negotiable instruments law 2031

8/20/2019 Negotiable Instruments Law 2031

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1Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) based on the book of Aquino and De Leon and Audio Lecture of Dean Sundiang

NEGOTIABLE INSTRUMENTS LAW

INTRODUCTION

GOVERNING LAWS – ACT No. 2031 effective June 2, 1911 (whichamended some of the provisions of the Rules of the Law Merchant),the Code of Commerce and the Civil Code.

APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW – the Act applies only to negotiable instruments or those that meet therequirements under Sec. 1 of Act No. 2031.

KRAUFFMAN VS. PNB (GR No. 16454, Sept. 29, 1921) - Herein plaintiffwas entitled to P98,000 of the Philippine Fiber and Produce Company’sdividend for the year 1917. George B. Wicks, treasurer of the Company,requested that a telegraphic transfer of $45,000 to the plaintiff in New

York City. Wicks drew and delivered a check for the amount ofP90,355.50, total cost of said transfer, including exchange and cost ofmessage which was accepted by the officer selling the exchange inpayment of the transfer in question. As evidence of this transaction adocument was made out and delivered to Wicks, which is referred to bythe bank's assistant cashier as its official receipt. On the same day thePhilippine National Bank dispatched to its New York agency a cablegramfor $45,000. However, the bank's representative in New York repliedsuggesting the advisability of withholding this money from Kauffman. ThePNB dispatched to its New York agency another message to withhold theKauffman payment as suggested. Meanwhile, upon advice of Wicks thatthe money has been placed to his credit, Kauffman presented himself atthe office of the Philippine National Bank in New York and demanded the

money. By this time, however, the message from the Philippine NationalBank directing the withholding of payment had been received in New York, and payment was therefore refused. Thus the present complaint torecover said sum, with interest and costs. ISSUE: WON Act No. 2031 isapplicable in the above case? HELD: NO. The provisions of theNegotiable Instruments Law to come into operation, there must be adocument in existence of the character described in section 1 of the Law;and no rights properly speaking arise in respect to said instrument until itis delivered. In the case before us there was an order transmitted by thedefendant bank to its New York branch, for the payment of a specifiedsum of money to George A. Kauffman. But this order was not madepayable "to order or "to bearer," as required in Section 1(d) of that Act;and inasmuch as it never left the possession of the bank, or itsrepresentative in New York City, there was no delivery in the senseintended in Section 16 of the same Law. In this connection it isunnecessary to point out that the official receipt delivered by the bank to

the purchaser of the telegraphic order, and already set out above, cannotitself be viewed in the light of a negotiable instrument, although it affordscomplete proof of the obligation actually assumed by the bank.

GSIS VS. CA (GR No. L-40824, Feb. 23, 1989) - Private respondents, Mr.and Mrs. Isabelo R. Racho, together with the Lagasca spouses, executed adeed of mortgage in favor of petitioner GSIS. Subsequently, another deedof mortgage was executed in connection with earlier two loans granted. Aparcel of land, co-owned by said mortgagor spouses, was given assecurity under the aforesaid two deeds and they also executed a"promissory note". The Lagasca spouses executed an instrumentdenominated "Assumption of Mortgage" under which they obligatedthemselves to assume obligation to the GSIS. This undertaking was notfulfilled. Upon failure of the mortgagors to comply with the conditions ofthe mortgage, particularly the payment of the amortizations due, GSISextra-judicially foreclosed the mortgage and caused the mortgaged

property to be sold at public auction. Private respondents filed a complaintagainst the petitioner and the Lagasca spouses praying that theextrajudicial foreclosure be declared null and void. In their aforesaidcomplaint, they alleged that they signed the mortgage contracts not assureties or guarantors for the Lagasca spouses but they merely gave theircommon property to the said co-owners who were solely benefited by theloans from the GSIS. Trial court dismissed the case. CA reversed decisionstating that the respondents are that only of an accommodation party.ISSUE: WON the NIL is applicable to the promissory note and mortgagedeed? HELD: No. Both parties relied on the provisions of Section 29 of ActNo. 2031, otherwise known as the Negotiable Instruments Law, which

provide that an accommodation party is one who has signinstrument as maker, drawer, acceptor of indorser without receivingtherefor, but is held liable on the instrument to a holder for value altthe latter knew him to be only an accommodation party. This approboth parties appears to be misdirected and their reliance misplacepromissory note hereinbefore quoted, as well as the mortgage subject of this case, are clearly not negotiable instruments. documents do not comply with the fourth requisite to be considesuch under Section 1 of Act No. 2031 because they are neither payorder nor to bearer. The note is payable to a specified party, the

Absent the aforesaid requisite, the provisions of Act No. 2031 wouapply, governance shall be afforded, instead, by the provisions of thCode and special laws on mortgages.

C. CONCEPT OF NEGOTIABLE INSTRUMENTS

1. DEFINITION: Negotiable Instruments are written statesigned by the maker or drawer containing an unconditional por order to pay a sum certain money, payable on demand ofixed or determinable future time, to order or to bearer.

2. FUNCTIONS OF NEGOTIABLE INSTRUMENTSa. Substitute for money - although they are not cons

legal tender. One of its distinct characteristics is its negotwhich allows it to go from hand to hand in the commmarkets and to take the part of money in commtransactions free from all personal defenses available a

the original owner. b.

Media of exchange – they thus increase the purcmedium in circulation. They are a safe and convenient medoing business that eliminate the risk of dealing in cash.

c.

Medium of credit transactions – they allow mundoubted credit (such as those with illiquid properties) ton business enterprise upon their promissory notes, bexchange and checks knowing that other businessmen wthese promises as cash.

Checks are primarily used for immediate payment (subsfor money); while ordinary bill of exchange and the promnote are intended for the circulation of credits (instruments)

3. LEGAL TENDER – that amount which the creditor can be com

to accept as payment.

Sec. 52,NewCentralBank

Act

Legal Tender Power. — All notes and coins issued Bangko Sentral shall be fully guaranteed by the Goverof the Republic of the Philippines and shall be legal tenthe Philippines for all debts, both public and pProvided, however , That, unless otherwise fixed Monetary Board, coins shall be legal tender in amounexceeding Fifty pesos (P50.00) for denominations of Tfive centavos and above, and in amounts not excTwenty pesos (P20.00) for denominations of Ten centa

Sec. 60 Legal Character. — Checks representing demand dedo not have legal tender power and their acceptance payment of debts, both public and private, is at the opthe creditor: Provided, however, That a check whibeen cleared and credited to the account of the credito

be equivalent to a delivery to the creditor of cash amount equal to the amount credited to his account

TIBAJIA VS. CA (GR No. 100290, June 4, 1993) - A writ of attacwas issued by the trial court in connection to the collection of a smoney filed by Eden Tan against the Tibajia spouses. The fund waon deposit with the cashier of the Regional Trial Court of PasigTibajia spouses thereafter delivered to the Deputy Sheriff the total

judgment in the form of Cashier's Check worth P262,750.00. HoEden Tan, refused to accept the payment made and instead insistethe garnished funds deposited with the cashier of the Regional Tria




of Pasig be withdrawn to satisfy the judgment obligation. Petitioners fileda motion to lift the writ of execution on the ground that the judgmentdebt had already been paid but was denied by the trial court on theground that payment in cashier's check is not payment in legal tender.When the petitioners' motion for reconsideration was denied, the spousesTibajia filed herein petition. ISSUE: WON the delivery of the cashier'scheck is considered payment in legal tender? HELD: No. A check, whethera manager's check or ordinary check, is not legal tender, and an offer of acheck in payment of a debt is not a valid tender of payment and may berefused receipt by the obligee or creditor. (Philippine Airlines, Inc. vs.Court of Appeals and Roman Catholic Bishop of Malolos, Inc. vs.Intermediate Appellate Court). The ruling in the two (2) abovementionedcases decided by the Supreme Court applies the statutory provisionswhich lay down the rule that a check is not legal tender and that a creditor

may validly refuse payment by check, whether it be a manager's, cashier'sor personal check.

PAL VS. CA (GR No. 49188, Jan. 30, 1990) - CFI Manila ruled in favor of Amelia Tan [under the name and style of Able Printing Press] in acomplaint for damages against petitioner Philippine Airlines. On appeal,the CA upheld the decision of the CFI with minor modifications as to thedamages to be awarded. The corresponding writ of execution was dulyreferred to Deputy Sheriff Emilio Z. Reyes for enforcement with checks inthe name of the latter. Four months later, Amelia Tan moved for theissuance of an alias writ of execution since the judgment remainedunsatisfied. The petitioner filed an opposition to the motion for theissuance of an alias writ of execution stating that it had already fully paidits obligation to plaintiff through the deputy sheriff of the respondentcourt, Emilio Z. Reyes, as evidenced by cash vouchers properly signed andreceived by said Emilio Z. Reyes. On March 3,1978, the Court of Appealsdenied the issuance of the alias writ for being premature, ordering theexecuting sheriff Emilio Z. Reyes to appear with his return and explain thereason for his failure to surrender the amounts paid to him by petitionerPAL. However, the order could not be served upon Deputy Sheriff Reyesbecause he already absconded or disappeared. ISSUE: WON the paymentrendered through a check made by PAL to the absconding sheriff in hisname operate to satisfy the judgment debt? HELD: Under ordinarycircumstances, payment by the judgment debtor to the sheriff should bevalid payment to extinguish the judgment debt. There are circumstances,however, which compel a different conclusion such as when the paymentmade by the petitioner to the absconding sheriff was not in cash or legaltender but in checks. The delivery of promissory notes payable to order,or bills of exchange or other mercantile documents shall produce theeffect of payment only when they have been cashed, or when through thefault of the creditor they have been impaired. In the meantime, the action

derived from the original obligation shall be held in abeyance. Since anegotiable instrument is only a substitute for money and not money, thedelivery of such an instrument does not, by itself, operate as payment. Acheck, whether a manager’s check or ordinary check, is not legal tender,and an offer of a check in payment of a debt is not a valid tender ofpayment and may be refused receipt by the obligee or creditor. Meredelivery of checks does not discharge the obligation under a judgment.The obligation is not extinguished and remains suspended until thepayment by commercial document is actually realized (Art. 1249, CivilCode, par. 3). PAL created a situation which permitted the said Sheriff topersonally encash said checks and misappropriate the proceeds thereof tohis exclusive personal benefit. For the prejudice that resulted, thepetitioner himself must bear the fault. As between two innocent persons,one of whom must suffer the consequence of a breach of trust, the onewho made it possible by his act of confidence must bear the loss.

CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

1. NEGOTIABILITY – is that quality or attribute of a bill or notewhereby it may pass from one person to another similar to money,so as to give the holder in due course the right to collect on theinstrument the sum payable for himself free from any defect in thetitle of any of the prior parties or defenses available to them amongthemselves.

2. ACCUMULATION OF SECONDARY CONTRACTS – as they aretransferred from one person to another. Once an instrument isissued, additional parties can become involved.

E. INCIDENTS IN THE LIFE OF NEGOTIABLE INSTRUMENTS

PROMISSORY NOTE BILL OF EXCHANGE

Preparation & SigningIssuance

Negotiation

Presentment for Acceptanc Acceptance

Dishonor by Non-acceptan

Presentment for payment

Dishonor by Non-payment

Notice of DishonorPayment

Discharge

F. KINDS OF NEGOTIABLE INSTRUMENTS

1. PROMISSORY NOTES (Sec. 184, NIL) – An unconditional pin writing mace by one person to another, signed by the mengaging to pay on demand, or at a fixed or determinable time, a sum certain in money to order or to bearer. a. Parties to a Negotiable Promissory Note are (1) Mak

(2) Payee; b. Kinds of Negotiable Promissory Note include certific

deposits, bank notes, due bills and bonds.

2. BILLS OF EXCHANGE (Sec. 126, 185, NIL) – An uncondorder in writing addressed by one person to another, signed person giving it, requiring the person to whom it is addressed

on demand, or at a fixed or determinable future time, a sum cin money to order or bearer. a. Parties to a Bill of Exchange are (1) Drawer, (2) Pay

(3) Drawee; b. Kinds of Bills of Exchange include drafts, trade accep

and banker’s acceptances.

G. WHEN BILLS TREATED AS NOTES

Sec. 130 When bill may be treated as promissory note. - Win a bill the drawer and drawee are the same person or wthe drawee is a fictitious person or a person not hcapacity to contract, the holder may treat the instrumehis option either as a bill of exchange or as a promissory

Sec. 17(e) Construction where instrument is ambiguous. - Wthe language of the instrument is ambiguous or there

omissions therein, the following rules of construction app

(e) Where the instrument is so ambiguous that there is dwhether it is a bill or note, the holder may treat it as eithhis election;

H. BILLS AND NOTES DISTINGUISHED

PROMISSORY NOTES BILLS OF EXCHANGE

2 parties – Maker and Payee 3 parties – Drawer, Payee Drawee

Maker cannot be the payee Drawer and payee may be the person

There is unconditional PROMISE bythe maker

There is unconditional ORDER bdrawer to the drawee

Presentment for payment withoutprior acceptance

Some Bills need prior acceptanthe drawee before presentmenpayment

Liability of the maker is primary andabsolute

Liability of the drawer is secoand conditional

I. NEGOTIABLE INSTRUMENTS COMPARE WITH OTHER PA(Negotiability vs. Assignability)

SESBRENO VS. CA (GR No. 89252, May 24, 1993) - Petitioner Semade a money market placement in the amount of P300,000 wi




Philippine Underwriters Finance Corporation (PhilFinance), with a term of32 days. PhilFinance issued to Sesbreno (1) the Certificate of Confirmationof Sale of a Delta Motor Corporation Promissory Note, (2) the Certificate ofSecurities Delivery Receipt indicating the sale of the note with notationthat said security was in the custody of Pilipinas Bank, and (3) post-datedchecks drawn against the Insular Bank of Asia and America forP304,533.33 payable on March 13, 1981. The checks were dishonored forhaving been drawn against insufficient funds. Pilipinas Bank neverreleased the note, nor any instrument related thereto, to Sesbreno; butSesbreno learned that the Delta Promissory Note maturing on 6 April1981, has a face value of P2,300,833.33 with PhilFinance as payee andDelta Motors as maker; and was stamped “non-negotiable” on its face.PhilFrance was later on placed under the custody of the Securities andExchange Commission. As Sesbreno was unable to collect his investment

and interest thereon, he filed an action for damages against Delta Motorsand Pilipinas Bank. Delta Motors contends that said promissory note wasnot intended to be negotiated or otherwise transferred by Philfinance asmanifested by the word "non-negotiable" stamped across the face of theNote. The trial court and the CA dismissed petitioner’s complaint andappeal, respectively, for lack of cause of action. If anything, petitioner hasa cause of action against Philfrance, which, however, was not impleaded.ISSUE: WON the non-negotiability of a promissory note prevents itsassignment? HELD: No. A negotiable instrument, instead of beingnegotiated, may also be assigned or transferred. The legal consequencesof negotiation and assignment of the instrument are different. A non-negotiable instrument may not be negotiated but may beassigned or transferred, absent an express prohibition againstassignment or transfer written in the face of the instrument. Thesubject promissory note, while marked "non-negotiable," was not at thesame time stamped "non-transferable" or "non-assignable." It containedno stipulation which prohibited Philfinance from assigning or transferringsuch note, in whole or in part.

SOME NON-NEGOTIABLE INSTRUMENTS1. Document of Title – like a certificate of stock, bill of lading and

warehouse receipt (non-negotiable because there is no unconditionalpromise or order to pay a certain sum in money);

2. Letter of Credit – a letter from a merchant or bank or banker inone place, addressed to another, in another place or country,requesting the addressee to pay money or deliver goods to a thirdparty therein named, the writer of the letter undertaking to providehim the money for the goods or to repay him. It is a letter requestingone person to make advances to a third person on the credit of thewriter. (It is in favor of a certain person and not to order)

3. Treasury Warrant - it is a government warrant for the payment of

money such as that issued in favor of a public officer or employeecovering payment or replenishment of cash advances for officialexpenditures. (It is payable out of a specific fund or appropriation)

4. Postal Money Order

PHILIPPINE EDUCATION CO. VS. SORIANO (GR No. L-22405, June30, 1971) - Enrique Montinola sought to purchase from the Manila PostOffice 10 money orders (P200 each), offering to pay for them with aprivate check. Montinola was able to leave the building with his check andthe 10 money orders without the knowledge of the teller. Upon discovery,message was sent to all postmasters and banks involving the unpaidmoney orders. One of the money orders was received by the PhilippineEducation Co. as part of its sales receipt. It was deposited by the companywith the Bank of America, which cleared it with the Bureau of Post. ThePostmaster, through the Chief of the Money Order Division of the ManilaPost Office informed the bank of the irregular issuance of the money

order. The bank debited the account of the company. The companymoved for reconsideration. ISSUE: WON postal money orders arenegotiable instruments? HELD: No. Philippine postal statutes arepatterned from those of the United States, and the weight of authority insaid country is that Postal money orders are not negotiable instrumentsinasmuch as the establishment of a postal money order is an exercise ofgovernmental power for the public’s benefit. Furthermore, some of therestrictions imposed upon money order by postal laws and regulations areinconsistent with the character of negotiable instruments. For instance,postal money orders may be withheld under a variety of circumstances,and which are restricted to not more than one indorsement

II. FORM AND INTERPRETATION OF NEGOTIABLE INSTRUMENT

A. HOW NEGOTIABILITY IS DETERMINED?

CALTEX VS. COURT OF APPEALS (GR No. 97753, Aug. 10, 1Respondent bank issued 280 certificates of time deposit (CTDs) in fa

Angel dela Cruz who delivered the same to herein petitioner in connwith his purchased fuel products. Eventually, dela Cruz executedelivered an Affidavit of Loss for the reissuance of the CTDs. Dellater on obtained a loan from respondent bank and negotiated thCTDs, executing a Deed of Assignment of Time Deposit which samong others, that the bank has full control of the indicated time defrom and after date of the assignment and may set-off such and apsame to the payment of amount or amounts that may be due on th

upon maturity.

Petitioner then went to the Sucat branch for verification of thedeclared lost, alleging that the same were delivered to herein petitio

“security for purchases made with Caltex Philippines, Inc.” and reqthat the CTDs be pre-terminated, which was refused by the respobank due to the failure of petitioner to present requested documeprove such allegation. Petitioner then filed a complaint in the RTC,was dismissed. On appeal, the CA affirmed the decision of the RTCthe present petition. ISSUE: WON the CTDs are considered negoHELD: Yes. A sample text of the certificates of time deposit is reprobelow:

SECURITY BANK

AND TRUST COMPANY

6778 Ayala Ave., Makati No. 90101

Metro Manila, PhilippinesSUCAT OFFICE P4,000.00

CERTIFICATE OF DEPOSIT

Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of

PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFI

P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor

days. after date, upon presentation and surrender of this certificate, with i

at the rate of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES

Section 1, of Act No. 2031, otherwise known as the NegInstruments Law, enumerates the requisites for an instrument to bnegotiable. The CTDs in question undoubtedly meet the requiremethe law for negotiability. The accepted rule is that the negotiability onegotiability of an instrument is determined from the writing, that is

the fact of the instrument itself. Contrary to what respondent cou(that the CTDs are payable to the “depositor” which is Angel dela the documents provide that the amounts deposited shall be repayathe depositor. And who, according to the document is the depositothe “bearer”. The documents do not say that the depositor is AngCruz and that the amounts deposited are repayable specifically tRather, the amounts are to be repayable to the bearer of the docuor, for that matter, whosoever may be the bearer at the tipresentment.

B. EFFECT OF ESTOPPEL

BANCO DE ORO SAVINGS VS. EQUITABLE BANKING CORP. (74917, Jan. 20, 1988) - Manager's checks (Checks) having an aggamount of P45,982.23 and payable to certain member establishme

Visa Card. Subsequently, the Checks were deposited with the def

(respondent Equitable) to the credit of its depositor (Aida Traccount). Following normal procedures, and after stamping at the bthe Checks the usual endorsements (All prior and/or lack of endorsguaranteed), Equitable sent the checks for clearing through the PhiClearing House Corporation (PCHC). Accordingly, BDO paid the Checclearing account was debited for the value of the Checks and defenclearing account was credited for the same amount. Thereaftediscovered that the endorsements appearing at the back of the Cpurporting to be that of the payees, were forged and/or unauthoriotherwise belong to persons other than the payees. Pursuant to theClearing Rules and Regulations, it presented the Checks direc




Equitable for the purpose of claiming reimbursement from the latter.However, Equitable refused to do so. After an exhaustive investigation andhearing, the Arbiter rendered a decision in favor of BDO and againstEquitable ordering the PCHC to debit the clearing account of thedefendant (E), and to credit the clearing account of the plaintiff (B) of theforegoing amount with interest at the rate of 12% per annum from date ofthe complaint. The Board of Directors of the PCHC affirmed the decision ofthe Arbiter. Hence this petition. ISSUE 1: Were the subject checks non-negotiable and if not, does it fall under the ambit of the power of thePCHC? OR Does the PCHC has jurisdiction over the controversy involved inview of petitioner’s claim that the subject matter of the case (the Checks)was not negotiable. HELD: Yes. As provided in the articles ofincorporation of PCHC, its operation extend to "clearing checks and otherclearing items." No doubt transactions on non-negotiable checks are

within the ambit of its jurisdiction. The term check as used in the said Articles of Incorporation of PCHC can only connote checks in general usein commercial and business activities. It cannot be conceived to be limitedto negotiable checks only. Checks are used between banks and bankersand their customers, and are designed to facilitate banking operations. Itis of the essence to be payable on demand, because the contract betweenthe banker and the customer is that the money is needed on demand.Further, the participation of the two banks, petitioner and privaterespondent, in the clearing operations of PCHC is a manifestation of theirsubmission to its jurisdiction. ISSUE 2: How does principle of estoppelapply? HELD: Petitioner is estopped from raising the defense of non-negotiability of the checks in question. It stamped its guarantee on theback of the checks and subsequently presented these checks for clearingand it was on the basis of these endorsements by the petitioner that theproceeds were credited in its clearing account. The principle of estoppeleffectively prevents the defendant from denying liability for any damagessustained by the plaintiff which, relying upon an action or declaration ofthe defendant, paid on the Checks. The same principle of estoppeleffectively prevents the defendant from denying the existence of theChecks. The petitioner by its own acts and representation cannot nowdeny liability because it assumed the liabilities of an endorser by stampingits guarantee at the back of the checks. The petitioner having stamped itsguarantee of "all prior endorsements and/or lack of endorsements" (Exh.

A-2 to F-2) is now estopped from claiming that the checks underconsideration are not negotiable instruments. The checks were acceptedfor deposit by the petitioner stamping thereon its guarantee, in order thatit can clear the said checks with the respondent bank. By such deliberateand positive attitude of the petitioner it has for all legal intents andpurposes treated the said cheeks as negotiable instruments andaccordingly assumed the warranty of the endorser when it stamped itsguarantee of prior endorsements at the back of the checks. It led the said

respondent to believe that it was acting as endorser of the checks and onthe strength of this guarantee said respondent cleared the checks inquestion and credited the account of the petitioner. Petitioner is nowbarred from taking an opposite posture by claiming that the disputedchecks are not negotiable instrument.

PBCOM VS. JOSE ARUEGO (GR No. L-25836-37, Jan. 31, 1981) - Hereinplaintiff instituted against an action against defendant for the recovery ofthe total sum of money plus interests and attorney’s fees. The complaintfiled by the Philippine Bank of Commerce contains twenty-two (22) causesof action referring to twenty-two (22) transactions entered into by the saidBank and Aruego on different dates. The sum sought to be recoveredrepresents the cost of the printing of "World Current Events," a periodicalpublished by the defendant. To facilitate the payment of the printing thedefendant obtained a credit accommodation from the plaintiff. Thus, forevery printing of the "World Current Events," the printer collected the cost

of printing by drawing a draft against the plaintiff, said draft being sentlater to the defendant for acceptance. As an added security for thepayment of the amounts advanced to printer, the plaintiff bank alsorequired defendant Aruego to execute a trust receipt in favor of said bankwherein said defendant undertook to hold in trust for plaintiff theperiodicals and to sell the same with the promise to turn over to theplaintiff the proceeds of the sale of said publication to answer for thepayment of all obligations arising from the draft. Defendant filed ananswer interposing for his defense that he signed the drafts in arepresentative capacity, that he signed only as accommodation party andthat the drafts signed by him were not really bills of exchange but mere

pieces of evidence of indebtedness because payments were made acceptance. ISSUE1: WON the drafts Aruego signed were bexchange? HELD: YES. Under the Negotiable Instruments Law, aexchange is an unconditional order in writing addressed by one peranother, signed by the person giving it, requiring the person to whoaddressed to pay on demand or at a fixed or determinable future sum certain in money to order or to bearer. As long as a commerciaconforms with the definition of a bill of exchange, that paper is consa bill of exchange. The nature of acceptance is important only determination of the kind of liabilities of the parties involved, but the determination of whether a commercial paper is a bill of exchanot. ISSUE2: WON Aruego is personally liable? HELD: YES. FSection 20 of the Negotiable Instruments Law provides that "Wheinstrument contains or a person adds to his signature words ind

that he signs for or on behalf of a principal or in a representative cahe is not liable on the instrument if he was duly authorized; but theaddition of words describing him as an agent or as filing a represencharacter, without disclosing his principal, does not exempt himpersonal liability." An inspection of the drafts accepted by the defeshows that nowhere has he disclosed that he was signing representative of the Philippine Education Foundation Companmerely signed as follows: "JOSE ARUEGO (Acceptor) (SGD)

ARGUEGO For failure to disclose his principal, Aruego is personallyfor the drafts he accepted. Secondly, an accommodation party who has signed the instrument as maker, drawer, indorser, wreceiving value therefor and for the purpose of lending his name toother person. Such person is liable on the instrument to a holder fornotwithstanding such holder, at the time of the taking of the instrknew him to be only an accommodation party. In lending his nameaccommodated party, the accommodation party is in effect a surethe latter. He lends his name to enable the accommodated party tocredit or to raise money. He receives no part of the consideration finstrument but assumes liability to the other parties thereto becawants to accommodate another. In the instant case, the defendant as a drawee/acceptor. Under the Negotiable Instrument Law, a draprimarily liable. Thus, if the defendant who is a lawyer, he shouhave signed as an acceptor/drawee. In doing so, he became primarpersonally liable for the drafts.

C. REQUISITES OF NEGOTIABILITY

Section 1. Form of negotiable instruments. - An instrument negotiable must conform to the following requirements

(a) It must be in writing and signed by the maker or drawer;

(b)

Must contain an unconditional promise or order to pay a sum cermoney;(c) Must be payable on demand, or at a fixed or determinable future ti(d) Must be payable to order or to bearer; and(e) Where the instrument is addressed to a drawee, he must be nam

otherwise indicated therein with reasonable certainty.

(a) It must be in writing and signed by the maker or drawer;

Section 191. Definition and meaning of terms .

“Written ” includes printed, and “writing ” includes print.

Signature of the maker or drawer is usually written, preferably with tname or at least the surname. However, initials or any mark will be sufprovided that such signature be used as a substitute and the maker or d

intends to be bound by it.

Signature is presumed valid , the person denying and to whosignature operates must provide evidence of its invalidity.

(b) Must contain an unconditional promise or order to pay certain in money;

Money is the medium of exchange authorized or adopted by a domeforeign government as part of its currency. In a literal sense, the term

“cash”. It includes all legal tender which has been defined in p.1.




1. Promise or Order to Pay

ec. 10 Terms, when sufficient. - The instrument need not follow thelanguage of this Act, but any terms are sufficient which clearlyindicate an intention to conform to the requirements hereof.

lear intention of the parties – the substance of the transaction rather thane form is the criterion of negotiability. Instead of “promise” the words “bindyself” may be used; instead of “on demand”, the words “on call” may be usedd instead of “bearer”, the word “holder” may be used.

ere defect in language or grammatical error – The words “himselfder” may be construed as “himself or order” and thus not render the

strument non-negotiable.

2. Promise or Order to Pay Must be Unconditional

ondition – Resolutory or Suspensive - In conditional obligations, thequisition of rights, as well as the extinguishment or loss of those alreadyquired, shall depend upon the happening of the event which constitutes thendition (Art. 1181, NCC)

eriod – As opposed to a condition, is when the event is certain to happen orme.

3. When is a promise unconditional

romissory Notes :is not essential that the word “promise” be used. Any words equivalent to aomise or assumption of responsibility for the payment of the note (likeayable”, “to be paid”, “I agree to pay”, “I guarantee to pay”, “M obligesmself to pay”, “good for”, “due on demand”, etc.) are sufficient to constitute“promise to pay”.

owever, bare acknowledgements like “IOU”, “Due P1,000” or “for valueceived” do not constitute promise to pay and are non-negotiable, unlessords constituting a promise to pay is added, like “IOU (or Due) P1,000 to beid on Jan. 8”.

ills of Exchange:is not necessary to use the word “order”. Any other words like “Let thearer” or “Drawer obliges the drawee to pay P or order” are sufficient.

n order is a command or imperative direction and, therefore, a mere request,

pplication, or authority (like “I request you to pay”, or “I hope you will pay”“I authorize you to pay”) is not sufficient. However, the use of polite wordse “please” does not convert an order to a request.

ec. 3 When promise is unconditional. - An unqualified order orpromise to pay is unconditional within the meaning of this Actthough coupled with:

(a) An indication of a particular fund out of whichreimbursement is to be made or a particular account to bedebited with the amount; or(b) A statement of the transaction which gives rise to theinstrument.

But an order or promise to pay out of a particular fund is notunconditional.

ec. 39 Conditional indorsement., - see Part III, ConditionalIndorsement, p. 13.

ec. 3 (a): does not render the instrument non-negotiable because thembursement is a subsequent act to the payment, which still makes itsolute. Same is true if there is indication of a particular fund to be “debited”,e “Pay P or order the sum of P10,000 and charge it to my account”, becausere the instrument is payable absolutely, the “debit” of the account is also a

ubsequent act to the payment.

ec. 3, last paragraph : The instrument is deemed non-negotiable because

the payment depends upon the adequacy or existence of the fund desigIt is immaterial, whether the fund has sufficient funds at maturity.

METROPOLITAN BANK & TRUST CO. VS. CA (GR No. 88866; F1991) - Eduardo Gomez opened an account with Golden Savingdeposited over a period of two months 38 treasury warrants. Theyall drawn by the Philippine Fish Marketing Authority and purposigned by its General Manager and counter-signed by its Auditor.these were directly payable to Gomez while the others appeared tbeen indorsed by their respective payees, followed by Gomez as sindorser. On various dates all these warrants were subsequently inby Gloria Castillo as Cashier of Golden Savings and deposited Savings Account in the Metrobank. They were then sent for clearthe branch office to the principal office of Metrobank, which forw

them to the Bureau of Treasury for special clearing. After being wait several times, Gloria Castillo and Gomez made subsewithdrawals at Metrobank with the impression that the treasury wahad been cleared. Metrobank informed Golden Savings that 32 warrants had been dishonored by the Bureau of Treasury and demthe refund by Golden Savings of the amount it had previously withdto make up the deficit in its account. The demand was rejected. IWON treasury warrants are negotiable instruments? HELD: Notreasury warrants in question are not negotiable instruments. Cstamped on their face is the word "non-negotiable." Moreoverindicated that they are payable from a particular fund, to wit, FunSections 1 and 3 of the Negotiable Instruments Law espunderscored this requirement. The indication of Fund 501 asource of the payment to be made on the treasury wamakes the order or promise to pay "not unconditional" anwarrants themselves non-negotiable. Metrobank cannot contenby indorsing the warrants in general, Golden Savings assumed thawere "genuine and in all respects what they purport to be," in accowith Section 66 of the Negotiable Instruments Law. The simple reathat this law is not applicable to the non-negotiable treasury warranindorsement was made by Gloria Castillo not for the purpoguaranteeing the genuineness of the warrants but merely to deposiwith Metrobank for clearing.

4. Provisions which do not affect certainty of sum

The Basic Test : is whether the holder can determine by calculatcomputation the amount payable when the instrument is due.

Sec. 2. What constitutes certainty as to sum. - The sum payable iscertain within the meaning of this Act, although it is to be paid:

(a) with interest; or(b) by stated installments; or(c) by stated installments, with a provision that, upon default in paymany installment or of interest, the whole shall become due; or(d) with exchange, whether at a fixed rate or at the current rate; or(e) with costs of collection or an attorney's fee, in case payment shall made at maturity.

Sec. 2(b) : STATED instalments must clearly indicate the amount due oinstalment and the interest, if any. A bill or note indicating “payable instalments” or “in instalments” does not fulfil the requirement of the law

Sec. 2(c): Stated instalments with acceleration clause: Acceleration clause – requires the debtor to pay off the balance soonethe due date if some specified event occurs, such as failure to p

instalment.Insecurity clause – allows the creditor to demand immediate anpayment of the loan balance if the creditor has reason to believe thdebtor is about to default, as when the debtor suddenly loses a signsource of income.Extension clause – allows additional time for the payment of the loan d

Acceleration at the option of the HOLDER will render the instrumennegotiable.Sec. 2(d): refers to instruments payable in foreign currency. Exchangecharge for the expense of providing funds at the place where the instrum




yable to meet the instrument which is issued at another place. It may be at aed rate or at the current rate. Ex. M promises to pay P or order $1,000 “withchange at ¾%” or “at the current rate”.

ec. 2(e): does not affect negotiability because such takes place afteraturity.

ec. 5 Additional provisions not affecting negotiability. - Aninstrument which contains an order or promise to do any act inaddition to the payment of money is not negotiable. But thenegotiable character of an instrument otherwise negotiable is notaffected by a provision which:

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

be not paid at maturity; or(b) authorizes a confession of judgment if the instrument be not paidat maturity; or(c) waives the benefit of any law intended for the advantage orprotection of the obligor; or(d) gives the holder an election to require something to be done inlieu of payment of money.But nothing in this section shall validate any provision or stipulationotherwise illegal.

ec. 6 Omissions; seal; particular money. - The validity and negotiablecharacter of an instrument are not affected by the fact that:

(e) designates a particular kind of current money in which paymentis to be made.

eneral Rule is that, an additional act, aside from payment of money, isohibited. This is based on the fact that while the “payment of money” may bedorsed, the “additional act” would have to be assigned. The following clausesve been held to render non-negotiable the instrument:“pay for taxes assessed upon the note or its mortgage security” (Hubard vs.

obert Wallace Co.);“keep free from encumbrance property on which the value of collateral

edged for security of the instrument depends” (Streckhold vs. National Salto.)“promise to insure the property pledged as security” (First State Savingsnk vs. Russel)

xceptions are:ec. 5(a) : “I promise to pay P or order the sum of P1,000 secured by a ring Ilivered to him by way of pledge and which he could sell should I fail to paym at maturity” – the additional act is to be performed after non-payment at

aturity. Until maturity, the promise is to pay money only.

ec. 5(b) : “I promise to pay P or order P10,000 and I hereby authorize mytorney-at-law to appear in any court of record after the obligation becomese and waive the issuing and service of processes and confess a judgmentainst me in favor of the holder and thereupon waive all errors in any suchoceedings and waive all right of appeal” – confession of judgment is a writtenknowledgment by the defendant of his indebtedness and liability to theaintiff. It enables the holder to obtain a judgment without the delay usuallycident to a lawsuit. While not authorized in this jurisdiction, because itprives the maker or drawer a day in court, it nevertheless does not affectgotiability. A confession of judgment given AFTER the action is brought tove expenses is valid.

ec. 5(c): “Notice of dishonor waived” – even waiver of protest, presentmentr payment, or demand, would not destroy negotiability.

ec. 5(d): “or an airconditioner at the option of the holder” – since the holders the choice, the instrument is still negotiable because he can still demandyment of money. If the option is on the promisor, it would be difficult tompel him to make payment in money.

(c) Payable on demand or at a fixed or determinable future time

me must be certain so that the holder will know when he may enforce thestrument, and the person liable – maker, drawee, or acceptor – when he may

required to pay, or the secondary parties – drawer, indorser or

accommodation party – when his obligation will arise.

Sec. 4. Determinable future time; what constitutes . - An instrumpayable at a determinable future time, within the meaning of this Act, wexpressed to be payable:(a) At a fixed period after date or sight; or(b) On or before a fixed or determinable future time specified therein; or(c) On or at a fixed period after the occurrence of a specified event wcertain to happen, though the time of happening be uncertain.

An instrument payable upon a contingency is not negotiable, anhappening of the event does not cure the defect

Time Instruments

Sec. 4(a): To pay on Aug. 12, 2013;Sec. 4(b): To pay sixty days after date;Sec. 4(c): To pay after P dies.

Sec. 4, last paragraph: refers to a condition which may or may not hapnegotiable instrument must be payable in all events.

Sec. 7. When payable on demand. - An instrument is payabdemand:(a) When it is so expressed to be payable on demand, or at sight, presentation; or(b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, itregards the person so issuing, accepting, or indorsing it, payable on dem

Demand Instruments are those which are payable on demand, dupayable immediately after delivery. It is a present debt due at once.

(d) Payable to order or bearer

Sec. 8 When payable to order . - The instrument is payable towhere it is drawn payable to the order of a specified personhim or his order. It may be drawn payable to the order of:

(a) A payee who is not maker, drawer, or drawee; or(b) The drawer or maker; or(c) The drawee; or(d) Two or more payees jointly; or(e) One or some of several payees; or(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be or otherwise indicated therein with reasonable certainty.

Sec. 9 When payable to bearer . - The instrument is payabearer:(a) When it is expressed to be so payable; or(b) When it is payable to a person named therein or bearer; or(c) When it is payable to the order of a fictitious or non-eperson, and such fact was known to the person makingpayable; or(d) When the name of the payee does not purport to be the naany person; or(e) When the only or last indorsement is an indorsement in bla

Payable to Order : when it is payable to the (1) order of a specified per(2) to him or his order. Consequently, an instrument payable to a sp

person (Pay to P), is not a negotiable order instrument.

Sec. 8(b) : An instrument payable to the maker is not complete until indby him. (Sec. 184)Sec. 8(c): Being payable to the drawee, he may pay himself at maturitthe funds of the drawer.Sec. 8(d): Pay to A and B; for Sec. 8(e), Pay to A or B.Sec. 8(f): Pay to the order of the Commissioner of Internal Revenue.

Sec. 8, last paragraph : If there is no payee, there is nobody who couthe order or authority to collect or otherwise indorse and, therefore, ther




int in considering it negotiable.

earer Instruments produce the following effect: (a) it is payable to bearer;) payment to any person in possession thereof in good faith and withouttice that his title is defective, at or after maturity (Sec. 88) discharges thestrument (Sec. 119); (c) Delivery alone is enough to effect negotiation (Sec.).

ec. 9(a) and (b) are originally bearer instruments. Those under subsection), (d) and (e) are order instruments on the face converted to bearerstruments.

ec. 9(c): A fictitious person is meant to be one who, though named, asyee, has no right to it because the maker or drawer so intended and it

atters not, whether the name of the payee used by him be that one living orad, or one who never existed. (Snyder vs. Com. Exch. Nat. Bank)

ec. 9(c) and (d): They are treated as bearer instruments because it ispossible to indorse when it is payable to “cash, sundries” or a fictitiousrson.

ANG TEK LIAN VS. CA (GR No. L-2516; Sept. 25, 1950) - Petitioner AngTek Lian approached Lee Hua and asked him if he could give himP4,000.00. He said that he is supposed to withdraw from the bank but hisbank was already closed. In exchange, he gave respondent Lee Hua acheck which is “payable to the order of ‘cash”. When Lee Hua presentedthe check for payment the next day, he discovered that it has aninsufficient funds, hence, was dishonored by the bank. In his defense, AngTek Lian argued that he did not indorse the check to Lee Hua when thelatter accepted the check without his indorsement. ISSUE: WON Ang TekLian’s indorsement of the said check is necessary to hold him liable for thedishonored check? HELD: No. Under Section 9 of the NegotiableInstruments Law, a check drawn payable to the order of “cash” is acheck payable to bearer and the bank may pay it to the personpresenting it for payment without drawer’s indorsement.Consequently, the form of the check was totally unconnected with itsdishonor. The check was returned unsatisfied because the drawer hadinsufficient funds and not because the drawer’s indorsement was lacking .Hence, Ang Tek Lian may be held liable for estafa because under article315, paragraph d, subsection 2 of the Revised Penal Code, one who issuesa check payable to cash to accomplish deceit and knows that at the timehe had no sufficient deposit with the bank to cover the amount of thecheck and without informing the payee of such circumstances is guilty ofestafa.

(e)

Identity of the drawee

Sec. 130. When bill may be treated as promissory note. - Where in abill the drawer and drawee are the same person or where the drawee is aictitious person or a person not having capacity to contract, the holder mayreat the instrument at his option either as a bill of exchange or as a

promissory note

OMISSIONS AND PROVISIONS THAT DO NOT AFFECTNEGOTIABILITY

PNB VS. MANILA OIL REFINING (GR No. L-18103; June 8, 1922) -The manager and treasurer of respondent company executed anddelivered to the Philippine National Bank (PNB), a promissory note whichprovides a promise to pay petitioner bank the amount of P61,000 and thatin case payment was not made at time of maturity, any lawyer in the

Philippines is authorize to represent the company and confess judgmentfor the said sum with interest, cost of suit and attorney's fees of ten% forcollection, a release of all errors and waiver of all rights to inquisition andappeal, and to the benefit of all laws exempting property, real or personal,from levy or sale. Indeed, Manila Oil has failed to pay on demand. Thisprompted the bank to file a case in court, wherein an attorney associatedwith them entered his appearance for the defendant. To this thedefendant objected. ISSUE: WON provisions in notes authorizingattorneys to appear and confess judgments against makers should not berecognized in Philippine jurisdiction by implication? HELD: No. Judgmentsby confession as appeared at common law were considered an amicable,

easy, and cheap way to settle and secure debts. They are quick rserve to save the court's time. They also save time and money litigants and the government the expenses that a long litigation entone sense, instruments of this character may be considered as agreements, with power to enter up judgments on them, bindiparties to the result as they themselves viewed it. On the other handisadvantages to the commercial world which outweigh the conside

just mentioned. Such warrants of attorney are void as against policy, because they enlarge the field for fraud, because undeinstruments the promissor bargains away his right to a day in coubecause the effect of the instrument is to strike down the right of accorded by statute. The recognition of such form of obligation bring about a complete reorganization of commercial custompractices, with reference to short-term obligations. It can readily b

that judgment notes, instead of resulting to the advantage of commlife in the Philippines, might be the source of abuse and oppressiomake the courts involuntary parties thereto. If the bank has a meritcase, the judgment is ultimately certain in the courts. The Court isopinion thus that warrants of attorney to confess judgment aauthorized nor contemplated by Philippine law; and that provisinotes authorizing attorneys to appear and confess judgments amakers should not be recognized in this jurisdiction by implicatioshould only be considered as valid when given express legislative sa

1. OMISSIONS

Sec. 6 Omissions; seal; particular money. - The validity negotiable character of an instrument are not affected byfact that:

(a) it is not dated; or(b) does not specify the value given, or that any value been given therefor; or(c) does not specify the place where it is drawn or the pwhere it is payable; or(d) bears a seal; or(e) designates a particular kind of current money in wpayment is to be made.

But nothing in this section shall alter or repeal any starequiring in certain cases the nature of the consideration tostated in the instrument.

Sec. 11 Date, presumption as to. - Where the instrument oacceptance or any indorsement thereon is dated, such datdeemed prima facie to be the true date of the making, draw

acceptance, or indorsement, as the case may be. Sec. 12 Ante-dated and post-dated. - The instrument is not invfor the reason only that it is ante-dated or post-dated, provthis is not done for an illegal or fraudulent purpose. The peto whom an instrument so dated is delivered acquires the thereto as of the date of delivery.

Sec. 13 When date may be inserted. - Where an instrumentexpressed to be payable at a fixed period after date is issundated , or (2) where the acceptance of an instrument payat a fixed period after sight is undated , any holder may intherein the true date of issue or acceptance, and the instrumshall be payable accordingly. The insertion of a wrong does not avoid the instrument in the hands of a subseqholder in due course; but as to him, the date so inserted be regarded as the true date. (emphasis supplied)

Sec. 14 Blanks; when may be filled. - Where the instrumen

wanting in any material particular, the personpossession thereof has a prima facie authority to complete filling up the blanks therein.

And a signature on a blank paper delivered by the pemaking the signature in order that the paper may be conveinto a negotiable instrument operates as a prima facie authto fill it up as such for any amount.

In order, however, that any such instrument when complmay be enforced against any person who became a p




thereto prior to its completion , it must be (1) filled up strictly inaccordance with the authority given and (2) within a reasonabletime.

But if any such instrument, after completion, is negotiated to aholder in due course, it is valid and effectual for all purposesin his hands , and he may enforce it as if it had been filled upstrictly in accordance with the authority given and within areasonable time.

(separation and emphasis supplied)

Sec. 17 Construction where instrument is ambiguous. – see E.Interpretation of Instruments.

Sec. 53 When person not deemed holder in due course. – seeHOLDER IN DUE COURSE, p. 16

Sec. 71 Presentment where instrument is not payable ondemand and where payable on demand. – (1) Where theinstrument is not payable on demand, presentment must bemade on the day it falls due. Where it is payable on demand,presentment must be made within a reasonable time after itsissue, except that in the case of a bill of exchange, presentmentfor payment will be sufficient if made within a reasonable timeafter the last negotiation thereof.

ec. 11: He who claims that some other date is the true date has the burdenestablishing such claim.

ec. 13: If an undated note payable to P matures on Aug. 29, 2013, 30 dayster issuance, but P inserted July 15 to hasten maturity date, P cannot enforce

yment because it is avoided as to him who ante-dated for fraudulentrposes (Sec. 12). But if it was indorsed to A, a holder in due course, he mayllect on Aug. 14, as if the date inserted was the true date.

ec. 14 : Material Particular is any particular proper to be inserted in agotiable instrument to make it complete.

uthority to Complete does not carry with it the authority to alter (Sec.4).

uthority to put any amount – there must be showing of intention toonvert it to a negotiable instrument. Otherwise, it cannot be enforcedainst the maker, even by a holder in due course (Sec. 15).

older NOT in due course of an instrument filled up in excess of thethority given is treated as a holder of a materially altered instrument (Sec.

4) and therefore cannot collect to parties prior to completion who did notsent to the alteration. If M issues a note and authorized P, payee, to insert,000, but P inserts P2,000, N, a subsequent holder NOT in due course cannotforce it against M. But if N was a holder in due course, he can enforce thestrument against M upto the stated amount of P2,000 since it is conclusiveat there was authority to fill up the instrument and the same was not done incess of authority.

2. ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABILITY – Sec. 5 (supra, p.6)

a. Confession of Judgment – see p.6 a.1 Warrant of attorney – to confess judgment, however, arenot authorized nor contemplated by our law because underthese instruments, the promisor bargains away his right to aday in court. (PNB vs. MANILA OIL REFINING, supra, p.6 )

a.2 Cognovit Actionem – “he has confessed the action” a.3 Relicta Verificationem – “his pleading being abandoned”;a confession of judgment accompanied by a withdrawal of theplea.

b. Waiver of Obligor – Sec. 109. Waiver of notice . - Notice ofdishonor may be waived either before the time of giving notice hasarrived or after the omission to give due notice, and the waiver maybe expressed or implied.

E. INTERPRETATION OF INSTRUMENTS

Sec. 17. Construction where instrument is ambiguous . - Whelanguage of the instrument is ambiguous or there are omissions tthe following rules of construction apply:

(a) Where the sum payable is expressed in words and also in figurethere is a discrepancy between the two, the sum denoted by the wthe sum payable; but if the words are ambiguous or uncertain, refmay be had to the figures to fix the amount;(b) Where the instrument provides for the payment of interest, wspecifying the date from which interest is to run, the interest runthe date of the instrument, and if the instrument is undated, froissue thereof;

(c) Where the instrument is not dated, it will be considered to be daof the time it was issued;(d) Where there is a conflict between the written and printed provisthe instrument, the written provisions prevail;(e) Where the instrument is so ambiguous that there is doubt whetha bill or note, the holder may treat it as either at his election;(f) Where a signature is so placed upon the instrument that it is noin what capacity the person making the same intended to sign, he isdeemed an indorser;(g) Where an instrument containing the word "I promise to pay" is by two or more persons, they are deemed to be jointly and severallthereon.

Sec. 17(d): Reason for this rule is that, the written words are deemexpress the true intention of the maker or drawer because they are there by himself. Also, because the amount in words are harder t(Sundiang, 2010 audio lecture).

Sec. 17(g): Joint and Solidary Obligation

REPUBLIC PLANTERS BANK VS. CA (GR No. 93073; Dec. 21, 1In 1979, World Garment Manufacturing, through its board authShozo Yamaguchi (president) and Fermin Canlas (treasurer) to credit facilities from Republic Planters Bank (RPB). For this, 9 promnotes were executed. Each promissory note was uniformly written following manner:

___________, after date, for value received, I/we, jointly and s

promise to pay to the ORDER of the REPUBLIC PLANTERS BANK, at its Manila, Philippines, the s um of ___________ PESOS(….) Philippine Curr

Please credit proceeds of this note to:

________ Savings Account ______XX Current Account No. 1372-002WORLDWIDE GARMENT MFG. CORP.

Sgd. Shozo YamaguchiSgd. Fermin Canlas

The note became due and no payment was made. RPB eventually Yamaguchi and Canlas. Canlas, in his defense, averred that he shobe held personally liable for such authorized corporate acts thperformed inasmuch as he signed the promissory notes in his capaofficer of the defunct Worldwide Garment Manufacturing. ISSUECanlas should be held liable for the promissory notes? HELD: Yesolidary liability of private respondent Fermin Canlas is made clearcertain, without reason for ambiguity, by the presence of the phraseand several” as describing the unconditional promise to pay to theof Republic Planters Bank. Where an instrument containinwords “I promise to pay” is signed by two or more personsare deemed to be jointly and severally liable thereon . Casolidarily liable on each of the promissory notes bearing his signatuthe following reasons: The promissory notes are negotiable instruand must be governed by the Negotiable Instruments Law. UndNegotiable lnstruments Law, persons who write their names on the promissory notes are makers and are liable as such. By signing thethe maker promises to pay to the order of the payee or any according to the tenor thereof.




SPS. EVANGELISTA VS. MERCATER FINANCE CORP. (GR No.148864; Aug. 21, 2003) - Petitioner spouses filed a complaint againstrespondents for the foreclosure of the mortgage on their property andeventual its eventual sale, claiming, among others, that they executed thesaid mortgage on their capacity as officers of Embassy Farms, and not ontheir personal capacity, thus, there is no consideration received by them,making the mortgage voidable. Respondent, on the other hand, claimsthat the promissory note for the loan, for which the mortgage wasexecuted, shows that the spouses signed as co-makers, also with thesucceeding promissory notes. The RTC, upon motion of the respondent,granted summary judgment and dismissed the complaint. On appeal, theCA affirmed in toto the decision of the RTC. ISSUE: WON petitioners aresolidarily liable with Embassy Farms for the loan as evidenced by thepromissory note? HELD: Yes. The promissory note reads:

For value received, I/We jointly and severally promise to pay to the order of MERCATOR FINANCECORPORATION at its office, the principal sum of EIGHT HUNDRED FORTY-FOUR THOUSAND SIXHUNDRED TWENTY-FIVE PESOS & 78/100 (P 844,625.78), Philippine currency, x x x, ininstallments as follows:

September 16, 1982 - P154,267.87

October 16, 1982 - P154,267.87

November 16, 1982 - P154,267.87

December 16, 1982 - P154,267.87

January 16, 1983 - P154,267.87

February 16, 1983 - P154,267.87

The note was signed by petitioners and Embassy Farms, Inc. with thesignature of Eduardo Evangelista below it. Sec. 17 of the NegotiableInstruments Law provide: “Construction where instrument is ambiguous – Where the language of the instrument is ambiguous or there areomissions therein, the following rules of construction shall apply: (g)Where an instrument containing the word “I promise to pay” is signed bytwo or more persons, they are deemed to be jointly and severally liablethereon. As such, the promissory note itself proves that petitionersare solidarily liable with Embassy Farms. Moreover, even ifpetitioners signed merely as officers, it does not erase the factthat they subsequently executed a continuing suretyshipagreement which makes them solidarily liable with the principal.They cannot eventually claim that they did not personably receive anyconsideration for the contract.

I. ISSUE, TRANSFER AND NEGOTIATION

ISSUANCE/DELIVERY OF NEGOTIABLE INSTRUMENTS

c. 15 Incomplete instrument not delivered. - Where an incompleteinstrument has not been delivered, it will not, if completed andnegotiated without authority, be a valid contract in the hands ofany holder, as against any person whose signature was placedthereon before delivery.

c. 16 Delivery; when effectual; when presumed. - Every contract ona negotiable instrument is incomplete and revocable untildelivery of the instrument for the purpose of giving effect thereto.

As between immediate parties and as regards a remote party otherthan a holder in due course, the delivery, in order to be effectual,must be made either by or under the authority of the party making,drawing, accepting, or indorsing, as the case may be; and, in suchcase, the delivery may be shown to have been conditional, or for a

special purpose only, and not for the purpose of transferring theproperty in the instrument. But where the instrument is in thehands of a holder in due course, a valid delivery thereof by allparties prior to him so as to make them liable to him is conclusivelypresumed. And where the instrument is no longer in the possessionof a party whose signature appears thereon, a valid and intentionaldelivery by him is presumed until the contrary is proved.

c. 191 Definition and meaning of terms . - In this Act, unless thecontract otherwise requires:

" Delivery " means transfer of possession, actual or constructive,

from one person to another;

" Issue " means the first delivery of the instrument, compform, to a person who takes it as a holder

Section 15 : Example: M makes a note for P10,000 with the name payee in blank and keeps it in his drawer. P steals the note, names himthe payee and indorses the note to A, A to B, B to C, a holder in due cour

NOTE: C, even though a holder in due course, cannot enforce said note aM by virtue of Sec. 15, but C can go after P, A and B.

Section 16 : As regards immediate parties and a remote party other holder in due course, delivery is a rebuttable presumption, as such can

be conditional or for a special purpose (without intention of transferring t

As regards a holder in due course, valid delivery, of a complete instrumopposed to an incomplete instrument under Sec. 15), by all parties prior is conclusively presumed (admission of evidence to the contrary is not allo

B. NEGOTIATION DEFINED

Sec. 30. What constitutes negotiation. - An instrument is negotiatedit is transferred from one person to another in such manner as to constittransferee the holder thereof . If payable to bearer, it is negotiated by deif payable to order, it is negotiated by the indorsement of the holdecompleted by delivery. (emphasis supplied)

1. Instruments payable to order: two steps are required for negot

(a) indorsement and (b) delivery.2. Instruments payable to bearer: delivery alone without indorsem

C. ASSIGNMENT AND NEGOTIATION DISTINGUISHED

Assignment is the transfer of the title to an instrument, with the asgenerally taking only such title or rights as his assignor has, subjectdefenses available against his assignor. It is the less usual method whicor may not involve an indorsement in the sense of writing on the back instrument.

NEGOTIATION ASSIGNMENT

ApplicableLaw

Negotiable Instruments Law Civil Code of the Philipp

Type oftransaction

orinstrument:

Negotiable instruments only Contracts in generaassignable rights

Nature ofthetransferee:

Transferee is a holder who maybe a holder in due course

Transferee is a assignee and can neverholder in due course

Rightsacquired:

The transferee-holder mayacquire more rights than thetransferor if he is a holder indue course

Transferee cannot acmore rights than transferor because he msteps into the shoes otransferor

Availabilityof personaldefenses

Transferee-holder may be freefrom personal defenses if he isa holder in due course

Transferee is always suto personal defenses

CASABUENA VS. COURT OF APPEALS (GR No. 115410; Feb. 27,- Ciriaco Urdaneta was a grantee of a parcel of land purchased by t

of Manila and conveyed to its less privileged inhabitants, through ireform program. Subsequently, he assigned his rights and interestsof the lot to Arsenia Benin covering full payment of his indebtednessamount of P500. A deed of sale with mortgage was executedUrdaneta undertaking to pay the City the amount figured for a peforty years in 480 equal installments. Another deeassignment involving the whole lot, with assignee Benin agreeshoulder all obligations including the payment of amortization to thin accordance with the contract between it and Urdaneta. As statheir verbal agreement, Urdaneta could redeem the property




payment of the loan within 3yrs. from the date of assignment; failure topay would transfer physical possession of the lot to Benin for a period of15 years, without actual transfer of title and ownership thereto.Meanwhile, the administration of the property was assigned to brothersCandido and Juan Casabuena, to whom Benin had transferred her right,title and interest for a consideration of P7,500. Notwithstanding thisassignment, Benin constructed a duplex (apartment) on the lot separatelyoccupied by Jose Abejero and Juan Casabuena, who collected rentals fromthe former. After the lot was fully paid for by the Urdanetas, a Release ofMortgage was executed and period of non-alienation of the land wasextended from 5 to 20 years. Casabuena was Benin's rental collector buttheir relationship soured resulting in a litigation involving issue onownership, of which the cause was the latter’s failure to pay rentals. Uponlearning of the litigation between petitioner and Benin, Urdaneta asked

them to vacate the property and surrender to him possession thereofwithin 15 days from notice. Petitioner's adamant refusal to comply withsuch demand resulted in a complaint for ejectment and recovery ofpossession of property filed by Urdaneta against Casabuena and Benin.

Amid the sprouting controversies involving the lot, the Urdaneta spousessucceeded in having the Court declare them as its true and lawful ownerswith the deed of assignment to Benin merely serving as evidence ofCiriaco's indebtedness to her in view of the prohibition against the sale ofthe land imposed by the City government. ISSUE: WON a deed ofassignment can transfer ownership of the property to the assignee?HELD: At the bottom of this controversy is the undisputed fact thatCiriaco Urdaneta was indebted to Benin, to secure which debt the spousesceded their rights over the land through a deed of assignment. Anassignment of credit is an agreement by virtue of which theowner of a credit, known as the assignor, by a legal cause,transfers his credit and its accessory rights to another, known asthe assignee, who acquires the power to enforce it to the sameextent as the assignor could have enforced it against thedebtor. Stated simply, it is the process of transferring the right ofthe assignor to the assignee, who would then be allowed toproceed against the debtor. The assignment involves no transferof ownership but merely effects the transfer rights which theassignor has at the time, to the assignee. Benin having been deemedsubrogated to the rights and obligations of the spouses, she was bound byexactly the same conditions to which the latter were bound. This being so,she and the Casabuenas were bound to respect the prohibition againstselling the property within the five-year period imposed by the Citygovernment. The act of assignment could not have operated to effaceliens or restrictions burdening the right assigned, because an assigneecannot acquire a greater right than that pertaining to the assignor. Atmost, an assignee can only acquire rights duplicating those which his

assignor is entitled by law to exercise. In the case at bar, the Casabuenasmerely stepped into Benin's shoes, who was not so much an owner as amere assignee of the rights of her debtors. Not having acquired any rightover the land in question, it follows that Benin conveyed nothing todefendants with respect to the property.

Art. 348, Code of Commerce. The conveyer shall answer for thelegality of the credit and for the capacity in which he made the transfer;but he shall not answer for the solvency of the debtor, unless there is anexpress agreement requiring him to do so

HOW ARE NEGOTIABLE INSTRUMENTS AND NON-NEGOTIABLEINSTRUMENTS TRANSFERRED?

SESBRENO VS. COURT OF APPEALS (supra, p.3)

CONSOLIDATED PLYWOOD INDUSTRIES, INC. VS. IFC LEASING(GR No. 72593; April 30, 1987) - Consolidated Plywood Industries, Inc.(CPII) needed two tractors for its logging business. Atlantic Gulf & PacificCompany through its sister company Industrial Products Marketing (IPM)offered to sell two “used" tractors. IPM inspected the job site and assuredthat the tractors were fit for the job and gave a 90-day warranty formachine performance and availability of parts. CPII officers Wee and

Vergara purchased the tractors on installment and paid the downpayment. The deed of sale with chattel mortgage with promissory noteand the deed of assignment, where IPM assigned its rights and interest inthe chattel mortgage in favor of IFC Leasing and Acceptance Corp., were

all executed on the same day by and among the parties. Barely 1after delivery, the tractors broke down. Mechanics were sent to do but the tractors were no longer serviceable. CPII logging operationdelayed so Vergara advised IPM that the installment payments likewise be delayed until it fulfills its obligation under its warrantthen filed a collection suit against petitioners for the recovery principal sum plus interest, attorney's fees and costs of suit contthat it was a holder in due course of a negotiable promissoryISSUE: WON IFC is a holder in due course of a negotiable promnote so as to bar all defenses of CPII against IPM? HELD: No. The question fails to meet the requirement under Sec. 1(d) of Act No.IFC is not and will never be a holder in due course of the promissorbut is merely an assignee. The note in question is not a neginstrument for lack of the so-called words of negotiability. The

assignor IPM is liable for breach of warranty and such liability as a grule extends to the corporation (IFC) to whom it assigned its righinterests. Even assuming that the note is negotiable, IFC which aparticipated in the sale on installment transaction from its inception be regarded as a holder in due course. Thus, petitioners may raise athe respondent all defenses available to it as against the seller-assIPM.

TRADERS ROYAL BANK VS. COURT OF APPEALS (GR No. Mar. 3, 1997) - Assailed in this Petition is the Decision of the Co

Appeals affirming the nullity of the transfer of Central Bank CertificIndebtedness (CBC), with a face value of P500,000 from PhiUnderwriters Finance Corporation (Philfinance) - without authorizatipetitioner Traders Royal Bank. ISSUE: WON Central Bank CertificIndebtedness (CBCI) is a negotiable instrument? HELD: Noinstrument provides for a promise to pay the registered owner F

Very clearly, the instrument was only payable to Filriters. It lackwords of negotiability which should have served as an expression consent that the instrument may be transferred by negotiationlanguage of negotiability which characterizes a negotiable papecredit instrument is its freedom to circulate as a substitute for mHence, freedom of negotiability is the touchstone relating to the proof holders in due course, and the freedom of negotiability foundation for the protection, which the law throws around a hodue course. This freedom in negotiability is totally absent in a certifiindebtedness as it merely acknowledges to pay a sum of monespecified person or entity for a period of time. The transfer instrument from Philfinance to TRB was merely an assignment, andgoverned by the negotiable instruments law. The pertinent questiois —was the transfer of the CBCI from Filriters to Philfinancsubsequently from Philfinance to TRB, in accord

existing law, so as to entitle TRB to have the CBCI registered in itswith the Central Bank? Clearly shown in the record is the facPhilfinance’s title over CBCI is defective since it acquired the instrfrom Filriters fictitiously. Although the deed of assignment stated thtransfer was for ‘value received‘, there was really no consideinvolved. What happened was Philfinance merely borrowed CBCFilriters, a sister corporation. Thus, for lack of any consideratioassignment made is a complete nullity. Furthermore, the transfer waconformity with the regulations set by the CB. Giving more crederule that there was no valid transfer or assignment to petitioner.

E. HOW NEGOTIATION TAKES PLACE

Sec. 30 What constitutes negotiation. (supra, p. 9)

Sec. 40 Indorsement of instrument payable to bearer. - Whinstrument, payable to bearer, is indorsed specially, it

nevertheless be further negotiated by delivery; but the indorsing specially is liable as indorser to only such holders astitle through his indorsement.

An instrument payable to bearer is not converted into an instrpayable to order by being indorsed specially. However, the personindorsed specially is liable only to those holders who can trace their titleinstrument by a series of unbroken indorsements from such special indor

Instruments originally payable to order : Sec. 40 does not apinstruments originally payable to order which was indorsed in black.




LIM VS. CA (GR No. 107898; Dec. 19, 1995) - Manuel Lim and Rosita Limare the officers of the Rigi Bilt Industries, Inc. (RIGI) which had beentransacting business with Linton Commercial Company, Inc. The Limsordered several steel plates and purlins from Linton and were delivered tothe Lim’s place of business which was in Caloocan. To pay Linton, thepetitioners issued seven checks. When the checks were presented to thedrawee bank (Solidbank), they were dishonored because payment for thechecks had been stopped and/or insufficiency of funds. As a result,petitioners were found guilty with Estafa and 7 counts of violation of BP22 by the Malabon RTC. On appeal, the CA reversed the trial court’sdecision on Estafa but upheld the decision on violation of BP 22, hence,this petition. ISSUE: WON the issue was within the jurisdiction of theMalabon RTC? HELD: The venue of jurisdiction lies either in the RTC

Caloocan or Malabon Trial Court. BP 22 is a continuing crime. A personcharged with a transitory crime may be validly tried in any municipality orterritory where the offense was partly committed. In determining theproper venue, the ff. must be considered. 1) 7 checks were issued toLinton in its place of business in Navotas. 2) The checkswere delivered Linton in the same place. 3) The checks were dishonoredin Caloocan 4) The Lims had knowledge of their insufficiency of funds.Under Section 191 of the Negotiable InstrumentsLaw, issue means the first delivery of the instrument complete in itsform to a person who takes it as holder. The term holder on the otherhand refers to the payee or endorsee of a bill or note who is in possessionof it or the bearer thereof. The place where the bills were written,signed or dated does not necessarily fix or determine the placewhere they were executed. It is the delivery that is important. Itis the final act essential to its consummation of an obligation. Anundelivered bill is unoperative. The issuance and delivery of the checkmust be to a person who takes it as a holder. In the case at bar, althoughLinton sent a collector who received the checks from the petitioners’ placeof business, the checks were actually issued and delivered to Linton inNavotas. The collector is not a holder or an agent, he was just anemployee.

LORETO DELA VICTORIA VS. HON. BURGOS (GR No. 111190; June27, 1995) - Raul Sebreño filed a complaint for damages against FiscalBienvenido Mabanto Jr. of Cebu City. Sebreño won and he was awardedthe payment of damages. Judge Burgos ordered De La Victoria, custodianof the paychecks of Mabanto, to hold the checks and convey them toSebre ño instead. De La Victoria assailed the decision as he said that thepaychecks and the amount thereon are not yet the property of Mabantobecause they are not yet delivered to him; that since there is no deliveryof the checks to Mabanto, the checks are still part of the public funds; and

the checks due to the foregoing cannot be the proper subject ofgarnishment. ISSUE: WON De La Victoria is correct? HELD: Yes. UnderSection 16 of the Negotiable Instruments Law, every contract on anegotiable instrument is incomplete and revocable until delivery of theinstrument for the purpose of giving effect thereto. As ordinarilyunderstood, delivery means the transfer of the possession of theinstrument by the maker or drawer with intent to transfer title to thepayee and recognize him as the holder thereof.

DEVELOPMENT BANK OF RIZAL VS. SIMA WEI (GR No. 85419; June9, 1983) - In consideration for a loan extended by petitioner Bank torespondent Sima Wei, the latter executed and delivered to the former apromissory note, engaging to pay the petitioner Bank or order the amountof P1,820,000.00 on or before June 24, 1983 with interest at 32% perannum . Sima Wei made partial payments on the note, leaving a balance ofP1,032,450.02. On November 18, 1983, Sima Wei issued two crossed

checks payable to petitioner Bank drawn against China BankingCorporation, bearing respectively the serial numbers 384934, for theamount of P550,000.00 and 384935, for the amount of P500,000.00. Thesaid checks were allegedly issued in full settlement of the drawer'saccount evidenced by the promissory note. These two checks were notdelivered to the petitioner-payee or to any of its authorizedrepresentatives. For reasons not shown, these checks came into thepossession of respondent Lee Kian Huat, who deposited the checkswithout the petitioner-payee's indorsement (forged or otherwise) to theaccount of respondent Plastic Corporation, at the Balintawak branch,Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the

Balintawak branch of Producers Bank, relying on the assuranrespondent Samson Tung, President of Plastic Corporation, thtransaction was legal and regular, instructed the cashier of Producerto accept the checks for deposit and to credit them to the account Plastic Corporation, inspite of the fact that the checks were crossepayable to petitioner Bank and bore no indorsement of the latter. Hpetitioner filed the complaint as aforestated. ISSUE: WON petitionehas a cause of action against any or all of the defendants, alternative or otherwise? HELD: A cause of action is defined as anomission of one party in violation of the legal right or rights of aThe essential elements are: (1) legal right of the plaintiff; (2) corrobligation of the defendant; and (3) an act or omission of the defendviolation of said legal right. The normal parties to a check are the dthe payee and the drawee bank. Courts have long recognized the bu

custom of using printed checks where blanks are provided for the dissuance, the name of the payee, the amount payable and the drsignature. All the drawer has to do when he wishes to issue a checproperly fill up the blanks and sign it. However, the mere fact that hdone these does not give rise to any liability on his part, until and the check is delivered to the payee or his representative. A neginstrument, of which a check is, is not only a written evidencecontract right but is also a species of property. Just as a deed to a pland must be delivered in order to convey title to the grantee, so negotiable instrument be delivered to the payee in order to evideexistence as a binding contract. Section 16 of the Negotiable InstruLaw, which governs checks, provides in part: “Every contractnegotiable instrument is incomplete and revocable until delivery instrument for the purpose of giving effect thereto”. Thus, the payenegotiable instrument acquires no interest with respect thereto udelivery to him. Delivery of an instrument means transfer of posseactual or constructive, from one person to another. Without thedelivery of the instrument from the drawer to the payee, there canliability on the instrument. Moreover, such delivery must be intengive effect to the instrument. The allegations of the petitioner original complaint show that the two (2) China Bank checks, num384934 and 384935, were not delivered to the payee, the petherein. Without the delivery of said checks to petitioner-payee, the did not acquire any right or interest therein and cannot therefore any cause of action, founded on said checks , whether against the dSima Wei or against the Producers Bank or any of the other responIn the original complaint, petitioner Bank, as plaintiff, sued respoSima Wei on the promissory note, and the alternative defenincluding Sima Wei, on the two checks. On appeal from the orddismissal of the Regional Trial Court, petitioner Bank alleged that itsof action was not based on collecting the sum of money evidenced

negotiable instruments stated but on quasi-delict — a claim for daon the ground of fraudulent acts and evident bad faith of the alterrespondents. This was clearly an attempt by the petitioner Bank to cnot only the theory of its case but the basis of his cause of actiowell-settled that a party cannot change his theory on appeal, as thisin effect deprive the other party of his day in court. Notwithstandiabove, it does not necessarily follow that the drawer Sima Wei isfrom liability to petitioner Bank under the loan evidenced bpromissory note agreed to by her. Her allegation that she has pabalance of her loan with the two checks payable to petitioner Bank merit for, as We have earlier explained, these checks were never deto petitioner Bank. And even granting, without admitting, that thedelivery to petitioner Bank, the delivery of checks in payment obligation does not constitute payment unless they are cashed ovalue is impaired through the fault of the creditor. None of exceptions were alleged by respondent Sima Wei. Therefore,

respondent Sima Wei proves that she has been relieved from liabithe promissory note by some other cause, petitioner Bank has a raction against her for the balance due thereon. However, insofar other respondents are concerned, petitioner Bank has no privitthem. Since petitioner Bank never received the checks on which itits action against said respondents, it never owned them (the checkdid it acquire any interest therein. Thus, anything which the respomay have done with respect to said checks could not have prejpetitioner Bank. It had no right or interest in the checks which coulbeen violated by said respondents. Petitioner Bank has therefore noof action against said respondents, in the alternative or otherwise. If




it is Sima Wei, the drawer, who would have a cause of action against herco-respondents, if the allegations in the complaint are found to be true.

INCOMPLETE NEGOTIATION OF ORDER INSTRUMENT

Sec. 49. Transfer without indorsement; effect of. - Where the holder ofan instrument payable to his order transfers it for value without indorsing it,he transfer vests in the transferee such title as the transferor had therein,

and the transferee acquires in addition, the right to have the indorsement ofhe transferor. But for the purpose of determining whether the transferee is a

holder in due course, the negotiation takes effect as of the time when thendorsement is actually made.

quitable Assignment – the transfer of an order instrument without

dorsement where the transferee acquires the instrument subject to defensesd equities available among prior parties.

e transferee acquires the legal title the transferor had and in addition, theht to have the indorsement of the transferor, without which he cannot bensidered a “holder” within the definition under Sec. 191 and thus cannotgotiate it. He also cannot be considered a “bearer” since the instrument ist payable to bearer.

WHERE INDORSEMENT SHOULD BE PLACED?

Sec. 31. Indorsement; how made. - The indorsement must be written onhe instrument itself or upon a paper attached thereto. The signature of thendorser, without additional words, is a sufficient indorsement.

ndorsement is the writing of the name of the payee on the instrument withe intent either to transfer the title to the same, or to strengthen the securitythe holder by assuming a contingent liability for its future payment, or both.

llonge - is a slip of paper sometimes attached to a negotiable instrument fore purpose of receiving further indorsements when the original paper is filledth indorsements. Generally, an allonge may not be utilized for indorsement ifere is still sufficient space on the instrument itself.

WHEN PERSON DEEMED INDORSER

Sec. 63. When a person deemed indorser. - A person placing hisignature upon an instrument otherwise than as maker, drawer, or acceptor,s deemed to be indorser unless he clearly indicates by appropriate words hisntention to be bound in some other capacity

n indorser cannot show by parol evidence (i.e., outside the instrument itself)s intention to be bound in some other capacity, as for example, he signederely as an agent.

OTHER RULES ON INDORSEMENT

ENRIQUE MONTINOLA VS. PNB (GR No. L-2861 ; Feb. 26, 1951) - In1942, Mariano Ramos, as disbursing officer of an army division of UnitedStates Armed Forces in the Far East (USAFFE) and based in MisamisOriental, procured cash advances in the amount of Php800,000 with theProvincial Treasurer (PT) of Lanao for the use of USAFFE in Cagayan deMisamis. PT-Lanao did not have that amount in cash so he gave RamosP300,000 in emergency notes and a check for P500,000. Thereafter,Ramos presented the check to their PT in their province for encashment.PT-Misamis did not have enough cash to cover the check so he gaveRamos P400,000 in emergency notes and a check for P100,000 drawn on

the PNB as he had previously deposited P500,000 emergency notes in thePNB branch in Cebu and thus he expected to have the check issued byhim cashed in Cebu against said deposit. Ramos was unable to encashsaid check for he was captured by the Japanese and later made a prisonerof war. After his release, sometime in 1945, Ramos allegedly indorsed thecheck to herein plaintiff-appellant. According to Montinola’s version of thecircumstances that roused the present controversy, Ramos, who then wasno longer connected with the USAFFE but already a civilian who neededthe money only for himself and his family, offered to sell the check to him.But as stated by Ramos, he and Montinola agreed to the sale of said checkand the agreement regarding the transfer of the check was that he was

selling only P30,000 of it and for such reason, at the back document he wrote in longhand: Pay to the order of Enrique P. MoP30,000 only. The balance to be deposited in the Philippine Nationato the credit of M. V. Ramos . Ramos further said that in exchange fassignment of P30,000, Montinola would pay him P90,000 in Japmilitary notes but that the latter gave him only two checks of P20,0P25,000, leaving a balance unpaid of P45,000. The writing made back of the check was, however, mysteriously obliterated and in itsa supposed indorsement appearing on the back of the check was mathe whole amount of the check. ISSUE: WON the check was negotiated within the meaning of the NIL in view of the fact thinstrument was indorsed for a lesser amount? HELD: NO. Sectionthe NIL provides that "the indorsement must be an indorsement entire instrument. An indorsement which purports to transfer

indorsee a part only of the amount payable (as in this case) dooperate as a negotiation of the instrument." As to what was really wat the back of the check which Montinola claims to be a full indorsof the check, the Court agreed with trial court that the original wriRamos on the back of the check was to the effect that he was assonly P30,000 of the value of the document and that he was instructbank to deposit to his credit the balance. Montinola may therefore regarded as an indorsee. At most he may be regarded as a mere asof the P30,000 sold to him by Ramos, in which case, as such assignis subject to all defenses available to the drawer Provincial TreasuMisamis Oriental and against Ramos.

ANG TEK LIAN VS. CA (GR No. L-2516; Sept. 25, 1950) - Knowhad no funds therefor, petitioner Ang Tek Lian drew a check upoChina Banking Corporation for the sum of P4,000, payable to the or

“cash”. He delivered it to Lee Hua Hong in exchange for money whlatter handed in the act. The next business day, the check was preby Lee Hua Hong to the drawee bank for payment, but it was dishofor insufficiency of funds, the balance of the deposit of Ang Tek Lboth dates being P335 only. Petitioner was sued for estafa. In his dehowever, he argues that as the check had been made payable to and had not been endorsed by Ang Tek Lian, the defendant is not gthe offense charged. ISSUE: WON a check payable to “cash” indorsement? HELD: NO. Under the Negotiable Instruments Law ([d], a check drawn payable to the order of “cash” is a check payabearer, and the bank may pay it to the person presenting it for pawithout the drawer’s indorsement. Where a check is made payableorder of ‘cash’, the word cash ‘does not purport to be the name person’, and hence the instrument is payable to bearer. The draweeneed not obtain any indorsement of the check, but may pay it person presenting it without any indorsement.

Sec. 21. Signature by procuration; effect of. - A signatu"procu ration” operates as notice that the agent has but a limited authosign, and the principal is bound only in case the agent in so signingwithin the actual limits of his authority.

Procuration is the act by which a principal gives power to another to acplace as he could himself. It is otherwise understood as agency or proxy.

Sec. 32 Indorsement must be of entire instrument. - The indorsmust be an indorsement of the entire instrument. An indorswhich purports to transfer to the indorsee a part only amount payable, or which purports to transfer the instrumtwo or more indorsees severally, does not operate as a negoof the instrument. But where the instrument has been paid iit may be indorsed as to the residue.

Sec. 40 Indorsement of instrument payable to bearer. (supra, pSec. 41 Indorsement where payable to two or more perso

Where an instrument is payable to the order of two or more por indorsees who are not partners, all must indorse unless thindorsing has authority to indorse for the others.

Sec. 42 Effect of instrument drawn or indorsed to a perscashier.- Where an instrument is drawn or indorsed to a per" cashier” or other fiscal officer of a bank or corporationdeemed prima facie to be payable to the bank or corporatwhich he is such officer, and may be negotiated by eithindorsement of the bank or corporation or the indorsement




officer.

ec. 43 Indorsement where name is misspelled, and so forth. -Where the name of a payee or indorsee is wrongly designated ormisspelled , he may indorse the instrument as therein describedadding, if he thinks fit, his proper signature. (emphasis supplied)

ec. 44 Indorsement in representative capacity. - Where any personis under obligation to indorse in a representative capacity, he mayindorse in such terms as to negative personal liability.

ec. 45 Time of indorsement; presumption. - Except where anindorsement bears date after the maturity of the instrument, everynegotiation is deemed prima facie to have been effected before theinstrument was overdue

ec. 46 Place of indorsement; presumption. - Except where thecontrary appears, every indorsement is presumed prima facie tohave been made at the place where the instrument is dated

ec. 48 Striking out indorsement. - The holder may at any time strikeout any indorsement which is not necessary to his title. Theindorser whose indorsement is struck out, and all indorserssubsequent to him, are thereby relieved from liability on theinstrument

ec. 49 Transfer without indorsement; effect of. (supra, p.12)

ec. 32: Reason: negotiation requires delivery, and there can be no partiallivery of one instrument. Also, to avoid multiplicity of suits and a bill or notevided into different parts divides a single cause of action.

ec. 41: Does not apply to instruments payable to two or more payeesverally, such as “payable to A or B”, which may be negotiated by either A orIn order to make an indorsement of an instrument payable to two or more

rsons effective, all must indorse to effect a negotiation.

ec. 48: An instrument payable to bearer remains a bearer instrument and thelder thereof can strike out any special indorsements by virtue of Sec. 48.

n instrument originally payable to order but converted by virtue of a blankdorsement, the holder thereof can remove all subsequent specialdorsements as he can acquire title only by delivery. But the holder cannotrike out the indorsements prior to the blank indorsement since it would becessary for his acquisition of title.

KINDS OF INDORSEMENT1. Blank and Special Indorsements

Sec. 33 Kinds of indorsement. - An indorsement may be either specialor in blank; and it may also be either restrictive or qualified or

conditional. Sec. 34 Special indorsement; indorsement in blank. - A special

indorsement specifies the person to whom, or to whoseorder, the instrument is to be payable , and the indorsementof such indorsee is necessary to the further negotiation of theinstrument. An indorsement in blank specifies no indorsee,and an instrument so indorsed is payable to bearer, andmay be negotiated by delivery. (emphasis supplied)

Sec. 35 Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a specialindorsement by writing over the signature of the indorser in blankany contract consistent with the character of the indorsement.

2. Qualified Indorsements

Sec. 38 Qualified indorsement. - A qualified indorsementconstitutes the indorser a mere assignor of the title to theinstrument. It may be made by adding to the indorser'ssignature the words "without recourse" or any words of similarimport. Such an indorsement does not impair the negotiablecharacter of the instrument.

Sec. 65 Warranty where negotiation by delivery and so forth. — — Every person negotiating an instrument by delivery or by aqualified indorsement warrants:

(a) That the instrument is genuine and in all respects what it

purports to be;(b) That he has a good title to it;(c) That all prior parties had capacity to contract;(d) That he has no knowledge of any fact which would impvalidity of the instrument or render it valueless.

But when the negotiation is by delivery only, the warranty ein favor of no holder other than the immediate trans

The provisions of subdivision (c) of this section do not appperson negotiating public or corporation securities other thaand notes.

Sec. 38: When the indorser wants to transfer his rights over the instr

but does not want to assume responsibilities under the secondary contramay do so by resorting to qualified indorsement, by virtue of whdisclaims his liability to any holder or any subsequent party who migcompelled by another.

He is only liable for breach of warranties under Sec. 65.

METROPOL (BACOLOD) FINANCING & INVESTMENT CORPSAMBOK MOTORS (GR No. L-39641 ; Feb. 28, 1983) - Sambok Company negotiated and indorsed the note in favor of plaintiff MeFinancing & Investment Corporation with the following indorsemento the order of Metropol Bacolod Financing & Investment Corpowith recourse. Notice of Demand; Dishonor; Protest; and Presenare hereby waived. SAMBOK MOTORS CO. (BACOLOD) By: RODONONILLO Asst. General Manager". The maker, Dr. Villaruel defauthe payment. Plaintiff notified Sambok as indorsee of said note of tthat the same has been dishonored and demanded payment. Sfailed to pay. Trial court rendered its decision in favor of Pl

Appellant Sambok argues that by adding the words "with recourse"indorsement of the note, it becomes a qualified indorser; that bqualified indorser, it does not warrant that if said note is dishonothe maker on presentment, it will pay the amount to the holder. IWON Sambok is a qualified indorser? HELD: Appellant, by indthe note "with recourse'' does not make itself a qualified indbut a general indorser who is secondarily liable, because byindorsement, it agreed that if Dr. Villaruel fails to pay the note, pappellee can go after said appellant. The effect of such indorsemthat the note was indorsed without qualification. A person who inwithout qualification engages that on due presentment, the note shaccepted or paid, or both as the case may be, and that if it be dishohe will pay the amount thereof to the holder. Appellant Sambok's in

of indorsing the note without qualification is made even more apparthe fact that the notice of' demand, dishonor, protest and presenwere all waived. The words added by said appellant do not limliability, but rather confirm his obligations as a general indorser.

3. Conditional Indorsement

Sec. 39. Conditional indorsement. - Where an indorsement is condthe party required to pay the instrument may disregard the conditiomake payment to the indorsee or his transferee whether the conditiobeen fulfilled or not. But any person to whom an instrument so indornegotiated will hold the same, or the proceeds thereof, subject to theof the person indorsing conditionally

If payment is made prior to the fulfilment of the condition, the holder wthe payment subject to the rights of the conditional indorser. Such that

the condition did not happen, he is obliged to return the amount he recoto the conditional indorser.

4. Restrictive Indorsement

Sec. 36 When indorsement restrictive. - An indorsement is restrwhich either:

(a) Prohibits the further negotiation of the instrument; or(b) Constitutes the indorsee the agent of the indorser; or(c) Vests the title in the indorsee in trust for or to the u




some other persons.

But the mere absence of words implying power to negotiate doesnot make an indorsement restrictive.

Sec. 37 Effect of restrictive indorsement; rights of indorsee. - Arestrictive indorsement confers upon the indorsee the right:

(a) to receive payment of the instrument;(b) to bring any action thereon that the indorser could bring;(c) to transfer his rights as such indorsee, where the form of theindorsement authorizes him to do so.

But all subsequent indorsees acquire only the title of the firstindorsee under the restrictive indorsement.

ec. 36(a) is the only type of indorsement that bars further negotiation. Thoseder (b) and (c) may still be further negotiated, but the subsequent indorseesll also be an agent or trustee.

NATIVIDAD GEMPESAW VS. CA (GR No. 92244; Feb. 9, 1993) -Natividad Gempesaw issued checks, prepared by her bookkeeper, a totalof 82 checks in favor of several supplies. Most of the checks for amountsin excess of actual obligations as shown in their corresponding invoices. Itwas only after the lapse of more than 2 years did she discovered thefraudulent manipulations of her bookkeeper. It was also learned that theindorsements of the payee were forged, and the checks were brought tothe chief accountant of Philippine Bank of Commerce (the Drawee Bank,Buendia Branch) who deposited them in the accounts of Alfredo Romeroand Benito Lam. Gempesaw made demand upon the bank to credit theamount charged due the checks. The bank refused. Hence, the presentaction. ISSUE: Who shall bear the loss resulting from the forgedindorsements? HELD: As a rule, a drawee bank who has paid a check onwhich an indorsement has been forged cannot charge the drawer’saccount for the amount of said check. An exception to the rule is wherethe drawer is guilty of such negligence which causes the bank to honorsuch checks. Gempesaw did not exercise prudence in taking steps that acareful and prudent businessman would take in circumstances to discoverdiscrepancies in her account. Her negligence was the proximate cause ofher loss, and under Section 23 of the Negotiable Instruments Law, isprecluded from using forgery as a defense. On the other hand, thebanking rule banning acceptance of checks for deposit or cash paymentwith more than one indorsement unless cleared by some bank officials,does not invalidate the instrument; neither does it invalidate thenegotiation or transfer of said checks. The only kind of indorsementwhich stops the further negotiation of an instrument is a

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

5. Absolute Indorsement6. Joint Indorsement

Sec. 41. Indorsement where payable to two or more persons. – see p.12

7. Irregular Indorser

Liability of irregular indorser . - Where a person, not otherwise a party toan instrument, places thereon his signature in blank before delivery, he isable as indorser, in accordance with the following rules:

a) If the instrument is payable to the order of a third person, he is liable tohe payee and to all subsequent parties.b) If the instrument is payable to the order of the maker or drawer, or is

payable to bearer, he is liable to all parties subsequent to the maker or

drawer.(c) If he signs for the accommodation of the payee, he is liable to all subsequent to the payee.

K. WHEN INDORSEMENT NECESSARY – Sec. 8(b) (p.6), Sec. 30 Sec. 184 (p.2)

L. INDORSEMENT OF ENTIRE INSTRUMENT – Sec. 32 (p.40)

M. INDORSEMENT OF BEARER INSTRUMENT – Sec. 40 (p.10)

N. INDORSEMENT WHEN PAYABLE TO TWO OR MORE PERSOSec. 41 (p.12)

O.

INDORSEMENT IN REPRESENTATIVE CAPACITY – Sec. 44 (p.

P. PRESUMPTION ON TIME, PLACE OF INDORSEMENT – Sec. 446 (p.13)

Q. CONTINUATION OF NEGOTIABLE CHARACTER

Sec. 47. Continuation of negotiable character . - An instrumnegotiable in its origin continues to be negotiable until it has brestrictively indorsed or discharged by payment or otherwise.

Restrictive indorsement as used in this provision pertains only to Sec.since, as discussed earlier, (b) and (c) thereof do not prevent fnegotiation.

Discharge by payment or otherwise are enumerated under Sec. 119

R. NEGOTIATION BY PRIOR PARTY

Sec. 50 When prior party may negotiate instrument. - Whinstrument is negotiated back to a prior party, such partysubject to the provisions of this Act, reissue and further negthe same. But he is not entitled to enforce payment thagainst any intervening party to whom he was perliable. (emphasis supplied)

Sec. 121 Right of party who discharges instrument. - Wheinstrument is paid by a party secondarily liable thereon, itdischarged; but the party so paying it is remitted to his frights as regard all prior parties, and he may strike out hand all subsequent indorsements and against negotiatinstrument, except:

(a) Where it is payable to the order of a third person anbeen paid by the drawer; and(b) Where it was made or accepted for accommodation abeen paid by the party accommodated.

S. STRIKING OUT OF INDORSEMENT

Sec. 48 Striking out indorsement. - The holder may at any timeout any indorsement which is not necessary to his titleindorser whose indorsement is struck out, and all indsubsequent to him, are thereby relieved from liability oinstrument

Sec. 50 When prior party may negotiate instrument . (supra, p.1

T. EFFECT OF TRANSFER WITHOUT INDORSEMENT – Sec. 49 (p.

U. DIFFERENT COMBINATIONS OF INDORSEMENT

V. RIGHT OF PRIOR PARTY TO NEGOTIATE – Sec. 50 (p.14)

W. CONSIDERATION FOR ISSUANCE AND SUBSEQUENT TRANS

Sec. 24 Presumption of consideration. - Every negotiable instrumdeemed prima facie to have been issued for a vaconsideration; and every person whose signature appears th




to have become a party thereto for value.

c. 25 Value, what constitutes. Value is any consideration sufficient tosupport a simple contract. An antecedent or pre-existing debtconstitutes value; and is deemed such whether the instrument ispayable on demand or at a future time.

c. 26 What constitutes holder for value. - Where value has at anytime been given for the instrument, the holder is deemed a holderfor value in respect to all parties who become such prior to thattime.

c. 27 When lien on instrument constitutes holder for value . — Where the holder has a lien on the instrument arising either fromcontract or by implication of law, he is deemed a holder for value tothe extent of his lien.

onsideration is not presumed when there is transfer without indorsement asSec. 49.

imple Contract as used in Sec. 25 is that found under the Civil Code. Suchat, a negotiable instrument is issued for a valuable consideration which mayto give, to do or not to do.

alue Sufficient need not mean that the amount of consideration and theomise to pay in the instrument are equal, so long as it is not grosslyadequate.

ec. 27 : If a negotiable instrument was delivered by way of pledge, theansferee is a holder for value up to the extent of the amount secured. If them certain state in the instrument is P50,000 and the same was pledged for0,000, the transferee is a holder for value upto P30,000 only.

alue previously given : If M issued a note to P, then P to A, A to B and B toas a way of gift. C is a holder for value as to A, since value has previously

ven by B to A.

WHAT CONSTITUTES VALUE – Sec. 24

BIBIANO BANAS VS. CA (GR No. 102967; Feb. 10, 2000) – Petitionersold to Ayala Investment Corporation (Ayala) a lot for P2,308,770 to bepaid P461,754 upon signing of the contract and the balance covered by apromissory note to be paid in four equal annual installments. On the sameday, petitioner discounted the promissory note with Ayala. On the year ofsale, petitioner reported the P461,754 as sales proceeds and the balanceas unrealized, and consistently reported in the succeeding years theinstallment that fell due. On 1978, Revenue Director of Manila authorizedherein respondents Tuazon and Talon to examine the books and records

of petitioner to which they assessed him for deficiency taxes, arguing thatsince the note evidencing the installment nature of the sale wasdiscounted the same year it was issued, the sale should be treated as acash transaction and not installment and accordingly the whole amount ofgain on disposition should have been reported in 1976, the year of sale.ISSUE: WON the proceeds of the discounted note should have beenreported as taxable income during 1976 and not deferred on installments?HELD: Yes. As a general rule, the whole profit accruing from a sale ofproperty is taxable as income in the year the sale is made. But, if not all ofthe sale price is received during such year, and a statute provides thatincome shall be taxable in the year in which it is “received”, the profit froman installment sale is to be apportioned between or among the years inwhich the installments are paid and received. However, the proceeds fromthe disposition or discounting of receivable, though not considered incomputing for “initial payments” under Sec. 43 and Sec. 175 of the TaxCode, it is still taxable in the year it was converted to cash. Non-dealer

sales of property may be reported as income under the installmentmethod provided that the obligation is still outstanding at the close of theyear. Where an installment obligation is discounted at a bank orfinance company, a taxable disposition results. Clearly, theindebtedness of the buyer is discharged, while the seller acquiresmoney for the settlement of his receivables. Logically then, theincome should be reported at the time of the actual gain.

EFFECT OF VALUE PREVIOUSLY GIVEN – Sec. 26 (p.15) HOLDER FOR VALUE – Sec. 27 (p.15)

IV. HOLDERS

A. WHAT IS A HOLDER?

A Holder means the payee or indorsee of a bill or note who is in possesit or the bearer thereof (Sec. 191), who may sue on his own name (Sec.

Sec. 51 Right of holder to sue; payment. - The holder of a negoinstrument may to sue thereon in his own name; and paymehim in due course discharges the instrument

Sec. 193 Reasonable time, what constitutes. - In determining wa "reasonable time" regard is to be had to the nature oinstrument, the usage of trade or business with respect toinstruments, and the facts of the particular case.

CHAN WAN VS. TAN KIM (G.R. No. L-15380; September 30, 1960) -checks payable to "cash or bearer" and drawn by defendant Tan upoEquitable Banking Corporation, were all presented for payment by Chan Wthe drawee bank, but they "were all dishonored and returned to him due to insufficient funds and/or causes attributable to the drawer." The din drawing the check engaged that "on due presentment, the check wopaid, and that if it be dishonored . . . he will pay the amount thereof holder". On the backs of the checks, endorsements which apparently shohad been deposited with the China Banking Corporation and were, latter, presented to the drawee bank for collection. The court declined topayment for two principal reasons: (a) plaintiff failed to prove he was a in due course, and (b) the checks being crossed checks should not havedeposited instead with the bank mentioned in the crossing. ISSUE: Wholder who is not a holder in due course may recover on the checks?

YES. The Negotiable Instruments Law does not provide that a hwho is not a holder in due course, may not in any case, recover oinstrument. If B purchases an overdue negotiable promissory note sign

A, he is not a holder in due course; but he may recover from A, if the latno valid excuse for refusing payment. The only disadvantage of holder not a holder in due course is that the negotiable instrument is subjdefense as if it were non- negotiable.

ATRIUM MANAGEMENT CORPORATION VS. CA (G.R. No. 1February 28, 2001) - Hi-Cement Corp. issued checks in favor of E.T. HenCo. Inc., as payee. The latter, in turn, endorsed the checks to Atriuvaluable consideration. But upon presentment for payment, the drawedishonored the checks for the common reason "payment stopped" prompted petitioner to institute this action. The trial court rendered a deordering E.T. Henry and Co., Inc. and Hi-Cement to pay petitioner A

jointly and severally, the amount corresponding to the value of the chec

however, absolved & ruled, inter alia, that Lourdes de Leon of Hi-Cemenot authorized to issue the subject checks in favor of E.T. Henry, Inc. IWON petitioner Atrium is a holder in due course? HELD: To emphasizchecks were crossed checks and specifically indorsed for deposit to p(E.T. Henry) account only. Atrium was aware of the fact that the checksall for deposit only to payee's account. Clearly, then, Atrium could considered a holder in due course. The SC, however, held that it doefollow as a legal proposition that simply because petitioner Awas not a holder in due course for having taken the instrumequestion with notice that the same was for deposit only taccount of payee E.T. Henry that it was altogether precludedrecovering on the instrument. The Negotiable Instruments Law doprovide that a holder not in due course cannot recover on the instrumendisadvantage of Atrium in not being a holder in due course is thnegotiable instrument is subject to defenses as if it were non-negotiablsuch defense is absence or failure of consideration.

B. CLASSES OF HOLDER

Sec. 51 Rights of holder to sue. (supra)

Sec. 26 What constitutes holder for value. - Where value has atime been given for the instrument, the holder is deemholder for value in respect to all parties who become such to that time

Sec. 52 What constitutes a holder in due course. – see C. HOIN DUE COURSE, p.

Sec. 57 Rights of holder in due course. – see Rights of A Hold




Due Course, p. 19.

MARCELO MESINA VS. CA (G.R. No. 70145 November 13, 1986) - JoseGo purchased from Associated Bank a cashier's check for P800,000.00.Unfortunately, he left said check on the top of the desk of the bankmanager when he left the bank. The bank manager entrusted the checkfor safekeeping to a bank official, a certain Albert Uy. While Uy went tothe men's room, the check was stolen by his visitor in the person of

Alexander Lim. Upon discovering that the check was lost, Jose Goaccomplished a "STOP PAYMENT" order. Two days later, Associated Bankreceived the lost check for clearing from Prudential Bank. Afterdishonoring the same check twice, Associated Bank received summonsand copy of a complaint for damages of Marcelo Mesina who was inpossession of the lost check and is demanding payment. Petitioner claims

that a cashier's check cannot be countermanded in the hands of a holderin due course. ISSUE: WON petitioner can collect on the stolen check onthe ground that he is a holder in due course? HELD: No. Petitioner failedto substantiate his claim that he is a holder in due course and forconsideration or value as shown by the established facts of the case.

Admittedly, petitioner became the holder of the cashier's check asendorsed by Alexander Lim who stole the check. He refused to say howand why it was passed to him. He had therefore notice of the defect of histitle over the check from the start. The holder of a cashier's check who isnot a holder in due course cannot enforce such check against the issuingbank which dishonors the same. A person who became the holder of acashier's check as endorsed by the person who stole it and who refused tosay how and why it was passed to him is not a holder in due course

HOLDER IN DUE COURSE

ec. 52. What constitutes a holder in due course . .- A holder in dueurse is a holder who has taken the instrument under the following conditions:) That it is complete and regular upon its face;) That he became the holder of it before it was overdue, and without noticeat it has been previously dishonored, if such was the fact;) That he took it in good faith and for value;) That at the time it was negotiated to him, he had no notice of any infirmitythe instrument or defect in the title of the person negotiating it.

older - the first requisite is that he should be a “holder” as defined underc. 191. If a possessor of a negotiable instrument is not a holder (i.e., he isither payee nor indorsee or bearer of a bearer instrument), he can NEVER beholder in due course.

c. 53 When person not deemed holder in due course. – see 2.

Overdue, b. Rule in case of demand instruments. c. 57 Rights of a holder in due course . See Rights of a Holder in

Due Course p. 19

c. 59 Who is deemed holder in due course. - Every holder isdeemed prima facie to be a holder in due course; but when it isshown that the title of any person who has negotiated theinstrument was defective, the burden is on the holder to provethat he or some person under whom he claims acquired the titleas holder in due course. But the last-mentioned rule does notapply in favor of a party who became bound on the instrumentprior to the acquisition of such defective title.

1. Instrument Complete and Regular

omplete - it is complete when it is not wanting of any material particular orrticular proper to be inserted in a negotiable instrument without which the

me will not be complete. Examples of material particulars are name of payee,mount, signature of maker or drawer, or rates of interest, if any.

egular – It is regular upon its face when it does not contain any materialerations or if there are, they are not apparent or visible on the face of thestrument.

Holder upon receiving an instrument which is incomplete or irregularontaining visible and apparent alterations) must be put on inquiry why it isch. If he fails to do so, he takes the instrument subject to all defenses.

2. Taken Before Overdue and Before Notice of Dishonor

Overdue – an instrument is overdue after the date of maturity fixed theupon happening of an event certain, and a person taking an ovinstrument must be put on inquiry why the instrument is still in circulation

Dishonor may be by non-acceptance (bills of exchange) under Sec. 149non-payment (promissory notes and bills of exchange) under Sec. 83. A who has knowledge that the instrument was previously dishonored isholder in due course.

Sec. 4 Determinable future time, what constitutes . (supra, p.

Sec. 7 When payable on demand (supra, p.6)

Sec. 87 Rule where instrument payable at bank. - Whereinstrument is made payable at a bank, it is equivalent to an to the bank to pay the same for the account of the prindebtor thereon.

Sec. 53 When person not deemed a holder in due course (sup

Sec. 143 When presentment for acceptance must be madPresentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other where presentment for acceptance is necessary in order to fmaturity of the instrument; or(b) Where the bill expressly stipulates that it shapresented for acceptance; or(c) Where the bill is drawn payable elsewhere than aresidence or place of business of the drawee.

In no other case is presentment for acceptance necessaorder to render any party to the bill liable.

Sec. 83 When instrument dishonored by non-payment. -instrument is dishonored by non-payment when:(a) It is duly presented for payment and payment is refuscannot be obtained; or(b) Presentment is excused and the instrument is overdueunpaid.

Sec. 149 When dishonored by nonacceptance. - A bill is dishonby non-acceptance: (a) When it is duly presented for acceptance and sucacceptance as is prescribed by this Act is refused or cannobtained; or(b) When presentment for acceptance is excused and the not accepted.

Sec. 47 Continuation of negotiable character (supra, p.14)

Sec. 5 Additional provisions not affecting negotiability (p.6)

a. Rule in case of installment instruments – a purchaserinstallment note after an installment is overdue may be a hodue course as to the balance if he has no notice of failure the first installment. The holder may assume that the regular of business has been followed and that each installment wawhen due. A transferee has no reason to conclude from thefact that a note circulates after the due date of one orinstallments that such installments were not paid (Bliss vs. CaCo-op Producers)

b. Rule in case of demand instruments

Sec. 53. When person not deemed holder in due course. - Whinstrument payable on demand is negotiated on an unreasonable length oafter its issue, the holder is not deemed a holder in due course.

“Unreasonable” is relative and must be determined in relation to Se(p.15)

c. Overdue interest payments – the mere fact that interestnote was overdue does not, in the absence of an acceleration on failure to pay interest, affect an indorsee with notice of dior put him on inquiry.

3. Notice of Infirmity or Defect




nfirmity means any irregularity in the instrument. Thus, notice of aneration which is apparent is notice of an infirmity in the instrument, as wellnotice of forgery in the maker or drawer’s signature. Sec. 56 provides whatnstitutes notice of defect.

c. 54 Notice before full amount is paid. - Where the transfereereceives notice of any infirmity in the instrument or defect in thetitle of the person negotiating the same before he has paid thefull amount agreed to be paid therefor, he will be deemed aholder in due course only to the extent of the amounttherefore paid by him.

c. 55 When title defective. - The title of a person who negotiates aninstrument is defective within the meaning of this Act when he

obtained the instrument, or any signature thereto, by fraud,duress, or force and fear, or other unlawful means, or for anillegal consideration, or when he negotiates it in breach of faith,or under such circumstances as amount to a fraud.

c. 56 What constitutes notice of defect. - To constitutes notice ofan infirmity in the instrument or defect in the title of the personnegotiating the same, the person to whom it is negotiatedmust have had actual knowledge of the infirmity ordefect, or knowledge of such facts that his action intaking the instrument amounted to bad faith.

c. 57 Rights of a holder in due course . (supra)

ec. 54: M makes a note for P100,000 payable to the order of P, P indorsed itA, B stole the note, and forged A’s signature, B then indorsed it to C whoid P50,000 before knowing that A’s signature was forged. In this case, C is a

lder in due course upto P50,000 only.

4. Good Faith

rossed Checks produce the following effect:) The check may not be encashed but only deposited in the bank;) The check may be negotiated only once – to one who has an account withbank; and) The act of crossing the check serves as warning to the holder that the checks been issued for a definite purpose so that he must inquire if he hasceived the check pursuant to that purpose, otherwise, he is not a holder in

ue course. (State Investment House Inc. vs. CA; Bataan Cigar and Cigarettectory vs. CA)

VICENTE DE OCAMPO & CO. VS. ANITA GATCHALIAN (GR No. L- 15126 ;Nov. 30, 1961) – Facts: Herein defendants issued a check

amounting to P600 to one Manuel Gonzales, who represented himself asauthorized by the owner of the car, Ocampo Clinic, which will be shown tothe owner as evidence of defendants’ good faith in the intention topurchase the said car. Without knowledge of this transaction, plaintiffreceived from Gonzales the subject check for the payment of thehospitalization of his wife. On the failure of Gonzales to appear the dayfollowing, to bring the car and its certificate of registration and to returnthe check on the following day as previously agreed upon, defendantGatchalian issued a "Stop Payment Order" on the check, with the draweebank. The CFI of Manila then ordered defendants to pay the plaintiff thesum of P600 with legal interest until paid. In this action, defendants seekto recover the value of the check, contending that plaintiff is not a holderin due course. ISSUE: WON plaintiff is a holder in due course? HELD:Under the Negotiable Instruments Law, Section 52 (c) provides that aholder in due course is one who takes the instrument "in good faith andfor value;" Section 59, "that every holder is deemed prima facie to be a

holder in due course;" and Section 52 (d), that in order that one may be aholder in due course it is necessary that "at the time the instrument wasnegotiated to him "he had no notice of any . . . defect in the title of theperson negotiating it;" and lastly Section 59, that every holder isdeemed prima facie to be a holder in due course. In the case at bar therule that a possessor of the instrument is prima facie a holder in duecourse does not apply because there was a defect in the title of the holder(Manuel Gonzales), because the instrument is not payable to him or tobearer. On the other hand, the stipulation of facts indicated by theappellants in their brief, like the fact that the drawer had no account withthe payee; that the holder did not show or tell the payee why he had the

check in his possession and why he was using it for the paymentown personal account — show that holder's title was defectsuspicious, to say the least. As holder's title was defective or suspiccannot be stated that the payee acquired the check without knowlesaid defect in holder's title, and for this reason the presumption thatholder in due course or that it acquired the instrument in good faitnot exist. And having presented no evidence that it acquired the chgood faith, it (payee) cannot be considered as a holder in due couother words, under the circumstances of the case, instead presumption that payee was a holder in good faith, the fact is acquired possession of the instrument under circumstances that have put it to inquiry as to the title of the holder who negotiatcheck to it. The burden was, therefore, placed upon it to shownotwithstanding the suspicious circumstances, it acquired the ch

actual good faith. In the case at bar as the payee acquirecheck under circumstances which should have put it to inwhy the holder had the check and used it to pay his own peaccount, the duty devolved upon it, plaintiff-appellee, to that it actually acquired said check in good faith. The stipulafacts contains no statement of such good faith, hence, plaintiff paynot proved that it acquired the check in good faith and may ndeemed a holder in due course thereof. It was payee's duty to asfrom the holder Manuel Gonzales what the nature of the latter's titlecheck was or the nature of his possession. Having failed in this rewe must declare that plaintiff-appellee was guilty of gross neglectfinding out the nature of the title and possession of Manuel Gonamounting to legal absence of good faith, and it may not be considea holder of the check in good faith. To such effect is the consenauthority

CELY YANG VS. CA (GR No. 138074; Aug. 15, 2003) – Cely YanPrem Chandiramani were to exchange dollar drafts and checks wdifference to be divided equally as their profit. Chandiramani dappear at the rendezvous and Ranigo, Yang’s representative, allegedthe two cashier’s checks and the dollar draft bought by petitioner. Rreported the alleged loss of the checks and the dollar draft to Liong, in turn, informed Yang, and the loss was then reported police. The checks and the dollar draft were not lost bChandiramani was able to get hold of said instruments, without delthe exchange consideration consisting of the PCIB manager’s chethe Hang Seng Bank dollar draft. Yang requested FEBTC and Equitastop payment on the instruments she believed to be lost. Both complied with her request, but upon the representation of PCIB, subsequently lifted the stop payment order on FEBTC Dollar Dra4771. Yang lodged a Complaint for injunction and damages a

Equitable, Chandiramani, and David (payee of the subject checksCourt rendered judgment in favor of defendant Fernando David athe plaintiff Cely Yang and declaring the former entitled to the procethe two (2) cashier’s checks. ISSUE: WON Fernando David is a hodue course? HELD: Yes. Petitioner fails to point any circumstanceshould have put David on inquiry as to the why and wherefore possession of the checks by Chandiramani. David was not privy transaction between petitioner and Chandiramani. Instead, Chandiand David had a separate dealing in which it was precisely Chandiraduty to deliver the checks to David as payee. The evidence showChandiramani performed said task to the letter. Petitioner admitDavid took the step of asking the manager of his bank to verifyFEBTC and Equitable as to the genuineness of the checks anaccepted the same after being assured that there was nothing wronsaid checks. At that time, David was not aware of any "stop payorder. Under these circumstances, David thus had no obligat

ascertain from Chandiramani what the nature of the latter’s title checks was, if any, or the nature of his possession. Thus, we cannohim guilty of gross neglect amounting to legal absence of goodabsent any showing that there was something amiss about Chandiraacquisition or possession of the checks. David did not close hideliberately to the nature or the particulars of a fraud allegedly comby Chandiramani upon the petitioner, absent any knowledge on hthat the action in taking the instruments amounted to bad faith. Mothe factual circumstances in De Ocampo and in Bataan Cigar apresent in this case. For here, there is no dispute that the crchecks were delivered and duly deposited by David, the




named therein, in his bank account. In other words, the purposebehind the crossing of the checks was satisfied by the payee.

BATAAN CIGAR AND CIGARETTE FACTORY VS. CA (GR No. 93048;March 3, 1994) - BCCFI issued to King Tim Pua George (George King)post-dated crossed checks for the delivery tobacco leaves. George Kinglater on sold at a discount the subject checks to SIHI. In as much asGeorge King failed to deliver the bales of tobacco leaves as agreed,despite petitioner’s demand, BCCFI issued a stop payment order on allchecks payable to George King. Unable to collect, SIHI instituted an actionto recover from herein petitioner and was granted relief by the trial courtand later on upheld by the CA. Hence, the present petition. ISSUE: WONSIHI, a second indorser, a holder of crossed checks, a holder in duecourse? HELD: No. Sec. 52 of the Negotiable Instruments Law (NIL)

states what constitutes a holder in due course, thus:

Sec. 52 – A holder in due course is a holder who has taken theinstrument under the following conditions:

a. That it is complete and regular upon its face;b. That he became the holder of it before it was

overdue, and without notice that it had beenpreviously dishonored, if such was the fact;

c. That he took it in good faith and for value;d. That at the time it was negotiated to him he had no

notice of any infirmity in the instrument or defect inthe title of the person negotiating it.

Jurisprudence has pronounced that crossing a check should have thefollowing effects: (a) the check may not be encashed but only deposited inthe bank; (b) the check may be negotiated only once – to one who has anaccount with a bank; (c) and the act of crossing the check serves aswarning to the holder that the check has been issued for a definitepurpose so that he must inquire if he has received the check pursuant tothat purpose, otherwise, he is not a holder in due course . It is settled thatcrossing the checks should put the holder on inquiry and upon himdevolves the duty to ascertain the indorser’s title to the check or thenature of his possession. Failing in this respect, the holder is declaredguilty of gross negligence amounting to legal absence of good faith,contrary to Sec. 52(c) of the NIL. In the present case, BCCFIs defense instopping payment is as good to SIHI as it is to George King. Because,really, the checks were issued with the intention that George King wouldsupply BCCFI with the bales of tobacco leaf. There being failure ofconsideration, SIHI is not a holder in due course. Consequently, BCCFIcannot be obliged to pay the checks

STELCO MARKETING CORPORATION VS. CA (GR No. 96160; June17, 1992) – Stelco Marketing Corporation is engaged in the distributionand sale to the public of structural steel bars. On 7 different occasions inSeptember and October 1980, it sold to RYL Construction, Inc. quantitiesof steel bars of various sizes and rolls of G.I. wire. These bars and wirewere delivered at different places at the indication of RYL Construction,Inc. The aggregate price for the purchases was P126,859.61. Although thecorresponding invoices issued by STELCO stipulated that RYL would pay"COD" (cash on delivery), the latter made no payments for theconstruction materials thus ordered and delivered despite insistentdemands for payment by the former. On April 4, 1981, RYL gave to

Armstrong Industries — described by STELCO as its "sister corporation"and "manufacturing arm" — a check drawn against Metrobank in theamount of P126,129.86, numbered 765380 and dated 4 April 1981. Thatcheck was a company check of another corporation, Steelweld Corporationof the Philippines, signed by its President, Peter Rafael Limson, and its

Vice-President, Artemio Torres. The check was issued by Limson at thebehest of his friend, Romeo Y. Lim, President of RYL. Romeo Lim hadasked Limson for financial assistance, and the latter had agreed to giveLim a check only by way of accommodation, "only as guaranty but not topay for anything." Why the check was made out in the amount ofP126,129.86 is not explained. The check was actually issued in saidamount of P126,129.86, and as already stated, was given by R.Y. Lim to

Armstrong, Industries, in payment of an obligation. When the latterdeposited the check at its bank, it was dishonored because "drawn againstinsufficient funds." When so deposited, the check bore two (2)indorsements, that of "RYL Construction," followed by that of "Armstrong

Industries." On account of the dishonor of Metrobank Check 76538on complaint of Armstrong Industries (through a Mr. Young), Limson and Artemio Torres were charged in the Regional Trial CoManila with a violation of Batas Pambansa Bilang 22. They were acqin a decision rendered on 28 June 1984 "on the ground that the chquestion was not issued by the drawer 'to apply on account for vabeing merely for accommodation purposes." That judgment hoconditioned the acquittal with the pronouncement that "this however to release Steelweld Corporation from its liability under Secthe Negotiable Instruments Law for having issued it foaccommodation of Romeo Lim." Eleven months later — and some 4after issuance of the check — in May, 1985, STELCO filed wiRegional Trial Court of Caloocan City a civil complaint against botand STEELWELD for the recovery of the value of the steel bars an

sold to and delivered to RYL in the amount of P126,129.86, pluinterest from 20 August 1980 and 25% of the total amount soughtrecovered as and by way of attorney's fees. A preliminary attachmeissued by the trial court on the basis of the averments of the combut was shortly dissolved upon the filing of a counter-boSTEELWELD. RYL could no longer be located and could not be servesummons. It never appeared. Only STEELWELD filed an answer, date of 16 July 1985. Judgment was rendered on 26 June 1986

judgment sentenced Steelweld to pay to Stelco the amouP126,129.86 with legal rate of interest from 9 May 1985, when thwas instituted until fully paid, plus another sum equivalent to 25% total amount due as and for attorney's fees. STELCO's motireconsideration was denied by the Appellate Tribunal's resolution daNovember 1990. STELCO appealed. ISSUE NO. 1 WON the condition, i.e. as to notice, for a holder in due course is applicableaccommodation party? HELD: "A holder in due course," says the lawholder who has taken the instrument under the following conditionThat it is complete and regular upon its face; (b) That he becamholder of it before it was overdue, and without notice that it hadpreviously dishonored, if such was the fact; (c) That he took it infaith and for value; (d) That at the time it was negotiated to him, hno notice of any infirmity in the instrument or defect in the title persons negotiating it." As regards an accommodation party (sSTEELWELD), the fourth condition, i.e., lack of notice of any infirthe instrument or defect in title of the persons negotiating it, happlication. This is because Section 29 of the law above quoted prethe right of recourse of a "holder for value" against the accommoparty notwithstanding that "such holder, at the time of takininstrument, knew him to be only an accommodation party." ISSUE WON STELCO ever became a holder in due course of Check 765bearer instrument within the contemplation of the Negotiable Instru

Law? HELD: NO. It never did. There is no evidence whateveSTELCO's possession of Check 765380 ever dated back to any time the instrument's presentment and dishonor. There is no evwhatsoever that the check was ever given to it, or indorsed to it manner or form in payment of an obligation or as security obligation, or for any other purpose before it was presented for payOn the contrary, STELCO never became a holder for value an"(n)owhere in the check itself does the name of Stelco Marketing aas payee, indorsee or depositor thereof." What the record shows i(1) the STEELWELD company check in question was given by its preto R.Y. Lim; (2) it was given only by way of accommodation, to beas collateral for another obligation;" (3) in breach of the agreehowever, R.Y. Lim indorsed the check to Armstrong in paymentobligation; (4) Armstrong deposited the check to its accountindorsing it; (5) the check was dishonored. The record does not shointervention or participation by STELCO in any manner or form what

in these transactions, or any communication of any sort beSTEELWELD and STELCO, or between either of them and ArmIndustries, at any time before the dishonor of the check. The recordshow that after the check had been deposited and dishonored, STcame into possession of it in some way, and was able, several yearthe dishonor of the check, to give it in evidence at the trial of the civit had instituted against the drawers of the check (Limson and TorreRYL. Possession of a negotiable instrument after presentmendishonor, or payment, is utterly inconsequential; it does not mapossessor a holder for value within the meaning of the law; it gives no liability on the part of the maker or drawer and indorsers. It is




from the relevant circumstances that STELCO cannot be deemed a holderof the check for value. It does not meet two of the essential requisitesprescribed by the statute. It did not become "the holder of it before it wasoverdue, and without notice that it had been previously dishonored," andit did not take the check "in good faith and for value." Neither is there anyevidence whatever that Armstrong Industries, to whom R.Y. Limnegotiated the check, accepted the instrument and attempted to encash itin behalf, and as agent of STELCO. On the contrary, the indications arethat Armstrong was really the intended payee of the check and was theparty actually injured by its dishonor; it was after all its representative (aMr. Young) who instituted the criminal prosecution of the drawers, Limsonand Torres, albeit unsuccessfully.

5. HOLDER FOR VALUE

ec. 25 Value, what constitutes (supra, p.15)

ec. 26 What constitutes holder for value (supra, p.15)

ec. 27 When lien on instrument constitutes holder for value(supra, p.15)

PRESUMPTION OF DUE COURSE HOLDING

ec. 53 When person not deemed holder in due course (p.16)

ec. 59 Who is deemed a holder in due course (p.16)

RIGHTS OF A HOLDER IN DUE COURSE – Sec. 57

c. 57. Rights of a holder in due course . A holder in due course (1) holds e instrument free from any defect of title of prior parties, and free

om defenses available to prior parties among themselves, and (2)ay enforce payment of the instrument for the full amount thereof againstparties liable thereon (emphasis supplied)

SALAS VS. CA (G.R. No. 76788 January 22, 1990) - Juanita Salas(Petitioner) bought a motor vehicle from the Violago Motor SalesCorporation (VMS) as evidenced by a promissory note. This note wassubsequently endorsed to Filinvest Finance & Leasing Corporation (privaterespondent) which financed the purchase. Petitioner defaulted in herinstallments allegedly due to a discrepancy in the engine and chassisnumbers of the vehicle delivered to her and those indicated in the salesinvoice, certificate of registration and deed of chattel mortgage, which factshe discovered when the vehicle figured in an accident. This failure to payprompted private respondent to initiate an action for a sum of moneyagainst petitioner before the Regional Trial Court. ISSUE: WON privaterespondent is a holder in due course? HELD: YES. The Promissory Note

was negotiated by indorsement in writing on the instrument itself payableto the Order of Filinvest Finance and Leasing Corporation and it is anindorsement of the entire instrument. Under the circumstances, thereappears to be no question that Filinvest is a holder in due course, havingtaken the instrument under the following conditions: [a] it is complete andregular upon its face; [b] it became the holder thereof before it wasoverdue, and without notice that it had previously been dishonored; [c] ittook the same in good faith and for value; and [d] when it was negotiatedto Filinvest, the latter had no notice of any infirmity in the instrument ordefect in the title of VMS Corporation. Accordingly, respondentcorporation holds the instrument free from any defect of title ofprior parties, and free from defenses available to prior partiesamong themselves, and may enforce payment of the instrumentfor the full amount thereof. This being so, petitioner cannot setup against respondent the defense of nullity of the contract ofsale between her and VMS.

STATE INVESTMENT HOUSE VS. CA (GR No. ; July 13, 1989) – NewSikatuna Wood Industries, Inc. requested for a loan from Chua. The latteragreed to grant the same subject to the condition that the former shouldwait until December 1980 when he would have the money. In view of thisagreement, private respondent Chua issued three (3) "crossed checks"payable to New Sikatuna Wood Industries, Inc. all postdated December22, 1980. Subsequently, New Sikatuna entered into an agreement withherein petitioner State Investment House, Inc. whereby New Sikatunaassigned and discounted with petitioner eleven (11) postdated checksincluding the aforementioned three (3) postdated checks issued by Chua.

The checks, however, were dishonored by reason of "insufficient f"stop payment" and "account closed", respectively. Petitioner claimdespite demands on Chua to make good said checks, the latter fapay the same necessitating the former to file an action for colleWhen the CA reversed the trial court ruling favoring State InvesHouse, the latter elevated the issue before the SC. ISSUE:petitioner is a holder in due course as to entitle it to proceed aprivate respondents Chua for the amount stated in the dishonored cHELD: The Intermediate Appellate Court (now Court of Appeals), coelucidated that the effects of crossing a check are: the check may encashed but only deposited in the bank; the check may be negonly once to one who has an account with a bank; and the act of crthe check serves as a warning to the holder that the check hasissued for a definite purpose so that he must inquire if he has receiv

check pursuant to that purpose, otherwise he is not a holder course. It results therefore that when State Investment rediscounted the check knowing that it was a crossed check hknowingly violating the avowed intention of crossing the Furthermore, his failure to inquire from the holder, party defendanSikatuna Wood Industries, Inc., the purpose for which the three were cross despite the warning of the crossing, prevents him fromconsidered in good faith and thus he is not a holder in due course. not a holder in due course, plaintiff is subject to pedefenses, such as lack of consideration between appellantNew Sikatuna Wood Industries. Note that under the facts the were postdated and issued only as a loan to New Sikatuna Industries, Inc. if and when deposits were made to back up the cSuch deposits were not made, hence no loan was made, hence, thechecks are without consideration (Sec. 28, Negotiable Instruments L

1.

When subject to original defense

Sec. 58. When subject to original defense. - In the hands of any other than a holder in due course, a negotiable instrument is subjthe same defenses as if it were non-negotiable. But a holder who dhis title through a holder in due course, and who is not himself a party fraud or illegality affecting the instrument, has all the rights of such holder in respect of all parties prior to the latter.

PRUDENCIO VS. CA (GR No.; July 14, 1986) – In 1955, ConcepciTamayo Construction Enterprise had a contract with the Bureau ofWorks. The firm needed fund to push through with the contracconvinced spouses Eulalio and Elisa Prudencio to mortgage their paland with the Philippine National Bank for P10,000.00. Prudencio, wconsideration, agreed and so he mortgaged the land and execu

promissory note for P10k in favor of PNB. Prudencio also authorizeto issue the P10k check to the construction firm. In December 195firm executed a Deed of Assignment in favor of PNB which provideany payment from the Bureau of Public Works in consideration odone (by the firm) so far shall be paid directly to PNB – this wensure that the loan gets to be paid off before maturity. Notwithstthe provision in the Deed of Assignment, the Bureau of Public asked PNB if it can make the payments instead to the firm becaufirm needs the money to buy construction materials to compleproject. Notwithstanding the provision of the Deed of Assignmenagreed. And so the loan matured without PNB actually receivinpayment from the Bureau of Public Works. Prudencio, upon learninno payment was made on the loan, petitioned to have the mocancelled (to save his property from foreclosure). The trial courtagainst Prudencio; the Court of Appeals affirmed the trial court. IWON Prudencio should pay the promissory note to PNB? HELD: N

is not a holder in due course. Prudencio is an accommodation partysigned the promissory note as maker but he did not receive vaconsideration therefor. He expected the firm (accommodated party)the loan – this obligation was shifted to the Bureau of Public Woway of the Deed of Assignment). As a general rule, an accommoparty is liable on the instrument to a holder for value/in due cnotwithstanding such holder at the time of taking the instrumenthim to be only an accommodation party. The exception is that holder, in this case PNB, is not a holder in due course. The courtthat PNB is not a holder in due course because it has not acgood faith when it waived the supposed payments from




Bureau of Public Works contrary to the Deed of Assignment. Hadthe Deed been followed, the loan would have been paid off atmaturity.

STELCO MARKETING CORPORATION VS. CA (supra, p. 18) - STELCOcame into possession of it in some way, and was able, several years afterthe dishonor of the check, to give it in evidence at the trial of the civil caseit had instituted against the drawers of the check (Limson and Torres) andRYL. Possession of a negotiable instrument after presentment anddishonor, or payment, is utterly inconsequential; it does not make thepossessor a holder for value within the meaning of the law; it gives rise tono liability on the part of the maker or drawer and indorsers. It is clearfrom the relevant circumstances that STELCO cannot be deemed a holderof the check for value. It does not meet two of the essential requisites

prescribed by the statute. It did not become "the holder of it before it wasoverdue, and without notice that it had been previously dishonored," andit did not take the check "in good faith and for value." Neither is there anyevidence whatever that Armstrong Industries, to whom R.Y. Limnegotiated the check, accepted the instrument and attempted to encash itin behalf, and as agent of STELCO. On the contrary, the indications arethat Armstrong was really the intended payee of the check and was theparty actually injured by its dishonor; it was after all its representative (aMr. Young) who instituted the criminal prosecution of the drawers, Limsonand Torres, albeit unsuccessfully.

RIGHTS OF HOLDER NOT IN DUE COURSE

ec. 51 Rights of holder to sue. (supra, p.15)

ec. 58 When subject to original defense (supra, p.19)

ACCOMMODATION PARTIES – Sec. 29.

ec. 29. Liability of accommodation party. - An accommodation party ise who has signed the instrument as maker, drawer, acceptor, or indorser,thout receiving value therefor, and for the purpose of lending his name tome other person. Such a person is liable on the instrument to a holder forlue, notwithstanding such holder, at the time of taking the instrument, knewm to be only an accommodation party

PAYEE AS HOLDER IN DUE COURSE

VICENTE DE OCAMPO VS. ANITA GATCHALIAN (supra, p.17) -Section 191 defines "holder" as the payee or indorsee of a bill or note,who is in possession of it, or the bearer thereof. Sec. 52 defines a holderin due course as "a holder who has taken the instrument under the

conditions enumerated therein. ” Since "holder", as defined in sec.191, includes a payee who is in possession the word holder in thefirst clause of sec. 52 and in the second subsection may bereplaced by the definition in sec. 191 so as to read "a holder indue course is a payee or indorsee who is in possession," etc.(Brannan's on Negotiable Instruments Law, 6th ed., p. 543).

EULALIO PRUDENCIO VS. CA (supra, p. 19) – Petitioners contend thatthe payee PNB is an immediate party and, therefore, is not a holder in duecourse and stands on no better footing than a mere assignee. In thosecases where a payee either acquired the note from another holder or hasnot directly dealt with the maker thereof. As was held in Bank ofCommerce and Savings vs. Randell: “We conclude, therefore, that a payeewho receives a negotiable promissory note, in good faith, for value, beforematurity, and without any notice of any infirmity, from a holder, not themaker, to whom it was negotiated as a completed instrument, is a holder

in due course within the purview of Negotiable Instruments Law, so as topreclude the defense of fraud and failure of consideration between themaker and the holder to whom the instrument was delivered.

SHELTER RULE

ec. 58. When subject to original defense. - In the hands of any holderher than a holder in due course, a negotiable instrument is subject to theme defenses as if it were non-negotiable. But a holder who derives hisle through a holder in due course, and who is not himself a party to

ny fraud or illegality affecting the instrument, has all the rights of

such former holder in respect of all parties prior to the latter.

If a Holder is not a holder in due course, he is subject to personal defenbetween prior parties. The only exception is an ordinary holder who derivtitle from a holder in due course, this is known in American case “Shelter Rule”.

Sec. 58: does not apply to a holder who repurchased the instrumentpersonally or through an agent.

CHARLES FOSSUM VS. FERNANDEZ HERMANOS (GR No. L-19Herein petitioner was the resident agent in Manila of the AmericaProducts Company, Inc. (AIPCI), engaged in business in New Yorwhile Fernandez Hermanos is a general commercial partnership en

in business in the Philippines. Fossum, acting as agent of AIPCI, proan order from respondent to deliver a tail shaft, to be installed on thRomulus . It was stipulated that the tail shaft would be in accordancthe specifications contained in a blueprint given to Fossum and thshaft should be shipped from New York in March or April 1920manufacture and shipment of the shaft was delayed considMeanwhile AIPCI had drawn a time draft for $2250, at 60 daysFernandez Hermanos, for the price of the shaft, and payable to PhiNational Bank (PNB). It was presented to Fernandez Hermanacceptance, and was accepted by the firm according to its Subsequently, the shaft was found not to be in conformity wispecifications and was incapable of use for its intended purposediscovering this, Fernandez Hermanos refused to pay the draft, remained for a time dishonored in PNB Manila. Later the bank indthe draft in blank, without consideration, and delivered it to Fossumthen instituted this action against Fernandez Hermanos. The triaheld that the consideration for the draft and for its acceptanFernandez Hermanos has completely failed and no action whatever maintained on the instrument by AIPCI, or by any other person awhom the defense of failure of consideration is available. ISSUEFossum is a holder in due course, such that an action can be mainon the instrument? HELD: NO. Fossum is far from being a holder course. He was himself a party to the contract which supplieconsideration for the draft, albeit acting in a representative capacityhe procured the instrument to be indorsed by the bank and delivehimself without the payment of value, after it was overdue, and wnotice that, as between the original parties, the consideratiocompletely failed. Under these circumstances, recovery on the draftof the question. He calls attention, however, to the familiar rule person who is not himself a holder in due course may yet recover athe person primarily liable where it appears that such holder deriv

title through a holder in due course. There is not a line of proof tendshow that the bank itself was ever a holder in due course. incumbent on Fossum to show that the bank was a holder in due cand can have no assistance from the presumption expressed in secNIL, to the effect that every holder is deemed prima facie to be a hodue course. This presumption arises only in favor of a person whholder in the sense defined in sec 191 of NIL, that is, a payee or inwho is in possession of the draft, or the bearer thereof. Undedefinition, in order to be a holder, one must be in possession of thor the bearer thereof. (Night & Day Bank vs. Rosenbaum) If this had been instituted by the bank itself, the presumption that the bana holder in due course would have arisen from the tenor of the drathe fact that it was in the bank's possession; but when the instrpassed out of the possession of the bank and into the possessFossum, no presumption arises as to the character in which the banthe paper. The bank's relation to the instrument became past

when it delivered the document to Fossum; and it was incumbenhim to show that the bank had in fact acquired the instrument forand under such conditions as would constitute it a holder in due cMoreover, Fossum personally made the contract which constitutconsideration for the draft. He was therefore a party in fact, if not to the transaction giving origin to the instrument; and it is difficult how he could strip himself of the character to agent with respect origin of the contract and maintain this action in his own name wheprincipal could not. An agent who actually makes a contract, and wnotice of all equities emanating therefrom, can stand on no better fthan his principal with respect to commercial paper growing out




transaction. To place him on any higher plane would be incompatible withthe fundamental conception underlying the relation of principal and agent.If the original payee of a note unenforceable for lack ofconsideration repurchases the instrument after transferring it toa holder in due course, the paper again becomes subject in thepayee's hands to the same defenses to which it would have beensubject if the paper had never passed through the hands of aholder in due course. The same is true where the instrument isretransferred to an agent of the payee.

RIGHTS OF HOLDER IN BILLS IN SET

ills in Set involve one bill although drawn in set. The problem arises whenfferent parts of the set are negotiated to separate persons who are holders in

e course.

ec. 178 Bills in set constitute one bill. - Where a bill is drawn in a set,each part of the set being numbered and containing a referenceto the other parts, the whole of the parts constitutes onebill.

ec. 179 Right of holders where different parts are negotiated. -Where two or more parts of a set are negotiated to differentholders in due course, the holder whose title first accrues is,as between such holders, the true owner of the bill. Butnothing in this section affects the right of a person who, in duecourse, accepts or pays the parts first presented to him.

ec. 180 Liability of holder who indorses two or more parts of a setto different persons.- Where the holder of a set indorses two ormore parts to different persons he is liable on every such part,and every indorser subsequent to him is liable on the part he hashimself indorsed, as if such parts were separate bills.

ec. 181 Acceptance of bill drawn in sets. - The acceptance may bewritten on any part and it must be written on one part only. If thedrawee accepts more than one part and such accepted partsnegotiated to different holders in due course, he is liable on everysuch part as if it were a separate bill.

PARTIES WHO ARE LIABLEPRIMARY AND SECONDARY LIABLE DISTINGUISHED

ctive Subject in the negotiable instrument is the holder . He is given theht to demand the performance of the obligation reflected in the negotiable

strument, that is, the obligation to pay a sum certain in money.

assive Subject is the one against whom the holder can enforce the right

esented by the instrument who may be primary or secondarily liable (Sec.2).

c. 61 Liability of drawer. - The drawer by drawing the instrumentadmits the existence of the payee and his then capacity toindorse; and engages that, on due presentment, the instrumentwill be accepted or paid, or both, according to its tenor, and thatif it be dishonored and the necessary proceedings ondishonor be duly taken, he will pay the amount thereof tothe holder or to any subsequent indorser who may becompelled to pay it. But the drawer may insert in theinstrument an express stipulation negativing or limiting his ownliability to the holder

c. 65 Warranty where negotiation by delivery and so forth(supra, p. 13)

c. 66 Liability of general indorser. – see d. Indorsers, General

Indorserc. 192 Persons primarily liable on instrument. - The person

"primarily" liable on an instrument is the person who, by theterms of the instrument, is absolutely required to pay the same.

All other parties are "secondarily" liable.

imary and Secondary Liability, in general:

Instrument Primary Secondary

Promissory Note Maker General Indorsers

Bill of Exchange Acceptor Drawer and Indorsers

B. PAYMENT BY PARTY SECONDARY LIABLE

Sec. 121 Right of party who discharges instrument. - Wheinstrument is paid by a party secondarily liable thereon, itdischarged; but the party so paying it is remitted to his rights as regard all prior parties, and he may strike out hand all subsequent indorsements and again negotiatinstrument, except:

(a) Where it is payable to the order of a third person and hapaid by the drawer; and(b) Where it was made or accepted for accommodation anbeen paid by the party accommodated.

Sec. 68 Order in which indorsers are liable. – see liability of indSec. 70 Effect of want of demand on principal debtor. - Presen

for payment is not necessary in order to charge the pprimarily liable on the instrument; but if the instrument is,terms, payable at a special place, and he is able and willing it there at maturity, such ability and willingness are equivaletender of payment upon his part. But except as herein othprovided, presentment for payment is necessary in order to the drawer and indorsers

Sec. 89 To whom notice of dishonor must be given. - Excherein otherwise provided, when a negotiable instrument hadishonored by non-acceptance or non-payment, notice of dimust be given to the drawer and to each indorser, and any dor indorser to whom such notice is not given is discharged

Sec. 118 When protest need not be made; when must be m

Where any negotiable instrument has been dishonored, it mprotested for non-acceptance or non-payment, as the casbe; but protest is not required except in the case of foreign exchange.

Sec. 119 Instrument; how discharged. - A negotiable instrumdischarged:(a) By payment in due course by or on behalf of the prdebtor;(b) By payment in due course by the party accommodated, the instrument is made or accepted for his accommodation;(c) By the intentional cancellation thereof by the h(d) By any other act which will discharge a simple contract payment of money;(e) When the principal debtor becomes the holder oinstrument at or after maturity in his own right.

Sec. 120 When persons secondarily liable on the instrumen

discharged. - A person secondarily liable on the instrumdischarged:(a) By any act which discharges the instrument;(b) By the intentional cancellation of his signature by the ho(c) By the discharge of a prior party;(d) By a valid tender or payment made by a prior party;(e) By a release of the principal debtor unless the holder's rrecourse against the party secondarily liable is expressly rese(f) By any agreement binding upon the holder to extend thof payment or to postpone the holder's right to enforcinstrument unless made with the assent of the party secoliable or unless the right of recourse against such paexpressly reserved.

Sec. 184 Promissory note, defined. - A negotiable promissorywithin the meaning of this Act is an unconditional promwriting made by one person to another, signed by the m

engaging to pay on demand, or at a fixed or determinable time, a sum certain in money to order or to bearer. Where is drawn to the maker's own order, it is not completeindorsed by him,

Sec. 151 Rights of holder where bill not accepted. - When adishonored by nonacceptance, an immediate right of reagainst the drawer and indorsers accrues to the holder apresentment for payment is necessary




LIABILITY DISTINGUISHED FROM WARRANTIES

e primary and secondary liability makes the parties liable to pay the sumrtain in money stated in the instrument. While warranties are affirmationsfact on the part of the parties that impose no direct obligation to pay in thesence of breach thereof.

case of breach of warranties, the person who breached the same may (1)her be liable; or (2) he may be barred from asserting a particular defense.

nlike secondary liability which requires a notice of dishonor, an action basedbreach of warranty is not so conditioned, the latter occurring as it does at

e time of the transfer, may be brought at any time.

LIABILITY AND/OR WARRANTIES OF PARTIESMaker – primary and unconditional

ec. 60. Liability of maker. - The maker of a negotiable instrument, byaking it, engages that he will pay it according to its tenor, and admits theistence of the payee and his then capacity to indorse

Drawer – secondary liability. But the drawer may insert in the instrumentan express stipulation negativing or limiting is own liability to the holder(see Sec. 61, p.21)

Relationship with Drawee – there is a contractual relation between thedrawer and the drawee. Thus, a drawer may have drawn the bill againstthe drawee because the latter is holding an amount in trust for thedrawer, or the drawee may have extended credit to the drawer andagreed to honor any bill drawn by the drawer against said drawee.

Relationship with Collecting Bank – the privity of contract is betweenthe holder-depositor and the collecting bank. There is no privity ofcontract between the drawer and the collecting bank.

JAI ALAI CORP OF THE PHILS. VS. BPI (GR No. L-29432; Aug. 6,1975) – Petitioner deposited 10 checks in its current account with BPIwhich were acquired from Antonio Ramirez, a regular jai-alai bettor and asales agent of the Inter-Island Gas. All the checks were payable to Inter-Island Gas Service, Inc. or order. After the checks had been submitted toInter-bank clearing, Inter-Island Gas discovered that all the indorsementsmade on the checks purportedly by its cashiers were forgeries. Thedrawers of the checks demanded reimbursement from the drawee-banks,who in turn demanded from BPI. BPI thus debited the value of the checksagainst petitioner's current account and forwarded to the latter the checks

containing the forged indorsements which petitioner refused to accept.ISSUE: WON BPI had the right to debit from petitioner's current accountthe value of the checks with the forged indorsements? HELD: Yes. BPIacted within legal bounds when it debited the petitioner's account. Whenthe petitioner deposited the checks with the respondent, thenature of the relationship created at that stage was one ofagency, that is, the bank was to collect from the drawees of thechecks the corresponding proceeds. It is true that the respondenthad already collected the proceeds of the checks when it debited thepetitioner's account, so that following the rule in Gullas vs. PhilippineNational Bank 2 it might be argued that the relationship between theparties had become that of creditor and debtor as to preclude therespondent from using the petitioner's funds to make payments notauthorized by the latter. It is our view nonetheless that no creditor-debtorrelationship was created between the parties. Since the indorsementswere forgeries, they are inoperative, the payment made by the drawee

banks therefore is inoperative and relationship of a creditor and debtorwas not created. Having indorsed the checks to respondent bank,petitioner is deemed to have given the warranty prescribed in Section 66of the NIL that every single one of those checks "is genuine and in allrespects what it purports to be." BPI, being the collecting bank is liable tothe drawee banks when it submitted the checks for clearing. Thepetitioner was, moreover, grossly recreant in accepting the checks inquestion from Ramirez. It could not have escaped the attention of thepetitioner that the payee of all the checks was a corporation — the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mereindividual who was admittedly a habitue at its jai-alai games without

making any inquiry as to his authority to exchange checks belongthe payee-corporation. In Insular Drug Co. vs. National, the Courtthe pronouncement that: ". . . The right of an agent to indorse commpaper is a very responsible power and will not be lightly infersalesman with authority to collect money belonging to his principanot have the implied authority to indorse checks received in paymenperson taking checks made payable to a corporation, which can aby agents, does so at his peril, and must abide by the consequenceagent who indorses the same is without authority." Respondent relied upon the petitioner's warranty should not be held liable fresulting loss. The depositor of a check as indorser warrants thagenuine and in all respects what it purports to be. Having indorschecks to respondent bank, petitioner is deemed to have givwarranty prescribed in Section 66 of the NIL that every single one o

checks "is genuine and in all respects what it purports to be."

c. Acceptor – it is only from the moment the drawee accepts the certifies the check that the drawee becomes primarily liable. (se127). He becomes liable to the holder by his unconditional acce(Westminster Bank vs. Torres & K. Nassor, Inc., GR No. L-38139; O1932)

Sec. 62 Liability of acceptor. - The acceptor, by acceptininstrument, engages that he will pay it according to theof his acceptance and admits:(a) The existence of the drawer, the genuineness of his signand his capacity and authority to draw the instrument; and(b) The existence of the payee and his then capacity to indo

Sec. 127 Bill not an assignment of funds in hands of drawee. of itself does not operate as an assignment of the funds hands of the drawee available for the payment thereof, adrawee is not liable on the bill unless and until he accepsame.

Sec. 143 When presentment for acceptance must be maPresentment for acceptance must be made:(a) Where the bill is payable after sight, or in any otherwhere presentment for acceptance is necessary in order to maturity of the instrument; or(b) Where the bill expressly stipulates that it shall be prefor acceptance; or(c) Where the bill is drawn payable elsewhere than residence or place of business of the drawee.

In no other case is presentment for acceptance necessary into render any party to the bill liable.

Sec. 164 Liability of the acceptor for honor. - The acceptor for hliable to the holder and to all parties to the bill subsequent party for whose honor he has accepted.

Sec. 165 Agreement of acceptor for honor. - The acceptor for by such acceptance, engages that he will, on due presenpay the bill according to the terms of his acceptance provshall not have been paid by the drawee and provided also shall have been duly presented for payment and protestnon-payment and notice of dishonor given to him.

Sec. 189 When check operates as an assignment. - A check odoes not operate as an assignment of any part of the fundscredit of the drawer with the bank, and the bank is not liathe holder unless and until it accepts or certifies the check.

PNB vs. BARTOLOME PICORNELL (GR No. L-18751/L-September 26, 1922) - Bartolome Picornell executed a bill of exc

ordering Hyndman, Tavera & Ventura (HTV) to pay PNB for the aused to purchase bales of tobacco and Picornell’s commission. HTon accepted the bill, and re-accepted it after the requested exteHowever, the bill was not paid upon maturity, HTV arguing that the of the bales of tobacco fell short of what was expected. ISSUE: WOis still liable on the instrument considering that the bales of todelivered were of poor quality? HELD: Yes. The question of whetnot the tobacco was worth the value of the bill, does not conceplaintiff bank. Such partial want of consideration, if it was, does nowith respect to the bank which paid to Picornell the full value of saidexchange. The bank was a holder in due course, and was such for




and complete. The HTV company cannot escape liability in view of Sec. 28of the Negotiable Instruments Law.

The drawee by acceptance becomes liable to the payee or hisindorsee, and also to the drawer himself. But the drawer andacceptor are the immediate parties to the consideration, and if theacceptance be without consideration, the drawer cannot recover ofthe acceptor. The payee holds a different relation; he is a stranger tothe transaction between the drawer and the acceptor, and is,therefore, in a legal sense a remote party. In a suit by him againstthe acceptor, the question as to the consideration between thedrawer and the acceptor cannot be inquired into. The payee orholder gives value to the drawer, and if he is ignorant of the equitiesbetween the drawer and the acceptor, he is in the position on a bona

fide indorsee. Hence, it is no defense to a suit against the acceptor ofa draft which has been discounted, and upon which money has beenadvance by the plaintiff, that the draft was accepted or theaccommodation of the drawer. . . . (3 R. C. L., pp. 1143, 1144, par,358.)

Payment Without Acceptance

PNB VS. CA (GR No. L-26001; Oct. 29, 1968) – Agusto Lim depositedGSIS check no. 645915-B with respondent bank Philippine Commercial andIndustrial Bank, who in turn submitted said check to PNB, through CentralBank, for clearing which the latter paid. Upon demand of GSIS that thesignatures of its officers on the check were forged, PNB re-credited theaccount of GSIS. PNB requested reimbursement from PCIB, the latterrefused. Hence, the present action. ISSUE: WON prior acceptance beforepayment is required in the case of checks? HELD: No. In general,"acceptance", in the sense in which this term is used in the NegotiableInstruments Law is not required for checks, for the same are payable ondemand. Indeed, "acceptance" and "payment" are, within the purview ofsaid Law, essentially different things, for the former is "a promise toperform an act," whereas the latter is the "actual performance " thereof.In the words of the Law, "the acceptance of a bill is the signification bythe drawee of his assent to the order of the drawer," which, in the case ofchecks, is the payment, on demand, of a given sum of money. Upon theother hand, actual payment of the amount of a check implies not only anassent to said order of the drawer and a recognition of the drawer'sobligation to pay the aforementioned sum, but, also, a compliance withsuch obligation. Sec. 62 of the NIL is applicable to a drawee whopays a bill without having previously accepted it.

Indorsers

ec. 63 When a person deemed indorser. supra, p.12

ec. 68 Order in which indorsers are liable. - As respect one another,indorsers are liable prima facie in the order in which theyindorse ; but evidence is admissible to show that, as between oramong themselves, they have agreed otherwise. Joint payees or

joint indorsees who indorse are deemed to indorse jointly andseverally.

General Indorser

ec. 66 Liability of general indorser. - Every indorser who indorses withoutalification, warrants to all subsequent holders in due course:

) The matters and things mentioned in subdivisions (a), (b), and (c) of thext preceding section (sec. 65 – warranties of a person negotiating by delivery

by qualified indorsement); and) That the instrument is, at the time of his indorsement, valid and subsisting;

nd, in addition, he engages that, on due presentment, it shall be accepted orid, or both, as the case may be, according to its tenor, and that if it beshonored and the necessary proceedings on dishonor be duly taken, he willy the amount thereof to the holder, or to any subsequent indorser who maycompelled to pay it.

ANG TIONG vs. LORENZO TING (G.R. No. L-26767, February 22, 1968)- Lorenzo Ting issued a check payable to “cash or bearer.” With Felipe

Ang’s signature (indorsement in blank) at the back thereof, the instrwas received by Ang Tiong who thereafter presented it to the bapayment. The drawee bank dishonored it. Ang Tiong made wdemands on both Ting and Ang to make good the amount representhe check. These demands unheeded, Ang Tiong then filed a scollection. The trial court adjudged for herein petitioner. Only Felipappealed, maintaining that he is only an accommodation party. IWON Felipe Ang is an accommodation party? What is the liabilityaccommodation indorser? HELD: NO. Felipe Ang is a general in(Section 63, NIL), in the absence of any indication by appropriatehis intention to be bound in some other capacity. Even on the assuthat Ang is a mere accommodation party as he professes to benevertheless by the clear mandate of section 29 of the NegInstruments Law. That the appellant, again assuming him to

accommodation indorser, may obtain security from the maker to phimself against the danger of insolvency of the latter, cannot manner affect his liability to the appellee, as the said remedy is a of concern exclusively between accommodation indorseraccommodated party. So that the fact that the appellant stands onsurety in relation to the maker, granting this to be true for the sargument, is immaterial to the claim of the appellee, and does not diminish nor defeat the rights of the latter who is a holder for valuliability of the appellant remains primary and unconditional. To sathe appellant's theory is to give unwarranted legal recognition patent absurdity of a situation where an indorser, when sued instrument by a holder in due course and for value, can escape liabhis indorsement by the convenient expedient of interposing the dthat he is a mere accommodation indorser.

PEOPLE VS. MANIEGO (G.R. No. L-30910 February 27, 1987) - AJulia T. Maniego was indicted, together with Rizalino Ubay and MPamintuan, for Malversation, by drawing checks. Maniego was acquthe absence of evidence against her but ordered to pay jointseverally the amount of P57,434.50 to the government. Maniego reconsideration of the judgment, praying that she be absolved froliability or, at the very least, that her liability be reduced. The declined to negate her civil liability, but did reduce the amounappealed. ISSUE: WON Maniego could properly be held civilly liablher acquittal? HELD: Yes. Appellant's contention that as mere indshe may not be made liable on account of the dishonor of the cindorsed by her, is untenable. Under the law, the holder oindorsee of a negotiable instrument has the right to "enpayment of the instrument for the full amount thereof agaiparties liable thereon." Among the "parties liable thereon"indorser of the instrument i.e., "a person placing his signature u

instrument otherwise than as maker, drawer, or acceptor ** unleclearly indicates by appropriate words his intention to be bound inother capacity.” Such an indorser "who indorses without qualificinter alia "engages that on due presentment, ** (the instrument) saccepted or paid, or both, as the case may be, according to its tenothat if it be dishonored, and the necessary proceedings on dishoduly taken, he will pay the amount thereof to the holder, or tsubsequent indorser who may be compelled to pay it."

Qualified Indorser

Sec. 65. Warranty where negotiation by delivery and so forthEvery person negotiating an instrument by delivery or by a qualiindorsement warrants:

(a) That the instrument is genuine and in all respects what it purport

be;(b) That he has a good title to it;(c) That all prior parties had capacity to contract;(d) That he has no knowledge of any fact which would impair the valof the instrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends in fof no holder other than the immediate transferee.

The provisions of subdivision (c) of this section do not apply to a penegotiating public or corporation securities other than bills and notes.




While a general indorser warrants that the instrument is valid andsubsisting at the time of his indorsement, the qualified indorser warrantsthat he has no knowledge of any fact which would impair the validity ofthe instrument or render it valueless, and the qualified indorser does notbreach his warranty even if the instrument was already impaired at thetime he negotiated it, as long as he has no knowledge of such fact.

A qualified indorser neither warrants payment nor binds himself to pay,nevertheless, if judgment for the amount of the note is defeated by themaker on the ground that the indorser, as payee, obtained it by fraud orwithout consideration, the holder may recover from the qualified indorserthe consideration paid by him with interest (Cressler vs. Brown).

Order of Liability – see Sec. 68 under d. Indorsers

PEOPLE VS. MANIEGO (supra) - Such an indorser "who indorseswithout qualification," inter alia "engages that on due presentment, **(the instrument) shall be accepted or paid, or both, as the case may be,according to its tenor, and that if it be dishonored, and the necessaryproceedings on dishonor be duly taken, he will pay the amount thereof tothe holder, or to any subsequent indorser who may be compelled to payit."

Persons Negotiating by Delivery – see Warranties of a PersonNegotiating by mere delivery under Sec. 65 under Qualified Indorsement – p.13. or Qualified Indorser from the preceding section.

Warranties of a person negotiating by delivery are similar to a qualifiedindorser, except that the former’s warranties extend only in favor of hisimmediate transferee.

Other Cases

Irregular Indorser – is a person, not otherwise a party to aninstrument, who placed thereon his signature in blank before delivery or aperson who indorses the instrument in an unusual, singular or peculiarmanner. If an instrument payable to A, but at the back has B as the firstindorser, B is an irregular indorser.

Sec. 64. Liability of irregular indorser . - Where a person, not otherwise aparty to an instrument, places thereon his signature in blank before delivery,he is liable as indorser, in accordance with the following rules:

a) If the instrument is payable to the order of a third person, he is liable to

he payee and to all subsequent parties.b) If the instrument is payable to the order of the maker or drawer, or ispayable to bearer, he is liable to all parties subsequent to the maker ordrawer.c) If he signs for the accommodation of the payee, he is liable to all partiesubsequent to the payee.

Indorser of Bearer Instrument – Sec. 40, 65 and 67

Sec. 40 Indorsement of instrument payable to bearer. – supraunder How Negotiation Takes Place, p. 10

Sec. 65 Sec. 65. Warranty where negotiation by delivery and soforth. – see under Qualified Indorser from previous section

Sec. 67 Liability of indorser where paper negotiable by delivery. — Where a person places his indorsement on an instrumentnegotiable by delivery, he incurs all the liability of an indorser.

Conditions precedent to make unqualified indorser liable

Accommodation Party – Sec. 29, p. 20.

The accommodation party lends his name to the accommodated party, toenable the latter to obtain credit or to raise money. He receives no part ofthe consideration for the instrument but assumes liability to the otherparties thereto. He is liable to a holder for value as if the contract was notfor accommodation. It is not a valid defense that the accommodationparty did not receive any valuable consideration. Nor is it correct to say

that the holder for value is not a holder in due course merely becathe time he acquired the instrument, he knew that the indorser waan accommodation party.

Corporations – the rule on the liability of an accommodation partnot apply to corporations.

ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sep1989) - The Vice-president of Mover Enterprises, Inc. issued a drawn against Traders Royal Bank, payable to petitioner ErnCrisologo-Jose, for the accommodation of his client. Petitioner-payecharged with the knowledge that the check was issued at the instanfor the personal account of the President who merely prevailedrespondent vice-president to act as co-signatory in accordance w

arrangement of the corporation with its depository bank. While it wcorporation's check which was issued to petitioner for the ainvolved, petitioner actually had no transaction directly withcorporation. ISSUE: WON private respondent, one of the signatothe check issued under the account of Mover Enterprises, Inc.,accommodation party under NIL and a debtor of petitioner to the of the amount of said check. HELD: Yes. To be consideraccommodation party, a person must (1) be a party to the instrusigning as maker, drawer, acceptor, or indorser, (2) not receivetherefor, and (3) sign for the purpose of lending his name for the crsome other person. It is not a valid defense that the accommodatiodid not receive any valuable consideration when he executeinstrument. He is liable to a holder for value as if the contract was accommodation, in whatever capacity such accommodation party the instrument, whether primarily or secondarily. Thus, it has beethat in lending his name to the accommodated party, the accommoparty is in effect a surety for the latter. The foregoing notwithstathe liability of an accommodation party to a holder for value, altsuch holder does not include nor apply to corporations whicaccommodation parties. This is because the issue or indorsemnegotiable paper by a corporation without consideration athe accommodation of another is ultra vires. One who has takinstrument with knowledge of the accommodation nature thereof recover against a corporation where it is only an accommodation paway of exception, an officer or agent of a corporation shall havpower to execute or indorse a negotiable paper in the name corporation for the accommodation of a third person only if specauthorized to do so. Corollarily, corporate officers, such as the preand vice-president, have no power to execute for mere accommodanegotiable instrument of the corporation for their individual detransactions arising from or in relation to matters in which the corpo

has no legitimate concern. Since such accommodation paper cannobe enforced against the corporation, especially since it is not invoany aspect of the corporate business or operations, the signatories t(president and vice-president) shall be personally liable therefor, aas the consequences arising from their acts in connection therewith.

RN CLARK VS. GEORGE SELLNER (GR No. 16477; Nov. 22, 1Herein defendant, together with two other persons, signed a note inof the plaintiff which stipulates that six months after date of the samformer shall pay the latter the sum of P12,000 with interest at rate oper annum from date until paid, payable quarterly. The note matureits amount was not paid. Counsel for the defendant allege that thedid not receive in that transaction either the whole or any part amount of the debt; that the instrument was not presented defendant for payment; and that the defendant, being an accommoparty, is not liable unless the note is negotiated, which was not do

shown by the evidence. ISSUE: WON defendant is liable givedefenses raised by him? HELD: The liability of the defendant, as the signers of the note, is not dependent on whether he has, or hareceived any part of the amount of the debt. The defendant is reaexpressly one of the joint and several debtors on the note, and as sis liable under the provisions of Sec. 70 of NIL. As provided in Secthe said law, as to presentment for payment, such action is not necin order to charge the person primarily liable, as is the defendant. Ato whether or not the defendant is an accommodation party, it shotaken into account that by putting his signature to the note, he lename, not to the creditor, but to those who signed with him p




himself with respect to the creditor in the same position and with thesame liability as the said signers. It should be noted that the phrase"without receiving value therefor," as used in section 29 of theaforesaid Act, means "without receiving value by virtue of theinstrument" and not, as it apparently is supposed to mean,"without receiving payment for lending his name." If, as in theinstant case, a sum of money was received by virtue of the note, it isimmaterial, so far as the creditor is concerned, whether one of the singershas, or has not, received anything in payment of the use of his name. Inreality the legal situation of the defendant in this case may properly beregarded as that of a joint surety rather than that of an accommodationparty. The defendant, as a joint surety, may, upon the maturity of thenote, pay the debt, demand the collateral security and dispose of it to hisbenefit; but there is no proof whatever that this was done. As to the

plaintiff, he is the "holder for value," under the phrase of said section 29,for he had paid the money to the signers at the time the note wasexecuted and delivered to him.

FERNANDO MAULINI VS. ANTONIO SERRANO (GR No. 8844; Dec.16, 1914) – The promissory note reads:

3,000. Due 5th of September, 1912.

We jointly and severally agree to pay to the order of Don Antonio G. Serrano on orbefore the 5th day of September, 1912, the sum of three thousand pesos (P3,000)for value received for commercial operations. Notice and protest renounced. If the

sum herein mentioned is not completely paid on the 5th day of September, 1912,this instrument will draw interest at the rate of 1½ per cent per month from the date

when due until the date of its complete payment. The makers hereof agree to paythe additional sum of P500 as attorney's fees in case of failure to pay the note.

Manila, June 5, 1912.

(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For JosePadern, by F. Moreno. Angel Gimenez.

The note was indorsed on the back as follows:

Pay note to the order of Don Fernando Maulini, value received. Manila, June 5, 1912.(Sgd.) A.G. Serrano.

Maulini's business as a broker consisted in looking up and ascertainingpersons who had money to loan as well as those who desired to borrowmoney and, acting as a mediary, negotiate a loan between the two.

According to the method usually followed, the broker delivered the moneypersonally to the borrower, took note in his own name and immediatelytransferred it by indorsement to the lender. At the special request of the

indorsee and simply as a favor to him, the latter stating to the broker thathe did not wish his name to appear on the books of the borrowingcompany as a lender of money and that he desired that the broker takethe note in his own name, immediately transferred to him title thereto byindorsement. The trial court held that it was immaterial whether there wasa consideration for the transfer or not, as the indorser, under the evidenceoffered, was an accommodation indorser. ISSUE: WON Serrano was anaccommodation indorser? HELD: No. There was never a moment thatSerrano was the real owner of the note. It was always the note of theindorsee, Maulini, he having furnished the money which was theconsideration or the note directly to the maker and being the only personwho had the slightest interest therein. Serrano, the broker, acting solelyas an agent, a vehicle by which the naked title to the note passed fromthe borrower to the lender. The only payment the broker received was forhis services in negotiating the loan. He was paid absolutely nothing forbecoming responsible as an indorser to the paper, nor did the indorseelose, pay or forego anything, or alter his position thereby. He is also notan accommodation party under Sec. 29. The accommodation to whichreference is made in Sec. 29, is not one to the person who takes the note

– that is, the payee or indorsee, but one to the maker or indorser of thenote. An accommodation note is one to which the accommodation partyhas put his name, without consideration, for the purpose ofaccommodating some other party who is to use it and is expected to payit. Where, however, an indorsement is made as a favor to theindorsee, who requests it, not the better to secure payment, butto relieve himself from a distasteful situation, and where the only

consideration for such indorsement passes from the indorthe indorsee, the situation does not present one creatinaccommodation indorsement, nor one where there is a considesufficient to sustain an action on the indorsement.

PNB VS. MAZA (GR No. 24224; Nov. 3, 1925) - PNB is suing Maza and Francisco Mecenas on five promissory notes of P10,000two of which is due 3 months after date, the three were due 4 mafter date. The notes were not taken up by Maza and Mecenmaturity. The special defines interposed by the defendants was thpromissory notes were sent in blank to them by Enrique Echaus wrequest that they sign them so that Echaus might negotiate them wPNB in case of need; that the defendants have not negotiated thwith the bank nor have they received the value thereof, or delivered

to the bank in payment of any pre-existing debt; and that it was Ewho negotiated the note with the bank and who is accordingly thparty in interest and the party liable for the payment of the Defendants move for the inclusion of Echaus as defending party,was denied. The court rendered a judgment in favor of PNB. ISSUERamon Maza and Francisco Mecenas are liable even if classifaccommodation parties? HELD: Yes. The most plausible and reasstand for the defendants is that they are accommodation parties. accommodation parties, the defendants having signed the instrwithout receiving value therefor and for the purpose of lendingnames to some other person, are still liable on the instruments. Tnow is that the accommodation party can claim no benefit as such, is liable according to the face of his undertaking, the same as if hhimself financially interested in the transaction. To fasten liability uaccommodation maker, it is not necessary that any consideration move to him. The consideration which supports the promise accommodation maker is that parted with by the person taking thand received by the person accommodated. The accommodation may make payment to the holder of the notes and have the right the party accommodated for reimbursement, since the relation bethem is in effect that of principal and sureties.

TOWN SAVINGS & LOAN BANK VS. CA (GR No. 106011; Ju1993) - Spouses Hipolito applied for and was granted a loan by thewhich was secured by a promissory note. For failure to pay their mpayments, they were declared in default. The spouses denied haviliability. They stated that the real party-in-interest is the sister husband, Pilarita Reyes. The spouses, not having received part loan, were mere guarantors of Reyes. As such, they protested abeing dragged into the litigation. The trial court held that they wereas accommodation parties to the promissory note. This was revers

the Court of Appeals. ISSUE: WON Respondent spouses are liable promissory note which they executed in favor of the petitioner? Yes. In lending his name to the accommodated party, the accommoparty is in effect a surety for the latter. He lends his name to enabaccommodated party to obtain credit or to raise money. He receipart of the consideration for the instrument but assumes liability other parties thereto because he wants to accommodate another. case at bar, it is indisputable that the spouses signed the promissorto enable Reyes to secure a loan from the bank. She was the beneficiary of the loan and the spouses accommodated her by signnote. Unlike in the Maulini case, there was no agreement here, wriverbal, that in signing the promissory note, the spouses were actagents for the money lender, the Bank. The consideration of thesigned by the Hipolitos was received by them through Pilarita. Theyas agents of Pilarita, not the Bank. They signed the promissory notfavor to Pilarita, to help her raise the funds that she needed. I

Pilarita whom they accommodated, not the bank, contrary terroneous finding of the appellate court.

Liability of Agent or Broker

Sec. 69 Liability of an agent or broker. - Where a broker oragent negotiates an instrument without indorsement, he incthe liabilities prescribed by Section Sixty-five of this Act, undiscloses the name of his principal and the fact that he is only as agent

Sec. 19 Signature by agent; authority; how shown. - The sig




of any party may be made by a duly authorized agent. Noparticular form of appointment is necessary for this purpose; andthe authority of the agent may be established as in other cases ofagency

Sec. 20 Liability of person signing as agent, and so forth. - Wherethe instrument contains or a person adds to his signature wordsindicating that he signs for or on behalf of a principal or in arepresentative capacity, he is not liable on the instrument if hewas duly authorized; but the mere addition of words describinghim as an agent, or as filling a representative character, withoutdisclosing his principal, does not exempt him from personal liability

Sec. 21 Signature by procuration; effect of. - A signature by" procuration" operates as notice that the agent has but a limitedauthority to sign, and the principal is bound only in case the agentin so signing acted within the actual limits of his authority

PBCOM VS. ARUEGO (supra, p.4) - Sec. 20 provides that “a person(who) adds to his signature words indicating that he signs for or on behalfof a principal or in a representative capacity, he is not liable on theinstrument if he was duly authorized; but the mere addition of wordsdescribing him as an agent, or as filling a representative character,without disclosing his principal, does not exempt him from personalliability. An inspection of the drafts accepted by the defendant shows thatnowhere has he disclosed that he was signing as representative of thePhilippine Education Foundation Company. He merely signed as follows:

“JOSE ARUEGO (Acceptor) (SGD) JOSE ARUEGO”. For failure to disclosehis principal, Aruego is personally liable for the drafts he accepted.

Signature by Procuration – Sec. 21, supra, p. 12 .

Person who should sign

A person must sign the negotiable instrument before he can be madeliable under the same instrument. For example, a maker must sign as suchmaker before he can be made primarily liable.

Sec. 18. Liability of person signing in trade or assumed name. - Noperson is liable on the instrument whose signature does not appear thereon,except as herein otherwise expressly provided. But one who signs in a tradeor assumed name will be liable to the same extent as if he had signed in hisown name

By way of EXCEPTION, the following persons who did not sign in theirown names, or persons whose signatures do appear in the instrumentitself, are still liable:

1. One who signs in a trade or assumed name (Sec. 18);2. One who signs through an agent or authorized representative (Sec.

19);3. Incapacitated persons who sign through their legal guardians;4. Forgers of signatures (Sec. 23);5. Persons whose signatures were forged but who are precluded from

setting up the defense of forgery (Sec. 23);6. In case of constructive acceptance

Sec. 137. Liability of drawee returning or destroying bill. - Where adrawee to whom a bill is delivered for acceptance destroys the same, orrefuses within twenty-four hours after such delivery or within such otherperiod as the holder may allow, to return the bill accepted or non-acceptedto the holder, he will be deemed to have accepted the same.

7.

Indorsers who sign on a separate piece of paper known as allonge(see p. 12);

8. Persons who negotiate by mere delivery. They are liable for breach ofwarranty although they did not sign. (Sec. 65)

I. DEFENSES

REAL AND PERSONAL DEFENSE DISTINGUISHED

eal Defenses may be raised against all holders even against a holder in dueurse and attaches to the instrument itself. Personal Defenses (also called

equitable defenses) may be raised only against holders who are not holddue course which are brought out of conduct of persons and mainequitable to impose payment.

Professor William Britton: In the main, real defenses are those wherefacts disclose an absence of one or more of the essential elementscontract, or where the admitted contract is vitiated for all purposes for reof public policy. Personal defenses are those wherein the facts present contract but where, for various reasons, such as fraud, duress, mistakebreach of contract by the holder, discharge before maturity, and the likdefendant is excused from his obligation to perform.

Defenses distinguished from EQUITIES OF OWNERSHIP: the laraised by persons who may have legal claim over the instrument. They

different purposes, one is to claim the instrument and the other to rclaim for payment. For example, the person from whom a bearer instrwas stolen may claim the instrument from a holder who is not in due because of his equity of ownership. He may also resist the claim of a holdin due course by raising the defense of non-delivery.

REAL DEFENSES AND PERSONAL DEFENSES

REAL DEFENSE PERSONAL DEFENSE

Minority (available only to theminor)

Failure or Absence of Considera

Forgery Illegal Consideration

Non-delivery of IncompleteInstrument

Non-delivery of Complete Instru

Material Alteration Conditional delivery of com

instrumentUltra Vires act of Corporation Fraud in inducement

Fraud in Factum or Esse Contractus Filling up blank not within authoIllegality – if declared void for anypurpose

Duress or Intimidation

Vicious Force or Violence Filling up blank beyond reasotime

Want of authority Transfer in breach of faithPrescription Mistake

Discharge in Insolvency Insertion of wrong date Ante-dating or Post-dating for or fraudulent purpose

B.

REAL DEFENSES1. MINORITY AND ULTRA VIRES ACTS

Sec. 22. Effect of indorsement by infant or corporation.indorsement or assignment of the instrument by a corporation or by anpasses the property therein, notwithstanding that from want of capacicorporation or infant may incur no liability thereon

a. Minor – the defense of minority is real and may be enforced agaholders but is only available to the minor himself.

b. Ultra Vires Acts – are acts done beyond the power conferred ucorporation by law and such want of authority may be raised as defense but the negotiation of the corporation may pass title instrument.

ATRIUM MANAGEMENT VS. CA (supra, p. 15) – ISSUE: WOissuance of the checks were ultra vires? HELD: No. the act of issui

checks was well within the ambit of a valid corporate act, for it wsecuring a loan to finance the activities of the corporation, hence, ultra vires act. An ultra vires act is one committed outside the objwhich a corporation is created as defined by the law of its organand therefore beyond the power conferred upon it by law" The termvires" is "distinguished from an illegal act for the former is merely vowhich may be enforced by performance, ratification, or estoppel, whlatter is void and cannot be validated.

CRISOLOGO-JOSE VS. CA (supra, p.24) - The liability accommodation party to a holder for value, although such holder do




include nor apply to corporations which are accommodation parties. This isbecause the issue or indorsement of negotiable paper by acorporation without consideration and for the accommodation ofanother is ultra vires.

NON-DELIVERY OF INCOMPLETE INSTRUMENT

c. 15 Incomplete instrument not delivered. - Where an incompleteinstrument has not been delivered, it will not, if completed andnegotiated without authority, be a valid contract in the hands ofany holder, as against any person whose signature was placedthereon before delivery.

ee under p. 9

FRAUD IN FACTUM (or Fraud in execution or Fraud in essecontractus)

DEFINITION: It is present when a person is induced to sign an instrumentnot knowing its character as a note or a bill. The person signing does notknow that he is signing a negotiable instrument and may be used as adefense even against a holder in due course.NOT APPLICABLE: When the person had reasonable opportunity to obtainknowledge of the character or essential terms of the instrument.FACTORS FOR REASONABLE OPPORTUNITY: (1) age and sex of theobligor; (2) intelligence, education and business experience; (3) ability toread and understand the language used; (4) representations made to himand his reason to rely on them or to have confidence in the person makingthem; (5) the presence or absence of any third person who might read orexplain the instrument to him, or any other information; and (6) apparentnecessity, or lack of it, for acting without delay (Milton Roberts, Fraud asDefense Against Holder in Due Course)

SALAS VS. CA (supra, p. 19) – ISSUE: WON VMS’ fraud in the conductof its business, specifically in the delivery of a defective truck, wouldrelease petitioner-maker from paying First Finance the amount stated inthe note? HELD: No. The note was a negotiable instrument and wasvalidly negotiated to private respondent who is a holder in due course andas such holds the instrument free from defenses available to prior partiesamong themselves. This being so, petitioner cannot set up againstrespondent the defense of nullity of the contract of sale between her and

VMS.

PRUDENCIO VS. CA (supra, p. 19) - The court finds that PNB is not aholder in due course because it has not acted in good faith when it waived

the supposed payments from the Bureau of Public Works contrary to theDeed of Assignment. Had the Deed been followed, the loan would havebeen paid off at maturity.

FORGERY AND WANT OF AUTHORITY

rgery of signatures and the placing of a signature in behalf of anotherthout authority are real defenses.

c. 23. Forged signature; effect of. - When a signature is forged or madethout the authority of the person whose signature it purports to be, it isholly inoperative, and no right to retain the instrument, or to give a dischargeerefor, or to enforce payment thereof against any party thereto, can bequired through or under such signature, unless the party against whom it isught to enforce such right is precluded from setting up the forgery or want ofthority

forged signature, whether it be that of the drawer, maker, payee or anyher party, is wholly inoperative and no one can gain title to the instrumentrough such forged signature against parties prior to the forgery.

a. Forgery of Maker’s Signature – the maker is not liable to allsubsequent parties whether the instrument is an order or bearerinstrument. However, indorsers after the forgery are still secondarilyliable to the holder by virtue of their warranty.

b. Forgery of Indorser’s Signature in a promissory note payable to

ORDER – Where the instrument of the payee is forged in apayable to order, the instrument cannot be enforced against theand the maker. But the indorsers after the forgery are liable bthey warrant that they have good title to the instrument.

Example: M made a note payable to the order of P who indorsed F stole the note and indorsed it to C who indorsed it to D, pholder.

1. D, even if he is a holder in due course, cannot recover from prior to the forgery. Thus, he cannot recover from A, P aBecause F forged the signature of A, D did not acquire anyagainst A, P and M because A did not transfer his right ovinstrument;

2.

D, however, can enforce the instrument against C, whoindorser after the forgery and is secondarily liable to subsparties due to their warranties;

3. Later on, C can recover what he paid from the forger, Fbecomes principal debtor because of his wrongful act of forsignature in the note.

4. A, whose signature was forged, has a remaining equownership, hence, his right to recover from either M whoprimarily liable or P who is secondarily liable in case M dishthe note.

c. Forgery of Indorser’s Signature in a promissory note payaBEARER – the signature of the payee or holder is unnecessary ttitle to the instrument. Hence, the maker may still be liable to a in due course even if an indorsement was forged after the issuathe note since according to Sec. 60 he is to pay the instr

“according to its tenor” and considering that the “tenor” instrument is that he engages to pay any bearer of the instruHowever, if the holder is not a holder in due course, the person signature is forged may raise the defense of non-delivery of a coinstrument.

Example: M made a note payable to P or bearer, P delivered the n A, who indorsed it specially to B. F stole the note and forgsignature and later on indorsed it to C, who in turn delivered it to

1. H can collect from M since the liability remains that he will pbearer of the instrument.

2. P, A and B cannot be liable since under Sec. 40, they will oliable to those who can trace their title to the indorsnotwithstanding the fact that B’s signature was forged.

3.

If, however C indorsed it to H, a holder in due course, themay recover from A considering that he can trace his title toB, whose signature was forged, may raise the defense of feven against a holder in due course.

4. If H is not a holder in due course, M, A and B may raidefense of non-delivery of a complete instrument as a defen

d. Forgery of Drawer’s Signature – barring gross negligence part of the drawer where his signature is forged, he is notwhether or not the instrument is payable to bearer or order becaudrawer was never a party to the instrument – he did not promiseanybody.

e. Forgery of Indorser’s Signature in a bill of exchange payaORDER – subsequent holders cannot enforce payment againdrawee, drawer, payee or the indorser whose signature was forg

those parties prior to the forged indorsement. Indorsers AFTEforgery are still secondarily liable because of their warranties. Sevs. Equitable Banking Corp

f. Forgery of Indorser’s Signature in a bill of exchange payaBEARER – same rule with bearer promissory note.

g. Situation with a COLLECTING BANK1. Payee can claim against Collecting Bank – a payee

signature is forged may directly proceed against the colbank (Westmont Bank vs. Eugene Ong);




2. Drawer and Collecting Bank – the drawer cannot opt torecover from the collecting bank since there is no privity ofcontract between him and the collecting bank (Associated Bank vs.CA);

3. Warranty of Collecting Bank The collecting bank which indorses a check bearing a forged

indorsement and presents it to the drawee bank guaranteesall prior indorsements, including the forged indorsementitself, and ultimately should be held liable therefor. (TradersRoyal Bank vs. RPN);

An EXCEPTION is when the issuance of the check itself wasattended with negligence.

Collecting Bank, for having indorsed the checks, is solelyliable when the checks were deposited in an account other

than that of the payees on the strength of forged instruments(Republic Bank vs. Ebrada; BDO vs. EBC; Traders Royal Bankvs. RPN);

In other cases, the collecting bank and the drawee bank weremade to share in the liability because of the relativenegligence that they exhibited (BPI vs. CA);

4.

Recourse of Collecting Bank – the collecting bank may recoverfrom its depositor who had not given value for the money paid tohim.

ASSOCIATED BANK VS. CA (GR No. 107382; 107612; Jan. 31, 1996) – The Province of Tarlac maintains a current account with the PhilippineNational Bank where the provincial funds are deposited. A portion of thefunds of the province is allocated to the Concepcion Emergency Hospital.The allotment checks for said government hospital are drawn to the order of"Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief,Concepcion Emergency Hospital, Concepcion, Tarlac”. It was later discoveredthat the hospital did not receive several allotment checks drawn by theProvince. After the checks were examined, it was learned that 30 checkswere encashed by one Fausto Pangilinan, with the Associated Bank acting ascollecting bank. It turned out that Fausto Pangilinan, who was theadministrative officer and cashier of payee hospital, collected the questionedchecks from the office of the Provincial Treasurer claiming to be assisting orhelping the hospital on the release of the checks. To encash the checks, heforged the signature of Dr. Adena Canlas chief of the payee hospital. All thechecks bore the stamp of Associated Bank which reads "All priorendorsements guaranteed ASSOCIATED BANK." The Provincial Treasurersought to recover from PNB various amounts debited from the currentaccount of the Province. In turn, PNB demanded reimbursement from theAssociated Bank who refused to pay interposing the defense of forgery.ISSUE: WON Associated Bank (collecting bank) may interpose the real

defense of forgery against PNB (drawee bank) as to bar recovery by thelatter? HELD: NO. Where the instrument is payable to order at the time ofthe forgery, such as the checks in this case, the signature of its rightfulholder (here, the payee hospital) is essential to transfer title to the sameinstrument. When the holder's indorsement is forged, all parties priorto the forgery may raise the real defense of forgery against allparties subsequent thereto. An indorser of an order instrumentwarrants "that the instrument is genuine and in all respects what itpurports to be; that he has a good title to it; that all prior partieshad capacity to contract; and that the instrument is at the time ofhis indorsement valid and subsisting." He cannot interpose the defensethat signatures prior to him are forged. A collecting bank where a check isdeposited and which indorses the check upon presentment with the draweebank, is such an indorser. So even if the indorsement on the check depositedby the bank's client is forged, the collecting bank is bound by his warrantiesas an indorser and cannot set up the defense of forgery as against the

drawee bank. The loss incurred by drawee bank-PNB can be passed on tothe collecting bank-Associated Bank which presented and indorsed thechecks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan,liable. The drawee bank is not similarly situated as the collecting bankbecause the former makes no warranty as to the genuineness of anyindorsement. The drawee bank's duty is but to verify the genuineness of thedrawer's signature and not of the indorsement because the drawer is itsclient.

GEMPESAW VS. CA (supra, p. 14) - Under Sec. 23 of the NegotiableInstruments Law, a forged signature is “wholly inoperative, no one

can gain title to the instrument through such forged indorseSuch an indorsement prevents any subsequent party from acqany right as against any party whose name appears prior tforgery. Such forged indorsement cuts-off the rights subsequent parties as against parties prior to the forgery. As a drawee bank who has paid a check on which an indorsement hasforged cannot charge the drawer’s account for the amount of said cheexception to the rule is where the drawer is guilty of such negligencecauses the bank to honor such checks. Gempesaw did not exercise pruin taking steps that a careful and prudent businessman would tcircumstances to discover discrepancies in her account. Her negligenthe proximate cause of her loss, and under Section 23 of the NegInstruments Law, is precluded from using forgery as a defense.

REPUBLIC BANK VS. EBRADA (GR No. L-40769; July 31, 1975) - Tcase of what appeared to be an indorsed check by one Martin Lorenzturned out to be dead since 1952. The forged signature of the deappeared at the dorsal portion of the check indorsed in favor of one RLorenzo. From Ramon Lorenzo the same was indorsed to oneDominguez and then from Dominguez to herein respondent ESubsequently, Ebrada encashed the same in 1963 at herein petRepublic Bank's main office in Escolta. Upon informing petitioner ReBank, however, that the payee's (Lorenzo) indorsement was a forgeBureau of Treasury requested the Bank to refund them the amount gEbrada. The Bank sued Ebrada upon the latter’s refusal to return the of the forged check. ISSUE: WON Ebrada is liable to return the moneto him by Republic Bank subject of a forged check and may the petrecover the proceeds given? HELD: It is clear from the provision of S23 of the NIL that where the signature on a negotiable instrument if fthe negotiation of the check is without force or effect. But does thisthat the existence of one forged signature therein will render void other negotiations of the check with respect to the other parties signature are genuine? No. Applying the principle of Beam vs. FarreIowa 670, 113 N.W. 590, it can be safely concluded that it is onnegotiation predicated on the forged indorsement that should be deinoperative. This means that the negotiation of the check in questioMartin Lorenzo, the original payee, to Ramon R. Lorenzo, the 2 nd indshould be declared of no effect, but the negotiation of the aforesaid from Ramon R. Lorenzo to Adelaida Dominguez, the 3 rd indorser, an

Adelaida Dominguez to the defendant-appellant who did not know forgery, should be considered valid and enforceable, barring any clforgery. Being the last indorser, however, Ebrada warrants that she hatitle to the check subject of this action. The petitioner, drawee of thecan recover from the holder [Ebrada] the money paid to the latteforged instrument. It is not supposed to be its duty to ascertain wheth

signatures of the payee or indorsers are genuine or not. This is becauindorser is supposed to warrant to the drawee that the signatures payee and previous indorsers are genuine, warranty not extending oholders in due course. Ebrada, upon receiving the check in questionDominguez, was duty-bound to ascertain whether the check in questiogenuine before presenting it to plaintiff Bank for payment. Indorsercredulity or recklessness or misplaced confidence was thecause of the loss. Why should he be permitted to shift the losto his own fault in assuming the risk, upon the drawee, sbecause of the accidental circumstance that the drawee afterfailed to detect the forgery when the check was presentepayment.

Persons precluded from setting up forgery

MWSS VS. CA (GR No. L-62943; July 14, 1986) - 23 checks were dep

by the payees Dizon, Sison and Mendoza in their respective current acwith the PCIB and PBC. Thru the Central Bank Clearing, these checkspresented for payment by PBC and PCIB to the defendant PNB, andpaid. At the time of their presentation to PNB, these checks bestandard indorsement which reads 'all prior indorsement and/or lendorsement guaranteed.' Subsequent investigation however, conducthe NBI showed that Raul Dizon, Arturo Sison and Antonio Mendoza wfictitious persons. NWSA addressed a letter to PNB requesting the immrestoration to its Account No. 6, of the total sum of P3,457,9corresponding to the total amount of these twenty-three (23) checks cby NWSA to be forged and/or spurious checks. ISSUE: WON THE DR




BANK WAS LIABLE FOR THE LOSS UNDER SECTION 23 OF THENEGOTIABLE INSTRUMENTS LAW? HELD: The NBI does not declare orprove that the signatures appearing on the questioned checks are forgeries.These reports did not touch on the inherent qualities of the signatures whichare indispensable in the determination of the existence of forgery. Theremust be conclusive findings that there is a variance in the inherentcharacteristics of the signatures and that they were written by two or moredifferent persons. Forgery cannot be presumed. It must beestablished by clear, positive, and convincing evidence. This wasnot done in the present case. Even if the twenty-three (23) checksin question are considered forgeries, considering the petitioner'sgross negligence, it is barred from setting up the defense of forgeryunder Section 23 of the Negotiable Instruments Law. One factorwhich facilitates this fraud was the delay in the reconciliation of bank (PNB)

statements with the NAWASA bank accounts. The records likewise show thatthe petitioner failed to provide appropriate security measures over its ownrecords thereby laying confidential records open to unauthorized persons.We cannot fault the respondent drawee Bank for not having detected thefraudulent encashment of the checks because the printing of the petitioner'spersonalized checks was not done under the supervision and control of theBank. Under the circumstances, therefore, the petitioner was in a betterposition to detect and prevent the fraudulent encashment of its checks.

METROPOLITAN BANK VS. CA (supra, p.5) - ISSUE: WON MetropolitanBank can use forgery of the warrants as defense, hence, making GoldenSavings liable? HELD: No. There was no question of Gomez's identity or ofthe genuineness of his signature as checked by Golden Savings. In fact, thetreasury warrants were dishonored allegedly because of the forgery of thesignatures of the drawers, not of Gomez as payee or indorser. Under thecircumstances, it is clear that Golden Savings acted with due care anddiligence and cannot be faulted for the withdrawals it allowed Gomez tomake. By contrast, Metrobank exhibited extraordinary carelessness. Despitethe lack of such clearance, it allowed Golden Savings to withdraw from theuncleared treasury warrants. The supposed reason for the dishonor, to wit,the forgery of the signatures of the general manager and the auditor of thedrawer corporation, has not been established. This was the finding of thelower courts which must not be disturbed. As held in MWSS v. Court ofAppeals, forgery cannot be presumed. It must be established by clear,positive and convincing evidence. This was not done in the present case.Hence, petition was denied.

SAMSUNG CONSTRUCTION VS. FAR EAST BANK (GR No. 129015; Aug.15, 2003) - Petitioner maintained a current account with respondent bank.The sole signatory to petitioner’s account was Jong Kyu Lee ("Jong"), itsProject Manager, while the checks remained in the custody of the company’s

accountant, Kyu Yong Lee ("Kyu"). A certain Roberto Gonzaga presented forpayment FEBTC Check to the bank. The check, payable to cash and drawnagainst Samsung Construction’s current account, was in the amount of P999,500.00. After the bank teller ascertained that there were enough funds tocover the check and compared the signature as contained in the specimensignature, the bank teller forwarded the check with two other bank branchofficers, who counterchecked the signature. One of the bank officers noticedSempio, the assistant accountant of Samsung Construction, was also in thebank and when asked, Sempio vouched for the genuineness of Jong’ssignature. The following day, Kyu examined the balance of the bank accountand discovered that a check amounting to P999, 500.00 had been encashed.Aware that he had not prepared such a check for Jong’s signature, Kyuperused the checkbook and found that the last blank check was missing. Hereported the matter to Jong, who then proceeded to the bank. Jong learnedof the encashment of the check, and realized that his signature had beenforged. Samsung Construction filed before the RTC against respondent bank

for violation of Section 23 of the Negotiable Instruments Law who ruled infavor of Samsung Construction while the CA reversed the RTC Decision andabsolved FEBTC from any liability. The Court of Appeals invoked the rulingin PNB v. National City Bank of New York that, if a loss, which must be borneby one or two innocent persons, can be traced to the neglect or fault ofeither, such loss would be borne by the negligent party, even if innocent ofintentional fraud. (equity principle). ISSUE: WON Samsung Constructionwas precluded from setting up the defense of forgery under Section 23 ofthe Negotiable Instruments Law? HELD: No. On the premise that Jong’ssignature was indeed forged, FEBTC is liable for the loss since it authorizedthe discharge of the forged check. Such liability attaches even if the bank

exerts due diligence and care in preventing such faulty discharge. Foroften deceive the eye of the most cautious experts; and when a banbeen so deceived, it is a harsh rule which compels it to suffer althouone has suffered by its being deceived. The forgery may be so near lgenuine as to defy detection by the depositor himself, and yet the bliable to the depositor if it pays the check. The Court recognize that S23 of the Negotiable Instruments Law bars a party from setting udefense of forgery if it is guilty of negligence. Yet, we are unable to cothat Samsung Construction was guilty of negligence in this caseappellate court failed to explain precisely how the Korean accountanegligent or how more care and prudence on his part would have prethe forgery. We cannot sustain this "tar and feathering" resorted to wany basis. When the bank receives the deposit, it impliedly agrees ONLY UPON THE DEPOSITOR’S ORDER. When the Bank pays a che

which the depositor’s signature is a forgery, it has failed to comply wcontract in this respect.

PNB VS. QUIMPO (GR No. L-53194, March 14, 1988) - Private RespFrancisco Gozon went to the Caloocan City Branch of PNB with hisErnesto Santos, who he left in the car while he transacted business bank. Santos saw that Gozon left his checkbook, he took a check therfilled it up for P5,000 and forged the signature of Gozon. Santos was laapprehended and admitted that he stole the check and encashed thewith the bank. Gozon filed an action to recover the amount from thewhich the court granted. Hence the petition. ISSUE: WON Gozon whis checkbook into hands of Santos was indeed the proximate cause loss and thus precluded from setting up the defense of forgery? HEL

A bank is bound to know the signatures of its customers; and if it forged check, it must be considered as making the payment out of itfunds, and cannot ordinarily change the amount so paid to the accothe depositor whose name was forged' (San Carlos Milling Co. vs. Bthe P.I). This rule is absolutely necessary to the circulation of drafchecks, and is based upon the presumed negligence of the drawee in to meet its obligation to know the signature of its correspondent. ... Tnothing inequitable in such a rule. If the paper comes to the draweeregular course of business, and he, having the opportunity ascertaincharacter, pronounces it to be valid and pays it, it is not only a quespayment under mistake, but payment in neglect of duty whiccommercial law places upon him, and the result of his negligence muupon him. The prime duty of the bank is to ascertain the genuinenesssignature of the drawer or the depositor on the check being encasheexpected to use reasonable business prudence in accepting and cascheck presented to it. Obviously, petitioner was negligent in encasaid forged check without carefully examining the signature shows marked variation from the genuine signature of p

respondent. The act of the plaintiff in leaving his checkbook car cannot be considered negligence sufficient to excusdefendant bank from its own negligence. Santos could notbeen expected to know that Santos, a long time classmatefriend, would remove a check from his checkbook .

BANCO DE ORO VS. EQUITABLE BANKING CORPORATIONp.3) - A commercial bank cannot escape the liability of an endorsecheck and which may turn out to be a forged endorsement. Whenevbank treats the signature at the back of the checks as endorsementhus logically guarantees the same as such there can be no doubt saidhas considered the checks as negotiable. Apropos the matter of forgendorsements, this Court has succinctly emphasized that the collebank or last endorser generally suffers the loss because it haduty to ascertain the genuineness of all prior endorsemconsidering that the act of presenting the check for payment

drawee is an assertion that the party making the presentmendone its duty to ascertain the genuineness of the endorsem(PNB vs. National City Bank) In another case, this court held thatdrawee-bank discovers that the signature of the payee was forged ahas paid the amount of the check to the holder thereof, it can recovamount paid from the collecting bank.

WESTMONT BANK VS. EUGENE ONG (GR No. 132250; Jan. 30, 20was undisputed that Respondent Eugene Ong maintained a current awith petitioner, formerly the Associated Banking Corporation, but now as Westmont Bank. Sometime in May 1976, he sold certain shares of




through Island Securities Corporation. To pay Ong, Island Securitiespurchased two (2) Pacific Banking Corporation manager’s checks, both datedMay 4, 1976, issued in the name of Eugene Ong as payee. Before Ong couldget hold of the checks, his friend Paciano Tanlimco got hold of them, forgedOng’s signature and deposited these with petitioner, where Tanlimco wasalso a depositor. Even though Ong’s specimen signature was on file,petitioner accepted and credited both checks to the account of Tanlimco,without verifying the ‘signature indorsements’ appearing at the back thereof.Tanlimco then immediately withdrew the money and absconded. ISSUE:WON Westmont Bank is precluded from setting up the forgery or want ofauthority and therefore, should suffer the loss and be made liable to hereinRespondent Ong? HELD: YES. Citing the ruling in Associated Bank vs. Courtof Appeals, the collecting bank or last endorser generally suffers the lossbecause it has the duty to ascertain the genuineness of all prior

endorsements. The collecting bank is also made liable because it is privy tothe depositor who negotiated the check. The bank knows him, his addressand history because he is a client. Hence, it is in a better position to detectforgery, fraud or irregularity in the indorsement. Further, respondent Ong, atthe time the fraudulent transaction took place, was a depositor of petitionerbank. Banks are engaged in a business impressed with public interest, and itis their duty to protect in return their many clients and depositors whotransact business with them. They have the obligation to treat their client’saccount meticulously and with the highest degree of care, considering thefiduciary nature of their relationship. The diligence required of banks,therefore, is more than that of a good father of a family. Since thesignature of the payee, in the case at bar, was forged to make itappear that he had made an indorsement in favor of the forger,such signature should be deemed as inoperative and ineffectual.Petitioner, as the collecting bank, grossly erred in making paymentby virtue of said forged signature. The payee, herein respondent,should therefore be allowed to recover from the collecting bank. The theory of said rule is that the collecting bank’s possession of such checkis wrongful.

LUSORIO VS. CA (GR No. 139130; Nov. 27, 2002) – Petitioner was apositor in good standing of respondent bank, the Manila Banking

orporation. As he was then running about 20 corporations, and was going outthe country a number of times, petitioner entrusted to his secretary,

therine E. Eugenio, his credit cards and his checkbook with blank checks. Itas also Eugenio who verified and reconciled the statements of said checkingcount. Between the dates September 5, 1980 and January 23, 1981, Eugenioas able to encash and deposit to her personal account about seventeen (17)ecks drawn against the account of the petitioner at the respondent bank.

pon learning that Eugenio has been using his credit cards, petitioner firedgenio immediately, and instituted a criminal action against her for estafa thru

sification. Private respondent also lodged a complaint for estafa thrusification of commercial documents against Eugenio on the basis oftitioner’s statement that his signatures in the checks were forged. Petitioneren requested the respondent bank to credit back and restore to its accounte value of the checks which were wrongfully encashed but respondent bankfused. Hence, petitioner filed the instant case. Petitioner contends thatanila Bank is liable for damages for its negligence in failing to detect thescrepant checks. He adds that as a general rule a bank which has obtainedssession of a check upon an unauthorized or forged endorsement of theyee’s signature and which collects the amount of the check from the draweeliable for the proceeds thereof to the payee. Petitioner further contends thatder Section 23 of the Negotiable Instruments Law a forged check is

operative, and that Manila Bank had no authority to pay the forged checks.SUE: WON petitioner may put up the defense of forgery against Manilank? HELD: NO. True, it is a rule that when a signature is forged or madethout the authority of the person whose signature it purports to be, the

eck is wholly inoperative. No right to retain the instrument, or to give ascharge therefor, or to enforce payment thereof against any party, can bequired through or under such signature. However, the rule does provide forexception, namely: “unless the party against whom it is sought to enforce

ch right is precluded from setting up the forgery or want of authority.” In thestant case, it is the exception that applies. In our view, petitioner isecluded from setting up the forgery, assuming there is forgery, duehis own negligence in entrusting to his secretary his credit cards

nd checkbook including the verification of his statements of account.titioner’s reliance on Associated Bank vs. Court of Appeals and Philippinenk of Commerce vs. CA to buttress his contention that respondent Manila

Bank as the collecting or last endorser generally suffers the loss becausethe duty to ascertain the genuineness of all prior endorsements is mispIn the cited cases, the fact of forgery was not in issue. In the presenthe fact of forgery was not established with certainty. In those cited cascollecting banks were held to be negligent for failing to observe precautmeasures to detect the forgery. In the case before us, both courts uniformly found that Manila Bank’s personnel diligently performed their having compared the signature in the checks from the specimen signaturecord and satisfied themselves that it was petitioner’s.

TRADERS ROYAL BANK VS. RPN (GR No. 138510; Oct. 10, 2002) - Tassessed plaintiffs Radio Philippines Network (RPN), IntercontBroadcasting Corporation (IBC), and Banahaw Broadcasting Corporationof their tax obligations for the taxable years 1978 to 1983. To pay the as

taxes, respondent networks purchased from petitioner Traders Roya(TRB) three manager’s checks which was turned over through Aida NuñeBranch Manager, to Mrs. Lourdes C. Vera, the financial comptrorespondents. The 3 manager’s checks, however, were never delivered noto the BIR but instead, the checks were presented for payment by unpersons to Security Bank, Taytay Branch. Respondents sent letters to boand Security Bank thereafter demanding that the amounts covered checks be reimbursed or credited to their account. An action was filed wwas decided that the networks should be reimbursed for the amounts checks by petitioner bank and the latter in turn, must be reimbursSecurity Bank. In the appellate court, it was held that Traders Bank shothe only Bank liable. ISSUE: WON Traders Royal Bank should solely baloss for its negligence? HELD: YES. If a bank pays a forged check, it mconsidered as paying out of its funds and cannot charge the amount so the account of the depositor. Petitioner TRB ought to have known that checks drawn payable to the order of one person and is presented for paby another and purports upon its face to have been duly indorsed by theof the check, it is the primary duty of petitioner to know that the checduly indorsed by the original payee and, where it pays the amount of theto a third person who has forged the signature of the payee, the loss fallpetitioner who cashed the check. Its only remedy is against the perwhom it paid the money. A bank is engaged in a business impressedpublic interest and it is its duty to protect its many clients and depositortransact business with it. It is under the obligation to treat the accountsdepositors and clients with meticulous care, whether such accounts consiof a few hundred or millions of pesos. Since TRB did not pay the rightfulor other person or entity entitled to receive payment, it has no rireimbursement. Petitioner TRB was remiss in its duty and obligation, antherefore suffer the consequences of its own negligence and disregestablished banking rules and procedures. It should be further noted thof the checks was a crossed check. The crossing of the check should ha

petitioner on guard; it was duty-bound to ascertain the indorser’s title check or the nature of his possession.

MATERIAL ALTERATION

A material alteration is only a partial real defense because the holder course can enforce it according to its original tenor.

Sec. 124 Alteration of instrument; effect of. - Where a negoinstrument is materially altered without the assent of all paliable thereon, it is avoided, except as against a party whohimself made, authorized, or assented to the alterationsubsequent indorsers.

But when an instrument has been materially altered and is hands of a holder in due course not a party to the alteratio

may enforce payment thereof according to its original tenor.Sec. 125 What constitutes a material alteration. - Any alte

which changes:

(a) The date;(b) The sum payable, either for principal or interest;(c) The time or place of paym(d) The number or the relations of the parties;(e) The medium or currency in which payment is to be made(f) Or which adds a place of payment where no place of payis specified, or any other change or addition which alter




effect of the instrument in any respect, is a material alteration.

Concept

PNB VS. CA (GR No. 107508; April 25, 1996) - A check with serial number7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00 was issuedby the Ministry of Education and Culture payable to F. Abante Marketing.This check was drawn against Philippine National Bank (herein petitioner).F. Abante Marketing, a client of Capitol City Development Bank (Capitol),

deposited the questioned check in its savings account with said bank. Inturn, Capitol deposited the same in its account with the Philippine Bank ofCommunications (PBCom) which, in turn, sent the check to petitioner forclearing. Petitioner cleared the check as good and, thereafter, PBComcredited Capitol’s account for the amount stated in the check. However,

petitioner PNB returned the check to PBCom and debited PBCom’s accountfor the amount covered by the check, the reason being that there was a“material alteration” of the check number. PBCom, as collecting agent ofCapitol, then proceeded to debit the latter’s account for the same amount.On the other hand, Capitol could not, in turn, debit F. Abante Marketing’saccount since the latter had already withdrawn the amount of the check.ISSUE: WON AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS AMATERIAL ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW?HELD: No. An alteration is said to be material if it alters the effect of theinstrument. It means an unauthorized change in an instrument that purportsto modify in any respect the obligation of a party or an unauthorized additionof words or numbers or other change to an incomplete instrument relating tothe obligation of a party. In other words, a material alteration is one whichchanges the items which are required to be stated under Section 1 of theNegotiable Instrument Law. The case at the bench is unique in thesense that what was altered is the serial number of the check inquestion, an item which, it can readily be observed, is not anessential requisite for negotiability under Section 1 of theNegotiable Instruments Law. The aforementioned alteration didnot change the relations between the parties. The name of thedrawer and the drawee were not altered. The intended payee wasthe same. The sum of money due to the payee remained the same.If the purpose of the serial number is merely to identify the issuinggovernment office or agency, its alteration in this case had no material effectwhatsoever on the integrity of the check. The identity of the issuinggovernment office or agency was not changed thereby and the amount ofthe check was not charged against the account of another government officeor agency which had no liability under the check.

ENRIQUE MONTINOLA VS. PNB (supra, p. 12) – Provincial Treasurer(PT) of Misamis Oriental Ubaldo Laya issued the check in question as PT and

not as agent of PNB when he signed it as drawer payable to the order of MVRamos who later on sold the check to Montinola. On trial, the check wasseverely mutilated and beneath Laya’s signature appears the words “Agent,Phil. National Bank. HELD: The insertion of the words "Agent, Phil. NationalBank" which converts the bank from a mere drawee to a drawer andtherefore changes its liability, constitutes a material alteration of theinstrument without the consent of the parties liable thereon, and sodischarges the instrument.

Alteration that totally prevents recovery – in the case of Montinolavs. PNB above, even if it was negotiated to a holder in due course, suchholder cannot enforce the instrument against the bank as drawer. Thedrawee cannot be compelled to pay unless he accepts, and the drawercannot be made liable until the instrument is dishonored. As a drawee, hecannot be made to pay because there was no acceptance, the Bankcannot also be made to pay as a drawer considering that the change of

liability was due to the alteration. Same rule applies if the alteration is inthe payee’s name, since the holder in due course cannot enforce itaccording to its original tenor, which contains a different payee.

EXTINCTIVE PRESCRIPTION

The prescriptive period for the filing of a claim based no negotiableinstruments is ten years from the time the cause of action accrued (Payvs. Vda. De Palanca) . With respect to CHECKS, the action of the depositoragainst his drawee bank commences to run from the time he is givennotice of payment.

PHILIPPINE COMMERCIAL INTERNATIONAL BANK VS. CA (G121413; Jan. 29, 2001) - Ford Philippines filed actions to recover frodrawee bank Citibank and collecting bank PCIB the value of schecks payable to the Commissioner of Internal Revenue as paympercentage or manufacturer's sales taxes. What prompted this actiothe drawing of a check by Ford, which it deposited to PCpayment and was debited from their Citibank account. It was lafound out that the payment wasn’t received by the CommisMeanwhile, according to the NBI report, one of the checks issued bwas withdrawn from PCIB for alleged mistake in the amount to be paidwas replaced with manager’s check by PCIB, which were allegedly by a syndicate and deposited in their own account. The triadecided in favor of Ford. In this petition, PCIB claims that the action o

had prescribed because of its inability to seek judicial relief seasoconsidering that the alleged negligent act took place prior to Decemb1977 but the relief was sought only in 1983, or seven years therISSUE: WON Ford’s cause of action has prescribed, hence, cannot ranymore from PCIB? HELD: The statute of limitations begins to runthe bank gives the depositor notice of the payment, which is ordinarilythe check is returned to the alleged drawer as a voucher with a statemhis account. An action upon a check is ordinarily governed by the staperiod applicable to instruments in writing. Our laws on the matter pthat the action upon a written contract must be brought within tenfrom the time the right of action accrues. Hence, the reckoning time fprescriptive period begins when the instrument was issued ancorresponding check was returned by the bank to its depositor. Applysame rule, the cause of action for the recovery of the proceeds of Ciwould normally be a month after December 19, 1977, when Citibank pface value of the check in the amount of P4,746,114.41. Since the ocomplaint for the cause of action was filed on January 20, 1984, baryears had lapsed. Thus, Ford's cause of action to recover the amouseasonably filed within the period provided by law. Hence, PCIdeclared solely responsible for the loss of the proceeds of Citibank amount P4,746,114.41, which shall be paid together with 6% inthereon to Ford from the date when the original complaint was filesaid amount is fully paid.

PAPA VS. AU VALENCIA (GR NO. 105188; Jan. 23, 1998) - respondents filed in the RTC a complaint for specific performance apetitioner herein, in his capacity as administrator of the Testate Est

Angela Butte. The RTC ruled in favor of the PR allowing PR to redeesubject property and ordering petitioner to execute a Deed of Sale in fPR Penarroyo covering the property in question and to deliver the pepossession of the said property. Petitioner appealed the aforesaid deci

the trial court to the Court of Appeals, alleging among others that thwas never "consummated" as he did not encash the check (in the amoP40,000.00) given by respondents Valencia and Peñarroyo in paymentfull purchase price of the subject lot. He maintained that wharespondent had actually paid was only the amount of P5,000.00 (in caearnest money. The Court of Appeals rendered a decision, affirminmodification the trial court's decision. ISSUE: WON alleged sale osubject property had been consummated? HELD: The Court finds no mpetitioner’s arguments. It is an undisputed fact that respondents Vaand Peñarroyo had given petitioner P5, 000.00 in cash, P40, 000.00 in in payment of the purchase price of the subject lot. Petitioner's assertiohe never encashed the aforesaid check is not substantiated and is awith his statement in his answer that "he can no longer recall the transwhich is supposed to have happened 10 years ago." After more th(10) years from the payment in party by cash and in part by checpresumption is that the check had been encashed. As already stat

even waived the presentation of oral evidence. Granting that petitionnever encashed the check, his failure to do so for more than ten (10)undoubtedly resulted in the impairment of the check througunreasonable and unexplained delay. While it is true that the delivercheck produces the effect of payment only when it is cashed, pursu

Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejby the creditor's unreasonable delay in presentment. The acceptanccheck implies an undertaking of due diligence in presenting it for payand if he from whom it is received sustains loss by want of such diligewill be held to operate as actual payment of the debt or obligation forit was given. It has, likewise, been held that if no presentment is m




all, the drawer cannot be held liable irrespective of loss or injury unlesspresentment is otherwise excused. This is in harmony with Article 1249 ofthe Civil Code under which payment by way of check or other negotiableinstrument is conditioned on its being cashed, except when through the faultof the creditor, the instrument is impaired. The payee of a check would be acreditor under this provision and if its no-payment is caused by hisnegligence, payment will be deemed effected and the obligation for whichthe check was given as conditional payment will be discharged. Consideringthat respondents Valencia and Peñarroyo had fulfilled their part of thecontract of sale by delivering the payment of the purchase price, saidrespondents, therefore, had the right to compel petitioner to deliver to themthe owner's certificate of title.

PERSONAL DEFENSES

ANTEDATING OR POST-DATING

ec. 12. Ante-dated and post-dated. - The instrument is not invalid for theason only that it is ante-dated or post-dated, provided this is not done for anegal or fraudulent purpose . The person to whom an instrument so dateddelivered acquires the title thereto as of the date of delivery.

ample: Where the maximum allowed interest rate is 24% per annum, aeck was ante-dated for six months in order to collect additional 12% withoutdicating it in the contract to hide the usurious nature of the transaction – innsidered made for fraudulent purposes and may give rise to the personalfense of antedating against the one who made the ante-dating.

INSERTION OF A WRONG DATE

ec. 13.When date may be inserted. - Where an instrument expressed topayable at a fixed period after date is issued undated, or where the

ceptance of an instrument payable at a fixed period after sight is undated,y holder may insert therein the true date of issue or acceptance, and thestrument shall be payable accordingly. The insertion of a wrong dateoes not avoid the instrument in the hands of a subsequent holder inue course; but as to him, the date so inserted is to be regarded ase true date.

ample: On Jan. 1, 2013, M issued a promissory note payable to the order offor P10,000 with 12% within 6 months from date and the date is notecified in the instrument. If A inserted Dec. 1, 2012 as the date to collectore interest and thereafter indorsed it to B.

If B was aware of the fraudulent insertion of the wrong date, the

instrument is avoided as to him;If B is a holder in due course, he can treat Dec. 1, 2012 as the true date.

FILLING UP BLANKS BEYOND AUTHORITY

Filling up in excess of the authority given as provided in Sec. 14 is only apersonal defense. See p.8 for discussion on Sec. 14 and illustration.Signed blank piece of paper – (1) there must delivery of the instrument toanother person; (2) the paper that was delivered was a blank papercontaining the signature of the person who will deliver; and (3) there mustbe intention to convert it to a negotiable instrument.

Absent no. (3) above, the instrument cannot be enforced against the onewho delivered the instrument. Example: If P a fan of Vilma Aunor, askedfor her autograph and later on filled-up the paper to be a promissory notepayable to his order. P then endorsed it to A. In this example, even if A is

a holder in due course, he cannot enforce it against Vilma Aunor, as theact of P converting the blank piece of paper into a negotiable instrument,without intention from the indicated maker, would constitute fraud infactum , which, as discussed earlier, is a real defense which may be raisedeven against a holder in due course.

ABSENCE OR FAILURE OF CONSIDERATION

STATE INVESTMENT HOUSE VS. CA (supra, p. 19) - Being not a holder indue course, plaintiff is subject to personal defenses, such as lack ofconsideration between appellants and New Sikatuna Wood Industries. Note

that under the facts the checks were postdated and issued only as a lNew Sikatuna Wood Industries, Inc. if and when deposits were made tup the checks. Such deposits were not made, hence no loan was hence, the three checks are without consideration.

5. SIMPLE FRAUD, DURESS, INTIMIDATION, FORCE OR ILLEGALITY OF CONSIDERATION, BREACH OF FAITH

Sec. 55 When title defective. - The title of a person who negotiatinstrument is defective within the meaning of this Act wheobtained the instrument, or any signature thereto, by fduress, or force and fear, or other unlawful means, or for an consideration, or when he negotiates it in breach of faith, or usuch circumstances as amount to a fraud.

Sec. 56 What constitutes notice of defect. - To constitutes notan infirmity in the instrument or defect in the title of the pnegotiating the same, the person to whom it is negotiated have had actual knowledge of the infirmity or defecknowledge of such facts that his action in taking the instruamounted to bad faith.

Sec. 57 Rights of holder in due course. - A holder in due course the instrument free from any defect of title of prior partiesfree from defenses available to prior parties among themseand may enforce payment of the instrument for the full amthereof against all parties liable thereon.

a. DURESS AND INTIMIDATION1. Generally, duress and/or intimidation exerted against a person

the latter a personal defense and is available even if there is

form of consideration.2. To constitute duress, there must be an actual or threatened exor power possessed by the party benefited thereby, for the puof obtaining the note (or bill), such as to deprive the maker quality of mind essential to making of a contract.

3. Duress is relative, hence threats to a feeble and old person miduress to one while it may not be so to another.

4. Duress is a real defense if it is vicious or if it is what is referreduress amounting to forgery, like when a person who exertsame is practically writing the note itself by holding the haanother.

b. ILLEGALITY 1. Generally, illegality of the transaction that gave rise to a par

transaction is only a personal defense. For example, if a checissued as payment for marijuana, the transaction involved isbut the same cannot be raised against a holder in due course.

2.

Exception to the rule is when the law which declares the transor document issued in connection thereto is void against any pa

GREAT EASTERN LIFE INSURANCE CO. (GELIC) VS. HONGKOSHANGHAI BANKING CORP (HSBC) and PNB (GR No. 18657; Au1922) - In May 1920, petitioner GELIC drew its check for P2,000 onwhom it had an account, payable to the order of Lazaro Melicor. Maasim fraudulently obtained possession of the check, forged Mesignature, as an endorser, and then personally endorsed and presentePNB where the amount of the check was placed to his credit. After paid the check, and on the next day, PNB endorsed the check to HSBCpaid it and charged the amount of the check to the account of the plIn the ordinary course of business, HSBC rendered a bank statemGELIC showing that the amount of the check was charged to its acand no objection was then made to the statement. About four (4) mafter the check was charged to the account of the plaintiff, it develope

Lazaro Melicor, to whom the check was made payable, had never receand that his signature, as an endorser, was forged by Maasimpresented and deposited it to his private account in PNB. Witknowledge, the plaintiff promptly made a demand upon the HSBC should be given credit for the amount of the forged check, which therefused to do, and GELIC commenced this action to recover the which was paid on the forged check. On the petition of HSBC, PNmade defendant. The former Bank denies any liability, but prays tha

judgment should be rendered against it, in turn, it should have like judagainst the latter Bank which denies all liability to either party. Upoissues being joined, a trial was had and judgment was rendered a




GELIC and in favor HSBC and PNB from which GELIC appealed. ISSUE:WON plaintiff GELIC can recover? HELD: Yes. GELIC’s check was drawn onHSBC payable to the order of Melicor. In other words, GELIC authorized anddirected HSBC to pay Melicor, or his order, P2,000. It did not authorize ordirect the bank to pay the check to any other person than Melicor, or hisorder, and the testimony is undisputed that Melicor never did part with histitle or endorse the check, and never received any of its proceeds. Neither isGELIC estopped or bound by the bank statement, which was made to it bythe HSBC. This is not a case where the GELIC's own signature was forged toone of it checks. In such a case, the plaintiff would have known of theforgery, and it would have been its duty to have promptly notified the bankof any forged signature, and any failure on its part would have released bankfrom any liability. That is not this case. Here, the forgery was that of Melicor,who was the payee of the check, and the legal presumption is that the bank

would not honor the check without the genuine endorsement of Melicor. Inother words, when GELIC received its banks statement, it had a right toassume that Melicor had personally endorsed the check, and that, otherwise,the bank would not have paid it. Sec. 23 of the NIL is square in point. Themoney was on deposit in HSBC, and it had no legal right to pay it out toanyone except GELIC or its order. Here, GELIC ordered HSBC to pay theP2,000 to Melicor, and the money was actually paid to Maasim and wasnever paid to Melicor, and he never paid to Melicor, and he never personallyendorsed the check, or authorized any one to endorse it for him, and thealleged endorsement was a forgery. Hence, upon the undisputed facts, itmust follow that HSBC has no defense to this action. It is admitted that thePNB cashed the check upon a forged signature, and placed the money to thecredit of Maasim, who was a forger. That the PNB then endorsed the checkand forwarded it to HSBC by whom it was paid. PNB had no license orauthority to pay the money to Maasim or anyone else upon a forgesignature. It was its legal duty to know that Melicor's endorsement wasgenuine before cashing the check. Its remedy is against Maasim to whom itpaid the money. The Supreme Court reversed the lower court's judgment,and entered another in favor of GELIC and against HSBC for P2,000, withinterest thereon from 8 November 1920, at the rate of 6% per annum, andthe costs of the action, and a corresponding judgment will be entered infavor of HSBC against PNB for the same amount, together with the amountof its costs in the action.

UIRINO GONZALEZ LOGGING VS. CA (GR No. 126568; April 20, 2003) -the expansion of its logging business, petitioner Quirino Gonzales Logging

oncessionaire (QGLC), through its proprietor, general manager - co-petitioneruirino Gonzales, applied for credit accommodations with respondent Republicnk . The Bank approved QGLC’s application. In separate transactions,titioners, to secure certain advances from the Bank in connection with

GLC’s exportation of logs, executed a promissory note in 1964 in favor of the

nk. They were to execute three more promissory notes in 1967. On January, 1977, alleging non-payment of the balance of QGLC’s obligation, and non-yment of the promissory notes despite repeated demands, the Bank filed amplaint for “sum of money” against petitioners. The complaint listed tenuses of action, the sixth to ninth of which were anchored on the promissorytes issued by petitioners allegedly to secure certain advances from the Bankconnection with the exportation of logs as reflected above. The notes wereyable 30 days after date and provided for the solidary liability of petitionerswell as attorney’s fees at ten percent of the total amount due in the event of

eir non-payment at maturity. Petitioners seek to avoid liability by claimingat Quirino and Eufemia Gonzales signed the promissory notes in blank; thatey had not received the value of said notes, and that the credit line thereonas unnecessary in view of their money deposits, and unremitted proceeds ong exports from the Bank. ISSUE: WON petitioners may interpose thefense of lack of consideration and that the Promissory Notes were signed inank against the bank? HELD: NO. The genuineness and due execution of the

tes had been deemed admitted by petitioners, they having failed to deny theme under oath. Their claim that they signed the notes in blank does not thus. Petitioners’ admission of the genuineness and due execution of theomissory notes notwithstanding, they raise want of consideration thereof.

he promissory notes, however, appear to be negotiable as they meete requirements of Section 1 of the Negotiable Instruments Law.

uch being the case, the notes are prima facie deemed to have beensued for consideration. It bears noting that no sufficient evidence wasduced by petitioners to show otherwise. In any case, it is no defense thate promissory notes were signed in blank as Section 14 of theegotiable Instruments Law concedes the prima facie authority of the

person in possession of negotiable instruments, such as the herein, to fill in the blanks.

VII. ENFORCEMENT OF LIABILITY

A. PARTIES PRIMARILY AND SECONDARILY LIABLE

How to Enforce Primary Liability

Sec. 60 Liability of maker. - The maker of a negotiable instrumenmaking it, engages that he will pay it according to its tenoradmits the existence of the payee and his then capacity to ind

Sec. 62 Liability of acceptor. - The acceptor, by acceptinginstrument, engages that he will pay it according to the ten

his acceptance and admits:

(a) The existence of the drawer, the genuineness of his signaand his capacity and authority to draw the instrument; and(b) The existence of the payee and his then capacity to indors

The unconditional promise attaches the moment the maker makeinstrument while the acceptor’s assent to the unconditional order attachmoment he accepts the instrument. No further act is necessary in order liability to accrue. What is only necessary later is for the holder to enforcliability by presenting it for payment.

B. GENERAL STEPS IN ENFORCING SECONDARY LIABILITY1. Promissory Notes

a. Presentment for payment must be made within the reperiod to the maker;

Sec. 70. Effect of want of demand on principal debtor. - Presentmpayment is not necessary in order to charge the person primarily liable instrument; but if the instrument is, by its terms, payable at a special and he is able and willing to pay it there at maturity, such abilitwillingness are equivalent to a tender of payment upon his part. But excherein otherwise provided, presentment for payment is necessary in orcharge the drawer and indorsers.

b. Notice of dishonor should be given, if promissory note is disoby non-payment by the maker;

Sec. 89. To whom notice of dishonor must be given . - Except as otherwise provided, when a negotiable instrument has been dishono

non-acceptance or non-payment, notice of dishonor must be given drawer and to each indorser, and any drawer or indorser to whom suchis not given is discharged

Other than PRESENTMENT FOR ACCEPTANCE, the rules under Bills of Excare similar to Promissory Notes as regards Presentment for PaymenDishonor.

2. Bills of Exchange

PRESENTMENT FOR ACCEPTANCE

Sec. 143. When presentment for acceptance must be maPresentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other case,

presentment for acceptance is necessary in order to fix the maturity instrument; or(b) Where the bill expressly stipulates that it shall be presentacceptance; or(c) Where the bill is drawn payable elsewhere than at the residence oof business of the drawee.

In no other case is presentment for acceptance necessary in order to any party to the bill liable.




c. 143 provides three instances when presentment for acceptance isquired, otherwise, it is dispensable and the instrument maybe directlyesented for payment.

a. How Made; Time for Presentment

ec. 145 Presentment; how made . - Presentment for acceptance mustbe made by or on behalf of the holder at a reasonable hour, on abusiness day and before the bill is overdue, to the drawee orsome person authorized to accept or refuse acceptance on hisbehalf; and

(a) Where a bill is addressed to two or more drawees who arenot partners, presentment must be made to them all unless one

has authority to accept or refuse acceptance for all, in which casepresentment may be made to him only;

(b) Where the drawee is dead, presentment may be made to hispersonal representative;

(c) Where the drawee has been adjudged a bankrupt or aninsolvent or has made an assignment for the benefit ofcreditors, presentment may be made to him or to his trustee orassignee.

ec. 146 On what days presentment may be made. - A bill may bepresented for acceptance on any day on which negotiableinstruments may be presented for payment under theprovisions of Sections seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday, presentment foracceptance may be made before twelve o'clock noon on that day.

ec. 85 Time of maturity. - Every negotiable instrument is payable atthe time fixed therein without grace. When the day of maturityfalls upon Sunday or a holiday, the instruments falling due orbecoming payable on Saturday are to be presented for paymenton the next succeeding business day except that instrumentspayable on demand may, at the option of the holder, be presentedfor payment before twelve o'clock noon on Saturday when thatentire day is not a holiday

ec. 72 What constitutes a sufficient presentment. – seePRESENTMENT FOR PAYMENT.

e Rule under Sec. 146 is different from Sec. 85 in that when the instrumentpayable on a Saturday which is not a holiday, presentment may be madefore 12:00 noon on that day, this rule is applicable in Sec. 85 if thestrument is payable on demand, Sec. 146 makes no such distinction.

Summary, the following rules should be followed:Fixed day for presentment for acceptance – day fixed;If the day fixed falls on a Sunday or holiday – next succeeding business day;If payable on demand – at the option of the holder, before 12:00 noon on aturday when the entire day is not a holiday.

b. When Time is Insufficient

c. 147. Presentment where time is insufficient. - Where the holder of al drawn payable elsewhere than at the place of business or the residence ofe drawee has no time, with the exercise of reasonable diligence, to presente bill for acceptance before presenting it for payment on the day that it fallse, the delay caused by presenting the bill for acceptance before presenting itr payment is excused and does not discharge the drawers and indorsers.

XAMPLE: When the instrument is payable in Pasay City two days afterceptance, and is required to be accepted in Davao City, the delay for theesentment for payment is excused and does not discharge the drawers anddorsers.

CCEPTANCE

c. 132. Acceptance; how made, by and so forth . - The acceptance of al is the signification by the drawee of his assent to the order of the drawer.e acceptance must be (1) in writing and (2) signed by the drawee. (3) Itust not express that the drawee will perform his promise by any

other means than the payment of money.

If the drawee merely stated that “I return the drawer’s order. Balanceaccount is in the same as order”, confirming the amount in the instrudoes not necessarily signify assent to the order, and consequentacceptance.

How made?i. Proof of Acceptance

Sec. 133 Holder entitled to acceptance on face of bill. - The holdbill presenting the same for acceptance may require thacceptance be written on the bill, and, if such request is re

may treat the bill as dishonored. Sec. 134 Acceptance by separate instrument. - Where an accepta

written on a paper other than the bill itself, it does not biacceptor except in favor of a person to whom it is shown anon the faith thereof, receives the bill for value.

Acceptance may be made on the instrument itself or in a separate instrHowever, under Sec. 133, the holder may require the acceptance on titself, otherwise, it may be treated as dishonored.

Sec. 134 : If acceptance is made by a telegram, the acceptance stated will not bind the acceptor to the subsequent holder if the said holder aware thereof.

ii. When Deemed Accepted

Sec. 137. Liability of drawee returning or destroying bill. - Wdrawee to whom a bill is delivered for acceptance destroys the same, or rwithin twenty-four hours after such delivery or within such other period holder may allow, to return the bill accepted or non-accepted to the holdwill be deemed to have accepted the same.

iii. Future Bills

Sec. 135. Promise to accept; when equivalent to acceptanceunconditional promise in writing to accept a bill before it is drawn is deemactual acceptance in favor of every person who, upon the faith threceives the bill for value.

iv. Time to Accept

Sec. 136 Time allowed drawee to accept. - The drawee is atwenty-four hours after presentment in which to decide wor not he will accept the bill; the acceptance, if given, datesthe day of presentation.

Sec. 147 Presentment where time is insufficient – see When TInsufficient, p. 34

SEC. 136 vs. SEC. 137: The bill is at all times the property of the holdehe is entitled to have it if he wants it. If the holder should demand before the 24 hours provided by Sec. 136, the drawee would be requcomply on pain of being held as an acceptor; but return within 24 unaccepted would not be a dishonor; the drawee can still accept by notifwithin 24 hours; if the drawee after returning the bill still refused to acthe expiration of the time allowed, the holder then would be required tthe bill as dishonored or lose his rights against prior parties (Beutel’s Branp. 1248).

v. Rule When Incomplete Bill is Accepted

Sec. 138. Acceptance of incomplete bill . - A bill may be accepted behas been signed by the drawer, or while otherwise incomplete, or wheoverdue, or after it has been dishonored by a previous refusal to acceptnon-payment. But when a bill payable after sight is dishonored byacceptance and the drawee subsequently accepts it, the holder, in the abof any different agreement, is entitled to have the bill accepted as of thof the first presentment.




. Kinds of Acceptance

c. 139 Kinds of acceptance. - An acceptance is either (1) general or (2)qualified. A general acceptance assents without qualification tothe order of the drawer. A qualified acceptance in express termsvaries the effect of the bill as drawn

c. 140 What constitutes a general acceptance. - An acceptance topay at a particular place is a general acceptance unless it expresslystates that the bill is to be paid there only and not elsewhere

c. 141 Qualified acceptance. - An acceptance is qualified which is:

(a) Conditional; that is to say, which makes payment by theacceptor dependent on the fulfillment of a condition therein stated;(b) Partial; that is to say, an acceptance to pay part only of theamount for which the bill is drawn;(c) Local; that is to say, an acceptance to pay only at a particularplace;(d) Qualified as to time;(e) The acceptance of some, one or more of the drawees butnot of all.

c. 142 Rights of parties as to qualified acceptance. – (1) The holdermay refuse to take a qualified acceptance and if he does notobtain an unqualified acceptance , he may treat the bill asdishonored by non-acceptance.

(2) Where a qualified acceptance is taken, the drawer andindorsers are discharged from liability on the bill unless theyhave expressly or impliedly authorized the holder to take a qualifiedacceptance , or subsequently assent thereto .

(3) When the drawer or an indorser receives notice of a qualifiedacceptance , he must, within a reasonable time, express hisdissent to the holder or he will be deemed to have assentedthereto. (segregation and emphasis supplied)

HEN PRESENTMENT EXCUSED

c. 148. Where presentment is excused . - Presentment for acceptance iscused and a bill may be treated as dishonored by non-acceptance in either ofe following cases:

) Where the drawee is dead, or has absconded, or is a fictitious person a person not having capacity to contract by bill.) Where, after the exercise of reasonable diligence, presentment cannot

e made.

) Where, although presentment has been irregular, acceptance has beenfused on some other ground.

RESENTMENT FOR PAYMENT

presentment for payment, the holder exhibits the instrument to the maker ore acceptor to demand payment of the amount reflected in the negotiablestrument or whatever balance that is due.

a. Requisites for Sufficiency

c. 72. What constitutes sufficient presentment. - Presentment foryment, to be sufficient, must be made: (HRPT)

) By the holder, or by some person authorized to receive payment on hishalf;

) At a reasonable hour on a business day;) At a proper place as herein defined;) To the person primarily liable on the instrument, or if he is absent oraccessible, to any person found at the place where the presentment is made.

b. Date of Presentment

c. 71. Presentment where instrument is not payable on demand andhere payable on demand. - Where the instrument is not payable onmand, presentment must be made on the day it falls due. Where it is

payable on demand, presentment must be made within a reasonableafter its issue, except that in the case of a bill of exchange , presentmpayment will be sufficient if made within a reasonable time after thnegotiation thereof .

i. Rule in determining MATURITY

Sec. 85. Time of maturity. - Every negotiable instrument is payable time fixed therein without grace. When the day of maturity falls upon Sor a holiday, the instruments falling due or becoming payable on Saturdto be presented for payment on the next succeeding business day exceinstruments payable on demand may, at the option of the holder, be prefor payment before twelve o'clock noon on Saturday when that entire daya holiday.

See p. 34, time for presentment for acceptance

ii. Rule in computing time

Sec. 86. Time; how computed. - When the instrument is payable at period after date, after sight, or after that happening of a specified evetime of payment is determined by excluding the day from which theis to begin to run, and by including the date of payment.

iii. Rule if payable AT A BANK

Sec. 75 Presentment where instrument payable at bank. - Wheinstrument is payable at a bank, presentment for payment mmade during banking hours, unless the person to make pa

has no funds there to meet it at any time during the day , incase presentment at any hour before the bank is closed oday is sufficient

Sec. 87 Rule where instrument payable at bank. - Wherinstrument is made payable at a bank, it is equivalent to an othe bank to pay the same for the account of the principal thereon.

Sec. 127 Bill not an assignment of funds in hands of drawee. - Aitself does not operate as an assignment of the funds in theof the drawee available for the payment thereof, and the dranot liable on the bill unless and until he accepts the same.

Sec. 187 Certification of check; effect of. - Where a check is certithe bank on which it is drawn, the certification is equivalentacceptance.

SEC. 127 & 87: A check of itself does not operate as assignment of an

of the funds to the credit of the drawer with the bank, and the bank liable to the holder, unless and until it accepts or certifies the Nevertheless, even if there is no assignment of funds, the statement instrument that it is payable at a bank is equivalent to an order to the bpay the same for the account of the principal debtor thereof. Howeveorder must specify the particular bank.

c. Place of Presentment

Sec. 73 Place of presentment. - Presentment for payment is madeproper place:

(a) Where a place of payment is specified in the instrument athere presented;(b) Where no place of payment is specified but the addressperson to make payment is given in the instrument and it ispresented;(c) Where no place of payment is specified and no address isand the instrument is presented at the usual place of businresidence of the person to make payment;(d) In any other case if presented to the person to make pawherever he can be found, or if presented at his last knownof business or residence.

Sec. 70 Effect of want of demand on principal debtor. - Presenfor payment is not necessary in order to charge the person prliable on the instrument; but if the instrument is, by its t




payable at a special place, and he is able and willing to payit there at maturity, such ability and willingness areequivalent to a tender of payment upon his part. But exceptas herein otherwise provided, presentment for payment isnecessary in order to charge the drawer and indorsers

the holder will not present the instrument for payment at such special placeovided under Sec. 70, he loses his right to the payment of interest.

LACE OF PAYMENT means a house, bank, counting room, store, or place ofsiness, where the holder can present a note, where the maker can deposit orovide funds to meet it, and where a legal offer to pay can be madeutchinson vs. Crutcher). Thus, a designation of a town or city is notfficient.

d. Presentment to the Party Primarily Liable

How Presentment Made

c. 74. Instrument must be exhibited. - The instrument must be exhibitedthe person from whom payment is demanded, and when it is paid, must belivered up to the party paying it.

Rule in case Party Primarily Liable is Dead

c. 76. Presentment where principal debtor is dead. - Where the personmarily liable on the instrument is dead and no place of payment is specified,esentment for payment must be made to his personal representative, ifch there be, and if, with the exercise of reasonable diligence, he can be

und.

. Presentment to Partners

c. 77. Presentment to persons liable as partners. - Where the (1)rsons primarily liable on the instrument are liable as partners and (2) noace of payment is specified, presentment for payment may be made to anyne of them, even though there has been a dissolution of the firm.

XAMPLE: A and B, partners, issued a note payable at #8 Ayala Ave., Makatity, to C who indorsed it to D, present holder, who resides in Quezon City,here A also resides. Even if it would be more convenient for D to present thete for payment at A’s residence, he cannot do so, since there is a specifiedace for presentment for payment. Note that the instrument may be presentedr payment to ANY partner only if there is no place of payment specified.

. Presentment to Joint Debtors

c. 78. Presentment to joint debtors. - Where there are several persons,t partners, primarily liable on the instrument and no place of payment isecified, presentment must be made to them all.

e. When Presentment is NOT NECESSARY or EXCUSED

c. 79 When presentment not required to charge the drawer. - Presentment for payment is not required in order to charge thedrawer where he has no right to expect or require that thedrawee or acceptor will pay the instrument.

c. 80 When presentment not required to charge the indorser. - Presentment is not required in order to charge an indorser wherethe instrument was made or accepted for his accommodationand he has no reason to expect that the instrument will bepaid if presented.

c. 81 When delay in making presentment is excused. - Delay inmaking presentment for payment is excused when the delay iscaused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. Whenthe cause of delay ceases to operate, presentment must be madewith reasonable diligence.

c. 82 When presentment for payment is excused. - Presentment forpayment is excused:

(a) Where, after the exercise of reasonable diligence, presenas required by this Act, cannot be made;(b) Where the drawee is a fictitious person;(c) By waiver of presentment, express or implied.

Sec. 79: When the drawer does not have sufficient funds with the drawas to require or expect it to pay the check, presentment for payment is e(Vda. De Victoria vs. Gutierrez).

“REASONABLE TIME”

LUIS WONG VS. CA (G.R. No. 117857; February 2, 2001) - PeWong was an agent of Limtong Press. Inc. (LPI). LPI would print scalendars, then give them to agents to present to customers. The

would get the purchase orders of customers and forward them to LPIprinting the calendars, LPI would ship the calendars directly customers. Thereafter, the agents would come around to collepayments. Petitioner, however, had a history of unremitted collectionshe duly acknowledged in a confirmation receipt he co-signed with hiHence, petitioner’s customers were required to issue post-dated before LPI would accept their purchase orders. Wong issued six (6)dated checks initially intended to guarantee the calendar orders of cuswho failed to issue post-dated checks. However, following company LPI refused to accept the checks as guarantees. Instead, the parties ato apply the checks to the payment of petitioner’s unremitted. Befomaturity of the checks, petitioner prevailed upon LPI not to deposchecks and promised to replace them within 30 days. However, petreneged on his promise. LPI deposited the checks with Rizal CommBanking Corporation (RCBC) which were returned because the accouclosed. Despite receipt of the notice of dishonor, petitioner failed toarrangements for payment within five (5) banking days so he was cwith violation of BP 22. ISSUE: What constitutes REASONABLE TIchecks? HELD: Contrary to petitioner’s assertions, the law does not ra maker to maintain funds in his bank account for only 90 days. Section 186 of the Negotiable Instruments Law, "a check must be prefor payment within a reasonable time after its issue or the drawer discharged from liability thereon to the extent of the loss caused delay." By current banking practice, a check becomes stalemore than six (6) months, or 180 days. Private respondent deposited the checks 157 days after the date of the check. Hencchecks cannot be considered stale. Only the presumption of knowleinsufficiency of funds was lost, but such knowledge could still be provdirect or circumstantial evidence. As found by the trial court, respondent did not deposit the checks because of the reassuranpetitioner that he would issue new checks. Upon his failure to do so, L

constrained to deposit the said checks. After the checks were dishopetitioner was duly notified of such fact but failed to make arrangemefull payment within five (5) banking days thereof. There is, on rsufficient evidence that petitioner had knowledge of the insufficiencyfunds in or credit with the drawee bank at the time of issuance checks. And despite petitioner’s insistent plea of innocence, we find nin the respondent court’s affirmance of his conviction by the trial coviolations of the Bouncing Checks Law.

DISHONOR

If DISHONORED BY NON-ACCEPTANCE

Sec. 149 When dishonored by nonacceptance. - A bill is dishononon-acceptance:

(a) When it is duly presented for acceptance and suacceptance as is prescribed by this Act is refused or cannobtained; or(b) When presentment for acceptance is excused and the bilaccepted.

Sec. 150 Duty of holder where bill not accepted. - Where a bill presented for acceptance and is not accepted within the prestime, the person presenting it must treat the bill as dishoby non-acceptance or he loses the right of recourse agthe drawer and indorsers.

Sec. 151 Rights of holder where bill not accepted. - When a




dishonored by nonacceptance, an immediate right of recourseagainst the drawer and indorsers accrues to the holder and nopresentment for payment is necessary.

OTICE OF DISHONOR

c. 89. To whom notice of dishonor must be given. - Except as hereinherwise provided, when a negotiable instrument has been dishonored byn-acceptance or non-payment, notice of dishonor must be given to theawer and to each indorser, and any drawer or indorser to whom such noticenot given is discharged

ASIA BANKING VS. JAVIER (GR No. L-19051; April 4, 1923) - SalvadorChaves drew two checks against PNB in favor of La Insular. This check wasindorsed by the limited partners of La Insular, and then deposited by Chavesin his current account with the plaintiff, Asia Banking Corporation. Theamount represented by both checks was used by Chaves after they weredeposited in the plaintiff bank, by drawing checks on the plaintiff.Subsequently these checks were presented by the plaintiff to the PhilippineNational Bank for payment, but the latter refused to pay on the ground thatthe drawer, Chaves, had no funds therein. The lower court sentenced thedefendant, as indorser, to pay the plaintiff, hence, this petition. ISSUE:WON defendant’s liability can be enforced? HELD: No. Section 89 of theNegotiable Instruments Law (Act No. 2031) provides that, when a negotiableinstrument is dishonored for non-acceptance or non-payment, notice thereofmust be given to the drawer and each of the indorsers, and those who arenot notified shall be discharged from liability, except where this act providesotherwise. According to this, the indorsers are not liable unless they arenotified that the document was dishonored. Then, under the general

principle of the law of procedure, it will be incumbent upon the plaintiff, whoseeks to enforce the defendant's liability upon these checks as indorser, toestablish said liability by proving that notice was given to the defendantwithin the time, and in the manner, required by the law that the checks inquestion had been dishonored. If these facts are not proven, the plaintiff hasnot sufficiently established the defendant's liability. There is no proof in therecord tending to show that plaintiff gave any notice whatsoever to thedefendant that the checks in question had been dishonored, and there it hasnot established its cause of action. Hence, petition was granted.

GULLAS VS PNB (GR. NO. L-43191; NOV. 13, 1935) - The Treasurer of theUnited States issued a warrant in the amount of $361 payable to FranciscoBacos. Petitioner and Pedro Lopez signed as endorsers of this check.Thereupon it was cashed by PNB. Subsequently the treasurer warrant wasdishonored by the Insular Treasurer. At that time, Gullas has an outstandingbalance of P509 with PNB and had issued certain checks before he left his

residence for Manila. The bank on learning of the dishonor of the treasurywarrant sent notices by mail to Gullas which could not delivered to himbecause he is not in Manila. In view of this, the bank applied the outstandingbalances of Gullas’ current account with the PNB for the payment of thecheck. On the return of Gullas, notice of dishonor was received and theunpaid balance of the US Treasury was paid by him. As a result of this, thechecks issued by him before he left for Manila were not paid because of lackof funds standing to his credit in the bank. ISSUE: WON PNB has the rightto apply a deposit to the debt of the depositor to the bank? HELD: No. TheNIL contains provisions establishing the liability of a general indorser andgiving the procedure for a notice of dishonor. The general indorser engagesthat if he be dishonored and the necessary proceedings of dishonor be dulytaken, he will pay the amount to the holder. The notice of dishonor is inorder to charge all indorser and that the right of action against him does notaccrue until the notice is given. As a general rule, a bank has a right to setoff the deposits in its hands for the payment of any indebtedness to it on the

part of the depositor. In the case at bar, though this right to set off exist, theremedy was not properly enforced because prior to the mailing of the noticeof dishonor, and without waiting for any action by Gullas, the bank made useof the money standing in his account to make good for the treasury warrant.

a. When instrument considered dishonored

c. 83 When instrument dishonored by non-payment. - Theinstrument is dishonored by non-payment when:(a) It is duly presented for payment and payment is refused orcannot be obtained; or

(b) Presentment is excused and the instrument is overduunpaid.

Sec. 149 When dishonored by nonacceptance. - A bill is dishononon-acceptance: (a) When it is duly presented for acceptance and suacceptance as is prescribed by this Act is refused or cannobtained; or(b) When presentment for acceptance is excused and the bilaccepted.

Sec. 151 Rights of holder where bill not accepted. - When a dishonored by nonacceptance, an immediate right of reagainst the drawer and indorsers accrues to the holder apresentment for payment is necessary

b.

Effect of Absence of Notice on Separate Contract

Failure to give notice of dishonor will not necessarily result in abseliability on the part of the drawer. The right of the payee to recover frodrawer based on the latter’s contractual obligation that is separate fronegotiable instrument is still binding. The drawer may no longer be secoliable but his contractual liability is preserved (Producers Bank of the Philvs. Excelsa Industries, Inc.)

NYCO SALES CORPORATION VS. BA FINANCE CORPORATIONo. 71694; Aug. 16, 1991) - Nyco Sales has discounting privileges wFinance. In 1978, brothers Renato Fernandez and Santiago Renato (oof Sanshell Corporation) approached Rufino Yao, president and gmanager of Nyco Sales Corporation (Nyco) for a credit accommodaorder for the brothers to make use of Nyco’s discounting privileges

agreed and so on November 15, 1978, Sanshell issued a post(November 17, 1978) BPI check to Nyco in the amount of P60,000. Fothe discounting process agreed upon, Nyco, thru its president Rufinendorsed the check in favor of BA Finance. Thereafter, BA Finance ischeck payable to Nyco which endorsed it in favor of Sanshell. Sanshemade use of and/or negotiated the check. Accompanying the exchachecks was a Deed of Assignment executed by Nyco (assignor) in favoFinance (assignee) with the conformity of Sanshell. The check bouncFinance notified Sanshell. Sanshell substituted the BPI check with a SBank and Trust Company check. This check again bounced. BA Fmade repeated demands to Nyco and Sanshell but neither of the two the obligation. Hence, BA Finance sued Nyco who averred that it receinotice of dishonor when the second check was dishonored. ISSUENyco Sales is liable to pay BA Finance? HELD: Yes. The relationship beNyco and BA Finance is one of assignor-assignee. The assignor-vwarrants both the credit itself (its existence and legality) and the per

the debtor (his solvency), if so stipulated, as in the case aConsequently, if there be any breach of the above warranties, the assvendor should be held answerable therefor. There is no question thethe assignor-vendor is indeed liable for the invalidity of whatever he asto the assignee-vendee. Considering now the facts of the case at babeyond dispute that Nyco executed a deed of assignment in favorFinance with Sanshell Corporation as the debtor-obligor. BA Finaactually enforcing said deed and the check covered thereby is merincidental or collateral matter. This particular check merely evidenccredit which was actually assigned to BA Finance. Thus, the designaimmaterial as it could be any other check. It is only what is representhe said checks that Nyco is being asked to pay. Nyco’s pretension had not been notified of the fact of dishonor is belied not only by the demand letter issued by BA Finance but also by the fact that NycSanshell had frequent contacts before, during and after the dishonorimportantly, as long as the credit remains outstanding, Nyco Sales

continue to be liable to BA Finance as its assignor. The dishonor assigned check simply stresses its liability and the failure to notice of dishonor will not discharge it from such liability. Tbecause the cause of action stems from the breach owarranties embodied in the Deed of Assignment, and not frodishonoring of the check alone.

c. Who should give notice

Sec 90 By whom given. - The notice may be given by or on behalfholder, or by or on behalf of any party to the instrument who




be compelled to pay it to the holder, and who, upon taking it up,would have a right to reimbursement from the party to whom thenotice is given.

c. 91 Notice given by agent. - Notice of dishonor may be given by anyagent either in his own name or in the name of any party entitled togiven notice, whether that party be his principal or not.

c. 92 Effect of notice on behalf of holder . - Where notice is given byor on behalf of the holder, it inures to the benefit of all subsequentholders and all prior parties who have a right of recourse against theparty to whom it is given.

c. 93 Effect where notice is given by party entitled thereto. -Where notice is given by or on behalf of a party entitled to givenotice, it inures to the benefit of the holder and all partiessubsequent to the party to whom notice is given.

XAMPLE: If M issued a note to P or his order, who indorsed it to A, A to B, BC, C to D, present holder, and M dishonors the instrument, D may notify C,

ho in turn may notify B, A and P. B may notify A and P and A may notify P.

D gave notice of dishonor to P, A, B and C: C may not notify P, A and Bcause the notice by the holder inures to the benefit of all prior parties whove the right of recourse against the party to whom it is given.

n the other hand, if D notified only C but C, in turn, notified P, A and B, D canready hold P, A and B liable because notice by an indorser inures to thenefit of the holder. Additionally, P need not be notified by A and B becausee notice given by C inures to the benefit of all parties subsequent to the partywhom notice is given.

d.

Time and Place to give notice

c. 103 Where parties reside in same place . - Where the persongiving and the person to receive notice reside in the same place,notice must be given within the following times:

(a) If given at the place of business of the person to receivenotice, it must be given before the close of business hours on theday following .(b) If given at his residence, it must be given before the usualhours of rest on the day following .(c) If sent by mail, it must be deposited in the post office in timeto reach him in usual course on the day following .

c. 104 Where parties reside in different places . - Where the persongiving and the person to receive notice reside in different places,the notice must be given within the following times:

(a) If sent by mail, it must be deposited in the post office in timeto go by mail the day following the day of dishonor , or if there beno mail at a convenient hour on last day, by the next mailthereafter .(b) If given otherwise than through the post office, then withinthe time that notice would have been received in due course ofmail , if it had been deposited in the post office within the timespecified in the last subdivision.

c. 105 When sender deemed to have given due notice. - Wherenotice of dishonor is duly addressed and deposited in the postoffice, the sender is deemed to have given due notice,notwithstanding any miscarriage in the mails.

c. 106 Deposit in post office; what constitutes. - Notice is deemedto have been deposited in the post-office when deposited in anybranch post office or in any letter box under the control of the

post-office department. c. 107 Notice to subsequent party; time of. - Where a party

receives notice of dishonor, he has, after the receipt of suchnotice, the same time for giving notice to antecedent parties thatthe holder has after the dishonor.

c. 108 Where notice must be sent. - Where a party has added anaddress to his signature, notice of dishonor must be sent to thataddress; but if he has not given such address, then the noticemust be sent as follows:

(a) Either to the post-office nearest to his place of residencethe post-office where he is accustomed to receive his letters(b) If he lives in one place and has his place of busineanother, notice may be sent to either place; or(c) If he is sojourning in another place, notice may be sent tplace where he is so sojourning.

But where the notice is actually received by the party withitime specified in this Act, it will be sufficient, though not seaccordance with the requirement of this section.

FAR EAST REALTY INVESTMENT INC., vs. THE HONORABLE COF APPEALS, DY HIAN TAT, SIY CHEE and GAW SUY AN [G.R.36549, October 5, 1988] - Respondent Dy Hian Tat, Siy Chee and Ga

An sought the extension of an accommodation loan from petitioner FaRealty Investment which the former will use to further their buRespondents promised to pay, jointly and severally, in one month timinsure payment, respondents delivered to Far East Realty InvestmChina Bank Check drawn by Dy Hian Tat issued on September 13, 196signed by them at the back of said check, with the assurance that aftmonth from September 13, 1960, the said check would be redeemrespondents by paying cash or the said check can be presented for paon or immediately after one month. The loan was actually extendwhen the check was presented for payment on March 5, 1964, dishonored —the account on which it is drawn has long been closed. Tcourt held in favor of petitioner but this was reversed by the CA by that the said check wasn’t presented within reasonable time and afissuance. Petitioner contends that presentment for payment and nodishonor are not necessary as when funds are insufficient to meet a the drawer is liable, whether such presentment and notice be totally oor merely delayed. ISSUE: WON presentment for payment and nodishonor of the questioned check were made within reasonable time?No. Where the instrument is not payable on demand, presentment mmade on the day it falls due. Where it is payable on demand, presenmust be made within a reasonable time after issue, except that in thof a bill of exchange, presentment for payment will be sufficient ifwithin a reasonable time after the last negotiation thereof. (SectiNegotiable Instruments Law). "Reasonable time" has been definedmuch time as is necessary under the circumstances for a reasonable pand diligent man to do, conveniently, what the contract or duty reshould be done, having a regard for the rights and possibility of loss, to the other party. In the instant case, the check in question was issuSeptember 13, 1960, but was presented to the drawee bank only on 5, 1964, and dishonored on the same date. After dishonor by the dbank, a formal notice of dishonor was made by the petitioner thro

letter dated April 27, 1968. Under these circumstances, the petundoubtedly failed to exercise prudence and diligence on what he oudo as required by law. The petitioner likewise failed to show any justiffor the unreasonable delay. Notice may be given as soon as instrumebeen dishonored and unless delay is excused must be given within thfixed by law

Sec. 104: If a note is dishonored on March 1, 2013:(a) by mail: the notice must be deposited with the appropriate addresstamped in such a way that it would be part of the mail that would depMarch 2, 2013;(b) personal service: within the same time that the mail will normally readestination. Thus, if it usually takes 3 days, then the person may give personally within such 3 days.

e. When Notice Not Required, Excused or Dispensed With

Sec. 109 Waiver of notice . - Notice of dishonor may be waived ebefore the time of giving notice has arrived or after the omito give due notice, and the waiver may be expressed or imp

Sec. 110 Whom affected by waiver . - Where the waiver is embodthe instrument itself, it is binding upon all parties; but, wherwritten above the signature of an indorser, it binds him only

By waiver, the person renounces the benefit of the act or matter in hiswhich in the case of Sec. 109 is the benefit of the notice. Accordingwaiver of notice, a drawer or indorser is not discharged from liability by




the holder to give notice, in fact, the giving of the notice is not necessaryymore to hold them liable.

may be made either (1) expressly or (2) impliedly;may be given either (1) before the time of giving of notice; or (2) after thelure to give notice.

NDING EFFECT: If the instrument reads “Pay to the order of P, P10,000 onarch 1, 2013. Notice of dishonor waived”, it is binding upon all partiescondarily liable thereon. If the waiver is found on an indorsement only, such“Pay to the order of A. Notice of Dishonor Waived, Sgd. P”, the waiver is

nding only on P.

c. 111. Waiver of protest. - A waiver of protest, whether in the case of a

reign bill of exchange or other negotiable instrument, is deemed to be aaiver not only of a formal protest but also of presentment and notice ofshonor.

ROTEST is a formal statement in writing made by a notary public at thestance of the holder declaring that the instrument has been presented foryment or for acceptance but the same was dishonored.

ch is indispensable only in a FOREIGN BILL OF EXCHANGE but may also bee subject of a waiver.

c. 118. When protest need not be made; when must be made. -here any negotiable instrument has been dishonored, it may be protested forn-acceptance or non-payment, as the case may be; but protest is notquired except in the case of foreign bills of exchange.

OTICE OF DISHONOR VS. PROTEST

NOTICE OF DISHONOR PROTEST Apply to inland bills Required in foreign bills,

permissive inland bills

May be verbal or written Always in writingMade by a holder or any personwho may be compelled to pay

Made by a notary public or arespectable resident

Required to be made usuallywithin one day after dishonor

Protest or noting thereof shouldbe made on the day of dishonor

Not made or given in the place ofdishonor but in the residence ofthe parties and other placesmentioned in Sec. 103

As a rule to be made in the placeof dishonor

c. 112 When notice is dispensed with. - Notice of dishonor is

dispensed with when, after the exercise of reasonable diligence,it cannot be given to or does not reach the parties sought to becharged.

c. 113 Delay in giving notice; how excused. - Delay in giving noticeof dishonor is excused when the delay is caused bycircumstances beyond the control of the holder and notimputable to his default, misconduct, or negligence. When thecause of delay ceases to operate, notice must be given withreasonable diligence.

XAMPLE: If notice was not given due to a calamity like flood and typhoon, thelay is excused. However, the holder must give notice once the flood orphoon ceases.

c. 114. When notice need not be given to drawer. - Notice of dishonornot required to be given to the drawer in either of the following cases:

) Where the drawer and drawee are the same person;) When the drawee is fictitious person or a person not having capacity tontract;) When the drawer is the person to whom the instrument is presented foryment;) Where the drawer has no right to expect or require that the drawee orceptor will honor the instrument;) Where the drawer has countermanded payment.

Sec. 114 (c): When the drawer is the agent of the drawee, and the fdishonors the bill.Sec. 114 (d): When the drawer closed his account or does not have suffunds with the drawee.Sec. 114 (e): When the drawer directed or ordered the drawee not to payas in ordering a Stop Payment.

GREAT ASIAN SALES CENTER CORPORATION and TAN CHON VS. CA and BANCASIA FINANCE AND INVESTMENT CORPOR(G.R. No. 105774; April 25, 2002) - In March 1981, the board of direcGreat Asian approved a resolution authorizing its Treasurer and GM, ALim Piat, Jr. to secure a loan from herein Respondent (Bancasia)amount not to exceed P1M and also authorized Arsenio to sign all pdocuments or promissory notes necessary to secure the loan. In Feb

the board of directors of Great Asian approved a second resauthorizing Great Asian to secure a discounting line with Bancasiaamount not exceeding P2M and also designated Arsenio as the authsignatory to sign all instruments, documents and checks necessary to the discounting line. In turn, Great Asian President, Tan Chong Lin, sigSurety Agreements in favor of Bancasia to guarantee, solidarily, the dGreat Asian to Bancasia. Great Asian, through Arsenio, signed 4 De

Assignment of Receivables, assigning to Bancasia 15 postdated issued by various customers, which were dishonored on maturitydeposited for collection by Bancasia, with any of the following as reasthe dishonor: “account closed”, “payment stopped”, “account garnishment”, and “insufficiency of funds”. ISSUE: WON Petitioner’s remains despite absence of notice of dishonor from Respondent. YES. Great Asian’s four contracts assigning its fifteen (15) postdated to Bancasia expressly stipulate the suspensive condition that in the evedrawers of the checks fail to pay, Great Asian itself will pay Bancasia.the common condition in the contracts had transpired, an obligation part of Great Asian arose from the four contracts, and that obligatiopay Bancasia the full value of the checks, including the stipulated pand attorney’s fees. It is to be noted that under the Negotiable InstruLaw, notice of dishonor is not required if the drawer has no right to or require the bank to honor the check, or if the drawer has countermpayment. In the instant case, all the checks were dishonored for anyfollowing reasons: "account closed", "account under garnishinsufficiency of funds", or "payment stopped". In the first three instthe drawers had no right to expect or require the bank to honor the cand in the last instance, the drawers had countermanded payFurthermore, the explicit with recourse stipulation against Greateffectively enlarges, by agreement of the parties, the liability of Greatbeyond that of a mere endorser of a negotiable instrument. Thus, wor not Bancasia gives notice of dishonor to Great Asian, the latter re

liable to Bancasia because of the with recourse stipulation whindependent of the warranties of an endorser under the NegInstruments Law.

Sec. 115. When notice need not be given to indorser. — Nodishonor is not required to be given to an indorser in either of the folcases:

(a) When the drawee is a fictitious person or person not having capacontract, and the indorser was aware of that fact at the time he indorsinstrument;(b) Where the indorser is the person to whom the instrument is presentpayment;(c) Where the instrument was made or accepted for his accommodation.

Sec. 115 (c): Since the indorser is the principal, he cannot really expe

accommodation maker to pay.

f. Notice when previously dishonored by non-acceptance

Sec. 116. Notice of non-payment where acceptance refused. - due notice of dishonor by non-acceptance has been given, noticesubsequent dishonor by non-payment is not necessary unless in the methe instrument has been accepted.

EXAMPLE: DR issued a bill of exchange against DW, drawee, payable torder. P indorsed the same to A, then A to B. When B presented




ceptance, DW dishonored it. B thereafter gave notice of dishonor to DR, Pd A. Later, B still presented:For payment and dishonored, there would be no need to give a secondtice of dishonor for the non-payment;For acceptance and it was accepted, then later on dishonored by non-

yment, it is necessary to give a notice of dishonor for non-acceptance.

CCEPTANCE FOR HONOR

c. 165. Agreement of acceptor for honor. - The acceptor for honor, bych acceptance, engages that he will, on due presentment, pay the billcording to the terms of his acceptance provided it shall not have been paidthe drawee and provided also that is shall have been duly presented for

yment and protested for non-payment and notice of dishonor given to him.

e liability of the acceptor for honor is in effect secondary because hisgagement is to pay only if it shall not have been paid by the drawee andovided also that it shall have been duly presented for payment and protestedr non-payment and notice of dishonor given to him. Acceptance for honor isso called acceptance supra protest or acceptance after protest.

a. Requisites

c. 161. When bill may be accepted for honor. - When a bill of exchanges been (1) protested for dishonor by non-acceptance or protested for bettercurity and is (2) not overdue, (3) any person not being a party already

able thereon may, (4) with the consent of the holder, intervene and accepte bill supra protest for the honor of any party liable thereon or for the honorthe person for whose account the bill is drawn. The acceptance for honor

ay be for part only of the sum for which the bill is drawn; and where theres been an acceptance for honor for one party, there may be a furtherceptance by a different person for the honor of another party.

c. 162. Acceptance for honor; how made. - An acceptance for honorpra protest (5) must be in writing and indicate that it is an acceptance fornor and must be signed by the acceptor for honor. (formal requisites)

b. In whose favor?

c. 163. When deemed to be an acceptance for honor of the drawer. -here an acceptance for honor does not expressly state for whose honor it isade, it is deemed to be an acceptance for the honor of the drawer.

c. Liability of Acceptor for Honor

c. 164. Liability of the acceptor for honor. - The acceptor for honor isble to the holder and to all parties to the bill subsequent to the party forhose honor he has accepted

XAMPLE: DR issued a bill of exchange ordering DW to pay P or order P10,000.ndorsed it to A, A to B, B to C, C to D, present holder. DW refused to accepte instrument and protest was duly made. X accepted the instrument in favorB. X is liable as acceptor for honor to B and the parties subsequent to him (Cd D); X is not liable to P and A.

d. Maturity Date of Sight Bills

c. 166. Maturity of bill payable after sight; accepted for honor. -here a bill payable after sight is accepted for honor, its maturity is calculatedom the date of the noting for non-acceptance and not from the date of theceptance for honor

XAMPLE: If a bill is payable 10 days after sight and was dishonored by non-ceptance on March 1, 2013 but was accepted for honor on March 5, 2013,e maturity date shall be March 11, 2013 not March 15, 2013.

e. Protest required

c. 167. Protest of bill accepted for honor, and so forth. - Where ashonored bill has been accepted for honor supra protest or contains a refereecase of need, it must be protested for non-payment before it is presented for

payment to the acceptor for honor or referee in case of need

f. Presentment for Payment and Dishonor by Non-Payment

Sec. 168 Presentment for payment to acceptor for honor,made. - Presentment for payment to the acceptor for honobe made as follows:

(a) If it is to be presented in the place where the protest fopayment was made, it must be presented not later than tfollowing its maturity.(b) If it is to be presented in some other place than thewhere it was protested, then it must be forwarded within thspecified in Section one hundred and four.

Sec. 169 When delay in making presentment is excused. provisions of Section eighty-one apply where there is demaking presentment to the acceptor for honor or referee iof need

Sec. 170 Dishonor of bill by acceptor for honor. - When thedishonored by the acceptor for honor, it must be protestnon-payment by him

ORDINARY ACCEPTANCE VS. ACCEPTANCE FOR HONOR

ACCEPTANCE FOR HONOR ORDINARY ACCEPTANCE

Protest is a prerequisite Protest is not necessary

The acceptor must be a stranger The person who accepts is a pa – the drawee

There must be an express

statement that it is for honor

Any word indicating an accepta

is enoughConsent of the holder is necessary Consent of the holder is not

necessary

Liability of acceptor is secondary Acceptor is primarily liable

Payment of the acceptor will notdischarge the bill

Payment by the acceptor in duecourse discharges the bill

Acceptance may be in favor ofonly one or some of the parties

Acceptance involves the entireinstrument

VIII. DISCHARGE

A. CONCEPT

Discharge means release from further liability, obligation, or from the beffect of the negotiable instrument.

1.

As to the paper itself, it puts an end to it as a contractual obligation2. As to the parties to the instrument, it operates as a release of some

of them from further obligation and liability under the instrument altthe instrument may not be discharged, as where only part of the oare released.

B. HOW INSTRUMENT IS DISCHARGED

Sec. 119 Instrument; how discharged. - A negotiable instrumedischarged:

(a) By payment in due course by or on behalf of the prindebtor;(b) By payment in due course by the party accommodwhere the instrument is made or accepted for

accommodation;(c) By the intentional cancellation thereof by the holder;(d) By any other act which will discharge a simple contracthe payment of money;(e) When the principal debtor becomes the holder ofinstrument at or after maturity in his own right.

A. Payment in Due Course

Sec. 88. What constitutes payment in due course. - Payment is mdue course when it is made at or after the maturity of the payment




lder thereof in good faith and without notice that his title is defective

a. By Whom Made:1. Primary Party Liabile, i.e., a maker or acceptor;2. Surety for the principal debtor, signing as a secondary party; 3. A person paying “on behalf of the principal debtor” also discharges

the instrument under the principles of the law on agency;

b. Payment By Person Secondarily Liable does not dischargethe instrument; EXCEPTIONS.

ec. 121. Right of party who discharges instrument. - Where the instrument isaid by a party secondarily liable thereon, it is not discharged; but the party soaying it is remitted to his former rights as regard all prior parties, and he mayrike out his own and all subsequent indorsements and against negotiate thestrument, except:

) Where it is payable to the order of a third person and has been paid by theawer; and) Where it was made or accepted for accommodation and has been paid bye party accommodated.

yment by the drawer discharges the instrument since he is the one ultimatelyble. If he were to seek reimbursement from the payee, indorsee(s) or theawee, the liability to such parties would ultimately be his. Unless, the amountthe instrument has been advanced by the drawer to the drawee, in suchse, he may recover the amount paid to the holder from such drawee.

yment by the accommodated party discharges the instrument because he is

e principal in the case contemplated by Sec. 121(b).

c. Payment by a Third Person

yment by a third person who pays for the benefit or in behalf of the makerd does not wish to acquire any right over the instrument also discharges thestrument. If he intends to acquire a right over such instrument, he may bensidered a holder or assignee, as the case may be. Under the Civil Code, aeditor, though not bound to accept payment from a third person, is notohibited from doing so.

d. To Whom

yment must be to the holder. Payment to a payee who already negotiatede instrument will not discharge the instrument because he is no longer thelder, the same is true when payment is made to a possessor to whom the

strument was not indorsed.

e. Good Faith

c. 88 also requires that the payor be in good faith and without notice thate payee’s title is defective. Accordingly, a holder who has been deprived ofe instrument may still enforce payment against a payor who HAD NOTICE offect in the payee’s title.

Renunciation

c. 122. Renunciation by holder. - The holder may expressly renounce hishts against any party to the instrument before, at, or after its maturity. Ansolute and unconditional renunciation of his rights against the principalbtor made at or after the maturity of the instrument discharges thestrument. But a renunciation does not affect the rights of a holder in due

urse without notice. A renunciation must be in writing unless thestrument is delivered up to the person primarily liable thereon.

Intentional Cancellation – Sec. 119(c)

ule in Case of Unintentional Cancellation

c. 123. Cancellation; unintentional; burden of proof. - A cancellationade unintentionally or under a mistake or without the authority of the holder,inoperative but where an instrument or any signature thereon appears tove been cancelled, the burden of proof lies on the party who alleges that the

cancellation was made unintentionally or under a mistake or without auth

Unlike renunciation, the law does not require cancellation to be in wThus, there is cancellation if the agent of the holder burned the note wknowledge and consent of the said holder.

D. Acts that Discharges Simple Contracts – Sec. 1199(d)

Civil Code, Art. 1231. Obligations are extinguished:(1) By payment or performance:(2) By the loss of the thing due:(3) By the condonation or remission of the debt;(4) By the confusion or merger of the rights of creditor and debtor;(5) By compensation;(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescfulfillment of a resolutory condition, and prescription, are governed elsein this Code.

STATE INVESTMENT HOUSE VS. COURT OF APPEALS (217 SC[1993]) – Nora Moulic issued checks to Corazon Victoriano as depo

jewelry that she obtained from the latter which were meant to be sother persons. When she was returning the jewelry, the payee fareturn the checks because she already negotiated the same to the petMoulic withdrew her funds from the drawee bank. ISSUE: WOobligation is extinguished? HELD: No. The acts which will discharge a contract for the payment of money under Sec. 119(d) are determinother existing legislations, e.g., Art. 1231 of the Civil Code. None

modes outlined therein is applicable in the instant case as Seccontemplates of a situation where the holder is the creditor while its dis the debtor. In the present action, the payee, Corazon Victoriano, wlonger Moulic’s creditor at the time the jewelry were returned.

E. Principal Debtor Becomes the Holder – Sec. 119(e)

a. An instrument is discharged when the principal debtor becomholder of the instrument at or after maturity date in his own rig

b. “In his own right” has been construed to exclude a case wmaker acquires the instrument in a purely representative caThus, the note is not discharged when the maker acquires it asof another.

c. Nor is it discharged when the maker becomes the holdexample, as executor or administrator.

d. HOWEVER, the maker is discharged even if he acquire

instrument through an agent who did not disclose his principal.

SIGLER VS. SIGLER (98 Kans. 158, p. 864 [1916]) – A certain Sigler issued a negotiable note to Ode Sigler. Later, Joseph employWilson to purchase the note from Ode at the lowest possible price. Ode learned that Wilson was really the agent of Joseph, he sued thebut Joseph claimed that the instrument was discharged. HELD: Thesustained Joseph explaining that there is no principle of law that prevent an individual from going into the market and purchasingdiscount or otherwise, securities upon which he is indebted and which put in circulation. If he may do so himself, he may accomplish thething through an agent who acts without disclosing the agency.

F. Payment for Honor

Sec. 171 Who may make payment for honor. - Where a bill ha

protested for non-payment, any person may intervene andsupra protest for the honor of any person liable thereon or honor of the person for whose account it was drawn.

Sec. 172 Payment for honor; how made. - The payment for honorprotest, in order to operate as such and not as a mere volpayment, must be attested by a notarial act of honormay be appended to the protest or form an extension to it.

Sec. 173 Declaration before payment for honor. - The notarialhonor must be founded on a declaration made by the payhonor or by his agent in that behalf declaring his intentpay the bill for honor and for whose honor he pays




a. Preference

c. 174. Preference of parties offering to pay for honor. - Where two orore persons offer to pay a bill for the honor of different parties, the personhose payment will discharge most parties to the bill is to be given theeference.

b. Effect on Subsequent Parties

c. 175. Effect on subsequent parties where bill is paid for honor. -here a bill has been paid for honor, all parties subsequent to the party forhose honor it is paid are discharged but the payer for honor is subrogatedr, and succeeds to, both the rights and duties of the holder as regards therty for whose honor he pays and all parties liable to the latter.

XAMPLE: DR issued a bill of exchange ordering DW to pay P or order. Pdorsed it to A, A to B, B to C and C to D, present holder. Later, DW refused toy and protest was duly made. X made a payment for the honor of A.B, C and D are discharged;X has a right of recourse against the persons liable to A, i.e., DR and P.

c. Holder has no option

ec. 176. Where holder refuses to receive payment supra protest. - here the holder of a bill refuses to receive payment supra protest, he losess right of recourse against any party who would have beenscharged by such payment.

the previous example, if D refused to accept payment for the honor of A, heses his right of recourse against B and C, who would have been discharged.

d. Rights of Payer

c. 177. Rights of payer for honor. - The payer for honor, on paying to thelder the (1) amount of the bill and the (2) notarial expenses incidental to itsshonor, is entitled to receive both the bill itself and the protest.

e.

Payment for Honor vs. Acceptance for Honor

PAYMENT FOR HONOR ACCEPTANCE FOR HONOR

There must be protest for non-payment

There must be prior protest fornon-acceptance or for bettersecurity

The bill is already overdue The bill is not yet overdue

The person who will pay may be astranger or a party

The acceptor must be a stranger

The consent of the holder is notnecessary and the holder whorefuses to accept payment loses hisright of recourse against any partywho may be discharged by suchpayment.

The consent of the holder is arequisite

f. Payment for Honor vs. Payment by Person Primarily Liable

PAYMENT FOR HONOR PAYMENT BY PERSONPRIMARILY LIABLE

There must be protest for non-payment

There is no need to protest fornon-payment or non-acceptance

A notarial act is necessary A notarial act is not necessaryThe person who will pay may be astranger or may be a party

The person who will pay is a party – maker or drawee-acceptor

It cannot be payment in duecourse and payment dischargesonly the parties after the party inwhose favor payment for honor ismade

Payment in due course dischargesthe instrument

In favor of a specified person andthe law requires that there is astatement of the person for whose

Payment is not in favor of specificparties

honor payment is made

G. Surrender of Instrument Upon Discharge

The instrument must be surrendered to the payor whenever dischargepayment by or in behalf of the principal debtor, payment by the accommparty, by renunciation or by any other ground that discharges simple conIf the instrument is not surrendered, it may fall in the hands of a holder course who may have the right to enforce the instrument despite the prpayment that was made.

H. Discharge of Persons SECONDARILY LIABLE

Sec. 120. When persons secondarily liable on the instrumendischarged. - A person secondarily liable on the instrument is discharge

(a) By any act which discharges the instrument;(b) By the intentional cancellation of his signature by the holder;(c) By the discharge of a prior party;(d) By a valid tender or payment made by a prior party;(e) By a release of the principal debtor unless the holder's right of reagainst the party secondarily liable is expressly reserved;(f) By any agreement binding upon the holder to extend the time of paymto postpone the holder's right to enforce the instrument unless made wassent of the party secondarily liable or unless the right of recourse asuch party is expressly reserved.

Sec. 120(a): Those previously discussed mentioned in Sec. 119;

Sec. 120(b) and (c): The cancellation of an indorsement of a secondarily liable may result in the discharge of that person whose sigwas stricken-off and also of subsequent parties, as provided in Sec. 4813) . The subsequent parties are likewise discharged since they are deprtheir right of recourse against the party whose signature was stricken-off

Sec. 120(c): As suggested by the majority view, does not include dischaoperation of law, such as bankruptcy, insolvency, prescription or failure tnotice of dishonor but only those discharged by virtue of some act creditor.

Sec. 120(d): “Tender of Payment” means the act by one which producoffers to a person holding a claim or demand against him the amount of which he considers and admits to be due, in satisfaction of such clademand without any stipulation or condition. The rule is only fair becauthe fault of the holder that he did not receive payment. If he accepte

tender of payment by a prior party, the subsequent party would havedischarged.

Sec. 120(e): When the principal debtor is released from liability, the secondarily liable loses their right of recourse against the former. Undparagraph, in order to holder the secondary liability, there must be ereservation of the right of recourse against parties secondarily liable, produces the implied reservation of their (parties secondarily liable) rrecourse against the maker.

Sec. 120(f): Extension of Term: the assurance of the drawer anindorsers is payment according to the tenor of the instruments, an extentime agreed by the holder and the principal debtor, therefore, releasesparties from secondary liability which varies from the original undertakthe secondary parties. It is suggested by Aquino that this rule appliesaccommodated party who is the principal debtor but not to an accommo

indorser, who must also be discharged by the extension agreed upon principal debtor and the holder.

IX. CHECKS

A. CHECKS DEFINED

Sec. 185. Check, defined. - A check is a bill of exchange drawn on payable on demand. Except as herein otherwise provided, the provisions

Act applicable to a bill of exchange payable on demand apply to a check




hecks are used between banks and bankers and their customers, and aresigned to facilitate banking operations. It is the essence to be payable onmand, because the contract between the banker and the customer is thate money is needed on demand (Banco de Oro Savings vs. Equitable Bankingorporation, supra, p.3)

DISINGUISHED FROM DRAFT

REPUBLIC OF THE PHILIPPINES VS. PNB (GR No. L-16106; Dec. 30,1961) – A demand draft is a bill of exchange payable on demand, as such, itis an open letter request from, and an order by, one person on another topay a sum of money therein mentioned to a third person, on demand or at afuture time specified therein. In fact, the term “draft” is often used, and isthe common term, for all “bills of exchange”. And the two words are used

indiscriminately.

A bill of exchange, within the meaning of NIL does not operate as anassignment of funds in the hands of the drawee who is not liable onthe instrument until he accepts it (Sec. 127). In fact, our law requiresthat they be presented either for acceptance or for payment within areasonable time after their issuance or after their last negotiation (Sec. 71),failure of which will discharge the drawer from liability or to the extent of theloss caused by the delay (Sec. 186).

A demand draft is very different from a cashier’s or manager’s check,contrary to appellant’s pretense, for it has been held that the latter is aprimary obligation of the bank which issues it and constitutes its writtenpromise to pay upon demand. In In Re Bank of the United States (277 NYS96, 100) , a cashier’s check has been characterized as follows:

“A cashier's check issued by a bank, however, is not an ordinary draft. Thelatter is a bill of exchange payable demand. It is an order upon a third partypurporting to be drawn upon a deposit of funds. A cashier's check is of avery different character. It is the primary obligation of the bank which issuesit (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and constitutes itswritten promise to pay upon demand (Steinmetz v. Schultz, 59 S.D. 603, 241N.W. 734)…”

The following definitions cited by appellant also confirm this view:

“ A cashier's check is a check of the bank's cashier on his or another bank. Itis in effect a bill of exchange drawn by a bank on itself and accepted inadvance by the act of issuance (10 C.J.S. 409).”

“ A cashier's check issued on request of a depositor is the substantial

equivalent of a certified check and the deposit represented by the checkpasses to the credit of the checkholder, who is thereafter a depositor to thatamount (Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756, 195 Ala. 552).”

“ A cashier's check, being merely a bill of exchange drawn by a bank on itself,and accepted in advance by the act of issuance, is not subject tocountermand by the payee after indorsement, and has the same legal effectsas a certificate deposit or a certified check (Walker v. Sellers, 77 So. 715,201 Ala. 189).”

A demand draft is not therefore of the same category as a cashier's checkwhich should come within the purview of the law.

RELATIONSHIP BETWEEN DRAWER, DRAWEE AND PAYEE

Ordinarily, checks are drawn on bank accounts that are opened by

drawers on drawee banks. The drawer of the check is a depositor of thedrawee bank.

The drawer issues checks in payment of an obligation to a payee. But apayee does not have contractual relationship with the drawee bank.

SPOUSES MORAN AND LIBRADA MORAN VS. CA (GR No. 105836;March 7, 1994) – The relationship between the bank and the depositor isthat of a debtor and creditor. By virtue of the contract of deposit betweenthem, the banker agrees to pay checks drawn by the depositor provided thatsaid depositor has money in the hands of the bank. Hence, where the bank

possesses funds of a depositor, it is bound to honor his checks to the of the amount of his deposits. The failure of the bank to pay the checkthe deposit is sufficient, entitles the drawer to substantial damages wany proof of actual damages. Conversely, a bank is not liable for its rto pay a check on account of insufficient funds, notwithstanding the faa deposit may be made later in the day.

This relationship between the drawer and the drawee bank makdrawee bank liable to the drawer in case of wrongful dishonor of chedrawee bank who wrongfully dishonors a check is not liable payee for lack of privity but it is liable to the drawer becaubreach of contract.

Sec. 189. When check operates as an assignment. - A check of itse

not operate as an assignment of any part of the funds to the credit drawer with the bank, and the bank is not liable to the holder unless andaccepts or certifies the check

3. As a consequence of the above provision, the drawee is not liablepayee just because the drawer actually issued the check to hvaluable consideration. There is no obligation on the drawee’s phonor the check and the payee has no cause of action against the deven if the dishonor was wrongful.

HSBC INTERNATIONAL TRUSTEE LIMITED vs. CECILIA CATALAN (G.R. No. 159590 & 15959; October 18, 2004) - FrederickThomson drew 5 checks payable to Catalan in the total amount of Hmillion. Catalan presented these checks to HSBC. The checksdishonored for having insufficient funds. Thomson demanded that the be made good because he, in fact, had sufficient funds. Catalan knthat Thomson had communicated with the Bank, asked HSBC Bank tthe checks and pay her the said amount. HSBC did not heed her. Thdied but Catalan was not paid yet. The account was transferred to[Trustee]. Catalan then requested Trustee to pay her. They still refuseeven asked her to submit back to them the original checks for verifiCatalan and her lawyer went to Hongkong on their own expenpersonally submit the checks. They still were not honored, leading Catfile a suit against HSBC to collect her HK$3.2M. ISSUE: Whether Catalan has a cause of action. HELD: Yes. Although Catalan has no caaction because under Section 189, they payee may sue the drawee batort under Art. 19 of the Civil Code. HSBC is not being sued on the vthe check itself but for how it acted in relation to Catalan’s claim for padespite the repeated directives of the drawer Thomson to recognicheck the latter issued. Catalan may have prayed that she be paid theof the checks but it is axiomatic that what determines the nature

action, as well as which court has jurisdiction over it, are the allegatthe complaint, irrespective of whether or not the plaintiff is entitrecover upon all or some of the claims asserted therein.

D. KINDS OF CHECK

1.

Cashier’s Check and Manager’s Check

BSP Circular No. 291 – Series of 2001

The Monetary Board, in its Resolution No. 707 dated 10 May 2001 deciauthorize the issuance of cashier’s, manager’s or certified checks orsimilar instruments in blank or payable to cash, bearer or numbered accoan exception from the provisions of Circular no. 259, subject to the folconditions:

a. That the amount of each check shall not exceed P10,000;

b. That the buyer of the check is properly identified as required under CNo. 259 dated 29 September 2000; and

c. That a register of gift checks issued shall be maintained with the folminimum information:

1. Date issued;2. Amount;3. Name of buyer;4. Date paid;




5. If the aggregate instruments purchased by the same person within anythirty (30) day period amounts to at least fifty thousand pesos(P50,000), the purpose of the buyer should be stated.

That banks which issue as well as those which accept as deposits, saidshier’s, manager’s or certified checks or other similar instruments issued inank or payable to cash, bearer or numbered account shall take sucheasure(s) as may be necessary to ensure that said instruments are not beinged/resorted to by the buyer or depositor in furtherance of a money-undering activity.

That the deposit of said instruments shall be subject to the samequirements/scrutiny applicable to cash deposits.

That transactions involving said instruments should be accordingly reportedthe Bangko Sentral ng Pilipinas if there is reasonable ground to suspect thatid transactions are being used to launder funds of illegitimate origin.

Certified Check

A certified check is one drawn by a depositor upon funds to his credit in abank which a proper officer of the bank certifies will be paid when dulypresented for payment. It is analogous to a certificate of deposit of acertifying bank.Certification is similar to acceptance but different in the sense that: (1)Certification at the instance of the holder discharges while there is nodischarge in an ordinary acceptance; (2) In certification, the bank debitsthe drawer’s account at the time of certification and sets aside funds outof the drawer’s control. Thus, the effect of certification is the same as thought the money hadbeen paid by the bank to the holder and redeposited by him in his owncredit.

NEW PACIFIC TIMBER & SUPPLY COMPANY, INC. vs. HON.ALBERTO V. SENERIS RICARDO A. TONG and EX-OFFICIO SHERIFFHAKIM S. ABDULWAHID [G.R. No. L-41764 December 19, 1980] - Acompromise judgment was rendered by the respondent Judge against NewPacific Timber. For failure of the petitioner to comply with his judgmentobligation, a writ of execution was issued for the amount of P63,130.00pursuant to which, the Ex-Officio Sheriff levied upon the following personalproperties of the petitioner. Prior to the auction sale, petitioner depositedwith the CFI, in his capacity as Ex-Officio Sheriff of Zamboanga City, the sumof P63,130.00. Private respondent refused to accept the check as well as thecash deposit. Private respondent requested the scheduled auction to proceedif the petitioner cannot produce the cash. In the course of the proceedings,

Deputy Sheriff Castro sold the levied properties item by item to the privaterespondent as the highest bidder in the amount of P50,000.00. As a resultthereof, the Ex-Officio Sheriff declared a deficiency of P13,130.00. Petitionerfiled an ex-parte motion for issuance of certificate of satisfaction ofjudgment. This motion was denied by the respondent Judge. Petitioner nowquestions said order as there was already a full satisfaction of the judgmentbefore the auction sale was conducted. ISSUE: WON the private respondentcan validly refuse acceptance of the payment of the judgment obligation inCashier's check which it deposited with the Ex-Officio Sheriff before the dateof the scheduled auction sale? HELD: No valid reason for the privaterespondent to have refused acceptance of the payment of the obligation inhis favor. It is to be emphasized in this connection that the check depositedby the petitioner in the amount of P50,000.00 is not an ordinary check but aCashier's Check of the Equitable Banking Corporation, a bank of goodstanding and reputation. As testified to by the Ex-Officio Sheriff with whom ithas been deposited, it is a certified crossed check . It is a well-known and

accepted practice in the business sector that a Cashier's Check is deemed ascash. Moreover, since the said check had been certified by thedrawee bank, by the certification, the funds represented by thecheck are transferred from the credit of the maker to that of thepayee or holder, and for all intents and purposes, the latterbecomes the depositor of the drawee bank, with rights and dutiesof one in such situation. The exception to the rule enunciated underSection 63 of the Central Bank Act to the effect "that a check which hasbeen cleared and credited to the account of the creditor shall be equivalentto a delivery to the creditor in cash in an amount equal to the amountcredited to his account" shall apply in this case.

PNB VS. NATIONAL CITY BANK OF NEW YORK (63 Phil 11) – Wcheck is certified, it ceases to possess the character, or to perforfunctions, of a check, and represents so much money on deposit, paythe holder on demand. The check becomes a basis of credit – an easyof passing money from hand to hand, and answers the purposes of mo

d. Provisions in NIL Related to Certified Checks

Sec. 187 Certification of check; effect of. - Where a check is certithe bank on which it is drawn, the certification is equivalenacceptance

Sec. 188 Effect where the holder of check procures it to be cer- Where the holder of a check procures it to be accepcertified, the drawer and all indorsers are discharged from

thereon Sec. 189 When check operates as an assignment. - A check o

does not operate as an assignment of any part of the funds credit of the drawer with the bank, and the bank is not liableholder unless and until it accepts or certifies the check

Sec. 188: The holder, by requesting such certification instead of payenters into a new contract with the bank, and one not within the contemof the drawer or a prior indorser, since they expect that the check wpresented for payment and not to be certified.

3. Crossed Checks

ASSOCIATED BANK VS CA (GR No. 89802; May 7, 1992) – ISSUEPrivate Respondent Merle Reyes, doing business under the name and

Melissa’s RWT, has a cause of action against petitioners Associated BanConrado Cruz for their encashment and payment to another person of ccrossed checks issued in her favor? HELD: Yes. Under accepted bapractice, crossing a check is done by writing two paralleldiagonally on the left top portion of the checks. The crossing is swhere the name of a bank or a business institution is written betthe two parallel lines, which means that the drawee should paywith the intervention of that company. The crossing is general wthe words written between the two parallel lines are "and Co." opayee's account only," as in the case at bar. This means that the dbank should not encash the check but merely accept it for deposit. InInvestment House Inc vs. IAC (supra, p. 19), the Court declared the effcrossing a check. The effects therefore of crossing a check relate to theof its presentment for payment. Under Sec. 72 of the Negotiable InstruLaw, presentment for payment, to be sufficient, must be made by the hoby some person authorized to receive payment on his behalf. Who the

or authorized person is depends on the instruction stated on the face check. The six checks in the case at bar had been crossed and issuepayee's account only." This could only signify that the drawers had intthe same for deposit only by the person indicated, to wit, Melissa's RTWbeing no evidence that the crossed checks were actually received by the respondent, she would have a right of action against the drawer compwhich in turn could go against their respective drawee banks, which icould sue the herein petitioner as collecting bank. In a similar situation, held that, to simplify proceedings, the payee of the illegally encashed should be allowed to recover directly from the bank responsible foencashment regardless of whether or not the checks were actually delivethe payee.

a. APPLICABLE LAW

There is no provision in the NIL that governs crossed check. Howe

provision concerning such type of check can be found in the CoCommerce:

Sec. 541. The maker or any legal holder of a check shall be entitled to intherein that it be paid to a certain banker or institution, which he shallwriting across the face the name of said banker or institution, or only the

“and company”.

The payment made to a person other than the banker or institution shexempt the person on whom it is drawn, if the payment was not comade.




nd the Bills of Exchange Act of 1882, cited in Chan Wan vs. Tan Kim (supra,15) :

General and special crossings defined.

(1)Where a cheque bears across its face an addition of —

(a)The words “and company” or any abbreviation thereof between twoparallel transverse lines, either with or without the words “notnegotiable”; or(b)Two parallel transverse lines simply, either with or without thewords “not negotiable”;

That addition constitutes a crossing, and the cheque is crossed

generally.

(2)Where a cheque bears across its face an addition of the name of abanker, either with or without the words “not negotiable,” that additionconstitutes a crossing, and the cheque is crossed specially and to thatbanker.

Crossing by drawer or after issue.

(1)A cheque may be crossed generally or specially by the drawer.

(2)Where a cheque is uncrossed, the holder may cross it generally orspecially.

(3)Where a cheque is crossed generally the holder may cross itspecially.

(4)Where a cheque is crossed generally or specially, the holder mayadd the words “not negotiable.”

(5)Where a cheque is crossed specially, the banker to whom it iscrossed may again cross it specially to another banker for collection.

(6)Where an uncrossed cheque, or a cheque crossed generally, is sentto a banker for collection, he may cross it specially to himself.

EFFECTS OF CROSSING CHECKS

STATE INVESTMENT HOUSE INC. VS. IAC (supra, p.19) – (1) the checkmay not be encashed but only deposited in the bank; (2) the check may benegotiated only once to one who has an account with a bank; and (3) theact of crossing the check serves as a warning to the holder that the check

has been issued for a definite purpose so that he must inquire if he hasreceived the check pursuant to that purpose, otherwise he is not a holder indue course.

BATAAN CIGAR AND CIGARETTE FACTORY, INC. VS. CA (supra, p. 18) – The negotiability of the check is not affected by it being crossed, whethergenerally or specially. It may legally be negotiated from one person toanother as long as the one who encashes the check with the drawee bank isanother bank, or if it is specially crossed, by the bank mentioned betweenparallel lines.

GEMPESAW VS. CA (supra, p. 14) – Issuing a crossed check imposes noobligation on the drawee not honor such a check. It is more of a warning tothe holder that the check cannot be presented to the drawee bank forpayment in cash. Instead, the check can only be deposited with the payee’sbank which in turn must present it for payment against the drawee bank in

the course of normal banking transactions between banks. The crossedcheck cannot be presented for payment but it can only be deposited and thedrawee bank may only pay to another bank in the payee’s or indorser’saccount.

MEMORANDUM AND TRAVELLER’S CHECK

a. Memorandum Check

PEOPLE VS. NITAFAN (GR No. 75954; Oct. 22, 1992) - Accused K.T. Lima.k.a Mariano Lim, herein Private Respondent, was charged before

Respondent Court with violation of B.P. 22 in an Information alleging tdrew and issued to one Fatima Cortez Sasaki a check in the amoPhp143,000.00, well knowing, however, that at the time of issue, he dhave sufficient funds with the drawee bank – the reason for the ladishonor the subject check. Respondent Lim, despite receipt of nosuch dishonor, failed to pay Sasaki the amount of said check or toarrangement for full payment of the same within five (5) banking dayreceiving said notice. In his Motion to Quash, Lim averred that the facnot constitute a felony because the kind of check he issued, it bmemorandum check, was in the nature of a promissory note, perforccivil in nature. Citing U.S. v. Isham, private respondent contendealthough a memorandum check may not differ in form and appearancan ordinary check, such a check is given by the drawer to the payee mthe nature of memorandum of indebtedness and, should be sued upo

civil action. Consequently, herein Respondent Judge Nitafan, ruling th22 on which the Information was based was unconstitutional, issuequestioned Order quashing the Information. Hence, this petition for on certiorari filed by the Solicitor General in behalf of the governISSUE: WON the parameters of a concept of check under B.P. 22 incchecks, specifically, memorandum check, that are drawn against HELD: YES. A memorandum check is in the form of an ordcheck, with the word "memorandum", "memo" or "mem" wacross its face, signifying that the maker or drawer engages tthe bona fide holder absolutely, without any condition conceits presentment. Such a check is an evidence of debt against the dand although may not be intended to be presented, has the effect as an ordinary check, and if passed to the third personbe valid in his hands like any other check. From the above definis clear that a memorandum check, which is in the form of an orcheck, is still drawn on a bank and should therefore be distinguished fpromissory note, which is but a mere promise to pay. If private resposeeks to equate memorandum check with promissory note, as he dskirt the provisions of B.P. 22, he could very well have issued a promnote, and this would be have exempted him form the coverage of the the business community a promissory note, certainly, has less impapersuadability than a check. A memorandum check must therefore fallthe ambit of B.P. 22 which does not distinguish but merely provide"[a]ny person who makes or draws and issues any check knowing time of issue that he does not have sufficient funds in or credit widrawee bank . . . which check is subsequently dishonored . . . shpunished by imprisonment.

b. Traveller’s Check

Traveller’s checks are instruments purchased from banks, express comp

or the like, in various denominations, which can be used like cash upon signature by the purchaser. It has the characteristics of a cashier’s checkissuer. It requires the signature of the purchaser at the time he buys it anat the time he uses it – that is when he obtains the check from the baalso at the time he delivers the same to the establishment that will bthereby (Black’s Law Dictionary).

E. CHECKS AND BILLS OF EXCHANGE DISTINGUISHED

BILLS OF EXCHANGE CHECKS

Not necessarily drawn on a deposit It is necessary that a checdrawn on a deposit

Death of a drawer of a BOE withthe knowledge of the bank doesnot revoke the authority of thebanker to pay

Death of the drawer of a chwith the knowledge of the brevokes the authority of banker to pay

May be presented for paymentwithin a reasonable tie after itslast negotiation if payable ondemand

Must be presented for paymwithin a reasonable time afteissue

The drawee may or may not be abank

The drawee is always a bank

Presentment for acceptance isnecessary for certain types of billsof exchange

Presentment for acceptance isnecessary

May be payable on demand or at afixed or determinable future time

Always payable on demand




WHEN REQUIRED TO BE PRESENTED FOR PAYMENT

c. 185. Check, defined. - A check is a bill of exchange drawn on a bankyable on demand. Except as herein otherwise provided, the provisionsthis Act applicable to a bill of exchange payable on demand applya check.

EFFECT OF DEATH OF DRAWER

e authority of the drawee bank to honor a check drawn against it is said toterminated by the death of the drawer. There is no provision in the NIL

pressing this rule. However, the Bill of Exchange Act of 1882 provides thattice of the customer’s death revokes the banker’s authority to pay.

oreover, the National Internal Revenue Code already disallows withdrawalom the bank account of the deceased unless proper taxes are paid to thereau of Internal Revenue.

COLLECTION OF CHECKS

The holder of the check may either present it for payment or he maydeposit it in his account with his bank known as the depositary bank orcollecting bank.The depositary bank will then make a provisional credit to his account inthe amount of the check.The check thereafter goes through the process of clearing through the

“clearinghouse” The clearinghouse is defined as “an association of banks or other payorsfor the purpose of settling accounts with each other on a daily basis. Eachmember of the clearinghouse forwards all deposited checks drawn onother members and receives from the clearinghouse all checks drawn onit. Balances are adjusted and settled each day.” It is only after the check has been cleared and collected from the draweebank that final credit is made in the payee-depositor’s account. The normal bank policy is to disallow withdrawal from the account of theamount covered by the check. IN some cases, the collecting bank may beheld liable for damages if it allows withdrawal of deposit even if the checkhas not yet been cleared by the drawee bank.

PERTINENT PHILIPPINE CLEARING HOUSE CORPORATIONRULES

ction 102. Interbank Settlement . - The Bangko Sentral shall establishcilities for interbank clearing under such rules and regulations as the

onetary Board may prescribe: Provided, That the Bangko Sentral may chargeministrative and other fees for the maintenance of such facilities.

The deposit reserves maintained by the banks in the Bangko Sentral incordance with the provisions of Section 94 of this Act shall serve as basis fore clearing of checks and the settlement of interbank balances, subject to suches and regulations as the Monetary Board may issue with respect to sucherations: Provided, That any bank which incurs on overdrawing in its depositcount with the Bangko Sentral shall fully cover said overdraft, includingterest thereon at a rate equivalent to one-tenth of one percent (1/10 of 1%)r day or the prevailing ninety-one-day treasury bill rate plus three percentageints, whichever is higher, not later than the next clearing day: Provided,rther, That settlement of clearing balances shall not be effected for anycount which continues to be overdrawn for five (5) consecutive banking daystil such time as the overdrawing is fully covered or otherwise converted intoemergency loan or advance pursuant to the provisions of Section 84 of this

t: Provided, finally, That the appropriate clearing office shall be officiallytified of banks with overdrawn balances. Banks with existing overdrafts withe Bangko Sentral as of the effectivity of this Act shall, within such period asay be prescribed by the Monetary Board, either convert the overdraft into an

mergency loan or advance with a plan of payment, or settle such overdrafts,d that, upon failure to so comply herewith, the Bangko Sentral shall takech action against the bank as may be warranted under this Act.

J. CRIMES INVOLVING CHECKS

1. Estafa

RPC, Art. 315. Swindling (Estafa) . – Any person who shall defraud aby any of the means mentioned hereinbelow shall be punished by:

xxx

2. By means of any of the following false pretenses or fraudulent acts exprior to or simultaneously with the commission of the fraud:

xxx

(d) By postdating a check, or issuing a check in payment of an obligwhen the offender had no funds in the bank, or his funds depotherein were not sufficient to cover the amount of the checkfailure of the drawer of the check to deposit the amount necessary to cocheck within three (3) days from receipt of notice from the bank and/oror holder that said check has been dishonored for lack or insufficiency oshall be prima facie evidence of deceit constituting false pretense or frauact.

ESSENTIAL ELEMENTS:a. That the offender postdated or issued a check in payment of an oblcontracted at the time the check was issued;b. That such postdating or issuing a check was done when the offender funds in the bank, or his funds deposited therein were not sufficient tothe amount of the check;c. Deceit or damage to the payee thereof.

2.

Bouncing Checks Law (Batas Pambansa Bilang 22)

BP Blg 22 was enacted to prevent the proliferation of worthless checks mainstream of daily business and to avert not only the undermining banking system of the country but also the infliction of damage and injurtrade and commerce occasioned by the indiscriminate issuances ochecks.

ELEMENTS:a. The making, drawing and issuance of any check to apply for accountvalue;b. The knowledge of the maker, drawer, or issuer that at the time of issdoes not have sufficient funds in or credit with the drawee bank fpayment of such check in full upon its presentment; and

c. The subsequent dishonor of the check by the drawee bank for insuffiof funds or credit or dishonor for the same reason had not the drawer, wany valid cause, ordered the bank to stop payment.

DOMAGASANG VS. CA (347 SCRA 75 [2000]) – While Sec. 2 of BP does not state that the notice of dishonor be in writing, taken in conjuhowever, with Sec. 3 of the law, a mere oral notice or demand to payappear to be insufficient for conviction under the law.

3.

Check Kiting

Art. 315, 1: With unfaithfulness or abuse of confidence, namely:

xxx

(b) By misappropriating or converting, to the prejudice of another, m

goods or any other personal property received by the offender in trustcommission, or for administration, or under any other obligation involviduty to make delivery of, or to return the same, even though such obligatotally or partially guaranteed by a bond; or by denying having receivedmoney, goods or other property.

a. KITING is the wrongful practice of taking advantage of the float, ththat elapses between the deposit of the check in one bank and its collecanother.b. The depositary bank will honor the checks even if it has not yetcleared. In anticipation of the dishonor of the check that was deposite



nspirators will replace the original check with another worthless check.Check kiting has been described as a procedure whereby checks written oncounts in separate banks are used to generate short-term purchasing powerrough the use of the bank’s credit.

FERMINA RAMOS VS. CA (GR. NO. L-64129-31; Nov. 18, 1991) – FerminaRamos, then manager of Family Savings Bank, was accused and convicted ofEstafa for allowing her co-accused to withdraw right there and then fromtheir uncollected and uncleared deposit which were subsequently dishonoredby the drawee banks, which were covered by 3 different informations filedagainst her of the 23 criminal charges filed. ISSUE: WON such acts areconsidered estafa? HELD: Yes. The crime committed by the accused wasestafa with unfaithfulness or abuse of confidence under Article 315subparagraph 1 (b) of the Revised Penal Code, in that she conspired and

cooperated with her co-accused to defraud the bank by allowing them towithdraw funds of the bank against their worthless check deposits.

STOP PAYMENT

A check is a mere order on a bank to pay money from the drawer’saccount. As such, it is subject to revocation by the drawer at any timebefore it is accepted.The drawer may countermand payment if he has a valid defense againstthe holder of the check such as failure to deliver the goods that the latteris supposed to deliver.If there was no valid reason, the drawee is still contractually obligated todishonor the check on the basis of the stop payment order.However, if he has no valid defense, the drawer remains liable and he isnot released from the legal obligation he contracted.IRON CLAD RULE – a cashier’s check is in the nature of an accepted orcertified check and the payment thereon cannot be countermanded by thepayor, provided the holder is not a holder in due course (Mesinca vs. IAC).

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