), (b) and (c) of paragraph 1 of article 19 are present. agreed by the guarantor/issuer and the beneficiary, the
guarantor/issuer may discharge the payment obligation under the
Article 16: Examination of demand and accompanying documents undertaking by availing itself of a right of set-off, except with any

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claim assigned to it by the principal/applicant or the instructing 3. In the circumstances set out in subparagraphs (a), (b) and (c)
party. of paragraph 1 of this article, the principal/applicant is entitled to
provisional court measures in accordance with article 20.
Article 19: Exception to payment obligation
CHAPTER V. PROVISIONAL COURT MEASURES
1. If it is manifest and clear that:
Article 20: Provisional court measures
(a) Any document is not genuine or has been falsified;
1. Where, on an application by the principal/applicant or the instructing
(b) No payment is due on the basis asserted in the demand and party, it is shown that there is a high probability that, with regard to a
the demand made, or expected to be made, by the beneficiary, one of the
supporting documents; or circumstances referred in subparagraphs (a), (b) and (c) of paragraph 1 of
article 19 is present, the court, on the basis of immediately available
(c) Judging by the type and purpose of the undertaking, the strong evidence, may:
demand has no conceivable basis, the guarantor/issuer, acting in
good faith, has a right, as against the beneficiary, to withhold (a) Issue a provisional order to the effect that the beneficiary does
payment. not receive payment, including an order that the guarantor/issuer hold the
amount of the undertaking, or
2. For the purposes of subparagraph (c) of paragraph 1 of this
article, the following are types of situations in which a demand has (b) Issue a provisional order to the effect that the proceeds of the
no conceivable basis: undertaking paid to the beneficiary are blocked, taking into account
whether in the absence of such an order the principal/applicant would be
(a) The contingency or risk against which the undertaking was likely to suffer serious harm.
designed to secure the beneficiary has undoubtedly not
materialized; 2. The court, when issuing a provisional order referred to in paragraph 1
of this article, may require the person applying therefor to furnish such
(b) The underlying obligation of the principal/applicant has form of security as the court deems appropriate.
been declared invalid by a court or arbitral tribunal, unless the
undertaking indicates that such contingency falls within the risk to 3. The court may not issue a provisional order of the kind referred to in
be covered by the undertaking; paragraph 1 of this article based on any objection to payment other than
those referred to in subparagraphs (a), (b) and (c) of paragraph 1 of article
(c) The underlying obligation has undoubtedly been fulfilled to 19, or use of the undertaking for a criminal purpose.
the satisfaction of the beneficiary;
159 EDWARD OWEN ENGINEERING V. BARCLAYS BANK
(d) Fulfilment of the underlying obligation has clearly been 1977 QB 159 (TRIVIA: QB STANDS FOR QUEEN’S BENCH)
prevented by wilful misconduct of the beneficiary;
FACTS:
(e) In the case of a demand under a counter-guarantee, the
beneficiary of the counter-guarantee has made payment in bad EDWARD OWEN ENGRSUPPLY & INSTALL GREENHOUSESADC (LIBYA)
faith as guarantor/issuer of the undertaking to which the counter-
guarantee relates. 20% payable in advance of delivery
50% presentation of shipping documents
10% when materials on site DOCUMENTARY CREDIT
15% when there was a provisional handing over

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5% final handling over PERFORMANCE BOND AT 10% guarantee must honor the guarantee according to its terms. It is not
concerned in the least with the relations of the buyer and seller. The bank
(GUARANTEE) (GUARANTEE) must pay according to its guarantee, on demand, if so stipulated without
BARCLAY’S UNCONFIRMED LETTER OF CREDIT) UMMA BANK proof or conditions. The only exception is when there is clear fraud of
GUARANTEE which bank has notice.
*LC expressly provided that payment only to be made when the Libyan
customers authorized it. With respect to the English supplier, the only remedy available to it would
be to file for damages against the Libyan customers.
The English suppliers made every effort to get the Libyan customers to 160 GROUND AIR TRANSFER V. WESTATES AIRLINES
amend the LC but to no avail. Then it consulted with its bank, Barclay’s. it 899 F.2D. 1269
wrote a letter to the Libyan customers stating that the LC was
unacceptable to them because among other things, it was agreed that the FACTS:
LC should be confirmed but it is not. And more importantly, it said in its
letter that since the LC was inoperative, the guarantee is also inoperative. WESTATES AIRLINESCHARTER AIR SERVICECHARTER ONE
Nonetheless, the Libyan customers demanded from the guarantee.

Consequently, Umma bank claimed from Barclay’s bank. The English STANDBY LETTER OF CREDIT
suppliers were able to obtain a writ of injunction to restrain the bank from
paying. Later on, Barclay’s was able to get the discharge of the injunction. MICHIGAN BANK
In granting its motion, the court held that the relations of the banks with Each alleged breach of contract of the other party. This led Westates to
each other were independent of the underlying contract and Barclay’s call the standby letter of credit. Charter One was able to obtain an
should have paid Umma bank. injunction and this prompted Westates to appeal the same.
HELD: HELD:
A performance bond is similar to a letter of credit. It has been long The courts may not “normally ” issue an injunction because of an important
established that when a LC is issued and confirmed by the bank, the bank exception to the general “no injunction” rule. The exception concerns
must pay it if the documents are in order and the terms of the credit are “fraud” so serious as to make it obviously pointless and unjust to permit
satisfied. Any dispute between the buyer and seller must be settled the beneficiary to obtain the money. Where the circumstances “plainly ”
between themselves. The bank must honor the credit. The only exception show that the underlying contract forbids the beneficiary to call a letter of
to this is when there is established or obvious fraud to the knowledge of credit, where they show that the contract deprives the beneficiary of even
the bank. a “colorable ” right to do so, where the contract and circumstances reveal
that the beneficiary's demand for payment has “absolutely no basis in
Such is the principle with letters of credit. How about with regard fact,”; where the beneficiary's conduct has “so vitiated the entire
performance guarantees? transaction that the legitimate purposes of the independence of the issuer's
obligation would no longer be served,”; then a court may enjoin payment.
Performance guarantees are virtually promissory notes payable on
demand. So long as the Libyan customers make an honest demand, the The Uniform Commercial Code, as adopted in most states, says:
banks are bound to pay and the banks will rarely if ever be in a position to Unless otherwise agreed when documents appear on their face to comply
know whether the demand is honest or not. At any rate they will not be with the terms of a credit but a required document ... is forged or
able to prove it to be dishonest. So they will have to pay. fraudulent or there is fraud in the transaction:
....
All this leads to the conclusion that the performance guarantee is in the (b) [except in certain circumstances listed in subsection (a) not here
same footing as a letter of credit. A bank which gives a performance applicable] an issuer acting in good faith may honor the draft or demand

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for payment despite notification from the customer of fraud, forgery or in effect an absolute undertaking to pay the money advanced or the
other defect not apparent on the face of the documents but a court of amount for which the credit is given on the faith of the instrument. They
appropriate jurisdiction may enjoin such honor. are primary obligations and not accessory contract. Being separate and
independent contracts, the payments made by the spouses cannot be
The “fraud” exception does not apply in this case, however, for the record added in computing the liability of IBAA under its own standby LC.
shows nothing “fraudulent” about Westates' demand for payment, nor did
the district court find to the contrary. As our earlier discussion of the 162 TRANSFIELD PHILIPPINES V. LUZON HYDRO CORP.
contract dispute makes clear, the record reveals that Westates' claims and 443 SCRA 307
defenses are, at the least, “colorable.”
FACTS:
Since the letter of credit at issue is an ordinary “standby” or “guarantee”
letter, since Westates can readily fulfill the letter's expressed “call”
conditions, and since, in doing so, Westates' call would not amount to TRANSFIELD TURNKEY CONTRACT: POWER PLANT LUZON HYDRO
“fraud,” commercial law, as embodied in the law of most states, would
forbid a court to enjoin Westates from calling the letter, whether or not
that court believed that eventually Westates would lose its case on the SECURED STANDBY LC’S
underlying contract. ($75000/DAY OF DELAY)
161 INSULAR BANK OF ASIA AND AMERICA V. IAC

167 SCRA 450 ANZ BANK, SECURITY BANK
FACTS: Petitioner asked for several extensions in completing construction due to

different reasons but were denied by Luzon Hydro. These resulted to
SPOUSES MENDOZA LOAN K (X) PHILAM LIFE different legal actions. And upon foreseeing that Luzon Hydro would call on
the standby letters of credit, petitioner advised the banks that proceedings
were pending between the two parties and that Luzon Hydro doesn’t have
TWO IRREVOCABLE STANDBY LC any right to call on the LCs. And like a self-fulfilling prophecy, Luzon did
notified petitioner of its failure to comply with the contract and that it
REAL ESTATE MORTGAGE (X) would call in the standby letters of credit. Petitioner filed a complaint for
TWO PROMISSORY NOTES (X) injunction but this was denied ultimately.
INSULAR BANK OF ASIA AND AMERICA HELD:

*FIRST: P500000 At the core of the present controversy is the applicability of the
*SECOND: P100000 “independence principle” and “fraud exception rule” in letters of credit.
IBAA sued Spouses Mendoza. In the trial court’s decision, the trial court Thus, a discussion of the nature and use of letters of credit, also referred
deducted from the supposed liability of IBAA the payments made by the to simply as “credits,” would provide a better perspective of the case.
spouses to Philam Life. This was affirmed by the appellate court.
The letter of credit evolved as a mercantile specialty, and the only way to
HELD: understand all its facets is to recognize that it is an entity unto itself. The
The subject standby LC secure the payment of any obligation of the relationship between the beneficiary and the issuer of a letter of credit is
spouses to Philam Life including all interests, surcharges and expenses. not strictly contractual, because both privity and a meeting of the minds
But while they are security arrangements they are not converted into are lacking, yet strict compliance with its terms is an enforceable right. Nor
contracts of guaranty. That would make them ultra vires rather than a is it a third-party beneficiary contract, because the issuer must honor
letter of credit, which is within the powers of a bank. The standby LC are drafts drawn against a letter regardless of problems subsequently arising in

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the underlying contract. Since the bank’s customer cannot draw on the letters of credit incorporate the UCP. First published in 1933, the UCP for
letter, it does not function as an assignment by the customer to the Documentary Credits has undergone several revisions, the latest of which
beneficiary. Nor, if properly used, is it a contract of suretyship or was in 1993.
guarantee, because it entails a primary liability following a default. Finally,
it is not in itself a negotiable instrument, because it is not payable to order The engagement of the issuing bank is to pay the seller or beneficiary of
or bearer and is generally conditional, yet the draft presented under it is the credit once the draft and the required documents are presented to it.
often negotiable. The so-called “independence principle” assures the seller or the beneficiary
of prompt payment independent of any breach of the main contract and
In commercial transactions, a letter of credit is a financial device developed precludes the issuing bank from determining whether the main contract is
by merchants as a convenient and relatively safe mode of dealing with actually accomplished or not.
sales of goods to satisfy the seemingly irreconcilable interests of a seller,
who refuses to part with his goods before he is paid, and a buyer, who The independent nature of the letter of credit may be: (a) independence in
wants to have control of the goods before paying. The use of credits in toto where the credit is independent from the justification aspect and is a
commercial transactions serves to reduce the risk of nonpayment of the separate obligation from the underlying agreement like for instance a
purchase price under the contract for the sale of goods. However, credits typical standby; or (b) independence may be only as to the justification
are also used in non-sale settings where they serve to reduce the risk of aspect like in a commercial letter of credit or repayment standby, which is
nonperformance. Generally, credits in the non-sale settings have come to identical with the same obligations under the underlying agreement. In
be known as standby credits. 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
There are three significant differences between commercial and standby the credit.
credits. First, commercial credits involve the payment of money under a
contract of sale. Such credits become payable upon the presentation by the Can the beneficiary invoke the independence principle?
seller-beneficiary of documents that show he has taken affirmative steps to
comply with the sales agreement. In the standby type, the credit is Petitioner insists that the independence principle does not apply to the
payable upon certification of a party's nonperformance of the agreement. instant case and assuming it is so, it is a defense available only to
The documents that accompany the beneficiary's draft tend to show that respondent banks. LHC, on the other hand, contends that it would be
the applicant has not performed. The beneficiary of a commercial credit contrary to common sense to deny the benefit of an independent contract
must demonstrate by documents that he has performed his contract. The to the very party for whom the benefit is intended. As beneficiary of the
beneficiary of the standby credit must certify that his obligor has not letter of credit, LHC asserts it is entitled to invoke the principle.
performed the contract.
Given the nature of letters of credit, petitioner’s argument—that it is only
By definition, a letter of credit is a written instrument whereby the writer the issuing bank that may invoke the independence principle on letters of
requests or authorizes the addressee to pay money or deliver goods to a credit—does not impress this Court. To say that the independence principle
third person and assumes responsibility for payment of debt therefor to the may only be invoked by the issuing banks would render nugatory the
addressee. A letter of credit, however, changes its nature as different purpose for which the letters of credit are used in commercial transactions.
transactions occur and if carried through to completion ends up as a As it is, the independence doctrine works to the benefit of both the issuing
binding contract between the issuing and honoring banks without any bank and the beneficiary.
regard or relation to the underlying contract or disputes between the
parties thereto. Letters of credit are employed by the parties desiring to enter into
commercial transactions, not for the benefit of the issuing bank but mainly
Since letters of credit have gained general acceptability in international for the benefit of the parties to the original transactions. With the letter of
trade transactions, the ICC has published from time to time updates on the credit from the issuing bank, the party who applied for and obtained it may
Uniform Customs and Practice (UCP) for Documentary Credits to confidently present the letter of credit to the beneficiary as a security to
standardize practices in the letter of credit area. The vast majority of convince the beneficiary to enter into the business transaction. On the

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other hand, the other party to the business transaction, i.e., the The remedy for fraudulent abuse is an injunction. However, injunction
beneficiary of the letter of credit, can be rest assured of being empowered should not be granted unless:
to call on the letter of credit as a security in case the commercial (a) there is clear proof of fraud;
transaction does not push through, or the applicant fails to perform his part (b) the fraud constitutes fraudulent abuse of the independent purpose of
of the transaction. It is for this reason that the party who is entitled to the the letter of credit and not only fraud under the main agreement; and
proceeds of the letter of credit is appropriately called “beneficiary.” (c) irreparable injury might follow if injunction is not granted or the
recovery of damages would be seriously damaged.
Petitioner’s argument that any dispute must first be resolved by the
parties, whether through negotiations or arbitration, before the beneficiary Generally, injunction is a preservative remedy for the protection of one’s
is entitled to call on the letter of credit in essence would convert the letter substantive right or interest; it is not a cause of action in itself but merely
of credit into a mere guarantee. Jurisprudence has laid down a clear a provisional remedy, an adjunct to a main suit. The issuance of the writ
distinction between a letter of credit and a guarantee in that the settlement of preliminary injunction as an ancillary or preventive remedy to secure the
of a dispute between the parties is not a pre-requisite for the release of rights of a party in a pending case is entirely within the discretion of the
funds under a letter of credit. In other words, the argument is court taking cognizance of the case, the only limitation being that this
incompatible with the very nature of the letter of credit. If a letter of credit discretion should be exercised based upon the grounds and in the manner
is drawable only after settlement of the dispute on the contract entered provided by law.
into by the applicant and the beneficiary, there would be no practical and
beneficial use for letters of credit in commercial transactions. Before a writ of preliminary injunction may be issued, there must be a
clear showing by the complaint that there exists a right to be protected and
While it is the bank which is bound to honor the credit, it is the beneficiary that the acts against which the writ is to be directed are violative of the
who has the right to ask the bank to honor the credit by allowing him to said right. It must be shown that the invasion of the right sought to be
draw thereon. The situation itself emasculates petitioner’s posture that protected is material and substantial, that the right of complainant is clear
LHC cannot invoke the independence principle and highlights its puerility, and unmistakable and that there is an urgent and paramount necessity for
more so in this case where the banks concerned were impleaded as parties the writ to prevent serious damage. Moreover, an injunctive remedy may
by petitioner itself. Furthermore, Luzon Hydro is given the right to call as only be resorted to when there is a pressing necessity to avoid injurious
provided in their contract. consequences, which cannot be remedied under any standard
compensation.
Next, petitioner invokes the “fraud exception” principle. It avers that LHC’s
call on the Securities is wrongful because it fraudulently misrepresented to In the instant case, petitioner failed to show that it has a clear and
ANZ Bank and SBC that there is already a breach in the Turnkey Contract unmistakable right to restrain LHC’s call on the Securities which would
knowing fully well that this is yet to be determined by the arbitral tribunals. justify the issuance of preliminary injunction. By petitioner’s own
It asserts that the “fraud exception” exists when the beneficiary, for the admission, the right of LHC to call on the Securities was contractually
purpose of drawing on the credit, fraudulently presents to the confirming rooted and subject to the express stipulations in the Turnkey Contract.
bank, documents that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue. In such a PRESIDENTIAL DECREE No. 115 January 29, 1973
situation, petitioner insists, injunction is recognized as a remedy available
to it. PROVIDING FOR THE REGULATION OF TRUST RECEIPTS
TRANSACTIONS
Would injunction then be the proper remedy to restrain the alleged
wrongful draws on the Securities? WHEREAS, the utilization of trust receipts, as a convenient business
device to assist importers and merchants solve their financing
Fraud is an exception to the independence principle. The untruthfulness of problems, had gained popular acceptance in international and
a certificate accompanying a demand for payment under a standby credit domestic business practices, particularly in commercial banking
may qualify as fraud sufficient to support an injunction against payment. transactions;

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(b) "Entrustee" shall refer to the person having or taking

WHEREAS, there is no specific law in the Philippines that governs possession of goods, documents or instruments under a trust
trust receipt transactions, especially the rights and obligations of receipt transaction, and any successor in interest of such person
the parties involved therein and the enforcement of the said rights for the purpose or purposes specified in the trust receipt
in case of default or violation of the terms of the trust receipt agreement.
agreement;
(c) "Entruster" shall refer to the person holding title over the
WHEREAS, the recommendations contained in the report on the goods, documents, or instruments subject of a trust receipt
financial system which have been accepted, with certain transaction, and any successor in interest of such person.
modifications by the monetary authorities included, among others,
the enactment of a law regulating the trust receipt transactions; (d) "Goods" shall include chattels and personal property other
than: money, things in action, or things so affixed to land as to
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the become a part thereof.
Philippines, by virtue of the powers vested in me by the
Constitution, as Commander-in-Chief of all the Armed Forces of the (e) "Instrument" means any negotiable instrument as defined in
Philippines, and pursuant to Proclamation No. 1081, dated the Negotiable Instrument Law; any certificate of stock, or bond or
September 21, 1972, and General Order No. 1, dated September 22, debenture for the payment of money issued by a public or private
1972, as amended, and in order to effect the desired changes and corporation, or any certificate of deposit, participation certificate or
reforms in the social, economic, and political structure of our receipt, any credit or investment instrument of a sort marketed in
society, do hereby order and decree and make as part of the law of the ordinary course of business or finance, whereby the entrustee,
the land the following: after the issuance of the trust receipt, appears by virtue of
possession and the face of the instrument to be the owner.
Section 1. Short Title. This Decree shall be known as the Trust "Instrument" shall not include a document as defined in this
Receipts Law. Decree.
Section 2. Declaration of Policy. It is hereby declared to be the (f) "Purchase" means taking by sale, conditional sale, lease,
policy of the state (a) to encourage and promote the use of trust mortgage, or pledge, legal or equitable.
receipts as an additional and convenient aid to commerce and
trade; (b) to provide for the regulation of trust receipts (g) "Purchaser" means any person taking by purchase.
transactions in order to assure the protection of the rights and
enforcement of obligations of the parties involved therein; and (c) (h) "Security Interest" means a property interest in goods,
to declare the misuse and/or misappropriation of goods or documents or instruments to secure performance of some
proceeds realized from the sale of goods, documents or obligations of the entrustee or of some third persons to the
instruments released under trust receipts as a criminal offense entruster and includes title, whether or not expressed to be
punishable under Article Three hundred and fifteen of the Revised absolute, whenever such title is in substance taken or retained for
Penal Code. security only.
Section 3. Definition of terms. As used in this Decree, unless the (i) "Person" means, as the case may be, an individual, trustee,
context otherwise requires, the term receiver, or other fiduciary, partnership, corporation, business trust
or other association, and two more persons having a joint or
(a) "Document" shall mean written or printed evidence of title to common interest.
goods.
(j) "Trust Receipt" shall refer to the written or printed document
signed by the entrustee in favor of the entruster containing terms

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and conditions substantially complying with the provisions of this goods, documents or instruments themselves if they are unsold or
Decree. No further formality of execution or authentication shall be not otherwise disposed of, in accordance with the terms and
necessary to the validity of a trust receipt. conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
(k) "Value" means any consideration sufficient to support a simple
contract. 1. In the case of goods or documents, (a) to sell the goods or
procure their sale; or (b) to manufacture or process the goods with
TRUST RECEIPT the purpose of ultimate sale: Provided, That, in the case of goods
 Shall refer to the written or printed document signed by the entrustee delivered under trust receipt for the purpose of manufacturing or
in favor of the entruster containing terms and conditions substantially processing before its ultimate sale, the entruster shall retain its
complying with the provisions of this Decree. No further formality of title over the goods whether in its original or processed form until
execution or authentication shall be necessary to the validity of a trust the entrustee has complied fully with his obligation under the trust
receipt receipt; or (c) to load, unload, ship or tranship or otherwise deal
with them in a manner preliminary or necessary to their sale; or
ENTRUSTER
 Person holding title over the goods, documents, or instruments subject 2. In the case of instruments,
of a trust receipt transaction, and any successor in interest of such
person a) to sell or procure their sale or exchange; or
 Has security interest—property interest in goods, documents or
instruments to secure performance of some obligations of the b) to deliver them to a principal; or
entrustee or of some third persons to the entruster and includes title,
whether or not expressed to be absolute, whenever such title is in c) to effect the consummation of some transactions involving
substance taken or retained for security only delivery to a depository or register; or
ENTRUSTEE d) to effect their presentation, collection or renewal

 Person having or taking possession of goods, documents or
instruments under a trust receipt transaction, and any successor in The sale of goods, documents or instruments by a person in the
interest of such person for the purpose or purposes specified in the business of selling goods, documents or instruments for profit who,
trust receipt agreement at the outset of the transaction, has, as against the buyer, general
property rights in such goods, documents or instruments, or who
Section 4. What constitutes a trust receipt transaction. A trust sells the same to the buyer on credit, retaining title or other
receipt transaction, within the meaning of this Decree, is any interest as security for the payment of the purchase price, does not
transaction by and between a person referred to in this Decree as constitute a trust receipt transaction and is outside the purview
the entruster, and another person referred to in this Decree as and coverage of this Decree.
entrustee, whereby the entruster, who owns or holds absolute title
or security interests over certain specified goods, documents or Section 5. Form of trust receipts; contents. A trust receipt need not
instruments, releases the same to the possession of the entrustee be in any particular form, but every such receipt must substantially
upon the latter's execution and delivery to the entruster of a signed contain (a) a description of the goods, documents or instruments
document called a "trust receipt" wherein the entrustee binds subject of the trust receipt; (2) the total invoice value of the goods
himself to hold the designated goods, documents or instruments in and the amount of the draft to be paid by the entrustee; (3) an
trust for the entruster and to sell or otherwise dispose of the undertaking or a commitment of the entrustee (a) to hold in trust
goods, documents or instruments with the obligation to turn over for the entruster the goods, documents or instruments therein
to the entruster the proceeds thereof to the extent of the amount described; (b) to dispose of them in the manner provided for in the
owing to the entruster or as appears in the trust receipt or the trust receipt; and (c) to turn over the proceeds of the sale of the

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goods, documents or instruments to the entruster to the extent of public sale, become a purchaser. The proceeds of any such sale,
the amount owing to the entruster or as appears in the trust whether public or private, shall be applied (a) to the payment of
receipt or to return the goods, documents or instruments in the the expenses thereof; (b) to the payment of the expenses of re-
event of their non-sale within the period specified therein. taking, keeping and storing the goods, documents or instruments;
(c) to the satisfaction of the entrustee's indebtedness to the
The trust receipt may contain other terms and conditions agreed entruster. The entrustee shall receive any surplus but shall be
upon by the parties in addition to those hereinabove enumerated liable to the entruster for any deficiency. Notice of sale shall be
provided that such terms and conditions shall not be contrary to deemed sufficiently given if in writing, and either personally served
the provisions of this Decree, any existing laws, public policy or on the entrustee or sent by post-paid ordinary mail to the
morals, public order or good customs. entrustee's last known business address.
Section 6. Currency in which a trust receipt may be denominated. A RIGHTS OF THE ENTRUSTER
trust receipt may be denominated in the Philippine currency or any 1. He shall be entitled to the proceeds from the sale of the goods,
foreign currency acceptable and eligible as part of international documents or instruments released under a trust receipt to the
reserves of the Philippines, the provisions of existing law, entrustee to the extent of the amount owing to the entruster or as
executive orders, rules and regulations to the contrary appears in the trust receipt, or to the return of the goods,
notwithstanding: Provided, however, That in the case of trust documents or instruments in case of non-sale, and to the
receipts denominated in foreign currency, payment shall be made enforcement of all other rights conferred on him in the trust
in its equivalent in Philippine currency computed at the prevailing receipt provided such are not contrary to the provisions of this
exchange rate on the date the proceeds of sale of the goods, Decree.
documents or instruments held in trust by the entrustee are turned 2. He may cancel the trust and take possession of the goods,
over to the entruster or on such other date as may be stipulated in documents or instruments subject of the trust or of the proceeds
the trust receipt or other agreements executed between the realized therefrom at any time upon default or failure of the
entruster and the entrustee. entrustee to comply with any of the terms and conditions of the
trust receipt or any other agreement between the entruster and
Section 7. Rights of the entruster. The entruster shall be entitled to the entrustee, and the entruster in possession of the goods,
the proceeds from the sale of the goods, documents or instruments documents or instruments may, on or after default, give notice to
released under a trust receipt to the entrustee to the extent of the the entrustee of the intention to sell, and may, not less than five
amount owing to the entruster or as appears in the trust receipt, or days after serving or sending of such notice, sell the goods,
to the return of the goods, documents or instruments in case of documents or instruments at public or private sale, and the
non-sale, and to the enforcement of all other rights conferred on entruster may, at a public sale, become a purchaser.
him in the trust receipt provided such are not contrary to the 3. The proceeds shall be applied
provisions of this Decree. a. To the payment of the expenses thereof;
b. To the payment of the expenses of re-taking, keeping
The entruster may cancel the trust and take possession of the and storing the goods, documents or instruments;
goods, documents or instruments subject of the trust or of the c. To the satisfaction of the entrustee's indebtedness to the
proceeds realized therefrom at any time upon default or failure of entruster.
the entrustee to comply with any of the terms and conditions of the d. The entrustee shall receive any surplus but shall be liable
trust receipt or any other agreement between the entruster and the to the entruster for any deficiency.
entrustee, and the entruster in possession of the goods, documents 4. Notice of sale shall be deemed sufficiently given if in writing, and
or instruments may, on or after default, give notice to the either personally served on the entrustee or sent by post-paid
entrustee of the intention to sell, and may, not less than five days ordinary mail to the entrustee's last known business address.
after serving or sending of such notice, sell the goods, documents 5. The entruster holding a security interest shall not, merely by
or instruments at public or private sale, and the entruster may, at a virtue of such interest or having given the entrustee liberty of sale

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or other disposition of the goods, documents or instruments under Section 10. Liability of entrustee for loss. The risk of loss shall be
the terms of the trust receipt transaction be responsible as borne by the entrustee. Loss of goods, documents or instruments
principal or as vendor under any sale or contract to sell made by which are the subject of a trust receipt, pending their disposition,
the entrustee. irrespective of whether or not it was due to the fault or negligence
of the entrustee, shall not extinguish his obligation to the entruster
Section 8. Entruster not responsible on sale by entrustee. The for the value thereof.
entruster holding a security interest shall not, merely by virtue of
such interest or having given the entrustee liberty of sale or other LIABILITY OF ENTRUSTEE FOR LOSS
disposition of the goods, documents or instruments under the  The risk of loss is borne by the entrustee
terms of the trust receipt transaction be responsible as principal or  Loss of goods, documents or instruments which are the subject of a
as vendor under any sale or contract to sell made by the entrustee. trust receipt, pending their disposition, irrespective of whether or not it
was due to the fault or negligence of the entrustee, shall not
Section 9. Obligations of the entrustee. The entrustee shall (1) hold extinguish his obligation to the entruster for the value thereof.
the goods, documents or instruments in trust for the entruster and
shall dispose of them strictly in accordance with the terms and Section 11. Rights of purchaser for value and in good faith. Any
conditions of the trust receipt; (2) receive the proceeds in trust for purchaser of goods from an entrustee with right to sell, or of
the entruster and turn over the same to the entruster to the extent documents or instruments through their customary form of
of the amount owing to the entruster or as appears on the trust transfer, who buys the goods, documents, or instruments for value
receipt; (3) insure the goods for their total value against loss from and in good faith from the entrustee, acquires said goods,
fire, theft, pilferage or other casualties; (4) keep said goods or documents or instruments free from the entruster's security
proceeds thereof whether in money or whatever form, separate interest.
and capable of identification as property of the entruster; (5)
return the goods, documents or instruments in the event of non- RIGHTS OF PURCHASER FOR VALUE AND IN GOOD FAITH
sale or upon demand of the entruster; and (6) observe all other  Any purchaser of goods from an entrustee with right to sell, or of
terms and conditions of the trust receipt not contrary to the documents or instruments through their customary form of transfer,
provisions of this Decree. who buys the goods, documents, or instruments for value and in good
faith from the entrustee, acquires said goods, documents or
OBLIGATIONS OF THE ENTRUSTEE instruments free from the entruster's security interest.
1. Hold the goods, documents or instruments in trust for the  Doesn’t have recourse against the entrustor when there are warranty
entruster and shall dispose of them strictly in accordance with the claims or defects with regard the sale of the goods
terms and conditions of the trust receipt;
2. Receive the proceeds in trust for the entruster and turn over the Section 12. Validity of entruster's security interest as against
same to the entruster to the extent of the amount owing to the creditors. The entruster's security interest in goods, documents, or
entruster or as appears on the trust receipt; instruments pursuant to the written terms of a trust receipt shall
3. Insure the goods for their total value against loss from fire, theft, be valid as against all creditors of the entrustee for the duration of
pilferage or other casualties; the trust receipt agreement.
4. Keep said goods or proceeds thereof whether in money or
whatever form, separate and capable of identification as property VALIDITY OF ENTRUSTER’S SECURITY INTEREST AS AGAINST CREDITORS
of the entruster;  The entruster's security interest in goods, documents, or instruments
5. Return the goods, documents or instruments in the event of non- pursuant to the written terms of a trust receipt shall be valid as
sale or upon demand of the entruster; and against all creditors of the entrustee for the duration of the trust
6. Observe all other terms and conditions of the trust receipt not receipt agreement.
contrary to the provisions of this Decree.

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Section 13. Penalty clause. The failure of an entrustee to turn over LETTER OF CREDIT
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 TRUST RECEIPT AGREEMENT
entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the IBAA
crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known HELD:
as the Revised Penal Code. If the violation or offense is committed A trust receipt is a security agreement, pursuant to which a bank acquires
by a corporation, partnership, association or other juridical a "security interest" in the goods. "It secures an indebtedness and there
entities, the penalty provided for in this Decree shall be imposed can be no such thing as security interest that secures no obligation. ...
upon the directors, officers, employees or other officials or persons
therein responsible for the offense, without prejudice to the civil As elucidated in Samo vs. People "a trust receipt is considered as a security
liabilities arising from the criminal offense. transaction intended to aid in financing importers and retail dealers who do
not have sufficient funds or resources to finance the importation or
FAILURE OF AN ENTRUSTEE TO TURN OVER THE PROCEEDS OF THE SALE purchase of merchandise, and who may not be able to acquire credit
OF THE GOODS, DOCUMENTS OR INSTRUMENTS COVERED BY A TRUST except through utilization, as collateral, of the merchandise imported or
RECEIPT TO THE EXTENT OF THE AMOUNT OWING TO THE ENTRUSTER OR purchased. "
AS APPEARS IN THE TRUST RECEIPT OR TO RETURN SUCH GOODS,
DOCUMENTS OR INSTRUMENTS IF THEY WERE NOT SOLD OR DISPOSED Contrary to the allegation of the VINTOLAS, IBAA did not become the real
OF IN ACCORDANCE WITH THE TERMS OF THE TRUST RECEIPT owner of the goods. It was merely the the holder of appeals security title
 Shall constitute the crime of estafa, punishable under the provisions of for the advances it had made to the VINTOLAS the goods the VINTOLAS
Article Three hundred and fifteen, paragraph one (b) of Act Numbered had purchased through IBAA financing remain their own property and they
Three thousand eight hundred and fifteen, as amended, otherwise hold it at their own risk. The trust receipt arrangement did not convert the
known as the Revised Penal Code IBAA into an investor; the latter remained a lender and creditor.
 If the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in this ... for the bank has previously extended a loan which the L/C represents to
Decree shall be imposed upon the directors, officers, employees or the importer, and by that loan, the importer should be the real owner of
other officials or persons therein responsible for the offense, without the goods. If under the trust receipt, the bank is made to appear as the
prejudice to the civil liabilities arising from the criminal offense. owner, it was but an artificial expedient, more of a legal fiction than fact,
for if it were so, it could dispose of the goods in any manner it wants,
Section 14. Cases not covered by this Decree. Cases not provided which it cannot do, just to give consistency with the purpose of the trust
for in this Decree shall be governed by the applicable provisions of receipt of giving a stronger security for the loan obtained by the importer.
existing laws. To consider the bank as the true owner from the inception of the
transaction would be to disregard the loan feature thereof. ...
CASE DIGESTS: TRUST RECEIPTS LAW
Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot
163 VINTOLA V. IBAA justifiably claim that because they have surrendered the goods to IBAA and
150 SCRA 140 subsequently deposited them in the custody of the court, they are
absolutely relieved of their obligation to pay their loan because of their
FACTS: inability to dispose of the goods. The fact that they were unable to sell the
seashells in question does not affect IBAA's right to recover the advances it
SPOUSES VINTOLA SALE OF PUCA & OLIVE SHELLS E. ALANI had made under the Letter of Credit.

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acceptance is necessary only in the cases expressly provided for in Section

To support their case, the VINTOLAS argue that their return of the goods 143 of the Negotiable Instruments Law (NIL).
amounted to recovery by IBAA and to order them to further make payment
would be tantamount to double recovery. According to them, "the situation Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment
is akin to an act or omission constituting both a quasi-delict under the Civil at maturity of any accepted draft, bill of exchange or indebtedness shall
Code and also criminal negligence under the Revised Penal Code" hence not be extinguished or modified" does not, contrary to the holding of the
they invoke the rule under Art. 2177 of the New Civil Code against double public respondent, contemplate prior acceptance by Philippine Rayon, but
recovery. by the petitioner. Acceptance, however, was not even necessary in the first
place because the drafts which were eventually issued were sight drafts
The VINTOLAS' reliance on said provision of law is erroneous. As correctly And even if these were not sight drafts, thereby necessitating acceptance,
argued by IBAA, there is no double recovery since the bank has not yet it would be the petitioner and not Philippine Rayon which had to accept the
recovered from them, The VINTOLAS' deposit in court of the puka and olive same for the latter was not the drawee. Presentment for acceptance is
shells does not amount to recovery by IBAA. defined an the production of a bill of exchange to a drawee for acceptance.
THE TRIAL COURT AND THE PUBLIC RESPONDENT, THEREFORE, ERRED IN
164 PRUDENCIAL BANK V. IAC RULING THAT PRESENTMENT FOR ACCEPTANCE WAS AN INDISPENSABLE
216 SCRA 257 REQUISITE FOR PHILIPPINE RAYON'S LIABILITY ON THE DRAFTS TO
ATTACH. Contrary to both courts' pronouncements, Philippine Rayon
FACTS: immediately became liable thereon upon petitioner's payment thereof.
PHIL RAYON IMPORTATION OF TEXTILE MACHINES NISSHO JAPAN Such is the essence of the letter of credit issued by the petitioner. A
different conclusion would violate the principle upon which commercial
LETTER OF CREDIT letters of credit are founded because in such a case, both the beneficiary
and the issuer, Nissho Company Ltd. and the petitioner, respectively,
TRUST RECEIPT (SURETY SOLIDARILY LIABLE TO PB UPON FAILURE OF would be placed at the mercy of Philippine Rayon even if the latter had
PHIL RAYON TO PAY) (X) already received the imported machinery and the petitioner had fully paid
for it.
PRUDENTIAL BANK
The trial court and the public respondent likewise erred in disregarding the
trust receipt and in not holding that Philippine Rayon was liable thereon.
The trial court held Phil Rayon liable but not for the reimbursement of what
the bank paid for the machineries. This was appealed to the appellate Under P.D. No. 115, otherwise known an the Trust Receipts Law, which
court. took effect on 29 January 1973, a trust receipt transaction is defined as
"any transaction by and between a person referred to in this Decree as the
HELD: entruster, and another person referred to in this Decree as the entrustee,
A letter of credit is defined as an engagement by a bank or other person whereby the entruster, who owns or holds absolute title or security
made at the request of a customer that the issuer will honor drafts or other interests' over certain specified goods, documents or instruments, releases
demands for payment upon compliance with the conditions specified in the the same to the possession of the entrustee upon the latter's execution and
credit. Through a letter of credit, the bank merely substitutes its own delivery to the entruster of a signed document called the "trust receipt"
promise to pay for one of its customers who in return promises to pay the wherein the entrustee binds himself to hold the designated goods,
bank the amount of funds mentioned in the letter of credit plus credit or documents or instruments in trust for the entruster and to sell or otherwise
commitment fees mutually agreed upon. In the instant case then, the dispose of the goods, documents or instruments with the obligation to turn
drawee was necessarily the herein petitioner. It was to the latter that the over to the entruster the proceeds thereof to the extent of the amount
drafts were presented for payment. In fact, there was no need for owing to the entruster or as appears in the trust receipt or the goods,
acceptance as the issued drafts are sight drafts. Presentment for instruments themselves if they are unsold or not otherwise disposed of, in

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accordance with the terms and conditions specified in the trusts receipt, or  The recourse would be to go after the parties secondarily liable,
for other purposes substantially equivalent to any one of the following" namely, the drawer
It is alleged in the complaint that private respondents "not only have CAN DRAWER THEN SUE THE DRAWEE BASED ON THE ABOVEMENTIONED
presumably put said machinery to good use and have profited by its CHECK WHEN THE LATTER DISHONORS THE CHECK?
operation and/or disposition but very recent information that (sic) reached  No, there is no right of recourse against drawee
plaintiff bank that defendants already sold the machinery covered by the  But is there any other right of recourse using another law than the
trust receipt to Yupangco Cotton Mills," and that "as trustees of the NIL? Yes. There could be an action for breach of contract. When
property covered by the trust receipt, . . . and therefore acting in fiduciary there are sufficient funds, the bank is bound to pay. But if the bank
(sic) capacity, defendants have willfully violated their duty to account for refuses to pay, then there will be a breach of contract.
the whereabouts of the machinery covered by the trust receipt or for the
proceeds of any lease, sale or other disposition of the same that they may CASE DIGESTS: SECTION 127
have made, notwithstanding demands therefor; defendants have
fraudulently misapplied or converted to their own use any money realized 165 REPUBLIC V. NATIONAL CITY BANK
from the lease, sale, and other disposition of said machinery." While there 3 SCRA 851
is no specific prayer for the delivery to the petitioner by Philippine Rayon of
the proceeds of the sale of the machinery covered by the trust receipt, FACTS:
such relief is covered by the general prayer for "such further and other The government filed a complaint for escheat of certain unclaimed bank
relief as may be just and equitable on the premises." And although it is deposits balances pursuant to a law, which provides that unclaimed
true that the petitioner commenced a criminal action for the violation of the balances—credits, money, bullion, security or other evidence of
Trust Receipts Law, no legal obstacle prevented it from enforcing the civil indebtedness of any kind, and interest with banks—shall be deposited with
liability arising out of the trust, receipt in a separate civil action. Under the government if it remains to be unclaimed within a period of 10 years of
Section 13 of the Trust Receipts Law, the failure of an entrustee to turn more.
over the proceeds of the sale of goods, documents or instruments covered
by a trust receipt to the extent of the amount owing to the entruster or as One of the banks against the complaint has been filed is First National City
appear in the trust receipt or to return said goods, documents or Bank. Although it concedes that the government had the right to claim the
instruments if they were not sold or disposed of in accordance with the unclaimed deposit balances, it seeks to exclude some which, according to
terms of the trust receipt shall constitute the crime of estafa, punishable it, are not within the purview of credits and deposits as defined in law. the
under the provisions of Article 315, paragraph 1(b) of the Revised Penal trial court held in favor of the bank, excluding from the claim the
Code. Under Article 33 of the Civil Code, a civil action for damages, entirely manager’s checks and other demand drafts.
separate and distinct from the criminal action, may be brought by the
injured party in cases of defamation, fraud and physical injuries. Estafa HELD:
falls under fraud. Credit is a sum credited on the books of a company to a person who
appears to be entitled to it. it presupposes a creditor-debtor relationship
Sec. 127. Bill not an assignment of funds in hands of drawee. - A and may be said to imply ability, by reason of property or estates, to make
bill of itself does not operate as an assignment of the funds in the a promised payment. It is correlative to indebtedness, and that which is
hands of the drawee available for the payment thereof, and the due to any person, as distinguished to that which he owes.
drawee is not liable on the bill unless and until he accepts the
same. Do demand drafts and telegraphic orders come within the purview of
credits or deposits employed in the law?
CAN A PAYEE SUE A BANK FOR DISHONORING A CHECK FOR NON-
PAYMENT? Since the demand drafts herein involved have not been presented either
 No, since until the drawee bank pays or accepts the check, it will not for acceptance or payment, the inevitable consequence is that the bank
be liable for the instrument never had the chance of accepting or receiving them. Verily, the bank

Page 155 of 190
never became a debtor of the payee concerned and as such the aforesaid Sgd. A
drafts cannot be considered as credits subject to escheat within the
meaning of the law. To: Y or in default of Y, Z
Further, a demand draft is different from a cashier’s check for this is a

primary obligation of the bank which issues it and constitutes a written Sec. 129. Inland and foreign bills of exchange. - An inland bill of
promise to pay upon demand. It is an order to a third party purporting to exchange is a bill which is, or on its face purports to be, both
be drawn upon a deposit of funds. drawn and payable within the Philippines. Any other bill is a foreign
bill. Unless the contrary appears on the face of the bill, the holder
If there is any consolation, the telegraphic orders can be escheated in favor may treat it as an inland bill.
of the government. The agreement to remit creates a contractual
obligation and has been termed a purchase and sale transaction. The INLAND BILL
purchaser of a telegraphic transfer upon making payment completes the  Where the instrument is drawn and made payable in the Philippines
transaction insofar as he is concerned, though insofar as the remitting
bank is concerned the contract is executory until the credit is established. Pay to X or order P1000.
The drawer bank has already been paid the value of the telegraphic order. Sgd. A
It appears in the books of the bank that the amounts represented by the
orders appear in the names of respective payees. If the latter choose to To: Y, Manila, Philippines
demand payment, the bank had the obligation to pay them.
FOREIGN BILL
Sec. 128. Bill addressed to more than one drawee. - A bill may be 1. Where the bill is not drawn and not payable in the Philippines
addressed to two or more drawees jointly, whether they are 2. Where the bill is drawn in but not made payable in the Philippines
partners or not; but not to two or more drawees in the alternative 3. Where the bill is not drawn but made payable in the Philippines
or in succession.
Sec. 130. When bill may be treated as promissory note. - Where in
BILL ADDRESSED TO MORE THAN ONE DRAWEE: VALID a bill the drawer and drawee are the same person or where the
Pay to X or order P1000. drawee is a fictitious person or a person not having capacity to
contract, the holder may treat the instrument at his option either
Sgd. A as a bill of exchange or as a promissory note.
To: Y and Z WHEN BILL MAY BE TREATED AS PROMISSORY NOTE

1. Where the drawer and drawee are the same person
BILL ADDRESSED TO MORE THAN ONE DRAWEE: INVALID 2. Where the drawee is a fictitious person
3. Where the drawee is a person not having capacity to contract
Pay to X or order P1000.  The holder may treat the instrument at his option either as a bill of
exchange or a promissory note
Sgd. A
Sec. 131. Referee in case of need. - The drawer of a bill and any
To: Y or Z indorser may insert thereon the name of a person to whom the
holder may resort in case of need; that is to say, in case the bill is
Pay to X or order P1000. dishonored by non-acceptance or non-payment. Such person is
called a referee in case of need. It is in the option of the holder to
resort to the referee in case of need or not as he may see fit.

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 In general, acceptance in the sense in which the term is used in NIL

NOTES: WEEK #13 isn’t required for checks, for the same are payable on demand
SEPTEMBER 17 TO 21, 2007
THE DRAWEE MUST SIGN
 Without the signature of the drawee, he would not be bound pursuant
X. ACCEPTANCE to the principle enumerated in Section 18
Sec. 132. Acceptance; how made, by and so forth. - The acceptance PAYMENT IN MONEY
of a bill is the signification by the drawee of his assent to the order  Acceptance must be expressed to be payable in money only
of the drawer. The acceptance must be in writing and signed by the
drawee. It must not express that the drawee will perform his NECESSITY OF DELIVERY
promise by any other means than the payment of money.  The acceptance is incomplete until delivery or notification
 And the acceptor or drawee who hasn’t communicated his acceptance
ACCEPTANCE, DEFINED. or transmitted the accepted bill to the holder, may revoke an
 The signification of the drawee of his assent to the order of the drawer acceptance before delivery and cancel the written acceptance
 Act by which a person on whome the bill of exchange is drawn assents
to the request of the drawer to pay it EFFECT OF ACCEPTANCE
 It may be actual, constructive, general or qualified  Upon acceptance, the drawee becomes liable on the bill
 The bill becomes in effect a note, the acceptor standing in the place of
REQUISITES OF ACCEPTANCE the maker, and the drawer, in the place of the first indorser
1. Must be in writing  But should the drawee refuse to accept, the payee or other holder has
2. Signed by the drawee no recourse against him but only against the drawer or indorsers, if
3. It must not express that the drawee will perform his promise by any
any other means than payment of money
4. It must be communicated or delivered to the holder PAYMENT NOT ACCEPTANCE
 Payment of a check doesn’t include or imply its acceptance in the
ACCEPTANCE MUST BE IN WRITING sense that this word is used in Section 62 of the NIL
 The acceptance cannot be made orally  Payment is the actual performance while acceptance is the promise to
 Sound public policy requires substantial and tangible evidence of perform an act
contract, and more reliable in its nature than the statement or
recollection of witnesses CASE DIGESTS: SECTION 132
 An oral acceptance is not binding on the drawee
 Acceptance by phone is not acceptance 166 SUMACAD V. PROVINCE OF SAMAR
100 PHIL 72
ACCEPTANCE, HOW MADE
 Usually done by writing across the face of the bill the word “accepted” FACTS:
followed by the signature of the drawee While the Province of Samar was still occupied by Japanese military forces,
 But any words written by the drawee not negativing directly the order it issued a check in favor of Santos. This check was then negotiated to
of the drawer, would constitute sufficient acceptance, such as “holder”, McGuire, an American citizen and resident of Borongan. After the
“presented” or “seen”, or “honored” or “I will pay the bill” or the liberation, McGuire presented the check to the municipal treasurer of
signature of the drawee, without more Borongan for payment but the latter wasn’t able or didn’t choose to pay the
 Acceptance by telegram has been held to be sufficient same. This prompted McGuire to write letters seeking payment of the
check. This matter was referred to PNB. The bank received photostatic
WHEN ACCEPTANCE NOT REQUIRED copies of the check to verify its authencity. The bank then instructed

Page 157 of 190
McGuire to present the check to the provincial treasurer as the province

still had funds with the bank. Again, McGuire requested to expedite the 167 PNB V. CA
actions taken on his check. Before the check was certified by the 25 SCRA 693
authorities however, the province withdrew a substantial amount from its
account, leaving a balance insufficient to fund the check. This happened FACTS:
when McGuire has transferred his rights to McGuire Sumacad. This led to a Lim deposited in his PCIB account a GSIS check drawn against PNB.
complaint filed against the province and PNB. Following standard banking procedures, the check was sent to petitioner
for clearing. He didn’t return said check but paid the amount to PCIB as
The position of PNB is that it didn’t issue the check and was merely called well as debited it against the account of GSIS. Thereafter, a demand was
upon to pay the same upon being presented for encashment if and when received from GSIS asking for the credit of the amount since the
funds for the purpose were available. That it couldn’t have paid said check signatures found in the check were forged. This was done by PNB and it
because it was never presented to it with the required certification under now comes after PCIB but the latter wouldn’t want to return the money.
the circular of the Secretary of Finance. That the relationship between the
bank and the province is of debtor and creditor. That there is nothing in HELD:
the records to show that the holder of the check ever requested the bank Acceptance is not required for checks, for the same are payable on
to withhold the amount of the check or ever filed with the proper demand. Acceptance and payment are distinguished with each other. The
authorities any order to withhold the amount covered by the check. That former pertains to a promise to perform an act while the latter is the actual
in any event, the bank cannot be held solidarily liable because the province performance of the act.
is the drawee of the check and therefore primarily liable to pay the same.
PNB had also been negligent with the particularity that it had been guilty of
HELD: a greater degree of negligence because it had a previous and formal notice
Bank’s contentions are in the main correct. from GSIS that the check had been lost, with the request that payment be
stopped. Just as important is that it is its acts, which are the proximate
But in view of the fact that upon its own request, it was furnished with cause of the loss.
photostatic copies of the check in question and went to the trouble of
requiring to present the check to the provincial treasurer for necessary Sec. 133. Holder entitled to acceptance on face of bill. - The holder
certification, it voluntarily assumed the obligation of holding so much of the of a bill presenting the same for acceptance may require that the
deposit of the province as would be sufficient to cover the amount of the acceptance be written on the bill, and, if such request is refused,
check, or before allowing the withdrawal that exhausted said deposit, of may treat the bill as dishonored.
making the necessary inquiry on the matter.
Sec. 134. Acceptance by separate instrument. - Where an
There was implied acceptance of the check by the bank was thereby acceptance is written on a paper other than the bill itself, it does
created. The request by the bank from Bureau of Posts for photostatic not bind the acceptor except in favor of a person to whom it is
copies of the check and the subsequent requirement by it for its shown and who, on the faith thereof, receives the bill for value.
presentation by McGuire to the provincial treasurer and the auditor for
certification, would be an empty gesture if the appellant didn’t thereby Sec. 135. Promise to accept; when equivalent to acceptance. - An
mean to assume the obligation of paying the check and holding sufficient unconditional promise in writing to accept a bill before it is drawn
deposit of the drawer for the purpose. Even so, appellant’s resulting is deemed an actual acceptance in favor of every person who, upon
obligation is merely subsidiary, the province being primarily liable to pay the faith thereof, receives the bill for value.
the check.
WHERE ACCEPTANCE IS WRITTEN
DISSENTING OPINION: there was no proper presentment for acceptance Acceptance may be made
and payment and thus, there couldn’t have been acceptance made by the 1. On the bill itself
bank of the bill. 2. On a separate paper

Page 158 of 190
3. If on a separate paper,  C indorses the bill to D who saw the letter, and on faith thereof,
a. It may be acceptance as to the existing bill received the bill.
b. It may be acceptance as to a non-existing bill (virtual  Can C enforce the bill against A? No, because the acceptance binds X
acceptance). If the bill is non-existent, the acceptance only in favor of those whom it is shown and who, on faith thereof,
on a separate paper must comply with the following receive the bill for value, and C neither saw nor knew of the
requirements acceptance
i. That the contemplated drawee shall describe the  But B and D can enforce the bill against X because they received the
bill to be drawn, and promise to accept it bill for value on faith of the separate acceptance
ii. That the bill shall be drawn within a reasonable
time after such promise is written Sec. 136. Time allowed drawee to accept. - The drawee is allowed
iii. That the holder shall take the bill upon the credit twenty-four hours after presentment in which to decide whether or
of the promise not he will accept the bill; the acceptance, if given, dates as of the
day of presentation.
RIGHT TO REQUIRE ACCEPTANCE ON BILL
 The holder has the right to require that the acceptance must be ILLUSTRATION
written on the bill itself  A bill is payable 30 days after sight
 If the drawee refuses, the holder may treat the bill as dishonored, and  B the payee presents it for acceptance on January 2, 1950 to X drawee
he must therefore, give a notice of dishonor  X has 24 hours to accept the bill
 Otherwise, persons secondarily liable are discharged  But even if he accepts the bill on the next day, the acceptance will
 This section isn’t applicable to sight bills but to bills of exchange date back to January 2
 Hence the date of maturity of the bill would be February 1 and not
ILLUSTRATION OF SECTION 134 February 2
 B the payee of the bill writes to X drawee, asking him whether he  The time allowed begins from the time of delivery and not after
would accept the bill demand for a return of the bill and the time for returning the bill to the
 X write back stating that he accepts the bill holder doesn’t begin to run from the demand for its return but from
 But a telegram that a draft is good in answer to a telegram asking a the date of its delivery
bank if it would pay the draft isn’t acceptance nor an agreement to
accept SECTION 136 NOT APPLICABLE TO CHECKS
 Court says that “good” constitutes an acceptance if written on the bill  But a drawee bank isn’t entitled to 24 hours to decide whether to pay
or check but not when written in a collateral document such as a a check or not since a check is presented for payment, not acceptance
telegram
NEGLIGENCE OF DRAWEE
ILLUSTRATION OF SECTION 135  The drawee bank contends that the collecting bank is guilty of
 Before the bill is drawn, B prospective payee, writes to X, prospective negligence in not discovering that the signatures of the drawer are
drawee, if he would accept A’s bill for P1000 to cover cost of goods forged
purchased.  Assuming this to be true, the drawee bank is guilty of a greater degree
 X writes through telegram “yes” of negligence because it has a previous and formal notice from the
 The promise to accept must be in writing drawer that the check had been lost, with the request that payment
 But although the acceptance of a bill may be conditional, a collateral thereof be stopped.
written promise to accept a bill upon a condition isn’t an acceptance  The collecting bank didn’t cash the check upon its presentation by the
last indorser and on the same day sent it for clearing through the
EFFECT OF ACCEPTANCE ON SEPARATE PAPER Central Bank
 Suppose that B payee, indorses the bill to C who neither saw nor knew
of the letter of acceptance.

Page 159 of 190
 The drawee bank didn’t return the check and said failure to return the  Rule forces uniform treatment of instruments whether presented for
check implied that it did considered the check good and would honor payment or acceptance and establishes certain and predictable results
it, as it in fact did honor and pay where it is not clear for which purpose the instrument was presented
 The drawee bank may not recover from the collecting bank
Sec. 137. Liability of drawee returning or destroying bill. - Where a
drawee to whom a bill is delivered for acceptance destroys the 168 CEBU INTERNATIONAL V. CA
same, or refuses within twenty-four hours after such delivery or 316 SCRA 488
within such other period as the holder may allow, to return the bill
accepted or non-accepted to the holder, he will be deemed to have FACTS:
accepted the same. Petitioner is a quasi-banking institution involved in money market
transactions. Alegre invested with petitioner P500,000. Petitioner issued
CONSTRUCTIVE ACCEPTANCE then a promissory note, which would mature approximately after a month.
1. Where the drawee to whom the bill is delivered for acceptance The note covered for Alegre’s placement plus interest. On the maturity of
destroys it the note, petitioner issued a check payable to Alegre, covering the whole
2. Where the drawee refuses, within 24 hours after such delivery, or amount due. It was drawn from petitioner’s current account in BPI. When
within such time as is given him, to return the bill acceptected or the wife of Alegre tried to deposit the check, the bank dishonored the
not accepted check. Petitioner was notified of this matter and Alegre demanded the
 In any of these cases, the drawee will be deemed to have accepted the immediate payment in cash. In turn, petitioner promised to replace the
bill even if there is no actual written acceptance by him check on the impossible premise that the first issued be returned to them.
 Accordingly, the drawee will be primarily liable as an acceptor This prompted Alegre to file a complaint against petitioner and petitioner in
turn, filed a case against BPI for allegedly unlawfully deducting from its
DRAWEE NOT ENTITLED TO KEEP BILL account counterfeit checks. The trial court decided in favor of Alegre.
 The drawee isn’t entitled to keep the bill while he makes up his mind
 The bill is at all times the property of the holder and he is entitled to ISSUE: W/N NIL is applicable to the money market transaction held
have it when he wants it between petitioner and Alegre?
 If the holder should demand its return before 24 hours, the drawee
would be required to comply on pain of being held as an acceptor; but HELD:
return within 24 hours unaccepted wouldn’t be a dishonor Considering the nature of the money market transaction, Article 1249 of
 The drawee could still accept by notification within 24 hours the CC is the applicable provision should be applied. A money market has
been defined to be a market dealing in standardized short-term credit
MERE RETENTION IS EQUIVALENT TO ACCEPTANCE instruments where lenders and borrowers don’t deal directly with each
 Mere failure to return the bill within 24 hours is an acceptance other but through a middleman or dealer in the open market. In a money
 The presentation for acceptance is a demand for acceptance which, if market transaction, the investor is the lender who loans his money to a
the bill is retained by the drawee, implies a demand for its return if borrower through a middleman or dealer.
acceptance is declined
In the case at bar, the transaction is in the nature of a loan. Petitioner
SECTION 136 AND 137 COVER PRESENTMENT FOR ACCEPTANCE AND accepted the check but when he tried to encash it, it was dishonored. The
PAYMENT holder has an immediate recourse against the drawer, and consequently
 It expressly mentions presentment for acceptance but not could immediately file an action for the recovery of the value of the check.
presentment for payment Further, in a loan transaction, the obligation to pay a sum certain in money
 The considerations for both are the same may be paid in money, which is the legal tender or, by the use of a check.
 He must return the instrument or be liable for its face value as A check is not legal tender, and therefore cannot constitute valid tender of
acceptor payment.

Page 160 of 190
OTHER KINDS OF ACCEPTANCE

Sec. 138. Acceptance of incomplete bill. - A bill may be accepted 1. General acceptance—assents without qualification to the order of
before it has been signed by the drawer, or while otherwise the drawer
incomplete, or when it is overdue, or after it has been dishonored 2. Qualified acceptance—which in express terms varies the effect of
by a previous refusal to accept, or by non payment. But when a bill the bills as drawn
payable after sight is dishonored by non-acceptance and the a. Conditional
drawee subsequently accepts it, the holder, in the absence of any PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT.
different agreement, is entitled to have the bill accepted as of the
date of the first presentment. SGD. A
TO X BANK
WHEN ACCEPTANCE MAY BE MADE
1. Before the bill has been signed by the drawer X could accept the bill with the qualification he will pay upon
2. Even when the bill is otherwise incomplete the happening of a condition, let’s say when D would sell out
3. Even when the bill is overdue his shares in a company.
4. Even after it has been dishonored by non-acceptance or non-
payment b. Partial
PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT.
Sec. 139. Kinds of acceptance. - An acceptance is either general or
qualified. A general acceptance assents without qualification to the SGD.A
order of the drawer. A qualified acceptance in express terms varies
the effect of the bill as drawn. TO: X
X would accept but only accept to pay P500.
Sec. 140. What constitutes a general acceptance. - An acceptance
to pay at a particular place is a general acceptance unless it c. Local
expressly states that the bill is to be paid there only and not
elsewhere. PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT.
Sec. 141. Qualified acceptance. - An acceptance is qualified which SGD. A

is:
TO: X
(a) Conditional; that is to say, which makes payment by the X would accept but make a qualification that he would pay
acceptor dependent on the fulfillment of a condition therein stated; only in RCBC Rockwell.
(b) Partial; that is to say, an acceptance to pay part only of the d. Qualified as to time
amount for which the bill is drawn; PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT.
(c) Local; that is to say, an acceptance to pay only at a SGD. A

particular place;
TO: X
(d) Qualified as to time;
X accepts but will pay 20 days after sight.
(e) The acceptance of some, one or more of the drawees but
not of all. e. The acceptance of some, one or more of the drawees but
not all

Page 161 of 190
(b) Where the bill expressly stipulates that it shall be presented

PAYMENT AT A PARTICULAR PLACE for acceptance; or
 But the mere fact that the acceptance is to pay at a particular place
doesn’t make the acceptance qualified (c) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.
Sec. 142. Rights of parties as to qualified acceptance. - The holder
may refuse to take a qualified acceptance and if he does not obtain In no other case is presentment for acceptance necessary in order
an unqualified acceptance, he may treat the bill as dishonored by to render any party to the bill liable.
non-acceptance. Where a qualified acceptance is taken, the drawer
and indorsers are discharged from liability on the bill unless they CASE DIGESTS: SECTION 143
have expressly or impliedly authorized the holder to take a
qualified acceptance, or subsequently assent thereto. When the 169 PRUDENTIAL BANK V. IAC
drawer or an indorser receives notice of a qualified acceptance, he 216 SCRA 257
must, within a reasonable time, express his dissent to the holder or
he will be deemed to have assented thereto. FACTS:
PHIL RAYON IMPORTATION OF TEXTILE MACHINES NISSHO JAPAN
RIGHTS OF HOLDER TO REQUIRE GENERAL ACCEPTANCE
 The holder has the right to require the drawee to accept the bill LETTER OF CREDIT
without qualification
 If the drawee refuses, the holder can treat the bill as dishonored by TRUST RECEIPT (SURETY SOLIDARILY LIABLE TO PB UPON FAILURE OF
non-acceptance PHIL RAYON TO PAY) (X)
 Accordingly, the holder must give notice of dishonor
PRUDENTIAL BANK
EFFECT OF TAKING QUALIFIED ACCEPTANCE
 Where the holder takes a qualified acceptance, the drawer and
indorsers are discharged The trial court held Phil Rayon liable but not for the reimbursement of what
 Reason? The drawer and indorsers warrant that the bill would be paid the bank paid for the machineries. This was appealed to the appellate
as drawn, or as indorsed by them, and a qualified acceptance would court.
vary their contract without their consent
 If the drawer or indorsers give their consent to the qualified HELD:
acceptance, then they are not discharged. They will be considered to A letter of credit is defined as an engagement by a bank or other person
have given consent when after receiving notice of the qualified made at the request of a customer that the issuer will honor drafts or other
acceptance, he doesn’t express his dissent thereto within a reasonable demands for payment upon compliance with the conditions specified in the
time credit. Through a letter of credit, the bank merely substitutes its own
promise to pay for one of its customers who in return promises to pay the
XI. PRESENTMENT FOR ACCEPTANCE bank the amount of funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon. In the instant case then, the
Sec. 143. When presentment for acceptance must be made. - drawee was necessarily the herein petitioner. It was to the latter that the
Presentment for acceptance must be made: drafts were presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts. Presentment for
(a) Where the bill is payable after sight, or in any other case, acceptance is necessary only in the cases expressly provided for in Section
where presentment for acceptance is necessary in order to fix the 143 of the Negotiable Instruments Law (NIL).
maturity of the instrument; or

Page 162 of 190
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment required by the next preceding section to be presented for
at maturity of any accepted draft, bill of exchange or indebtedness shall acceptance must either present it for acceptance or negotiate it
not be extinguished or modified" does not, contrary to the holding of the within a reasonable time. If he fails to do so, the drawer and all
public respondent, contemplate prior acceptance by Philippine Rayon, but indorsers are discharged.
by the petitioner. Acceptance, however, was not even necessary in the first
place because the drafts which were eventually issued were sight drafts PRESENTMENT FOR PAYMENT, DEFINED
And even if these were not sight drafts, thereby necessitating acceptance,  Production of a bill of exchange to the drawee for his acceptance
it would be the petitioner and not Philippine Rayon which had to accept the
same for the latter was not the drawee. Presentment for acceptance is GENERAL RULE AS TO PRESENTMENT FOR ACCEPTANCE
defined an the production of a bill of exchange to a drawee for acceptance.  Presentment for acceptance is not necessary for cases aside from the
THE TRIAL COURT AND THE PUBLIC RESPONDENT, THEREFORE, ERRED IN three enumerated above
RULING THAT PRESENTMENT FOR ACCEPTANCE WAS AN INDISPENSABLE  In those three cases, to charge persons secondarily liable it is
REQUISITE FOR PHILIPPINE RAYON'S LIABILITY ON THE DRAFTS TO necessary
ATTACH. Contrary to both courts' pronouncements, Philippine Rayon o To make presentment for acceptance
immediately became liable thereon upon petitioner's payment thereof. o To negotiate the bill within a reasonable time
Such is the essence of the letter of credit issued by the petitioner. A
different conclusion would violate the principle upon which commercial ILLUSTRATION
letters of credit are founded because in such a case, both the beneficiary 1. Where the bill is payable after sight. A bill is payable 30 days
and the issuer, Nissho Company Ltd. and the petitioner, respectively, after sight. The law requires the bill to be presented for
would be placed at the mercy of Philippine Rayon even if the latter had acceptance. The date of maturity will not be fixed if the bill isn’t
already received the imported machinery and the petitioner had fully paid presented.
for it. 2. Where there is express stipulation. The bill contains a stipulation
that it must be presented for acceptance. Such a bill must be
170 PHIL. BANK OF COMMERCE V. ARUEGO presented for acceptance.
102 SCRA 530 3. Where bill is drawn elsewhere than at the residence of drawee.
The bill reads as follows
FACTS: a. The bill must be presented for acceptance in order to
Aruego, on behalf of World Current Events, entered into a Credit inform the drawee X of the existence of the bill so that he
Agreement with PBCom, for the publication of the company’s periodicals. can make arrangements for its payment at the PNB
At every printing endeavor by the printing press, a bill of exchange is Manila
drawn against PBCom. The instruments are signed by Aruego, without any
indication that he is an agent of World Current Events. When he was being Pay to B or order P1000 at the PNB, Manila.
held liable by PBCom, he averred that he only signed the instrument in the
capacity of agent of the company. Sgd. A
HELD: To X, Davao City

An inspection of the drafts accepted by the defendant would show nowhere
that he has disclosed that he was signing in representation of the Philippine
Education Foundation Company. He merely signed his name. For failure to Sec. 145. Presentment; how made. - Presentment for acceptance
disclose his principal, Aruego was personally liable for the drafts he must be made by or on behalf of the holder at a reasonable hour,
accepted. on a business day and before the bill is overdue, to the drawee or
some person authorized to accept or refuse acceptance on his
Sec. 144. When failure to present releases drawer and indorser. - behalf; and
Except as herein otherwise provided, the holder of a bill which is

Page 163 of 190
(a) Where a bill is addressed to two or more drawees who are  Where presentment is for acceptance, it may be made for all kinds of
not partners, presentment must be made to them all unless one has bills before 12 o’clock noon on Saturday provided that day isn’t a
authority to accept or refuse acceptance for all, in which case holiday
presentment may be made to him only;
Sec. 147. Presentment where time is insufficient. - Where the
(b) Where the drawee is dead, presentment may be made to his holder of a bill drawn payable elsewhere than at the place of
personal representative; business or the residence of the drawee has no time, with the
exercise of reasonable diligence, to present the bill for acceptance
(c) Where the drawee has been adjudged a bankrupt or an before presenting it for payment on the day that it falls due, the
insolvent or has made an assignment for the benefit of creditors, delay caused by presenting the bill for acceptance before
presentment may be made to him or to his trustee or assignee. presenting it for payment is excused and does not discharge the
drawers and indorsers.
TIME FOR MAKING PRESENTMENT FOR ACCEPTANCE
1. Before the bill is overdue MANILA, PHILS.
2. And within reasonable time after acquisition thereof September 17, 2007
TO WHOM PRESENTMENT MADE PAY TO B OR ORDER AT THE PNB MANILA P1000 ON SEPTEMBER 20, 2007.
1. Generally, presentment must be made to the drawee or some
person authorized to accept or refuse acceptance on his behalf SGD. A
2. Where there are two or more drawees, presentment must be
made to both of them unless— TO X, WASHINGTON, DC.
a. One is duly authorized to accept or refuse acceptance
b. They are partners, subject to the limitation set forth in
the partnership law  Presentment where time is insufficient
3. With regard to a drawee who is dead, paragraph b is merely  The delay for presentment for acceptance is excused
permissive since presentment is excused where the drawee is  Nonetheless, still, the payee must do everything in the process in
dead presenting to the drawee for acceptance the instrument
4. With regard to an insolvent or bankrupt drawee, it indicates
merely a permission to adopt either one of two alternative Sec. 148. Where presentment is excused. - Presentment for
methods of presentment stated—not permission to omit acceptance is excused and a bill may be treated as dishonored by
presentment altogether non-acceptance in either of the following cases:
Sec. 146. On what days presentment may be made. - A bill may be (a) Where the drawee is dead, or has absconded, or is a
presented for acceptance on any day on which negotiable fictitious person or a person not having capacity to contract by bill.
instruments may be presented for payment under the provisions of
Sections seventy-two and eighty-five of this Act. When Saturday is (b) Where, after the exercise of reasonable diligence,
not otherwise a holiday, presentment for acceptance may be made presentment cannot be made.
before twelve o'clock noon on that day.
(c) Where, although presentment has been irregular,
SECTION 146 COMPARED WITH SECTIONS 72 AND 85 acceptance has been refused on some other ground.
 The only difference between Sections 72 and 85 is that under Section
146, there is no distinction between instruments payable at a fixed or APPLICATION OF SECTION 148
determinable future time and instruments payable on demand 1. Where the drawee is dead, presentment for acceptance is not
necessary. Hence, it seems that under paragraph b of Section

Page 164 of 190
145, the presentment to the representative is merely optional.  The holder, after giving notice of dishonor, and protesting when
Presentment is excused in this case and in case the drawee has required, can IMMEDIATELY file an action against the parties
absconded, or is fictitious or a person not having capacity to secondarily liable on the bill. This is true even when the bill is payable
contract because it would then be futile at a fixed or determinable future time and the date of maturity hasn’t
2. Where presentment cannot be made notwithstanding the exercise yet arrived. The holder need not wait for that day to arrive.
of due diligence, presentment is excused
3. An irregular indorsement in which acceptance is refused on some XII. PROTEST
other ground is where presentment is made on a Sunday, it is
irregular but the acceptance is refused on the ground that the Sec. 152. In what cases protest necessary. - Where a foreign bill
drawer has no funds in the hands of the drawee appearing on its face to be such is dishonored by nonacceptance, it
must be duly protested for nonacceptance, by nonacceptance is
Sec. 149. When dishonored by nonacceptance. - A bill is dishonored dishonored and where such a bill which has not previously been
by non-acceptance: dishonored by nonpayment, it must be duly protested for
nonpayment. If it is not so protested, the drawer and indorsers are
(a) When it is duly presented for acceptance and such an discharged. Where a bill does not appear on its face to be a foreign
acceptance as is prescribed by this Act is refused or can not be bill, protest thereof in case of dishonor is unnecessary.
obtained; or
NECESSITY OF PROTEST
(b) When presentment for acceptance is excused and the bill is  Protest is required only for foreign bills but not for inland bills or notes.
not accepted. However, they may also be protested if desired.
 Omission of protest, where protest is required, will discharge the
Sec. 150. Duty of holder where bill not accepted. - Where a bill is drawer and the indorsers
duly presented for acceptance and is not accepted within the  Protest is required—
prescribed time, the person presenting it must treat the bill as 1. Where the foreign bill is dishonored by non-acceptance
dishonored by nonacceptance or he loses the right of recourse 2. Where the foreign bill is dishonored by non-payment, it not having
against the drawer and indorsers. been previously dishonored by non-acceptance
3. Where the bill has been accepted for honor, it must be protested
DUTY OF HOLDER WHERE BILL IS DISHONORED BY NON-ACCEPTANCE for non-payment before it is presented for payment to the
 Where the bill is dishonored by non-acceptance, the holder must give acceptor for honor
notice of dishonor and protest, when required 4. Where the bill contains a referee in case of need, it must be
 Otherwise, the drawer and indorsers will be discharged protested for non-payment before it is presented for payment to
the referee in case of need
Sec. 151. Rights of holder where bill not accepted. - When a bill is
dishonored by nonacceptance, an immediate right of recourse MEANING OF PROTEST
against the drawer and indorsers accrues to the holder and no  A formal statement in writing made by a notary under his seal of office
presentment for payment is necessary. at the request of the holder of a bill or note, in which it is declared that
the same was on a certain day presented for payment was refused,
RIGHTS OF HOLDER WHERE BILL DISHONORED BY NON-ACCEPTANCE whereupon the notary protests against all parties to such instrument
 When a bill is dishonored by non-acceptance, there is no necessity of and declares that they will be held responsible for all loss or damage
making a presentment of the bill for payment arising from its dishonor
 But of course, if after previous non-acceptance, the bill is subsequently  All the steps or acts accompanying the dishonor of a bill or note
accepted, presentment for payment is necessary necessary to charge an indorser
 And when the bill has been accepted for honor, to charge the acceptor
for honor, presentment for payment is also necessary CASE DIGESTS: SECTION 152

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Here, the provisions on guaranty is pertinent. The respondents undertook

171 ALLIED BANKING CORPORATION V. CA and bound themselves as guarantors and sureties to pay the full amount of
494 SCRA 467 the export bill.
FACTS: Respondents claim that the petitioner failed to give a notice of protest and
ALLIEDDISCOUNTING AGREEMENT: EXPORT BILLGG SPORTSWEAR given such, they are exonerated of their liabilities. Nonetheless, their
contention should fail. The provisions on indorsers is not applicable to this
case. The contract of indorsement is primarily of transfer and a guaranty
is a personal security. The liability of a guarantor is broader than that of
GUARANTYGIDWANI; ALCRON an indorser. Unless the bill is promptly presented for payment at maturity
SURETYDE VILLA; GIDWANI and due notice of dishonor given to the indorser, he will be discharged
from liability thereon. On the other hand, except where required by the
provisions of the contract of suretyship, a demand or notice of default is
not required to fix the liability of the surety. Therefore, no notice of
Allied purchased from GG Sportswear an export bill to which the latter is protest is necessary to charge the respondents solidarily on the export bill.
the beneficiary. It was drawn under a letter of credit for the transit of
training suits to West Germany. It was issued by Chekiang First Bank of Sec. 153. Protest; how made. - The protest must be annexed to the
Hong Kong. With the purchase, it credited the account of GG Sportswear. bill or must contain a copy thereof, and must be under the hand
On this same date, Gidwani and Alcron executed their respective letters of and seal of the notary making it and must specify:
guaranty for the export bill, holding themselves liable in case the bill is not
paid. Consequently, de Villa and Gidwani issued a letter of surety, (a) The time and place of presentment;
guaranteeing payment of the bill. Part of the stipulations of these two
guarantee arrangements is that any notice of protest is waived. The date (b) The fact that presentment was made and the manner
came when Allied presented the check for payment to Chekiang Bank but thereof;
such was dishonored for lacking material documents with regard the letter
of credit. This prompted Allied Bank to demand payment from the (c) The cause or reason for protesting the bill;
respondents but the latter refused to do so. One of their averments is that
they couldn’t be made liable on the export bill absent any notice of protest (d) The demand made and the answer given, if any, or the fact
coming from petitioner. The trial court dismissed the case filed by that the drawee or acceptor could not be found.
petitioner and this was modified by the appellate court by holding GGS
liable but exonerating the guarantors from any liability. PROCEDURE FOR PROTEST
 Where the instrument is presented for payment and payment is
HELD: refused, the instrument may be taken by the notary public to the party
What transpired in this case was a discounting arrangment. The and the party may state that he refuses to pay it; the notary makes a
beneficiary, GGS, instead of proceeding to the issuing bank, negotiated the statement to that effect and attaches his seal that it has been
draft with petitioner. Before petitioner agreed to purchase the export bill, dishonored, and he has protested it for non-payment.
it required letters of guaranty and surety to cover the payment of the bill in  The notary keeps this or he may send his sworn statement, one copy
case it wouldn’t be paid. to one person and one to the other
 The above is the protest. It is not the notice of protest.
In this case, it must be stressed that obligations from contracts have the  The protest is a solemn declaration made by the notary public that the
force of law between the parties and should be complied with in good faith. paper has been dishonored
Nothing can stop the parties from establishing stipulations and clauses as
they may deem convenient. CERTIFICATE OF PROTEST AS EVIDENCE

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 When suit is brought on the paper, it is absolutely necessary that proof

be shown Sec. 155. Protest; when to be made. - When a bill is protested, such
 So when one comes to prove his case as the holder of an instrument protest must be made on the day of its dishonor unless delay is
he must prove that there has been a protest of the instrument, that it excused as herein provided. When a bill has been duly noted, the
has been presented for payment or acceptance to the person liable protest may be subsequently extended as of the date of the noting.
and that it has been refused.
 At the trial, the statement of the protest by the notary is a part of his MEANING OF “DULY NOTED”
case  The notary public jots down a note on the bill, or a paper attached
thereto, or in his registry book, consisting of his initials or signature
NOTICE OF PROTEST and those matters required to be stated in Section 153
 After the notary protests the instrument, he sends notice to all the  The noting must be made on the day of dishonor but it may be
parties on the instrument extended into a formal protest afterwards
 He can do this in several ways. He might send it to the person who  The protest may even be made in the trial
sent the paper for collection. Then the notary public would send the
notice of protest for the other parties on the instrument, to the last Sec. 156. Protest; where made. - A bill must be protested at the
person on the instrument, and he would say “Notices enclosed place where it is dishonored, except that when a bill drawn payable
herewith to be sent to the other parties” at the place of business or residence of some person other than the
 If the holder has sent notice to all parties he is entield to come in and drawee has been dishonored by nonacceptance, it must be
recover because he has performed the contract. He has sent notices protested for non-payment at the place where it is expressed to be
to all the parties on the instrument that he intends to recover against payable, and no further presentment for payment to, or demand on,
them. the drawee is necessary.
REASONS FOR REQUIRING PROTEST PLACE FOR MAKING PROTEST

1. For uniformity in international transactions because most  Generally, the protest must be made at the place where the
countries require it instrument is dishonored
2. In order to furnish authentic and satisfactory evidence of the  The exception is where the bill is payable at a place other than the
dishonor to the drawer who, from his residence abroad, may residence of the payee
experience difficulty in verifying the matter and may be forced to
rely on the representations of the holder Sec. 157. Protest both for non-acceptance and non-payment. - A
bill which has been protested for non-acceptance may be
MEASURE OF DAMAGES subsequently protested for non-payment.
1. Face value of the bill
2. Interest thereon PROTEST FOR NON-PAYMENT OPTIONAL AFTER PROTEST FOR NON-
3. Protest fees ACCEPTANCE
4. Re-exchange, being the additional expense of procuring a new bill  Where a bill has already been protested for non-acceptance, protest
for the same amolunt payable in the same place as day of for non-payment is merely optional
dishonor  Under Section 151, after a bill has been dishonored by non-
acceptance, presentment for payment is not necessary
Sec. 154. Protest, by whom made. - Protest may be made by:
Sec. 158. Protest before maturity where acceptor insolvent. -
(a) A notary public; or Where the acceptor has been adjudged a bankrupt or an insolvent
or has made an assignment for the benefit of creditors before the
(b) By any respectable resident of the place where the bill is bill matures, the holder may cause the bill to be protested for
dishonored, in the presence of two or more credible witnesses. better security against the drawer and indorsers.

Page 167 of 190
 It was held that the bank must stand the loss and cannot charge the
PROTEST FOR BETTER SECURITY amount of the checks to the depositor’s account
 One made by the holder against the drawer and indorsers where the
acceptor has been adjudged bankrupt or an insolvent or has made an XIII. ACCEPTANCE FOR HONOR
assignment for the benefit of creditors before the bill matures
 Such a protest isn’t necessary to charge the drawer or indorsers Sec. 161. When bill may be accepted for honor. - When a bill of
 It is optional on the part of the holder exchange has been protested for dishonor by non-acceptance or
protested for better security and is not overdue, any person not
WHEN PROTEST FOR BETTER SECURITY MADE being a party already liable thereon may, with the consent of the
1. After acceptance holder, intervene and accept the bill supra protest for the honor of
2. But before the date of maturity any party liable thereon or for the honor of the person for whose
3. When the acceptor has been adjudged bankrupt or insolvent or account the bill is drawn. The acceptance for honor may be for part
has made an assignment for the benefit of creditors only of the sum for which the bill is drawn; and where there has
been an acceptance for honor for one party, there may be a further
PURPOSE OF PROTEST FOR BETTER SECURITY acceptance by a different person for the honor of another party.
 When the acceptor is declared bankrupt, he probably wouldn’t be able
to pay for the bill ACCEPTANCE FOR HONOR
 The protest for better security is to give notice to the drawer or  An acceptance of bill made by a stranger to it before maturity, where
indorsers of this fact in order to enable them to make the necessary the drawee of the bill has refused to accept it, and the bill has been
arrangements so that they will not be held liable thereon and prevent protested for non-acceptance, or where the bill has been protested for
loss of re-exchange better security
 Such an acceptance is also called an acceptance supra protest
Sec. 159. When protest dispensed with. - Protest is dispensed with  This is a peculiar kind of acceptance. It most frequently happens when
by any circumstances which would dispense with notice of the original drawee refuses to accept the bill in which case a stranger
dishonor. Delay in noting or protesting is excused when delay is may accept the bill for the honor of some one of the parties thereto,
caused by circumstances beyond the control of the holder and not which acceptance will inure to the benefit of all parties subsequent to
imputable to his default, misconduct, or negligence. When the him for whose honor it was accepted
cause of delay ceases to operate, the bill must be noted or
protested with reasonable diligence. PURPOSE FOR ACCEPTANCE FOR HONOR
 To save the credit of the parties to the instrument or some party to it,
Sec. 160. Protest where bill is lost and so forth. - When a bill is lost as the drawer, drawee, or indorser or somebody else
or destroyed or is wrongly detained from the person entitled to  Someone desires to save the credit of another on the bill and he does
hold it, protest may be made on a copy or written particulars so by writing accepted on the bill
thereof.  The court holds that the consideration is presumed and the
presumption is that he does have funds or money for the party for
EFFECT OF LOSS OR DESTRUCTION OF BILL whose honor he accepts
 Loss or destruction of the bill doesn’t excuse the making of the protest
 In a case, checks indorsed without restriction and deposited in the REQUISITES FOR ACCEPTANCE FOR HONOR
defendant bank which credited the amount to the depositor’s account 1. The bill must have been previously protested for non-acceptance
and mailed them to its correspondent for collection, were lost and not or for better security
found until after the drawer became bankrupt 2. The bill isn’t overdue at the time of the acceptance for honor
 They were not dishonored due to the failure of defendant to attempt to 3. The acceptor for honor must be a stranger to the bill. If he is a
collect them as lost paper party, his acceptance for honor wouldn’t give any additional
security to the holder, as such a party is already liable thereon

Page 168 of 190
4. The holder must give his consent  He agrees to pay if—presentment for payment has been made; the
drawee doesn’t pay; the bill is protested for non-payment; and notice
Sec. 162. Acceptance for honor; how made. - An acceptance for of dishonor is given to him
honor supra protest must be in writing and indicate that it is an
acceptance for honor and must be signed by the acceptor for honor. Sec. 166. Maturity of bill payable after sight; accepted for honor. -
Where a bill payable after sight is accepted for honor, its maturity
HOW ACCEPTANCE IS MADE is calculated from the date of the noting for non-acceptance and
 Acceptance for honor must be in writing and indicate that it is an not from the date of the acceptance for honor.
acceptance for honor and signed by the person making the acceptance
Sec. 167. Protest of bill accepted for honor, and so forth. - Where a
ACCEPTOR FOR HONOR MUST APPEAR BEFORE NOTARY dishonored bill has been accepted for honor supra protest or
 It is essential that the acceptor for honor appear before the notary and contains a referee in case of need, it must be protested for non-
declare that he accepts the protested bill in honor of the drawer or payment before it is presented for payment to the acceptor for
indorser, as the case may be, and that he will pay it at the appointed honor or referee in case of need.
time
Sec. 168. Presentment for payment to acceptor for honor, how
Sec. 163. When deemed to be an acceptance for honor of the made. - Presentment for payment to the acceptor for honor must
drawer. - Where an acceptance for honor does not expressly state be made as follows:
for whose honor it is made, it is deemed to be an acceptance for
the honor of the drawer. (a) If it is to be presented in the place where the protest for
non-payment was made, it must be presented not later than the
Sec. 164. Liability of the acceptor for honor. - The acceptor for day following its maturity.
honor is liable to the holder and to all parties to the bill subsequent
to the party for whose honor he has accepted. (b) If it is to be presented in some other place than the place
where it was protested, then it must be forwarded within the time
Sec. 165. Agreement of acceptor for honor. - The acceptor for specified in Section one hundred and four.
honor, by such acceptance, engages that he will, on due
presentment, pay the bill according to the terms of his acceptance Sec. 169. When delay in making presentment is excused. - The
provided it shall not have been paid by the drawee and provided provisions of Section eighty-one apply where there is delay in
also that is shall have been duly presented for payment and making presentment to the acceptor for honor or referee in case of
protested for non-payment and notice of dishonor given to him. need.
TO WHOM ACCEPTOR IS LIABLE Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is
 Suppose A is the drawer of a bill with B as payee and X as drawee dishonored by the acceptor for honor, it must be protested for non-
 It is successively indorsed to C, D, E and F. X drawee at maturity payment by him.
refuses to accept the bill and F protests it.
 Before the date of maturity, Y as a stranger accepts the bill for the NECESSITY OF PROTEST
honor of C.  The holder must protest for non-payment by the acceptor for honor in
 Subject to 165, Y is liable to F holder, and to D and E, parties order to fix the liabilities of the indorsers
subsequent to C, the party for whose honor Y accepted the bill
NOTES: WEEK #14
CONTRACT OF ACCEPTOR FOR HONOR
SEPTEMBER 24 - 28, 2007
 The liability of an acceptor for honor is secondary and not primary or
absolute

Page 169 of 190
XIV. PAYMENT FOR HONOR parties, the person whose payment will discharge most parties to
the bill is to be given the preference.
Sec. 171. Who may make payment for honor. - Where a bill has
been protested for non-payment, any person may intervene and Sec. 175. Effect on subsequent parties where bill is paid for honor.
pay it supra protest for the honor of any person liable thereon or - Where a bill has been paid for honor, all parties subsequent to the
for the honor of the person for whose account it was drawn. party for whose honor it is paid are discharged but the payer for
honor is subrogated for, and succeeds to, both the rights and duties
Sec. 172. Payment for honor; how made. - The payment for honor of the holder as regards the party for whose honor he pays and all
supra protest, in order to operate as such and not as a mere parties liable to the latter.
voluntary payment, must be attested by a notarial act of honor
which may be appended to the protest or form an extension to it. ILLUSTRATION OF EFFECT OF PAYMENT FOR HONOR
PAY TO B OR ORDER P1000.
Sec. 173. Declaration before payment for honor. - The notarial act
of honor must be founded on a declaration made by the payer for SGD.A
honor or by his agent in that behalf declaring his intention to pay TO: X DRAWEE
the bill for honor and for whose honor he pays.
BCDEF
REQUISITES FOR PAYMENT FOR HONOR X REFUSES TO PAY.
1. The bill has been protested for non-payment F HAS DULY PROTESTED FOR NON-PAYMENT
2. And any person even a party thereto, may pay supra protest Y PAYS FOR THE HONOR OF C
 D and E, being subsequent to C, for whose honor the payment is
FORM FOR PAYMENT FOR HONOR made, are discharged
1. The payment must be attested by notarial act appended to the  Y acquires the rights of F, as against C, A, B and X parties who are
protest or form an extension of it liable to C but the payor for honor shall notify within reasonable time,
2. The notarial act must be based on a declaration by the payer for the party for whose honor he pays.
honor  Otherwise, the party is not bound to refund.
PROCEDURE FOR PAYMENT FOR HONOR PREFERENCE OF PARTIES OFFERING TO PAY

1. The payer or his agent goes to a notary public and declares his  If Z offers to pay for the honor of B, he is to be preferred as Z’s
intention to pay the bill and for whose honor he pays payment for the honor of B will discharge C, D, and E while Y’s
2. The notary then records the declaration in the protest or in a payment for C would only discharge D and E
separate paper attached to it
3. The payer then notifies the person for whose honor he pays within Sec. 176. Where holder refuses to receive payment supra protest. -
reasonable time Where the holder of a bill refuses to receive payment supra protest,
he loses his right of recourse against any party who would have
PURPOSE FOR PAYMENT FOR HONOR been discharged by such payment.
 Instead of simple negotiation to the person desiring to pay, payment
for honor may be availed of when the holder doesn’t want to indorse Sec. 177. Rights of payer for honor. - The payer for honor, on
the bill and thereby incur the liabilities of an indorser or of one paying to the holder the amount of the bill and the notarial
negotiating by mere delivery expenses incidental to its dishonor, is entitled to receive both the
bill itself and the protest.
Sec. 174. Preference of parties offering to pay for honor. - Where
two or more persons offer to pay a bill for the honor of different RIGHTS OF PAYER FOR HONOR

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1. He acquires the rights of a holder under Section 175 and in To X

addition 48 Exchange Place
2. The payor for honor has also the right to receive both the bill and New York City
the protest. This is to enable him to enforce his rights against
those who are liable to him.
PURPOSE OF BILL IN SET
Wednesday: 185 and 186 plus cases  Bills in set are for the purpose of increasing the probability of the bill
reaching its destination
XV. BILLS IN SET  For this reason, each part is sent by different conveyances
 B, the payee, is supposed to negotiate only one part, or if he is paid on
Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a one, he cannot be paid on the second part
set, each part of the set being numbered and containing a
reference to the other parts, the whole of the parts constitutes one Sec. 179. Right of holders where different parts are negotiated. -
bill. Where two or more parts of a set are negotiated to different
holders in due course, the holder whose title first accrues is, as
BILL IN SET between such holders, the true owner of the bill. But nothing in
 One composed of various parts, each part being numbered, and this section affects the right of a person who, in due course,
containing a reference to the other parts, all of which parts constitute accepts or pays the parts first presented to him.
one bill
ILLUSTRATION OF SECTION 179
ILLUSTRATION OF A BILL IN SET CONSISTING OF TWO PARTS  B, payee, wants to raise P4000. In violation of his rights, he
negotiates the first part of the bill to C and the second part to D, both
First part of whom are holders in due course. Who is the true owner of the bill?
Exchange for P2000  If B negotiates to C on September 25 and to D on September 27, C is
First the true owner, as C’s title accrues first.
Manila, Philippines  But if D succeeds in presenting his part of the bill for acceptance for
September 24, 2007 payment and X the drawee, accepts or pays the second part in due
course, X is protected and X can refuse to accept C’s part of the bill.
30 days after sight of this First of Exchange (Second part unpaid), pay to
the order of B P2000. Sec. 180. Liability of holder who indorses two or more parts of a set
Sgd. A to different persons. - Where the holder of a set indorses two or
To X more parts to different persons he is liable on every such part, and
48 Exchange Place every indorser subsequent to him is liable on the part he has
New York City himself indorsed, as if such parts were separate bills.
Second part LIABILITY OF HOLDER WHO INDORSES TWO OR MORE PARTS

Exchange for P2000  B is liable on both parts as if there are two bills, on the first to C and
Second on the second to D
Manila, Philippines  In other words, as a result of his negotiation of the 2 parts, B is liable
September 24, 2007 for a total of P4000
 But A, the drawer, or X, the drawee, is liable only on one part or for
30 days after sight of this Second of Exchange (First part unpaid), pay to P2000 unless the drawee accepts both parts
the order of B, P2000.
Sgd. A

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 Suppose that C and D respectively negotiate the parts they have to E,

the first part, and F, the second part. C is liable to E for the part he Sec. 184. Promissory note, defined.
endorsed to E and D is liable to F for the part he indorsed to F. A negotiable promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to another,
Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be signed by the maker, engaging to pay on demand, or at a fixed or
written on any part and it must be written on one part only. If the determinable future time, a sum certain in money to order or to
drawee accepts more than one part and such accepted parts bearer. Where a note is drawn to the maker's own order, it is not
negotiated to different holders in due course, he is liable on every complete until indorsed by him.
such part as if it were a separate bill.
IS MAKER LIABLE AS INDORSER?
DRAWEE MUST ACCEPT ONLY ONE PART  The maker of a note payabloe to himself who indorses it is not liable
 The drawee X must accept only one part as indorser but only as maker.
 But if he accepts both parts and they are negotiated to holders in due  Since the indorsement by the maker-payee isn’t part of a sale of the
course, he is liable on every such part as if it were a separate bill, that note, it should not give rise to any warranty.
is, for a total of P4000  In the absence of such warranties, it is immaterial whether the
 But he can ask for reimbursement from A, drawer, on only one part, defendant is sued as an indorser or as maker since, in either event, he
that is P2000, because the order of the drawer to him is to pay only may set up the defense of fraud against the plaintiff unless the plaintiff
one part, not both parts is a holder in due course.
Sec. 182. Payment by acceptor of bills drawn in sets. - When the SPECIAL TYPES OF PROMISSORY NOTES
acceptor of a bill drawn in a set pays it without requiring the part 1. Certificate of deposit
bearing his acceptance to be delivered up to him, and the part at 2. Bonds
maturity is outstanding in the hands of a holder in due course, he is 3. Bank notes
liable to the holder thereon. 4. Due bills
ILLUSTRATION CERTIFICATE OF DEPOSIT

 Suppose that X accepts only the first part. Then he pays the second  Written acknowledgement by a bank of the receipt of money on
part without requiring the return of the first part. deposit which the bank promises to pay to the depositor, bearer, or to
 On the date of maturity, X would still be liable to the holder of the first some other person or order
part on which it appears his acceptance
BONDS
Sec. 183. Effect of discharging one of a set. - Except as herein  A promise, under seal to pay money
otherwise provided, where any one part of a bill drawn in a set is  More formal in character
discharged by payment or otherwise, the whole bill is discharged.  Runs for a longer period of time
 Issued under different legal circumstances
EFFECT OF DISCHARGE ON ONE PART
 Subject to the exceptions in Section 180, 181, and 182, if one part is CLASSES OF BONDS
discharged, the whole bill is discharged 1. Mortgage bonds
 The reason is that the bill constitutes only one bill 2. Equipment bonds
 Thus, suppose that in the illustration, X the acceptor pays the first part 3. Collateral trust bonds
which he accepted. 4. Guaranteed bonds
 The second and third parts are also discharged 5. Debentures
6. Income bonds
XVI. PROMISSORY NOTES AND CHECKS 7. Convertible

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8. Redeemable  Issuing a check without sufficient funds in the drawee bank constitutes
9. Registered bonds estafa if it is done as a means of obtaining money and merchandise
10. Coupon bonds but not if the check is given for a pre-existing debt
BANK NOTES BP 22: BOUNCING CHECKS LAW

 Bank notes are the promissory notes of the issuing bank payable to ELEMENTS OF OFFENSE DEFINED IN THE FIRST PARAGRAPH OF SECTION
bearer on demand and intended to circulate as money 1: BP 22
 Regarded as cash and pass from hand to hand without any evidence of 1. That a person makes or draws and issues any check.
title in the holder than that which arises from possessession 2. That the check is made or drawn and issued to apply on account or for
 However, they are not money value.
3. That the person who makes or draws and issues the check knows at the
DUE BILL time of issue that he does not have sufficient funds
 Instrument whereby one person acknowledges his indebtedness to 4. In or credit with the drawee bank for the payment of such check in full
another upon its presentment.
5. That the check is subsequently dishonored by the drawee bank for
CLEARING HOUSE DUE BILL insufficiency of funds or credit, or would have been dishonored for the
 Device of clearing house associations to save inconvenience and labor same reason had not the drawee, without any valid reason, ordered the
incident to the settling of balances between the members of the bank to stop payment.
association
 The certificates or due bills are issued, instead of actual payment of NOTE: Failure to make good within 5 banking days prima facie evidence
money, by one member of the association to another of knowledge of lack and insufficiency
 They are not merely certificates of deposit creating a contract of
bailment but are negotiable as checks payable to bearer, or as ELEMENTS OF THE OFFENSE DEFINED IN THE SECOND PARAGRAPH OF
promissory notes payable to order or bearer SECTION 1: BP 22
1. That a person has sufficient funds in or credit with the drawee bank
Sec. 185. Check, defined. - A check is a bill of exchange drawn on a when he makes or draws and issues a check.
bank payable on demand. Except as herein otherwise provided, the 2. That he fails to keep sufficient funds or to maintain a credit to cover the
provisions of this Act applicable to a bill of exchange payable on full amount of the check if presented within
demand apply to a check. 3. A period of 90 days from the date appearing thereon.
4. That the check is dishonored by the drawee bank.
CHECK, DEFINED
 Bill of exchange drawn on a bank payable on demand
NOTE: Failure to make good within 5 banking days prima facie evididence
CHECK DISTINGUISHED FROM A PROMISSORY NOTE; USED AS of knowledge of lack and insufficiency
SUBSTITUTE FOR MONEY; EFFECT OF WORTHLESS CHECKS ON TRADE
CIRCLES AND BANKING COMMUNITY BP 22 IS CONSTITUTIONAL; NOT VIOLATIVE OF PROHIBITION AGAINST
 A check is not a mere undertaking to pay an amount of money IMPRISONMENT FOR DEBT, FREEDOM OF CONTRACT; EQUAL PROTECTION
 It is an order addressed to a bank and partakes of a representation OF LAW, PROHIBITION AGAINST UNDUE DELEGATION OF POWER; AND
that the drawer has funds on deposit against which the check is PROHIBITION ON AMENDMENTS ON THIRD READING
drawn, sufficient to ensure payment upon its presentment to the bank
 Element of assurance or certainity that the instrument will be paid ISSUING CHECKS WITHOUT OR WITH INSUFFICIENT FUNDS UNDER BP22
upon presentation 1. Issuing a check with knowledge of insufficiency of funds to pay for
the check, and the check is subsequently dishonored by the
ISSUING CHECK WITHOUT FUNDS AS ESTAFA drawer bank for insufficiency of funds or credit or would have

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been dishonored for the same reason had not the drawer, without
any valid reason, ordered the bank to stop payment FOREIGN CHECKS ARE COVERED BY BP22
2. Issuing a check with sufficient funds or credit to pay for the same,
but with failure to keep sufficient funds or maintain a credit to ACCUSED MAY BE CONVICTED OF BOTH BP22 AND ESTAFA
cover a full amount of the check if presented within 90 days from
the date appearing thereon, for which reason the check is AS ELEMENT OF VIOLATION OF BP22, KNOWLEDGE OF INSUFFICIENCY OF
dishonored FUNDS IS CONTINUING EVENTUALITY FROM ISSUANCE OF DISHONOR
ELEMENTS OF THE OFFENSE OF ISSUING BOUNCING CHECKS VIOLATION OF BOUNCING CHECKS LAW IS TRANSITORY AND
1. The making, drawing and issuance of any check to apply to CONTINUING CRIME AND ITS VENUE IS ANY OF PLACES WHERE IN PART
account or for value COMMITTED
2. The maker, drawer, or issuer knows at the time of issue that he
doesn’t have sufficient funds in or credit with the drawee bank for IS ISSUANCE OF CHECK FOR PREEXISTING DEBT DEFENSE UNDER BP22?
the payment of such check in full upon its presentment  Under the cases, the issuance of a check without or with insufficient
3. The check is subsequently dishonored by the drawee bank for funds is not estafa where it is issued for a preexisting debt. But would
insufficiency of funds or credit or would have been dishonored for the issuance of such check be a defense under BP22?
the same reason had not the drawer, without any valid reason,  Section 1 of said law in making the drawing or issuance of a check
ordered the bank to stop payment under the circumstances stated in the law of a crime, uses the words
“to apply for account or for value”
ISSUANCE OF BUM CHECKS GIVE RISE TO PRIMA FACIE PRESUMPTION OF  Account—to refer to a claim or demand growing out of the sale of
KNOWLEDGE goods, performance on services and the like; preexisting debt
 Gravamen of the offense under BP22 is the act of making and issuing a
worthless check or a check that is dishonored upon its presentment for JURISDICTION ON BOUNCING CHECKS LAW VIOLATION IS DETERMINED
payment BY ALLEGATIONS IN INFORMATION, PLACE OF ISSUANCE OF CHECKS
 The law made the mere act of issuing a bum check a malum
prohibitum ELEMENTS OF ESTAFA BY POSTDATING A CHECK OR ISSUING A CHECK
IN PAYMENT OF AN OBLIGATION
BP22 PENALIZES ACT OF MAKING OR DRAWING AND ISSUANCE OF 1. That the offender postdated a check, or issued a check in payment of an
BOUNCING CHECKS, NOT ONLY DISHONOR obligation.
 The law penalizes the act or making or drawing and issuance of a 2. That such postdating or issuing a check was done when the offender had
bouncing check and not only the fact of dishonor no funds in the bank or his funds deposited therein were not sufficient to
 Where the bouncing check was issued before the effectivity of BP22, cover the amount of the check.
but dishonored after such effectivity, the accused who issued the
bouncing check didn’t commit a violation thereof as there was no law
that was violated WHEN POSTDATING CHECK IS NOT ESTAFA
1. Postdating a check or issuing it for payment of an obligation, the
KNOWLEDGE OF MAKER OR DRAWER OF CHECK OF INSUFFICIENCY OF offender knowing that at the time he had no funds in the bank, or
FUNDS ESSENTIAL ELEMENT OF OFFENSE the funds deposited by him in the bank weren’t sufficient to cover
the amount of the check, and without informing the payee of such
FILING OF ACTION TO ANNUL DEED OF SALE ON WHICH BOUNCING circumstances isn’t a crime in itself as estafa
CHECK WAS ISSUED, NOT A PREJUDICIAL QUESTION 2. However, under BP22, such issuance of a check would be a crime,
where subsequently, the check is dishonored for insufficiency of
IT IS NOT A DEFENSE THAT THE CHECK WAS ISSUED TO GUARANTEE OR fund or credit, or would have been dishonored for the same
SECURE PAYMENT OF OBLIGATION

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reason had not the drawer, without any valid reason ordered the 4. Certified checks—a check on which the drawee bank has written
bank to stop payment an agreement whereby it undertakes to pay the check at any
3. If the payee was informed that the check wasn’t covered by future time when presented for payment, such as, by stamping on
adequate funds and it is expected that such funds would be the check the word “certified” and underneath it is written the
available when the check became due, the drawer isn’t guilty of signature of the cashier
bad faith in issuing it. Where a person issued a post dated check 5. Crossed checks
without funds to cover it and informs the payee of that fact, he
isn’t guilty of estafa because there is no deceit HOW CROSSING OF CHECK IS DONE
4. Accused issuing unfunded check but with OD or DAUD privilege  Usually done by drawing two parallel lines transversally on the face of
not guilty of fraudulent intent the check
 A check may be crossed specially or generally
DRAWING OF A CHECK WITH INSUFFICIENT FUNDS ISN’T FALSIFICATION
CROSSING SPECIALLY
WHEN POSTDATING CHECK IS A CRIME  A check is crossed specially when the name of a particular banker or a
 The payee or the person receving the check must be defrauded by the company is written between parallel lines drawn transversally on the
act of the offender face of the check
 To defraud is to deprive of some right, interest, or property by a
deceitful device Check #1234
PNB
DISTINCTIONS BETWEEN ESTAFA CONSISTING OF ISSUING CHECKS Phil. Trust Co.
WITHOUT FUNDS AND VIOLATION OF BP22 Manila, Philippines
ESTAFA BP22 September 24, 2007
Deceit and damage are essential Deceit and damage are not essential
elements of the crime elements of the crime Pay to B or order P1000 only.
Sgd. A
Mala in se Malum prohibitum
CROSSING GENERALLY
 A check is crossed generally when only the words “And company” are
THEFT OF CHECKS written between the parallel lines, or when nothing is written at all
 Checks are personal property and may be subject to theft even when between the parallel lines
they are not indorsed  In this case, payment must be made through the intervention of any
company which is duly authorized.
SPECIAL TYPES OF CHECKS  Otherwise, the payment will be not valid.
1. Cashier’s check—one drawn by the cashier of a bank in the name  In actual practice, the holder of a crossed check merely deposits it for
of the bank against the bank itself payable to a third person or collection with the bank indicated between the parallel lines or with
order any bank where he keeps an account in the case of a check crossed
2. Manager’s check—check drawn by the manager of a bank in the generally
name of the bank against the bank itself payable to a third person
3. Memorandum check—check on which is written the word
Check #1234
“memorandum” signifying that the drawer engages to pay the
bona fide holder absolutely and not upon a condition to pay upon
Phil. Trust Co.
presentment or non-payment
Manila, Philippines
September 24, 2007

Page 175 of 190
172 MORAN V. CA
Pay to B or order P1000 only. 230 SCRA 799
Sgd. A
FACTS:
Spouses Moran were the owners of a gasoline station. They regularly
UNDER CROSSED CHECK, THE PAYEE HAS DUTY TO ASCERTAIN HOLDER’S purchased bulk fuel products on COD basis. These orders were made
TITLE TO CHECKS through telephone and payments were effectuated through personal checks
 The SC recognizes the practice that a check with two parallel lines in upon delivery. Since the spouses were valued clients of the bank, they had
the upper left hand corner means that it could only be deposited and with the latter a pre-authorized transfer wherein they were allowed to
may not be converted to cash maintain a zero balance current account and transfers were allowed from
 Such circumstances should put the payee into inquiry and upon him their savings account.
devolves the duty to ascertain the holder’s title to the check or the
nature of his possession Two checks were drawn by petitioners and made payable to Petrophil.
 Failing in this respect, the payee is declared guilty of gross negligence Subsequently, these were deposited with PNB, the collecting bank. The
amounting to legal absence of good faith and as such the consensus of check underwent clearing and it was seen that the current account had
authority is to the effect that the holder of the check isn’t holder in zero balance. Thereafter, the husband deposited in their savings account
good faith money.
 The NIL doesn’t provide that a holder isn’t a holder in due course may
not in any case recover on the instrument if the drawee if the latter The wife then informed her husband days after that there was refusal to
has no valid excuse for refusing payment deliver the orders since the checks they paid previously have both been
dishonored upon presentment for payment. This incident prompted the
DRAWEE SHOULDN’T ENCASH A CROSSED CHECK BUT MERELY ACCEPT spouses to stop business operations, which caused losses and damages. In
THE SAME FOR DEPOSIT addition, Petrophil cancelled their credit accommodation and this led them
 Under usual practice, crossing a check is done by placing two parallel to pay in cash. This prompted the spouses to demand an explanation from
lines diagonally on the left top portion of the check the bank. They were informed that a bank officer committed a grave error.
 The crossing may be special wherein between two 2 parallel lines is The bank manager then visited the spouses, made them sign an
written the name of a bank or a business institution, in which case the agreement for the issuance of a manager’s check to replace the 2
drawee should pay only with the intervention of that bank or company, dishonored checks payable to Petrophil. The husband then on a chance
or crossing may be general wherein between 2 parallel diagonal lines meeting with Petrophil’s credit manager, was informed that Petrophil
are written the words “And Co.” or none at all as in the case at bar, in received notification that the two checks were dishonored due to
which case the drawee shouldn’t encash the same but merely accept operational error.
the same for deposit
The spouses six months after wrote the bank claiming that due to the
WHERE OTHER THAN PAYEE OF CROSSED CHECKS PRESENTED IT FOR dishonor of their checks, they suffered besmirched business and personal
PAYMENT, THERE IS NO PROPER PRESENTMENT AND DRAWER IS NOT reputation. The bank didn’t act on their demands however.
LIABLE THEREON
HELD:
ADVANTAGES OF CROSSING A CHECK Where the bank possesses funds of a depositor, it is bound to honor his
 It is good precaution when it is to be forwarded by mail or when it is checks to the extent of the amount of the deposits. The failure of the bank
entrusted to an agent and the drawer wants to be sure that it will be to pay the check of a merchant or trader, when the deposit is sufficient,
paid to the rightful owner entitles the drawer to substantial damages without any proof of actual
damages.

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However, a bank isn’t liable for its refusal to pay a check on account of 173 FIRESTONE TIRE V. INES CHAVEZ
insufficient funds, notwithstanding the fact that a deposit may be made 18 SCRA 356
later in the day. Before a depositor may maintain a suit to recover a
specific amount from his bank, he must show first that he had on deposit FACTS:
sufficient funds to meet his demand. Firestone filed a complaint against Chavez for an amount representing the
price of automobile tires, tubes, and other accessories, which the former
The issue in this case is that whether or not petitioners had sufficient funds had sold and delivered to Chavez on different dates. The trial court held in
in their account when the checks were dishonored. favor of Firestone and awarded the principal as well as attorney’s fees.
Chavez questioned this in the appellate court and in the SC as well. It
Following clearing house rules, it is supposed to be processed on the date it raised the argument that the court erred in finding her to be in bad faith.
was presented for clearing. It was the available balance the day before the The claim is made that when the check was issued, Firestone knew that
date the funds were deposited was used by the bank in determining there were no funds to back it up and that Chavez expected that such
whether or not there was sufficient cash deposited to fund the checks since funds would be available when the check became due.
it was December 15 was the actual date when the checks were processed.
The funds during which the checks were dishonored wasn’t enough to HELD:
cover the two checks. When the check was presented for payment, there Of course, if Firestone agreed to accept the check, knowing that it wasn’t
was insufficiency of funds. It was only the next day when the funds to covered by adequate funds, no finding of bad faith can be made against
cover the checks were deposited, which unfortunately was too late to Chavez. In a number of cases it was held that where a person issues a
prevent the dishonor of the checks. post dated check without funds to cover it and informs the payee of this
fact, he cannot be held guilty of estafa because there is no deceit.
Petitioner had no reason to complain, for they alone were at fault. A
drawer must remember his responsibilities every time he issues a check. Nonetheless, it was nowhere to be found in the records that there was
He must personally keep track of his available balance in the bank and not knowledge on the part of Firestone.
rely on the bank to notify him of the necessity to fund certain checks he
previously issued. A check as distinguished from a bill of exchange, is 174 BATAAN CIGAR V. CA
supposed to be drawn against a previously deposit of funds for it is 230 SCRA 643
ordinarily intended for immediate payment.
FACTS:
Moreover, on the issuance of the checks on day 1 and 2, and the time for Bataan Cigar has engaged one of its suppliers, George King, to deliver
presentment on day 3, the petitioners had more than 24 hours to replenish bales of tobacco leaves. Petititoner then issued postdated crossed checks
their accounts in the bank. in favor of King. This was continued despite the failure to deliver the bales.
Simultaneous to these transactions was the discounting of King of the
It should also be noted that the bank has no responsibility to pay a check checks to State Investment House. Bataan then stopped payment and
partly when the amount drawn on the check is larger than the amount SIHI tried to collect.
deposited in the account. There would naturally be a conflict of interests
between the payee and the bank. The bank would then want the return of HELD:
the check while the payee will not want to do so since there is still balance The negotiability of the check isn’t affected by it being crossed, whether
left unpaid. specially or generally. It may be legally negotiated from one person to
another as long as the one who encashes the check with the drawee bank
Furthermore, when the drawer has two accounts—a savings account and or if its specially crossed, by the bank mentioned between the parallel
open account—and a check was drawn with the open account having lines.
insufficient funds, the bank has no authority to use the funds to be found in
the savings account to cover the insufficiency of the funds. Jurisprudence provides the following effects of crossing a check:
1. The check may not be encashed but only deposited in the bank

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2. The check may be negotiated only once—to one who has an

account with a bank Since the demand drafts herein involved have not been presented either
3. The act of crossing the check serves the warning to the holder for acceptance or payment, the inevitable consequence is that the bank
that the check has been issued for a definite purpose so that he never had the chance of accepting or receiving them. Verily, the bank
must inquire if he has received the check pursuant to that never became a debtor of the payee concerned and as such the aforesaid
purpose, otherwise, he is not a holder in due course. drafts cannot be considered as credits subject to escheat within the
meaning of the law.
The check should have placed the holder in inquiry and upon him devolves
the duty to ascertain the indorser’s title to the check or the nature of his Further, a demand draft is different from a cashier’s check for this is a
possession. Failing in this respect, the holder is declared guilty of gross primary obligation of the bank which issues it and constitutes a written
negligence amount to legal absence of good faith. promise to pay upon demand. It is an order to a third party purporting to
be drawn upon a deposit of funds.
In the present case, petitioner’s defense in stopping payment is as good to
SIHI as it is to King because really the consideration for the checks were 176 MESINA V. IAC
the delivery of the bales of tobacco leaves which King failed to do. There 145 SCRA 497
being failure of consideration, SIHI is not a holder in due course.
FACTS:
175 REPUBLIC V. PNB Jose Go purchased from Associate Bank a Cashier’s Check, which he left on
3 SCRA 851 top of the manager’s desk when left the bank. The bank manager then
had it kept for safekeeping by one of its employees. The employee was
FACTS: then in conference with one Alexander Lim. He left the check in his desk
The government filed a complaint for escheat of certain unclaimed bank and upon his return, Lim and the check were gone. When Go inquired
deposits balances pursuant to a law, which provides that unclaimed about his check, the same couldn't be found and Go was advised to request
balances—credits, money, bullion, security or other evidence of for the stoppage of payment which he did. He executed also an affidavit of
indebtedness of any kind, and interest with banks—shall be deposited with loss as well as reported it to the police.
the government if it remains to be unclaimed within a period of 10 years of
more. The bank then received the check twice for clearing. For these two times,
they dishonored the payment by saying that payment has been stopped.
One of the banks against the complaint has been filed is First National City After the second time, a lawyer contacted it demanding payment. He
Bank. Although it concedes that the government had the right to claim the refused to disclose the name of his client and threatened to sue. Later, the
unclaimed deposit balances, it seeks to exclude some which, according to name of Mesina was revealed. When asked by the police on how he
it, are not within the purview of credits and deposits as defined in law. the possessed the check, he said it was paid to him Lim. An information for
trial court held in favor of the bank, excluding from the claim the theft was then filed against Lim.
manager’s checks and other demand drafts.
A case of interpleader was filed by the bank and Go moved to participate
HELD: as intervenor in the complaint for damages. Mesina moved for the
Credit is a sum credited on the books of a company to a person who dismissal of the case but was denied. The trial court ruled in the
appears to be entitled to it. it presupposes a creditor-debtor relationship interpleader case ordering the bank to replace the cashier’s check in favor
and may be said to imply ability, by reason of property or estates, to make of Go.
a promised payment. It is correlative to indebtedness, and that which is
due to any person, as distinguished to that which he owes. HELD:
Petitioner cannot raise as arguments that a cashier’s check cannot be
Do demand drafts and telegraphic orders come within the purview of countermanded from the hands of a holder in due course and that a
credits or deposits employed in the law? cashier’s check is a check drawn by the bank against itself. Petitioner

Page 178 of 190
failed to substantiate that he was a holder in due course. Upon person accepts a crossed check and pays cash for value despite the
questioning, he admitted that he got the check from Lim who stole the warning of the crossing, he cannot be considered in good faith and thus,
check. He refused to disclose how and why it has passed to him. It simply not a holder in due course. The purpose of the crossing is to ensure that
means that he has notice of the defect of his title over the check from the the check will be encashed by the rightful payee only. Yet, despite the
start. The holder of a cashier’s check who is not a holder in due course restriction on negotiability of crossed checks, they were held to be
cannot enforce payment against the issuing bank which dishonors the negotiable instruments.
same. If a payee of a cashier’s check obtained it from the issuing bank by
fraud, or if there is some other reason why the payee is not entitled to To be sure, it is the fraud or deceit employed which is the gravamen of the
collect the check, the bank would of course have the right to refuse offense of estafa and not the negotiability of the check.
payment of the check when presented by payee, since the bank was aware
of the facts surrounding the loss of the check in question. Nonetheless, the accused should be acquitted of estafa. It was held in a
prior case that when the payee knew that the check was drawn on an
177 PEOPLE V. REYES account with insufficient funds, there would be no liability for estafa. First,
454 SCRA 635 Alabastro presented 4 different checks with 4 different dates. When he
deposited the first check, he was then informed that the account was
FACTS: closed and yet, on later dates, he still deposited the other four checks.
Reyes was charged with estafa. The facts that led to this are as follows— Second, was his own admission to this knowledge. (Doctrine of
Concomitance)
She together with her daughter and another person issued a check in favor
of Alabastro for payment of an obligation. Alabastro was never able to get Sec. 186. Within what time a check must be presented. - A check
the value of the check because when he presented it for payment in the must be presented for payment within a reasonable time after its
bank, it was dishonored for the account it was drawn upon is closed. issue or the drawer will be discharged from liability thereon to the
extent of the loss caused by the delay.
Reyes alleges that her liability should only be civil and not criminal for the
check was issued for payment of a pre-existing obligation. WHEN CHECK MUST BE PRESENTED FOR PAYMENT
 A check must be presented within a reasonable time after its issue
As per the testimony of the bank manager, the accused maintained a  The whole theory and use of a check points to its immediate payability
negotiable order of withdrawal account under her name. It was explained  A depositor places his money with his bank or banker; where it is
that checks may be drawn against the account but only to a specific payee. subject at any time to his order; and by his check or order, he desires
He verified also that the check issued to Alabastro is a NOW check. to appropriate so much of it to another person, and the bank or
banker, in consideration of its temporary use of the money, agrees to
As per the testimony of Alabastro, he established that the checks issued to pay it in whole, or in parcels, to the depositor’s order when demanded
him were for a discounting agreement. This was countered by the accused  But he doesn’t agree to contract to pay at a future day by acceptance
by saying also that the checks were dated and completed by Alabastro. and the depositor cannot require it
 Although under Section 185, a check is a bill of exchange payable on
The trial court convicted the accused and she avers that the checks issued demand, it is intended for immediate use and not to circulate as a
by her doesn’t fall within the meaning of checks under the NIL. First, the promissory note. Therefore, the transfer of a check to successive
NOW check was drawn against a savings account. Second, it is only holders, where it is drawn and delivered in the place where the drawee
payable to a certain payee or specific person. bank is located, doesn’t extend the time for presentment. If the check
isn’t delivered on one day and isn’t presented before the close of
HELD: banking hours the next business day, the drawer is discharged to the
It is inconsequential that the check shall be only payable to a specific extent of any loss suffered from the failure to present.
person. The same restriction is produced when the check is crossed, only
the payee named therein in the check may deposit it in the bank. If a third REASONABLE TIME

Page 179 of 190
 Did the payee employ such diligence as a prudent man exercises his the precise age of the instrument—that is, the good or bad faith
own affairs? exercised the prime consideration. The result is that the plaintiff has
 The payee’s failure to present a check to the drawee bank and who been treated as a holder in due course of checks transferred several
didn’t present the check for one week after its receipt, was held to months after their issue
have delayed presentment for an unreasonable time as a matter of law
EFFECT OF DELAY AS TO INDORSERS
FAILURE TO PRESENT ON TIME DOESN’T TOTALLY WIPE OUT ALL  An unreasonable delay in the presentment of a check for payment will
LIABILITY discharge the indorsers thereon, whether or not he is injured by the
delay as it is presumed that he is prejudiced
WHEN DELAY IS EXCUSED  Exception: when there is affirmative proof that the indorsers knew that
 Delay in making presentment for payment is excused when the delay there was delay in presentment
is caused by circumstances beyond the control of the holder and not
imputable to his default, misconduct, or negligence. CASE DIGESTS: SECTION 186
 When the cause of delay ceases to operate, presentment must be
made with reasonable diligence. 178 PNB V. SEETO
91 PHIL 756
STALE CHECK
 One which isn’t presented for payment within reasonable time after its FACTS:
issue Seeto called at a branch of bank and presented a check payable to cash or
bearer, and drawn by Kiao against PBC. After consultation with the
EFFECT OF DELAY ON LIABILITY OF DRAWER employees, Seeto made a general and qualified indorsement of the check.
 When a check isn’t presented for payment within a reasonable time He was then paid the amount of the check by bank. The check was
after its issue, the drawer is discharged but only to the extent of the consequently dishonored, a letter was sent to Seeto and was asked to
loss caused by the delay refund the money given to him. A second letter was sent to him and he
 Hence, if no loss or injury is shown, the drawer is not discharged averred that case against him be deferred while he inquired about why the
 The only injury which would be sustained by the drawer in case check was dishonored. Thereafter, he refused to pay, alleging that the
presentment wasn’t made within a reasonable time would be caused account against the check was drawn had sufficient funds when the check
by the failure of the bank subsequent to the delivery and prior to the was drawn and if the bank didn’t delay in clearing the check, there would
presentment of the check have been sufficient funds.
EFFECT OF FAILURE TO GIVE NOTICE TO DRAWER The appellate court reversed the lower court in its decision. It ruled that
 Where the check is dishonored by non-payment and the drawer isn’t the bank was guilty of unreasonably retaining and withholding the check,
given notice of dishonor, the drawer is totally discharged from liability and that the delay in the presentment was inexcusable, so that respondent
on the instrument thereby was discharged from liability.
 But the drawer may be held liable by the payee on the basis of the
original consideration between him and said payee HELD:
Section 84 is applicable, nonetheless, it should be read in correlation with
HOLDERS OF STALE CHECKS Section 186, which says that presentment should be within reasonable
 But it is clear that the maturity of the check for the purpose of time.
presentment for payment and of dishonor in order to bind parties to it, *Section 186 applies when the bank suddenly becomes bankrupt.
is not identical with the maturity which will charge subsequent holders
with notice of defect of title or infirmities in the instrument 179 CRYSTAL V. CA
 In applying the rule, the courts are disposed to be governed rather by 71 SCRA 443
the circumstances under which the plaintiff received the check than by

Page 180 of 190
FACTS: for P90000 Japanese Military notes, of which only P45000 was paid by the
Petitioner redeemed property, which has been sold upon execution, with a latter. The writing made by Ramos at the back of the check was to the
check issued to the buyer Ocang. The CA found that the check for P11200 effect that he was assigning only P30000 of the value of the document with
paid by petitioner for the redemption in dispute has been dishonored, in an instruction to the bank to pay P30000 to Montinola and to deposit the
the face of the other findings in the same decision of the CA indicating that balance to Ramos's credit. This writing was, however, mysteriously
instead of having been dishonored, the said check had only become stale, obliterated and in its place, a supposed indorsement appearing on the back
albeit it being replaced with new ones from time to time. of the check was made for the whole amount of the check. At the time of
the transfer of this check to Montinola, the check was long overdue by
HELD: about 2-1/2 years.
Surely, for a check to be dishonored upon presentment, on the one hand,
and to be stale for not being presented at all in time, are incompatible Montinola instituted an action against the PNB and the Provincial Treasurer
developments that naturally have variantly legal consequences. Thus, if of Misamis Oriental to collect the sum of P100,000, the amount of the
indeed the check in question had been dishonored, then there can be no aforesaid check. There now appears on the face of said check the words in
doubt that the petitioner’s redemption was null and void. On the other parenthesis "Agent, Phil. National Bank" under the signature of Laya
hand, if it had only become stale, then it becomes imperative that the purportedly showing that Laya issued the check as agent of the Philippine
circumstances that caused its non-presentment be determined, for if this National Bank.
wasn’t due to the fault of petitioner, then it would be unfair to deprive him
of the rights he acquired as redemptioner, particularly, if after all, the HELD:
value of the check has otherwise been received or realized by the party Montinola could not be considered as a holder in due course. Why? For
concerned. one to be a holder in due course, one should take the instrument before it
has become overdue. Remember that in this case, Montinola took the
The case was remanded to the trial court to receive all relevant and check which has long become overdue. He cannot even be in the slightest
competent evidence to the issue of whether or not Ocang has received in be considered as a holder because the NIL defines a holder as being the
one form or another, the full amount as redemption price of the four payee or the indorsee of the negotiable instrument. In this case, he wasn't
parcels of land in dispute as well as to the other facts. the payee nor was he the indorsee of the check in issue.
It was found out that Ocang, when he applied for a writ of possession, 181 PACHECO V. CA
there was payment of redemption price by Crystal. Thus, there was a 319 SCRA 595
proper redemption.
FACTS:
180 MONTINOLA V. PNB Due to dire financial needs of petitioner spouses who were engaged in the
88 SCRA 178 construction business, they secured loans from Vicencio. At every loan
secured, the lender compelled the spouses to issue an undated check
FACTS: despite the admission of spouses that their bank account has insufficient
Ramos, as a disbursing officer of an army division of the USAFE, made cash funds or as on a later date, already closed. Lender assured them that the
advancements w/ the Provincial Treasurer of Lanao. In exchange, the issuance of the check was only evidence of indebtedness, that it would not
Prov’l Treasurer of Lanao gave him a P500,000 check. Thereafter, Ramos be presented to the bank, and it would be for formalities only. On the date
presented the check to Laya for encashment. Laya in his capacity as wherein there was an unpaid balance to the loans secured by the spouses,
Provincial Treasurer of Misamis Oriental as drawer, issued a check to the lender had them place a date on two of the later checks issued.
Ramos in the sum of P100000, on the Philippines National Bank as drawee; Surprised later on, the spouses were charged with estafa as the checks
the P400000 value of the check was paid in military notes. were presented for encashment and was dishonored.
Ramos was unable to encash the said check for he was captured by the HELD:
Japanese. But after his release, he sold P30000 of the check to Montinola

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BY MUTUAL AGREEMENT OF THE PARTIES, THE NEGOTIABLE CHARACTER A stale check is one which has not been presented for payment within a
OF A CHECK MAY BE WAIVED AND THE INSTRUMENT BE SIMPLY TREATED reasonable time after its issue. It is valueless and, therefore, should not be
AS PROOF OF AN OBLIGATION. There cannot be deceit on the part of the paid. A check should be presented for payment within a reasonable time
spouses because they agreed with the lender at the time of the issuance after its issue. Here, what is involved is a manager’s check, which is
and postdating of the checks that the same shall not be encashed or essentially a bank’s own check and may be treated as a PN with the bank
presented to the bank. As per assurance of the lender, the checks are as a maker. Even assuming that presentment is needed, failure to present
nothing but evidence of the loan or security thereof in lieu of and for the for payment within a reasonable time will result to the discharge of the
same purpose as a promissory note. drawer only to the extent of the loss caused by the delay—but here there is
no loss sustained. Still, such failure to present on time does not wipe out
182 THE INTERNATIONAL CORPORATE BANK V. SPOUSES liability.
GUECO
315 SCRA 516 183 WONG V. CA
351 SCRA 100
FACTS:
Gueco spouses obtained a loan from ICB (now Union Bank) to purchase a FACTS:
car. In consideration thereof, the debtors executed PNs, and a chattel Petitioner was an agent for Limtong Press, a manufacturer of calendars.
mortgage was made over the car. As the usual story goes, the spouses LPI would give sample calendars to their agents and the agents would get
defaulted in payment of their obligations and despite the lowering of the the purchase orders of customers and present them to the company. The
amount to be paid, they still failed to pay. Thereafter, they tendered a company would then make the calendars and ship them to the customers.
manager’s check in favor of the bank. Nonetheless, the car was still The agents would then collect the payments and remit it to the company.
detained for the spouses refused to sign the joint motion to dismiss. The He had a record of unremitted payments and a confirmation receipt
bank averred that the joint motion to dismiss is part of standard office evidenced this. Because of this, it became a company policy that
procedure to preclude the filing of other claims. Because of this, the postdated checks must be issued by customers to secure payment for the
spouses filed an action for damages against the bank. And by the time the orders. Thereafter, Wong issued 6 postdated checks. But this wasn’t
case was instituted, the check had become stale in the hands of the bank. accepted by the company since it was against its policy to accept checks
from its agents. It was then agreed upon that the checks would be applied
HELD: to its unremitted payments. When the checks were about to be deposited,
The main issue though unrelated to NIL in this case was whether or not the Wong requested that it be deferred and he will replace the same. But this
signing of the joint motion to dismiss a part of the compromise agreement didn’t happen. The checks were then subsequently deposited and
between the spouses and the bank. The answer is no, it is not a part of dishonored which prompted the company to sue Wong.
the compromise agreement entered by the parties. And thus, the signing
is dispensible in releasing the car to the spouses. HELD:
The trial and appellate court both ruled that Wong’s checks were to be
And on the ancillary issue of the case, which is the relevant issue for the used as guarantees but due to refusal of the company, it was agreed upon
subject, whether or not the spouses should replace the check they paid to that it will be used as payment for Wong’s unremitted payments.
the bank after it became stale, the answer is yes. It appeared that the
check has not been encashed. The delivery of the manager’s check did not On the issue if all the elements of violations of BP22 has been committed,
constitute payment. The original obligation to pay still exists. Indeed, the there are two ways of violating BP22:
circumstances that caused the non-presentment of the check should be 1. By making or drawing or issuing a check to apply on account or
considered to determine who should bear the loss. In this case, ICB held for value knowing at the time of issue that the check isn’t
on the check and refused to encash the same because of the controversy sufficiently funded
surrounding the signing of the joint motion to dismiss. There is no bad faith 2. By having sufficient funds in or credit with the drawee bank at the
or negligence on the part of ICB. time of issue but failing to keep sufficient funds therein or credit
with said bank to cover the full amount of the check when

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presented to the drawee bank for payment within a period of 90 In this case, the checks were presented within 6 months from the issuance
days of the checks and wouldn’t therefore have been considered stale had
petitioner’s account had been existing. Although the presumption of
ELEMENTS OF OFFENSE DEFINED IN THE FIRST PARAGRAPH OF SECTION knowledge didn’t arise, such knowledge was sufficiently proven during the
1: BP 22 trial upon the testimony of one of the bank’s employees.
1. That a person makes or draws and issues any check.
2. That the check is made or drawn and issued to apply on account or for Likewise, for estafa, it is the same. All the elements were present. It was
value. the allegation however of accused that there was no damage done against
3. That the person who makes or draws and issues the check knows at the the company. He even averred that there was a return of the equipment.
time of issue that he does not have sufficient funds Nonetheless, damage contemplated in estafa may consist in the offended
4. In or credit with the drawee bank for the payment of such check in full party being deprived of his money or property as a result of the
upon its presentment. defraudation, disturbance in property rights, or temporary prejudice. In
5. That the check is subsequently dishonored by the drawee bank for this case, the deprivation of property was apparent. The backhoe was
insufficiency of funds or credit, or would have been dishonored for the delivered precisely to the accused because of his downpayment and the
same reason had not the drawee, without any valid reason, ordered the issuance of the checks.
bank to stop payment.
185 TY V. PEOPLE
For the first act, the petitioner averred that the first element is not present 439 SCRA 220
for he didn’t issue the checks for value or for account. This was
established by the trial and appellate courts to be false and unsupported by FACTS:
evidence. Ty’s mother was confined in Manila Doctors. As the daughter, she signed
the acknowledgement of responsibility for payment. Her sister was also
184 NAGRAMPA V. PEOPLE subsequently confined in the same hospital. She then drew promissory
386 SCRA 412 notes, promising to pay her obligations to the hospital. She issued 7
checks and these were thereafter deposited on their due dates. But these
FACTS: checks were dishonored for the account against which they were drawn
The sales manager of Fedcor brought into the plant Nagrampa in order for against had been closed. The hospital then sent demand letters but to no
the latter to purchase an excavation machine. He made a downpayment avail. This prompted it to file a complaint for 7 counts of violations of
and for the balance, he issued a postdated check. The checks were drawn BP22.
against Security Bank. Upon the guarantee of the salesman, the
equipment was delivered. However, when the checks were presented for HELD:
payment, they were dishonored on the ground that the account against Ty doesn’t deny to have issued the checks in issue. She claims that the
which it is drawn has long been closed. The company notified petitioner issuance was under the impulse of an uncontrollable fear of a greater
but it still failed to make payments. This prompted the company to file a injury or in avoidance of a greater evil or injury.
case for estafa and violation of BP22 against Nagrampa. The trial court
and appellate court both found him guilty. It seems that all the factual findings are not disputed except for the
allegation of uncontrollable fear or injury. Nonetheless, this is insufficient
HELD: to exempt the accused of her liabilities. For uncontrollable fear or injury
Petitioner admitted the issuance of the two checks but he would like to to become an exempting circumstance—
argue that the same had been presented more than the 90-day period 1. Existence of an uncontrollable fear
stated in the law. This is to no avail though since the 90-day period is for 2. The fear must be real and imminent
the presumption of knowledge to arise. It is not an essential element of 3. The fear of injury is greater than or at least equal to that
the offenses committed within the purview of BP22. committed

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In this case, far from it, the fear, if any, harbored by Ty wasn’t real or The deeds of assignment enabled Great Asian to generate instant cash,
imminent. Ty claims that she was compelled to issue the checks—a with checks which were not due and demandable then.
condition the hospital commanded of her before her mother can be
discharged. This is only speculative fear. In the financing industry, a discounting line means a credit facility with a
financing bank or company, which allows a business entity to sell, on a
It is also bereft of merit to raise the justifying circumstance of state of continuing basis, its accounts receivable at a discount. The term discount
necessity, which has the following elements— means the sale of a receivable at less than its face value. The purpose of
1. That the evil sought to be avoided actually exists discounting line is to enable a business entity to generate instate cash out
2. That the injury feared be greater than the one done to avoid it of its receivables which are still to mature at future debts. The financing
3. That there be no other practical and less harmful means of company or bank which buys the receivables makes its profits out of the
preventing it difference between the face value of the receivable and the discounted
price.
And to her claim of lack of consideration because she wasn’t the patient, it
is no defense to an action on a promissory note for the maker to say that Clearly, the discounting arrangements entered into by Arsenio were the
there was no consideration which was beneficial to him personally. It is same arrangements authorized under the board resolutions.
sufficient if the consideration was a benefit conferred upon a third person,
or a detriment suffered by the promisee, at the instance of the promissor. Second, on the issue of breach of contract, Bancasia alleged that Great
It is enough that the obligee foresees some right or privilege or suffers Asian committed a breach. In the deeds of assignment, it was stipulated
some detriment and the release and extinguishment of the original that there is a vital suspensive condition—in case the drawers fail to pay
obligation. the checks on maturity, Great Asian obligated itself to pay Bancasia the full
face value of the dishonored checks, including penalties and other costs.
186 GREAT ASIAN SALES V. CA Failure to pay would give rise to the obligation to pay Bancasia.
381 SCRA 557
Great Asian and Bancasia agreed on this specific with recourse stipulation,
FACTS: despite that the receivables were negotiable instruments. The contracting
Great Asian Sales was a business engaged in the selling and buying of parties are allowed such stipulation in addition to the warranties of an
merchandise. In 2 of its board resolutions, it first authorized Arsenio, its indorser under the NIL. The explicit with recourse stipulation against Great
treasurer, to secure a loan from Bancasia as well as to sign any pertinent Asian enlarges the liability of Great Asian beyond that of a mere indorser of
documents related to such. Second, it authorized Arsenio to obtain from a negotiable instrument. Thus, whether or not Bancasia gives notice of
Bancasia a discounting line. Pursuant to these, deeds of assignments were dishonor to Great Asian, the latter remains liable because of the with
issued by Great Asian in favor of Bancasia for receivables—specifically recourse stipulation.
checks. Almost all the checks assigned by Great Asian were dishonored.
Notice of dishonor was sent by the bank and its lawyer to Tan Chong Lin. The recourse of Bancasia to file an action for breach of contract doesn’t
Later, Great Asian filed for insolvency and in its petition, Bancasia was one leave Great Asian with an empty bag. It is then subrogated back as
of those listed as its creditors. In the meanwhile, a complaint was filed creditor of the receivables. Great Asian can now proceed against the
against Great Asian and Tan Chong Lin because of the surety agreement it drawers who issued the checks. Even if there was no timely notice of
signed in favor of Bancasia. dishonor, Great Asian is not prejudiced. A notice of dishonor is not
required if the drawer has no right to expect or require the bank to honor
HELD: the check, or if the drawer has countermanded payment.
First, under the 2 board resolutions, indeed Arsenio was authorized to
obtain a loan and sign any document related to the securing of the loan. Wednesday: 187 and 189
The question is whether the deeds of assignment signed by Arsenio was
within the ambits of his authority. NOTES: L AS T WEEK

Page 184 of 190
OCTOBER 1 - 6, 2007
IMPLICATION OF CERTIFICATION FURTHER EXPLAINED
 The bank virtually says that the check is good and we have the
Sec. 187. Certification of check; effect of. - Where a check is mo0ney of the drawer here ready to pay it. We will pay it now if you
certified by the bank on which it is drawn, the certification is will receive it. The holder says no, I will not take the money; you may
equivalent to an acceptance. now certify the check and retain the money for me until this check is
presented. The law will not permit a check, when due, to be thus
CERTIFICATION OF CHECK presented, and the money to be left with the bank for the
 A certification is an agreement whereby the bank against whom a accommodation of the holder without discharging the drawer. The
check is drawn, undertakes to pay it at any future time when money being due and the check presented, it is his fault if the holder
presented for payment declines to receive the payment, and for his own convenience has the
 But a bank is not obligated to the depositor to certify checks money appropriated to that check subject to its future presentment at
 And the drawee is not liable to the holder for refusal of the bank to any time within the statute of limitations.
certify the fcheck
 The refusal of the bank doesn’t dispense with the requirement of FUNCTIONS OF CERTIFIED CHECKS
presentment for payment since a check is of right presentable only for  Although a check doesn’t call for acceptance and the holder can
payment at the bank on which it is drawn present it only for payment, the certification of checks is a means in
constant and extensive use in the business of banking and its effects
FORM OF CERTIFICATION and consequences are regulated by the law merchant. Checks drawn
 No particular form is required but it must be in writing against banks, thus marked and certified, enter largely into the
 The usual method is by stamping on the check the word “certified” and commercial and financial transactions of the country; they pass from
underneath it the signature of the cashier, or by writing upon the hand to hand, in the payment of balances from one house and one
check the word “good” with the date of certification and signature of bank to another. In the great commercial centers, they make up no
the officer of the bank having the express or implied authority to inconsiderable portion of the circulation and thus perform a useful,
certify checks, has been held to be a sufficient certification valuable and an almost indispensable office
 The letters “OK” with the initials of the cashier of a bank doesn’t
constitute a sufficient certification under modern banking practice PURPOSE OF PROCURING CHECKS TO BE CERTIFIED
 To impart strength and credit to the paper by acknowledgment from
EFFECT OF CERTIFICATION the certifying bank that the drawer has funds therein sufficient to
1. Equivalent to acceptance and is the operative act that makes the cover the check and securing the engagement of the bank that the
drawee bank liable check will be paid upon presentation
2. It operates as an assignment of the funds of the drawer in the  When a check is certified, it ceases to possess the character, or to
hands of the drawee bank perform its functions, of a check, and represents so much money on
3. If obtained by the holder, it discharges the persons secondarily deposit, payable to the holder on demand.
liable  The check becomes a basis for credit and an easy mode of passing
money from hand to hadn and answers the purposes of money
CERTIFICATION EQUIVALENT TO ACCEPTANCE
 Certification is equivalent to acceptance in the drawee bank is bound PAYMENT NEITHER INCLUDES NOR IMPLIES ACCEPTANCE
on the instrument upon certification  Acceptance and payment are entirely different. If the drawee accepts
 And it is immaterial to such liability in favor of a holder in due course the paper after seeing it, and then permits it to go into circulation as
whether the drawer had funds or not in the bank or the drawer was genuine, on all the principles of estoppel, he ought to be prevented
indebted to the bank for more than the amount of the check from setting up forgery to defeat liability to one who has taken the
 The certifying bank has all the liabilities of an acceptor under Section paper on the faith of the acceptance or certification
62

Page 185 of 190
 On the other hand, mere payment of the paper at the termination of of the bid was paid and covered into the Treasury, the government could
its course doesn’t act as an act of estoppel hardly be heard to say that the award was invalid because the amount paid
 Payment is the final act which extinguishes a bill was originally represented in part by an uncertified check.
 Acceptance is the promise to pay in the future and continues the life of
the bill 188 NEW PACIFIC TIMBER V. SENERIS
101 SCRA 686
RIGHT OF THE HOLDER TO SUE DRAWER WHERE CHECK NOT CERTIFIED
 The drawer of a check certifies that it will be paid on presentment but FACTS:
not that it will be certified New Pacific Timber and Supply was the defendant in a case for collection of
 This is the theory on which the law discharging the drawer and money. Upon failure to comply with the compromise agreement, a writ of
indorsers upon certification is based execution was issued and its properties were levied. Prior though to the
 Certification is different from acceptance in that the refusal of the auction sale, petitioner deposited with the trial court a cashier’s check but
drawee bank to certify doesn’t amount to a dishonor of the check private respondent refused to accept.
 There is no need for a notice of non-certification and the check must
still be presented for paymenht HELD:
The check deposited by the petitioner is no ordinary check but a cashier’s
CASE DIGESTS: SECTION 187 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
187 PANLILIO V. DAVID been certified by the drawee bank, by the certification, the funds
50 PHIL 105 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
FACTS: becomes the depositor of the drawee bank, with rights and duties of one in
Panlilio and David are both bidders for lease of a big chunk of land owned such situation. The certification by the bank is equivalent to acceptance.
by the government. Panlilio had a higher bid than David. Both of their It is an understanding that the check is good then, and shall continuegood,
bids were accompanied by uncertified checks, the amount for David’s is and this agreement is binding on the bank as its notes in circulation, a
lesser than that of Panlilio’s. Later, David equaled the bid of Panlilo by certificate of deposit payable to the order of the depositor, or any other
adding cash to the amount of his check. With this, the lease was awarded obligation it can assume. The object of certifying the check as regards
to David. His check was encashed and the proceeds were deposited with both parties is to enable the holder to use it as money. Hence the
the Treasury. This award was questioned by Panlilio by averting that the exception to the rule on Section 64 of the CB Act to the effect “that a check
bid of David should have been denied since the check he offered was which has been cleared and credited to the account of the creditor shall be
uncertified. This prompted the withdrawal of the award to David and equivalent to a delivery to a creditor in cash in an amount equal to the
instead, the lease was awarded to Panlilio, whom it was thought to have amount credited to his account” shall apply in this case.
submitted a certified check. After knowing that he too didn’t have a
certified check, his award was cancelled. Both appealed this to the 189 PNB V. NATIONAL CITY BANK OF NY
appellate court. 63 PHIL 711
HELD: FACTS:
The rule that the check to be offered should be certified is an office rule. It Unknown persons negotiated with Motor Services Company checks, which
sought to prevent the presentation of frivolous bids and to avoid difficulties were part of the stipulation in payment of automobile tires purchased from
in the collection of the amount of the accepted bid. The Director of Lands the latter’s store. It purported to have been issued by Pangasinan
therefore had the authority to reject both bids in question on the ground Transportation Company. The said checks were indorsed at the back by
that they weren’t accompanied by certified checks. Nonetheless, this said unknown persons, the Motor company believing at that time that the
doesn’t mean that if he accepted one of them, a merely formal defect signatures contained therein were genuine. The checks were later
would vitiate the award. When David’s bid was accepted and the amount deposited with the company’s account in National City Bank of NY. The

Page 186 of 190
said checks were consequently cleared and PNB credited National City Bank Tuazon owned a big parcel of land, which was subdivided into smaller lots.
with the amounts. Thereafter, PNB discovered that the signatures were These lots were leased to people and under the contract of lease, the
forged and it demanded the reimbursement of the amounts for which it lessees had the right of first refusal, in case Tuazon decides to sell the lots.
credited the other bank. Tuazon then obtained loans from Vidal, which was secured by mortgages
over the same land. Thereafter, Tuazon and Araneta entered into a
HELD: promise to buy and sell, subject to the decision of the lessees if they will
A check is a bill of exchange payable on demand and only the rules purchase the lots. Many lessees took advantage of this proposition and
governing bills of exchanges payable on demand are applicable to it. in bought the lots. The only encumbrance left is the mortgage to Vidal.
view of the fact that acceptance is a step necessary insofar as negotiable Tuazon tried to tender a check for payment of the full mortgage obligation
instruments are concerned, it follows that the provisions relative to but Vidal refused to accept the check, prompting the former to file an
acceptance are without application to checks. Acceptance impies action against the latter. Attached to the complaint was the check refused
subsequent negotiation of the instrument, which is not true in the case of by Vidal, another certified check, and an ordinary check. This action
checks because from the moment it is paid, it is withdrawn from however wasn’t pursued. The records and the checks were destroyed in a
circulation. When the drawee banks cashes or pays a check, the cycle of fire and wasn’t reconstituted. Since one of the checks was issued by
negotiation is terminated and it is illogical thereafter to speak of Araneta in favor of Vidal, and there was a stipulation that Tuazon would be
subsequent holders who can invoke the warrant against the drawee. held liable, Araneta ran after Tuazon for the value of the checks.
Further, in determining the relative rights of a drawee who under a mistake HELD:
of fact, has paid, a holder who has received such payment, upon a check to The stipulation holding Tuazon liable for the loss of the checks issued was a
which the name of the drawer has been forged, it is only fair to consider valid stipulation, nonetheless, Tuazon should not be held liable for the loss
the question of diligence and negligence of the parties in respect thereto. of the certified checks. The matter of who should bear the loss doesn’t
The responsibility of the drawee who pays a forged check, for the depend upon the validity of the sale but on the extent and scope of the
genuineness of the drawer’s signature is absolute only in favor of one who clause hereinbefore quoted as applied to the facts of the present case.
has not, by his own fault or negligence, contributed to the success of the
fraud or to mislead the drawee. Some of the checks was issued by Araneta and payable to Vidal, and were
drawn against BPI with which Araneta had a deposit in the current account.
According to the undisputed facts, National City Bank in purchasing the They were certified and the certification stated that they were to be void if
papers in question from unknown persons without making any inquiry as to not presented for payment at the office within 90 days from date of
the identity and authority of said persons negotiating and indorsing them, acceptance. Under banking laws and practices, by the certification, the
acted negligently and contributed to the constructive loss of PNB in failing funds represented by the check were transferred from the credit of the
to detect the forgery. Under the circumstances of the case, if the appellee maker to that of the payee or holder, and for all intents and purposes, the
bank is allowed to recover, there will be no change in position as to the latter became the depositor of the bank, with rights and duties of one in
injury or prejudice of the appellant. such relation. But the transfer of the corresponding funds from the credit
of the depositor to that of the payee had to be co-extensive with the life of
DRAWER: PANGASINAN the checks, which in this case was 90 days. If the checks were not
PAYEE: IASMOTOR SERVICE presented for payment within that period they became invalid and the
DRAWEE: PNB funds were automatically restored to the credit of the drawer though not as
COLLECTING BANK: NATIONAL CITY BANK OF NEW YORK a current deposit but as special deposit.
The checks were never collected and the account against which they were
190 ARANETA V. PAZ TUAZON drawn wasn’t used or claimed by Araneta and since the account was
91 PHIL 786 opened during the Japanese occupation and in Japanese currency, the
checks became obsolete as the account subject thereto is considered null
FACTS: and void.

Page 187 of 190
interpose the defense of want of consideration because that defense is only

Whether BPI could lawfully limit the negotiability of the certified checks to personal. Therefore, when the check was accepted and certified, there was
a period less than what is provided by the statute of limitations doesn’t already a valid consideration.
seem material. The limitation imposed by the bank as to the time would
adversely only affect the payee Vidal but in this case, Vidal actually refused Furthermore, what was issued was a manager’s check. It stands in the
to accept the checks. same footing as a certified check. Where a check is certified by a bank on
which it is drawn, the certification is equivalent to acceptance.
But as to Araneta and Tuazon, the conditions specified in the certification
and the prevailing regulations of the bank were the law of the case. Not Sec. 188. Effect where the holder of check procures it to be
only this, but they were aware of and abided by those reghulations and certified. - Where the holder of a check procures it to be accepted
practice, as instanced by the fact that the parties presented testimony to or certified, the drawer and all indorsers are discharged from
prove those regulations and practice. And that Araneta knew that Vidal liability thereon.
hadn’t cashed the checks within 90 days is not, and couldn’t successfully
be, denied. EFFECT WHERE HOLDER OBTAINS CERTIFICATION
 When the certification is obtained by the holder, the drawer and the
In these circumstances, the stipulation that the defendant or seller shall indorsers are discharged
not hold the buyer responsible for the loss of the checks is unconscionable  The certification has the same effect as if the holder has drawn the
and void insofar as this would stretch Tuazon’s liability for more than 90 money redeposited it and taken a certificate of deposit for it
days.  Only the indorsers at the time of the certification are discharged
191 EQUITABLE PCI BANK V. ONG REASON FOR THE RULE

502 SCRA 119  The moment that the check is certified, the funds ceased to exist to be
under the control of the original depositrors and pass under the control
FACTS: of the person who procures the certification of the check drawn in his
Sarande deposited a check with her account. After getting assurance that favor
the said check had been cleared, she issued two checks in the same
amount as of the proceeds of the check. One of the checks issued was EFFECT WHERE CERTIFICATION OBTAINED BY OTHERS
given to Ong. Thereafter, Ong instead of depositing the check given, had a  Where the certification is obtained by the drawer, even when the
manager’s check issued to him in the same value of the check. This she drawer procures the certification at the instance of the payee
tried to deposit but she received a notice that the bank has stopped  Where the certification is obtained by a person who is neither the
payment of the check. Despite her demands to make good the value of holder nor drawer
her check, she was refused.
Sec. 189. When check operates as an assignment. - A check of itself
HELD: does not operate as an assignment of any part of the funds to the
PCI should be held liable. It had certified the check and since certification credit of the drawer with the bank, and the bank is not liable to the
is equivalent to acceptance, the bank as drawee bank is bound on the holder unless and until it accepts or certifies the check.
instrument upon certification and it is immaterial to such liability in favor of
the plaintiff who is a holder in due course whether the drawer had funds or CERTIFICATION OPERATES AS ASSIGNMENT OF FUNDS
not with the bank or the drawer was indebted to the bank for more than  When the holder procures the check to be certified, the check operates
the amount of the check as the certifying bank had the same liabilities as as an assignment of a part of the funds to the credit of the drawer with
acceptor. the bank
It may be true that the check which was paid to her had no funds to DURATION OF TRANSFER OF FUND
support it, nonetheless, as a holder in due course, the bank cannot

Page 188 of 190
 As stated, “Under banking laws and practices, by the certification, the

funds represented by the check were transferred from the credit of the SUMMARY OF RIGHTS AND LIABILITIES OF PARTIES
maker to that of the payee or holder, and for all intents and purposes, 1. The holder has no action against it as a check is not in itself an
the latter became the depositor of the bank, with rights and duties of assignment of funds of the drawer in the hands of the drawee
one in such relation. But the transfer of the corresponding funds from bank, and the drawee bank isn’t liable on the check until it has
the credit of the depositor to that of the payee had to be co-extensive accepted or certified it
with the life of the checks, which in this case was 90 days. If the 2. Neither has the holder a right of action against the drawer where
checks were not presented for payment within that period they the drawee bank refuses to accept or certify the check but he has
became invalid and the funds were automatically restored to the credit a right of action against the drawer where the drawee bank
of the drawer though not as a current deposit but as special deposit.” refuses to pay
3. And while the holder has no right of action against the drawee
UNCERTIFIED CHECK IS NOT AN ASSIGNMENT OF FUNDS bank which refuses to pay, accept or certify the check, the drawer
 A check of itself is not an assignment of the funds of the drawer in the has a right of action against the drawee bank so refusing. Such
bank right of action, however, isn’t based on the check drawn but on
 A general deposit in the bank is so much money to the depositor’s the original contract of deposit between them
credit. It is a debt to him by the bank, payable on demand to his
order, not property capable of identification and specific appropriation. DUTY OF DEPOSITOR TO BANK
A check drawn upon the bank in usual form, not accepted or certified  Where a drawer of a check has prepared his check so negligentlythat it
by its cashier to be good, doesn’t constitute transfer of any money to can be altered easily without giving the instrument a suspicious
the credit of the holder. It is simply an order which may be appearance and alterations are afterwards made, he cannot blame
countermanded and payment forbidden by the drawer at any time anyone but himself and in such case, he cannot hold the bank liable
before it is actually cashed. It creates no lien on the money which the for the consequences of his own negligence in the respect
holder can enforce against the bank. It doesn’t of itself operate as an  But negligence of depositor in drawing a check will not excuse the
equitable assignment. paying bank unless it is misled by such negligent act, and if the drawer
of a check is first in fault and if his negligence contributes directly to
DRAWEE BANK NOT LIABLE TO HOLDER ON CHECK UNLESS ACCEPTED OR its wrongful and fraudulent appropriation, he isn’t entitled to recover
CERTIFIED
 Before acceptance or certification, the bank isn’t liable and the holder DUTY OF DEPOSITOR WHERE PASSBOOK RETURNED TO HIM
has no right to sue the drawee bank on the check  It is his duty to examine such checks within a reasonable time and if
 On this question, we conclude that the general rule is that an action they disclose forgeries or alterations, to report them to the bank,
cannot be maintained by the payee of the check against the bank on dispute the correctness of payments thereafter made by it on similar
which it is drawn, unless the check has been certified or accepted by checks.
the bank in compliance with the statute, even though at the time the  This rule assumes that the bank itself hasn’t been guilty of negligence
check is that an action cannot be maintained by the payee of the in making the payment for when, by the exercise of proper case, it
drawer of the check out of which the check is legally payable; and that could have discovered the alteration of forgery, it must bear the loss
the payment of the check by the bank on which it is drawn, even notwithstanding that the depositor failed in his duty to examine the
though paid on the unauthorized indorsement of the name of the accounts
holder; doesn’t constitute as certification thereof, neither is it an
acceptance thereof; and without acceptance or certification, as STOPPING PAYMENT
provided by statute, there is no privity of contract between the drawee  As a check is itself doesn’t operate as an assignment of funds to the
bank and the payee, or the holder of the check. Neither is there credit of the drawer, the latter may countermand payment before its
assignment of the funds where the check isn’t drawn on a particular acceptance or certification.
fund, or doesn’t show on its face that it is an assignment of a  The order to stop payment must be communicated to the bank before
particular fund. the check to which it refers has been paid; and in the absence of this

Page 189 of 190
rule of the bank that stop orders must be in writing, a verbal notice is RCBC insists that immediate payment of a certified check is discretionary
sufficient. on the bank whom the check was presented and such being the case, its
refusal to immediately pay the check in this case is not to be equated with
WHEN STOPPING PAYMENT CONSTITUTES A CRIME negligence on its part.
 It would constitute the crime of estafa where the accused issues a
check and receives money, not goods, for them to the offended party, This is without merit.
and where at the time the accused has received money for the check
from the offended party, he has the intention of stopping payment on An ordinary check is not a mere undertaking to pay an amount of money.
it. There is an element of certainty or assurance that it will be paid upon
presentation that is why it is perceived as a convenient substitute for
CASE DIGESTS: SECTION 189 currency in commercial transactions. The basis of perception being
confidence. Any practice which destroys this confidence will impair the
190 TAN V. CA usefulness of the check.
239 SCRA 310
What was presented in this case was a cashier’s check payable to the
FACTS: account of the depositor himself. A cashier’s check is a primary obligation
Tan was a businessman who maintained an account with RCBC. To avoid of the issuing bank and accepted in advance by its mere issuance. By its
the risk of bringing with him cash, he bought a manager’s check from PCIB very nature, a cashier’s check is a bank’s order to pay drawn upon itself,
and deposited it in his account. On the same day, RCBC erroneously sent committing in effect its total resources, integrity and honor behind the
the check for clearing which was sent back for having been missent or check. It is regarded to be as good as the money which it represents. In
misrouted. This caused RCBC to debit the account of Tan. Thereafter, this case, PCIB by issuing the check created an unconditional credit in favor
without being informed of his account being debited, Tan issued two checks of the collecting bank.
with the same value of the manager’s check he deposited. This naturally
bounced and this prompted Tan to file an action against RCBC. 191 VILLANUEVA V. NITE
496 SCRA 459
HELD:
RCBC cannot exculpate itself from liability by claiming that the depositor FACTS:
has implied instructed it to send the check for clearing by filling a local Nite obtained a loan from Villanueva. This was secured by an ABC check
check deposit slip. Such posture is disingenuous to say the least. First, but when the check was deposited, it was dishonored for having been
why would the bank follow a patently erroneous act born of ignorance or materially altered. Afterwards, Nite remitted to Villanueva partial payment
inattention or both. Second, bank transactions pass through a succession of the loan. Nonetheless, the latter filed an action for collection of sum of
of bank personnel whose duty is to check and countercheck transactions money from the former for the whole value of the check. The lower court
for possible errors. As soon as their deposits are accepted by the bank decided in favor of Villanueva and ordered ABC to pay the former.
teller, they wholly repose trust in the bank personnel’s mastery of banking, Thereafter, when Nite tried to withdraw money from her account she
their and the bank’s sworn profession of diligence and meticulousness in couldn’t do so. This prompted Nite to file with the CA for annulment of
giving irreproachable service. judgment which she was granted.
In the instant case, it was the bank which was remiss in its duties. The HELD:
two checks were issued 45 days after the cashier’s check was deposited. Villanueva obviously acted on bad faith. Barely 6 days after accepting the
The bank had ample time to have cleared the cashier’s check had it partial payment from Nite, he acted with haste in filing the action. He
corrected its missending the same upon the return from CB using the didn’t even implead Nite in his action against the bank, showing his intent
correct slip this time so that it can be cleared properly. Instead, the bank to prevent Nite from opposing his action.
has promptly debited the account of Tan.

Page 190 of 190
Furthermore, if a bank refuses to pay a check notwithstanding the

sufficiency of funds, the payee cannot sue the bank. The payee should
instead sue the drawer who might in turn sue the bank.
Villanueva should have not sued ABC. Contracts take effect only between
the parties, assigns and heirs, except in cases where the rights and
obligations arising from the contract are not transmissible in nature, by
stipulation or by provision of law. None of the foregoing exceptions to the
relativity of contracts applies in this case.
The contract of loan was between Villanueva and Nite. Consequentially,

Nite should have been made an indispensable party in the former’s action
against ABC.
192 MIRANDA V. PDIC; BSP AND PRIME

501 SCRA 288
FACTS:
Miranda had an account with Prime Savings. She withdrew some of her
money but instead of asking for cash, she requested that she be issued two
crossed cashier’s check. She then deposited these in another account. But
these checks weren’t paid, since the BSP suspended the clearing privileges
of Prime Savings. Thereafter, Prime Savings declared bank holiday and
was placed under receivership. The checks were then returned to Miranda
unpaid and this prompted her to file an action for collection of sum of
money from PDIC, the receiver.
HELD:
The two cashier’s check in issued don’t constitute an assignment of funds
in the hands of Miranda as there were no funds in the first place. The bank
was insolvent for sometime even before the checks were issued in favor of
Miranda.
Second, the claim of Miranda is subject to the jurisdiction of the liquidation

court. Regular courts don’t have jurisdiction over claims against insolvent
bank.
Third, it is only Prime Savings that is liable to pay for the amount of the
cashier’s check. Solidary liability cannot attach to the BSP in its capacity
as regulator of banks, and the PDIC as statutory receiver because they are
principal government agencies mandated by law to determine the financial
viability of banks and quasi-banks, and facilitate receivership and
liquidation of closed financial institutions upon factual determination of the
latter’s insolvency.


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NEGOTIABLE INSTRUMENTS NOTES

BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES

MOST COMMON FORMS OF NEGOTIABLE INSTRUMENTS

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

2. Where the instrument is payable to order, neither is delivery

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

 Draft of which the acceptor is a bank or banker engaged generally in

CERTIFICATE OF DEPOSIT REQUISITES AS TO A NEGOTIABLE BILL

BY: MA. ANGELA LEONOR C. AGUINALDO

IF A BILL, IT MUST CONTAIN AN ORDER TO PAY INSTRUMENT MUST SPECIFY DENOMINATION

EFFECT OF MERE REQUEST TO PAY WHERE NO YEAR IS SPECIFIED

BY: MA. ANGELA LEONOR C. AGUINALDO

 Where payable to “bearer B”

SECTION 1: CASE DIGESTS FACTS:

BY: MA. ANGELA LEONOR C. AGUINALDO

5 CF SHARP & CO., INC. V. NORTHWEST AIRLINES, INC. FACTS:

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

Sec. 3. When promise is unconditional. AS PER CONTRACT NOTES

BY: MA. ANGELA LEONOR C. AGUINALDO

Gomez opened an account with Golden Savings bank and deposited 38

HELD: (a) At a fixed period after date or sight; or

17 METROPOLITAN BANK V. CA An instrument payable upon a contingency is not negotiable, and

FACTS: “AFTER SIGHT”

BY: MA. ANGELA LEONOR C. AGUINALDO

ACCELARATION NOTES Sec. 5. Additional provisions not affecting negotiability. - An

(a) authorizes the sale of collateral securities in case the

BY: MA. ANGELA LEONOR C. AGUINALDO

TWO CLASSES OF CONFESSION OF JUDGMENT FACTS:

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

 Pay the payee or the person designated by the payee

MEANING OF THE PHRASE “TO ORDER”

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

HELD: EXISTING PAYEE INTENDED TO RECEIVE PROCEEDS; NOT PAYABLE TO

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

HELD: WHEN DATE NECESSARY

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

the obligations. Later, the bank instituted an action for collection of

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

PRESUMPTION OF VALID DELIVERY AS TO IMMEDIATE PARTY OR REMOTE CASE DIGESTS: SECTION 16

DEFENSES UNDER THE SECOND SENTENCE OF SECTION 16 30 PEOPLE V. GROSPE

BY: MA. ANGELA LEONOR C. AGUINALDO

31 DELA VICTORIA V. BURGOS FACTS:

BY: MA. ANGELA LEONOR C. AGUINALDO

(g) Where an instrument containing the word "I promise to HELD:

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

BY: MA. ANGELA LEONOR C. AGUINALDO

FORGERY, DEFINED AND EXPLAINED Sgd. A

Bill of Exchangedrawer GENERAL RULE IN FRAUDULENT IMPERSONATION

BY: MA. ANGELA LEONOR C. AGUINALDO