Negotiable Instrument 4d5v52

NEGOTIABLE INSTRUMENTS NOTES BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES Page 1 of 190

NOTES FORWEEK#1

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JUNE 12-16, , 2007 INTRODUCTION TO NEGOTIABLE INSTRUMENTS PURPOSE OF CODIFICATION  Chief purpose was to produce uniformity in the laws of the different states upon this important subject, so that the citizens of each state might know the rules which would be applied to their notes, checks, and other negotiable paper in every other state in which the law was enacted, since it is an absolute impossibility for the commercial purchaser  Second purpose was to preserve the law as nearly as possible as it then existed LAW EMBRACES SUBTANTIVE AND ADJECTIVE LAW MOST COMMON FORMS OF NEGOTIABLE INSTRUMENTS 1. Promissory notes 2. Bills of exchange 3. Checks, which are also bills of exchange, but of a special kind PROMISSORY NOTE, SECTION 184  “A negotiable promissory note, within the meaning of this act, is an unconditional promise in writing by one person to another, signed by the maker (1), engaging to pay on demand or at a fixed or determinable future time (2), a sum certain in money (3) to order or to bearer (4). Where a note is drawn to the maker’s own order, it is not complete until indorsed by them.”  Essentially a promise in writing to pay a sum certain in money  The promise is to pay on demand or on a fixed or determinable future time  General characteristics: amount; place where contract to pay is executed; due date; absolute promise to pay something; payable to order/bearer; payee; maker of the note BILL OF EXCHANGE, SECTION 126  “A bill of exchange is an unconditional order in writing addressed by one person to another signed by the person giving it (1), requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time (2) a sum certain in money (3) to order or to bearer (4).”

General characteristics: the order or command to pay; drawer/maker; drawee

CHECK  A bill of exchange drawn on a bank payable on demand CHECK BILL OF EXCHANGE Always drawn upon a bank or May or may not be drawn upon a banker bank Not necessary to present for Necessary acceptance Drawn on a deposit Not drawn Death of drawer revokes the Does not revoke authority of banker to pay Must be presented for payment May be presented for payment within a reasonable time after its within a reasonable time after its issue last negotiation

TO 1. 2. 3.

WHOM INSTRUMENTS MAY BE PAYABLE Bearer Order To a specified person

WHEN IS IT PAYABLE TO BEARER? 1. When it is expressed to be so payable 2. When it is payable to a person named therein or bearer WHEN IS IT PAYABLE TO ORDER? 1. When it is expressed to be payable to the order of a specified person 2. To a specified person or his order WHEN IS IT PAYABLE TO A SPECIFIED PERSON?  When the instrument is payable to a specified person named in the instrument and no other PARTIES TO A PROMISSORY NOTE 1. Maker—the person who executes the written promise to pay 2. Payee, if the instrument is payable to order—the person in whose favor the promissory note is made payable 3. Bearer, if the instrument is payable to bearer PARTIES TO A BILL OF EXCHANGE

BY: MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2D BATCH 2010


1. 2. 3. 4.

Drawer—the person who executes the written order to pay Payee, if the instrument is payable to order—the person in whose favor a bill of exchange is drawn payable Bearer, if the instrument is payable to bearer Acceptor—the drawee who signifies his assent to the order of the drawer. It is only when he accepts the bill that he becomes a party thereto and liable thereon.

OTHER PARTIES TO NEGOTIATED INSTRUMENTS 1. Indorser and 2. Indorsee, in the case of instruments payable to order 3. Persons negotiating by mere delivery 4. Persons to whom the instrument is negotiated by delivery INDORSER AND INDORSEE  When the negotiation is by indorsement completed by delivery, the parties added are the indorser and indorsee  Indorser—the one who negotiates the instrument  Indorsee—the one to whom the instrument is negotiated by indorsement WHERE INSTRUMENT IS PAYABLE TO BEARER  Where the instrument is payable to bearer, it can be negotiated by mere delivery without necessity of indorsement HOLDER  The payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof  If the instrument is payable to order, he who is the payee or indorsee and who is in possession thereof  If the instrument is payable to bearer, he who is in possession thereof INCIDENTS IN THE “LIFE” OF A NEGOTIABLE INSTRUMENT 1. Issue 2. Negotiation 3. Presentment for acceptance, in certain kinds of bills of exchange 4. Acceptance 5. Dishonor by non-acceptance 6. Presentment for payment 7. Dishonor by non-payment 8. Notice of dishonor 9. Payment ISSUE

BY: MA. ANGELA LEONOR C. AGUINALDO

 First delivery of the instrument, complete in form to a person who takes it as a holder DELIVERY  Consists principally of placing the transferee in possession of the instrument, but it must be accompanied by the intent to transfer title  “every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto” NEGOTIATION  Transfer of an instrument from one person to another as to constitute the transferee the holder of the instrument  Mode of transferring an instrument  Effect is to make the transferee the holder of the instrument HOW INSTRUMENT PAYABLE TO BEARER IS NEGOTIATED  May be negotiated by mere delivery HOW INSTRUMENT PAYABLE TO ORDER IS NEGOTIATED  Must be negotiated by indorsement completed by delivery  Indorsement is necessary to make the transferee the indorsee and delivery is necessary to place the transferee in possession of the instrument INDORSEMENT  Legal transaction, effected by the writing of one’s own name on the back of the instrument or upon a paper attached thereto, with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers one’s full legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid SPECIAL INDORSEMENT  Specifies the person to whom or to whose order the instrument is to be payable BLANK INDORSEMENT  One that doesn’t specify the person to whom or to whose order the instrument is to be payable NEGOTIATION, INDORSEMENT, DELIVERY, COMPARED. 1. Indorsement is merely the first step in the process of negotiating an instrument which is payable to order

ATENEO LAW 2D BATCH 2010


2. Where the instrument is payable to order, neither is delivery equivalent to negotiation 3. But where the instrument is payable to bearer, delivery is equivalent to negotiation PRESENTMENT FOR ACCEPTANCE  Exhibiting the bill to the drawee and demanding that he accept it, that is, signify his assent to the order or command of the drawer

SECONDARY LIABILITY OF DRAWER  By the mere drawing of the instrument, the drawer assumes liability stated in Section 61  The general tenor of the liability of the drawer is that he will pay bill if the drawee doesn’t accept or pay the bill.  In other words, he is not absolutely required to pay the bill—if drawee pays, then he is not required to pay. It is only when drawee doesn’t pay that he will be required to pay.

ACCEPTANCE  Signification of the drawee of his assent to the order of the drawer

SECONDARY LIABILITY OF INDORSER  He will pay the instrument if the person primarily liable will not pay.

DISHONOR BY ACCEPTANCE  Where the bill is presented for acceptance, and acceptance is refused by the drawee, or cannot be obtained, or where presentment for acceptance is excused, and the bill is not accepted

SECONDARY LIABILITY OF ONE NEGOTIATING BY DELIVERY  By merely delivering an instrument payable to bearer, without saying anything more, the person negotiating by mere delivery assumes the liability mentioned in Section 65.  Under said section, the general tenor of liability is similar to that of an indorser

PRESENTMENT FOR PAYMENT  Consists of exhibiting the instrument to the person primarily liable thereon and demanding payment form him on the date of maturity DISHONOR BY NON-PAYMENT  Where the instrument is presented for payment and payment is refused or cannot be obtained, or where presentment for payment is excused and the instrument is overdue and unpaid NOTICE OF DISHONOR  When an instrument has been dishonored by non-payment or non-acceptance DISCHARGE  An instrument is discharged by payment in due course by or on behalf of the principal debtor PARTIES PRIMARILY AND SECONDARILY LIABLE  Under the NIL, the person primarily liable on an instrument is the person who by the of the instrument is absolutely required to pay the same  All other parties are secondarily liable IN BILLS OF EXCHANGE  The acceptor is the one primarily liable  He is absolutely required to pay the instrument as he engages that he will pay it according to the tenor of his acceptance


the the the the

IN PROMISSORY NOTES  The maker is primarily liable  Agreement of the maker is that he will pay the instrument according to the tenor FUNCTION OF NEGOTIABLE INSTRUMENTS 1. Substitute for money 2. Increase the purchasing medium in circulation PAYMENT BY NEGOTIABLE INSTRUMENTS  W/N the giving and taking of a promissory note or bill of exchange is prima facie absolute payment as in the case of money or merely a prima facie conditional payment?  The delivery of the promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when, through the fault of the creditor, they have been impaired PRINCIPAL FEATURES OF NEGOTIABLE INSTRUMENTS 1. Negotiability 2. Accumulation of secondary contracts as they are transferred from one person to another



NEGOTIABILITY  Attribute or property whereby a bill, note or check es or may from hand to hand similar to money, so as to give the holder in due course the right to hold the instrument and collect the sums payable for himself free from defense. PRIMARY PURPOSE OF NEGOTIABILITY  To allow bills and notes the effect which money, in the form of government bills or notes, supplies in the commercial world ACCUMULATION OF SECONDARY CONTRACTS  Most important characteristic of negotiable instruments is the accumulation of secondary contracts which they pick up and carry with them as they are negotiated from one person to another  Advantage: they improve as they from hand to hand, as more debtors are added NEGOTIABILITY VS. ASSIGNABILITY ASSIGNABILITY More comprehensive term and pertains to contracts in general Subject to the defenses obtaining among the original parties It was necessary to allege and prove consideration to maintain an action on a common law instrument

Assignor in good faith doesn’t warrant the solvency of the debtor unless it has been expressly stipulated or unless the insolvency was prior to the assignment and of common knowledge

NEGOTIABILITY Pertains only to a special class of contracts—negotiable instruments Takes it free from personal defenses available among the parties Consideration is presumed and need not be alleged and proved Indorser is not liable on his indorsement unless there be presentment for payment at maturity and prompt notice of dishonor in case of dishonor General indorser is secondarily liable for any cause for which the party primarily liable on a negotiable instrument doesn’t or cannot pay. He warrants the solvency of the person primarily liable. The qualified indorser and the person negotiating by mere delivery have a limited secondary liability

Sec. 126. Bill of exchange, defined. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the


person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. TYPES OF BILLS OF EXCHANGE 1. Draft 2. Trade acceptance 3. Banker’s acceptance 4. Treasury warrants 5. Money orders 6. Clean bills of exchange 7. Documentary bill of exchange 8. D/A bills of exchange 9. D/P bills of exchange 10. Time or usance bills 11. Bills in set 12. Inland bills 13. Foreign bills DRAFT  Common term for used synonymously

all

bills

of

exchange

and

they

are

IN BANK DRAFTS, DRAWER AND DRAWEE BANK ARE LIABLE TO PURCHASER OF DRAFT FOR NOT COMPLYING WITH HIS INSTRUCTIONS  The drawee bank acting as “payor” bank is solely liable for acts not done in accordance with the instructions of the drawer bank or of the purchaser of the draft  The drawee bank has the burden of proving that it didn’t violate TRADE ACCEPTANCE  A bill of exchange payable to order and at a certain maturity, drawn by a seller against the purchaser of goods as drawee, for a fixed sum of money, showing on its face the acceptance of the purchaser of goods and that it has arisen out of a purchase of goods by the acceptor  A draft drawn by the seller on the purchaser of goods sold and accepted by such purchaser  States upon its face that the obligation of the acceptor arises out of purchase of goods from the drawer  Arises from credit obligations arising from the sale of goods and must have a definite maturity BANKER’S ACCEPTANCE



 Draft of which the acceptor is a bank or banker engaged generally in the business of granting banker’s acceptance credit  Similar to a trade acceptance  Drawn against the bank instead of the buyer TRUST RECEIPT  The written or printed document signed by the entrustee in favor of the entruster containing and conditions substantially complying with the provisions of this decree  The legal title to the matter entrusted remains in the entruster but the entruster gives to the trustee a form of title which is good and legal against everybody except the entruster  Entrustee—the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement  Entruster—person holding title over the goods, documents, or instruments subject of a TRA and any successor-in-interest of such person Sec. 184. Promissory note, defined. A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him. SPECIAL TYPES OF PROMISSORY NOTES 1. Certificate of deposit 2. Bonds 3. Bank notes 4. Due bills CERTIFICATE OF DEPOSIT  Written acknowledgement by a bank of the receipt of money on deposit which the bank promises to pay to the depositor, bearer, or to some other person or order BONDS  A promise, under seal to pay money  More formal in character  Runs for a longer period of time  Issued under different legal circumstances


CLASSES OF BONDS 1. Mortgage bonds 2. Equipment bonds 3. Collateral trust bonds 4. Guaranteed bonds 5. Debentures 6. Income bonds 7. Convertible 8. Redeemable 9. ed bonds 10. Coupon bonds Section 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. REQUISITES AS TO A NEGOTIABLE NOTE 1. It must be in writing and signed by the maker 2. It must contain an unconditional promise to pay a sum certain in money 3. It must be payable on demand, or at a fixed or determinable future time 4. It must be payable to order or to bearer REQUISITES AS TO A NEGOTIABLE BILL 1. It must be in writing and signed by the maker 2. It must contain an unconditional order to pay a sum certain in money 3. It must be payable on demand, or at a fixed or determinable future time 4. It must be payable to order or to bearer 5. The drawee must be named or otherwise indicated therein with reasonable certainty



THE INSTRUMENT MUST BE IN WRITING  There must be a writing of some kind, for if the instrument were not in writing, there would be nothing t o be negotiated or ed from hand to hand

SUM PAYABLE MUST BE DEFINITE AND CERTAIN  The amount of money to be paid must be determinable by inspection and must be stated plainly on the face of the instrument, and like the denomination of money, must be started in the body of the instrument

THE INSTRUMENT MUST BE SIGNED BY THE MAKER OR DRAWER  Full name must be written  At least the surname should appear and generally, the signature usually is by writing the signer’s name  But, where the name is not signed, the holder must prove that what is written is intended as a signature of the person sought to be charged  Commonly, it is found in the lower part of the instrument. It could also be signed anywhere as long as the maker or drawer acknowledges the signature to be his own.

SUM MUST BE PAYABLE IN MONEY ONLY  Money is the one standard of value in actual business or more stable standard of value  Legal tender—that kind of money which the law compels the creditor to accept in payment of his debt when tendered by the debtor in the right amount  But if authorized by law or consent of creditor, cash may be substituted by other means, or may be check  Instrument need not be payable in legal tender

IF A BILL, IT MUST CONTAIN AN ORDER TO PAY  It is an instrument demanding right  Any words which are equivalent to order or which show the drawer’s will that the money should be paid, are sufficient to make the instrument a bill of exchange

INSTRUMENT MUST SPECIFY DENOMINATION  Instruments should express the specific denomination of money when it is payable in the money of a foreign country in order that the courts may be able to ascertain its equivalent value; otherwise, it is non-negotiable

AN INSTRUMENT WITH AN EFFECT OF MERE AUTHORITY TO PAY  It is not negotiable because it is not an order to pay  “I hereby authorize you to pay P1000 to Pedro Cruz”

PAYABLE ON DEMAND OR ON A FIXED OR DETERMINABLE FUTURE TIME  On demand  At a fixed or determinable future time

EFFECT OF MERE REQUEST TO PAY  The instrument is not negotiable as it is not an order to pay but a mere request to pay  “Please to let the bearer have P70 and place to my and you will oblige”

WHERE NO YEAR IS SPECIFIED  Neither payable on demand or on a fixed or determinable future time  Time of payment is not determinable as the year is not stated

EFFECT OF MERE WORDS OF CIVILITY  The mere fact that it contains words of civility or courtesy doesn’t make it non-negotiable WHERE INSTRUMENT IS A NOTE, IT MUST CONTAIN A PROMISE TO PAY 1. It is enough that words of equivalent meaning are used 2. The promise is implied from promissory words contained in the instrument THE PROMISE OR ORDER TO PAY MUST BE UNCONDITIONAL  It must not be subject to a condition  It must be unconditional and absolute


THE INSTRUMENT MUST BE PAYABLE TO ORDER OR TO BEARER  An instrument is not negotiable unless made payable to a person or his order or bearer or unless words of the similar or equivalent import are used such as assigns or assignees or holder WHERE PAYABLE TO THE ORDER OF BEARER  Also negotiable  This was held to be payable to order  The payee of such an instrument is the bearer and it can only be negotiated by his indorsement WHERE PAYABLE TO A CERTAIN PERSON  Where the instrument is payable to a specified person, it’s not payable to order  Payable to a certain person or his agent



 Where payable to “bearer B” THE DRAWEE MUST BE NAMED  Requirement that refers only to bills of exchange  Drawee’s name may be omitted and be filled in under implied authority like any other blank  An acceptance may supply the omission of the designation IMPORTANCE OF FORMALITIES  Essential for the security of the mercantile transactions  Distinguish the negotiable instrument from the ordinary non-transferrable written contract NECESSITY OF COMPLIANCE WITH PROVISIONS  Where the instrument doesn’t conform with the requirements laid down in Section 1, then it is not governed by NIL DETERMINATION OF NEGOTIABILITY  By the provisions of the NIL, particularly Section 1 thereof  By considering the whole of the instrument  By what appears on the face of the instrument and not elsewhere SECTION 1: CASE DIGESTS 1

CEBU INTERNATIONAL V. CA 316 SCRA 488

FACTS: Petitioner is a quasi-banking institution involved in money market transactions. Alegre invested with petitioner P500,000. Petitioner issued then a promissory note, which would mature approximately after a month. The note covered for Alegre’s placement plus interest. On the maturity of the note, petitioner issued a check payable to Alegre, covering the whole amount due. It was drawn from petitioner’s current in BPI. When the wife of Alegre tried to deposit the check, the bank dishonored the check. Petitioner was notified of this matter and Alegre demanded the immediate payment in cash. In turn, petitioner promised to replace the check on the impossible premise that the first issued be returned to them. This prompted Alegre to file a complaint against petitioner and petitioner in turn, filed a case against BPI for allegedly unlawfully deducting from its counterfeit checks. The trial court decided in favor of Alegre. ISSUE: W/N NIL is applicable to the money market transaction held between petitioner and Alegre?


HELD: Considering the nature of the money market transaction, Article 1249 of the CC is the applicable provision should be applied. A money market has been defined to be a market dealing in standardized short-term credit instruments where lenders and borrowers don’t deal directly with each other but through a middleman or dealer in the open market. In a money market transaction, the investor is the lender who loans his money to a borrower through a middleman or dealer. In the case at bar, the transaction is in the nature of a loan. Petitioner accepted the check but when he tried to encash it, it was dishonored. The holder has an immediate recourse against the drawer, and consequently could immediately file an action for the recovery of the value of the check. Further, in a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal tender or, by the use of a check. A check is not legal tender, and therefore cannot constitute valid tender of payment. 2

ROMAN CATHOLIC OF MALOLOS V. IAC 191 SCRA 411

FACTS: Petitioner was the owner of a parcel of land. It then entered into a contract of lease agreement with Robes-Fransisco Realty for the parcel of land. The agreement was that there would be downpayment plus installments with interest. Robes-Fransisco was then in default. Knowing that it was in its payment of the installments, it requested for the restructuring of the installment payments but was denied. It then asked for grace period to pay the same and tendered a check thereafter. Such was refused and the contract was cancelled. HELD: A check whether a manager’s check or ordinary check is not legal tender and an offer of a check in payment of a debt is not valid tender of payment and may be refused receipt by the obligee or creditor. As this is the case, the subsequent consignation of the check didn't operate to discharge Robes-Fransisco from its obligation to petitioner. 3 FACTS:

BPI EXPRESS CARD CORPORATION V. CA 292 SCRA 260



Marasigan was the holder of a BPI credit card. Due to his delinquency in payment, immediate demand was given by BPI to pay . Marasigan issued a postdated check. The check was thereafter kept in custiody by BPI and card was temporarily suspended. And on a relevant date, Marasigan after eating in Café Adriatico tried to use his card to pay but it was dishonored. HELD: The issuance of the postdated check was not effective payment on the part of Marasigan and thus, the bank was justified in suspending temporarily his use of the credit card. A check is only a substitute for money and not money, and the delivery of such instrument doesn't itself operate as payment. 4

DEVELOPMENT BANK OF RIZAL V. SIMA WEI 219 SCRA 736

FACTS: Sima Wei executed a promissory note in consideration of a loan secured from petitioner bank. She was able to pay partially for the loan but failed to pay for the balance. She then issued two checks to pay the unpaid balance but for some unexplainable reason, the checks were not received by the bank but ended up in the hands of someone else. The bank instituted actions against Sima Wei and other people. The trial court dismissed the case and the CA affirmed this decision. HELD: A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a species of property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable instrument be delivered to the payee in order to evidence its existence as a binding contract. Section 16 provides that every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. Thus, the payee of the negotiable instrument acquires no interest with respect thereto until its delivery to him. Delivery of an instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended to give effect to the instrument. 5

CF SHARP & CO., INC. V. NORTHWEST AIRLINES, INC. 381 SCRA 314

FACTS:


Petitioner was authorized to sell tickets of Northwest Airlines-Japan, but failed to remit the proceeds. This prompted NWA to file suit against petitioner in Tokyo and judgment was rendered in its favor. Thereafter, the RTC issued a writ of execution for foreign court’s decision. The petitioner filed for certiorari, asserting it has already made partial payments. The CA lowered the amount to be paid and included in its decision that the amount may be paid in local currency at rate prevailing at time of payment. HELD: Under RA 529, stipulations on the satisfaction of obligations in foreign currency are void. Payments of monetary obligations, subject to certain exceptions, shall be discharged in the currency which is the legal tender of the Philippines. But since the law doesn't provide for the rate of exchange for the payment of foreign currency obligations incurred after its enactment, jurisprudence held that the exchange rate should be the prevailing rate at time of payment. This law has been amended, allowing payments for obligations to be made in currency other than Philippine currency but then again, it failed to state what the exchange rate that should be used. This being the case the jurisprudence regarding the use of the exchange rate at time of payment shall be used. 6

TIBAJIA V. CA 223 SCRA 163

FACTS: Tan filed a suit against spouses Tibaija. Decision was rendered in her favor. She then filed a motion of execution for the amount deposited and the cashier of RTC was garnished for the amount deposited therein by the spouses. This prompted the spouses to deliver cash and check but Tan refused to accept. HELD: A check is not valid legal tender and the creditor may validly refuse payment by check. 7

CALTEX V. CA 12 SCRA 448

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



reissuance. Upon compliance with some formal requirements, he was issued replacements. Thereafter, he secured a loan from the bank where he assigned the certificates as security. Here comes the petitioner, averred that the certificates were not actually lost but were given as security for payment for fuel purchases. The bank demanded some proof of the agreement but the petitioner failed to comply. The loan matured and the time deposits were terminated and then applied to the payment of the loan. Petitioner demands the payment of the certificates but to no avail. SECURITY BANK AND TRUST COMPANY 6778 Ayala Ave., Makati No. 90101 Metro Manila, Philippines SUCAT OFFICEP 4,000.00 CERTIFICATE OF DEPOSIT Rate 16% Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____ This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per cent per annum. (Sgd. Illegible) (Sgd. Illegible) —————————— ——————————— AUTHORIZED SIGNATURES HELD: CTDs are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical in the documents, instead of having the word


"BEARER" stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself. In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products." This ission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an ission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon 8 FACTS:

TRADERS ROYAL BANK V. CA 269 SCRA 15



Filriters through a Detached Agreement transferred ownership to Philfinance a Central Bank Certificate of Indebtedness. It was only through one of its officers by which the CBCI was conveyed without authorization from the company. Petitioner and Philfinance later entered into a Repurchase agreement, on which petitioner bought the CBCI from Philfinance. The latter agreed to repurchase the CBCI but failed to do so. When the petitioner tried to have it ed in its name in the CB, the latter didn't want to recognize the transfer. HELD: The CBCI is not a negotiable instrument. The instrument provides for a promise to pay the ed owner Filriters. Very clearly, the instrument was only payable to Filriters. It lacked the words of negotiability which should have served as an expression of the consent that the instrument may be transferred by negotiation. The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchstone relating to the protection of holders in due course, and the freedom of negotiability is the foundation for the protection, which the law throws around a holder in due course. This freedom in negotiability is totally absent in a certificate of indebtedness as it merely acknowledges to pay a sum of money to a specified person or entity for a period of time. The transfer of the instrument from Philfinance to TRB was merely an assignment, and is not governed by the negotiable instruments law. The pertinent question then is—was the transfer of the CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with existing law, so as to entitle TRB to have the CBCI ed in its name with the Central Bank? Clearly shown in the record is the fact that Philfinance’s title over CBCI is defective since it acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that the transfer was for ‘value received‘, there was really no consideration involved. What happened was Philfinance merely borrowed CBCI from Filriters, a sister corporation. Thus, for lack of any consideration, the assignment made is a complete nullity. Furthermore, the transfer wasn't in conformity with the regulations set by the CB. Giving more credence to rule that there was no valid transfer or assignment to petitioner. 9

INCIONG V. CA 257 SCRA 578

FACTS:


A promissory note was issued by petitioner together with 2 others tly and severally, to make them liable to PBC. Thereafter was a default on the payment of the note. PBC proceeded against Inciong and in the action filed by the bank, the court decided in its favor. HELD: Where the promissory note expressly states that the three signatures therein are tly and severally liable, any one or some or all of them may be proceeded against for the entire obligation—the choice is left to the solidary creditor to determine against whom he will enforce collection. 10

FIRESTONE TIRE V. CA 353 SCRA 601

FACTS: Fojas Arca and Firestone Tire entered into a franchising agreement wherein the former had the privilege to purchase on credit the latter’s products. In paying for these products, the former could pay through special withdrawal slips. In turn, Firestone would deposit these slips with Citibank. Citibank would then honor and pay the slips. Citibank automatically credits the of Firestone then merely waited for the same to be honored and paid by Luzon Development Bank. As this was the circumstances, Firestone believed in the sufficient funding of the slips until there was a time that Citibank informed it that one of the slips was dishonored. It wrote then a demand letter to Fojas Arca for the payment and damages but the latter refused to pay, prompting Firestone to file an action against it. HELD: The withdrawal slips, at the outset, are non-negotiable. Hence, the rule on immediate notice of dishonor is non-applicable to the case at hand. Thus, the bank was under no obligation to give immediate notice that it wouldn't make payment on the subject withdrawal slips. Citibank should have known that withdrawal slips are not negotiable instruments. It couldn't expect then the slips be treated like checks by other entities. Payment or notice of dishonor from respondent bank couldn't be expected immediately in contrast to the situation involving checks. In the case at bar, Citibank relied on the fact that LDB honored and paid the withdrawal slips which made it automatically credit the of Firestone with the amount of the subject withdrawal slips then merely waited for LDB to honor and pay the same. It bears stressing though that Citibank couldn't have missed the non-negotiable character of the slips. The essence of negotiability which characterizes a negotiable paper as a



credit instrument lies in its freedom to be a substitute for money. withdrawal slips in question lacked this character.

The

this however, the jewelry was redeemed by a Tomasa de Leon who presented the pawnshop ticket.

The withdrawal slips deposited were not checks as Firestone its and Citibank generally was not bound to accept the withdrawal slips as a valid mode of deposit. Nonetheless, Citibank erroneously accepted the same as such and thus, must bear the risks attendant to the acceptance of the instruments. Firestone and Citibank could not now shift the risk to LDB for their committed mistake.

HELD: Having been informed by the petitioner and the police that jewelry pawned to it was either stolen or involved in an embezzlement of the proceeds of the pledge, pawnbroker became duty bound to hold the things pledged and to give notice to the petitioner and authorities of any effort to redeem them. Such a duty was imposed by Article 21 of the CC. The circumstance that the pawn ticket stated that the pawn was redeemable by the bearer, didn’t dissolve this duty. The pawn ticket wasn’t a negotiable instrument under the NIL, nor was it a negotiable document of title under Article 1507 of the CC.

11

SESBRENO V. CA 222 SCRA 466

FACTS: Petitioner made a placement with Philfinance. The latter delivered to him documents, some of which was a promissory note from Delta Motors and a post-dated check. The post-dated checks were dishonored. This prompted petitioner to ask for the promissory note from DMC and it was discovered that the note issued by DMC was marked as non-negotiable. As Sesbreno failed to recover his money, he filed case against DMC and Philfinance. HELD: The non-negotiability of the instrument doesn’t mean that it is non-assignable or transferable. It may still be assigned or transferred in whole or in part, even without the consent of the promissory note, since consent is not necessary for the validity of the assignment. In assignment, the assignee is merely placed in the position of the assignors and acquires the instrument subject to all the defenses that might have been set up against the original payee. 12

SERRANO V. CA 196 SCRA 107

FACTS: Serrano bought some jewelry from Ribaya. Due to need of finances, she decided to have the jewelry pawned. She instructed her secretary to do so for her, which the secretary did but absconded after receiving the proceeds. It is to be noted that the pawnshop ticket indicated that the jewelry was redeemable “by presentation by the bearer.” Afterwards, there was a lead on where the jewelry was pawned. An investigation was done to the suspicion. The jewelry was to be sold in a public auction then. The petitioner and police authorities informed the pawnshop owner not to sell the jewelry as she was the rightful owner thereof. Despite of

Sec. 2. What constitutes certainty as to sum. The sum payable is a sum certain within the meaning of this Act, although it is to be paid: (a) with interest; or (b) by stated installments; or (c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) with exchange, whether at a fixed rate or at the current rate; or (e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity. WITH INTEREST  The fact that the sum payable is to be paid with interest doesn’t render the sum uncertain  Amount can easily be computed  When interest is stipulated but not specified, the legal interest shall be used  Where there is no stipulation, the legal rate shall be paid when the debtor incurs delay  Interest due shall earn legal interest from the time it is judicially demaned, although the instrument may be silent upon this point ESCALATION AND DEESCALATION CLAUSE—FORMER VALID IF ACCOMPANIED BY THE LATTER  May stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the MB



 Deescalation clause—stipulation in the agreement that the rate of interest agreed upon shall be reduced if the maximum rate of interest is decreased by law or by the MB BY STATED INSTALLMENTS 1. Must be stated 2. The maturity of each installment must be fixed or determinable— required in order to comply with the requisite that the instrument, if not payable on demand, must be payable on a fixed or determinable future time BY STATED INSTALLMENTS, WITH ACCELERATION CLAUSE  Acceleration clause—“upon default in the payment of any installment, the whole sum payable shall become due”  It hastens the payment of the whole note WITH EXCHANGE  While the rate of exchange is not always the same and while it is technically true that the resort must be had to extrinsic evidence to ascertain what it is, yet the current rate of exchange between two places at a particular date is a matter of common commercial knowledge, or at least easily ascertained by anyone so that the parties can always, without difficulty, ascertain the exact amount necessary to discharge the paper  Applies only to instruments drawn in one country and payable in another

SECTION 2: CASE DIGESTS 13

MEDEL V. CA 299 SCRA 481

FACTS: Four loans were involved in this case. The first loan was secured by the spouses Medel from Gonzales in the amount of P50,000 wherein P3,000 was withheld by the latter as advance interest. This was secured by a P/N. The second loan obtained was for P90,000. P84,000.

The spouses only received

The third loan was for P300,000 and this was secured by a real estate mortgage. The spouses failed to pay for the aforementioned three loans. This was consolidated into one loan in the amount of P500,000. An additional P60,000 was loaned to make the payable P500,000. This was covered with a promissory note containing an accelaration clause. Again the spouses failed to pay. The appellate court modified the interest to be paid by saying that that the interest should be 5.5% per month.

EXCHANGE  Difference in value of the same amount of money in different countries  Current rate or fixed rate

HELD: The interest was exorbitant, iniquitous, and unconscionable and hence, it contrary to morals, if not the law.

WITH COSTS AND ATTORNEY’S FEES  An instrument may thus stipulate that costs of collection and attorney’s fees shall be paid by the debtor in addition to the principal in case the instrument shall not be paid in maturity  Although the stipulation will make the sum after maturity uncertain, it will not affect the certainty of the sum payable at maturity and therefore, will not affect the negotiability of the instrument in which it is stipulated

The interest should be lowered down.

NOTES FOR WEEK 2 JUNE 18-23, , 2007


14

RADIOWEALTH FINANCE V. INTERNATIONAL CORPORATE BANK 182 SCRA 862

FACTS: The petitioner entered into a Credit Facilities agreement with Interbank. This is secured by a promissory note, trust receipts, security arrangements, which included provisions on payment of attorney’s fees and costs of collection in case of default. The petitioner failed to pay. A compromise agreement was entered into by the parties but this agreement


failed to include the attorney’s fees and costs of collection. The trial court reduced the percentage of attorney’s fees in its decision.

But an order or promise to pay out of a particular fund is not unconditional.

HELD: The courts may modify the attorney’s fees previously agreed upon where the amount appears to be unconscionable and unreasonable. For the law recognizes the validity of stipulations included in documents such as negotiable instruments and mortgages with respect. The fees in this case are reasonable and fair.

APPLICATION OF SECTION  Whether or not the indication of a particular fund or particular , or the statement of the transaction which gives rise to the instrument, would make the promise or order conditional

15

BACHRACH V. GOLINGCO 39 PHIL 139

FACTS: Bachrach sold a truck to Golingco, which was secured by a promissory note and a chattel mortgage on the truck. The promissory note provided that there would be payment of 25% attorney’s fees. HELD: It may lawfully be stipulated in favor of the creditor that in the event that it becomes necessary, by reason of the delinquency of the debtor, to employ counsel to enforce payment of the obligation, a reasonable attorney’s fee shall be paid by the debtor, in addition to amount due of principal and interest. The legality of this stipulation, when annexed to the negotiable instrument, is recognized by the NIL. The courts have the power to limit the amount recoverable under a special provision in a promissory note, whereby the debtor obligates himself to pay a specified amount, or a certain per centum of the principal debt, in satisfaction of attorney’s fees for which the creditor would become liable in suing upon the note. *Normally, if there is absence of any agreement as to attorney’s fees, then the court would only grant nominal amounts.

INDICATION OF A PARTICULAR FUND  First case, the particular fund is not the direct source of the payment, only the source of reimbursement  Unconditional—drawee pays the payee from his own funds and afterwards, the drawee pays himself from the particular fund indicated  But an order or promise to pay out of a particular fund is not unconditional—particular fund is the direct source of payment  Conditional—where the payment to the payee is directly from the funds indicated, the payment is the subject to the condition that the funds indicated are sufficient PARTICULAR TO BE DEBITED  The instrument is to be paid first and afterwards, the particular indicated will be debited  The payment is not subject to the sufficiency or adequacy of the particular to be debited STATEMENT OF TRANSACTION  Instruments are not issued without any transaction upon which they are based  Generally negotiable but a statement of transaction will render the instrument non-negotiable where the promise or order to pay is made subject to the conditions and of the transactions stated, then the instrument is rendered non-negotiable

Sec. 3. When promise is unconditional. An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with:

AS PER CONTRACT NOTES  The appearance of words “as per contract” on the face of the instruments in any position doesn’t affect the negotiability of the instrument

(a) An indication of a particular fund out of which reimbursement is to be made or a particular to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument.

CHATTEL NOTES  A promissory note given for a chattel and stipulating that the title to the chattel shall remain in the vendor-payee until the note is paid, is not conditional




REFERENCE TO MORTGAGES  Provisions in the mortgage doesn’t affect the negotiability of the instrument it secures  Where a note otherwise negotiable contains the words “this note is secured by a mortgage” and the mortgage contains clauses promising to do many acts other than the payment of money, it was held that the note is not rendered non-negotiable WHEN REFERENCE TO A MORTGAGE RENDERS INSTRUMENT NONNEGOTIABLE  When there is uncertainty in amount or when such provisions become part of the note, even though they aren’t in the note itself, the instrument is also rendered non-negotiable SECTION 3: CASE DIGESTS 16

ABUBAKAR V. AUDITOR GENERAL 81 PHIL. 359

FACTS: The auditor general refuses to authorize the payment of the treasury warrant issued in the name of Placido Urbanes, now in the hands of Benjamin Abubakar. The auditor general refuses to do so because, first, the money available for redemption of treasury warrants was appropriated by law and the subject warrant doesn’t fall within the purview of the law; second, one of the requirements was not complied with, which is it must be sworn that the holders of the warrant covering payment or replenishment of cash advances for official expenditures received them in payment of definite government obligations. HELD: Petitioner holds that he is a holder in good faith and for value of a negotiable instrument and is entitled to the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is within the scope of the NIL. For one thing, the document bearing on its face the words “payable from the appropriation for food istration”, is actually an order for payment out of a particular fund, and is not unconditional, and doesn’t fulfill one of the essential requirements of a negotiable instrument. 17

METROPOLITAN BANK V. CA 194 SCRA 169

FACTS:


Gomez opened an with Golden Savings bank and deposited 38 treasury warrants. All these warrants were indorsed by the cashier of Golden Savings, and deposited it to the savings in a Metrobank branch. They were sent later on for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. On persistent inquiries on whether the warrants have been cleared, the branch manager allowed withdrawal of the warrants, only to find out later on that the treasury warrants have been dishonored. HELD: The treasury warrants were not negotiable instruments. Clearly, it is indicated that it was non-negotiable and of equal significance is the indication that they are payable from a particular fund, Fund 501. This indication as the source of payment to be made on the treasury warrant makes the promise to pay conditional and the warrants themselves nonnegotiable. Metrobank then cannot contend that by indorsing the warrants in general, GS assumed that they were genuine and in all respects what they purport it to be, in accordance to Section 66 of the NIL. The simple reason is that the law isn’t applicable to the non-negotiable treasury warrants. The indorsement was made for the purpose of merely depositing them with Metrobank for clearing. It was in fact Metrobank which stamped on the back of the warrants: “All prior indorsements and/or lack of endorsements guaranteed…” Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: (a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) On or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. “AFTER SIGHT”


 After the drawee has seen the instrument upon presentment for acceptance

I promise to pay B or his order P100 ten days after sight. Signed A ACCELARATION NOTES  There are certain notes which contain acceleration provisions  Make it possible for the maker to pay the instrument at an earlier date or make it possible for the holder to require payment of the instrument at an earlier date

I promise to pay B or order P100 on or before July 1, 2007. Signed A *Type of acceleration note wherein the option to accelerate belongs to the maker, in the above case is A. EXAMPLES OR ILLUSTRATIONS OF ACCELARATION NOTES 1. That contain acceleration clauses on the maker’s default in payment of installments or of interest, or on the happening of an extrinsic event 2. Or contain, in notes secured by collateral, a provision that the maker shall supply additional collateral in case of depreciation in the value of the original deposit, with the holder’s right to declare the note due immediately on failure to make good the depreciation a. Non-negotiable—time for payment becomes uncertain and indefinite b. It doesn’t render it non-negotiable—that from the standpoint of expediency as encouraging circulation and of business custom on of their common acceptance by the commercial world, such clauses should be interpreted as not affecting negotiability 3. Or contain provisions for acceleration when holder deems himself insecure a. It is rendered non-negotiable where it is payable at a fixed and future time, but with an option on the part of the holder to declare it due and demandable before maturity whenever he deems it insecure but to hold them non-negotiable is a spurious construction of the Act


b.

It is rendered non-negotiable when the whole condition is lodged to the holder—middle ground is so long as the basis is dependent on factors not within the control of the holder, then it would still be negotiable

WORD USED IS AFTER  The word used in the law is “after” and not before Sec. 5. Additional provisions not affecting negotiability. An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which: (a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) authorizes a confession of judgment if the instrument be not paid at maturity; or (c) waives the benefit of any law intended for the advantage or protection of the obligor; or (d) gives the holder an election to require something to be done in lieu of payment of money. But nothing in this section stipulation otherwise illegal.

shall

validate

any

provision

or

GENERAL RULE AS TO THE ADDITIONAL ACT  The general rule is that an instrument must not contain an order or promise to do any act in addition to the payment of money. Otherwise, the instrument wouldn’t be negotiable. FOUR EXCEPTIONS TO THE GENERAL RULE 1. SALE OF COLLATERAL SECURITIES if the instrument be not paid at maturity 2. Authorizes CONFESSION OF JUDGMENT if the instrument be not paid at maturity 3. WAIVER OF BENEFIT OF LAW for the protection and benefit of the obligor 4. Gives the HOLDER an election to require something to be done in lieu of payment of money


PROMISE TO FURNISH ADDITIONAL SECURITY  A promise of the maker to render additional collateral will render the note non-negotiable, as that would be an additional act to the promise to pay money  However, they are to be distinguished from those instruments in which the holder may demand collateral, and failure to furnish it accelerates the instrument which are clearly negotiable, but merely accelerable on the non-performance of an optional act SALE OF COLLATERAL SECURITIES  The law gives exceptions to the general rule that “an instrument which contains an order or promise to do any act in addition to the payment of money is non-negotiable”  Sometimes, the obligation arising from the transaction which gives rise to the instrument is secured by a mortgage or pledge  The additional act to be performed is to be executed after the date of maturity, when the instrument c eases to be negotiable in the full commercial sense  Before date of maturity, however, the sale of collateral securities would render the instrument non-negotiable CONFESSION OF JUDGMENT  Must be after the date of maturity  Second exception to the rule TWO CLASSES OF CONFESSION OF JUDGMENT 1. Cognovit actionem—a written confession of an action by the defendant, subscribed but not sealed, and irrevocably authorizing any attorney of any court of record to confess judgment and issue execution usually for the sum named. It is given in order to save expense and differs from a warrant of attorney, which is given to an expressly designated attorney before the commencement of any action and is under seal. 2. Confession relicta verificatione—confession of judgment made after plea is pleaded WARRANT OF ATTORNEY  Instrument in writing addressed to one or more attorneys named therein, authorizing them, generally to appear in court, or in some specified court on behalf of the person giving it, and to confess judgment in favor of some particular person named therein in an action for debt EFFECT OF CONFESSION OF JUDGMENT IN THE PHILIPPINES


In the Philippines, a confession of judgment is considered void as it is against public policy-1. Because they enlarge the field for fraud 2. Because under this treatment, the promissory bargains away his right to a day in court 3. Because the effect of the instrument is to strike down the right to appeal accorded by statute WAIVER OF BENEFIT  Waives the benefit of any law intended for the advantage and protection of the obligor  Examples: presentment for payment, notice of dishonor, protest ELECTION OF HOLDER TO REQUIRE SOME OTHER ACT  Fourth exception to the rule  Even if there is an additional act, the instrument still remains to be negotiable provided that the right to choose between payment of money or the performance of the additional act is in the hands of the holder CASE DIGESTS: SECTION 5 18

NATIONAL BANK V. MANILA OIL REFINING 43 PHIL 444

FACTS: Manila Oil has issued a promissory note in favor of National Bank which included a provision on a confession of judgment in case of failure to pay obligation. Indeed, Manila Oil has failed to pay on demand. This prompted the bank to file a case in court, wherein an attorney associated with them entered his appearance for the defendant. To this the defendant objected. HELD: Warrants of attorney to confess judgment aren’t authorized nor contemplated by our law. Provisions in notes authorizing attorneys to appear and confess judgments against makers should not be recognized in our jurisdiction by implication and should only be considered as valid when given express legislative sanction. ATTY. MERCADO’S QUESTIONS: 1. What are the arguments for the validity of a confession of judgment? 2. One of the arguments is that the NIL acknowledges the validity of a stipulation for a confession of judgment. Is this sufficient? The answer is no.



19

TRADERS INSURANCE V. DY ENG BIOK 104 PHIL 806

FACTS: Dy Eng Giok was a provincial sales agent of distillery corporation, with the responsibility of remitting sales proceeds to the principal corporation. He has a running balance and to satisfy payment, a surety bond was issued with petitioner as guarantor, whereby they bound themselves liable to the distillery corporation. More purchases was made by Dy Eng Giok and he was able to pay for these additional purchases. Nonetheless, the payment was first applied to his prior payables. A remaining balance still is unpaid. Thus, an action was filed against sales agent and surety company. Judgment was rendered in favor of the corporation. HELD: The remittances of Dy Eng Giok should first be applied to the obligation first contracted by him and covered by the surety agreement. First, in the absence of express stipulation, a guaranty or suretyship operates prospectively and not retroactively. It only secures the debts contracted after the guaranty takes effect. To apply the payment to the obligations contracted before the guaranty would make the surety answer for debts outside the guaranty. The surety agreement didn't guarantee the payment of any outstanding balance due from the principal debtor but only he would turn out the sales proceeds to the Distileria and this he has done, since his remittances exceeded the value of the sales during the period of the guaranty. Second, since the Dy Eng Biok’s obligations prior to the guaranty were not covered, and absent any express stipulation, any prior payment made should be applied to the debts that were guaranteed since they are to be regarded as the more onerous debts. Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that: (a) it is not dated; or (b) does not specify the value given, or that any value had been given therefor; or

(c) does not specify the place where it is drawn or the place where it is payable; or (d) bears a seal; or (e) designates a particular kind of current money in which payment is to be made. But nothing in this section shall alter statute requiring in certain cases the consideration to be stated in the instrument.

or repeal nature of

EFFECT OF OMISSION OF DATE  Even where the instrument is not dated, still the instrument is not rendered non-negotiable  There are however instances, wherein the date is needed for the instrument to become negotiable  When are these instances? o When it is payable in a period after date or after sight o When it is allowed to write the date… (Section 13) ATTY. MERCADO: “WHEN IS DATING REQUIRED TO COMPLETE THE INSTRUMENT?” EFFECT OF OMISSION OF VALUE  Usually, what is stated in the instrument is that it is being used for “value received” without specifying what that value is  Nevertheless, the absence of value given, doesn’t render the instrument non-negotiable PARTICULAR KIND OF MONEY  Even if the money in which the instrument is to be payable is not legal tender, provided that it is current money or foreign money which has a fixed value in relation to the money in the country in which the instrument is payable, still the negotiability of the instrument is not affected, as the instrument still is considered payable in money Sec. 7. When payable on demand. - An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed.


any the



Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. EXPRESSED TO BE PAYABLE ON DEMAND  An instrument is payable on demand where it is expressed to be payable on demand, on sight, or on presentation  It is payable on demand also when no date of payment is specified  It is payable on demand when the time of payment is left blank or unfilled INSTRUMENT ON DEMAND ONLY AS BETWEEN THE PARTIES  That after the date of maturity, the instrument can no longer be negotiated as to make the parties who acquire the instrument after the date of maturity holders in due course because they become holders thereof with notice that it is already overdue, as this can be determined from the face of the instrument itself Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees tly; or (e) One or some of several payees; or (f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. WORDS OF NEGOTIABILITY  Among others, for an instrument to be negotiable, it should contain words of negotiability  There are only 2 ways by which an instrument and the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed or delivered the same  Without the words “or order” or “to order of”, the instrument is payable only to the person designated therein and therefore, is non-negotiable MEANING OF THE PHRASE “TO ORDER”


 Pay the payee or the person designated by the payee NECESSITY OF NAMING THE PAYEE  The law requires that the payee must be named or otherwise indicated with reasonable certainty  Must be a person in being, whether natural or legal, and ascertained at the time of issue  If there is no named payee, where the instrument is payable to order, no one could indorse the instrument. Consequently, it is useless to consider it as negotiable. WHERE THE BLANK FOR NAME OF PAYEE UNFILLED  Not payable to order because the payee is not named neither is he designated with reasonable certainty Pay to Y or order the amount of P100.

Sgd. A

To: X Pay to the order of the President of Ateneo de Manila University on June 20, 2010. Sgd. A To: X Corporation

CASE DIGESTS: SECTION 8 20

SALAS V. CA 181 SCRA 296

FACTS: Petitioner bought a car from Viologo Motor Sales Company, which was secured by a promissory note, which was later on indorsed to Filinvest Finance, which financed the transaction. Petitioner later on defaulted in her installment payments, allegedly due to the fraud imputed by VMS in selling her a different vehicle from what was agreed upon. This default in payment prompted Filinvest Finance to initiate a case against petitioner. The trial court decided in favor of Filinvest, to which the appellate court upheld by increasing the amount to be paid.



It is the contention of petitioner that since the agreement between her and the motor company was inexistent, none had been assigned in favor of private respondent. HELD: Petitioner’s liability on the promissory note, the due execution and genuineness of which she never denied under oath, is under the foregoing factual milieu, as inevitable as it is clearly established. The records reveal that involved herein is not a simple case of assignment of credit as petitioner would have it appear, where the assignee merely steps into the shoes of, is open to all defenses available against and can enforce payment only to the same extent as, the assignor-vendor. The instrument to be negotiable must contain the so-called words of negotiability. There are only 2 ways for an instrument to be payable to order. There must always be a specified person named in the instrument and the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words “or order” or “to the order of”, the instrument is payable only to the person designated therein and is thus non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder in due course but will merely step into the shoes of the person designated in the instrument and will thus be open to the defenses available against the latter. In the case at bar, the promissory notes is earmarked with negotiability and Filinvest is a holder in due course. 21

CONSOLIDATED PLYWOOD V. IFC 149 SCRA 448

FACTS: Petitioner bought from Atlantic Gulf and Pacific Company, through its sister company Industrial Products Marketing, two used tractors. Petitioner was issued a sales invoice for the two used tractors. At the same time, the deed of sale with chattel mortgage with promissory note was issued. Simultaneously, the seller assigned the deed of sale with chattel mortgage and promissory note to respondent. The used tractors were then delivered but barely 14 days after, the tractors broke down. The seller sent mechanics but the tractors were not repaired accordingly as they were no longer serviceable. Petitioner would delay the payments on the promissory notes until the seller completes its obligation under the warranty.

Thereafter, a collection suit was filed against petitioner for the payment of the promissory note. HELD: It is patent that the seller is liable for the breach in warranty against the petitioner. This liability as a general rule extends to the corporation to whom it assigned its rights and interests unless the assignee is a holder in due course of the promissory note in question, assuming the note is negotiable, in which case, the latter’s rights are based on a negotiable instrument and assuming further that the petitioner’s defense may not prevail against it. The promissory note in question is not a negotiable instrument. The promissory note in question lacks the so-called words of negotiability. And as such, it follows that the respondent can never be a holder in due course but remains merely an assignee of the note in question. Thus, the petitioner may raise against the respondents all defenses available to it against the seller. 22

FACTS: Two deeds of mortgages were issued by spouses Racho in favor of GSIS as security for two loans obtained by them. They also executed a promissory note. Due to the failure to comply with the of the mortgage, the mortgages were extrajudicially foreclosed. The foreclosure was being assailed by the spouses as they alleged that the mortgage contracts were signed not as guarantees or sureties but merely gave their common property for the sole benefit of the other spouses. Both sides of the case used the provisions on accommodation parties in the NIL. The trial court dismissed the action but this was reversed by the appellate court. HELD: Both parties rely on the NIL but this is misplaced. The promissory note and the deeds of mortgage are not negotiable instruments as they lack the fourth requisite which is it must be payable to order or bearer. 23 FACTS:


GSIS V. CA 170 SCRA 533

PECO V. SORIANO 39 SCRA 587


Montinola purchased money orders from the postal office. He issued a personal check to pay for the money orders and since it is irregular to have checks as payments, he was advised to see the Chief of the Money Order Division. He didn’t do so but left the office with the money orders and the check. A notice was thereafter issued to all post offices as well as the Bank of America, about the irregularly issued money orders and the order not to accept such orders. Plaintiff was one of those who received the subject money orders and encashed it with the Bank of America. At first, it was given the money but later on, his was debited in pursuance of the letter given by the Chief. HELD: Postal money orders are not negotiable instruments. In establishing and operating a postal money order system, the government is not engaged in commercial transactions but merely exercises a governmental power for the public benefit. Moreover, some restrictions imposed money orders by postal laws and regulations are inconsistent with the character of negotiable instruments. 24

EQUITABLE BANKING V. IAC 161 SCRA 518

FACTS: Nell Company issued a check to help Casals and Casville Enterprises obtain a letter of credit from Equitable Banking in connection with equipment, a garrett skidder, which Casals and Casville were buying from Nell. Nell indicated the payee as follows “EQUITABLE BANKING CORPORATION A/C CASVILLE ENTERPRISES INC.” Casals deposited the check with the bank and the bank teller accepted the same and in accordance with customary bank practice, stamped in the check the words “non-negotiable”. The amount was withdrawn after the deposit. This prompted Nell to file a case against the bank, Casals and Casville. While the instant case was being tried, Casals and Casville assigned the garrett skidder to plaintiff which credited in favor of defendants the amount of P450,000, as partial satisfaction of its claim against them. HELD:


Equitable is not liable to Nell. Nell should bear the loss as it was through its own acts, which put it into the power of Casals and Casville Enterprises to perpetuate the fraud against it. The check wasn’t initially non-negotiable. Neither was it cross-checked. The rubber-stamping transversally on the face of the check was only made the bank teller in accordance with customary bank practice, and not by Nell as the drawer of the check, and simply meant that thereafter the same check could no longer be negotiated. The payee was not indicated with reasonable certainty in contravention of Section 8. As worded, it could be accepted as deposit to the of the party named therein after the symbols of A/C, or payable to the bank as trustee, or as an agent, for Casville with the latter being the ultimate beneficiary. Sec. 9. When payable to bearer. - The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank. PAYABLE TO THE ORDER OF A FICTITIOUS OR NON-EXISTENT PERSON 1. The payee named must be fictitious or non-existent 2. The one making the instrument so payable must know him to be fictitious or non-existing FICTITIOUS PERSON  Not limited to persons having no real existence  To be a person who has no right to the instrument because the drawer or maker of it so intended, and therefore, it doesn’t matter whether the name of the payee used by the drawer or drawee be that of the living or the dead, or one who never existed EXISTING PAYEE INTENDED TO RECEIVE PROCEEDS; NOT PAYABLE TO BEARER


 A negotiable paper made payable to the name of an existing person known or believed by the maker or drawer to be existing, with intent that he should receive it or its proceeds, or that it be paid to him or upon his indorsement, IS NOT PAYABLE TO A FICTITIOUS PAYEE OR TO BEARER, although as a matter of fact such person has no interest in the paper and it was procured by fraud of a third person or of the maker’s or drawer’s employee or agent whose knowledge or intent is not imputable to the principal or employer, and cashed by the person having possession upon the forged instrument of the payee NON-EXISTING PAYEE, OR ONE WITHOUT INTEREST, BUT BELIEVED EXISTING OR WITH INTEREST, AND INTENDED TO RECEIVE PROCEEDS; NOT PAYABLE TO BEARER NON-EXISTING PAYEE, OR ONE WITHOUT INTEREST, KNOWN OR BELIEVED NON-EXISTING NOT INTENDED TO RECEIVE PROCEEDS; PAYABLE TO BEARER PERSON TO WHOM THE FICTITIOUS OR NON-EXISTING CHARACTER OF PAYEE MUST BE KNOWN  The drawer drawing a bill or the maker making a note is the person to whom the fictitious or non-existing character of the payee must be known  Where the instrument is drawn or made by an agent or prepared by an employee with the maker or drawer g only, the question arises as to whose intent should control  Another difficulty: who is the person who makes the instrument payable to the payee—the clerk or the treasurer?  Agbayani’s view: that the signer does after all create the instrument and should determine who owns it WHERE AGENT HAS NO AUTHORITY TO EXECUTE INSTRUMENT  The knowledge of the principal or employer is controlling, and if he doesn’t have any knowledge of the fictitious or non-existing character of the payee, the knowledge of the employee or the agent will not avail to call into application as to fictitious payees and the instrument will not be considered as payable to bearer NAME OF PAYEE NOT NAME OF PERSON  Pay to cash  Pay to the order of money  Pay to the order of cash WHERE PAYABLE TO THE ESTATE OF A DEAD PERSON

 It has been held to be payable to bearer  Agbayani: estate is a juridical person in a limited way and thus it shouldn’t be payable to bearer CASE DIGESTS: SECTION 9 25

ANG TEK LIAN V. CA 87 PHIL 383

FACTS: Knowing he had insufficient funds, Ang Tek Lian issued a check for P4000, payable to cash. This was given to Lee Hua Hong in exchange for cash. Upon presentment of the check, it was dishonored for having insufficient funds. It is argued that the check, being payable to cash, wasn’t indorsed by the defendant, and thus, isn’t guilty of the crime charged. HELD: A check drawn to the order of “cash” is payable to bearer, and the bank may pay it to the person presenting it for payment without the drawer’s indorsement. Of course, if the bank is not sure of the bearer’s identity or financial solvency, it has the right to demand for identification and/or assurance against possible complications—for instance, forgery of the drawer’s signature, loss of the check by the rightful owner, raising the amount payable, etc. The bank therefore, requires for its protection that the indorsement of the drawer—or some other persons known to it—be obtained. A check payable to bearer is authority for payment to the holder. Where a check is in the ordinary form and is payable to bearer so that no indorsement is required, a bank to which it is presented for payment need not have the holder identified, and is not negligent in failing to do so. Sec. 10. , when sufficient. - The instrument need not follow the language of this Act, but any are sufficient which clearly indicate an intention to conform to the requirements hereof. CASE DIGESTS: SECTION 10 26

JIMENEZ V. BUCOY 103 PHIL 40

FACTS: In the intestate of the estate of spouses Young, Jimenez presents a promissory note signed by Pacita Young for different amounts totaling P21,000. The is willing to pay the promissory note on the



premise that the amount be adjusted. Claimant assails the adjustment and hence, she instituted a case for collection of sum of money. *Note: “6 months after the war” HELD: The calls attention to the fact that the notes contained no express promise to pay for a certain amount. This is without merit. An acknowledge may become a promise to pay by the addition of words by which a promise of payment is naturally implied, such as “payable”, “payable” on a given date, “payable on demand”, “paid…when called for”. To constitute a good promissory note, no precise words of contract are necessary, provided they amount, in legal effect, a promise to pay.

payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. WHEN DATE NECESSARY  Under Section 6, the insertion of date is unnecessary  However, it may be necessary to determine the date of maturity  In the following cases, the date is also necessary: o Where interest is stipulated, to determine when interest is to run, but not to make the instrument negotiable o To determine where a party has acted within a reasonable time, but not make the instrument negotiable INSTRUMENT PAYABLE AT A FIXED PERIOD AFTER DATE

Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case may be. APPLICATION OF SECTION 11 1. The instrument contains the date of issue—prima facie the true date of the making or drawing of the instrument 2. In an accepted bill of exchange, the acceptance is dated—prima facie the date of acceptance 3. An instrument is indorsed, and the indorsement is dated—prima facie date of indorsement PRIMA FACIE  Evidence produces for the time being a certain result but that result may be repealed by contrary evidence  Apparent, as it first appears Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. Sec. 13. When date may be inserted. Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be

(UNDATED) I PROMISE TO PAY TO B OR ORDER P1000, 60 DAYS AFTER DATE. SGD. A

EFFECT OF INSERTION OF WRONG DATE  Knowingly inserting the wrong date in an undated instrument will avoid it as to the party so inserting the wrong date  It is implied that the instrument void as to the person who knowingly inserted the wrong date  Also, under Section 12, it is void for ante-dating an instrument for fraudulent purposes  To a holder in due course, the instrument is not void, after the instrument is indorsed to him. The insertion of the wrong date doesn’t avoid the instrument in the hands of a holder in due course. CASE DIGESTS: SECTIONS 12 TO 13 27

PACHECO V. CA 319 SCRA 595

FACTS: Due to dire financial needs of petitioner spouses who were engaged in the construction business, they secured loans from Vicencio. At every loan secured, the lender compelled the spouses to issue an undated check despite the ission of spouses that their bank has insufficient funds or as on a later date, already closed. Lender assured them that the



issuance of the check was only evidence of indebtedness, that it would not be presented to the bank, and it would be for formalities only. On the date wherein there was an unpaid balance to the loans secured by the spouses, the lender had them place a date on two of the later checks issued. Surprised later on, the spouses were charged with estafa as the checks were presented for encashment and was dishonored. HELD: BY MUTUAL AGREEMENT OF THE PARTIES, THE NEGOTIABLE CHARACTER OF A CHECK MAY BE WAIVED AND THE INSTRUMENT BE SIMPLY TREATED AS PROOF OF AN OBLIGATION. There cannot be deceit on the part of the spouses because they agreed with the lender at the time of the issuance and postdating of the checks that the same shall not be encashed or presented to the bank. As per assurance of the lender, the checks are nothing but evidence of the loan or security thereof in lieu of and for the same purpose as a promissory note. Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. ILLUSTRATION  Authority was only to fill in the blank for an amount not more than P100; before it was complete, the instrument was given to B. I promise to pay B or order P400 on June 20, 2010. Sgd. A


 For it to be enforceable against the next holder, the completion must be strictly in accordance with the authority given and within a reasonable time. ILLUSTRATION #2  One sees Manny Pacquiao in person and has a blank sheet of paper signed by Pacquiao. He then filled it up to show the following: I promise to pay Jonathan Nepomuceno or order P10,000. Sgd. Manny Pacquiao  For the above to be a valid negotiable instrument, it should have been delivered by the person g the instrument with the intent of converting the blank paper into a negotiable instrument. SCOPE OF SECTION 14  There are 2 steps in the execution of a negotiable instrument— o The act of writing the instrument completely and in accordance with Section 1 of the NIL o The delivery of the instrument with the intention of giving effect to it THE MATERIAL PARTICULAR REFERRED TO IN THIS PROVISION MAY BE— 1. A particular the omission of which will render the instrument nonnegotiable 2. A particular the omission of which will not render the instrument nonnegotiable FACTS FROM WHICH PRIMA FACIE AUTHORITY PRESUMED 1. Want of a material particular in the instrument 2. Possession thereof by a person, a third fact 3. That such person had authority to fill up the blank THE LAW PRESUMES THE EXISTENCE OF AUTHORITY TO FILL THE INSTRUMENT UP TO ANY AMOUNT FROM THE FOLLOWING FACTS 1. A signature on blank paper 2. That the person g in blank delivers it in order that the paper may be converted into a negotiable instrument REQUISITES TO HOLD PRIOR PARTIES LIABLE 1. The blank must be filled strictly in accordance with the authority given 2. It must be filled up within a reasonable time


RIGHT OF HOLDER OF DUE COURSE WHERE BLANK WRONGFULLY FILLED  First view: One who is not a holder in due course cannot enforce the instrument if the same is not filled up strictly in accordance with the authority given or within reasonable time  Second view: the holder can enforce the instrument accordance with the authorized tenor  According to Agbayani, the better view is the first view is the better view to have. The law provides that in order be one who is not a holder in due course may enforce mechanically incomplete but delivered instrument, the two requisites must exist. The implication is that one or both are not present, the instrument may not be enforced. REASONABLE TIME  Regard is had to the nature of the instrument, the usage of trade or business with respect to such instrument and the facts of the particular case  Term is very relative PERSONAL DEFENSE  Defense available only to holders who are not holders in due course SUMMARY OF RULES WHEN INSTRUMENT IS INCOMPLETE BUT DELIVERED 1. Where the holder is a holder in due course, he can enforce the instrument as completed against parties prior or subsequent to the completion 2. Where the holder is not a holder in due course, he can enforce the instrument as completed as against the parties subsequent to the completion but not against those prior thereto NOTES FOR WEEK #3: JUNE 26-JUL Y , 1, 2007 CASE DIGESTS: SECTION 14 28

REPUBLIC PLANTERS BANK V. CA 219 SCRA 736

FACTS: Yamaguchi and Canlas are officers of the Worldwide Garment Manufacturing, which later changed its name to Pinch Manufacturing. They were authorized to apply for credit facilities with the petitioner bank. The two officers signed the promissory notes issued to secure the payment of

the obligations. Later, the bank instituted an action for collection of money, impleading also the two officers. The trial court held the two officers personally liable also. HELD: Canlass is solidarily liable on each of the promissory notes to which his signature appears. The promissory notes in question are negotiable instruments and thus, governed by the NIL. Under the NIL, persons who write their names in the instrument are makers are liable as such. By g the note, the maker promises to pay to the order of the payee or any holder the tenor of the obligation. Based on the above provisions of the law, there is no denying that Canlass is one of the co-makers of the promissory note. Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. APPLICATION OF PROVISION  Section applies to an incomplete and undelivered instrument INSTRUMENT NOT VALID AGAINST PARTY BEFORE DELIVERY  Situation: A signs a blank check, which was subsequently stolen by B and fills up the amount and a fictitious name as payee. He then indorses the same to C, C to D, D to E, and E to F. Can F enforce the instrument against A?  The answer is NO, because against A, whose signature was placed on the check prior to delivery, the instrument is not valid.  The answer would still be the same in case F was a holder in due course. Why? The law doesn’t discriminate on what kind of holder.  However, the invalidity of the instrument is only with reference to parties whose signature appears in the same prior to delivery. As to parties whose signature appears after delivery, it may be valid. IT IS A REAL DEFENSE  The possible defense of a party whose signature appears on an instrument prior to delivery is that, as against him, the instrument is not valid for having been incomplete and undelivered  Want of delivery of a mechanically incomplete instrument— defense that cannot only be interposed against one who is not a holder in due course but also a holder in due course



DELIVERY IS NOT CONCLUSIVELY PRESUMED WHERE INSTRUMENT IS INCOMPLETE  Section 15 and 16 read together BUT DELIVERY PRESUMED PRIMA FACIE  But where an incomplete and undelivered instrument is in the hands of a holder in due course, there is prima facie presumption of delivery which the maker may rebut by proof of non-delivery  Where the custody of an incomplete instrument has been entrusted to another, who wrongfully completes and negotiates it to a holder in due course, delivery to an agent or custodian is a sufficient delivery to bind the drawer or maker. Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. SCOPE OF SECTION  Applies to an instrument mechanically complete but undelivered UNDELIVERED INSTRUMENT IS INCOMPLETE  Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto DELIVERY AND ISSUE  As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing as the case may be  Issue—the first delivery of the instrument, complete in form, to a person who takes it as a holder

OUTLINE OF RULES ON DELIVERY OF NEGOTIABLE INSTRUMENTS 1. Delivery is essential to the validity of any negotiable instrument 2. As between immediate parties, or those in like cases, delivery must have been with the intention of ing title 3. An instrument signed by the drawer/maker but not completed by him and retained in his own custody, is invalid as to him for want of delivery, even though stolen or negotiated to a holder in due course 4. But when the instrument mentioned above is in the hands of a holder of due course, there is prima facie presumption of delivery which the maker/drawer may rebut by proof of non-delivery 5. Where the custody of the incomplete instrument has been entrusted to another, who wrongfully completes and negotiates it to a holder in due course, delivery to an agent or custodian is sufficient delivery to bind the drawer or maker 6. Where maker or drawer executes a complete instrument which is found in the possession of another other than a holder in due course, there is a prima facie presumpton of delivery—but subject to rebuttal 7. Where the instrument mentioned above is in the hands of a holder in due course, there is a conclusive presumption of delivery 8. Delivery of the instrument may be made on a parol condition or for a special purpose not inconsistent with its written , where the validity of the instrument is to arise out of the performance of the condition or consummation of the purpose. But such condition or specification or purpose doesn't affect the rights of a holder in due course. Such conditions is a condition precedent, and is to be sharply distinguished from a condition subsequent, the happening or nonhappening of which is to defeat or qualify the instrument. Such condition subsequent contradicts the written and may not be set up by parol evidence. RIGHT TO REVOKE  Before delivery, the maker or drawer can revoke, cancel, or tear up the instrument LITERAL MEANING OF IMMEDIATE AND REMOTE PARTIES  The drawer and payee are immediate parties to one another  Maker and payee are immediate parties to one another  Indorser and indorsee are also immediate parties to one another BROAD MEANING OF IMMEDIATE AND REMOTE PARTIES  Immediate parties are confined to “those who are immediate, in the sense of knowing or being held to know the conditions or limitations placed upon the delivery of the instrument—privity and not proximity



 Criterion: W/N the party in question knows of the conditions or limitations placed upon the delivery of the fact that the instrument was not delivered but stolen.. o If the party in question knows, he is an immediate party even if he is not physically remote o If he doesn’t know, he is not an immediate party even if he is the next party immediately

IT IS A PERSONAL DEFENSE IF IT IS AVAILABLE ONLY AGAINST A PERSON WHO IS NOT A HOLDER IN DUE COURSE.

PRESUMPTION OF VALID DELIVERY AS TO IMMEDIATE PARTY OR REMOTE PARTY NOT HOLDER IN DUE COURSE  Where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved  Presumption is however rebuttable

CASE DIGESTS: SECTION 16

DELIVERY FOR SPECIAL PURPOSES  For safekeeping or for collection only PRESUMPTION OF DELIVERY AS TO HOLDER IN DUE COURSE  Conclusively presumed  There is conclusive presumption where the contrary proof is barred PERSONAL DEFENSE  The possible defense of a party sought to be charged is that the instrument wasn't delivered, or if delivered, the delivery wasn't authorized or only on a condition or for a special purpose  “Want of delivery of a mechanically complete instrument” defense  It can however be interposed against an immediate party and remote parties not holders in due course inasmuch as the presumption of valid and intentional delivery is only rebuttable as to immediate parties and to remote parties who are not holders in due course  Only personal defense CONCLUSIVE PRESUMPTION INSTRUMENTS

NOT

APPLICABLE

TO

INCOMPLETE

DEFENSES UNDER THE SECOND SENTENCE OF SECTION 16 1. It wasn’t delivered either by or under the authority of the party making, delivering, accepting or indorsing the instrument 2. It was for a conditional purpose 3. It was for a special purpose only


IT IS A REAL DEFENSE IF IT IS AVAILABLE AGAINST ANY HOLDER.

29

MANUEL LIM V. COURT OF APPEALS 251 SCRA 408

FACTS: Spouses Lim were charged with estafa and violations of BP22 for allegedly purchasing goods from Linton Commercial Corporation and issuing checks as payment thereof. The checks when presented to the bank were dishonored for insufficiency of funds or the payment for the checks has been stopped. HELD: It is settled that venue in criminal cases is a vital ingredient of jurisdiction. It shall be where the crime or offense was committed or any one of the essential ingredients thereof took place. In determining the proper venue for these cases, the following are material facts—the checks were issued at the place of business of Linton; they were delivered to Linton at the same place; they were dishonored in Kalookan City; petitioners had knowledge of the insufficiency of funds in their . Under Section 191 of the NIL, issue means the first delivery of the instrument complete in its form to a person who takes it as holder. The term holder on the other hand refers t o the payee or indorsee of a bill or note who is in possession of it or the bearer t hereof. The important place to consider in the consummation of a negotiable instrument is the place of delivery. Delivery is the final act essential to its consummation as an obligation. 30

PEOPLE V. GROSPE 157 SCRA 154

FACTS: Parolan was an authorized wholesale dealer of SMC. He was charged with violations of BP22 and estafa for allegedly issuing checks in favor of SMC but when the check was presented, it was dishonored for having


insufficiency funds. This is even more aggravated by the allegation that Paralan failed to make good the check to the prejudice of SMC. HELD: Estafa by postdating or issuing a bad check may be a transitory or continuing offense. Its basic elements of deceit and damage may arise independently in separate places. In this case, it did and jurisdiction may be conferred in any of the two places wherein the two elements arose. For while the subject check was issued in Bulacan, it wasn't completely drawn thereat, but in Pampanga. What is of decisive importance is the delivery thereof. The delivery of the instrument is the final act essential to its consummation as an obligation. For although the check was received by the SMC Supervisor in Bulacan, that was not delivery in the contemplation of law. The rule is that the issuancve as well as the delivery of the check must be to a person who takes it as a holder, which means the payee or indorser of a bill or note, who is in possession of it, or the bearer thereof. The said representative had to forward the check to the SMC regional office, who thereafter forwarded it to the Finance Officer and later on to the depository bank. 31

DELA VICTORIA V. BURGOS 245 SCRA 374

FACTS: Sesbreno filed a case against Mabanto Jr. among other people wherein the court decided in favor of the plaintiff, ordering the defendants to pay former a definite amount of cash. The decision had become final and executory and a writ of execution was issued. This was questioned in the CA by the defendants. In the meanwhile, a notice of garnishment was issued to petitioner who was then the City Fiscal. She was asked to withhold any check or whatnot in favor of Mabanto Jr. The CA then dismissed the defendant’s petition and the garnishment was commenced only to find out that petitioner didn't follow instructions of sheriff. She is now being held liable. HELD: Garnishment is considered as the species of attachment for reaching credits belonging to the judgment debtor owing to him from a stranger in litigation. Emphasis is laid on the phrase belonging to the judgment debtor since it is the focal point of resolving the issues raised. As Assistant City Fiscal, the source of Mabanto’s salary is public funds. Under Section 16 of the NIL, every contract on a negotiable instrument is


incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As ordinarily understood, delivery means the transfer of the possession of the instrument by the maker or drawer with intent to transfer title to the payee and recognize him as the holder thereof. The petitioner is the custodian of the checks. Inasmuch as said checks were in the custody of the petitioner and not yet delivered to Mabanto, they didn't belong to him and still had the character of public funds. The salary check of a government officer or employee doesn't belong to him before it has been physically delivered to him. Until that time the check belongs to the government. Accordingly, before there is actual delivery of the check, the payee has no power over it, he cannot assign it without the consent of the government. *If public funds would be allowed to be garnished, then basic services of the government may be hampered. 32

DEVELOPMENT BANK OF RIZAL V. SIMA WEI 219 SCRA 736

FACTS: Sima Wei executed a promissory note in consideration of a loan secured from petitioner bank. She was able to pay partially for the loan but failed to pay for the balance. She then issued two checks to pay the unpaid balance but for some unexplainable reason, the checks were not received by the bank but ended up in the hands of someone else. The bank instituted actions against Sima Wei and other people. The trial court dismissed the case and the CA affirmed this decision. HELD: A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a species of property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable instrument be delivered to the payee in order to evidence its existence as a binding contract. Section 16 provides that every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. Thus, the payee of the negotiable instrument acquires no interest with respect thereto until its delivery to him. Delivery of an instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended to give effect to the instrument.



Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof;

*In this case, the sum payable is P12,345, following the rule that when the words are ambiguous or uncertain, reference may be had to the figures to fix the amount. I promise to pay B or order the sum of one two three four five (P12,345) on June 27, 2008 with interest. Sgd. AA *The interest should run on the date of instrument but if it is undated, then it will reckon on the date of issue.


(c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued;

33

(d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail;

FACTS: Complainant was a radio commentator who interviewed the two accused regarding their marketing business, which solicits funds from the general public, promising an 800% profit. The latter induced the complainant to invest in the business, in the process thereof, issued a postdated check wherein the amount in figures was P1,200,000 and the amount in words was P1,000,200. The check when presented in the bank was dishonored and the accused refused to redeem or pay the check. This prompted the complainant to file a case of estafa against the accused to which they were found guilty of.

(e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be tly and severally liable thereon. WHEN SECTION APPLICABLE  Rules stated in this section shall not be availed of if the of the instrument in question is clear and it of no doubt  Applicable only when the instrument in question is ambiguous, doubtful or obscure, or when there are omissions therein that the I promise to pay B or order the sum of one two three four five (P12,345) Sgd. AA

PEOPLE V. ROMERO 306 SCRA 90

HELD: Accused tried to contend that if the trial court followed the ission and stipulation of facts submitted by them, it would prove that there was sufficient funds. The check had a discrepancy between the amount in figures and in words. Following NIL, the check was issued for P1,000,200—meaning that this could be validly ed by their business’ funds. Nonetheless, this is misplaced since this rule of interpretation finds no room in this case. The agreement was perfectly clear that at the end of 21 days, the investment of complainant would increase by 800% or P1,200,000.

34

FACTS:

PNB V. CONCEPCION MINING 115 PHIL 723



A case for collection of a sum of money was filed against defendants in connection with a promissory note they issued with others. The defendants move that since their co-makers have died, claim should be also against the estates of such. This was denied by the court. HELD: Where an instrument containing the words “I promise to pay” is signed by two or more persons, they are deemed to be tly and severally liable thereon. By virtue of this provision found in Section 17, and as the promissory note was executed tly and severally by the parties, the payee of the promissory note had the right to hold any one of the them responsible for the payment of the amount of the note. 35

REPUBLIC PLANTERS BANK V. COURT OF APPEALS 216 SCRA 738

FACTS: Yamaguchi and Canlas are officers of the Worldwide Garment Manufacturing, which later changed its name to Pinch Manufacturing. They were authorized to apply for credit facilities with the petitioner bank. The two officers signed the promissory notes issued to secure the payment of the obligations. Later, the bank instituted an action for collection of money, impleading also the two officers. The trial court held the two officers personally liable also. HELD: Canlass is solidarily liable on each of the promissory notes to which his signature appears. The promissory notes in question are negotiable instruments and thus, governed by the NIL. Under the NIL, persons who write their names in the instrument are makers are liable as such. By g the note, the maker promises to pay to the order of the payee or any holder the tenor of the obligation. Based on the above provisions of the law, there is no denying that Canlass is one of the co-makers of the promissory note. Sec. 18. Liability of person g in trade or assumed name. No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. GENERAL RULE AS TO LIABILITY OF PERSON WHOSE SIGNATURE IS NOT ON INSTRUMENT


 A person whose signature doesn’t appear on the instrument is not liable EXCEPTIONS TO THE GENERAL RULE 1. Where a duly authorized agent signs for a person, the person is liable 2. Where a person sought to be charged forges the signature of another person, the forger is liable even if his signature doesn’t appear thereon 3. Where a person sought to be charged signs on a paper separate from the instrument itself, as in an allonge, although the allonge may be considered a part of the instrument, or where an acceptance is written on a paper other than the bill itself 4. Where the person uses an assumed name or trade name—one may become a party to a negotiable instrument by any designation he desires Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency. SIGNATURE THROUGH AGENT, FORM  The party may sign personally or through an agent  Agency may be written or oral  No particular form required by the law and the agency may be proved through oral or written evidence, unless specific provisions of the law, such as the Statute of Frauds, requires otherwise Sec. 20. Liability of person g as agent, and so forth. Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. REQUISITES FOR AGENT TO ESCAPE LIABILITY 1. Be duly authorized 2. Add words to his signature indicating that he signs as an agent, that is, for or on behalf of a principal, or a representative capacity 3. Disclose his principal CASE DIGESTS: SECTION 19 AND 20


36

REMO V. COURT OF APPEALS 172 SCRA 405

FACTS: The Board of Directors of Akron, which includes petitioner Remo, authorized the purchase of 13 trucks to be used in the business through a resolution. The president then of the corporation purchased from private respondent the trucks evinced by a deed of absolute sale, with of payment as follows—downpayment, balance payable within 60 days from date of execution of agreement. It was also agreed upon that until said balance, the downpayment shall constitute as rentals for the trucks. And if there would be failure of payment, the balance shall constitute as chattel mortgage lien. This is further secured by a promissory note—that the balance would be paid from a loan to be obtained from a bank. After several days, private respondent made several demands but the corporation failed to pay. This prompted the private respondent to file a complaint. Meanwhile, petitioner sold his shares to Coprada and the name of the corporation was modified. HELD: If the private respondent is the victim of fraud in this transaction, it has not been clearly shown that petitioner had any part or partcipation in the perpetration of the same. Fraud must be established by clear and convincing evidenced. If at all, the principal character on whom fault should be attributed is the president Coprada, whom private respondent dealt with personally all through out. 37

INSULAR DRUGS V. PNB 55 PHIL 634

FACTS: Foerster was a collector for Insular Drugs. Upon collection of checks for payment to the company, he deposited the checks in his own personal . This came to the knowledge of the company and upon investigation, the salesman committed suicide thereafter. Insular Drugs filed an action against the bank, to credit to its the amount Foerster and his wife took from them. The indorsements took various forms. HELD: When a bank accepts the indorsements on checks made out to the company and the indorsements of the salesman’s wife and clerk, and credits to the personal of the salesman and his wife, allowing them to make withdrawals, the bank makes itself responsible to the drug company for the amounts represented by the checks, unless it is pleaded


and proved that after the money was withdrawn from the bank, it ed to the drug company which thus suffered no loss. 38

JAI ALAI V. BPI 66 SCRA 29

FACTS: Checks were deposited by petitioner in its current with the bank. These checks were from a certain Ramirez, a consistent better in its games, who was a sales agent from Inter-Island Gas. Inter-Island later found out that of the forgeries committed in the checks and thus, it informed all the parties concerned. Upon the demands on the bank as the collecting bank, it debited the of petitioner. Thereafter, petitioner tried to issue a check for payment of shares of stock but such was dishonored for insufficient funds. It filed a complaint against the bank. HELD: Respondent bank acted within legal bounds when it debited the of petitioner. When the petitioner deposited the checks to its , the relationship created was one of agency still and not of creditor-debtor. The bank was to collect from the drawees of the checks with the corresponding proceeds. Bank may have the proceeds already when it debited the of petitioner. Nonetheless, there is still no creditor-debtor relationship. Following Section 23, a forged signature is wholly inoperative and no right to discharge it or enforce its payment can be acquired through or under the forged signature except against a party who cannot invoke its forgery or want of authority. It stands to reason that as a collecting bank which indorsed the checks to the drawee-banks for clearing, should be liable to the latter for reimbursement for the indorsements on the checks had been forged prior to their delivery to the petitioner. The payments made by the drawee banks to respondent were ineffective—the creditordebtor relationship hadn’t been validly effected. 39

PNB V. PICORNELL 46 PHIL 716

FACTS: Picornell followed the instructions of Hyndman, Tavera and Venutra by buying bales of tobacco. He was able to obtain in National Bank a sum of money together with his commission. He drafted a bill of exchange against



the firm and in favor of the bank. It was received by National Bank and was accepted thereafter by the firm. However, on alleged conditions of the tobacco, the bill of exchange was not paid.

collect payments from the GSIS. Further, they opened an with a bank from which checks would be issued by Fransisco and the GSIS president.

HELD: This action for recovery is for the value of the bill of exchange. The firm accepted the bill unconditionally but did not pay it at maturity, wherefore its responsibility to pay the same is clear. The question whether or not the tobacco was worth the value of the bill doesn’t concern the bank. Such partial want of consideration if it was, doesn’t exist with respect to the bank which paid Picornell the full value of the said bill of exchange. The bank was a holder in due course, and was such for value full and complete. The firm cannot escape liability.

HCCC later on filed a complaint for the unpaid balance in pursuance to its agreement with AFRDC. However, an amicable settlement ensued, which was embodied in a Memorandum of Agreement. It was embodied in said agreement that GSIS recognizes its indebtedness to HCCC and that HCCC would also pay its obligations to AFRDC.

40

PHILIPPINE BANK OF COMMERCE V. ARUEGO 102 SCRA 530

FACTS: Aruego, on behalf of World Current Events, entered into a Credit Agreement with PBCom, for the publication of the company’s periodicals. At every printing endeavor by the printing press, a bill of exchange is drawn against PBCom. The instruments are signed by Aruego, without any indication that he is an agent of World Current Events. When he was being held liable by PBCom, he averred that he only signed the instrument in the capacity of agent of the company. HELD: An inspection of the drafts accepted by the defendant would show nowhere that he has disclosed that he was g in representation of the Philippine Education Foundation Company. He merely signed his name. For failure to disclose his principal, Aruego was personally liable for the drafts he accepted. 41

FRANSISCO V. COURT OF APPEALS 319 SCRA 354

FACTS: A. Fransisco Realty and Development and Herby Commercial and Construction Corporation entered into a Land Development and Construction Contract. Fransisco was the president of AFRDC while Ong was the president of HCCC. It was agreed upon that HCCC would undertake the construction of housing units and the development of a large parcel of land. The payment would be on a turnkey basis. To facilitate the payment, AFDRC executed a Deed of Assignment to enable the HCCC to


A year later, it was found out that Diaz and Fransisco had drawn checks payable to Ong. Ong denied accepting said checks and it was further found out that Diaz entrusted the checks to Fransisco who later forged the signature of Ong, showing that he indorsed the checks to her and then she deposited the checks to her personal savings . This incident prompted Ong to file a complaint against Fransisco. HELD: Ong’s signature was found to be forged by Fransisco. Fransisco’s contention that he was authorized to sign Ong’s name in her favor giving her authority to collect all the receivables of HCCC from GSIS. This contention is bereft of any merit. The NIL provides that when a person is under obligation to indorse in a representative capacity, he may indorse in such as to negative personal liability. An agent, when so g, should indicate that he is merely g as an agent in behalf of the principal and must disclose the name of his principal. Otherwise, he will be held liable personally. And assuming she was indeed authorized, she didn't comply with the requirements of the law. Instead of g Ong’s name, she should have signed in her own name as agent of HCCC. Thus, her contentions cannot or validate her acts of forgery. 42

ASTRO ELECTRONICS CORP. V. PHIL. EXPORT 411 SCRA 462

FACTS: Astro obtained loans from Philtrust Bank, secured by promissory notes that were signed by Roxas, both as President of Astro Electronics and in his personal capacity. Thereafter, PhilGuarantee bound itself as a guarantor. At default of Astro, PhilGuarantee paid the obligation. It then filed an action for collection of money from Astro and Roxas. HELD:



Under the NIL, persons who write their names on the face of promissory notes are makers, promising that they will pay to the order of the payee or any holder according to its tenor. At the study of the instrument, the allegations of Roxas are bereft of any merit—that is, the words “in his personal capacity” were added after he signed the instrument. 43

SOLIDBANK CORPORATION V. MINDANAO FERROALLOY CORPORATION GR 153535, JULY 28, 2005

FACTS: Mindanao Ferroalloy corporation is the fruit of a t venture agreement between a Filipino corporation and Korean Corporation. In its operations, its liabilities ballooned over its assets that it had to secure loans from petitioner Solidbank. The loans were later consolidated and restructured, evinced by a promissory note. The promissory note was signed by Cu and Hong, both officers of the corporation. The corporation, through the same officers also executed a deed of assignment. Thereafter, the corporation stopped its operations and the loan was left unpaid. The bank was prompted to file a complaint against the corporation, and with it, impleading the officers who signed the agreement and promissory notes. The trial court held in favor of the bank but didn't adjudge liability of the officers. Both the trial court and CA held that there was no solidary liability on the part of the officers impleaded by the bank. HELD: Though Hong and Cu signed above the “maker/borrower” and the printed name of the corporation, without the word “by” preceding their signatures, the fact that they signed in their personal capacities is negated by the facts that name and address of the corporation also appeared on the space provided for in the “maker/borrower” and their signatures only appeared once when it should be twice if indeed it was in their personal capacities. Further, they didn't sign on the portion allocated for the co-maker, and there was also indicia of it being signed as authorized representatives. Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so g acted within the actual limits of his authority. HOW SIGNATURE PER PROCURATION IS MADE


 “Luis Martin Tan, Per Procuration: Ryan Teehankee” on which Luis Tan is the principal while Ryan Teehankee is the agent EFFECT OF SIGNATURE PER PROCURATION  Constitutes a warning that an agent has a limited authority  A person who takes the instrument so signed is bound at his peril to inquire into the extent and nature of the agent’s authority, and this applies to every person Sec. 22. Effect of indorsement by infant or corporation. The indorsement or assignment of the instrument by a corporation or by an infant es the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon.// INDORSEMENT OF MINOR OR CORPORATION  If a minor or corporation indorses an instrument, the indorsee acquires title to it and can enforce it against the maker or acceptor or other parties prior to the minor  Such prior parties cannot escape liability by setting a defense the incapacity of the indorser  Also applies to other incapacitated persons

A (INCOMPLETE, UNDELIVERED)  B  C  D  E (MINOR)  F *F cannot enforce against A the instrument, following Section 15 of the NIL *General rule in an indorsement by an infant or corporation: it shall be enforceable against the maker, acceptor, or other parties prior to the minor

NOTES FOR WEEK #4: July l 2, , 2007-July l ,7, 2007 Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.



FORGERY, DEFINED AND EXPLAINED  Counterfeit making or fraudulent alteration of any writing, and may consist in the g of another’s name, or the alteration of an instrument, in the name, amount, description of the person and the like, with the intent to defraud  Section 23 only applies to forged signatures or signatures made without the authority of the person whose signature purports it to be FRAUD AMOUNTING TO FORGERY  Fraud in factum or fraud in esse contractus  There is no intention to issue an instrument FRAUD IN FACTUM Does amount to forgery Real defense

FRAUD IN INDUCEMENT Doesn’t amount to forgery Personal defense A sells to B what he represents as a diamond ring, when it is actually made of glass. B issues a check. The fraud is in inducing B to issue the check.

Promissory notemaker indorser

Sgd. A

Additional fact: B has with RCBC Makati. *Process is that RCBC will send the check to X Bank for clearing and X Bank would consequently debit the of A. *What if the signature of A is forged? What is the recourse of A? The recourse is for A to approach X Bank and demand to credit the his . X Bank was the proximate cause of the loss of A and it should know the drawer’s signature. Generally, X Bank is liable when the drawer’s signature is forged and his was debited. FRAUDULENT IMPERSONATION  Suppose X represents himself as Juan Cruz when he is not to Y. Due to such misrepresentation, he obtained from Y a note payable to the order of Juan Cruz. If Y intends that the proceeds of the note will go to the real Juan Cruz and not X, but to whom Y issued the note on the belief that X was Juan Cruz, would be a forgery. DOUBLE INTENT IN FRAUDULENT IMPERSONATION 1. He intends to make the instrument payable to the person before him or to the person writing at the other end of the line, in case the negotiation is by correspondence 2. He intends to make the instrument payable to the person whom he believes the stranger to be GENERAL RULE IN FRAUDULENT IMPERSONATION  The first one is the controlling intent except where the name of the payee was already known to the maker or drawer or was particularly identified in some manner

Bill of Exchangedrawer indorser I promise to pay B or order P100,000 Sgd. A *Suppose that B forged A’s signature. Is the instrument valid? It is totally inoperative. *If ABCDE, and B’s signature was forged, it is totally inoperative and ineffectual against A and B. C and D are precluded to set up the defense of forgery since as indorsers, they warrant the validity of the instrument. Pay to the order of B P100,000

To X Bank Alabang (drawee)

REASON FOR RULE: THEORY OF ACTUAL INTENT  Throws the loss on the drawer  In the absence of anything to show that the drawer had any doubt as to the identity of the person to whom he delivered the paper as payee—the drawee, in paying the paper, or the holder, in taking it upon the indorsement of the impostor in the name of which the payee was described, carries out the intention that the drawer entertained at the time of delivery of the paper to the impostor, although that intention was conceived in consequence of the fraud of the impostor as to his identity and ownership of the property which represented the consideration



ANOTHER REASON FOR THE RULE: THEORY OF ESTOPPEL  As between two innocent persons, the one whose act was the cause of the loss should bear the consequences  It was the drawer’s duty to use diligence to ascertain the identity of the party with whom he has dealt. Failing to make this discovery, he became the victim of the fraud. The impostor having succeeded in this first and essential step in the practice of the fraud, the next was comparatively an easy one. RULE IS QUALIFIED WHERE IMPOSTOR REPRESENTS HIMSELF AS AGENT OF PAYEE  There is a distinction between cases where the paper is delivered to the impostor as payee, in the belief that he is the person to whom the instrument it would be paid, and cases where the paper is delivered to the impostor upon his representation, in the belief that he is agent of the person named as payee  The loss falls on the drawee or purchaser, as the case may be, rather than on the drawer where the impostor upon whose indorsement the paper was purchased or paid, represented himself to be the agent of the payee and not the payee himself ISSION OF GENUINENESS AND DUE EXECUTION  When an action or defense is founded upon a written instrument such as a negotiable instrument, copied in or attached to the corresponding pleading, the genuineness and due execution of the instrument shall be deemed itted unless specifically denied under oath by the adverse party  Consequently, the genuineness and due execution of the written instrument or document copied in or attached to the opponent’s pleading as the basis of his claim or defense, should be denied specifically under oath, otherwise they are deemed itted. MEANING OF ISSION OF GENUINENESS AND DUE EXECUTION 1. That he signed it or that it was signed by another for him and with his authority 2. That at the time it was signed, it was in words and figures exactly as set out in the pleading of the party relying upon it, 3. That any formal requisites required by law, such as swearing and acknowledgment, or revenue stamp which it requires, are waived by him DEFENSES CUT OFF BY ISSION OF GENUINENESS, ETC. 1. The defense that the signature is a forgery


2.

3.

That it was unauthorized, as in the case of an agent g for his principal, or one g on behalf of a partnership or corporation or that in case of the latter, that the corporation was not authorized under its charter to sign the instrument That the party charged signed the instrument in some other capacity than that alleged in the pleading setting it out

FAILURE TO IDENTIFY PROMISSORY NOTE WILL NOT NECESSARILY DEFEAT CLAIM EFFECT OF FORGERY IN GENERAL 1. That the signature forged or made without authority is wholly inoperative 2. That no right to retain the instrument, or to give discharge thereof, or to enforce payment thereof against any party thereto, can be acquired through or under such a signature forged or made without authority 3. That nevertheless, as against a party precluded from setting up the forgery or want of authority, the signature forged or made without authority is operative, and rights to retain the instrument, to give discharge therefore, or to enforce payment thereof, can be acquired through or under the signature forged or made without authority EXTENT OF THE EFFECT OF THE FORGERY 1. Only the signature forged or made without authority is stated by the law to be inoperative but neither the instrument itself is, nor the genuine signatures are, rendered inoperative 2. The instrument can be enforced by holders to whose title over the instrument the forged signature is not necessary, such as, the indorsement of an instrument which on its face is payable to bearer 3. The instrument can be enforced against those who are precluded from setting up the defense of forgery, even against those whose signatures have been forged PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY 1. Those who warrant or it to the genuineness of the signature in question—indorsers, persons negotiating by delivery, and acceptors 2. Those who, by their acts, silence or negligence, are estopped from setting up the defense of forgery INDORSERS AS WARRANTORS  Whether general or qualified  Warrant that the instrument indorsed by them is genuine in all respects what it purports it to be


PERSONS NEGOTIATING BY DELIVERY AS WARRANTORS  Persons negotiating by mere delivery also warrant that the instrument negotiated by them is genuine and in all respects what it purports to be  They are consequently precluded from setting up the defense of forgery ACCEPTORS AS WARRANTORS  A drawee, by accepting the bill, its the genuineness off the signature of the drawer PRECLUDED  Includes those cases where they are estoppels against the party desiring to set up the forgery ESTOPPEL AS TO FORGERY OF INSTRUMENTS  Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe that his or another’s signature in an instrument is genuine, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to set up the forgery of such signature/s  Estoppel may arise from a declaration, act or omission/negligence UNREASONABLE DELAY  Unreasonable delay, after his discovery of the forgery, on the part of one having the opportunity and duty to speak, in disclosing the forgery upon commercial paper to the one who ought to be apprised thereof, estops the former from thereafter asserting the forgery as against the latter where the latter is prejudiced by such delay or failure  Requisites: o That the delay be unreasonable o That the one who ought to be apprised of the forgery has been prejudiced REASONABLY PROMPT NOTICE  Depends upon the circumstances of the case, and the situation of the parties with reference to the remedies against any party is a proper element to enter into the estimate of the reasonableness of the notice WHEN PREJUDICED AND WHEN NOT PREJUDICED  A bank is prejudiced—at the time one discovered that his attorney forged his indorsement to a draft in his favor, it had assets of the attorney in its possession to protect itself but at the time it was notified of the forgery, it has parted with such assets



It is not prejudiced by the delay where at no time after the discovery of the forgery did the cashier have any property with which to indemnify the bank

ESTOPPEL BY NEGLIGENCE IN DELIVERY  A drawer may be precluded from defense of forgery of the payee’s indorsement if delivery by him to the payee is negligent CASES OF FORGERY IN GENERAL 1. Forgery of promissory notes which may be further subdivided into— forgery of indorsement in the note; forgery of the maker’s signature 2. Forgery of bills of exchange which may be further classified into— forgery of an indorsement on the bill; forgery of the drawer’s signature, either with acceptance by the drawee, or without such acceptance but the bill is paid by the drawee RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN NOT PAYABLE TO ORDER Where the indorsement is forged and the note is payable to order, the party whose indorsement is forged and parties prior to him including the maker cannot be held liable by the holder, whether that holder is a holder in due course or not: 1. The reason is that, inasmuch as the indorsement is forged, it is inoperative. But since the note is payable to order, it can be negotiated only by indorsement completed by delivery, and therefore, the forged instrument is the only means one could acquire any rights to it or its proceeds 2. The law further provides that no right to retain the note, give discharge thereof, or enforce payment thereof, could be acquired through and under the forged signature. Hence the holder didn’t acquire at least those rights as against the party whose signature is forged and parties prior to him, including the maker 3. The forger usually obtains possession of the note by fraudulent or other unlawful means and therefore, he has no right whatsoever in the note RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN A NOTE PAYABLE TO BEARER  May be held liable by a holder in due course but not by the one who is not a holder in due course  Provided that the note was mechanically complete before the forgery Forged instrument is not necessary to the title of a holder since instruments payable by bearer can be negotiated by mere delivery



RIGHTS OF PARTIES IN FORGERY OF MAKER’S SIGNATURE  Where the maker’s signature is forged, he cannot be held liable by any holder, whether the holder is in due course or not  Purported maker is not a party to the instrument as his forged signature is inoperative and no right to retain, enforce, or discharge the note, may be acquired against him

COLLECTING BANK BOUND TO SCRUTINIZE CHECKS DEPOSITED WITH IT TO DETERMINE GENUINENESS AND REGULARITY CONVERSION  An unauthorized assumption and exercise of the right of ownership over goods or personal chattels belonging to another, to the alteration of their condition or exclusion of the owner’s right

DRAWEE CANNOT CHARGE OF DRAWER  In an action by the drawee against the drawer for the amount charged by the drawee against the of the drawer where the drawee paid a check on a forged indorsement, the drawee has no defense against the drawer and the drawer may recover from the drawee for an instrument paid on a forged indorsement  Depository owes to the depositor an absolute and contractual duty to pay the check only to the person to whom it is made payable or upon his genuine indorsement

AS AFFECTED BY QUESTION OF DELIVERY TO PAYEE  The checks didn’t reach the hands of the payee. The bearing of such absence of delivery is considered in some cases and held not to be material  Where there is no delivery to the payee and no title vests upon him, he ought not to be allowed to recover on the ground that he lost nothing because he never became owner of the check and still retained his claim against the drawer

DRAWER CANNOT RECOVER FROM THE COLLECTING BANK  Drawer has no right to recover the amount paid from the collecting bank as the duty of the collecting to exercise care in collection is due only to the payee, and as the drawer suffers no loss since it can recover the amount paid from the drawee bank which has no right to charge the drawer’s

PAYEE CANNOT RECOVER FROM THE DRAWEE  An action cannot be maintained by a payee of a check against the bank on which it is drawn unless the check has been certified or accepted by the bank on which it is drawn, without acceptance or certification, as provided by the statute, there is no privity of contract between the drawee bank and the payee, or holder of the check

DRAWEE CAN RECOVER FROM COLLECTING BANK  The drawee may recover from the recipient of payment, such as the collecting bank, under a forged indorsement  Rule allowing the payee to recover from the recipient of the payment under a forged indorsement

RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN BILL PAYABLE TO BEARER  Holder may recover if he is a holder in due course

PAYEE CAN RECOVER FROM RECEIPT OF PAYMENT  According to the general rule, a bank or other corporation or an individual, who has obtained possession of a check, upon an unauthorized or forged indorsement of the payee’s signature and who collects the amount of the check from the drawee, is liable for the proceeds thereof to the payee or other owner, notwithstanding that they have been paid to the person whom the check was obtained  The possession of the check on the forged indorsement is wrongful and when the money had been collected on the check, the bank or other person or corporation, can be held as far as moneys had and received and the proceeds are held for the rightful owners of the payment and may be recovered by them


RIGHTS OF PARTIES IN FORGERY OF DRAWER’S SIGNATURE WHERE DRAWEE HASN’T ACCEPTED BILL BUT PAID IT  In the case of the payment of a forged check even without former acceptance, the drawee cannot recover from a holder in due course not chargeable with any act or negligence or disregard of duty  As between equally innocent parties, the drawee who pays money on a check the signature to which is forged, cannot recover the money from the one who received it BUT PAYMENT NOT EQUIVALENT TO ACCEPTANCE OR CERTIFICATION  The payment of a forged check doesn’t include or imply its acceptance in the sense that this word is used in Section 62 of NIL  Basis of the general rule is not that the drawee is precluded from setting up forgery because, by paying the check, it has accepted the check and therefore itted the genuineness of the drawer’s signature





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

NEGLIGENCE IN FORGERY OF INDORSEMENTS IN BILL  It presupposes that the drawer himself wasn’t negligent or guilty of such conduct as would estop him from asserting the forged character of the indorsement as against the depository and that if he was negligent or guilty of such conduct, the loss must fall on him WHERE A DEPOSITOR IS USING ITS OWN PERSONALIZED CHECKS, ITS FAILURE TO PROVIDE ADEQUATE SECURITY MEASURES TO PREVENT FORGERIES OF ITS CHECKS CONSTITUTES GROSS NEGLIGENCE AND BARS IT FROM SETTING UP THE DEFENSE OF FORGERY BUT FAILURE OF DEPOSITOR TO MAKE PROMPT RECONCILIATION OF THE MONTHLY BANK STATEMENTS FURNISHED BY THE BANK CONSTITUTES NEGLIGENCE FOR WHICH THE BANK CANNOT BE BLAMED IN CASE DEPOSITOR’S CASE ARE FORGED BUT DRAWER NOT GENERALLY NEGLIGENT WHERE HIS CHECK IS STOLEN PAYEE’S NEGLIGENCE IN FORGERY OF DRAWER’S SIGNATURE  The payee in a check may be supposed to have knowledge of the circumstances under which it is drawn and generally, of the person drawing it, and is in a better position to judge the genuineness of the paper than are indorsees.  And there is a tendency to place greater responsibility upon him and he is much more likely to be required to return the proceeds of the paper than are the indorsees INDORSER’S NEGLIGENCE  After a draft or check has once been negotiated so that it is in circulation, there is little opportunity for negligence on the part of those through whose hands it es; but as to them, in most cases, the rule will apply that, as between innocent parties, the loss must fall on the drawee DUTY OF PURCHASER OF CHECK OR BILL  One who purchases a bill or check is bound to satisfy himself that the paper is genuine; and that by indorsing or presenting it for payment or putting it in circulation before presentation, he impliedly asserts that he has performed his duty and the drawee who has without actual negligence on his part, paid the forged demand, may recover the money paid from such negligent purchaser


PAPER FORWARDED FOR COLLECTION  The fact that the paper wasn’t cashed and indorsed with unrestricted indorsement but was taken for collection and forwarded for that purpose under an indrosement giving notice of that fact, may place a greater burden upon the drawee than it would otherwise bear FORGERY OF SIGNATURE IN INSTRUMENT IS FALSIFACTION OF PRIVATE DOCUMENT FORGER NEED NOT IMITATE GENUINE SIGNATURE  One who signs in the name of another without the latter’s authority, as drawer in a check, and thereby makes it appear falsely that the alleged drawer of the check was a real party thereto, when as a matter of fact he didn’t participate in the transaction, is guilty of falsification COMMERCIAL DOCUMENTS  Documents or instruments which are used by businessmen or merchants to promote or facilitate trade or credit transactions CASE DIGESTS: SECTION 23 (FORGED SIGNATURE OF DRAWER) 44

SAN CARLOS MINING V. BPI 59 PHIL 59

FACTS: Wilson, a principal employee of petitioner, together with Wilson, a messenger-clerk, conspired to withdraw cash from the petitioner’s through forgery of a check, in the name of the agent authorized to sign the check. While the authorized agent of petitioner was on vacation, Wilson and Dolores sent a cablegram to China Banking for the transfer of $100,000. On the contract, the name of Baldwin was forged and it was indicated therein that a certified check be issued. Thereafter, this was received and deposited with the BPI. Upon deposit, an indorsement in the name of Baldwin was placed. The bank was credited. Later, a letter was sent to the bank, purporting to be signed by Baldwin asking that it be withdrawn. This was done in supervision of Dolores. Dolores and Wilson then was able to get the money. This eventually came to the knowledge of plaintiff who filed an action against China Banking and BPI. The trial court dismissed the case.



HELD: A bank is bound to know the signatures of its customers and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the of the depositor whose name was forged. There is no act of the plaintiff that led the bank astray. If it was in fact lulled into the false sense of security, it was by the effrontery of Dolores, the messenger to whom it entrusted this large sum of meny. The proximate cause of the loss must therefore be due to the negligence of the bank in honoring and cashing the two forged checks. 45

PNB V. QUIMPO 158 SCRA 582

FACTS: While Gozon was in the bank with Santos left in the car, the latter stole a check and forged the signature of the former. He was able to encash the check. He was later apprehended by the police authorities and he itted to stealing the check. The court decided in favor of Gozon. The bank now posed the issue on whether Gozon’s act of leaving his checkbook in the car the proximate cause of the loss. HELD: Where the private respondent’s check was removed and stolen without his knowledge and consent, he cannot be considered negligent in this case. 46

PNB V. CA 25 SCRA 693

FACTS: Lim deposited in his PCIB a GSIS check drawn against PNB. Following standard banking procedures, the check was sent to petitioner for clearing. He didn’t return said check but paid the amount to PCIB as well as debited it against the of GSIS. Thereafter, a demand was received from GSIS asking for the credit of the amount since the signatures found in the check were forged. This was done by PNB and it now comes after PCIB but the latter wouldn’t want to return the money. HELD: Acceptance is not required for checks, for the same are payable on demand. Acceptance and payment are distinguished with each other. The


former pertains to a promise to perform an act while the latter is the actual performance of the act. PNB had also been negligent with the particularity that it had been guilty of a greater degree of negligence because it had a previous and formal notice from GSIS that the check had been lost, with the request that payment be stopped. Just as important is that it is its acts, which are the proximate cause of the loss. 47

MWSS V. CA 143 SCRA 20

FACTS: MWSS had an from PNB. Its treasurer, auditor, and General Manager are the ones authorized to sign checks. During a period of time, 23 checks were drawn and debited against the of petitioner. Bearing the same check numbers, the amounts stated therein were again debited from the of petitioner. The amounts drawn were deposited in the s of the payees in PCIB. It was found out though that the names stated in the drawn checks were all fictitious. Petitioner demanded the return of the amounts debited but the bank refused to do so. Thus, it filed a complaint. HELD: There was no categorical finding that the 23 checks were signed by persons other than those authorized to sign. On the contrary, the NBI reports shows that the fraud was an “inside job” and that the delay in the reconciliation of the bank statements and the laxity and loss of records control in the printing of the personalized checks facilitated the fraud. It further doesn’t provide that the signatures were forgeries. Forgery cannot be presumed. It should be proven by clear, convincing and positive evidence. This wasn’t done in the present case. The petitioner cannot invoke Section 23 because it was guilty of negligence not only before the questioned checks but even after the same had already been negotiated. 48

REPUBLIC V. EQUITABLE BANK 10 SCRA 8

FACTS: The corporation had acquired 24 treasury warrants by accommodating its former trusted employee who asked the corporation to cash the warrants,


alleging it was difficulty to do directly with the government and that his wife expected a sort of commission for the encashment. The corporation acceded to the request provided that it be first cleared and that the corporation would receive the amount before paying for it. The warrants were then cleared but later on, at different periods of time, the treasurer returned 24 warrants to the CB on the ground that they have forged. The bank refused to return the cash. The clearing of the checks, it should be noted, was in accordance to the 24-hour clearing rule by the CB. HELD: The warrants were cleared and paid by the Treasurer, in view of which Equitable and PI bank credited the corresponding amounts to the respective depositors of the warrants and then honored the checks for said amounts. Thus, the treasury had not been only negligent in clearing its own warrants but had already thereby induced the banks to pay the amounts thereof to said depositors. This gross negligence becomes more apparent when each of the warrants were valued for more than the authority of the treasurer to approve. 49

PNB V. NATIONAL CITY BANK OF NY 63 PHIL 711

FACTS: Unknown persons negotiated with Motor Services Company checks, which were part of the stipulation in payment of automobile tires purchased from the latter’s store. It purported to have been issued by Pangasinan Transportation Company. The said checks were indorsed at the back by said unknown persons, the Motor company believing at that time that the signatures contained therein were genuine. The checks were later deposited with the company’s in National City Bank of NY. The said checks were consequently cleared and PNB credited National City Bank with the amounts. Thereafter, PNB discovered that the signatures were forged and it demanded the reimbursement of the amounts for which it credited the other bank. HELD: A check is a bill of exchange payable on demand and only the rules governing bills of exchanges payable on demand are applicable to it. in view of the fact that acceptance is a step necessary insofar as negotiable instruments are concerned, it follows that the provisions relative to acceptance are without application to checks. Acceptance impies subsequent negotiation of the instrument, which is not true in the case of


checks because from the moment it is paid, it is withdrawn from circulation. When the drawee banks cashes or pays a check, the cycle of negotiation is terminated and it is illogical thereafter to speak of subsequent holders who can invoke the warrant against the drawee. Further, in determining the relative rights of a drawee who under a mistake of fact, has paid, a holder who has received such payment, upon a check to which the name of the drawer has been forged, it is only fair to consider the question of diligence and negligence of the parties in respect thereto. The responsibility of the drawee who pays a forged check, for the genuineness of the drawer’s signature is absolute only in favor of one who has not, by his own fault or negligence, contributed to the success of the fraud or to mislead the drawee. According to the undisputed facts, National City Bank in purchasing the papers in question from unknown persons without making any inquiry as to the identity and authority of said persons negotiating and indorsing them, acted negligently and contributed to the constructive loss of PNB in failing to detect the forgery. Under the circumstances of the case, if the appellee bank is allowed to recover, there will be no change in position as to the injury or prejudice of the appellant. DRAWER: PANGASINAN PAYEE: IASMOTOR SERVICE DRAWEE: PNB COLLECTING BANK: NATIONAL CITY BANK OF NEW YORK 50


FACTS: Gomez opened an with Golden Savings bank and deposited 38 treasury warrants. All these warrants were indorsed by the cashier of Golden Savings, and deposited it to the savings in a Metrobank branch. They were sent later on for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. On persistent inquiries on whether the warrants have been cleared, the branch manager allowed withdrawal of the warrants, only to find out later on that the treasury warrants have been dishonored. HELD:



The treasury warrants were not negotiable instruments. Clearly, it is indicated that it was non-negotiable and of equal significance is the indication that they are payable from a particular fund, Fund 501. This indication as the source of payment to be made on the treasury warrant makes the promise to pay conditional and the warrants themselves nonnegotiable. Metrobank then cannot contend that by indorsing the warrants in general, GS assumed that they were genuine and in all respects what they purport it to be, in accordance to Section 66 of the NIL. The simple reason is that the law isn’t applicable to the non-negotiable treasury warrants. The indorsement was made for the purpose of merely depositing them with Metrobank for clearing. It was in fact Metrobank which stamped on the back of the warrants: “All prior indorsements and/or lack of endorsements guaranteed…” 51

PCIB V. CA 350 SCRA 446

FACTS: Ford Philippines filed actions to recover from the drawee bank Citibank and collecting bank PCIB the value of several checks payable to the Commissioner of Internal Revenue which were embezzled allegedly by an organized syndicate. What prompted this action was the drawing of a check by Ford, which it deposited to PCIB as payment and was debited from their Citibank . It later on found out that the payment wasn’t received by the Commissioner. Meanwhile, according to the NBI report, one of the checks issued by petitioner was withdrawn from PCIB for alleged mistake in the amount to be paid. This was replaced with manager’s check by PCIB, which were allegedly stolen by the syndicate and deposited in their own . The trial court decided in favor of Ford. ISSUE: Has Ford the right to recover the value of the checks intended as payment to CIR? HELD: The checks were drawn against the drawee bank but the title of the person negotiating the same was allegedly defective because the instrument was obtained by fraud and unlawful means, and the proceeds of the checks were not remitted to the payee. It was established that instead paying the


Commissioner, the checks were diverted and encashed for the envetual distribution among of the syndicate. Pursuant to this, it is vital to show that the negotiation is made by the perpetrator in breach of faith amounting to fraud. The person negotiating the checks must have gone beyond the authority given by his principal. If the principal could prove that there was no negligence in the performance of his duties, he may set up the personal defense to escape liability and recover from other parties who, through their own negligence, allowed the commission of the crime. It should be resolved if Ford is guilty of the imputed contributory negligence that would defeat its claim for reimbursement, bearing in mind that its employees were among the of the syndicate. It appears although the employees of Ford initiated the transactions attributable to the organized syndicate, their actions were not the proximate cause of encashing the checks payable to CIR. The degree of Ford’s negligence couldn’t be characterized as the proximate cause of the injury to parties. The mere fact that the forgery was committed by a drawer-payor’s confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, doesn’t entitle the bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer. Note: not only PCIB but also Citibank is responsible for negligence. Citibank was negligent in the performance of its duties as a drawee bank. It failed to establish its payments of Ford’s checks were made in due course and legally in order. 52

ILLUSORIO V. CA 393 SCRA 89

FACTS: Petitioner was a prominent businessman who, because of different business commitments, entrusted to his then secretary the handling of his credit cards and checkbooks. For a material period of time, the secretary was able to encash and deposit in her personal money from the of petitioner. Upon knowledge of her acts, she was fired immediately and criminal actions were filed against her. Thereafter, petitioner requested the bank to restore its money but the bank refused to do so. HELD:



The petitioner doesn’t have a course of action against the bank. To be entitled to damages, petitioner has the burden of proving negligence on the part of the bank for failure to detect the discrepancy in the signatures on the checks. It is incumbent upon petitioner to establish the fact of forgery. Curiously though, petitioner failed to supply additional signature specimens as requested by the NBI. The bank was not also remiss in performance of its duties, it practices due diligence in encashing checks. The bank didn’t have any hint of the modus operandi of Eugenio as she was a regular customer, designated by the petitioner himself to transact on his behalf. It was petitioner who was negligent in this case. He failed to examine his bank statements and this was the proximate cause of his own damage. Because of this negligence, he is precluded from setting up the defense of forgery with regard the checks. 53

BPI V. CASA MONTESORRI INTERNATIONALE 430 SCRA 261

FACTS: CASA has a current with BPI. It was discovered that for a material period of time, several checks were encashed by a certain Sonny Santos, who eventually was known to be a fictitious name used by the external auditor of CASA. The external auditor itted forging the signature of CASA’s president to be able to encash the checks. The trial court held the bank liable but this was modified. The modified decision apportioned the loss between BPI and CASA. HELD: A forged signature is a real and absolute defense, and a person whose signature appears on a negotiable instrument is forged is deemed to never have become a party thereto and to have never consented to the contract that allegedly gave rise to it. The counterfeiting of any writing, consisting in the g of another’s name with intent to defraud, is forgery. First, there was really a finding of forgery. The forger itted even in his affidavit of his forgery. Second, there was a finding by the police laboratory that indeed the signatures were forged. Furthermore, the negligence is attributable to BPI alone. Its negligence consisted in the omission of the degree of diligence required of a bank.

*Loss borne by proximate cause of negligence 54

CITIBANK N.A V. CABAMONGAN 488 SCRA 517

FACTS: Spouses Cabamongan opened a t and/or foreign currency time deposit in favor of their two children with Citibank. On a material date, a person who claimed to be Carmelita sought the pretermination of the . She presented identification cards to ascertain her identity to the then officer. When she left with the money, she left an identification card. The officer then called up the address. The spouses and their family knew of the incident. They were presently residing in the US and there was a prior incident wherein they got robbed in their house with the jewelry box and cards stolen. Spouses made several demands for the return of the amount but Citibank refused to do so. HELD: Citibank was negligent. First, the “depositor” didn’t present the Certificate of Deposit. Second, from the internal memorandum issued by the Officer, he itted to the fact that the specimen signature was different from the one who misrepresented herself as Carmelita. Third, the bank kept in its records pictures of its depositors. It is inconceivable how the bank was duped by an imposter. CASE DIGESTS: SECTION 23 (FORGED INDORSEMENT) 55

GREAT EASTERN LIFE V. HSBC 43 PHIL 678

FACTS: The plaintiff is an insurance corporation, which drew a check in favor of Melicor. This was stolen by Maasim, forged the signature of Melicor and deposited the check to his in PNB. Thereafter, PNB endorsed the check to HSBC who later debited the of plaintiff. Plaintiff believed all along that Melicor received the payment. Upon knowledge of the debit HSBC did on its , it demanded that the same amount be credited. HELD: The banks are liable. The money was in deposit with the bank and it had no legal right to pay it out to anyone except the plaintiff or its order.



The only remedy of the bank paying a check to a person who has forged the name of the payee is against the forger. 56

GEMPESAW V. CA 218 SCRA 682

FACTS: Gempensaw was the owner of many grocery stores. She paid her suppliers through the issuance of checks drawn against her checking with respondent bank. The checks were prepared by her bookkeeper Galang. In the g of the checks prepared by Galang, Gempensaw didn't bother herself in ing to whom the checks were being paid and if the issuances were necessary. She didn't even the returned checks of the bank when the latter notifies her of the same. During her two years in business, there were incidents shown that the amounts paid for were in excess of what should have been paid. It was also shown that even if the checks were crossed, the intended payees didn't receive the amount of the checks. This prompted Gempensaw to demand the bank to credit her for the amount of the forged checks. The bank refused to do so and this prompted her to file the case against the bank. HELD: Forgery is a real defense by the party whose signature was forged. A party whose signature was forged was never a party and never gave his consent to the instrument. Since his signature doesn’t appear in the instrument, the same cannot be enforced against him even by a holder in due course. The drawee bank cannot charge the of the drawer whose signature was forged because he never gave the bank the order to pay. In the case at bar the checks were filled up by petitioner’s employee Galang and were later given to her for signature. Her g the checks made the negotiable instruments complete. Prior to g of the checks, there was no valid contract yet. Petitioner completed the checks by g them and thereafter authorized Galang to deliver the same to their respective payees. The checks were then indorsed, forged indorsements thereon. As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot debit the of a drawer for the amount of said check. An exception to this rule is when the drawer is guilty of negligence which causes the bank to honor such checks. Petitioner in this case has relied solely on the honesty and loyalty of her bookkeeper and never bothered to the accuracy of the amounts of the checks she signed the invoices attached thereto. And though she received her bank


statements, she didn't carefully examine the same to double-check her payments. Petitioner didn't exercise reasonable diligence which eventually led to the fruition of her bookkeeper’s fraudulent schemes. 57

BANCO DE ORO SAVING V. EQUITABLE 157 SCRA 188

FACTS: BDO drew checks payable to member establishments. Subsequently, the checks were deposited in Trencio’s with Equitable. The checks were sent for clearing and was thereafter cleared. Afterwards, BDO discovered that the indorsements in the back of the checks were forged. It then demanded that Equitable credit its but the latter refused to do so. This prompted BDO to file a complaint against Equitable and PCHC. The trial court and RTC held in favor of the Equitable and PCHC. HELD: First, PCHC has jurisdiction over the case in question. The articles of incorporation of PHHC extended its operation to clearing checks and other clearing items. No doubt transactions on non-negotiable checks are within the ambit of its jurisdiction. Further, the participation of the two banks in the clearing operations is submission to the jurisdiction of the PCHC. Petitioner is likewise estopped from raising the non-negotiability of the checks in issue. It stamped its guarantee at the back of the checks and subsequently presented it for clearing and it was in the basis of these endorsements by the petitioner that the proceeds were credited in its clearing . The petitioner cannot now deny its liability as it assumed the liability of an indorser by stamping its guarantee at the back of the checks. Furthermore, the bank cannot escape liability of an indorser of a check and which may turn out to be a forged indorsement. Whenever a bank treats the signature at the back of the checks as indorsements and thus logically guarantees the same as such there can be no doubt that said bank had considered the checks as negotiable. A long line of cases also held that in the matter of forgery in endorsements, it is the collecting bank that generally suffers the loss because it had the dutyh to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements.


58

BPI V. CA 216 SCRA 51

FACTS: Someone who identified herself to be Fernando called up BPI, requesting for the pre-termination of her money market placement with the bank. The person who took the call didn't bother to with Fernando’s office if whether or not she really intended to preterminate her money market placement. Instead, he relied on the verification stated by the caller. He proceeded with the processing of the termination. Thereafter, the caller gave delivery instructions that instead of delivering the checks to her office, it would be picked up by her niece and it indeed happen as such. It was found out later on that the person impersonated Fernando and her alleged niece in getting the checks. The dispatcher also didn't bother to get the promissory note evincing the placement when he gave the checks to the impersonated niece. This was aggravated by the fact that this impersonator opened an with the bank and deposited the subject checks. It then withdrew the amounts. The day of the maturity of the money market placement happened and the real Fernando surfaced herself. She denied preterminating the money market placements and though she was the payee of the checks in issue, she didn't receive any of its proceeds. This prompted the bank to surrender to CBC the checks and asking for reimbursement on alleged forgery of payee’s indorsements. HELD: The general rule shall apply in this case. Since the payee’s indorsement has been forged, the instrument is wholly inoperative. However, underlying circumstances of the case show that the general rule on forgery isn’t applicable. The issue as to who between the parties should bear the loss in the payment of the forged checks necessitates the determination of the rights and liabilities of the parties involved in the controversy in relation to the forged checks. The acts of the employees of BPI were tainted with more negligence if not criminal than the acts of CBC. First, the act of disclosing information about the money market placement over the phone is a violation of the General Banking Law. Second, there was failure on the bank’s part to even compare the signatures during the termination of the placement, opening of a new with the specimen signature in file of Fernando. And third, there was failure to ask the surrender of the promissory note evidencing the placement.


The acts of BPI employees was the proximate cause to the loss. Nevertheless, the negligence of the employees of CBC should be taken also into consideration. They closed their eyes to the suspicious large amount withdrawals made over the counter as well as the opening of the . 59


FACTS: Checks were deposited by petitioner in its current with the bank. These checks were from a certain Ramirez, a consistent better in its games, who was a sales agent from Inter-Island Gas. Inter-Island later found out that of the forgeries committed in the checks and thus, it informed all the parties concerned. Upon the demands on the bank as the collecting bank, it debited the of petitioner. Thereafter, petitioner tried to issue a check for payment of shares of stock but such was dishonored for insufficient funds. It filed a complaint against the bank. HELD: Respondent bank acted within legal bounds when it debited the of petitioner. When the petitioner deposited the checks to its , the relationship created was one of agency still and not of creditor-debtor. The bank was to collect from the drawees of the checks with the corresponding proceeds. Bank may have the proceeds already when it debited the of petitioner. Nonetheless, there is still no creditor-debtor relationship. Following Section 23, a forged signature is wholly inoperative and no right to discharge it or enforce its payment can be acquired through or under the forged signature except against a party who cannot invoke its forgery or want of authority. It stands to reason that as a collecting bank which indorsed the checks to the drawee-banks for clearing, should be liable to the latter for reimbursement for the indorsements on the checks had been forged prior to their delivery to the petitioner. The payments made by the drawee banks to respondent were ineffective—the creditordebtor relationship hadn’t been validly effected. 60 REPUBLIC V. EBRADA 65 SCRA 680 FACTS:


Ebrada encashed a “Back Pay Check” issued by the Bureau of Treasury at the Republic Bank in Escolta Manila. The Bureau of Treasury advised the Republic Bank that the instrument was forged. It informed the bank that the original payee of the check died 11 years before the check was issued. Therefore, there was a forgery of his signature. This is the sequence: Martin Lorenzo Ramon Lorenzo Delia Dominguez Mauricia Ebrada

The deceased person, “payee”, where forgery happened

original the

Defendant-appelant

Ebrada refuses to return the proceeds of the check claiming that she already gave it to Delia Dominguez. She also claims that she is a HDC (holder in due course) and that the bank is already estopped. HELD: Ebrada should return the proceeds of the check to Republic Bank. As an indorser of the check, she was supposed to have warranted that she has good title to said check. See Section 65. Section 23: When the signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instruments, or to give a discharge thereof against any party thereto, can be acquired through or under such signature unless the party against whom it is sought to enforce such right is PRECLUDED from setting up the forgery or want of authority. It is only the negotiation based on the forged or unauthorized signature which is inoperative. Therefore: Martin Lorenzo Ramon Lorenzo Delia Dominguez Mauricia Ebrada

Signature inoperative To Dominguez: operative To Ebrada: operative

Drawee bank can collect from the one who encashed the check. If Ebrada performed the duty of ascertaining the genuiness of the check, in all probability, the forgery wouyld have been detected and the fraud defeated.


NOTES FOR WEEK #5: JULY 10-15, , 2007 61

MANILA LIGHTER TRANS V. CA 182 SCRA 251

FACTS: Perez was able to collect the checks payable to petitioner. The petitioner wasn't able however to receive the checks. Instead, the payee’s signatures therein were forged and was able to land in the hands of third persons who deposited the same to their in China bank. Petitioner sued Chinabank for the sum of money. The trial court held that there was equal negligence on the part of petitioner and bank but the appellate court held that the bank had no liability whatsoever. HELD: Since the petitioner had no with the bank and wasn't a client thereof, the latter had no way of ascertaining the authenticities of its indorsements on the checks which were deposited in the s of the third party defendants in said bank. Respondent bank wasn't negligent because, in accordance with banking practice, it caused the checks to through the clearing house before it allowed their proceeds to be withdrawn by the depositors. 62

ASSOCIATED BANK V. CA 208 SCRA 465

FACTS: Reyes was engaged in the RTW business and held transactions with different department stores. She was about to collect payments from the department stores when she was informed that the payments had already been made, through crossed checks issued in her business’ name and the same were deposited with the bank. The bank consequently allowed its transfer to Sayson who later encashed the checks. This prompted Reyes to sue the bank and its manager for the return of the money. The trial and appellate court ruled in her favor. HELD: There is no doubt that the checks were crossed checks and for payee’s only. Reyes was able to show that she has never authorized Sayson to deposit the checks nor to encash the same; that the bank had allowed all checks to be deposited, cleared and paid to one Sayson in violation of the instructions in the said crossed checks that the same were



for payee’s only; and that Reyes maintained a savings with the bank which never cleared the said checks. Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the top left portion of the checks. The crossing is special where the name of a bank or a business institution is written between the two parallel lines, which means that the drawee should pay only with the intervention of the company. The crossing is general where the words written in between are “And Co.” and “for payee’s only”, as in the case at bar. This means that the drawee bank should not encash the check but merely accept it for deposit. The effects of crossing a check are as follows: 1. That the check may not be encashed but only deposited in the bank 2. That the check may be negotiated only once—to one who has an with a bank 3. That the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to the purpose The subject checks were accepted for deposit by the bank for the of Sayson although they were crossed checks and the payee wasn't Sayson but Reyes. The bank stamped thereon its guarantee that all prior endorsements and/or lack of endorsements guaranteed. By such deliberate and positive act, the bank had for all legal intents and purposes treated the said checks as negotiable instruments and accordingly assumed the warranty of the endorser. When the bank paid the checks so endorsed notwithstanding that title has not ed to the endorser, it did so at its peril and became liable to the payee for the value of the checks. 63


FACTS: The province of Tarlac maintains an with PNB-Tarlac. Part of its funds is appropriated for the benefit of Concepcion Emergency Hospital. During a post-audit done by the province, it was found out that 30 of its checks weren’t received by the hospital. Upon further investigation, it was found out that the checks were encashed by Pangilinan who was a former cashier and istrative officer of the hospital through forged


indorsements. This prompted the provincial treasurer to ask for reimbursement from PNB and thereafter, PNB from Associated Bank. As the two banks didn't want to reimburse, an action was filed against them. HELD: There is a distinction on forged indorsements with instruments and instruments payable to order.

regard bearer

With instruments payable to bearer, the signature of the payee or holder is unnecessary to title to the instrument. Hence, when the indorsement is a forgery, only the person whose signature is forged can raise the defense of forgery against holder in due course. In instruments payable to order, the signature of the rightful holder is essential to transfer title to the same instrument. When the holder’s signature is forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. In connection to this, an indorser warrants that the instrument is genuine. A collecting bank is such an indorser. So even if the indorsement is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank. Furthermore, in cases involving checks with forged indorsements, such as the case at bar, the chain of liability doesn't end with the drawee bank. The drawee bank may not debit the of the drawer but may generally liability back through the collection chain to the party who took from the forger and of course, the forger himself, if available. In other words, the drawee bank can seek reimbursement or a return of the amount it paid from the collecting bank or person. The collecting bank generally suffers the loss because it has te duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements. With regard the issue of delay, a delay in informing the bank of the forgery, which deprives it of the opportunity to go after the forger, signifies negligence on the part of the drawee bank and will preclude it from claiming reimbursement. In this case, PNB wasn't guilty of any negligent delay. Its delay hasn't prejudiced Associated Bank in any way because even if there wasn't delay, the fact that there was nothing left of the of Pangilinan, there couldn't be anymore reimbursement. 64

WESTMONT BANK V. ONG



373 SCRA 212 FACTS: Ong was supposed to be the payee of the checks issued by Island Securities. Ong has a current with petitioner bank. He opted to sell his shares of stock through Island Securities. The company in turn issued checks in favor of Ong but unfortunately, the latter wasn't able to receive any. His signatures were forged by Tamlinco and the checks were deposited in his own with petitioner. Ong then sought to collect the money from the family of Tamlinco first before filing a complaint with the Central Bank. As his efforts were futile to recover his money, he filed an action against the petitioner. The trial and appellate court decided in favor of Ong. HELD: Since the signature of the payee was forged, such signature should be deemed inoperative and ineffectual. Petitioner, as the collecting bank, grossly erred in making payment by virtue of said forged signature. The payee, herein respondent, should therefore be allowed to collect from the collecting bank. It should be liable for the loss because it is its legal duty to ascertain that the payee’s endorsement was genuine before cashing the check. As a general rule, a bank or corporation who has obtained possession of a check with an unauthorized or forged indorsement of the payee’s signature and who collects the amount of the check other from the drawee, is liable for the proceeds thereof to the payee or the other owner, notwithstanding that the amount has been paid to the person from whom the check was obtained. DOCTRINE OF DESIRABLE SHORT CUT—plaintiff uses one action to reach, by desirable short cut, the person who ought to be ultimately liable as among the innocent persons involved in the transaction. In other words, the payee ought to be allowed to recover directly from the collecting bank, regardless of whether the check was delivered to the payee or not. On the issue of laches, Ong didn't sit on his rights. He immediately sought the intervention of Tamlinco’s family to collect the sum of money, and later the Central Bank. Only after exhausting all the measures to settle the issue amicably did he file the action. 65

TRADERS ROYAL BANK V. RPN 390 SCRA 608


FACTS: RPN, IBC and BBC were all assessed for tax by the BIR. To pay the assessed taxes, they bought manager’s checks from petitioner bank. None of these checks were paid to the BIR. They were found to have been deposited in the of a third person in Security Bank. As the taxes remained unpaid, the BIR issued a levy, distraint and garnishment against the three networks. An action was filed wherein it was decided that the networks should be reimbursed for the amounts of the checks by petitioner bank and the latter in turn, must be reimbursed by Security Bank. In the appellate court, it was held that Traders Bank should be the only bank liable. HELD: Petitioner ought to have known that where a check is drawn payable to the order of one person and is presented for payment by another and purports upon its face to have been duly indorsed by the payee of the check, it is the primary duty of the petitioner to know that the check was duly indorsed by the original payee, and it pays the amount of the check to the third person, who has forged the signature of the payee, the loss falls upon the petitioner who cashed the check. Its only remedy is against the person to whom it paid the money. It should be further noted that one of the checks was a crossed check. The crossing of the check should have put petitioner on guard; it was dutybound to ascertain the indorser’s title to the check or the nature of his possession. Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor. RIGHTS OF ONE NOT HOLDER IN DUE COURSE  Where an instrument has been materially altered, it is avoided in the hands of one who is not a holder in due course as against a prior party who has not assented to the alteration WHERE INSTRUMENT NOT AVOIDED AS TO HOLDER NOT IN DUE COURSE 1. A party who has made the material alteration 2. A party who has authorized the material alteration



3. 4.

A party who has assented to the material alteration Any subsequent indorsers

RIGHTS OF HOLDER IN DUE COURSE  He may enforce the instrument in its original tenor  He could recover the altered tenor to any party who has made, authorized or assented the alteration, or any subsequent indorser of the instrument NO DISTINCTION BETWEEN FRAUDULENT AND INNOCENT ALTERATION RIGHT TO COLLECT ORIGINAL CONSIDERATION  When the alteration wasn't fraudulently done, the holder may recover the original consideration WHERE DRAWEE BANK PAYS ALTERED AMOUNT, DRAWER HAS THE RIGHT TO HAVE HIS DEBITED WITH CORRECT AMOUNT ONLY BANKS ARE BOUND BY THE 24-HOUR CLEARING HOUSE RULE AND MUST NOTIFY THE COLLECTING BANKS WITHIN 24 HOURS OF ALTERATION OF CHECKS SECTION 23 Forgery with regard the signature of the drawer or indorser Real defense

SECTION 124 AND 125 Forgery on any other material in the instrument Personal defense—the instrument is not avoided when it comes to a holder in due course; the holder may enforce the original tenor still of the instrument

(f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. CASE DIGESTS: SECTIONS 124 AND 125 66

FACTS: People’s Bank is sought to be liable for the amount involved in checks subject of this case. This arose from the following facts: PLDT drew a check on HSBC with the latter being the payee. The check landed in the hands of a third person who successfully substituted his name as payee and deposited the check with the People’s Bank. Upon knowledge of this, reimbursement was being sought from the People’s Bank and it refused to do so. This prompted to an action against it. HELD: The entire case of HSBC relied on the indorsement that has been heretofore copied—namely, a guarantee of all prior indorsements made by People’s Bank and since such an indorsement carries with it a concomitant guarantee of genuineness, the People’s Bank is liable to HSBC for alteration of the name of the payee. On the other hand, the People’s Bank relied on the 24-hour regulation of the Central Bank that required after a clearing, that all cleared items must be returned not later than 24 hours. It should be noted that the checks were returned by HSBC 27 days later. Dismissal of its complaint was therefore called for. 67

Sec. 125. What constitutes a material alteration. - Any alteration which changes:

HSBC V. PEOPLE’S BANK 35 SCRA 140

REPUBLIC BANK V. CA 196 SCRA 100

(c) The time or place of payment:

FACTS: SMC issued a dividend check in favor of Delgado and the check was drawn against FBTC. Delgado was able to alter the check, increased the amount of the same and deposited it with his in Republic Bank. RB indorsed it with FBTC. The SMC notified FBTC of the alterations made and demanded for reimbursement. Republic Bank then didn't want to reimburse. The trial court held it liable.

(d) The number or the relations of the parties;

HELD:

(a) The date; (b) The sum payable, either for principal or interest;

(e) The medium or currency in which payment is to be made;




The 24-hour clearing rule is a valid rule applicable to commercial banks. It is true that when an indorsement is forged, the collecting bank or last indorser, as a general rule, bears the loss. But the unqualified endorsement of the collecting bank of the checks should be read together with the 24-hour regulation on clearing house operation. Thus, when a drawee bank fails to return the forged check to the collecting bank within the 24-hour clearing rule, the collecting bank is absolved from liability.

In view of the foregoing, the embassy as the drawer of the 3 checks in question cannot be held liable. It is apparent that the said 3 checks were (fraudulently altered) by Boncan as to their s and therefore wholly inoperative (note: should be “avoided”).

68

FACTS: DECS issued a check in favor of Abante Marketing containing a specific serial number, drawn against PNB. The check was deposited by Abante in its with Capitol and the latter consequently deposited the same with its with PBCOM which later deposited it with petitioner for clearing. The check was thereafter cleared. However, on a relevant date, petitioner PNB returned the check on that there had been a material alteration on it. Subsequent debits were made but Capitol cannot debit the of Abante any longer for the latter had withdrawn all the money already from the . This prompted Capitol to seek reclarification from PBCOM and demanded the recrediting of its . PBCOM followed suit by doing the same against PNB. Demands unheeded, it filed an action against PBCOM and the latter filed a third-party complaint against petitioner.

BANCO ATLANTICO V. AUDITOR GENERAL 81 SCRA 335

FACTS: Boncan was the Finance Officer of the Philippine Embassy in Madrid who on many occasions negotiated with Banco Atlantico checks, allegedly endorsed to her by the embassy. On these occasions, the bank allowed the payment of the checks, notwithstanding the fact that the drawee bank has not yet cleared the checks for collection. This was premised on the finding that Boncan had special relations with the employees of the bank. And that upon presentment to the drawee bank, the checks were dishonored due to non-acceptance allegedly on the ground that the drawer has ordered the stoppage of payment. This prompted Banco Atlantico to collect from the Philippine Embassy for the funds released to Boncan but the latter refused. This eventually led to filing of money claim of the bank with the Auditor General. HELD: On whether or not Banco Atlantico was a holder in due course, it is not. Following the decision of the Auditor General in denying the claim of the bank, the checks were demand notes. It should have been put on guard when Boncan negotiated the checks with them and subsequently deposited the same to her . Even though it were demand notes, she instructed the bank that the same be not presented for collection till a later date. The fact that the amount was quite big and it was the payee herself who made the request that the same be not presented for collection until a fixed date in the future was proof of a glaring infirmity or defect in the instrument. It loudly proclaims “Take me at your own risk.” It was obvious by then that the bank had knowledge of the infirmity or defect of the checks. Furthermore, what it did when it allowed payment before clearing is beyond the normal and ordinary banking practice especially when the bank involved is a foreign bank and the amounts involved were large. Boncan wasn't even a client of the bank but was someone who had special relations with its officers.


69


HELD: An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in the instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of the party. In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the NIL. In this case, the alleged material alteration was the alteration of the serial number of the check in issue—which is not an essential element of a negotiable instrument under Section 1. PNB alleges that the alteration was material since it is an accepted concept that a TCAA check by its very nature is the medium of exchange of governments, instrumentalities and agencies. As a safety measure, every government office or agency is assigned checks bearing different serial numbers. But this contention has to fail. The check’s serial number is not the sole indicia of its origin. The name of the government agency issuing the check is clearly stated therein. Thus, the check’s drawer is sufficiently identified, rendering redundant the referral to its serial number.


Therefore, there being no material alteration in the check committed, PNB could not return the check to PBCOM. It should pay the same. ATTY. MERCADO’S QUESTION: HOW DO YOU RECONCILE THE OPINION OF VITUG WITH AGBAYANI’S RE: MATERIAL ALTERATION? Vitug only refers to innocent alterations not affecting negotiability and those under Section 124 and 125 70

AMERICAN BANK V. MACONDRAY 4 PHIL 695

FACTS: MANILA, P. I., August 12, 1902. $300.00 At sight pay to my order three hundred dollars, value received, and charge to my . V. S. WOLFF. To F. H. TAYLOR & Co., Louisville, Kentucky. No ................................ [Indorsements.] V. S. Wolff. The signature is O. K. payment guaranteed. Protest, demand, and notice of nonpayment waived. Macondray & Company. Pay to First National Bank of San Francisco, or order. American Bank, Manila, P. I. H. B. Mulford, cashier. Pay to 3rd National Bank or order. The First National Bank of San Francisco. James K. Lynch, cashier. American Bank claims the right to recover from Wolff the amount of the bill of exchange upon the theory that Macondray guaranteed the payment of the instrument. This was refuted by Macondray by saying that it didn't guarantee the payment of the instrument. Instead, it only certified the


signature of Wolff and that the statement “payment guaranteed xxx” was not written on said indorsement at the time it signed the firm name. HELD: An examination of the alleged indorsement of Macondray & Co. which appeared upon the said bill of exchange at the time of the trial, and the indorsement of said company at the time of the protest of said bill of exchange, shows beyond peradventure of doubt that the contention of the defendant is true, and that part of the indorsement which says "Payment guaranteed. Protest, demand, and notice of nonpayment waived" was added by some person after the signature of the defendant, Macondray & Co., and after the protest of said bill. The indorsement made by Macondray & Co. was changed, after said indorsement by said company, by adding thereto the statement "Payment guaranteed. Protest, demand, and notice of nonpayment waived," and that the indorsement actually made by Macondray & Co. was in the following form: V. S. Wolff. The signature is O. K. Macondray & Co. The liability of an indorser of a bill of exchange, after due protest and notice of nonpayment and dishonor, is the same as that of the original obligors on such a contract, and any material alteration in the of this contract by the holder of the same, without the consent of the obligor, will relieve such obligor from all liability thereon. The original indrosement then of the company was for the purpose only of assuring the American Bank that the signature of Wolff was genuine—that is to say, that the person whom he represented himself to be. It was an indorsement for identification of the person only and not for the purpose of incurring liability to the payment of such bill of exchange. 71

MONTINOLA V. PNB 88 PHIL 178

FACTS: Ramos, as a disbursing officer of an army division of the USAFE, made cash advancements w/ the Provincial Treasurer of Lanao. In exchange, the Prov’l Treasurer of Lanao gave him a P500,000 check. Thereafter, Ramos presented the check to Laya for encashment. Laya in his capacity as Provincial Treasurer of Misamis Oriental as drawer, issued a check to Ramos in the sum of P100000, on the Philippines National Bank as drawee; the P400000 value of the check was paid in military notes.


Ramos was unable to encash the said check for he was captured by the Japanese. But after his release, he sold P30000 of the check to Montinola for P90000 Japanese Military notes, of which only P45000 was paid by the latter. The writing made by Ramos at the back of the check was to the effect that he was asg only P30000 of the value of the document with an instruction to the bank to pay P30000 to Montinola and to deposit the balance to Ramos's credit. This writing was, however, mysteriously obliterated and in its place, a supposed indorsement appearing on the back of the check was made for the whole amount of the check. At the time of the transfer of this check to Montinola, the check was long overdue by about 2-1/2 years. Montinola instituted an action against the PNB and the Provincial Treasurer of Misamis Oriental to collect the sum of P100,000, the amount of the aforesaid check. There now appears on the face of said check the words in parenthesis "Agent, Phil. National Bank" under the signature of Laya purportedly showing that Laya issued the check as agent of the Philippine National Bank. HELD: The words "Agent, Phil. National Bank" now appearing on the face of the check were added or placed in the instrument after it was issued by the Provincial Treasurer Laya to Ramos. The check was issued by only as Provincial Treasurer and as an official of the Government, which was under obligation to provide the USAFE with advance funds, and not as agent of the bank, which had no such obligation. The addition of those words was made after the check had been transferred by Ramos to Montinola. The insertion of the words "Agent, Phil. National Bank," which converts the bank from a mere drawee to a drawer and therefore changes its liability, constitutes a material alteration of the instrument without the consent of the parties liable thereon, and so discharges the instrument 72

THE INTERNATIONAL CORPORATE BANK V. CA AND PNB 501 SCRA 20

FACTS: Here comes again the Ministry of Education issuing checks drawn against PNB. It was deposited with petitioner bank and the latter consequently submitted the checks to PNB for clearing. After the 24-hour clearing period without any reply from the latter, the petitioner bank credited the with the values of the checks. Thereafter, PNB returned the checks without clearing them for allegedly being materially altered. HELD:


The alterations in the checks were made on its serial numbers. This has been long decided in a previous case involving PNB, the same bank in this case. An alteration on the serial number is not to be considered as a material alteration. A material alteration is one which changes the items relating to any of the essential requisites mentioned in Section 1. There is no need to rule on the 24-hour clearing period since there was no material alteration to speak of. PNB had no right to dishonor the checks and return them to petitioner. Thus, PNB is liable for the value of the checks. **Modification of the 24-hour clearing rule. Now, its notice after 24 hours of discovering the fraud or material alteration. 73

METROBANK V. CABLIZO 510 SCRA 259

FACTS: Cablizo maintained an with petitioner. It drew a check payable to cash payable to a certain Marquez, for the latter’s sales commission. The check was subsequently deposited in Westmont bank and the latter submitted it with Metrobank for clearing. The check was cleared. Thereafter, the bank’s representative asked Cablizo if he issued a check for P91,000. The answer was in the negative. This prompted Cablizo to call Metrobank and ask for the recrediting of P90,000 but petitioner failed to recredit the amount prompting Cablizo to file an action against it. HELD: An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in the instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of the party. In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the NIL. The check in issue was materially altered when its amount was increased from P1000 to P91000. Cablizo was not the one who authorized or made such increase. There is no showing that he was negligent in exercising what was due in a prudent man which could have otherwise prevented the loss. Cablizo was never remiss in the preparation and issuance of the check.



The doctrine of equitable estoppel is inapplicable against Cablizo. This doctrine states that when one of the two innocent person, each guiltiness of an intentional or moral wrong, must suffer a loss, it must be borne by the one whose erroneous conduct, either by omission or commission, was the cause of the injury. Negligence is never presumed. Metrobank was actually the one remiss in its duties. The CA took into consideration that the alterations were actually visible in the eye and yet the bank allowed someone not acquainted with the examination of checks to do the same. Furthermore, it cannot rely on the indorsement of Westmont Bank of the check. It should have exercised meticulous care in handling the affairs of its clients especially if the client’s money is involved. II. CONSIDERATION Sec. 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. PRESUMPTION OF CONSIDERATION IS DISPUTABLE  One of the disputable presumptions laid down by our Rules of Court is that a negotiable instrument was given or indorsed for a sufficient consideration CONSIDERATION NEED NOT ALLEGED OR PROVED  In an action based on a negotiable instrument, it is unnecessary to aver or prove consideration for it is imported and presumed from the fact that it is a negotiable instrument MERE INTRODUCTION OF INSTRUMENT SUFFICIENT  The mere introduction of the instrument sued on in evidence, prima facie entitles the plaintiff of a recovery and unless such prima facie case is overcome by evidence produced by the defendant the plaintiff is entitled to recover EFFECT OF LACK OF CONSIDERATION  The same is without legal effect and the payment for the note is not demandable CASE DIGESTS: SECTION 24 74

BANK OF THE PHILIPPINE ISLANDS V. LAGUNA COCONUT OIL

48 PHIL 5 FACTS: Laguna Coconut Oil Company executed the following promissory note in favor of the Philippine Vegetable Oil Company: P50,000.00. One month after date we promise to pay to the Philippine Vegetable Oil Company, Inc., or order at City of Manila, Philippine Islands, the sum of fifty thousand pesos (P50,000), Philippine currency; value received. In case of non-payment of this note at maturity, we are to pay interest at the rate of nine per cent (9%) per annum on the said amount and the further sum of P5,000 in full, without any deduction as and for costs, expenses and attorney's fees for collection whether actually incurred or not. Manila, Philippine Islands, April 26, 1920. LAGUNA COCONUT OIL CO. By BALDOMERO COSME President After a month, Fidelity & Surety Company of the Philippine Islands made the following notation on the note: For value received, we hereby obligate ourselves to hold the Laguna Cocoanut Oil Co. harmless against loss for having discounted the foregoing note at the value stated therein. Philippine Vegetable Oil Company indorsed the note to BPI, which at maturity date demanded payment from both Laguna Oil and Fidelity Surety. Both having failed to pay, BPI instituted actions against them. PNB pleaded the note with its indorsements by copy and alleged that the Fidelity & Surety Company by having undertaken to hold the Laguna Oil harmless for having discounted the note, contracted the obligation to pay said note on behalf of the Laguna Oil and to be surety for the latter. The trial court held against Fidelity and Surety and demanded it to pay the note. The trial court also held that the words “BPI” should have been placed in the indorsement rather than “Laguna Oil”. HELD:



The trial court underestimated the importance of pleading the supposed mistake in the complaint. The judgment as it stands clearly involves a reformation of the contract of guaranty and it is elementary that the facts upon which relief by reformation is sought must be put in issue by the pleadings. Jurisprudence states that a court of equity cannot reform an instrument except on allegations, which make out a case for the equitable remedy asked. The allegations must show that the instrument sought to be reformed fails to express the real agreement or transaction between the parties by reason of their mutual mistake or on of fraud of one them or fraud or inequitable condition on one side and mistake on the other. The indorsement upon which this action is brought does not in show any obligation in favor of PNB and the action can only be maintained upon the theory that the writing does not express the true intent of the parties. It could be speculated that the guarantee in question was intended for the benefit of the party who subsequently discounted the note, but this cannot be certain. The note may have been merely an accommodation not and the guarantee may have been intended for the protection of the maker in the event of the discounting of the note or its transfer to a third party. The appellee contends that this hypothesis is negatived by the fact that the words "value received" appear in the note as quoted in the stipulation of facts. But that proves nothing definitely or conclusively. Unless otherwise stated in the instrument, a negotiable promissory note implied prima facie valuable consideration moving to the maker whether the words "value received" appear in it or not. An accommodation note showing on its face in express that it had been issued for no consideration would be of little or no use to the payee, and for that reason, if for no other, practically all accommodation notes are so drawn as to either express or imply a valuable consideration prima facie. There is therefore nothing in the note here in question to distinguish it from an ordinary accommodation note. This being so and the guarantee of the Fidelity & Surety Company by its being in favor of the maker of the note, there is at least a possibility that the Fidelity, if called upon to do so, might have been able to prove that the note was given as an accommodation to the Vegetable Oil Company. This possibility existing, the court was not justified in virtually reforming the document by mere construction without proper pleadings. In this connection it should be borne in mind that contracts of suretyship and guarantee are strictly construed in favor of the surety or guarantor. 75

TRAVEL ON V. CA 210 SCRA 351


FACTS: Petitioner was a travel agency involved in ticket sales on a commission basis for and on behalf of different airline companies. Miranda has a revolving credit line with the company. He procured tickets on behalf of others and derived commissions from it. Petitioner filed a collection suit against Miranda for the unpaid amount of six checks. Petitioner alleged that Miranda procured tickets from them which he paid with cash and checks but the checks were dishonored upon presentment to the bank. This was being refuted by Miranda by saying that he actually paid for his obligations, even in the excess. He argued that the checks were for accommodation purposes only. The company needed to show to its Board of Directors that its s receivable was in good standing. The RTC and CA held Miranda not to be liable. HELD: Reliance by the lower and appellate court on the company’s financial statements were wrong, to see if Miranda was liable or not. This financial statements were actually not updated to show that there was indebtedness on the part of Miranda. The best evidence that the courts should have looked at were the checks itself. There is a prima facie presumption that a check was issued for valuable consideration and the provision puts the burden upon the drawer to disprove this presumption. Miranda was unable to relieve himself of this burden. Only clear and convincing evidence and not mere self-serving evidence of drawer can rebut this presumption. The company was entitled to the benefit conferred by the statutory provision. Miranda failed to show that the checks weren’t issued for any valuable consideration. The checks were clear by stating that the company was the payee and not a mere accommodated party. And also, notice was given to the fact that the checks were issued after a written demand by the company regarding Miranda’s unpaid liabilities. 76 PINEDA V. DELA RAMA 121 SCRA 671 FACTS: Pineda was caught in a case against the NARIC for his alleged misappropriation of many cavans of palay. He hired Atty. Dela Rama to delay the filing of the complaint against him, on alleged representation of the lawyer that he is a friend of the NARIC .



Pineda then issued a promissory note in favor of dela Rama to pay for the advances that the lawyer made to the to delay the filing of the complaint. Dela Rama on the other hand contended that the promissory note was for the loan advanced to Pineda by him. Dela Rama filed an action against Pineda for the collection of the amount of the note. HELD: The presumption that a negotiable instrument was issued for valuable consideration is a rebuttable presumption. It can be rebutted by proof to the contrary. In the case at bar, the claims of dela Rama that the promissory note was for a loan advanced to Pineda is unbelievable. The grant of a loan by a lawyer to a moneyed client and whom he has known for only 3 months can not be relied on. Pineda had actually just purchased numerous properties. It is highly illogical that he would loan from dela Rama P9500 for 5 days apart. Furthermore, the note was void ab initio because the consideration given was to influence the to delay charges against Pineda. The consideration was void for being against law and public policy. Sec. 25. Value, what constitutes. — Value is any consideration sufficient to a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. VALUABLE CONSIDERATION, IN GENERAL  Consideration is the inducement—cause or impelling influence which induces a contracting party to enter into the contract  Valuable consideration may in general be said to consist either in some right, interest, profit or benefit accruing to the party who makes the contract, or some forbearance, detriment, loss or some responsibility to act, or labor, or service given, suffered, or undertaken by the other side Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. MEANING OF A HOLDER FOR VALUE  One who gives valuable consideration for an instrument issued or negotiated to him is a holder for value



Not limited to one who is known to have given valuable consideration for the instrument he holds—it refers to any holder of an instrument for which value has been given at any time

Sec. 27. When lien on instrument constitutes holder for value. — Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. APPLICATION OF SECTION 27  Suppose that A makes a note in the sum of P1000 payable to the order of B. B owes C P600. C is said to have a lien on the note to the extent of P600 only, and to that extent, he is a holder for value.  Can C as indorsee collect the whole amount of P1000 from A, or only P600? It depends. If A maker, has defenses against B indorser, such as absence of consideration, C, even if a holder in due course can collect only P600 from A, the extent of his lien.  Reason for the rule: C is actually a holder in due course for P600 only. He is a holder in due course for such as he is a holder for value for only P600. For the balance of P400 he is not a holder for value, and since being a holder for value is one of the requisites of a holder in due course, he cannot be a holder in due course as far as the P400 is concerned.  If A has personal defenses, he cannot use such as far as the P600 is concerned.  If A on the other hand has real defenses, C cannot collect anything.  But if A maker doesn't have any defenses at all against B indorser, then C can collect the whole amount of P1000 and hold the P400 for the benefit of B. NOTES FOR WEEK #6: JULY 16-JU ,LY 20, 2007 Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. ABSENCE OF CONSIDERATION  It is total lack of any valid consideration Examples—note for future illicit cohabitation; note of husband to wife, upon promise of wife to withdraw all opposition to proceedings of





divorce instituted by him; a note given in consideration of an agreement to stifle or hinder a public prosecution for a felony; consideration for commercial paper is clearly fraudulent Embraces transactions where no consideration was intended to

FAILURE OF CONSIDERATION  It is the neglect or failure of one of the parties to give, to do or perform the consideration agreed upon  Implies that the giving of valuable consideration was contemplated but that it failed to ABSENCE AND FAILURE OF CONSIDERATION AS DEFENSES  Matter of defense against persons who are not holders in due course  They are personal defenses EFFECT OF WANT OF CONSIDERATION BETWEEN THE DRAWER AND ACCEPTOR AS TO HOLDER  The drawee, by accepting unconditionally the bill, becomes liable to the holder, and cannot allege want of consideration between him and drawer  Holder is a stranger to the transaction between the drawer and drawee Sec. 29. Liability of accommodation party. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. ACCOMODATION PARTY: REQUISITES  One who has signed the instrument as maker, drawer, indorser, acceptor, without receiving any value therefore and for the purpose of lending his name to some other person  Requisites: 1. He must be a party to the instrument, g as maker, acceptor, indorser, or drawer 2. He must not receive any value therefore 3. He must sign for the purpose of lending his name or credit RIGHTS AND LEGAL POSITION OF AN ACCOMODATION PARTY  The accommodation party is generally regarded as a surety for the party accommodated




When the accommodation parties make payment to the holder of the notes, they have the right to sue the accommodated party for reimbursement since the relation between them is in effect that of a principal and sureties, the accommodation parties being the sureties

ACCOMODATED PARTY CANNOT RECOVER FROM ACCOMODATION PARTY  Absence of consideration is a defense  In fact as between them, the understanding is that the accommodated party either is to 1. To reimburse the amount which the accommodation party may be obliged to pay 2. To pay the instrument directly to the holder LIABILITY OF THE ACCOMODATION PARTY  The accommodation party is liable on the instrument to a holder in value, notwithstanding such holder at any time of the taking of the instrument knew him to be only an accommodation party  The accommodation party doesn't receive any valuable consideration for the instrument he signs but he is liable to a holder for value as if the contract wasn't for accommodation CORPORATIONS ARE NOT LIABLE AS ACCOMODATION PARTIES EVEN TO HOLDERS FOR VALUE OFFICERS G FOR CORPORATION AS ACCOMODATION PARTY WITHOUT AUTHORITY TO DO SO FOR THEIR INDIVIDUAL DEBTS OR TRANSACTIONS ARE PERSONALLY LIABLE THEREON HOLDER MUST OTHERWISE BE A HOLDER IN DUE COURSE ACCOMODATION PARTY MAY ACCOMMODATE ONE WHO IS NOT A PARTY TO THE INSTRUMENT ACCOMMODATION PARTY CAN INTERPOSE DEFENSE OF WANT CONSIDERATION AGAINST ONE NOT HOLDER IN DUE COURSE.

OF


CLARK V. SELINER 42 PHIL 384

FACTS: Sellner with two other persons, signed a promissory note solidarily binding themselves to pay to the order of R.N Clark. The note matured but the


amount wasn't paid. The defendant alleges that he didn't receive any amount of the debt; that the instrument wasn't presented to him for payment and being an accommodation party, he is not liable unless the note is negotiated, which wasn't done. HELD: On the first issue, the liability of Sellner as one of the signers of the note, is not dependent on whether he has or has not, received any part of the debt. The defendant is really and expressly one of the t and several debtors of the note and as such he is liable under the provisions of Section 60 of the NIL. As to the presentment for payment, such action is not necessary in order to charge the person primarily liable, as is the defendant Sellner. As to whether or not Sellner is an accommodation party, it should be taken into that by putting his signature to the note, he lent his name, not to the creditor, but to those who signed with him placing him in the same position and with the same liability as the said signers. It should be noted that the phrase”without receiving value therefore” as used in section 29 means “without receiving value by virtue of the instrument” and not, as it apparently is supposed to mean, “without receiving payment for lending his name.” It is immaterial as far as the creditor is concerned, whether one of the signers has or has not received anything in payment for the use of his name. In this case, the legal situation of Sellner is that of a t surety who upon the maturity of the note, pay the debt, demand the collateral security and dispose of it to his benefit. As to the plaintiff, he is a holder for value. 78 CANEDA V. CA 181 SCRA 762 FACTS: Gueson for value received, executed a promissory note in favor of Caneda, promising to pay monthly installments with interest per annum. That to secure the obligation, he executed a chattel mortgage and used a Toyota Jiffy jeep as collateral; that it is expressly provided for in the promissory note that in case of default in any installment would deem that whole obligation demandable. This promissory note was later assigned to FNCB. Gueson then defaulted in his obligation and had an outstanding balance. Despite demands on Gueson, he failed and refused to pay. This prompted FNCB to file an action for replevin and sum of money, and in the alternative, prayed for the payment of the outstanding balance plus interest.


Gueson in his answer alleged that he was just an accommodation party in favor of Caneda. This was denied by Caneda. The trial court held that Gueson was indeed an accommodation party in favor of Caneda; that there was a novation in the form of substitution of debtors when Caneda executed the undertaking assuming the liability of Gueson in favor of FNCB; that the phrase “with recourse to Gueson in case of default” found in the undertaking was inserted only after Caneda and FNCB had already signed the undertaking and without the knowledge of Gueson and that Caneda was in bad faith when it tried to evade payment of a justly-secured legal obligation. HELD: As to the merits of the case, it is undisputed that Gueson executed a promissory note in favor of Caneda, secured by a chattel mortgage on a Toyota Jiffy jeep as collateral; which promissory note and chattel mortgage was assigned by Caneda in favor of FNCB evidently to secure his obligation with said company, with the knowledge and consent of Gueson. The records also clearly established that FNCB tried to collect from Gueson, Caneda consented and affixed his signature in an undertaking thereby acknowledging indebtedness in favor of FNCB. As between Gueson and Caneda, it is obvious that whether private agreement between them is binding on them alone and not on FNCB whose only concern in the whole transaction is the repayment of the loan it has extended. As regards FNCB, Caneda is the real debtor of the company and Gueson is only an accommodation party of Caneda. The trial court held that there was novation as there was substitution of debtors when Caneda executed the undertaking. But the CA is correct, by saying that there was no novation. Novation is never presumed. It must be explicitly stated. Caneda merely confirmed that he was the real debtor of FNCB in the undertaking signed, while Gueson merely accommodated Caneda in g the promissory note and executing the chattel mortgage. Thus, it has been ruled that one who signs as maker, drawer, acceptor or indorser, without receiving value therefore, and for the purpose of lending his name to some other person is liable to the instrument to a holder for value, notwithstanding the fact that such holder at the time of the taking the instrument knew him to be only an accommodation party. Nonetheless, after paying the holder, he is entitled to obtain reimbursement from the party accommodated.



Likewise, it is no defense to state that Caneda and Gueson didn't receive any value for the promissory note executed, both claiming to be accommodation parties. A third person advances the face value of the note to the accommodated party at the time of the creation of the note, the consideration for the note as regards the maker is the money advanced to the accommodated party, and it cannot be said that the note is lacking in consideration as to the accommodating party just becaue he himself received some of the money. It is enough that the value given for the note at the time of its creation. 79

TOWN SAVINGS AND LOAN BANK V. CA 223 SCRA 459

FACTS: Spouses Hipolito applied for and was granted a loan by the bank, which was secured by a promissory note. For failure to pay their monthly payments, they were declared in default. The spouses denied having any liability. They stated that the real party-ininterest is the sister of the husband, Pilarita Reyes. The spouses, not having received part of the loan, were mere guarantors of Reyes. As such, they protested against being dragged into the litigation. The trial court held that they were liable as accommodation parties to the promissory note. This was reversed by the Court of Appeals. HELD: An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefore and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be an accommodation party. In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. In the case at bar, it is indisputable that the spouses signed the promissory note to enable Reyes to secure a loan from the bank. She was the actual beneficiary of the loan and the spouses accommodated her by g the note. 80

MAULINI V. SERRANO


28 PHIL 640 FACTS: This is an appeal from a judgment of the Court of First Instance of the city of Manila in favor of the plaintiff for the sum of P3,000, with interest thereon at the rate of 11⁄2 per cent month from September 5, 1912, together with the costs. The action was brought by the plaintiff upon the contract of indorsement alleged to have been made in his favor by the defendant upon the following promissory note: 3,000. Due 5th of September, 1912. We tly and severally agree to pay to the order of Don Antonio G. Serrano on or before the 5th day of September, 1912, the sum of three thousand pesos (P3,000) for value received for commercial operations. Notice and protest renounced. If the sum herein mentioned is not completely paid on the 5th day of September, 1912, this instrument will draw interest at the rate of 11⁄2 per cent per month from the date when due until the date of its complete payment. The makers hereof agree to pay the additional sum of P500 as attorney's fees in case of failure to pay the note. Manila, June 5, 1912. (Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For Jose Padern, by F. Moreno. Angel Gimenez. The note was indorsed on the back as follows: Pay note to the order of Don Fernando Maulini, value received. Manila, June 5, 1912. (Sgd.) A.G. Serrano. HELD: 1.

The accommodation to which reference is made in Section 29 is not one to the person who takes the note but one to the maker or indorser of the note. It is true, that in the case at bar, it was an accommodation to the plaintiff, in the popular sense, to have the defendant indorse the note; but it wasn't the accommodation described in the law but rather a mere favor to him and one which in no way bound Serrano. In cases of accommodation indorsement, the indorser makes the indorsement for the accommodation of the maker. Such an indorsement is generally


2.

81

for the purpose of better securing the payment of the note—that is, he lends his name to the maker and not the holder. Parol evidence is issible for the purposes named. The prohibiton against parol evidence is to prevent alteration, change, modification, or contradiction of the term of a written instrument, ittedly existing, by the use of some parol evidence except in cases specifically named in the action. The case at bar is not one where the evidence offered varies, alters, modifies, or contradicts the of the indorsement ittedly existing. The evidence was not offered for that purpose. The purpose was to show that the contract of indorsement ever existed; that the minds of the parties never met on the of such contract; that they never mutually agreed to enter into such contract; and that there never existed a consideration upon which such an agreement could be founded. ACUNA V. VELOSO 50 PHIL 241

FACTS: At the time of execution of the note, Xavier was the agent of Veloso in the management of the latter’s real property in Manila. Though lacking in capital, Xavier was engaged in real estate trading, so far as his credit permitted, upon his own . His attention was then attracted to a piece of property, which was then on the market. Xavier communicated to his principal his desire to acquire the property and at the same time requested that Veloso assist him in the matter. Veloso was later convinced to help out Xavier. Thereafter, Gonzales lent a helping hand by advancing the money needed by Xavier, on the condition that a note should be issued tly and severally by Xavier and Veloso; and that Xavier should agree to purchase ½ interest from Gonzales which the latter possessed in a mortgage credit. MANILA, ................................................. On or before six months after date we will tly and severally pay in Manila to the order of ........................... the sum of twenty-five thousand pesos (P25,000), Philippine currency, for value received of the same in cash, for commercial operations, and with interest at 10 per cent per annum, payable monthly. Protest waived. (Sgd.) N XAVIER


M. G. VELOSO. Witness: Sgd.) MODESTO ALBERTO The sale of the property ensued. It was found out that the property has already been encumbered by a mortgage with Shanghai Life. And as the value of the property was more than the property mortgaged by Xavier, Gonzales demanded another second mortgage. A foreclosure proceeding took place and while the result of such was pending, the note was transferred to the hands of Acuna who filed an action against Veloso and Xavier, both of which denied liability. Xavier posed the special defense that he had executed a second mortgage to secure the note and that he already sold the mortgaged property and another has assumed the indebtedness. The trial court decided that Veloso and Xavier were solidarily liable to Acuna/Gonzales. Nonetheless, Veloso was held to be an accommodation party, who has a right to reimbursement from Xavier for whatever he may pay for the note. HELD: The case being cited by defendants is not applicable to the case at bar. The case of Rylee v. Wilkinson contemplates a situation wherein an accommodation maker executes a note in favor of an accommodated party. In the case at bar, the accommodation party and accommodated party execute a note tly and severally to a person who advances the face value of the note to one of its makers at the very time of its creation. The consideration for the note is the money advanced to Xavier. Value was given for the note and that is enough. In equity as between Veloso and Xavier, Veloso is entitled to the rights as a surety and Xavier is the real debtor; but as to the creditor who gave value for the note at the time of its creation, both of Veloso and Xavier are mere t and several makers. 82

PNB V. MAZA AND MECENAS 48 PHIL 207

FACTS: Maza and Macenas executed a total of five promissory notes. These were not paid at maturity. And to recover the amounts stated on the face of the



promissory notes, PNB initiated an action against the two. The special defense posed by the two is that the promissory notes were delivered to them in blank by a certain Enchaus and were made to sign the notes so that the latter could secure a loan from the bank. They also alleged that they never negotiated the notes with the bank nor have they received any value thereof. They also prayed that Enchaus be impleaded in the complaint but such was denied. The trial court then held in favor of the bank. HELD: The defendants attested to the genuineness of the instruments sued on. Neither did they point out any mistake in regard to the amount and interest that the lower court sentenced them to pay. Given such, the defendants are liable. They appear as the makers of the promissory notes and as such, they must keep their engagement and pay as promised. And assuming that they are accommodation parties, the defendants having signed the instruments without receiving value thereof, for the purpose of lending their names to some other person, are still liable for the promissory notes. The law now is such that an accommodation party cannot claim no benefit as such, but he is liable according to the face of his undertaking, the same as he himself financially interest in the transaction. It is also no defense to say that they didn't receive the value of the notes. To fasten liability however to an accommodation maker, it is not necessary that any consideration should move to him. The accommodation which s the promise of the accommodation maker is that parted with by the person taking the note and received by the person accommodated. 83

PRUDENCIO V. CA 143 SCRA 7

FACTS: Appellants are the owners of a property, which they mortgaged to help secure a loan of a certain Domingo Prudencio. On a later date, they were approached by their relative who was the attorney-in-fact of a construction company, which was in dire need of funds for the completion of a municipal building. After some persuasion, the appellants amended the mortgage wherein the and conditions of the original mortgage was made an integral part of the new mortgage. The promissory note covering the “second loan” was signed by their relative. It was also signed by them, indicating the request that the check be released by the bank. After the amendment of the mortgage was executed, a deed of assignment was made by Toribio, asg all the payments to the Bureau to the


construction company. This notwithstanding, the Bureau with approval of the bank, conditioned however that they should be for labor and materials, made three payments to the company. The last request was denied by the bank, averring that the was long overdue, the remaining balance of the contract price should be applied to the loan. The company abandoned the work and as consequence, the Bureau rescinded the contract and assumed the work. Later on, the appellants wrote to the PNB that since the latter has authorized payments to the company instead of on of the loan guaranteed by the mortgage, there was a change in the conditions of the contract without the knowledge of appellants, which entitled the latter to cancel the mortgage contract. The trial court held them still liable together with their co-makers. It has also been held that if the judgment is not satisfied within a period of time, the mortgaged properties would be foreclosed and sold in public auction. In their appeal, petitioners contend that as accommodation makers, the nature of their liability is only that of mere sureties instead of solidary codebtors such that a material alteration in the principal contract, effected by the creditor without the knowledge and consent of the sureties, completely discharges the sureties from all liabilities on the contract of suretyship. HELD: There is no question that as accommodation makers, petitioners would be primarily and unconditionally liable on the promissory note to a holder for value, regardless of whether they stand as sureties or solidary co-debtors since such distinction would be entirely immaterial and inconsequential as far as a holder for value is concerned. Consequently, the petitioners cannot claim to have been released from their obligation simply because at the time of payment of such obligation was temporarily deferred by the PNB without their knowledge and consent. There has to be another basis for their claim of having been freed from their obligation. It has to be determined if PNB was a holder for value. A holder for value is one who meets the requirement of being a holder in due course except the notice for want of consideration. In the case at bar, PNB may not be considered as a holder for value. Not only was PNB an immediate party or privy to the promissory note, knowing fully well that petitioners only signed as accommodation parties, but more importantly it was the Deed of Assignment which moved the petitioners to sign the promissory note. Petitioners also relied on the belief that there will be no alterations to the of the agreement. The deed provided that there will no further conditions which could possibly alter the agreement without



the consent of the petitioner such as the grant of greater priority to obligations other than the payment of the loan. This notwithstanding, the bank approved the release of payments to the Company instead of the same to the bank. This was in violation of the deed of assignment and prejudiced the rights of petitioners. The bank was not in good faith—a requisite for a holder to be one in due course. 84

STELCO MARKETING V. CA 210 SCRA 51

FACTS: Petitioner was engaged in the distribution and sale of structiural steel bars. RYL bought on several occasion large quantities of steel bars but the same were never paid for despite several demands by petitioner. On a relevant date, RYL gave to Armstrong Industries a check in payment of its obligations. The check was drawn by Steelweld Corporation— allegedly the owner of RYL persuaded the president of Steelweld to accommodate the former in its obligation. The check, when deposited was thereafter dishonored due to insufficient funds. A case ensued for violations of BP22 but the case was dismissed as the check was held to be for accommodation purposes only. Thereafter a complaint was filed by petitioner against RYL and Steelweld for the recovery of sum of money in payment of the steel bars ordered. RYL was nowhere to be found that is why the proceedings commenced as against Steelweld only. The trial court decided in favor of petitioner but this was reversed by the CA. HELD: Petitioner contends that the acquittal of Lim and Tianson didn't operate to release Steelweld from its liability as an accommodation party. Noteworthy is that neither said pronouncement nor any other part of the judgment of acquittal declared it liable to petitioner. To be sure, as regards an accommodation party, the condition of lack of notice of any infirmity or defect in title of the persons negotiating it is of no application since the law preserves the right of recourse of a holder for value against an accommodation party notwithstanding knowledge that at the time of taking the instrument, knew him only as an accommodation party. Further, there is no evidence to show that petitioner possessed the check before the instrument’s presentment and dishonor. In what transpired during the transactions involving the check, evidence and facts show that there was any participation or intervention on the part of petitioner. What


the record shows is that only after the check was deposited and dishonored, petitioner came into possession of it in some way and was able to give it in evidence at the trial of the civil case it has instituted against the drawers of the check. 85

ANG TIONG V. TING 22 SCRA 713

FACTS: Ting issued a PBCom check payable to cash or bearer. This was indorsed by Ang at the back and it was received by plaintiff. Upon encashment of the check, the same was dishonored. Plaintiff moved that the two make good the value of the check but despite demands, he was unheeded, prompting him to file a complaint. The trial court decided in his favor. HELD: Even on the assumption that the appellant was an accommodation indorser, as he professes to be, he is nevertheless by the clear mandate of section 29, liable on the instrument to a holder for value, notwithstanding that such holder at the time of taking the instrument knew him to be an accommodation party. And assuming that he was an accommodation party, he may obtain security from the maker to protect himself against the danger of insolvency of the latter but this doesn't affect his liability to the appellee, as the said remedy is a matter of recourse between him and the maker. 86

SADAYA V. SEVILLA 19 SCRA 924

FACTS: Sadaya, Sevilla and Varona signed solidarily a promissory note in favor of the bank. Varona was the only one who received the proceeds of the note. Sadaya and Sevilla both signed as co-makers to accommodate Varona. Thereafter, the bank collected from Sadaya. Varona failed to reimburse. Consequently, Sevilla died and intestate estate proceedings were established. Sadaya filed a creditor’s claim on his estate for the payment he made on the note. The resisted the claim on the ground that Sevilla didn't receive any proceeds of the loan. The trial court itted the claim of Sadaya though tis was reversed by the CA. HELD: Sadaya could have sought reimbursement from Varona, which is right and just as the latter was the only one who received value for the note



executed. There is an implied contract of indemnity between Sadaya and Varona upon the former’s payment of the obligation to the bank. Surely enough, the obligations of Varona and Sevilla to Sadaya cannot be t and several. For indeed, had payment been made by Varona, Varona couldn't had reason to seek reimbursement from either Sadaya or Sevilla. After all, the proceeds of the loan went to Varona alone. On principle, a solidary accommodation maker—who made payment—has the right to contribution, from his co-accomodation maker, in the absence of agreement to the contrary between them, subject to conditions imposed by law. This right springs from an implied promise to share equally the burdens thay may ensue from their having consented to stamp their signatures on the promissory note. The following are the rules: 1. A t and several accommodation maker of a negotiable promissory note may demand from the principal debtor reimbursement for the amount that he paid to the payee 2. A t and several accommodation maker who pays on the said promissory note may directly demand reimbursement from his coaccommodation maker without first directing his action against the principal debtor provided that a. He made the payment by virtue of a judicial demand b. A principal debtor is insolvent. It was never shown that there was a judicial demand on Sadaya to pay the obligation and also, it was never proven that Varona was insolvent. Thus, Sadaya cannot proceed against Sevilla for reimbursement. 87

AGRO CONGLOMERATES V. SORIANO 348 SCRA 450

FACTS: Petitioner sold to Wonderland Food Industries two parcels of land. They stipulated under a Memorandum of Agreement that the of payment would be P1,000,000 in cash, P2,000,000 in shares of stock, and the balance would be payable in monthly installments. Thereafter, an addendum was executed between them, qualifying the cash payment. Instead of cash payment, the vendee authorized the vendor to obtain a loan from the financier on which the vendee bound itself to pay for. This loan was to cover for the payment of P1,000,000. This addendum was not notarized.


Petitioner Soriano signed as maker the promissory notes payable to the bank. However, the petitioners failed to pay the obligations as they were due. During that time, the bank was in financial distress and this prompted it to endorse the promissory notes for collection. The bank gave ample time to petitioners then to satisfy their obligations. The trial court held in favor of the bank. It didn't find merit to the contention that Wonderland was the one to be held liable for the promissory notes. HELD: First, there was no contract of sale that materialized. The original agreement was that Wonderland would pay cash and petitioner would deliver possession of the farmlands. But this was changed through an addendum, that petitioner would instead secure a loan and the settlement of the same would be shouldered by Wonderland. Petitioners became liable as accommodation parties. They have the right after paying the instrument to seek reimbursement from the party accommodated, since the relation between them has in effect became one of principal and surety. Furthermore, as it turned out, the contract of surety between Woodland and petitioner was extinguished by the rescission of the contract of sale of the farmland. With the rescission, there was confusion in the persons of the principal debtor and surety. The addendum thereon likewise lost its efficacy. 88

CRISOLOGO JOSE V. CA 177 SCRA 594

FACTS: The president of Movers Enterprises, to accommodate its clients Spouses Ong, issued a check in favor of petitioner Crisologo-Jose. This was in consideration of a quitclaim by petitioner over a parcel of land, which the GSIS agreed to sell to spouses Ong, with the understanding that upon approval of the compromise agreement, the check will be encahsed accordingly. As the compromise agreement wasn't approved during the expected period of time, the aforesaid check was replaced with another one for the same value. Upon deposit though of the checks by petitioner, it was dishonored. This prompted the petitioner to file a case against Atty. Bernares and Santos for violation of BP22. Meanwhile, during the preliminary investigation, Santos tried to tender a cashier’s check for the value of the dishonored check but petitioner refused to accept such. This


was consigned by Santos with the clerk of court and he instituted charges against petitioner. The trial court held that consignation wasn't applicable to the case at bar but was reversed by the CA. HELD: Petitioner averred that it is not Santos who is the accommodation party to the instrument but the corporation itself. But assuming arguendo that the corporation is the accommodation party, it cannot be held liable to the check issued in favor of petitioner. The rule on accommodation party doesn't include or apply to corporations which are accommodation parties. This is because the issue or indorsement of another is ultra vires. Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is such as to charge the indorsee with the knowledge that the issue or indorsement of the instrument by the corporation is for the accommodation of another, he cannot recover against the corporation thereon. By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third party only is specifically authorized to do so. Corollarily, corporate officers have no power to execute for mere accommodation a negotiable instrument of the corporation for their individual debts and transactions arising frm or in relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot be enforced against the corporation, the signatories thereof shall be personally liable therefore, as well as the consequences arising from their acts in connection therewith. III. NEGOTIATION Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. METHOD OF TRANSFER 1. By assignment 2. By operation of law 3. By negotiation, which may be completed by indorsement completed by delivery or by mere delivery


ASSIGNMENT  Method of transferring a non-negotiable instrument whereby the assignee is merely placed in the position of the assignor and acquires the instrument subject to all defenses that might have been setup against the original payee MODE OF ASSIGNMENT  Differs in no respect from that of any other contract  Although some sort of written instrument is customarily employed, it may be written either on the instrument itself or on a separate piece of paper EFFECT OF ASSIGNMENT OF A NON-NEGOTIABLE INSTRUMENT  The effect of the assignment is that the party holding the right drops out of the contract and another takes his place  The assignee is substituted in place of the assignor  The assignee and every subsequent person to whom the instrument comes by assignment may be considered as the person who made the instrument in the first instance and as having said and done everything in making the instrument which the original assignor did or said.  Each assignee takes his chance as to the exact position in which any party making an assignment of it stands  And as it is called in law, the assignee takes the contract subject to equities, that is, to defenses to the contract which would avail in favor of the original party up to the time the notice of the assignment is given to the person against whom the contract is sought to be enforced ASSIGNMENT OF A NEGOTIABLE INSTRUMENT  A person taking a negotiable instrument by assignment in a separate piece of paper takes it subject to the rules applying to assignment  And where the holder of a bill payable to order transfers it without indorsement, it operates an equitable assignment TRANSFER BY OPERATION OF LAW 1. By the death of his holder where the title vests in his representative, or 2. By the bankruptcy of the holder, where title vests in his or trustee 3. Upon the death of a t payee or indorsee in which general rule is that the title vests at once in the surviving trustee

personal assignee case the payee or



NEGOTIATION  Transfer of the instrument from one person to another in such a manner as to constitute the transferee the holder thereof  May either be by indorsement completed by delivery or by mere delivery

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per cent per annum.

IS DELIVERY TO PAYEE A NEGOTIATION?  First view: no because negotiation refers to an existing negotiable instrument and before delivery to the payee, the instrument is incomplete.  Second or better view: under this section and section 191, an instrument is negotiated when it is delivered to the payee or to an indorsee

(Sgd. Illegible) (Sgd. Illegible)


CALTEX V. CA 212 SCRA 448

FACTS: Security bank issued Certificates of Time Deposits to Angel dela Cruz. The same were given by Dela Cruz to petitioner in connection to his purchase of fuel products of the latter. On a later date, Dela Cruz approached the bank manager, communicated the loss of the certificates and requested for a reissuance. Upon compliance with some formal requirements, he was issued replacements. Thereafter, he secured a loan from the bank where he assigned the certificates as security. Here comes the petitioner, averred that the certificates were not actually lost but were given as security for payment for fuel purchases. The bank demanded some proof of the agreement but the petitioner failed to comply. The loan matured and the time deposits were terminated and then applied to the payment of the loan. Petitioner demands the payment of the certificates but to no avail. SECURITY BANK AND TRUST COMPANY 6778 Ayala Ave., Makati No. 90101 Metro Manila, Philippines SUCAT OFFICEP 4,000.00 CERTIFICATE OF DEPOSIT Rate 16% Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____


—————————— ——————————— AUTHORIZED SIGNATURES HELD: CTDs are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical in the documents, instead of having the word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its



own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself. In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products." This ission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an ission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon 90

MANUEL LIM V. CA 251 SCRA 408

FACTS: Spouses Lim were charged with estafa and violations of BP22 for allegedly purchasing goods from Linton Commercial Corporation and issuing checks as payment thereof. The checks when presented to the bank were dishonored for insufficiency of funds or the payment for the checks has been stopped. HELD: It is settled that venue in criminal cases is a vital ingredient of jurisdiction. It shall be where the crime or offense was committed or any one of the essential ingredients thereof took place. In determining the proper venue for these cases, the following are material facts—the checks were issued at the place of business of Linton; they were delivered to Linton at the same place; they were dishonored in Kalookan City; petitioners had knowledge of the insufficiency of funds in their . Under Section 191 of the NIL, issue mean s the first delivery of the instrumen t complete in it s form to a person who takes it as holder. The term holder on the other hand refers t o the payee or indorsee of a bill or note who is in possession of it or the bearer thereof. The important place


to consider in the consummation of a negotiable instrument is the place of delivery. Delivery is the final act essential to its consummation as an obligation. Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. NATURE OF AN INDORSEMENT  It is not only a mode of transfer  It is also a contract  Every indorser is a new drawer and the are found on the face of the bill or note  The indorsement of the bill or not implies an undertaking from the indorser to the person in whose favor it is made and to every other person to whom the bill or note may afterwards be transferred, exactly similar to that which is implied by drawing a bill except that, in the case of drawing a bill, the stipulations with respect to the drawer’s responsibility and undertaking don't apply  The general indorser in effect, states to every person who follows him—this instrument will be paid by the maker, if a note, or accepted b the drawee or paid by the acceptor, if a bill. If it is dishonored by non-payment or non-acceptance, and you give me notice thereof, I will pay it. WHERE THE INDORSEMENT IS WRITTEN  The indorsement may be written on the instrument itself or upon a paper attached thereto  Allonge: paper attached to the instrument MAY ALLONGE BE USED WHERE THERE IS ROOM ON INSTRUMENT FOR INDORSEMENT?  It has been held that the use of an allonge is allowable only when there is a physical impossibility of writing the indorsement on the instrument itself, and an indorsement on a separate piece of paper where there is sufficient space on the instrument for indorsement will be considered as a mere assignment and not a negotiation  Agbayani: Questionable view however HOW INDORSEMENT WRITTEN?  Means must show that there is indorsement


Sec. 32. Indorsement must be of entire instrument. The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue. INDORSEMENT MUST BE OF THE WHOLE INSTRUMENT  The general rule is that the instrument must be of the entire instrument  Accordingly, an indorsement of a part of the instrument doesn't operate as a negotiation thereof EFFECT OF PARTIAL INDORSEMENT  It doesn't operate as an indorsement  It may constitute a valid assignment though binding between the parties  The person to whom the instrument is indorsed would not be considered an indorsee but merely an assignee and would therefore take the instrument subject to the defenses available between the original parties EXCEPTION  But where the instrument has been paid in part, it may be indorsed as to the residue TRANSFER TO TWO OR MORE INDORSEES SEVERALLY  An indorsement which purports to transfer the instrument to two or more indorsees severally, doesn't operate as a negotiation of the instrument CASE DIGESTS: SECTION 32 91

MONTINOLA V. PNB 88 PHIL 178

FACTS: * the case with the Japanese occupation and the mutilated check. HELD: Where the indorsement of the check was only for a part of the amount payable, it is not legally negotiated within the meaning of Section 32,


which provides that the indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable doesn't operate as a negotiation of the instrument. Montinola may therefore be not regarded as an indorsee. At most he may be regarded as a mere assignee of the P30,000 sold to him. In which case, as an assignee, he is subject to the defenses available to the drawer Provincial Treasurer. Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional. KINDS OF INDORSEMENT 1. Special 2. In blank 3. Absolute 4. Conditional 5. Restrictive 6. Qualified 7. t 8. Successive 9. Irregular 10. Facultative Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. SPECIAL AND BLANK INDORSEMENT HOW FURTHER NEGOTIATED 1. Where the instrument is originally payable to order and it is negotiated by the payee by special indorsement, it can be further negotiated by the indorsee of the instrument completed by delivery 2. Where the instrument is originally payable to order and it is negotiated by the payee in blank indorsement, it can be further negotiated by the holder by mere delivery. The reason is that the effect of a blank indorsement is to make the instrument payable to bearer



3.

Where the instrument is originally payable to bearer, it can be further negotiated by mere delivery, even if the original bearer negotiated it by special indorsement

Sec. 35. Blank indorsement; how changed to special indorsement. -The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. APPLICATION OF SECTION 35  Suppose that A makes a note with B as payee. It is indorsed as follows: o (Indorsement in blank) (Sgd.) B.  Delivery was then made to C. C may place above the signature of B, “Pay to C.” so as to make the indorsement thus: o Pay to C. (Sgd.) B.  This converts the blank indorsement to a special indorsement LIMITATION UPON CONVERSION OF BLANK INDORSEMENT  Holder must not write any contract not consistent with the indorsement, that is, the contract so written must not change the contract of the blank indorser  The following has been held to be inconsistent with the contract of blank indorsement—“pay to X and Y”, “Demand and notice waived”, “I guaranty payment”, “Without recourse” Sec. 36. When indorsement restrictive. - An is restrictive which either:

indorsement



Known as the agency-type of indorsement “Pay to C for collection” (Sgd.) B

 

Hence, any action the indorsee may file is subject to defenses available against the indorser such as lack of consideration Thus, where the proof tends to show that the plaintiff holds the draft for collection only, and that the acceptance of it by defendants was conditional, and that after such an acceptance, the defendants refused to accept the goods evidenced by the draft, which were returned to and accepted by the plaintiff, who agreed to release the defendants from any liability, plaintiff thereafter cannot recover

INDORSEMENTS FOR DEPOSIT  An indorsement for deposit constitutes the indorsee the agent of the indorser  “Pay to C for deposit (Sgd.) B”—such an indorsement, like an indorsement for collection, constitutes a relation of title in the depositor in the absence of any practice or agreement to the contrary  In any event, a restrictive indorsement of an instrument for collection or deposit, or to the use of the indorser and for his benefit, in the absence of any other circumstances, will not divest the indorser of his title thereto until the money is paid  Indorsements for deposits are usually informal VESTS TITLE IN INDORSEE IN TRUST FOR ANOTHER 1. Pay to X in trust for C 2. Pay to X for use of C

(a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive. PROHIBITION OF FURTHER NEGOTIATION 1. Pay to C only 2. Pay to C and no other person INDORSEE AGENT OF THE INDORSER


CAN THE MAKER SET UP AGAINST THE INDORSEE HIS DEFENSES AGAINST THE RESTRICTIVE INDORSER? There are two views to this question: 1. Sulbrason-Dickinson v. Hopkins: an indorsement to A for the benefit of B was held restrictive under Section 47 of the NIL, making the indorsee and its successors subject to the good defenses against the restrictive indorser 2. Some learned writers held this view to be unsound. Thus, it has been held that the indorsee of a check indorsed in trust for a third person who is a holder in due course could recover from the drawer who had a defense of failure of consideration, for while the restrictive indorsement creating a trust gives notice of this trust to





subsequent purchasers, it did not give notice of defenses obtaining between prior parties. TO MAKE IT EASIER TO UNDERSTAND—first, you have to make a distinction between what kind of restrictive indorsement was made. Was it a trust type or an agency type? If it was an agency type, the indorsee just fills in the shoes of the restrictive indorser. And thus, he is susceptible and open to the defenses that the maker can have against the indorser. It is different if it is trust type because the indorsee does not step inside the shoes of the indorser and thus, the maker can no longer set up against the indorsee his defenses against the indorser.

PRESUMPTION OF CONSIDERATION IN RESTRICTIVE INDORSEMENTS  As a general rule, an indorsement of a negotiable bill which purports to the title to the bill to the indorsee, imports a consideration and the burden of proving want of consideration rests upon the party alleging it  The restrictive indorsements which are held to negative the presumption of a consideration are such as to indicate that they are intended to title but merely to enable the indorsee to collect for the benefit of the indorser, such as indorsements “for collection” or others showing that the indorser is entitled to the proceeds  But an indorsement to one person for the use or benefit of another, affords no such indication. The indorser parts with the whole title to the bill and the presumption is that he done so for a consideration.  The only effect of such an indorsement, by way of restriction, is to give notice of the rights of the beneficiary named in the indorsement and protect him against misappropriation EFFECT OF OMISSION OF WORDS OF NEGOTIABILITY  The mere absence of words of negotiability doesn't make the indorsement restrictive  While the omission of words in the indorsement doesn't affect negotiability of the instrument, such omission in the body thereof will render the instrument non-negotiable Sec. 37. Effect of restrictive indorsement; rights of indorsee. A restrictive indorsement confers upon the indorsee the right: (a) to receive payment of the instrument; (b) to bring any action thereon that the indorser could bring;


(c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. RESTRICTIVE INDORSEE MAY RECEIVE PAYMENT  A restrictive indorsement confers upon the indorsee the right to receive payment of the instrument RESTRICTIVE INDORSEE MAY BRING AN ACTION  A restrictive indorsement confers upon the indorsee the right to bring any action thereon that the indorser could bring  In a restrictive indorsement “for deposit”, can the indorsee such as B in the illustration, bring an action against the indorser, such as A? Yes if the indorser received value for said indorsement RESTRICTIVE INDORSEE MAY TRANSFER HIS RIGHTS  It is stated in the interpretation of the clause in Section 47 declaring a paper negotiable in its origin to continue negotiable until it has been restrictively indorsed, is that the words “until it has been restrictively indorsed” don't contemplate every restrictive indorsement but a restrictive indorsement that prohibits the further negotiation of the instrument under subdivision 1 of Section 36  Section 46 didn't mean to declare the effects of a restrictive indorsement but to preserve as far as possible the negotiability of an instrument negotiable in its origin and that the implication of Section 47 should not be taken as destroying negotiability of an instrument heretofore universally accepted as negotiable EXTENT OF NEGOTIABILITY AFTER RESTRICTIVE INDORSEMENT  That all forms of restrictive negotiability impose some degree of limitation on negotiability  That they don't all impose the same degree of limitation  That the indorsement itself discloses the extent of the limitation in the particular case LIMITATION ON TRANSFER OF RIGHT: ILLUSTRATION  But all subsequent indorsees acquire only title of the first indorsee under the restrictive indorsement  Illustrations of this rule: o In the indorsement, “pay to A for collection,” the rights of the subsequent indorsees are subject to the restrictive indorsement—namely, he can collect only for being a



o

o

restrictive indorsee, he acquires only the title of the first indorsee whose right is merely to collect Suppose the P1000 note is indorsed as “Pay to B for deposit only. (Sgd.) A” and that B owes Y P1000, B cannot transfer the note to Y for said debt. Or suppose B transfers the note to another person for P1000, B cannot use the P1000 for his own personal expenses. He must safely keep the money for the benefit of A. “Pay to A for of B”—gives notice that the instrument cannot be negotiated by A for his own debt or benefit

Sec. 38. Qualified indorsement. A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. HOW QUALIFIED INDORSEMENT IS MADE  By adding to the indorser’s signature the words “without recourse”, “Sans recours”, “indorser not holden”, or “with intent to transfer title only and not to incur liability as indorser”, “at indorsee’s own risk” EFFECT OF QUALIFIED INDORSEMENT  Constitutes the indorser a mere assignor of the title to the instrument  One who indorses without recourse states that all parties to the paper are genuine; I am the lawful owner of the paper and I have title to it and know of no reason why you could not recover on it as a valid instrument, but on thing I don't guarantee; I don't guarantee the financial responsibility on that paper but I do say that I hold the title the same as any other personal property QUALIFIED INDORSER HAS LIMITED SECONDARY LIABILITY  He is secondarily liable on his warranties as an indorser under Section 65, that is, the qualified indorser is liable if the instrument is dishonored by non-acceptance or non-payment due to: 1. Forgery 2. Lack of good title on the part of the indorser 3. Lack of capacity to indorse on the part of the prior parties 4. The fact that, at the time of the indorsement, the instrument was valueless or not valid and he knew of that fact A QUALIFIED INDORSEMENT DOESN'T CHARACTER OF THE INSTRUMENT

IMPAIR


THE

NEGOTIABLE


METROPOL V. SAMBOK MOTORS CO. 120 SCRA 864

Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. ABSOLUTE INDORSEMENT  One by which the indorser binds himself to pay upon no other condition than the failure of prior parties to do so and upon due notice to him of such failure CONDITIONAL INDORSEMENT  An indorsement subject to a contingent event, that is, an event that may or may not happen, or a past event unknown to the parties  Suppose a note for P1000 with A maker, and B payee. It is then indorsed as follows “Pay to Y if he es the bar examinations. (Sgd.) B”—this is a conditional indorsement as Y may or may not the bar examination. OBLIGATION OF CONDITIONAL INDORSEE  Y indorsee holds the note or the proceeds thereof, if he is paid by A, subject to the rights of B  If A disregards the condition and pays Y without waiting for the condition to be fulfilled, Y doesn't immediately acquire ownership of the sum  Y must hold in trust while the condition is not fulfilled  It is upon the fulfillment of the condition that such ownership over the proceeds of the note is absolutely acquired by the conditional indorsee Y A CONDITIONAL INDORSEMENT DOESN'T RENDER AN INSTRUMENT NONNEGOTIABLE Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person



indorsing specially is liable as indorser to only such holders as make title through his indorsement. APPLICATION OF SECTION 40  Section applies only to instruments which are originally payable to bearer  Cannot apply where the paper is originally made payable to order and indorsed in blank; for by Section 9, a note or bill which is payable to order becomes payable only when the last indorsement is in blank; and hence, when a blank indorsement is followed by a special indorsement, the instrument is not within the of Section 9. NEGOTIATION OF INSTRUMENT PAYABLE TO BEARER BUT SPECIALLY INDORSED  Where an instrument payable to bearer is indorsed, it may nevertheless be further negotiated by delivery  An instrument which is originally payable to bearer is always payable to bearer  Hence, even when it has been specially indorsed, it is still payable to bearer

*C is bearer and he delivered to D *D specially indorsed it to E *E specially indorsed it to F *F delivered to G, bearer.  

APPLICATION OF SECTION 42

(Sgd.) A (Sgd.) A

Is D liable to G being the first who specially indorsed the instrument? No, because G didn't take title through D’s indorsement but through delivery of D To whom D is liable? To E and F, because they acquired the title to the instrument through the special indorsement of D. Had F merely indorsed the instrument to G, D would be liable also to G for the same reason.

Sec. 41. Indorsement where payable to two or more persons. -Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. APPLICATION OF SECTION 41  Applies only to instruments payable to two or more payees tly


Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer.

Pay P1000 to the order of cashier, Lyceum of the Philippines.

EFFECT ON LIABILITY OF SPECIAL INDORSER Pay P1000 to bearer

HOW INDORSEMENT OF T PAYEES MADE  Where the instrument is payable to two or more payees, all payees must each indorse in order to negotiate the instrument  If only one indorses, he es only his part of the instrument—such an indorsement wouldn't operate as such because it would not be an indorsement of the whole instrument  Exceptions to the rule: 1. Where the payee or person indorsing has authority to indorse for the others 2. Where the payee or indorsees are partners

 

Presumption is that the note is payable to Lyceum, not to the cashier personally And the note may be indorsed by any duly authorized officer of Lyceum other than the cashier

DISPUTABLE PRESUMPTION Sec. 43. Indorsement where name is misspelled, and so forth. -Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature. APPLICATION OF SECTION 43  An instrument drawn or indorsed to “Juan Dytuco” whose real name is “Juan Dyjuco” may be indorsed as follows: o Pay to Y (Sgd.) Juan Dytuco Juan Dyjuco o Or (Sgd.) Juan Dyjuco



Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative capacity, he may indorse in such as to negative personal liability. HOW AGENT MUST INDORSE? 1. He must add words describing himself as agent 2. At the same time, disclose his principal 3. He must be duly authorized Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue. DISPUTABLE PRESUMPTION IMPORTANCE OF THIS PROVISION  This provision becomes importance when considered in connection with Section 52 (b)  Under the provision, in order that one may become a holder in due course, the instrument must be negotiated to him before it becomes overdue  The indorsement without date establishes a prima facie presumption that the instrument was indorsed before maturity and one who denies that the holder of such instrument is a holder in due course has the burden of proof Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated.

NEGOTIABILITY AFTER DATE OF MATURITY  FIRST VIEW: negotiability ceases in the full commercial sense after maturity and negotiability ceases by default of the maker in his payment  SECOND VIEW: negotiability continues even after maturity  RECONCILIATION OF THE TWO: the mercantile character of the instrument as a negotiable paper and of the contracts of the several parties to it, continues after maturity and until it is paid except: that an indorsee or a transferee after maturity takes the instrument subject to defenses between original parties, because after maturity such subsequent parties take the instrument after it becomes overdue and therefore, under paragraph b of Section 52, they are not holders in due course  After maturity, an instrument originally negotiable continues to be negotiable in the sense that the contracts of the parties to it continue and are governed by the NIL  After maturity the instrument ceases to be negotiable in the sense that a transferee after maturity is not a holder in due course and therefore not free from defenses obtaining between prior parties LEGAL POSITION OF HOLDER TAKING OVERDUE INSTRUMENT  He is a holder with notice. He may or may not be a holder for value and his rights will be regulated accordingly. He takes a bill which on the face of it, ought to have been paid.  He is bound to make two inquiries—has what ought to have been done really have been done? And if not, why not? RIGHT OF HOLDER NOT IN DUE COURSE  He can recover checks in his possession but the only disadvantage is that the negotiable instrument is subject to the defenses as if it were non-negotiable

IMPORTANCE OF PLACE OF INDORSEMENT  The place of indorsement is sometimes material because an indorsement is governed by the laws of the state where it is indorsed, although the instrument is drawn or made in a different state

Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument.

Sec. 47. Continuation of negotiable character. An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise.

WHEN HOLDER MAY OR MAY NOT STRIKE OUT INDORSEMENT  But where the instrument is transferred by special indorsement, the holder has no right to strike out the name of the person mentioned in such indorsement and insert his own name in place thereof; nor can

WHEN NEGOTIABLE INSTRUMENT RENDERED NON-NEGOTIABLE 1. Restrictive indorsement which further prohibits the negotiation of an instrument 2. By a discharge thereof by payment or otherwise

further





he strike out such name and convert such special indorsement into a blank indorsement The holder who acquires title subsequent to the succeeding special indorsement must trace his title not only through the blank indorsement but through the special indorsement as well

EFFECT OF STRIKING OUT 1. The indorser whose indorsement is struck out is relieved from his liability on the instrument 2. All subsequent indorsers are also relieved from their liability on the instrument Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. APPLICATION OF SECTION 49  Applies only to instruments payable to order  Contemplates a case wherein delivery and payment of value but there was no indorsement  One element lacking for the negotiation of the instrument RIGHTS OF TRANSFEREES FOR VALUE 1. The transferee acquires only the rights of the transferor. This means that if a defense is available against the transferor, that defense is also available against the transferees 2. The transferee has also the right to require the transferor to indorse the instrument CASE DIGESTS: SECTION 49 93

BPI V. COURT OF APPEALS GR 136202, JANUARY 25, 2007

FACTS: Templonuevo demanded payment from petitioner of a sum of money representing the aggregate value of three checks which were allegedly payable to him but which were deposited with the petitioner to Salazar’s , without his knowledge and corresponding endorsement. Finding


merit in the demands of Templonuevo, the bank then froze the of the engineering firm as the of Salazar was already closed or had insufficient funds. Failure of any settlement between Templonuevo and Salazar, this prompted the bank to debit the of Salazar and give back the money to Templonuevo through cashier’s check. The of Salazar was also debited for whatever charges incurred for the issuance of the cashier’s check. The trial court held in favor of Salazar. ISSUE: does a collecting bank, over the objections of its depositor, have the authority to withdraw unilaterally from such depositor’s the amount it had previously paid upon certain unendorsed order instruments deposited by the depositor to another that she later closed? HELD: In the present case, the records do not the finding made by the CA and the trial court that a prior arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of the checks. This fact is crucial as Salazar’s entitlement to the value of the instruments is based on the assumption that she is a transferee within the contemplation of Section 49 of the Negotiable Instruments Law. Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they are neither payees nor indorsees of such instruments. The weight of authority is that the mere possession of a negotiable instrument does not in itself conclusively establish either the right of the possessor to receive payment, or of the right of one who has made payment to be discharged from liability. Thus, something more than mere possession by persons who are not payees or indorsers of the instrument is necessary to authorize payment to them in the absence of any other facts from which the authority to receive payment may be inferred. Even if the delay in the demand for reimbursement is taken in conjunction with Salazar’s possession of the checks, it cannot be said that the presumption of ownership in Templonuevo’s favor as the designated payee therein was sufficiently overcome. This is consistent with the principle that if instruments payable to named payees or to their order have not been indorsed in blank, only such payees or their indorsees can be holders and entitled to receive payment in their own right. The presumption that a negotiable instrument was given for a sufficient consideration will not inure to the benefit of Salazar because the term



“given” does not pertain merely to a transfer of physical possession of the instrument. The phrase “given or indorsed” in the context of a negotiable instrument refers to the manner in which such instrument may be negotiated. It is an exception to the general rule for a payee of an order instrument to transfer the instrument without indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to prior holders to require possessors to prove without the aid of an initial presumption in their favor, that they came into possession by virtue of a legitimate transaction with the last holder. Salazar failed to discharge this burden, and the return of the check proceeds to Templonuevo was therefore warranted under the circumstances despite the fact that Templonuevo may not have clearly demonstrated that he never authorized Salazar to deposit the checks or to encash the same. Noteworthy also is the fact that petitioner stamped on the back of the checks the words: "All prior endorsements and/or lack of endorsements guaranteed," thereby making the assurance that it had ascertained the genuineness of all prior endorsements. Having assumed the liability of a general indorser, petitioner’s liability to the designated payee cannot be denied. Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s for the value of the checks it previously credited in her favor. However, the issue of whether it acted judiciously is an entirely different matter. As businesses affected with public interest, and because of the nature of their functions, banks are under obligation to treat the s of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship. In this regard, petitioner was clearly remiss in its duty to private respondent Salazar as its depositor. To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of indorsement thereon, petitioner permitted the encashment of these checks three times on three separate occasions. This negates petitioner’s claim that it merely made a mistake in crediting the value of the checks to Salazar’s and instead bolsters the conclusion of the CA that petitioner recognized Salazar’s claim of ownership of checks and acted deliberately in paying the same, contrary to ordinary banking policy and practice. It must be emphasized that the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this field, and the law thus holds it to a high standard of conduct. The taking and collection of a check without the proper indorsement amount to a conversion of the check by the bank.

More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of the brewing dispute between Salazar and Templonuevo, petitioner debited the held in the name of the sole proprietorship of Salazar without even serving due notice upon her. This ran contrary to petitioner’s assurances to private respondent Salazar that the would remain untouched, pending the resolution of the controversy between her and Templonuevo. For the above reasons, the Court finds no reason to disturb the award of damages granted by the CA against petitioner. This whole incident would have been avoided had petitioner adhered to the standard of diligence expected of one engaged in the banking business. A depositor has the right to recover reasonable moral damages even if the bank’s negligence may not have been attended with malice and bad faith, if the former suffered mental anguish, serious anxiety, embarrassment and humiliation Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable. RIGHT OF PARTY PRIOR TO NEGOTIATE; ILLUSTRATION  Suppose that A makes a note for P1000 with B as payee  Indorsement from: B to C; C to Jose Soriano; C to D; D to E; E to F; F back to Jose Soriano  Can Jose Soriano negotiate the note? Under this section, he may do so. EFFECT OF NEGOTIATION TO PRIOR PARTIES  Jose Soriano cannot enforce the payment of the note against C, D, E and F to whom he is liable  This is to avoid circuity of suits NOTES FOR WEEK #7 JULY 23-27, , 2007 IV. RIGHTS OF THE HOLDER Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon in his own name; and payment to him in due course discharges the instrument.



RIGHTS OF A HOLDER IN GENERAL 1. He may sue on the instrument in his own name 2. He may receive payment and if the payment is in due course, the instrument is discharged RIGHT TO SUE  Holder of a negotiable instrument may sue on his own name, even if he be a holder only for collection or as a pledge of the instrument RIGHT OF TRANSFEREE OF UNINDORSED INSTRUMENT  Such possessor may sue in his own name if his transferor could have done so  Under Section 49, a transfer for value, but without indorsement, of an instrument is payable to order vests in the transferee such title as the transferor had therein. EFFECT OF PAYMENT TO THE HOLDER  The payment in due course to the holder of the instrument discharges the instrument  It is in due course if it is made at or after the maturity of the instrument; or to the holder thereof; in good faith and without notice that his title is defective Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. PRESUMPTION HOLDER IN DUE COURSE  Generally, every holder is prima facie a holder in due course  Any one, therefore, who claims otherwise must prove that the holder in question acquired the instrument with one or more of the conditions lacking




Any holder proved to have taken an instrument with one of the conditions enumerated lacking is not a holder in due course

ACQUISITION BEFORE THE INSTRUMENT IS OVERDUE  The holder of the instrument must have become the holder before the instrument has become overude  Illustrations— o One who has purchased 2 promissory notes without the necessary indorsement on the part of the holder after payment thereof had already been one year overdue and without having made inquiries about the solvency of the makers cannot be considered as a holder in due course o One taking past due paper is chargeable with notice of all equities between the original parties but nbt with equities between intermediate indorsers o If the instrument is overdue, it is also a notice that it has been dishonored WHEN INSTRUMENT IS OVERDUE  When it after the date of maturity On the date of maturity, the instrument is not overdue and a holder who acquires the instrument on that date is a holder in due course  If the instrument is overdue, there might be something wrong with the instrument AS TO ACCELERATED INSTRUMENTS  When the instrument contains an acceleration clause, knowledge of the holder at the time of acquisition thereof that one installment or interest, or both, as the case may be, is unpaid, is notice that the instrument is overdue AS TO INTEREST  One who purchases in good faith an instrument upon which the interest is overdue is a holder in due course  But where by the of the instrument, the principal was to become due upon default of the payment of instrument, then one who takes the instrument upon which the interest is overdue is not a holder in due course WHAT IS AN ACQUISITION IN GOOD FAITH?  Good faith refers to the indorsee or transferee and not to the seller of the paper





Taking in good faith means that he doesn't have any knowledge of fact which would render it dishonest for him to take a particular piece of negotiable paper

MEANING OF HOLDER IN GOOD FAITH  Holder without knowledge or notice of equities of any sort which could be set up against a prior holder of an instrument

o o o o o o

Acquisition of the instrument by fraud Acquisition of the instrument by force, duress or fear Acquisition of the instrument by unlawful means Acquisition of the instrument by for an illegal consideration Negotiation of the instrument in breach of faith Negotiation of the instrument under circumstances which amount to fraud

EFFECT OF FAILURE TO MAKE INQUIRY  Ordinarily, failure to inquire after notice merely sufficient to cause a person of ordinary prudence to make inquiry as to an infirmity in a negotiable instrument and defect in the holder’s title, is not evidence of purchaser’s bad faith so as to bar him from recovery  TEST OF HONESTY—whether or not his purpose is dishonest?

DEFENSES  Include those common law defenses outside those covered in Section 55  These include mistake, absence and failure of consideration covered in Section 28, minority and other forms of incapacity, lack of authority of an agent

WHEN FAILURE TO MAKE INQUIRY IS INDICIA OF BAD FAITH?  Failure to make inquiry when circumstances strongly indicate defect, renders the holder not a holder in due course

INFIRMITIES  Things that are wrong with the instrument itself  What are these? o Wrong date inserted where the instrument is expressed to be payable at a fixed period after sight is undated o Filling up a blank instrument not strictly in accordance with the authority given or not within authority given or not within the reasonable time, where it was delivered wanting in a material alteration o Filling up without authority an incomplete and undelivered instrument o Lack of valid and intentional delivery o Forgery o Material alteration

ACQUISITION FOR VALUE  Where the holder gave no valuable consideration for the transfer of the instrument to him, he cannot be a holder in due course  Discounting of a negotiable instrument is still considered to be taking for value EFFECT OF INADEQUACY OF INSTRUMENT  Generally, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence  It may be an evidence of fraud  An amount paid for an instrument if a trifling sum should be a red flag and may by itself establish notice ACQUISITION WITHOUT NOTICE OF DEFECT OF TITLE OR OF INFIRMITY  The following may be chargeable with notice—one taking an instrument which is overdue; and one acquiring an instrument for a grossly inadequate consideration GOOD FAITH MEANS LACK OF NOTICE OF DEFECT OR INFIRMITY DEFECTS OF TITLE  All those situations which at common law were known as equitable defenses and also to cover those equities of ownership where there was breach of faith in negotiation  Examples?


MAY A PAYEE BE A HOLDER IN DUE COURSE?  Yes, if he satisfies the requirements as set forth in Section 52 MAY A DRAWEE BE A HOLDER IN DUE COURSE?  A holder refers to one who has taken the instrument as it es along in the course of negotiation towards the drawee and not the drawee, who, on the acceptance and payment of the instrument, thereby strips the instrument of all negotiability and reduces it to a mere voucher or proof of payment Sec. 53. When person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course.



WHAT CONSTITUTES UNREASONABLE LENGTH OF TIME?  Jurisprudence doesn't state an exact period, nonetheless, there is practically no authorities hold that a reasonable time for negotiating a demand note could be extended beyond a year Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him.



While mere suspicion is not enough, where there is knowledge of suspicious circumstances, coupled with means of ing them, taking the instrument may amount to bad faith

Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.

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

RIGHTS OF A HOLDER IN DUE COURSE 1. He may sue on the instrument in his won name 2. He may receive payment and if the payment is in due course, the instrument is discharged 3. He holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves 4. And he may enforce payment of the instrument for the full amount thereof against all parties liable thereto

DEFECTIVE TITLE IN GENERAL  In the acquisition or negotiation thereof

LEGAL AND EQUITABLE DEFENSES  The holder in due course is free from equitable defenses only

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

AN ALTERATION MAY BE A REAL OR PERSONAL DEFENSE. WHY?  An alteration irrespective of original tenor, it can be enforced—real  Irrespective of difference between original and altered tenor, can collect only limited amount—personal

NOTICE OF DEFECT IN GENERAL To constitute a notice of defect or infirmity, the holder must have actual knowledge either: 1. Of the defect or infirmity 2. Or of facts that his action in taking the instrument amounts to bad faith ACTUAL KNOWLEDGE  Actual knowledge is required and not mere suspicion, surmise or fear TAKING AMOUNTING TO BAD FAITH  Bad faith consists in guilty knowledge, or willful ignorance, showing a vicious or evil mind


EQUITABLE OR PERSONAL DEFENSES  Those which grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him, though holding legal title, to enforce it against the defendant, but which are not available against bona fide purchasers for value without notice LEGAL OR REAL DEFENSE  Attach to the instrument itself and can be set up against the whole world, including a holder in due course  The right sought to be enforced has never existed or ceased to exist  Defense against everybody THE INSTRUMENT SUBJECT TO A REAL DEFENSE CAN STILL BE ENFORCED. IT CANNOT BE ENFORCED WITH REGARD THE PERSON TO WHOM THE LEGAL DEFENSE IS AVAILABLE.



BETWEEN WHOM DEFENSE CAN BE RAISED IN NOTES  In general, the defense of want of consideration may only be raised between immediate parties  But this could be raised in the instance that the holder has notice of the want in consideration BETWEEN WHOM DEFENSE MAY BE RAISED IN BILLS  The want or failure of consideration may be interposed in an action brought by the payee against the drawer or by the indorsee against the payee indorsing, or by the drawer against the acceptor, but not in an action between the payee and acceptor  In the latter case, the defense is available only if there is no consideration received by the defendant for his liability and plaintiff must have given no consideration for his title WANT OF DELIVERY OF COMPLETE INSTRUMENT  Where the instrument is mechanically complete and is not wanting in any material particular, want of delivery is an equitable defense  As against holders not in due course, it can be shown that no delivery was made, or that the delivery was conditional or for a special purpose  Where the instrument is stolen, the defense is also equitable  But where the instrument is payable to order, it is a real defense—for the person would have to commit forgery on the instrument FRAUD IN INDUCEMENT IS A PERSONAL OR EQUITABLE DEFENSE  Relates to the quantity, quality, value or character of the consideration of the instrument FOR MISTAKE TO INVALIDATE CONSENT  It should refer to the substance of the thing which is the object of the contract, or those conditions which have principally moved one or both parties to enter into the contract FRAUD IN FACTUM OR FRAUD IN ESSE CONTRACTUS IS A LEGAL DEFENSE This fraud exists in those cases which a person without negligence has signed an instrument which was in fact a negotiable instrument but was deceived as to the character of the instrument and without knowledge of it  Essential element is that the maker or indorser, as the case may be, must have exercised ordinary diligence and in no manner contributed negligently to the imposition MINORITY IS A LEGAL DEFENSE ONLY AVAILABLE TO THE MINOR


WHERE THE CORPORATION IS ABSOLUTELY ISSUING ANY NEGOTIABLE INSTRUMENT, THE ENFORCED EVEN BY A HOLDER IN DUE COURSE

PROHIBITED FROM PAPER CANNOT BE

WHERE THE CONTRACT OR INSTRUMENT ITSELF IS MADE VOID BY STATUTE, THE ILLEGALITY OF THE INSTRUMENT IS A REAL DEFENSE Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. RIGHTS OF A HOLDER NOT IN DUE COURSE 1. He may sue on his own name 2. He may receive payment and if the payment is in due course, the instrument is discharged 3. He holds the instrument subject to the same defenses as if it were non-negotiable 4. But a holder not in due course who derives his title from a holder in due course and who isn’t a party himself to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of parties prior to the latter THE HOLDER ACQUIRING FROM A HOLDER IN DUE COURSE HAS THE BURDEN OF PROOF TO SHOW PREDECESSOR IS INDEED A HOLDER IN DUE COURSE Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. IN WHOSE FAVOR PRESUMPTION ARISES  In order to be a holder, he must be in possession of the note or the bearer thereof



WHEN PRESUMPTION ACCRUES  It is presumed that the holder acquired the note under all the circumstances required under Section 52  Before the presumption arises, he must prove that he is the holder of the instrument, that is, that he is the indorsee in possession of the instrument, as it is payable to order WHEN BURDEN IS SHIFTED  When it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some under whom he claims, acquired the title as holder in due course THE PRESUMPTION IS NOT APPLICABLE WHEN THE HOLDER’S TITLE WAS DEFECTIVE OR SUSPICIOUS NOTES FOR WEEK #8 JULY 30- AUGUST ,4, 2007 CASE DIGESTS: SECTIONS 51 TO 59 94

CHAN WAN V. TAN KIM 109 PHIL 706

FACTS: Tam Kim issued 11 checks payable to cash or bearer. Chan Wan presented these for payment but were dishonored for insufficiency of funds. This prompted Chan Wan to institute an action against Tam Kim. She didn't take the witness stand and merely presented the checks for payment. Tan Kim on the other hand alleged that the checks were for mere receipts only. The trial court dismissed the complaint as Chan Wan failed to show that she wa a holder in due course. HELD: Eight of the checks were crossed checks specially to Chinabank and should have been presented for payment by Chinabank and not by Chan Wan. Inasmuch as Chan Wan didn't present them for payment himself, there was no proper presentment, and the liability didn't attach to the drawer. The facts show that the checks were indeed deposited with Chinabank and were by the latter presented for collection to the drawee bank. But as the had no sufficient funds, they were unpaid and returned, some of them stamped “ closed”. How it reached the hands of Chan Wan,


she didn't indicate. Most probably, as the trial court surmised, she acquired them after they have been dishonored. Chan Wan is then not a holder in due course. Nonetheless, it doesn't mean that she couldn't collect on the checks. He can still collect against Tan Kim if the latter has no valid excuse for refusing payment. The only disadvantage for Chan Kim is that she is susceptible to defenses of Tan Kim but what are the defenses of latter? This has to be further deliberated by the trial court. 95

STELCO MARKETING V. CA 210 SCRA 51

FACTS: Petitioner was engaged in the distribution and sale of structiural steel bars. RYL bought on several occasion large quantities of steel bars but the same were never paid for despite several demands by petitioner. On a relevant date, RYL gave to Armstrong Industries a check in payment of its obligations. The check was drawn by Steelweld Corporation— allegedly the owner of RYL persuaded the president of Steelweld to accommodate the former in its obligation. The check, when deposited was thereafter dishonored due to insufficient funds. A case ensued for violations of BP22 but the case was dismissed as the check was held to be for accommodation purposes only. Thereafter a complaint was filed by petitioner against RYL and Steelweld for the recovery of sum of money in payment of the steel bars ordered. RYL was nowhere to be found that is why the proceedings commenced as against Steelweld only. The trial court decided in favor of petitioner but this was reversed by the CA. HELD: Petitioner contends that the acquittal of Lim and Tianson didn't operate to release Steelweld from its liability as an accommodation party. Noteworthy is that neither said pronouncement nor any other part of the judgment of acquittal declared it liable to petitioner. To be sure, as regards an accommodation party, the condition of lack of notice of any infirmity or defect in title of the persons negotiating it is of no application since the law preserves the right of recourse of a holder for value against an accommodation party notwithstanding knowledge that at the time of taking the instrument, knew him only as an accommodation party.



Further, there is no evidence to show that petitioner possessed the check before the instrument’s presentment and dishonor. In what transpired during the transactions involving the check, evidence and facts show that there was any participation or intervention on the part of petitioner. What the record shows is that only after the check was deposited and dishonored, petitioner came into possession of it in some way and was able to give it in evidence at the trial of the civil case it has instituted against the drawers of the check. 96

BATAAN CIGAR V. CA 230 SCRA 642

FACTS: Bataan Cigar has engaged one of its suppliers, George King, to deliver bales of tobacco leaves. Petititoner then issued postdated crossed checks in favor of King. This was continued despite the failure to deliver the bales. Simultaneous to these transactions was the discounting of King of the checks to State Investment House. Bataan then stopped payment and SIHI tried to collect. HELD: The negotiability of the check isn’t affected by it being crossed, whether specially or generally. It may be legally negotiated from one person to another as long as the one who encashes the check with the drawee bank or if its specially crossed, by the bank mentioned between the parallel lines. Jurisprudence provides the following effects of crossing a check: 1. The check may not be encashed but only deposited in the bank 2. The check may be negotiated only once—to one who has an with a bank 3. The act of crossing the check serves the warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. The check should placed the holder in inquiry and upon him devolves the duty to ascertain the indorser’s title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amount to legal absence of good faith. In the present case, petitioner’s defense in stopping payment is as good to SIHI as it is to King because really the consideration for the checks were


the delivery of the bales of tobacco leaves which King failed to do. There being failure of consideration, SIHI is not a holder in due course. 97

STATE INVESTMENT HOUSE V. IAC 175 SCRA 310

FACTS: New Sikatuna requested for a loan from Spouses Chua. Latter issued postdated crossed checks in favor of former. Thereafter, Sikatuna sold checks to SIHI which upon deposit, checks were dishonored. The trial court decided the case in favor of SIHI. HELD: Jurisprudence provides the following effects of crossing a check: 1. The check may not be encashed but only deposited in the bank 2. The check may be negotiated only once—to one who has an with a bank 3. The act of crossing the check serves the warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. The checks in issue were crossed generally and issued payable to New Sikatuna Wood which could only mean that the drawer has intended the same for deposit only by the rightful person. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment and the liability didn't attach to the drawer. Thus, in the absence of due presentment, the drawer didn't become liable. Consequently, no right of recourse is available to petitioner against the drawer of the subject checks considering that the petitioner is the proper party authorized to make presentment of the checks in question. Nonetheless, the holder could still collect from New Sikatuna if the latter doesn't have a valid excuse from refusing payment. 98

STATE INVESTMENT HOUSE V. CA 217 SCRA 32

FACTS: Moulic issued checks as security to Victoriano, for pieces of jewelry to be sold on commission. Moulic failed to sell the pieces of jewelry, so she returned them to Victoriano. The checks however could not be recovered by Moulic as these have been discounted already in favor of petitioner. Consequently, before the maturity dates, Moulic withdrew her funds from



her . Thereafter, petitioner presented the checks for payment but these were dishonored. This prompted the petitioner to initiate an action against Moulic. HELD: A prima facie presumption exists that a holder of a negotiable instrument is a holder in due course. The burden of proving that State is not a holder in due course is upon Moulic. In this regard, she failed to do so. The evidence shows that the dated checks were complete and regular; petitioner bought the checks from Victoriano before their due dates; it took the checks in good faith and for value; and it was never informed nor made aware that these checks were merely issued to payee as security. Consequently, State is a holder in due course. Moulic cannot set up the defense that there was failure or want of consideration. It can only invoke the defense if State was a privy to the purpose for which they were issued and therefore is not a holder in due course. Furthermore, the mere fact that the checks were issued as security is not sufficient ground to discharge the instrument as against a holder in due course. And also, Moulic was responsible for the dishonor of her checks. She withdrew her funds from her and could not have expected her checks to be honored by then. 99


FACTS: Boncan was the Finance Officer of the Philippine Embassy in Madrid who on many occasions negotiated with Banco Atlantico checks, allegedly endorsed to her by the embassy. On these occasions, the bank allowed the payment of the checks, notwithstanding the fact that the drawee bank has not yet cleared the checks for collection. This was premised on the finding that Boncan had special relations with the employees of the bank. And that upon presentment to the drawee bank, the checks were dishonored due to non-acceptance allegedly on the ground that the drawer has ordered the stoppage of payment. This prompted Banco Atlantico to collect from the Philippine Embassy for the funds released to Boncan but the latter refused. This eventually led to filing of money claim of the bank with the Auditor General.


HELD: On whether or not Banco Atlantico was a holder in due course, it is not. Following the decision of the Auditor General in denying the claim of the bank, the checks were demand notes. It should have been put on guard when Boncan negotiated the checks with them and subsequently deposited the same to her . Even though it were demand notes, she instructed the bank that the same be not presented for collection till a later date. The fact that the amount was quite big and it was the payee herself who made the request that the same be not presented for collection until a fixed date in the future was proof of a glaring infirmity or defect in the instrument. It loudly proclaims “Take me at your own risk.” It was obvious by then that the bank had knowledge of the infirmity or defect of the checks. Furthermore, what it did when it allowed payment before clearing is beyond the normal and ordinary banking practice especially when the bank involved is a foreign bank and the amounts involved were large. Boncan wasn't even a client of the bank but was someone who had special relations with its officers. In view of the foregoing, the embassy as the drawer of the 3 checks in question cannot be held liable. It is apparent that the said 3 checks were (fraudulently altered) by Boncan as to their s and therefore wholly inoperative (note: should be “avoided”). 100

SALAS V. CA 181 SCRA

FACTS: Petitioner bought a car from Viologo Motor Sales Company, which was secured by a promissory note, which was later on indorsed to Filinvest Finance, which financed the transaction. Petitioner later on defaulted in her installment payments, allegedly due to the fraud imputed by VMS in selling her a different vehicle from what was agreed upon. This default in payment prompted Filinvest Finance to initiate a case against petitioner. The trial court decided in favor of Filinvest, to which the appellate court upheld by increasing the amount to be paid. It is the contention of petitioner that since the agreement between her and the motor company was inexistent, none had been assigned in favor of private respondent. HELD: Petitioner’s liability on the promissory note, the due execution and genuineness of which she never denied under oath, is under the foregoing factual milieu, as inevitable as it is clearly established.


The records reveal that involved herein is not a simple case of assignment of credit as petitioner would have it appear, where the assignee merely steps into the shoes of, is open to all defenses available against and can enforce payment only to the same extent as, the assignor-vendor. The instrument to be negotiable must contain the so-called words of negotiability. There are only 2 ways for an instrument to be payable to order. There must always be a specified person named in the instrument and the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words “or order” or “to the order of”, the instrument is payable only to the person designated therein and is thus non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder in due course but will merely step into the shoes of the person designated in the instrument and will thus be open to the defenses available against the latter. In the case at bar, the promissory notes is earmarked with negotiability and Filinvest is a holder in due course. 101

CONSOLIDATED PLYWOOD V. IFC LEASING 149 SCRA 448

FACTS: Petitioner bought from Atlantic Gulf and Pacific Company, through its sister company Industrial Products Marketing, two used tractors. Petitioner was issued a sales invoice for the two used tractors. At the same time, the deed of sale with chattel mortgage with promissory note was issued. Simultaneously, the seller assigned the deed of sale with chattel mortgage and promissory note to respondent. The used tractors were then delivered but barely 14 days after, the tractors broke down. The seller sent mechanics but the tractors were not repaired accordingly as they were no longer serviceable. Petitioner would delay the payments on the promissory notes until the seller completes its obligation under the warranty. Thereafter, a collection suit was filed against petitioner for the payment of the promissory note. HELD: It is patent that the seller is liable for the breach in warranty against the petitioner. This liability as a general rule extends to the corporation to whom it assigned its rights and interests unless the assignee is a holder in due course of the promissory note in question, assuming the note is


negotiable, in which case, the latter’s rights are based on a negotiable instrument and assuming further that the petitioner’s defense may not prevail against it. The promissory note in question is not a negotiable instrument. The promissory note in question lacks the so-called words of negotiability. And as such, it follows that the respondent can never be a holder in due course but remains merely an assignee of the note in question. Thus, the petitioner may raise against the respondents all defenses available to it against the seller. 102

DE OCAMPO V. GATCHALIAN 3 SCRA 596

FACTS: Gatchalian was interested in buying a car and for this reason, Gonzales offered and shown to her the same. He represented himself to be authorized by the owner of the car to sell the same. After negotiation, Gatchalian agreed to buy the car and wanted Gonzales to bring the certificate of registration so that her husband could it. Gonzales excused himself from bringing said certificate as allegedly the owner wanted to be secure that the buyer would be in good faith. This led to him asking Gatchalian to issue a check as evidence of good faith. He promised that said check wouldn't be deposited but merely shown to the owner. Relying on this promise, she issued the check but Gonzales failed to show up the next day. She ordered the stoppage of payment of the check, which the plaintiff didn't knew about. The plaintiff accepted the check from Gonzales as payment for hospitalization later on. HELD: The stipulation of facts would show that De Ocampo wasn't aware of the circumstances that led to the issuance of the check. Nonetheless, he should have been placed into inquiry, with the showing that the check was crossed—that the check could only be deposited and not encashed. He should have made an inquiry as to why Gonzales had with him the check and not deposited in . He had the duty to ascertain that Gonzales had legal title to the instrument. Having failed in this accord, he was grossly negligent in not finding out the nature of the title and possession of Gonzales, amounting to legal absence of good faith. In taking an instrument with a defect or infirmity, it could not be said that the holder took it as a holder in due course. 103

MONTINOLA V. PNB


88 PHIL 178 FACTS: * the case with the Japanese occupation and the mutilated check. HELD: Montinola could not be considered as a holder in due course. Why? For one to be a holder in due course, one should take the instrument before it has become overdue. that in this case, Montinola took the check which has long become overdue. He cannot even be in the slightest be considered as a holder because the NIL defines a holder as being the payee or the indorsee of the negotiable instrument. In this case, he wasn't the payee nor was he the indorsee of the check in issue. 104

PEOPLE V. MANIEGO 148 SCRA 30

FACTS: The accused were charged and later on found guilty of committing malversation. Ubay was the disbursing officer in the Office of the Chief of Finance in a military camp and together with his co-accused, were able to take personal checks drawn against the PNB and BPI, of which Pamintuan was the drawer and Maniego was the indorser. The checks were encashed and used, to the prejudice of the government. Maniego averred that the trial court erred in adjudging her as liable as an indorser to the government. HELD: The contention of Maniego that as a mere indorser, she may not be liable on of the dishonor of the checks indorsed by her is untenable. The holder or last indorsee of a negotiable instrument has the right to enforce payment of the instrument for the full amount thereof and against all parties liable thereon. Among the parties liable thereon is the indorser unless he clearly indicates that his intention to be bound in some other capacity. Maniego may also be considered as an accommodation party and as such, is liable to a holder for value notwithstanding if the holder knew that she was only an accommodation party. 105

UB V. IAC 183 SCRA 38

FACTS:


Petitioner bank issued a manager’s check in favor of Makati Bel-Air as purchased by Altiura as payment for a condominium unit. Thereafter, Altiura requested the bank to hold payment as there was a discrepancy between the areas of the unit purchased to what has been agreed upon. The bank then told Makati Bel-Air of this request. This request happened two times. On the second time, Bel-Air denied such request, which prompted the bank to file a complaint-interpleader so that the two other parties could settle their claims with one another. This led to a civil case and another. Altiura filed for rescission of the contract between him and Bel-Air. Bel-Air filed counterclaims against the bank and Altiura. During the pendency of these actions, the bank moved that it first deposit the amount of the check in a special , which was approved by the trial court. Later on, it moved for the dismissal of the complaint it filed for the reason that there is no more conflict between Altiura and Bel-Air. Bel-Air returned the check to the bank. In resolving the motion to withdraw, the court held that the motion is rendered moot and academic by its earlier order ordering the bank to return the amount to Altiura. This was appealed by the bank. HELD: Makati Bel-Air was a party to the contract of sale of the office condominium unit to Altiura. Accordingly, it was aware that at the time it had received the manager’s check, that there was or had arisen at least partial failure of consideration since it was unable to comply with its obligation to deliver the office space to Altiura. Makati Bel-Air was also aware that the bank had been informed of the claimed defect in its title to the check or of its right to the proceeds thereof. Vis a vis both Altiura and the bank, Makati Bel-Air cannot be considered as a holder in due course. 106

YANG V. COURT OF APPEALS 409 SCRA 159

FACTS: Yang and Chandimari entered into an agreement that the latter would issue to the former a manager’s check in exchange for two checks that Yang has payable to the order of David. The difference in amount would be the profit of the two of them. It was further agreed upon that Yang would secure a dollar draft, which Chandimari would exchange with another dollar draft to be secured from a Hong Kong bank. At the agreed time of rendezvous, it was reported by Yang’s messenger that Chandimari didn't show up and the drafts and checks were allegedly stolen. This wasn't true however. Chandimari was able to get hold of the drafts and checks. He was even able to deliver to David the two checks and was able to get money in return. Consequently, Yang asked for the stoppage of payment


of the checks she believed to be lost, relying on the report of her messenger. The stoppage order was eventually lifted by the banks and the drafts and checks were able to be encashed. Yang then filed an action for injunction and damages against the banks, Chandimari and David. The trial court and CA held in favor of David as a holder in due course. HELD: Every holder of a negotiable instrument is presumed to be a holder in due course. This is specially true if one is a holder because he is the payee or indorsee of the instrument. In the case at bar, it is evident that David was the payee of the checks. The prima facie presumption of him being a holder in due course is in his favor. Nonetheless, this presumption is disputable. On whether he took the check under the conditions set forth in Section 52 must be proven. Petitioner relies on two arguments on why David isn’t a holder in due course—first, because he took the checks without valuable consideration; and second, he failed to inquire on Chandimari’s title to the checks given to him. The law gives rise to the presumption of valuable consideration. Petitioner has the burden of debunking such presumption, which it failed to do so. Her allegation that David received the checks without consideration is uned and devoid of any evidence. Furthermore, petitioner wasn't able to show any circumstance which should have placed David in inquiry as to why and wherefore of the possession of the checks by Chandimari. David wasn't a privy to the transactions between Yang and Chandimari. Instead, Chandimari and David had the agreement between themselves of the delivery of the checks. David even inquired with the banks on the genuineness of the checks in issue. At that time, he wasn't aware of any request for the stoppage of payment. Under these circumstances, David had no obligation to ascertain from Chandimari what the nature of the latter’s title to the checks was, if any, or the nature of his possession. 107

MESINA V. IAC 145 SCRA 497

FACTS: Jose Go purchased from Associate Bank a Cashier’s Check, which he left on top of the manager’s desk when left the bank. The bank manager then had it kept for safekeeping by one of its employees. The employee was then in conference with one Alexander Lim. He left the check in his desk and upon his return, Lim and the check were gone. When Go inquired about his check, the same couldn't be found and Go was advised to request


for the stoppage of payment which he did. He executed also an affidavit of loss as well as reported it to the police. The bank then received the check twice for clearing. For these two times, they dishonored the payment by saying that payment has been stopped. After the second time, a lawyer ed it demanding payment. He refused to disclose the name of his client and threatened to sue. Later, the name of Mesina was revealed. When asked by the police on how he possessed the check, he said it was paid to him Lim. An information for theft was then filed against Lim. A case of interpleader was filed by the bank and Go moved to participate as intervenor in the complaint for damages. Mesina moved for the dismissal of the case but was denied. The trial court ruled in the interpleader case ordering the bank to replace the cashier’s check in favor of Go. HELD: Petitioner cannot raise as arguments that a cashier’s check cannot be countermanded from the hands of a holder in due course and that a cashier’s check is a check drawn by the bank against itself. Petitioner failed to substantiate that he was a holder in due course. Upon questioning, he itted that he got the check from Lim who stole the check. He refused to disclose how and why it has ed to him. It simply means that he has notice of the defect of his title over the check from the start. The holder of a cashier’s check who is not a holder in due course cannot enforce payment against the issuing bank which dishonors the same. If a payee of a cashier’s check obtained it from the issuing bank by fraud, or if there is some other reason why the payee is not entitled to collect the check, the bank would of course have the right to refuse payment of the check when presented by payee, since the bank was aware of the facts surrounding the loss of the check in question. 108

ASIA BANKING CORPORATION V. TEN SEN GUAN 44 PHIL 511

FACTS: Ten Sen Guan ordered from Snow’s Ltd. ten cases of mercerized bastite to be shipped from New York to Manila. Upon the arrival of the merchandise, a draft drawn by Snow’s Ltd. against Ten Sen Guan was presented to them for acceptance. The delivery of the bill of lading and other documents were being put on hold pending acceptance of the draft that is why Ten Sen Guan accepted the same. When the cases were opened however, it was found out that the merchandise wasn't bastite but instead were burlap.


Ten Sen Guan then was prompted to return the bill of lading and other documents and requested Asia Banking Corporation, the agent of Snow Ltd. to cancel its acceptance, which the corporation promised to do so. However it didn't do good its promise since it sued Ten Sen Guan for the amount of the draft. The trial court however ruled in favor of Ten Sen Guan. HELD: It is undisputed that the defendants placed the order with Snow Ltd. for 10 cases of mercerized bastite and that the draft was drawn from the corresponding value of 10 cases of mercerized bastite including incidental expenses. That when the cases were examined it was found out that it wasn't bastite but instead were burlap, of which the corporation was notified and that Ten Sen Guan refused to refused the goods. The corporation alleges that it is a holder for value but it failed to prove such allegation. If indeed it was a holder for value, it could have easily proven such fact by competent evidence but it failed to do so. It wasn't able to give an authentic of the transactions. It being a fact that it is not a holder for value, it is susceptible to any defenses available to Ten Sen Guan. According to the findings, the acceptance was conditional. The draft was for collection and also, the evidence established that the corporation has released Ten Sen Guan from liability from the draft. 109

FOSSUM V. FERNANDEZ 44 PHIL 675

FACTS: Fernandez Hermanos placed an order with the products company for the manufacturing of a chain given a set of specifications. The chain was duly prepared and delivered. A draft was drawn by the company and was accepted by Fernandez Hermanos. Thereafter, the draft was negotiated with Fossum who demanded payment on the instrument but was refused by Fernandez on alleged failure of the chain delivered to satisfy the specifications given. HELD: It devolved around Fernandez Hermanos to allege and prove its claim that which was delivered and received didn't comply with the specifications and didn't answer the purposes for which it was intended. It alleged that the chain didn't meet the specifications given by the contract. Nonetheless, there was failure to identify the so-called defects of the chain. It was upon

Fernandez Hermanos to show that indeed the chain was defective. But as the trial court found out, there was a failure of proof. **WEEK 9: MID WEEK NOTES FOR WEEK 10 AUGUST 20-25, , 2007 V. LIABILITIES OF PARTIES Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and its the existence of the payee and his then capacity to indorse. MAKER PRIMARILY LIABLE  Engagement of the maker is to pay absolutely for the note according to its tenor  His liability is primarily and unconditional  One who has signed an instrument as a maker is presumed to have acted with care and to have signed the instrument with full knowledge of its contents, unless of course, if fraud is proved MAKER MUST PAY ACCORDING TO THE OF THE NOTE  The maker bound himself to pay personally. He cannot shift the obligation without the consent of the payee. He cannot allege that he spend the money on expenses which should be charged to a trust istered by a creditor because it is not the payee’s concern to know how the proceeds should be spent. That is the sole concern of the maker. The payee’s interest is merely to see that the note is paid according to its term. LIABILITY OF 2 OR MORE MAKERS  When 2 or more makers sign tly or severally, each of them is individually liable for the payment of the full amount of their obligation even if one of them didn’t receive part of the value given therefor, as he would be considered as an accommodation party PAYEE’S EXISTENCE, ETC.  The maker also its of the existence of the payee and his then capacity to indrose  He is precluded from setting up the following defenses: o That the payee is a fictitious person because by making the note, he its that the payee exists



o

That the payee was insane, a minor, or a corporation acting ultra vires because by making the note, he its the then capacity of the payee to indorse


PNB V. MAZA AND MACENAS 48 PHIL 207

FACTS: Maza and Macenas executed a total of five promissory notes. These were not paid at maturity. And to recover the amounts stated on the face of the promissory notes, PNB initiated an action against the two. The special defense posed by the two is that the promissory notes were delivered to them in blank by a certain Enchaus and were made to sign the notes so that the latter could secure a loan from the bank. They also alleged that they never negotiated the notes with the bank nor have they received any value thereof. They also prayed that Enchaus be impleaded in the complaint but such was denied. The trial court then held in favor of the bank. HELD: The defendants attested to the genuineness of the instruments sued on. Neither did they point out any mistake in regard to the amount and interest that the lower court sentenced them to pay. Given such, the defendants are liable. They appear as the makers of the promissory notes and as such, they must keep their engagement and pay as promised. And assuming that they are accommodation parties, the defendants having signed the instruments without receiving value thereof, for the purpose of lending their names to some other person, are still liable for the promissory notes. The law now is such that an accommodation party cannot claim no benefit as such, but he is liable according to the face of his undertaking, the same as he himself financially interest in the transaction. It is also no defense to say that they didn't receive the value of the notes. To fasten liability however to an accommodation maker, it is not necessary that any consideration should move to him. The accommodation which s the promise of the accommodation maker is that parted with by the person taking the note and received by the person accommodated. 111

ARANETA V. PEREZ 14 SCRA 498

FACTS:


Perez executed a promissory note in favor of Araneta. Perez failed to pay upon maturity of the note and despite demands, still failed to pay. Araneta was then prompted to file a case against him. As defense, he alleged that the proceeds were used to pay for the medical treatment of his daughter who was then the beneficiary of the trust then istered by Araneta. Perez was adjudged to pay Araneta. And by virtue of this judgment, Perez filed a case against Araneta for reimbursement for his alleged advances for the medical treatment of his daughter. HELD: Perez bound himself to pay personally said promissory note which he cannot shift to another without the consent of the payee. Such is the undertaking of the maker. The maker of a negotiable instrument by making it engages that he will pay it according to the tenor and its the existence of the payee and his then capacity to indorse. Given such, Perez could not now escape his liability by alleging that he spent the money for the treatment of his daughter since it is not the concern of the payee how the said proceeds would be spent. This is the sole concern of the maker. The interest of the payee is the payment of the instrument. 112

TAN SIN V. YU BIAO 56 PHIL 707

FACTS: Plaintiff were the heirs of Sontuan while the defendant is the partnership to which he belonged. After his death, there was dispute over the share of the heirs correlative the share of the deceased partner in the partnership. An agreement was made between the surviving partners and heirs. There was liquidation of the deceased’s share. The share was then retained in the hands of the partnership in the nature of a loan, which was secured by a promissory note. The partnership defaulted in payment and this prompted the heirs to file a case against them. Judgment was rendered against the partnership and the other solidary maker. The solidary maker appealed and averred that he signed the note by mistake only. HELD: Inasmuch as the appellant is a businessman and is of age, he is presumed to have acted with due care, and to have signed the document in question with full knowledge of its contents. And this presumption of law is not overcome by the evidence adduced by the appellant, consisting in his own testimony. There being no evidence of fraud, and the appellant having itted to the genuineness of his signature, the same must be given legal effects.



Sec. 61. Liability of drawer. - The drawer by drawing the instrument its the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. DRAWER SECONDARILY LIABLE  He engages merely that the bill will be accepted or paid or both, according to its tenor, and that he will pay only when 1. It is dishonored 2. And the necessary proceedings of dishonor are duly taken  The liability of the drawer is subject to the two conditions and attaches only upon their fulfillment  The drawer, by merely drawing the bill and g his name in the bill as such drawer, without more, impliedly engages to be so secondarily liable, as if he has incorporated the provisions of Section 61 in the bill  If the bill is not paid, accordingly, if a bill is not paid, the drawer becomes liable for the payment of its value to the holder provided that notice of dishonor is given TO WHOM DRAWER IS SECONDARILY LIABLE 1. The holder 2. Or if any of the indorsers intervening between the holder and the drawer is compelled to pay by the holder, the drawer, will be liable to that indorser so compelled to pay IS DRAWER OF UNACCEPTED BILL PRIMARILY LIABLE?  Yes  It was held that until the bill has been accepted, the drawer is the principal debtor and after acceptance, the drawee or acceptor is the principal debtor and the drawer becomes secondarily liable PAYEE’S EXISTENCE  Like the maker, the drawer its to the existence of the payee and his capacity to indorse NEGATIVES HIS LIABILITY  The law allows the drawer to negative or limit his liability by express stipulation




By adding words such as “without recourse” or “I shall not be liable in case of non-payment or non-acceptance”


PNB V. PICORNELL 46 PHIL 706

FACTS: Picornell followed the instructions of Hyndman, Tavera and Venutra by buying bales of tobacco. He was able to obtain in National Bank a sum of money together with his commission. He drafted a bill of exchange against the firm and in favor of the bank. It was received by National Bank and was accepted thereafter by the firm. However, on alleged conditions of the tobacco, the bill of exchange was not paid. HELD: This action for recovery is for the value of the bill of exchange. The firm accepted the bill unconditionally but did not pay it at maturity, wherefore its responsibility to pay the same is clear. The question whether or not the tobacco was worth the value of the bill doesn’t concern the bank. Such partial want of consideration if it was, doesn’t exist with respect to the bank which paid Picornell the full value of the said bill of exchange. The bank was a holder in due course, and was such for value full and complete. The firm cannot escape liability. 114


FACTS: Boncan was the Finance Officer of the Philippine Embassy in Madrid who on many occasions negotiated with Banco Atlantico checks, allegedly endorsed to her by the embassy. On these occasions, the bank allowed the payment of the checks, notwithstanding the fact that the drawee bank has not yet cleared the checks for collection. This was premised on the finding that Boncan had special relations with the employees of the bank. And that upon presentment to the drawee bank, the checks were dishonored due to non-acceptance allegedly on the ground that the drawer has ordered the stoppage of payment. This prompted Banco Atlantico to collect from the Philippine Embassy for the funds released to Boncan but the latter refused. This eventually led to filing of money claim of the bank with the Auditor General. HELD:


On whether or not Banco Atlantico was a holder in due course, it is not. Following the decision of the Auditor General in denying the claim of the bank, the checks were demand notes. It should have been put on guard when Boncan negotiated the checks with them and subsequently deposited the same to her . Even though it were demand notes, she instructed the bank that the same be not presented for collection till a later date. The fact that the amount was quite big and it was the payee herself who made the request that the same be not presented for collection until a fixed date in the future was proof of a glaring infirmity or defect in the instrument. It loudly proclaims “Take me at your own risk.” It was obvious by then that the bank had knowledge of the infirmity or defect of the checks. Furthermore, what it did when it allowed payment before clearing is beyond the normal and ordinary banking practice especially when the bank involved is a foreign bank and the amounts involved were large. Boncan wasn't even a client of the bank but was someone who had special relations with its officers. In view of the foregoing, the embassy as the drawer of the 3 checks in question cannot be held liable. It is apparent that the said 3 checks were (fraudulently altered) by Boncan as to their s and therefore wholly inoperative (note: should be “avoided”). Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and its: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. ACCEPTOR PRIMARILY LIABLE  Acceptor engages to pay absolutely according to the tenor of its acceptance  His liability is not subject to any condition  The acceptor is the drawee who accepts the bill  His acceptance immediately places a legal liability on him for the payment of the bill in favor of one who became a holder thereof after acceptance, and if he wants to escape liability, it is up to him to show that he is a mere agent of the drawer, or allege and prove any other defense which he has to the liability EFFECT OF MORTGAGE EXECUTED BY ACCEPTOR




Where being unable to pay certain bills of exchange which the drawee has accepted, the latter makes a mortgage in favor of the holder of said bills upon certain merchandise the value of which is sought to be collected through said bills, in order to secure the payment of said amount if the merchandise is sold and the integrity thereof while the sale is not effected, the execution of said mortgage doesn’t constitute a Novation of the obligation represented by said accepted bills unless it is expressly stated in the mortgage

ACCEPTOR TO PAY ACCORDING TO TENOR OF HIS ACCEPTANCE  While the maker of a note engages to pay according to the tenor of the note, an acceptor engages to pay according to the tenor of his acceptance, not of the bill he accepts  Tenor of his acceptance may be different from the tenor of the bill, as the acceptor may accept the bill with qualifications  If his acceptance is general, the tenor of then bill is the same tenor as the tenor of his acceptance WHERE ORIGINAL TENOR IS ALTERED BEFORE ACCEPTANCE  Suppose the bill is originally for P1000. Before the drawee X accepts it, it is altered by the payee B to P4000. Then X accepts it. How much is X liable to a holder in due course?  According to one view, X is liable for P4000 and not P1000. The reason is that the tenor of X’s acceptance is for P4000. EFFECT OF SECTION 124  Under the first view, what is the effect of Section 124 which provides that a holder in due course can recover only the original tenor of the instrument?  It seems that this refers to the original tenor of instrument taken from the standpoint of the person primarily liable, in X’s standpoint. In other words, the original tenor of the instrument is P4000, which is the tenor of X’s acceptance.  If after his acceptance, a subsequent indorsee alters the bill to read P9000, then X could be liable for P4000 only, the original tenor of his acceptance, even as to a holder of due course. ISSION OF DRAWER’S EXISTENCE, ETC.  Drawer’s existence  The genuineness of the drawer’s signature  The capacity and authority of the drawer to draw the instrument  He doesn’t it the genuineness of the indorser’s signatures EFFECT OF ACCEPTOR’S ISSIONS



1. 2. 3.

Acceptor consequently precluded from setting up the defense that the drawer is non-existent or fictitious because of his ission of the drawer’s existence Neither can he claim the drawer’s signature is a forgery because he its the genuineness of the drawer’s signature Neither can the drawee escape liability by alleging want of consideration between him and the drawer as by accepting the bill, he its the capacity and authority of the drawer to draw the bill


FOSSUM V. FERNANDEZ 64 PHIL 675

FACTS: Fernandez Hermanos placed an order with the products company for the manufacturing of a chain given a set of specifications. The chain was duly prepared and delivered. A draft was drawn by the company and was accepted by Fernandez Hermanos. Thereafter, the draft was negotiated with Fossum who demanded payment on the instrument but was refused by Fernandez on alleged failure of the chain delivered to satisfy the specifications given. HELD: It devolved around Fernandez Hermanos to allege and prove its claim that which was delivered and received didn't comply with the specifications and didn't answer the purposes for which it was intended. It alleged that the chain didn't meet the specifications given by the contract. Nonetheless, there was failure to identify the so-called defects of the chain. It was upon Fernandez Hermanos to show that indeed the chain was defective. But as the trial court found out, there was a failure of proof. **Fernandez Hermanos accepted the instrument and thus, made certain warranties regarding the same. These warranties have many effects and one of it is being precluded from raising the defense of want of consideration. In case he raises the said defense, he should be able to present evidence to such allegation. Failure to do so would make the presumption still subsisting. 116


FACTS:


Lim deposited in his PCIB a GSIS check drawn against PNB. Following standard banking procedures, the check was sent to petitioner for clearing. He didn’t return said check but paid the amount to PCIB as well as debited it against the of GSIS. Thereafter, a demand was received from GSIS asking for the credit of the amount since the signatures found in the check were forged. This was done by PNB and it now comes after PCIB but the latter wouldn’t want to return the money. HELD: Acceptance is not required for checks, for the same are payable on demand. Acceptance and payment are distinguished with each other. The former pertains to a promise to perform an act while the latter is the actual performance of the act. PNB had also been negligent with the particularity that it had been guilty of a greater degree of negligence because it had a previous and formal notice from GSIS that the check had been lost, with the request that payment be stopped. Just as important is that it is its acts, which are the proximate cause of the loss. 117

PNB V. NATIONAL CITY BANK 63 PHIL 711

FACTS: Unknown persons negotiated with Motor Services Company checks, which were part of the stipulation in payment of automobile tires purchased from the latter’s store. It purported to have been issued by Pangasinan Transportation Company. The said checks were indorsed at the back by said unknown persons, the Motor company believing at that time that the signatures contained therein were genuine. The checks were later deposited with the company’s in National City Bank of NY. The said checks were consequently cleared and PNB credited National City Bank with the amounts. Thereafter, PNB discovered that the signatures were forged and it demanded the reimbursement of the amounts for which it credited the other bank. HELD: A check is a bill of exchange payable on demand and only the rules governing bills of exchanges payable on demand are applicable to it. in view of the fact that acceptance is a step necessary insofar as negotiable instruments are concerned, it follows that the provisions relative to acceptance are without application to checks. Acceptance impies subsequent negotiation of the instrument, which is not true in the case of checks because from the moment it is paid, it is withdrawn from



circulation. When the drawee banks cashes or pays a check, the cycle of negotiation is terminated and it is illogical thereafter to speak of subsequent holders who can invoke the warrant against the drawee. Further, in determining the relative rights of a drawee who under a mistake of fact, has paid, a holder who has received such payment, upon a check to which the name of the drawer has been forged, it is only fair to consider the question of diligence and negligence of the parties in respect thereto. The responsibility of the drawee who pays a forged check, for the genuineness of the drawer’s signature is absolute only in favor of one who has not, by his own fault or negligence, contributed to the success of the fraud or to mislead the drawee. According to the undisputed facts, National City Bank in purchasing the papers in question from unknown persons without making any inquiry as to the identity and authority of said persons negotiating and indorsing them, acted negligently and contributed to the constructive loss of PNB in failing to detect the forgery. Under the circumstances of the case, if the appellee bank is allowed to recover, there will be no change in position as to the injury or prejudice of the appellant. DRAWER: PANGASINAN PAYEE: IASMOTOR SERVICE DRAWEE: PNB COLLECTING BANK: NATIONAL CITY BANK OF NEW YORK Sec. 63. When a person deemed indorser. his signature upon an instrument otherwise drawer, or acceptor, is deemed to be indorser indicates by appropriate words his intention some other capacity.

A person placing than as maker, unless he clearly to be bound in

WHEN PERSON DEEMED INDORSER  In the absence of any indication in what capacity a person whose signature is written on the instrument intends to be bound, he shall be deemed as an indorser INDICATION TO BE BOUND OTHERWISE THAN INDORSER  Will not be deemed as an indorser if he indicates by appropriate words his intention to be bound in some other capacity  But anyone who assumes the responsibility of identifying the payee of a check is answerable to the bank cashing the check if the bank pays its amount to such payee so identified


ISSIBILITY OF PAROL EVIDENCE The statutory command that the legal effect of a blank instrument cannot be changed by parol proof or by evidence from other source  The intent to be bound in some other capacity than as an indorser must be indicated in the indorsement or on the face of the instrument and cannot be shown by parol CASE DIGESTS: SECTION 63 118

ANG TIONG V. TING 22 SCRA 713

Ting issued a PBCom check payable to cash or bearer. This was indorsed by Ang at the back and it was received by plaintiff. Upon encashment of the check, the same was dishonored. Plaintiff moved that the two make good the value of the check but despite demands, he was unheeded, prompting him to file a complaint. The trial court decided in his favor. HELD: There is nothing in the check in question indicates that the appellant is not a general indorser. When a person placing his signature upon an instrument otherwise than a maker, drawer, or acceptor, he is deemed to be a general indorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity, which he did not do so. Even on the assumption that the appellant was an accommodation indorser, as he professes to be, he is nevertheless by the clear mandate of section 29, liable on the instrument to a holder for value, notwithstanding that such holder at the time of taking the instrument knew him to be an accommodation party. And assuming that he was an accommodation party, he may obtain security from the maker to protect himself against the danger of insolvency of the latter but this doesn't affect his liability to the appellee, as the said remedy is a matter of recourse between him and the maker. 119

TUAZON V. HEIRS OF BARTOLOME RAMOS 463 SCRA 408

FACTS: Respondents alleged that on a relevant date, spouses Tuazon purchased from their predecessor-in-interest cavans of rice. That on the total number



of cavans, only a certain portion has been paid for. In payment thereof, checks have been issued but on presentment, the checks were dishonored. Respondents alleged that since spouses anticipated the forthcoming suit against them, they made fictitious sales over their properties. As defense, the spouses averred that it was the wife of Bartolome who effected the sale and that Maria was merely her agent in selling the rice. The true buyer of the cavans was Santos. The spouses further averred that when Ramos got the check from Santos, she took it in good faith and didn't knew that the same were unfunded. HELD: First, there is no contract of agency. If it was truly the intention of the parties to have a contract of agency, then when the spouses sued Santos on a separate civil action, they should have instituted the same on behalf and for the respondents. They didn't do so. The filing in their own names negate their claim that they acted as mere agents in selling the rice. Second, the spouses are liable on the check. As indorser, Tuazon warranted that upon due presentment, according to their tenor, and that in case they were dishonored, she would pay the corresponding amount. After the instrument is dishonored by nonpayment, indorsers cease to be merely secondarily liable. They became principal debtors whose liability becomes identical to that of the original obligor. The holder of a negotiable instrument need not even proceed against the maker before suing the indorser. Santos is not an indispensable party to the suit against the spouses. Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.


IRREGULAR INDORSEMENT  An irregular indorser is one who not otherwise a party to an instrument, places his signature thereon his signature in blank before delivery IRREGULAR INDORSEMENT  Its an indorsement in an unusual, peculiar, or singular manner  His name appears where he would naturally expect another name BEFORE DELIVERY  It means the initial delivery  Provision doesn’t apply if the signature was placed after delivery PAY TO X OR HIS ORDER P1000 SGD. B SGD. Y PAY TO D SGD. X PAY TO E SGD. D Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes. APPLICATION OF SECTION 65



1. A person negotiating by mere delivery 2. A person negotiating by qualified indorsement LIABILITY OF PERSON NEGOTIATING BY DELIVERY I promise to pay P1000 to bearer. Sgd. A *A delivers the note to B. *B negotiates the note to C by mere delivery. 

A person negotiating by mere delivery becomes liable to the holder only when the holder cannot obtain payment by reason of the fact that any of the warranties of the person negotiating by delivery is or becomes false

I promise to pay B or bearer P1000. Sgd. A Sgd. B To D Sgd. C To E Sgd. D (blank) Sgd. E *E negotiated the note to F. F negotiated to G.  

E is not liable to G. G’s right didn’t derive from the indorsement of F F is liable to G.


METROPOL V. SAMBOK MOTORS CO. 120 SCRA 864

FACTS: Dr. Villareal issued a promissory note in favor of Sambok, which was payable in monthly installments. The promissory note was then indorsed to Metropol. Villareal defaulted payment and this prompted Metropol to run after Sampol. Sampol alleged that it is not liable since it was a qualified indorser through the wordings it inserted in its indorsement—with recourse. HELD:


A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement relieves the indorser of the general obligation to pay if the instrument is dishonored but not of the liability arising from warranties on the instrument as provided in Section 65 of the Negotiable Instruments Law already mentioned herein. However, appellant Sambok indorsed the note "with recourse" and even waived the notice of demand, dishonor, protest and presentment. "Recourse" means resort to a person who is secondarily liable after the default of the person who is primarily liable. 3 Appellant, by indorsing the note "with recourse" does not make itself a qualified indorser but a general indorser who is secondarily liable, because by such indorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said appellant. The effect of such indorsement is that the note was indorsed without qualification. A person who indorses without qualification engages that on due presentment, the note shall be accepted or paid, or both as the case may be, and that if it be dishonored, he will pay the amount thereof to the holder. 4 Appellant Sambok's intention of indorsing the note without qualification is made even more apparent by the fact that the notice of demand, dishonor, protest and presentment were an waived. The words added by said appellant do not limit his liability, but rather confirm his obligation as a general indorser. Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due course: (holders in good faith) (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is, at the time of his indorsement, valid and subsisting; And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. APPLICATION OF SECTION 66



 

Deals with the liability or warranties of one negotiating by general indorsement, as distinguished from qualified indorsers or persons negotiating by mere delivery It has been held that this section includes an indorser for collection

LIABILITY OF GENERAL INDORSER 1. That the instrument is genuine and in all respects what it purports to be 2. That he has a good title to it 3. That all prior parties had capacity to contract 4. And that the instrument is, at the time of his indorsement, valid and subsisting FOURTH WARRANTY OF GENERAL INDORSER AND QUALIFIED INDORSER, DISTINGUISHED  While the qualified indorser or person negotiating by delivery warrants that he is ignorant of any fact that will render the instrument valueless or impair its validity, the general indorser warrants that the instrument he is indorsing is valid and subsisting regardless of whether he is ignorant of that fact or not THE WARRANTIES OF A GENERAL INDORSER EXTEND TO THE FOLLOWING 1. Holders in due course 2. Persons who derive their title from holders in due course 3. Immediate transferees even if they are not holders in due course WARRANTIES DON’T EXTEND TO DRAWEE  The indorser of a check doesn’t warrant the genuineness of the drawer’s signature to the drawee who pays it since the drawee is not a holder in due course  The warranties provided do not run in favor of the drawee in respect to the genuineness of the drawer’s signature but only in favor of subsequent holders in due course A  B  C  D (FORGED)  E  F *Is C liable? No. OTHER LIABILITTY OF GENERAL INDORSER  He engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings of dishonor be duly taken,


he will pay the amount to the holder, or to any subsequent indorser who may be compelled to pay it GENERAL INDORSER IS SECONDARILY LIABLE  Secondary liability not confined to the four warranties  He is liable if for any reason, the person primarily liable cannot pay, as distinguished from the limited secondary liability of the qualified indorser or of the person negotiating by mere delivery  The reason for dishonor need not be established. As long as there was dishonor, this is sufficient. SUMMARY OF NEGOTIATING

DISTINCTIONS

BETWEEN

GENERAL INDORSER EXTENSION WARRANTY

OF

FOURTH WARRANTY

WHEN DOES HE PAY?

All subsequent parties

Warrants that the instrument is valid and subsisting Engages to pay the holder or any intervening party who may be compelled to pay if the instrument is dishonored either by nonacceptance or non-payment

LIABILITIES

QUALIFIED INDORSER

OF

PERSONS

NEGOTIATING BY MERE DELIVERY Immediate transferee

All subsequent parties—who acquire title through their indorsement Warrants that the instrument is valid and subsisting

Doesn’t engage to pay the instrument if it is dishonored by non-acceptance or non-payment except when such dishonor arises from his four warranties

LIABILITY OF ASSIGNOR  The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale unless it should have been sold as doubtful but not for the solvency of the debtor unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge




PEOPLE V. MANIEGO 148 SCRA 30

FACTS: The accused were charged and later on found guilty of committing malversation. Ubay was the disbursing officer in the Office of the Chief of Finance in a military camp and together with his co-accused, were able to take personal checks drawn against the PNB and BPI, of which Pamintuan was the drawer and Maniego was the indorser. The checks were encashed and used, to the prejudice of the government. Maniego averred that the trial court erred in adjudging her as liable as an indorser to the government. HELD: The contention of Maniego that as a mere indorser, she may not be liable on of the dishonor of the checks indorsed by her is untenable. The holder or last indorsee of a negotiable instrument has the right to enforce payment of the instrument for the full amount thereof and against all parties liable thereon. Among the parties liable thereon is the indorser unless he clearly indicates that his intention to be bound in some other capacity. Maniego may also be considered as an accommodation party and as such, is liable to a holder for value notwithstanding if the holder knew that she was only an accommodation party. 122


FACTS: Gomez opened an with Golden Savings bank and deposited 38 treasury warrants. All these warrants were indorsed by the cashier of Golden Savings, and deposited it to the savings in a Metrobank branch. They were sent later on for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. On persistent inquiries on whether the warrants have been cleared, the branch manager allowed withdrawal of the warrants, only to find out later on that the treasury warrants have been dishonored. HELD: The treasury warrants were not negotiable instruments. Clearly, it is indicated that it was non-negotiable and of equal significance is the


indication that they are payable from a particular fund, Fund 501. This indication as the source of payment to be made on the treasury warrant makes the promise to pay conditional and the warrants themselves nonnegotiable. Metrobank then cannot contend that by indorsing the warrants in general, GS assumed that they were genuine and in all respects what they purport it to be, in accordance to Section 66 of the NIL. The simple reason is that the law isn’t applicable to the non-negotiable treasury warrants. The indorsement was made for the purpose of merely depositing them with Metrobank for clearing. It was in fact Metrobank which stamped on the back of the warrants: “All prior indorsements and/or lack of endorsements guaranteed…” 123

PRUDENCIO V. CA 143 SCRA 7

FACTS: Appellants are the owners of a property, which they mortgaged to help secure a loan of a certain Domingo Prudencio. On a later date, they were approached by their relative who was the attorney-in-fact of a construction company, which was in dire need of funds for the completion of a municipal building. After some persuasion, the appellants amended the mortgage wherein the and conditions of the original mortgage was made an integral part of the new mortgage. The promissory note covering the “second loan” was signed by their relative. It was also signed by them, indicating the request that the check be released by the bank. After the amendment of the mortgage was executed, a deed of assignment was made by Toribio, asg all the payments to the Bureau to the construction company. This notwithstanding, the Bureau with approval of the bank, conditioned however that they should be for labor and materials, made three payments to the company. The last request was denied by the bank, averring that the was long overdue, the remaining balance of the contract price should be applied to the loan. The company abandoned the work and as consequence, the Bureau rescinded the contract and assumed the work. Later on, the appellants wrote to the PNB that since the latter has authorized payments to the company instead of on of the loan guaranteed by the mortgage, there was a change in the conditions of the contract without the knowledge of appellants, which entitled the latter to cancel the mortgage contract.



The trial court held them still liable together with their co-makers. It has also been held that if the judgment is not satisfied within a period of time, the mortgaged properties would be foreclosed and sold in public auction. In their appeal, petitioners contend that as accommodation makers, the nature of their liability is only that of mere sureties instead of solidary codebtors such that a material alteration in the principal contract, effected by the creditor without the knowledge and consent of the sureties, completely discharges the sureties from all liabilities on the contract of suretyship. HELD: There is no question that as accommodation makers, petitioners would be primarily and unconditionally liable on the promissory note to a holder for value, regardless of whether they stand as sureties or solidary co-debtors since such distinction would be entirely immaterial and inconsequential as far as a holder for value is concerned. Consequently, the petitioners cannot claim to have been released from their obligation simply because at the time of payment of such obligation was temporarily deferred by the PNB without their knowledge and consent. There has to be another basis for their claim of having been freed from their obligation. It has to be determined if PNB was a holder for value. A holder for value is one who meets the requirement of being a holder in due course except the notice for want of consideration. In the case at bar, PNB may not be considered as a holder for value. Not only was PNB an immediate party or privy to the promissory note, knowing fully well that petitioners only signed as accommodation parties, but more importantly it was the Deed of Assignment which moved the petitioners to sign the promissory note. Petitioners also relied on the belief that there will be no alterations to the of the agreement. The deed provided that there will no further conditions which could possibly alter the agreement without the consent of the petitioner such as the grant of greater priority to obligations other than the payment of the loan. This notwithstanding, the bank approved the release of payments to the Company instead of the same to the bank. This was in violation of the deed of assignment and prejudiced the rights of petitioners. The bank was not in good faith—a requisite for a holder to be one in due course. 124

AMERICA BANK V. MACONDRAY 4 PHIL 695

FACTS: MANILA, P. I., August 12, 1902.


$300.00 At sight pay to my order three hundred dollars, value received, and charge to my . V. S. WOLFF. To F. H. TAYLOR & Co., Louisville, Kentucky. No ................................ [Indorsements.] V. S. Wolff. The signature is O. K. payment guaranteed. Protest, demand, and notice of nonpayment waived. Macondray & Company. Pay to First National Bank of San Francisco, or order. American Bank, Manila, P. I. H. B. Mulford, cashier. Pay to 3rd National Bank or order. The First National Bank of San Francisco. James K. Lynch, cashier. American Bank claims the right to recover from Wolff the amount of the bill of exchange upon the theory that Macondray guaranteed the payment of the instrument. This was refuted by Macondray by saying that it didn't guarantee the payment of the instrument. Instead, it only certified the signature of Wolff and that the statement “payment guaranteed xxx” was not written on said indorsement at the time it signed the firm name. HELD: An examination of the alleged indorsement of Macondray & Co. which appeared upon the said bill of exchange at the time of the trial, and the indorsement of said company at the time of the protest of said bill of exchange, shows beyond peradventure of doubt that the contention of the defendant is true, and that part of the indorsement which says "Payment guaranteed. Protest, demand, and notice of nonpayment waived" was added by some person after the signature of the defendant, Macondray & Co., and after the protest of said bill. The indorsement made by Macondray & Co. was changed, after said indorsement by said company, by adding thereto the statement "Payment guaranteed. Protest, demand, and notice of nonpayment waived," and that the indorsement actually made by Macondray & Co. was in the following form:


V. S. Wolff. The signature is O. K. Macondray & Co. The liability of an indorser of a bill of exchange, after due protest and notice of nonpayment and dishonor, is the same as that of the original obligors on such a contract, and any material alteration in the of this contract by the holder of the same, without the consent of the obligor, will relieve such obligor from all liability thereon. The original indrosement then of the company was for the purpose only of assuring the American Bank that the signature of Wolff was genuine—that is to say, that the person whom he represented himself to be. It was an indorsement for identification of the person only and not for the purpose of incurring liability to the payment of such bill of exchange. 125

VELASCO V. TAN LIVAN 43 PHIL 196

FACTS: Defendant issued to Soo 4 promissory notes. Later, Soo drew a bill of exchange in favor of PNB. The latter refused at first to encash the bill, which made Velasco indorse it so that it would be encashed. When it was encashed, Velasco didn't receive a single penny and it was claimed that the proceeds was received instead by Tan Liuan. In the ordinary course of business, the draft was dishonored when presented, and later Velasco was required to make a promissory note in favor of PNB. HELD: 126


FACTS: Reyes was engaged in the RTW business and held transactions with different department stores. She was about to collect payments from the department stores when she was informed that the payments had already been made, through crossed checks issued in her business’ name and the same were deposited with the bank. The bank consequently allowed its transfer to Sayson who later encashed the checks. This prompted Reyes to sue the bank and its manager for the return of the money. The trial and appellate court ruled in her favor. HELD:


There is no doubt that the checks were crossed checks and for payee’s only. Reyes was able to show that she has never authorized Sayson to deposit the checks nor to encash the same; that the bank had allowed all checks to be deposited, cleared and paid to one Sayson in violation of the instructions in the said crossed checks that the same were for payee’s only; and that Reyes maintained a savings with the bank which never cleared the said checks. Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the top left portion of the checks. The crossing is special where the name of a bank or a business institution is written between the two parallel lines, which means that the drawee should pay only with the intervention of the company. The crossing is general where the words written in between are “And Co.” and “for payee’s only”, as in the case at bar. This means that the drawee bank should not encash the check but merely accept it for deposit. The effects of crossing a check are as follows: 1. That the check may not be encashed but only deposited in the bank 2. That the check may be negotiated only once—to one who has an with a bank 3. That the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to the purpose The subject checks were accepted for deposit by the bank for the of Sayson although they were crossed checks and the payee wasn't Sayson but Reyes. The bank stamped thereon its guarantee that all prior endorsements and/or lack of endorsements guaranteed. By such deliberate and positive act, the bank had for all legal intents and purposes treated the said checks as negotiable instruments and accordingly assumed the warranty of the endorser. When the bank paid the checks so endorsed notwithstanding that title has not ed to the endorser, it did so at its peril and became liable to the payee for the value of the checks. 127 FACTS:

GULLAS V. PNB 62 PHIL 519


The US government issued a warrant payable to the order of Bacos. Gullas and Lopez appeared as indorsers of the warrant. It was then encashed by the PNB. Subsequently, the warrant was dishonored by the Insular Treasurer. Upon learning of the dishonor, notices were sent to Gullas by the bank but it wasn’t receive by Gullas as he was currently not within the vicinity. In the said notices served to Gullas and Lopez, it was indicated therein that since there was dishonor of the warrant, their corresponding s have been charged. It was only after the return of Gullas in Cebu when he received the notices. This caused prior inconvenience to Gullas. First, he wasn’t able to pay for his insurance due to the lack of credit in his bank and second, the incident was given prominence in Cebu to the great mortification of Gullas. HELD: The general indorser of a negotiable instrument engages that if it be dishonored and the necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder. In this connection, it has been held by a long line of authorities that notice of dishonor is necessary in order to charge an indorser and that the right of action against him doesn’t accrue until the notice is given. As a general rule, a bank has a right of setoff of the deposits in its hands for payment of any indebtedness on the part of a depositor but this should be enforced properly. It is undeniable in this case that PNB didn’t enforce its right properly. It made used of the money in the of Gullas prior to its sending of notice of dishonor. 128

ASSOCIATED BANK V. TAN 446 SCRA 282

FACTS: Tan deposited with the bank a check issued to him by Cheng. The check was reflected in the bank record and consequently, after being informed that the check has been cleared, Tan withdrew an amount from his . He then deposited money again to his to make good the value of the checks he issued to his suppliers. To his surprise, his suppliers went back to him and told him that the checks he issued all bounced due to insufficient funds. He demanded the bank to take positive steps about the incident but the bank didn’t do anything. HELD: As a general rule, a bank has the right of setoff of the deposits in its hands for payment of any indebtedness on the part of a depositor but this should


be enforced properly. This is the question to be resolved in this case—on whether the remedy was properly exercised by the bank. It is undisputed that purportedly as an act of accommodation to a valued client, petitioner allowed the withdrawal of the face value of the check prior to its clearing. That act certainly disregarded the clearance requirement of the banking system. Such a practice is unusual, because a check is not legal tender or money and its value can be properly transferred to a depositor’s only after the check has been cleared by the drawee bank. Under ordinary banking practice, after receiving a check for deposit, the bank either credits the amount to a depositor’s or infuse value to that only after the drawee bank shall have paid the amount. Before clearance, the collecting bank can only assume the risk that the check would be cleared and paid out. In this case, bank shouldn’t have allowed Tan to withdraw as it exceeded his outstanding balance. Furthermore, there was failure to show immediate notice to Tan. Notice was proper and ought to be expected given that Tan was a valued client. Also, as a general indorser, a notice of dishonor should have been first served upon him. And lastly, the deposit made by Tan was not unusual for a reputed businessman like Tan who ordinarily takes note of the amount of money he takes and releases to immediately deposit money in his current to answer for the postdated checks he had issued. 129

GONZALES V. RCBC 508 SCRA 459

FACTS: Gonzales’ mother received a foreign check from the US, drawn by a certain doctor on behalf of a medical group. Since the bank gives special accommodations to its employees to receive the full value of a check without awaiting the clearing period, Gonzales presented the foreign check to Gomez, the head of Retail Banking. After examining the same, Gonzales was asked to indorse it and so she did. Gomez then acquiesced to the early encashment of the check, signed the check but indicated therein her authority of “up to P17500 only”. Afterwards, Gonzales was asked to procure from another employee his signature and she was good to go. She did what she was asked to do and she received the value of the check. Thereafter, the check was dishonored due to having an irregular indorsement. Gonzales was informed about this. The first arrangement was that the value of the check would be deducted from her salary. Thereafter, she was asked to pay the check but she didn’t.


HELD: The warranties for which Alviar and Gonzales are liable as general indorsers in favor of subsequent indorsers extend only to the state of the instrument at the time of their indorsements, specifically that the instrument is genuine and in all respects what it purports to be; that they have good title thereto; that all prior parties had capacity to contract; and that the instrument, at the time of their endorsements, is valid and subsisting. This however cannot be used by someone which introduced the defect in the instrument, such as the bank in this case, which qualifiedly indorsed the same, to hold prior parties liable on the instrument because it results to an absurd situation whereby a subsequent party may render an instrument useless and inutile and let innocent parties bear the loss while he himself gets away scot-free. It cannot be overstressed that had it not been for the qualified indorsement of Gomez, there would have been no reason for the dishonor of the check. Sec. 67. Liability of indorser where paper negotiable by delivery. — Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser. CASE DIGESTS: SECTION 67 130


FACTS: Checks were deposited by petitioner in its current with the bank. These checks were from a certain Ramirez, a consistent better in its games, who was a sales agent from Inter-Island Gas. Inter-Island later found out that of the forgeries committed in the checks and thus, it informed all the parties concerned. Upon the demands on the bank as the collecting bank, it debited the of petitioner. Thereafter, petitioner tried to issue a check for payment of shares of stock but such was dishonored for insufficient funds. It filed a complaint against the bank. HELD: Considering that the petitioner indorsed the said checks when it deposited them with the respondent, the petitioner as an indorser guaranteed the genuineness of all prior indorsements thereon. The respondent which relied upon the petitioner’s warranty should not be held liable for the resulting loss.


Furthermore, the provision in the deposit slip on the right of reservation by the bank applies only when there is actual receipt of current funds or solvent credits. But as earlier on indicated, the transfer on of the checks were ineffectual because it was made under the mistaken and valid assumption that the indorsements of the payee thereon were genuine. Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is issible to show that, as between or among themselves, they have agreed otherwise. t payees or t indorsees who indorse are deemed to indorse tly and severally. APPLICATION OF SECTION  Applies only with respect to an indorser as against another but not as against a holder in due course  Every indorser is liable to all indorsers subsequent to him but not those prior to him whom he in turn makes liable T AND SEVERAL LIABILITY OF T PAYEES  t payees or t indorsees are deemed to indorse solidarily EFFECT OF LACK OF NOTICE OF DISHONOR, ETC.  One of the t indorsers cannot escape liability because proper notice of dishonor wasn’t given to his t indorser Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent. APPLICATION OF SECTION 69  Instruments payable to bearer  To escape personal liability as a party negotiating by delivery, the agent must disclose his principal and state that he is acting only as an agent VI. PRESENTATION FOR PAYMENT Sec. 70. Effect of want of demand on principal debtor. -Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its , payable at a special place, and he is able and willing



to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers. MEANING OF PRESENTMENT FOR PAYMENT  Production of a bill of exchange to the drawee for his acceptance, or to the drawee or acceptor for payment or the production of the promissory note to the person liable for payment of the same 1. Personal demand for payment at the proper place 2. With the bill or note in readiness to exhibit it as required and to receive payment and surrender it if the debtor is willing to pay

NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE  Presentment for payment must be made within the period required to the person primarily liable unless excused If the note is dishonored by non-payment, notice of dishonor by non-payment must be given to the person secondarily liable unless excused CASE DIGESTS: SECTION 70 131

CLARK V. SELLNER 42 SCRA 384

PRESENTMENT FOR PAYMENT NOT NECESSARY TO CHARGE PERSONS PRIMARILY LIABLE  It cannot be validly claimed that it is presentment of the bill which is the operative act that makes the acceptor liable under his acceptance

FACTS: Sellner with two other persons, signed a promissory note solidarily binding themselves to pay to the order of R.N Clark. The note matured but the amount wasn't paid. The defendant alleges that he didn't receive any amount of the debt; that the instrument wasn't presented to him for payment and being an accommodation party, he is not liable unless the note is negotiated, which wasn't done.

PAYABLE AT A SPECIAL PLACE  If the bill is payable at the PNB, is it necessary to make presentment for payment to X in order to charge him? No, the rule is the same. The only effect is that if, X is able and willing to pay the bill at the PNB at maturity, it is equivalent to a tender of payment on the part of drawee X.

HELD: On the first issue, the liability of Sellner as one of the signers of the note, is not dependent on whether he has or has not, received any part of the debt. The defendant is really and expressly one of the t and several debtors of the note and as such he is liable under the provisions of Section 60 of the NIL.

PRESENTMENT NECESSARY TO CHARGE PERSONS SECONDARILY LIABLE

As to the presentment for payment, such action is not necessary in order to charge the person primarily liable, as is the defendant Sellner.

NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE IN BILLS OF EXCHANGE 1. In the three steps required by law, presentment for acceptance to the drawee or negotiation within reasonable time after acquisition unless excused 2. If the bill is dishonored by non-acceptance, notice of dishonor by non-acceptance must be given to persons secondarily liable unless excused and in case of foreign bills, protest for dishonor by non-acceptance must be made unless excused 3. But if the bill is accepted, or if the bill isn’t required to be presented for acceptance, it must be presented for payment to the persons primarily liable unless excused 4. If the bill is dishonored by non-payment, notice of dishonor by non-payment must be also be given to person secondarily liable unless excused, and in case of foreign bills, protest for dishonor by non-pay7ment must be made unless excused


As to whether or not Sellner is an accommodation party, it should be taken into that by putting his signature to the note, he lent his name, not to the creditor, but to those who signed with him placing him in the same position and with the same liability as the said signers. It should be noted that the phrase”without receiving value therefore” as used in section 29 means “without receiving value by virtue of the instrument” and not, as it apparently is supposed to mean, “without receiving payment for lending his name.” It is immaterial as far as the creditor is concerned, whether one of the signers has or has not received anything in payment for the use of his name. In this case, the legal situation of Sellner is that of a t surety who upon the maturity of the note, pay the debt, demand the collateral security and dispose of it to his benefit. As to the plaintiff, he is a holder for value.



Sec. 71. Presentment where instrument is not payable on demand and where payable on demand. - Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after its issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. WHEN PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME  The presentment must be made at the date of maturity WHEN PAYABLE ON DEMAND IN CASE OF NOTES  The time for presentment depends upon whether the instrument is a bill or a note  If it is a note, it must be presented for payment within reasonable time for issue  If it is a bill, it must be presented for payment within reasonable time from last negotiation and not for issue, as in the case of notes CASE DIGESTS: SECTION 71 132

FAR EAST REALTY INVESTMENT V. CA 166 SCRA 256

FACTS: Private respondents approached petitioner and asked the latter to extend to them an accommodation loan. They proposed to pay with interest. They even gave a check, signed by Tat, drawn against Chinabank, and signed at the back by the private respondents. They said that they will change the check with cash after one month and if not, the check could be presented for payment and it would be paid. The loan was actually extended but when the check was presented for payment, it was dishonored—the on which it is drawn has long been closed. The trial courts held in favor of petitioner but this was reversed by the appellate court by ruling that the check has ed through other hands before reaching the petitioner and the said check wasn’t presented within reasonable time and after its issuance. HELD: Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after issue, except that in case of a bill of exchange, presentment for payment is sufficient if made within reasonable time after the last negotiation thereof.

Notice may be given as soon as instrument has been dishonored and unless delay is excused must be given within the time fixed by law. In this case, presentment and notice of dishonor were not made within reasonable time. September 1960—date when the check was drawn March 1964—presented to drawee bank April 1968—notice of dishonor 133

REPUBLIC V. PNB 3 SCRA 851

FACTS: The government filed a complaint for escheat of certain unclaimed bank deposits balances pursuant to a law, which provides that unclaimed balances—credits, money, bullion, security or other evidence of indebtedness of any kind, and interest with banks—shall be deposited with the government if it remains to be unclaimed within a period of 10 years of more. One of the banks against the complaint has been filed is First National City Bank. Although it concedes that the government had the right to claim the unclaimed deposit balances, it seeks to exclude some which, according to it, are not within the purview of credits and deposits as defined in law. the trial court held in favor of the bank, excluding from the claim the manager’s checks and other demand drafts. HELD: Credit is a sum credited on the books of a company to a person who appears to be entitled to it. it presupposes a creditor-debtor relationship and may be said to imply ability, by reason of property or estates, to make a promised payment. It is correlative to indebtedness, and that which is due to any person, as distinguished to that which he owes. Do demand drafts and telegraphic orders come within the purview of credits or deposits employed in the law? Since the demand drafts herein involved have not been presented either for acceptance or payment, the inevitable consequence is that the bank never had the chance of accepting or receiving them. Verily, the bank never became a debtor of the payee concerned and as such the aforesaid



drafts cannot be considered as credits subject to escheat within the meaning of the law. Further, a demand draft is different from a cashier’s check for this is a primary obligation of the bank which issues it and constitutes a written promise to pay upon demand. It is an order to a third party purporting to be drawn upon a deposit of funds. If there is any consolation, the telegraphic orders can be escheated in favor of the government. The agreement to remit creates a contractual obligation and has been termed a purchase and sale transaction. The purchaser of a telegraphic transfer upon making payment completes the transaction insofar as he is concerned, though insofar as the remitting bank is concerned the contract is executory until the credit is established. The drawer bank has already been paid the value of the telegraphic order. It appears in the books of the bank that the amounts represented by the orders appear in the names of respective payees. If the latter choose to demand payment, the bank had the obligation to pay them. 134

THE INTERNATIONAL SPOUSES GUECO 351 SCRA 516

CORPORATE

BANK

V.

FACTS: Gueco spouses obtained a loan from ICB (now Union Bank) to purchase a car. In consideration thereof, the debtors executed PNs, and a chattel mortgage was made over the car. As the usual story goes, the spouses defaulted in payment of their obligations and despite the lowering of the amount to be paid, they still failed to pay. Thereafter, they tendered a manager’s check in favor of the bank. Nonetheless, the car was still detained for the spouses refused to sign the t motion to dismiss. The bank averred that the t motion to dismiss is part of standard office procedure to preclude the filing of other claims. Because of this, the spouses filed an action for damages against the bank. And by the time the case was instituted, the check had become stale in the hands of the bank. HELD: The main issue though unrelated to NIL in this case was whether or not the g of the t motion to dismiss a part of the compromise agreement between the spouses and the bank. The answer is no, it is not a part of the compromise agreement entered by the parties. And thus, the g is dispensible in releasing the car to the spouses.


And on the ancillary issue of the case, which is the relevant issue for the subject, whether or not the spouses should replace the check they paid to the bank after it became stale, the answer is yes. It appeared that the check has not been encashed. The delivery of the manager’s check did not constitute payment. The original obligation to pay still exists. Indeed, the circumstances that caused the non-presentment of the check should be considered to determine who should bear the loss. In this case, ICB held on the check and refused to encash the same because of the controversy surrounding the g of the t motion to dismiss. There is no bad faith or negligence on the part of ICB. A stale check is one which has not been presented for payment within a reasonable time after its issue. It is valueless and, therefore, should not be paid. A check should be presented for payment within a reasonable time after its issue. Here, what is involved is a manager’s check, which is essentially a bank’s own check and may be treated as a PN with the bank as a maker. Even assuming that presentment is needed, failure to present for payment within a reasonable time will result to the discharge of the drawer only to the extent of the loss caused by the delay—but here there is no loss sustained. Still, such failure to present on time does not wipe out liability. Sec. 72. What constitutes a sufficient presentment. - Presentment for payment, to be sufficient, must be made: (a) By the holder, or by some person authorized to receive payment on his behalf; (b) At a reasonable hour on a business day; (c) At a proper place as herein defined; (d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made. APPLICATION OF SECTION  Establishes the requisites for a sufficient presentment for payment WHO MAKES PRESENTMENT  Presentment for payment must be made by the holder of the instrument or by some person authorized to receive payment on his behalf


TIME FOR MAKING PRESENTMENT  At a reasonable hour on a business day CASE DIGESTS: SECTION 72 135

STATE INVESTMENT HOUSE V. IAC 175 SCRA 310

FACTS: New Sikatuna requested for a loan from Spouses Chua. Latter issued postdated crossed checks in favor of former. Thereafter, Sikatuna sold checks to SIHI which upon deposit, checks were dishonored. The trial court decided the case in favor of SIHI. HELD: Jurisprudence provides the following effects of crossing a check: 1. The check may not be encashed but only deposited in the bank 2. The check may be negotiated only once—to one who has an with a bank 3. The act of crossing the check serves the warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. The checks in issue were crossed generally and issued payable to New Sikatuna Wood which could only mean that the drawer has intended the same for deposit only by the rightful person. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment and the liability didn't attach to the drawer. Thus, in the absence of due presentment, the drawer didn't become liable. Consequently, no right of recourse is available to petitioner against the drawer of the subject checks considering that the petitioner is the proper party authorized to make presentment of the checks in question. Nonetheless, the holder could still collect from New Sikatuna if the latter doesn't have a valid excuse from refusing payment. Sec. 73. Place of presentment. - Presentment for payment is made at the proper place: (a) Where a place of payment is specified in the instrument and it is there presented;


(b) Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented; (c) Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; (d) In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. (ORDER OF PREFERENCE) Sec. 74. Instrument must be exhibited. - The instrument must be exhibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it. NECESSITY OF EXHIBITION OF INSTRUMENT  Presentment includes not only demand for payment but also the exhibition of the instrument  Purpose is to enable the debtor to determine the genuineness of the instrument and the right of the holder to receive payment and to enable him to retain possession upon payment A DEMAND BY TELEPHONE IS INSUFFICIENT WHEN EXHIBITION EXCUSED 1. When the debtor doesn’t demand to see the instrument but refuses payment on some other grounds 2. When the instrument is lost or destroyed CASE DIGESTS: SECTION 74 136

ANSALDO V. CA 177 SCRA 8

FACTS: TFC issued promissory notes in favor of PCIB. At about the same time, TFC extended loans to Ansaldo and Reyes. These loans were evidenced by promissory notes, each waiving demand, presentment, protest, and notice of protest and non-payment. TFC then paid part of its obligation with PCIB. To pay for its outstanding balance, it endorsed the notes issued by Ansaldo and Reyes. Claiming that the notes have matured without payment by Ansaldo and Reyes, the bank instituted actions against them.



HELD: The contention of Ansaldo that the instrument should have been first presented to him is bereft of merit. First, it couldn’t be first raised on appeal. Second, it is a petty issue for if according to him, such an exhibition was needed to give him opportunity to determine the genuineness of the instrument, this was rendered unnecessary not only by his omission to contest it, but also by his ission of the authenticity of the note implicit from his averment that he made substantial payments thereon and second, he made a waiver of demand, presentment, etc. Sec. 75. Presentment where instrument payable at bank. Where the instrument is payable at a bank, presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it at any time during the day, in which case presentment at any hour before the bank is closed on that day is sufficient.

SGD. A This gives rise to the presumption that A has an with RCBC Rockwell and the bank would pay on of A.

NOTES FOR WEEK #11 AUGUST 27-SEPTEM BER , 1, 2007 Sec. 76. Presentment where principal debtor is dead. - Where the person primarily liable on the instrument is dead and no place of payment is specified, presentment for payment must be made to his personal representative, if such there be, and if, with the exercise of reasonable diligence, he can be found. Sec. 77. Presentment to persons liable as partners. - Where the persons primarily liable on the instrument are liable as partners and no place of payment is specified, presentment for payment may be made to any one of them, even though there has been a dissolution of the firm.


SECTIONS 76 TO 78 NOT APPLICABLE WHERE PLACE SPECIFIED  Applies only where there is no place specified WHERE PERSON PRIMARILY LIABLE DEAD  Presentment must be made to the executor or if there is one and if he can be found  The holder must use diligence to find the personal representative if there be one  The person primarily liable is dead, there is a personal representative, and no place of payment indicated in the instrument—if there is a place indicated, then presentment should be done there WHERE PERSONS PRIMARILY LIABLE ARE PARTNERS THE PRESENMENT MUST BE MADE TO ANY ONE OF THEM WHERE PERSONS PRIMARILY LIABLE ARE T DEBTORS, PRESENTMENT MUST BE MADE TO ALL OF THEM

I PROMISE TO PAY B P1000 AT RCBC ROCKWELL.



Sec. 78. Presentment to t debtors. - Where there are several persons, not partners, primarily liable on the instrument and no place of payment is specified, presentment must be made to them all.

Sec. 79. When presentment not required to charge the drawer. -Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. Sec. 80. When presentment not required to charge the -Presentment is not required in order to charge an where the instrument was made or accepted accommodation and he has no reason to expect instrument will be paid if presented.

indorser. indorser for his that the

APPLICATION OF SECTION 79 AND 80  These provisions give exceptions to the general rule that if no presentment for payment is made, the persons primarily liable are discharged WHERE DRAWER NEED NOT BE GIVEN NOTICE  Where A withdraws his funds from X, drawee bank, so that they are not sufficient to pay the bill, he has no right to expect or require that the drawee or acceptor would pay the instrument




Accordingly, where F holder doesn’t make a presentment to X, A drawer would not be discharged by such failure

PRESENTMENT IS NOT REQUIRED TO CHARGE THE DRAWER IN THE FOLLOWING CASES 1. In case the check upon which payment has been stopped 2. Where the drawer’s balance is less than the amount of the check. The mere fact however that the drawer has no funds with drawee at the time he draws, doesn’t render presentment unnecessary if he still has reasonable grounds to believe that the instrument will be paid, particularly when provision has been made for payment of any bill drawn by the drawer on the drawee 3. Where the drawer of a bill containing the words “Pay from balance” had no money on deposit with the drawee but expected to arrange with the broker to cover drafts WHEN INDORSER NEED NOT BE GIVEN NOTICE  A makes a note for the accommodation of B, payee.

Sgd. A BC CD DE EF 

F need not make presentment for payment to A in order to charge B indorser  B didn’t give any value to A B has no reason to expect that the note will be paid upon presentment B is considered to be the ultimately liable party since he is the accommodated party  With regard C and D, presentment for payment is still required Sec. 81. When delay in making presentment is excused. - Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence.


Overwhelming calamity, malignant diseases, interruption of trade negotiations by political circumstances, etc.

Sec. 82. When presentment for payment is excused. - Presentment for payment is excused: (a) Where, after the exercise of reasonable presentment, as required by this Act, cannot be made;

diligence,

(b) Where the drawee is a fictitious person; (c) By waiver of presentment, express or implied. APPLICATION OF SECTION 82  What is excused is failure to make presentment for payment and not mere delay WAIVER MAY BE EXPRESS OR IMPLIED

I promise to pay B P1000.

EXCUSES FOR DELAY



IMPLIED WAIVER  Implied waiver of presentment may be manifested by any language or conduct or any agreement between the parties reasonably calculated to lead the holder to believe that presentment is waived or to mislead or prevent him from treating the bill as he otherwise would SUMMARY OF RULES AS TO PRESENTMENT FOR PAYMENT 1. Presentment for payment is not necessary to charge persons primarily liable 2. But it is necessary to charge a person secondarily liable except a. As to drawer, under Section 79 b. As to indorser, under Section 80 c. When dispensed with under Section 82 d.. When the instrument has been dishonored by non-acceptance Sec. 83. When instrument dishonored by non-payment. - The instrument is dishonored by non-payment when: (a) It is duly presented for payment and payment is refused or cannot be obtained; or (b) Presentment is excused and the instrument is overdue and unpaid. WHEN PAYMENT REFUSED, ETC.




The instrument must be duly presented for payment and payment is either refused or cannot be obtained

WHEN PRESENTMENT IS EXCUSED  Presentment for payment is excused  Instrument is overdue  It is unpaid Sec. 84. Liability of person secondarily liable, when instrument dishonored. - Subject to the provisions of this Act, when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. AFTER DISHONOR, INDORSERS, ETC. ARE PRIMARILY LIABLE  As to holder, after an instrument is dishonored by non-payment , the persons secondarily liable thereon ceases to be secondarily liable  They become principal debtors and their liability becomes the same as that of the principal obligors—provided a notice of dishonor has been given to them  If no notice is given, they are discharged  If they are charged by dishonor and notice, while it is true that they become principal debtors as to the holder, yet as among themselves, persons secondarily liable are presumed liable in the order that they become parties to the instrument CASE DIGEST: SECTION 84 137

PNB V. SEETO 91 SCRA 757

FACTS: Seeto called at a branch of bank and presented a check payable to cash or bearer, and drawn by Kiao against PBC. After consultation with the employees, Seeto made a general and qualified indorsement of the check. He was then paid the amount of the check by bank. The check was consequently dishonored, a letter was sent to Seeto and was asked to refund the money given to him. A second letter was sent to him and he averred that case against him be deferred while he inquired about why the check was dishonored. Thereafter, he refused to pay, alleging that the against the check was drawn had sufficient funds when the check was drawn and if the bank didn’t delay in clearing the check, there would have been sufficient funds.


The appellate court reversed the lower court in its decision. It ruled that the bank was guilty of unreasonably retaining and withholding the check, and that the delay in the presentment was inexcusable, so that respondent thereby was discharged from liability. HELD: Section 84 is applicable, nonetheless, it should be read in correlation with Section 186, which says that presentment should be within reasonable time. Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday. Sec. 86. Time; how computed. - When the instrument is payable at a fixed period after date, after sight, or after that happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment. Sec. 87. Rule where instrument payable at bank. - Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the of the principal debtor thereon. EFFECT OF FAILURE TO MAKE PRESENTMENT FOR PAYMENT—BUT SUPPOSE THAT B OR ANY SUBSEQUENT HOLDER FAILS TO MAKE A PRESENTMENT FOR PAYMENT AT THE PNB, IS A DRAWER DISCHARGED?  There is a conflict of authorities  Agbayani’s view: A is not discharged because he is primarily liable Sec. 88. What constitutes payment in due course. - Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective. REQUISITES FOR PAYMENT IN DUE COURSE 1. Payment must be made at or after the date of maturity 2. Payment must be to the holder


3.  



Payment must be made by the debtor in good faith and without notice that his title is defective If payment is made before maturity, it would constitute a negotiation back to the person primarily liable and he can renegotiate it. Payment doesn’t discharge the instrument. Payment to indorsee who is not in possession of the instrument is not payment to a person other than the holder is at the risk of the party so paying if the person wasn’t authorized by the holder to receive payment. So also, the payment to the original payee after the note had been transferred by him to a holder in due course doesn’t discharge the note Payment to a person by the debtor who knows that such person stole it, is not payment in due course, as such payment is not in good faith. The maker of a note or the acceptor of a bill must satisfy himself, when it is presented for payment, that the holder traces his title through genuine indorsements, and if there is a forged indorsement, it is a nullity and no right es by it

PAYMENT MUST BE MADE TO POSSESSOR OF INSTRUMENT  The party making payment must insist on the presentment of the paper by the party demanding payment in order to make sure that it is at the time in his possession and not outstanding in another  A receipt taken is no protection  If at the time he makes payment, it is outstanding and in the hands of a holder in due course, he must pay it again  Possession of notes by the maker is presumptive evidence



When an instrument is dishonored by NON-ACCEPTANCE or NONPAYMENT, notice of such dishonor must be given to persons secondarily liable, as the case may be. Otherwise, such parties are discharged

I PROMISE TO PAY F OR ORDER. SGD. A *BCDEF *F makes presentment for payment to A, maker, on the date of maturity. A refuses to pay. *If F doesn’t give notice of dishonor to B, C, D and E and prove the same, they are discharged and F cannot file an action against them. BURDEN OF PROOF  It is upon the plaintiff who seeks to enforce the defendant’s liability upon a negotiable instrument as indorser to establish said liability by proving that notice was given to the defendant within the time and in the manner required by the law that the instrument in question had been dishonored  Where these facts are not proven, the plaintiff doesn’t sufficiently establish the defendant’s liability  Where there is no proof in record tending to show that the plaintiff gave any notice whatsoever to the defendant that the instrument in question had been dishonored, said plaintiff hasn’t established its cause of action

VII. NOTICE OF DISHONOR

PERSONS PRIMARILY LIABLE NEED NOT BE NOTIFIED

Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged.

DOES FAILURE TO GIVE NOTICE OF DISHONOR OF A PREVIOUS INSTALLMENT TO PERSONS SECONDARILY LIABLE ALSO DISCHARGE THEM ON THE SUCCEEDING INSTALLMNETS?  It depends on whether the instrument contains an acceleration clause

MEANING OF NOTICE  By notice of dishonor is meant bringing either verbally or by writing, to the knowledge of the drawer or indorser of an instrument, the fact that a specified negotiable instrument, upon proper proceedings taken, has not been accepted or hasn’t been paid, and that the party notified is expected to paid it NECESSITY AND PURPOSE OF NOTICE


RULE WHERE THERE IS NO ACCELERATION CLAUSE  Where the instrument contains no acceleration clause, failure to give notice of dishonor on previous installment doesn’t discharge drawers and indorsers as to the succeeding installments, and therefore, the holder can file an action against them for such succeeding installments, notice is given  The reason is that each separate installment is equivalent to another note



RULE WHERE THERE IS AN ACCELERATION CLAUSE  It depends whether the clause is optional or automatic  If it is automatic, failure to give notice of dishonor as to a previous installment will discharge the persons secondarily liable as to the succeeding installments  If it is optional and it is not exercised, the rule would be the same as where there is no acceleration clause EXCEPTIONS TO REQUIREMENT OF NOTICE  The law provides for exceptions on failure to give notice would discharge drawer or indorsers CASE DIGESTS: SECTION 89 139

ASIA BANKING CORPORATION V. JAVIER 44 PHIL 777

FACTS: Chaves drew 2 checks on different occasions against PNB in favor La Insular. These checks were indorsed by the limited partners of La Insular and subsequently deposited by Chaves in his with Asia Bank. These were then presented for payment by Asia Bank but was dishonored by PNB on reason that there was insufficient funds. This prompted Asia Bank to file a case against one of the partners of La Insular for payment. HELD: When a negotiable instrument is dishonored by non-payment or nonacceptance, notice thereof must be given to the drawer and each of the inodrsers, and those who are not notified shall be discharged from liability, except where this act provides otherwise. According to this, the indorsers are not liable unless they are notified that the instrument is dishonored. Then, under the general principle of law on procedure, it will be incumbent upon plaintiff, who seeks to enforce the defendant’s liability upon these checks as indorser, to establish said liability by proving that notice was given within the time and in the manner required by law. if these facts are not proven, the plaintiff has not sufficiently established the defendant’s liability. There is no proof in record to show that plaintiff has indeed gave any notice to defendant that the checks had been dishonored. Therefore there is no cause of action established. 140

FIRESTONE V. CA 353 SCRA 601

FACTS:


Fojas Arca and Firestone Tire entered into a franchising agreement wherein the former had the privilege to purchase on credit the latter’s products. In paying for these products, the former could pay through special withdrawal slips. In turn, Firestone would deposit these slips with Citibank. Citibank would then honor and pay the slips. Citibank automatically credits the of Firestone then merely waited for the same to be honored and paid by Luzon Development Bank. As this was the circumstances, Firestone believed in the sufficient funding of the slips until there was a time that Citibank informed it that one of the slips was dishonored. It wrote then a demand letter to Fojas Arca for the payment and damages but the latter refused to pay, prompting Firestone to file an action against it. HELD: The withdrawal slips, at the outset, are non-negotiable. Hence, the rule on immediate notice of dishonor is non-applicable to the case at hand. Thus, the bank was under no obligation to give immediate notice that it wouldn't make payment on the subject withdrawal slips. Citibank should have known that withdrawal slips are not negotiable instruments. It couldn't expect then the slips be treated like checks by other entities. Payment or notice of dishonor from respondent bank couldn't be expected immediately in contrast to the situation involving checks. In the case at bar, Citibank relied on the fact that LDB honored and paid the withdrawal slips which made it automatically credit the of Firestone with the amount of the subject withdrawal slips then merely waited for LDB to honor and pay the same. It bears stressing though that Citibank couldn't have missed the non-negotiable character of the slips. The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to be a substitute for money. The withdrawal slips in question lacked this character. The withdrawal slips deposited were not checks as Firestone its and Citibank generally was not bound to accept the withdrawal slips as a valid mode of deposit. Nonetheless, Citibank erroneously accepted the same as such and thus, must bear the risks attendant to the acceptance of the instruments. Firestone and Citibank could not now shift the risk to LDB for their committed mistake. WHAT IF THE SLIPS WERE NEGOTIABLE?  Citibank would be the holder, LDB the drawee, Fojas Arca the drawer and Firestone would be indorser Applying the rules on notice of dishonor, Citibank as the “holder” should have sent the notices of dishonor to Fojas Arca and Firestone,



being the drawer and indorser respectively. Another, Firestone may have sent the notice to Fojas Arca. 141

GULLAS V. PNB 62 PHIL 519

FACTS: The US government issued a warrant payable to the order of Bacos. Gullas and Lopez appeared as indorsers of the warrant. It was then encashed by the PNB. Subsequently, the warrant was dishonored by the Insular Treasurer. Upon learning of the dishonor, notices were sent to Gullas by the bank but it wasn’t receive by Gullas as he was currently not within the vicinity. In the said notices served to Gullas and Lopez, it was indicated therein that since there was dishonor of the warrant, their corresponding s have been charged. It was only after the return of Gullas in Cebu when he received the notices. This caused prior inconvenience to Gullas. First, he wasn’t able to pay for his insurance due to the lack of credit in his bank and second, the incident was given prominence in Cebu to the great mortification of Gullas. HELD: The general indorser of a negotiable instrument engages that if it be dishonored and the necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder. In this connection, it has been held by a long line of authorities that notice of dishonor is necessary in order to charge an indorser and that the right of action against him doesn’t accrue until the notice is given. As a general rule, a bank has a right of setoff of the deposits in its hands for payment of any indebtedness on the part of a depositor but this should be enforced properly. It is undeniable in this case that PNB didn’t enforce its right properly. It made used of the money in the of Gullas prior to its sending of notice of dishonor. Sec. 90. By whom given. - The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given. NOTICE MAY BE GIVEN BY 1. The holder 2. Another in behalf of the holder


3. 4.

Any party to the instrument who may be compelled to pay it to the holder—against any party whom he has a right of reimbursement should such party giving notice pay the instrument Another person in behalf of such party

Sec. 91. Notice given by agent. - Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to given notice, whether that party be his principal or not. NOTICE OF AGENT  Notice may be given by the agent and it is not necessary that the agent be authorized by the principal  He may give the notice in his name or in the name of his principal  A collecting bank may give notice, and where it has done so, no notice from the owner is necessary  And where the cashier of the drawee bank which had refused to pay a check gave the check to a notary to protest, which was done, it was held that the possession of the check by the cashier was evidence of his agency of the holder to present it for protest Sec. 92. Effect of notice on behalf of holder. - Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. MEANING OF BENEFIT  Benefit refers to the right to charge the person secondarily liable who received notice  The party to whom this benefit inures can charge the party receiving notice of dishonor, even if himself didn’t give the notice INURES TO THE BENEFIT OF THE FOLLOWING 1. All parties prior to the holder, who have a right of recourse against the party to whom the notice is given 2. All holders subsequent to the holder giving notice I PROMISE TO PAY B OR ORDER P1000. SGD.A *BCDEF *F notifies B, C, D, E 1. The notice of F to B inures to the benefit of C, D and E, as they are parties prior to F, who have a right of recourse against B



2. 3. 4.

The notice of F to C inures to the benefit of D and E but not for the benefit of B The notice of F to D inures to the benefit of E but not to B and C Suppose that after notice given by F, further negotiation was made to G; GHI. The notice given by F inures to the benefit of all of them. And they don’t need to give another notice of dishonor to B, C, D, and E to make them liable.

Sec. 93. Effect where notice is given by party entitled thereto. -Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder and all parties subsequent to the party to whom notice is given. APPLICATION OF THIS SECTION  Follows the same principle as the preceding section but this time, the person giving notice is not the holder but a party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right of reimbursement from the party to whom notice is given Sec. 94. When agent may give notice. - Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder, and the principal, upon the receipt of such notice, has himself the same time for giving notice as if the agent had been an independent holder. WHEN AGENT’S NOTICE MUST BE GIVEN  When an instrument is dishonored in the hands of an agent, he can do either of the following o Directly give notice to the persons secondarily liable thereon o Give notice to his principal  If the agent decides to give notice to the principal, he must give notice within the time allowed by law as if he were a holder  The principal has also the same time to give notice to the persons secondarily liable Sec. 95. When notice sufficient. - A written notice need not be signed and an insufficient written notice may be supplemented and validated by verbal communication. A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is given is in fact misled thereby.


Sec. 96. Form of notice. - The notice may be in writing or merely oral and may be given in any which sufficiently identify the instrument, and indicate that it has been dishonored by non-acceptance or non-payment. It may in all cases be given by delivering it personally or through the mails. FORM AND CONTENTS OF NOTICE  It may be oral or in writing  Whether oral or in writing, it must contain 1. SUFFICIENT DESCRIPTION OF THE INSTRUMENT TO IDENTIFY IT, and 2. A STATEMENT THAT IT HAS BEEN PRESENTED FOR PAYMENT AND FOR ACCEPTANCE, AND THAT IT HAS BEEN DISHONORED, and 3. A STATEMENT THAT THE PARTY GIVING NOTICE INTENDS TO LOOK FOR THE PARTY ADDRESSED FOR PAYMENT EFFECTS OF DEFECTS IN NOTICE  If the notice is not signed, it will not invalidate it  If the notice is written and doesn’t contain #2 and #3, it can be supplemented by oral communication stating the things lacking  If there is misdescription, it would only vitiate the notice if the person is misled thereby NOTICE BY PHONE  This could be done however it must be shown that the party to be notified was really communicated with, that is, fully identified as to the party at the receiving end of the line MANNER OF GIVING NOTICE  May be given by personal delivery or by mail Sec. 97. To whom notice may be given. - Notice of dishonor may be given either to the party himself or to his agent in that behalf. NOTICE MAY BE GIVEN 1. To the party himself 2. To his agent in his behalf  An accommodation indorser is entitled to notice  An irregular indorser must also be given notice if he is to be charged  And if notice is given to an agent, he must be duly authorized to receive the notice of dishonor AGENT DISTINGUISHED FROM PERSON PRESENT IN ABSENCE OF PARTY





Notice to agent must be distinguished from notice attempted to be given to party himself where he is absent at his place of business or residence. In such a case, the notice may be left with anyone found in charge therein

Sec. 98. Notice where party is dead. - When any party is dead and his death is known to the party giving notice, the notice must be given to a personal representative, if there be one, and if with reasonable diligence, he can be found. If there be no personal representative, notice may be sent to the last residence or last place of business of the deceased. REQUISITES FOR NOTICE TO REPRESENTATIVE 1. Death is known to the party giving notice 2. There is a personal representative 3. If with reasonable diligence he could be found WHEN NOTICE MAY BE SENT TO THE LAST RESIDENCE OR PLACE OF BUSINESS 1. If his death is not known to the party giving notice 2. Or although his death is known to the party giving notice but there is no personal representative 3. If there be one but he cannot be found with reasonable diligence



In such cases, notice be given to the party himself or his trustee or assignee

Sec. 102. Time within which notice must be given. - Notice may be given as soon as the instrument is dishonored and, unless delay is excused as hereinafter provided, must be given within the time fixed by this Act. MAY NOTICE OF DISHONOR BE GIVEN BEFORE THE DATE OF MATURITY  No, such notice would be insufficient because an instrument cannot be said to be dishonored for non-payment unless presented and presentment must be made on the date of maturity unless of course, presentment is excused  But even in such cases, the instrument cannot be said to be dishonored by non-payment unless it is overdue and unpaid  Notice of dishonor can be given only after the instrument has been actually dishonored, and notice given before the paper due is premature and insufficient, regardless of the indorser’s knowledge that the maker was in default

Sec. 99. Notice to partners. - Where the parties to be notified are partners, notice to any one partner is notice to the firm, even though there has been a dissolution.

MAY NOTICE OF DISHONOR BE GIVEN ON THE DATE OF MATURITY?  Yes, provided that the instrument has been presented for payment and is has been dishonored  But if the instrument is payable at a bank, it is not dishonored if the maker deposits the amount of the instrument before the close of banking hours. Hence, notice of dishonor must be given after the close of banking hours on the date of maturity

Sec. 100. Notice to persons tly liable. - Notice to t persons who are not partners must be given to each of them unless one of them has authority to receive such notice for the others.

PURPOSE OF PROMPT NOTICE  To give the persons secondarily liable every opportunity to secure themselves such as to enable the party to be charged to preserve and protect his rights against prior parties

PROVISION WOULD APPLY ONLY TO T DRAWERS


Sec. 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, notice may be given either to the party himself or to his trustee or assignee.

142

APPLICATION OF SECTION 1. Where the party secondarily liable has been declared a bankrupt or an insolvent 2. Where he has made an assignment of his properties for the benefits of creditors


FAR EAST REALTY INVESTMENT V. CA 166 SCRA 256

FACTS: Private respondents approached petitioner and asked the latter to extend to them an accommodation loan. They proposed to pay with interest. They even gave a check, signed by Tat, drawn against Chinabank, and signed at the back by the private respondents. They said that they will change the check with cash after one month and if not, the check could be



presented for payment and it would be paid. The loan was actually extended but when the check was presented for payment, it was dishonored—the on which it is drawn has long been closed. The trial courts held in favor of petitioner but this was reversed by the appellate court by ruling that the check has ed through other hands before reaching the petitioner and the said check wasn’t presented within reasonable time and after its issuance. HELD: Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after issue, except that in case of a bill of exchange, presentment for payment is sufficient if made within reasonable time after the last negotiation thereof. Notice may be given as soon as instrument has been dishonored and unless delay is excused must be given within the time fixed by law. In this case, presentment and notice of dishonor were not made within reasonable time. September 1960—date when the check was drawn March 1964—presented to drawee bank April 1968—notice of dishonor 143

LINA LIM LAO V. CA 274 SCRA 572

FACTS: Lao was a junior officer of Premier Investment House. She was authorized to sign checks in behalf of the corporation. On a relevant date, she met Fr. Palijo, the provincial treasurer for the Society of the Divine World. Palijo was authorized to invest donations with Premiere and had been investing the Society’s money with Premiere. Thereafter, he was issued checks by Premiere, signed by its authorized officers, one of them being Lao. Upon presentment however for encashment, said checks were dishonored as they were drawn on insufficient funds. Palijo immediately made demands to Premiere but to no avail. Premiere was then placed under receivership. This prompted Palijo to file cases against Lao and Asprec who was the then head of operations. HELD: The following are the elements of the first paragraph of BP22: 1. That a person makes or draws or issues any check


2. 3.

4.

That the check is made or drawn or issued to apply on or for value That the person who makes or draws and issues the check knows at the time of issue that he doesn’t have sufficient funds or in credit with the drawee bank for the payment of such check in full upon its presentment That the check is subsequently dishonored by the drawee for insufficiency of funds or credit, or would have been dishonored for the same reason had not the drawer, without any valid reason, ordered the bank to stop payment.

In the present case, the fact alone that petitioner was a signatory to the checks subsequently dishonored merely engenders the prima facie presumption that she knew of the insufficiency of funds, but it doesn’t render her automatically guilty of violating BP22. The prosecution has the burden of proof to prove all the elements of the crime. If such knowledge of insufficiency of funds is proven to be actually absent or non-existent, the accused shouldn’t be held liable for the offense defined under the first paragraph of BP22. Although the offense is mala prohibitum, the prosecution thereby is not excused from its responsibility of proving beyond reasonable doubt all the elements of the crime, one of which is knowledge of insufficiency of funds. Lao didn’t have actual knowledge of the insufficiency of funds from the time she drew the checks up to the time that the checks were subsequently dishonored by the bank. Further, the scope of Lao’s duties didn’t encom the funding of the corporation’s checks, her duties were limited to the marketing department of the Binondo branch. It was further found out in the trial court that when Lao drew the checks, she signed the check blank as to the name of the payee and the amount to be drawn, and without knowledge of the transaction for which they were issued. Furthermore, there was no notice of dishonor sent to Lao. The notice of dishonor may be sent by the offended party or the drawee bank. The trial court itself found that there was absence of any personal notice of dishonor served upon Lao by the drawee bank. The notice, if any consolation, was given to the main office of Premiere and not on its branch office. Nor was there any notice sent to Lao by the offended party. Because no notice was sent, the prima facie presumption of knowledge cannot be applied in this case. 144

BETTY KING V. PEOPLE 319 SCRA 666


FACTS: On several occasions, King discounted with Fernando several checks amounting to P1,070,000 for the amount of P1,000,000. Upon presentment for encashment however, these checks were dishonored for being drawn on insufficient funds. Despite demands, King wasn’t able to make good the checks. This prompted Fernando to file a case against King for violation of BP22. HELD: The elements of the crime are as follows: 1. The accused makes, draws, issues any check to apply for or for value 2. The check is subsequently dishonored by the drawee bank for insufficiency of funds or credit, or it would have been dishonored for the same reason had not the drawer, without any valid reason, ordered the bank to stop payment 3. The accused knows at the time of the issuance that he doesn’t have sufficient funds or credit with the drawee bank for the payment of the check in full upon presentment Among the elements, to show that there is prima facie presumption of knowledge of insufficiency of funds, it should be shown that he received a notice of dishonor and within 5 banking days thereafter, failed to satisfy the amount of the check or make arrangement for its payment. To prove the knowledge of King, it was shown that a letter was sent by Fernando. Nonetheless, it wasn’t proven that indeed King received the demand letter. The letter was even shown to have been returned to sender. Sec. 103. Where parties reside in same place. - Where the person giving and the person to receive notice reside in the same place, notice must be given within the following times: (a) If given at the place of business of the person to receive notice, it must be given before the close of business hours on the day following. (b) If given at his residence, it must be given before the usual hours of rest on the day following. (c) If sent by mail, it must be deposited in the post office in time to reach him in usual course on the day following.


Sec. 104. Where parties reside in different places. - Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times: (a) If sent by mail, it must be deposited in the post office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on last day, by the next mail thereafter. (b) If given otherwise than through the post office, then within the time that notice would have been received in due course of mail, if it had been deposited in the post office within the time specified in the last subdivision. (TO REACH HIM IN USUAL COURSE THE DAY FOLLOWING) TIME FOR GIVING NOTICE IN GENERAL  The law provides for a different period for giving notice of dishonor depending on whether—the party giving notice and the party to receive notice reside in the same place; or the party giving notice and the party to receive reside in different places MEANING OF “THE SAME PLACE”  Refers to the corporate limits of a town or city where the presentment is made or where the holder resides EFFECT OF NOTICE GIVEN OUT OF TIME  Unless excused, notice given out of time would be considered not to have been given  Hence, the party to receive notice would be discharged Sec. 105. When sender deemed to have given due notice. Where notice of dishonor is duly addressed and deposited in the post office, the sender is deemed to have given due notice, notwithstanding any miscarriage in the mails. APPLICATION OF SECTION 105  A party giving notice is deemed to have given due notice where the notice of dishonor is duly addressed and deposited in the post office, even when there is miscarriage of mail CONCLUSIVE PRESUMPTION


Sec. 106. Deposit in post office; what constitutes. - Notice is deemed to have been deposited in the post-office when deposited in any branch post office or in any letter box under the control of the post-office department. DEPOSIT IN LETTER BOX  The letter box must be under the control of the post office department  Otherwise, notice wouldn’t deemed to have been deposited in the post office  Thus, a notice of protest properly addressed and left in a place in a notary’s office where mail was usually collected by his postman was held not a mailing of the notice as required by the statute

2.

After omission to give due notice

IMPLIED WAIVER  Waiver may be implied from acts, declarations, or silence Sec. 110. Whom affected by waiver. - Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it binds him only.

Sec. 107. Notice to subsequent party; time of. - Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor.

WHOM AFFECTED BY WAIVER IN GENERAL  The persons affected by waiver depends upon whether the waiver is in the instrument itself or is written above the signature of the indorser  If the waiver is embodied in the instrument itself, it is binding upon all parties  If the waiver is written above the signature of an indorser, it binds him only

Sec. 108. Where notice must be sent. - Where a party has added an address to his signature, notice of dishonor must be sent to that address; but if he has not given such address, then the notice must be sent as follows:

Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor.

(a) Either to the post-office nearest to his place of residence or to the post-office where he is accustomed to receive his letters; or

WHERE PROTEST IS WAIVED, THE FOLLOWING ARE INCLUDED AND ARE DEEMED WAIVED ALSO 1. Presentment 2. Notice of dishonor  Where presentment for payment is waived, notice of dishonor is also waived  But where notice of dishonor is waived, presentment for payment is not waived

(b) If he lives in one place and has his place of business in another, notice may be sent to either place; or (c) If he is sojourning in another place, notice may be sent to the place where he is so sojourning. But where the notice is actually received by the party within the time specified in this Act, it will be sufficient, though not sent in accordance with the requirement of this section. Sec. 109. Waiver of notice. - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. WHEN WAIVER MAY BE MADE 1. Before the time of giving notice, such as express waiver in the body of the instrument or added to the signature of the party


Sec. 112. When notice is dispensed with. - Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. WHEN NOTICE EXCUSED  When political disturbances interrupt and obstruct the ordinary negotiations of trade, they constitute a sufficient excuse for want of presentment or notice, upon the same principle that controls in cases of military operations or interdictions of commerce  Prevalence of a malignant, contagious, infectious disease…



Sec. 113. Delay in giving notice; how excused. - Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, notice must be given with reasonable diligence. Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer in either of the following cases: (a) Where the drawer and drawee are the same person; (b) When the drawee is fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer has countermanded payment. CASE DIGESTS: SECTION 114 145


FACTS: Moulic issued checks as security to Victoriano, for pieces of jewelry to be sold on commission. Moulic failed to sell the pieces of jewelry, so she returned them to Victoriano. The checks however could not be recovered by Moulic as these have been discounted already in favor of petitioner. Consequently, before the maturity dates, Moulic withdrew her funds from her . Thereafter, petitioner presented the checks for payment but these were dishonored. This prompted the petitioner to initiate an action against Moulic. HELD: A prima facie presumption exists that a holder of a negotiable instrument is a holder in due course. The burden of proving that State is not a holder in due course is upon Moulic. In this regard, she failed to do so.


The evidence shows that the dated checks were complete and regular; petitioner bought the checks from Victoriano before their due dates; it took the checks in good faith and for value; and it was never informed nor made aware that these checks were merely issued to payee as security. Consequently, State is a holder in due course. Moulic cannot set up the defense that there was failure or want of consideration. It can only invoke the defense if State was a privy to the purpose for which they were issued and therefore is not a holder in due course. Furthermore, the mere fact that the checks were issued as security is not sufficient ground to discharge the instrument as against a holder in due course. And also, Moulic was responsible for the dishonor of her checks. She withdrew her funds from her and could not have expected her checks to be honored by then. 146

GREAT ASIAN SALES V. CA 381 SCRA 488

FACTS: Great Asian Sales was a business engaged in the selling and buying of merchandise. In 2 of its board resolutions, it first authorized Arsenio, its treasurer, to secure a loan from Bancasia as well as to sign any pertinent documents related to such. Second, it authorized Arsenio to obtain from Bancasia a discounting line. Pursuant to these, deeds of assignments were issued by Great Asian in favor of Bancasia for receivables—specifically checks. Almost all the checks assigned by Great Asian were dishonored. Notice of dishonor was sent by the bank and its lawyer to Tan Chong Lin. Later, Great Asian filed for insolvency and in its petition, Bancasia was one of those listed as its creditors. In the meanwhile, a complaint was filed against Great Asian and Tan Chong Lin because of the surety agreement it signed in favor of Bancasia. HELD: First, under the 2 board resolutions, indeed Arsenio was authorized to obtain a loan and sign any document related to the securing of the loan. The question is whether the deeds of assignment signed by Arsenio was within the ambits of his authority. The deeds of assignment enabled Great Asian to generate instant cash, with checks which were not due and demandable then.



In the financing industry, a discounting line means a credit facility with a financing bank or company, which allows a business entity to sell, on a continuing basis, its s receivable at a discount. The term discount means the sale of a receivable at less than its face value. The purpose of discounting line is to enable a business entity to generate instate cash out of its receivables which are still to mature at future debts. The financing company or bank which buys the receivables makes its profits out of the difference between the face value of the receivable and the discounted price. Clearly, the discounting arrangements entered into by Arsenio were the same arrangements authorized under the board resolutions. Second, on the issue of breach of contract, Bancasia alleged that Great Asian committed a breach. In the deeds of assignment, it was stipulated that there is a vital suspensive condition—in case the drawers fail to pay the checks on maturity, Great Asian obligated itself to pay Bancasia the full face value of the dishonored checks, including penalties and other costs. Failure to pay would give rise to the obligation to pay Bancasia. Great Asian and Bancasia agreed on this specific with recourse stipulation, despite that the receivables were negotiable instruments. The contracting parties are allowed such stipulation in addition to the warranties of an indorser under the NIL. The explicit with recourse stipulation against Great Asian enlarges the liability of Great Asian beyond that of a mere indorser of a negotiable instrument. Thus, whether or not Bancasia gives notice of dishonor to Great Asian, the latter remains liable because of the with recourse stipulation.

(b) Where the indorser is the person to whom the instrument is presented for payment; (c) Where the instrument was made or accepted for his accommodation. WHEN NOTICE RELATIVELY EXCUSED 1. Where he has knowledge of the dishonor by means other than through a formal notice, as when he is both the drawee and drawer or when presentment is made to him 2. Where he has no reason to expect that the instrument will be honored, as when he has countermanded payment or where the drawee is fictitious or without capacity to contract NO RIGHT TO EXPECT OR REQUIRE PAYMENT AS TO DRAWER 1. Where the drawer of the check has no with the drawee bank 2. When the drawer of a check payable abroad has no funds with the drawee bank to meet it 3. When the knowledge that previous drafts on the same consignee had been dishonored.  In the foregoing, the drawer has no right to receive notice of dishonor DRAWER HAS COUNTERMANDED PAYMENT  A drawer tells drawee B not to pay the bill. F holder need not give notice to A drawer. An allegation that payment of a check had been countermanded is sufficiently set out where the check was set forth with the indorsement across the face “Payment stopped”

The recourse of Bancasia to file an action for breach of contract doesn’t leave Great Asian with an empty bag. It is then subrogated back as creditor of the receivables. Great Asian can now proceed against the drawers who issued the checks. Even if there was no timely notice of dishonor, Great Asian is not prejudiced. A notice of dishonor is not required if the drawer has no right to expect or require the bank to honor the check, or if the drawer has countermanded payment.

DRAWEE FICTITIOUS, ETC. MUST BE MADE KNOWN AS TO INDORSERS  The indorser must be aware of the fact that the drawee is fictitious or not having capacity to contract. Otherwise, notice of dishonor must be given to such indorser to charge him. But the fact that that the indorser knew the maker to be insolvent or that the instrument was dishonored doesn’t dispense with the necessity of notice

Sec. 115. When notice need not be given to indorser. — Notice of dishonor is not required to be given to an indorser in either of the following cases:

Sec. 116. Notice of non-payment where acceptance refused. -Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted.

(a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument;


ILLUSTRATION  Note is payable on December 31, 1950



    

F the holder presents it for acceptance to X drawee on December 1, 1950 X refuses to accept the bill F then gives notice of dishonor to drawer A and to the indorsers B, C, D and E Under section 151, there is no necessity for presentment for payment and under this section, need not give a notice of dishonor by nonpayment But suppose X drawee accepts the bill on December 15. F must then present the bill for payment to X on December 31. If X refuses to pay, F must give notice of dishonor to A, B, C, D, and E in order to charge them, as in the meantime the instrument has been accepted.

f.

As to a holder in due course without notice

Sec. 118. When protest need not be made; when must be made. -Where any negotiable instrument has been dishonored, it may be protested for non-acceptance or non-payment, as the case may be; but protest is not required except in the case of foreign bills of exchange.

Sec. 117. Effect of omission to give notice of non-acceptance. An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission.

WHEN PROTEST NECESSARY  Protest is necessary with regard foreign bills of exchange  Mere fact of protest is not conclusive upon the dishonor of the instrument and due notice to the indorser; other evidence is competent on these questions  While protest is not required in cases of promissory notes and inland bills, it is usual to protest these instruments also when dishonored since the notary’s certificate of protest is the most convenient and certain mode of proving the facts

ILLUSTRATION

NOTES FOR WEEK #11 SEPTEMBER 3-7, ,

PAY TO B OR ORDER P1000. 2007 SGD. A TO: X *BCDEFG (holder in due course) *F, when the instrument was still in his hands, presented the bill for acceptance to X and the latter refuses to accept the bill. F fails to give notice to B, C, D, and E. *B, C, D, E are not discharged with regard to G because omission to give notice of dishonor by non-acceptance doesn’t prejudice the rights of a holder in due due course subsequent to the omission. SUMMARY AS TO NOTICE OF DISHONOR 1. Like presentment for payment, notice of dishonor need not be given to persons primarily liable in order to charge them 2. But aside from presentment for payment to persons primarily liable, notice of dishonor to persons secondarily liable is necessary to charge the latter except— a. When notice is waived b. When dispensed with under Section 112 c. As to drawer, under Section 114 d. As to indorser, under Section 115 e. Where due notice of dishonor by non-acceptance has been given

VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS

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



  

In order to discharge the instrument, the payment must be a payment in due course, and second, a payment made by the principal debtor If payment is made before the date of maturity, the instrument is not discharged as the payment is not in due course Where payment is made by a party who is not a primary obligor or an accommodation party, his payment only conceals his own liability and those who are obligated after him. All prior parties primarily or secondarily liable on the bill, are liable to such a payer, and the payer may cancel indorsements subsequent to his own and reissue the paper, and it will be valid as against the prior parties

PAYMENT BY THIRD PERSONS  If payment is made by a third person, the instrument is not discharged because payment is not made by the person principally liable  Not any one who desires may pay the instrument and then recover of the maker. He must be a person who has in some way made himself liable for the payment of the instrument.  Exception: where an instrument has been protested and someone voluntarily makes payment supra protest or for honor. And if the instrument was to give money in payment, the instrument is discharged.

 

must be specified; and that an objection to tender on one ground is a waiver of all other objections which could have been made at that time It is ordinarily required of one to whom payment is offered in the form of a check, that he makes his objection at the time of the offer of by check instead of an offer of payment in money Reason for the rule—to afford the debtor the opportunity to secure the specific money which the law prescribes shall be accepted in payment of debts

PAYMENT BY ACCOMMODATED PARTY  The one ultimately liable on the accommodation instrument is the latter  Hence, his payment in due course discharges the instrument as if payment was made by the principal debtor under paragraph (a) INTENTIONAL CANCELLATION  The cancellation must be intentional and made by the holder  There must be an intention to cancel a negotiable instrument by the holder thereof as such intention is an essential element of discharge on a negotiable instrument and a negotiable note in a torn condition is presumed cancelled by the holder thereof

SUMMARY OF DISCHARGE BY PAYMENT 1. Payment by a person ultimately liable, whatever his position in the paper, is a discharge of the instrument 2. Payment by an accommodation party isn’t a discharge of the instrument, whatever his position thereon and whether the indorsement be regular or anomalous 3. Payment by the drawer or indorser is not a discharge of the instrument

WILL AN EXTENSION OF TIME GRANTED BY THE HOLDER TO THE DEBTOR DISCHARGE THE INSTRUMENT?  No, according to the majority view  Because while it isn’t omitted in Section 120, it is omitted in Section 119  Shows the legislative intent to that an extension of time by the holder will not discharge the instrument

PRINCIPAL DEBTOR  Person ultimately bound to pay the debt

PRINCIPAL DEBTOR ACQUIRES INSTRUMENT  Reacquisition must be by the principal debtor and in his own right at or after the date of maturity  In his own right—not in a representative capacity

PAYMENT BY CHECK OR OTHER NEGOTIABLE PAPER 1. When they actually have been cashed or 2. When, through the fault of the creditor, they have been impaired  A creditor isn’t bound to accept a check in satisfaction of his demand because a check, even if good when offered, doesn’t meet the requirements of legal tender WAIVER OF OBJECTION TO TENDER OF PAYMENT BY CHECK It is the general rule that an object to a tender must, to be available to the creditor, be made in good time and that the grounds for objection


WHEN INSTRUMENT REACQUIRED BEFORE MATURITY  A reacquisition by the principal debtor in his own right but before maturity will not discharge the instrument  It will merely be a negotiation back to the principal debtor DISCHARGE BY OPERATION OF LAW CASE DIGESTS: SECTION 119



147


FACTS: Moulic issued checks as security to Victoriano, for pieces of jewelry to be sold on commission. Moulic failed to sell the pieces of jewelry, so she returned them to Victoriano. The checks however could not be recovered by Moulic as these have been discounted already in favor of petitioner. Consequently, before the maturity dates, Moulic withdrew her funds from her . Thereafter, petitioner presented the checks for payment but these were dishonored. This prompted the petitioner to initiate an action against Moulic. HELD: A prima facie presumption exists that a holder of a negotiable instrument is a holder in due course. The burden of proving that State is not a holder in due course is upon Moulic. In this regard, she failed to do so. The evidence shows that the dated checks were complete and regular; petitioner bought the checks from Victoriano before their due dates; it took the checks in good faith and for value; and it was never informed nor made aware that these checks were merely issued to payee as security.

The note covered for Alegre’s placement plus interest. On the maturity of the note, petitioner issued a check payable to Alegre, covering the whole amount due. It was drawn from petitioner’s current in BPI. When the wife of Alegre tried to deposit the check, the bank dishonored the check. Petitioner was notified of this matter and Alegre demanded the immediate payment in cash. In turn, petitioner promised to replace the check on the impossible premise that the first issued be returned to them. This prompted Alegre to file a complaint against petitioner and petitioner in turn, filed a case against BPI for allegedly unlawfully deducting from its counterfeit checks. The trial court decided in favor of Alegre. ISSUE: W/N NIL is applicable to the money market transaction held between petitioner and Alegre? HELD: Considering the nature of the money market transaction, Article 1249 of the CC is the applicable provision should be applied. A money market has been defined to be a market dealing in standardized short-term credit instruments where lenders and borrowers don’t deal directly with each other but through a middleman or dealer in the open market. In a money market transaction, the investor is the lender who loans his money to a borrower through a middleman or dealer.

Furthermore, the mere fact that the checks were issued as security is not sufficient ground to discharge the instrument as against a holder in due course.

In the case at bar, the transaction is in the nature of a loan. Petitioner accepted the check but when he tried to encash it, it was dishonored. The holder has an immediate recourse against the drawer, and consequently could immediately file an action for the recovery of the value of the check. Further, in a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal tender or, by the use of a check. A check is not legal tender, and therefore cannot constitute valid tender of payment.

And also, Moulic was responsible for the dishonor of her checks. She withdrew her funds from her and could not have expected her checks to be honored by then.

Sec. 120. When persons secondarily liable on the instrument are discharged. A person secondarily liable on the instrument is discharged:

Consequently, State is a holder in due course. Moulic cannot set up the defense that there was failure or want of consideration. It can only invoke the defense if State was a privy to the purpose for which they were issued and therefore is not a holder in due course.

(a) By any act which discharges the instrument; 148


FACTS: Petitioner is a quasi-banking institution involved in money market transactions. Alegre invested with petitioner P500,000. Petitioner issued then a promissory note, which would mature approximately after a month.


(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 recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved. EFFECT OF SECTION 120 IS A SURETYSHIP  Generally the courts regard this provision as exclusive, as a complete codification of the law of discharge of secondary parties by the six methods therein set forth ACTS DISCHARGE INSTRUMENT  Any of the acts that will discharge an instrument under Section 119 will discharge a party secondarily liable thereon, such as payment in due course by the maker. This will discharge the indorsers in the note. INTENTIONAL CANCELLATION  A, maker B, payee  BCDEF  F then successively cancels the signature of D. D is discharged.  No consideration is necessary to a discharge by intentional cancellation of an indorser’s signature by the holder. DISCHARGE OF PRIOR PARTY  The intentional cancellation of D’s signature also discharges E, as D is a prior party to E  And according to this paragraph, the discharge of a prior party discharges parties subsequent thereto. DISCHARGE BY OPERATION OF LAW IS NOT INCLUDED 1. Discharge by reason of bankruptcy 2. Discharge of a party not given due notice of dishonor 3. Discharge by the statute of limitations VALID TENDER OF PAYMENT  If D an indorser validly tenders payment and F unjustifiably refuses to do accept, D is discharged Tender of payment: act by which one produces and offers to a person holding a claim or demand against him the amount of


money which he considers and its to be due, in satisfaction of such claim or demand without any stipulation or condition RELEASE OF PRINCIPAL DEBTOR  If the holder F discharges A maker, the parties secondarily liable, B, C, D, E are also discharged, as this discharges the instrument and two, it deprives them of their right of recourse against A maker.  But if on releasing A, F reserves his right of recourse against the indorsers, then they are not discharged. The effect of such reservation is the implied reservation of their right of recourse against A. In other words, while the holder cannot hold A liable, he can hold B, C, D, and E liable, but they in turn can hold A liable should any of them be made to pay F. This reservation of the right of recourse cannot be implied from acts and conduct but must be express. RELEASE MUST BE ACT OF HOLDER RELEASE MUST BE FOR VALUE EFFECT OF RELEASE ON ACCOMMODATION MAKER OR ACCEPTOR  General rule is that he is not discharged by the holder’s release of the principal debtor even if the release be made with knowledge or true relation of the parties and, conversely, the release of the accommodation maker or acceptor doesn’t discharge the principal debtor through the latter occupies the position of a party secondarily liable on the instrument EXTENSION OF TIME  If the holder agrees to extend the time of payment, the indorsers are discharged  However, where the extension of time is consented to by the party secondarily liable, he is not discharged. Also, where the holder expressly reserves his right of recourse against the party secondarily liable, the latter is not discharged. REQUISITES OF AGREEMENT FOR EXTENSION OF TIME 1. It must be a binding contract, ed by valuable consideration and for a definite period 2. It must be made with the principal debtor and not with a third party Sec. 121. Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former



rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except: (a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated. ILLUSTRATION OF SECTION 121  A is the drawer of the bill addressed to X, drawee, payable to the order of B.  BCDEF  Suppose D pays the bill. What are the effects? o The first effect: instrument is not discharged but it discharges D. o Second effect: D is remitted to his former rights against parties prior to him, such as A, B and C. If D was formerly a holder in due course, even if at the time of payment he had already notice of defects of title, he can enforce his rights against any of them free from defenses, as he is remitted to his former rights. But it is a well-known rule of law that if the original payee of a note unenforceable for lack of consideration repurchases the instrument after transferring it to a holder in due course, the paper again becomes subject in the payee’s hands to the same defenses to which it would have been subject if the paper had never ed through the hands of a holder in due course. o Third effect: D can strike out his indorsement and the subsequent indorsements of E and F o Fourth effect: D can renegotiate the instrument EXCEPTIONS TO RIGHT TO RENEGOTIATE 1. If instead of D, it is A drawer who pays and as the bill is payable to the order of a third person, B, A can no longer negotiate the instrument 2. Or if B payee is an accommodated party, and B pays, he cannot negotiate the bill, as B is the ultimate party to pay it, and he doesn’t have a right of recourse against either X drawee or A drawer Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument before, at,


or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. APPLICATION OF SECTION 122 1. Applies only to renunciation by the unilateral act of the holder without consideration and in cases where the instrument is not delivered up to the person intended to be released 2. Renunciation—act of surrendering a right or claim without recompense but it can be applied with equal propriety to the relinquishing of a demand upon an agreement ed by a consideration FORM OF RENUNCIATION  It must be in writing and must be express TIME FOR MAKING RENUNCIATION 1. Before maturity 2. At maturity 3. After maturity WHEN RENUNCIATION DISCHARGES INSTRUMENT 1. Renunciation discharges the instrument when it is absolute and unconditional 2. It is made in favor of the person primarily liable 3. It is made at or after maturity Sec. 123. Cancellation; unintentional; burden of proof. A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority. MEANING OF CANCELLATION  Signifies not only the drawing of criss-cross lines but also tearing, obliterations, erasures or burning  It may be made by any other means by which the intention to cancel the instrument may be evident WHEN CANCELLATION IS INOPERATIVE 1. When made unintentionally



2. 3.

When made under mistake When made without the authority of the holder

BURDEN OF PROOF IS UPON THE PERSON WHO CLAIMS THAT THE CANCELLATION IS INOPERATIVE Sec. 126. Bill of exchange, defined. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. TYPES OF BILLS OF EXCHANGE 1. Draft 2. Trade acceptance 3. Banker’s acceptance 4. Treasury warrants 5. Money orders 6. Clean bills of exchange 7. Documentary bill of exchange 8. D/A bills of exchange 9. D/P bills of exchange 10. Time or usance bills 11. Bills in set 12. Inland bills 13. Foreign bills DRAFT  Common term for used synonymously

all

bills

 A draft drawn by the seller on the purchaser of goods sold and accepted by such purchaser  States upon its face that the obligation of the acceptor arises out of purchase of goods from the drawer  Arises from credit obligations arising from the sale of goods and must have a definite maturity HOW TRADE ACCEPTANCE HANDLED  The seller sends with the goods or the invoice a filled-in trade acceptance form, often in duplicate to enable the buyer to retain a copy for his files  The buyer accepts the bill by g his name across its face, with date, designating the bank where it is payable  It is returned to the seller who may hold it at maturity or may discount it at the bank  At maturity, it is collected exactly as if it were a check  Usually, the buyer of goods is given a cash discount and other options beside the acceptance privilege BANKER’S ACCEPTANCE  Draft of which the acceptor is a bank or banker engaged generally in the business of granting banker’s acceptance credit  Similar to a trade acceptance  Drawn against the bank instead of the buyer

of

exchange

and

they

are

IN BANK DRAFTS, DRAWER AND DRAWEE BANK ARE LIABLE TO PURCHASER OF DRAFT FOR NOT COMPLYING WITH HIS INSTRUCTIONS  The drawee bank acting as “payor” bank is solely liable for acts not done in accordance with the instructions of the drawer bank or of the purchaser of the draft  The drawee bank has the burden of proving that it didn’t violate TRADE ACCEPTANCE  A bill of exchange payable to order and at a certain maturity, drawn by a seller against the purchaser of goods as drawee, for a fixed sum of money, showing on its face the acceptance of the purchaser of goods and that it has arisen out of a purchase of goods by the acceptor


ILLUSTRATIONS OF THE USE OF BANKER’S ACCEPTANCE 1. B importer makes an application with PNB for the issuance to A exporter of a letter of credit, if the PNB is satisfactory to A exporter. B the originator of the letter of credit is variously called the accredited buyer, consignee, or the of the importer. The PNB is called the opening bank while A is termed the beneficiary. 2. If PNB is willing, it issues the letter either by mail or by cable. If by cable, PNB instructs its correspondent bank in NYC to notify A. Such respondent bank is called the notifying bank. If by mail, PNB can send directly to A or B. 3. A then draws a draft or bill of exchange against the PNB pursuant to the letter of credit. When A ships the goods to B, A receives the bill of lading from the shipping company. He attaches this document to the draft or bill of exchange. The draft with the document attached is called the documentary bill and so long as the document is attached to the bill, the holder of the bill has title to the goods and is protected to the value thereof.



TRUST RECEIPT  The written or printed document signed by the entrustee in favor of the entruster containing and conditions substantially complying with the provisions of this decree  The legal title to the matter entrusted remains in the entruster but the entruster gives to the trustee a form of title which is good and legal against everybody except the entruster  Entrustee—the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement  Entruster—person holding title over the goods, documents, or instruments subject of a TRA and any successor-in-interest of such person

 Documents against acceptance bill: is a time bill to which are attached documents to be delivered and surrendered to the drawee when he accepts the bill

TREASURY WARRANTS  Bearing on its face the words payable from the appropriation for food istration is actually an order for payment out of a particular fund and is not unconditional and doesn’t fulfill one of the essential requirements of a negotiable instrument

FACTS: Samara purchased from Cititrust a bank draft, the payee being Thai Airways and the corresponding bank in the US is Marine Midland. Later on, Samara executed a stop payment order of the bank draft, instructing Citytrust to inform Marine Midland about the order through telex. Cititrust informed Marine Midland the next day and followed it up by cable, which the latter bank acknowledged to have received the order and stopped payment of the bank draft. Thereafter, the of Samara was credited but was debited again after knowing that Midland had debited its . This is despite that it itted to not have paid the bank draft.

MONEY ORDER  Species of draft drawn by the post office upon another for the amount of money deposited at the first office by the person purchasing the money order and payable at the second office to a payee named in the order  Being under the restrictions and limitation which postal laws and regulations place on them and which are inconsistent with the character of negotiable instruments, postal money orders are not negotiable CLEAN AND DOCUMENTARY BILLS OF EXCHANGE  Clean bill of exchange is one to which are not attached documents of title to be delivered to the person against whom the bill is drawn when he either accepts or pays the bill  Documentary bill of exchange is one to which are attached documents of title to be delivered and surrendered to the drawee when he accepts or pays the bill D/A AND D/P BILLS OF EXCHANGE  Documents against payment bill: is a sight or time bill to which are attached documents to be delivered and surrendered to the drawee when he has paid the corresponding bill


TIME OR USUANCE BILLS  Sight bills are bills which are payable upon presentation or at sight or demand  Time or usuance bills are bills which are payable at a fixed furture time or at a determinable future time CASE DIGESTS: SECTION 126 149

CITYTRUST BANKING CORPORATION V. CA 196 SCRA 553

On the first appeal on a different issue, it was held that petitioner and Midland were solidarily liable to Samara but it was Midland which was ultimately liable to pay for damages—it had to reimburse petitioner for whatever amount it would pay Samara. HELD: The defenses of petitioner and Marine Midland are distinct with each other. They were not in privity with each other in a transaction involving payment of a bank draft. A bank draft is a bill of exchange drawn by a bank upon its corresponding bank issued at the solicitation of a stranger who purchases and pays therefor. It is also defined as an order for payment of money. In the case at bar, petitioner from which Samara purchased the bank draft, was the drawer of the draft through which it ordered Marine Midland, the drawee bank to pay the amount of $40,000 in favor of Thai Airways. The drawee bank acting as a payor bank is solely liable for acts not done in accordance with the instructions of the drawer bank or of the purchaser of



the draft. The drawee bank has the burden of proving that it didn’t violate. Meanwhile, the drawer, if sued by the purchaser of the draft is liable for the act of debiting the customer’s despite an instruction to stop payment. The drawer has the duty to prove that he complied with the order to inform the drawee. Meanwhile, if the drawer is sued by the purchaser of the draft, he is liable for the act of debiting the customer’s despite an instruction to stop payment. The drawer has the burden of proving that he complied with the order to inform the drawee to stop payment. So, we see that the liabilities and obligations of the two parties are different, and their defenses are also different. Since their rights are not so interwoven, the appeal by Marine Midland of the decision cannot generally affect the case as regards Citytrust, which failed to appeal. As a matter of strict procedure, therefore, the decision on the appeal by Marine Midland should not apply to Citytrust. However, the SC made an exception in this case and allowed the Marine Midland decision to apply to Citytrust as a matter of justice and equity, since it would lead to an absurd situation wherein Samara can claim an even bigger amount if it chooses to collect from Citytrust who was not even the proximate cause of the loss. 150

PHIL. BANK OF COMMERCE V. ARUEGO 102 SCRA 530

FACTS: Aruego, on behalf of World Current Events, entered into a Credit Agreement with PBCom, for the publication of the company’s periodicals. At every printing endeavor by the printing press, a bill of exchange is drawn against PBCom. The instruments are signed by Aruego, without any indication that he is an agent of World Current Events. When he was being held liable by PBCom, he averred that he only signed the instrument in the capacity of agent of the company. HELD: An inspection of the drafts accepted by the defendant would show nowhere that he has disclosed that he was g in representation of the Philippine Education Foundation Company. He merely signed his name. For failure to disclose his principal, Aruego was personally liable for the drafts he accepted NOTES: WEEK #12

SEPTEMBER 10-14, , 2007 LETTERS OF CREDIT NATURE AND IMPORTANCE  A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of the seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying  To break the ime, the buyer may be required to contract a bank to issue a letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. The buyer and seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the buyer  Once the letter of credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents and documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank  The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. The seller gets paid only if he delivers the documents of title over the goods while the buyer acquires the said documents and control over the goods only after reimbursing the bank. INDEPENDENCE PRINCIPLE  What characterizes letters of credit, as distinguished from other accessory contract, is the ENGAGEMENT OF THE ISSUING BANK TO PAY THE SELLER ONCE THE DRAFT AND THE REQUIRED SHIPPING DOCUMENTS ARE PRESENTED TO IT. In turn, this arrangement ASSURES THE SELLER OF PROMPT PAYMENT, INDEPENDENT OF ANY BREACH OF THE MAIN SALES CONTRACT. LAWS GOVERNING A LETTER OF CREDIT TRANSACTION  Uniform Customs and Practice for Documentary Credits (U) issued by the International Chamber of Commerce PARTIES TO A LETTER OF CREDIT TRANSACTION



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Buyer—procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title. He is the one initiating the operation of the transaction as buyer of the merchandise and also of the credit instrument. His contract with the bank which is to issue the instrument and is represented by the Commercial Credit Agreement form which he signs, ed by the mutually made promises contained in the agreement Opening bank—usually the buyer’s bank which issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of titles to surrender the documents to the buyer upon reimbursement. As it is the one issuing the instrument, it should be a strong bank, well known and well regarded in international trading circles. Seller—in compliance with the contract of sale, ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. He is also the beneficiary of the credit instrument because the instrument is addressed to him and is in his favor. While the bank cannot compel the seller to ship the goods and avail of the benefits of the instruments, however, the seller may recover from the bank the value of his shipment is made within the of the instrument, even though he hasn’t given the bank any direct consideration for the bank’s promises contained in the instrument Correspondent bank/advising bank—to convey to the seller the existence of the credit or a confirming bank which will lend credence to the letter of credit issued by the lesser known issuing bank or paying bank which undertakes to encash the drafts drawn by the exporter. Furthermore, another bank known as the negotiating bank may be approached by the buyer to have the draft discounted instead of going to the place of the issuing bank to claim payment

RESPONSIBILITIES OF BANKS IN COMMERCIAL CREDIT TRANSACTIONS  If the beneficiary is to be advised by the issuing bank by cable, the services of an ADVISING OR NOTIFYING BANK must always be utilized  The responsibility of the NOTIFYING BANK is merely to convey or transmit to the seller or beneficiary the existence of the credit. However, if the beneficiary requires that the obligation of the issuing bank shall also be made the obligation of the bank to himself, there is what is known as a CONFIRMED COMMERCIAL CREDIT and the bank notifying the beneficiary of the credit shall become a CONFIRMING BANK. In this case, the liability of the confirming bank is primary and it is as if the credit were issued by the issuing and confirming banks

tly, thus giving the beneficiary or a holder for value of drafts drawn under the credit, the right to proceed against either or both banks, the moment the credit instrument has been breached.  The paying bank on which the drafts are to be drawn it may be the issuing bank or the advising bank. If the beneficiary is to draw and receive payment in his own currency, the advising bank may be indicated as the paying bank also. When the draft is to be paid in this manner, the paying bank assumes no responsibility but merely pays the beneficiary and debits the payment immediately to the which the issuing bank has with it. IF THE ISSUING BANK HAS NO WITH THE PAYING BANK, the paying bank reimburses itself by drawing a bill of exchange on the issuing bank, in dollars, for the equivalent of the local currency paid to the beneficiary, at the buyeing rate for dollar exchange. The beneficiary is entirely out of the transaction because his draft is completely discharged by the payment, and the credit arrangement between the paying bank and issuing bank doesn’t concern him.  If the draft contemplated by the credit instrument, is to be drawn on the issuing bank or on other designated banks not in the city of the seller, any bank in the city of the seller which buys or discounts the draft of the beneficiary becomes a negotiating bank. As a rule, whenever, the facilities of an advising or notifying bank are used, the beneficiary is apt to offer his drafts to the advising bank for negotiation, thus giving the advising bank the character of a negotiating bank becomes an endorser and bona fide holder of the drafts and within the protection of the credit instrument. It is also protected by the drawer’s signature, as the drawer’s contingent liability, as drawer, continues until discharged by the actual payment of the bills of exchange. LIABILITY IN COMMERCIAL CREDIT TRANSACTIONS  A commercial bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risk, and it may not thereafter be able to recover from the buyer or issuing bank, as the case may be, the money thus paid to the beneficiary  In the case of a discounting arrangement, wherein a negotiating bank pays the draft of a beneficiary of a letter of credit in order to save such beneficiary from the hardship of presenting the documents directly to the issuing bank, the negotiating bank can seek reimbursement of what has been paid to the beneficiary who as drawer of the draft continues to assume a contingent liability thereon. Thus, the negotiating bank has the ordinary right of recourse against the seller or beneficiary in the event of dishonor by the issuing bank.



PROTOTYPE EXPORT TRANSACTION 1. PROFORMA INVOICE—all the particulars for the proposed shipment which are then known to the buyer 2. PRICE QUOTATION FAS AND CIF—FAS stands for “free along side” which means that the seller will be responsible for the cost and risks of the goods “along side” an overseas vessel at the stated location: the buyer bears the costs and risks from that point. CIF on the other hand means “cost, freight and insurance”, that in exchange for this stated price, the seller undertakes not only to supply the goods but also to obtain and pay for insurance and bear the freight charges to the stated pointy. 3. BUYER’S PURCHASE ORDER 4. LETTER OF CREDIT a. One way for a seller to be assured of payment is to ship goods under a negotiable bill of lading and arrange for a bank in buyer’s city to hold the bill of lading until the buyer pays the draft in the usual foreign sale this arrangement for securing payment of the price is not adequate b. In some situations, sellers may need assurance of payment even before the time of payment. This problem arises in contracts which call for the manufacture of goods to the buyer’s specifications. c. Although the proforma invoice may not specify, the seller will expect the letter of credit to be confirmed by the local bank in its location. But why does a local bank confirm rather than issue a letter of credit? The bank that issues the letter of credit needs assurance that it will be reimbursed by the buyer, on whose behalf it pays the seller. The buyer’s bank can take steps to minimize or remove the hazards. It will receive the negotiable bill of lading controlling the goods which will provide security for the customer’s obligation to reimburse the bank; in addition, the buyer’s own bank can judge in the light of its knowledge of his financial standing whether added security is needed and can insist on such security before it issues the letter of credit d. To meet the seller’s letter of credit requirements, the buyer will request its bank to arrange for the issuance of a letter of credit which will comply with the of the proforma invoice. The buyer will then sign a detailed application and agreement for commercial credit prepared by the bank. The issuing bank, after approving


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the buyer’s credit standing transmits a letter of credit by cable to the confirming bank. This confirming bank will then deliver to seller a document advising the latter that the issuing bank opened a letter of credit in its favor and adding the confirming bank’s confirmation. In this arrangement, the seller is assured of payment of its sight drafts drawn on the confirming bank in the amount of the total amount of the sale, provided it presents the documents called for in the letter of credit. An examination of the letter of credit will also reveal that the bill of lading is to be consigned to the order of the buyer’s bank, thereby giving the bank control over the goods, with the consequent security for its claim against the buyer. ACCEPTANE; SHIPMENT a. On the receipt of the confirmed letter of credit, the seller will send the order acknowledgment. This document will repeat the description and price of the goods which has also appeared on the proforma invoice and states the number and expiration date of the letter of credit. b. Further, the arrival of the letter of credit is the go-signal for the seller to send the goods. The seller then prepares the COMMERCIAL INVOICE which provides a complete record of the transaction and is an important source of information to such interested parties as a bank discounting a draft or an underwriting extending issuance. c. As the time of shipment approaches, the seller will its forwarder and give its shipping instructions. It will inform that to comply with the requirements of the letter of credit, the bill of lading must be made to the order of the issuing bank. It will also send copies of the commercial invoice, a packing list, and a Shipper’s export declaration. When the forwarder receives these documents, he takes over all further documentation as the agent of the shipper, the latter merely has to dispatch the goods from the factory in accordance with the forwarder’s instructions. d. The seller will then send the truck to the pier where they are delivered to the ocean carrier’s receiving clerk who signs the dock receipt. The dock receipt is a form supplied by the ocean carrier which contains information relevant to the shipping of the bearings such as the number of the pier, and the name of the ship. The dock


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receipt is NON-NEGOTIABLE and serves as a temporary receipt for the goods until they are loaded on board. e. The ocean carrier is soon ready to receive the cargo. When the goods are loaded on board, the steamship line issues a bill of lading which, to comply with the letter of credit, is CONSIGNED TO ORDER OF THE ISSUING BANK. The bill of lading is initially prepared by the forwarder on a form supplied by the ocean carrier, it sets forth the markings and numbers of the packages, description of the goods, and the number and weight of the packages. On its dorsal side, it will state that the goods are received for shipment, but a statement FREIGHT PREPAID ON BOARD is initiated by a representative of the steamship line after loading. The forwarder then delivers the bill of lading and the commercial invoice to the seller. INSURANCE PAYMENT; THE DRAFT. a. The confirming bank stated in their letter that the estimated CIF price would be “available by your drafts on us at sight” when accompanied by the listed documents b. Seller accordingly draws a sight draft on the confirming bank. The sight draft together with the commercial invoice, insurance certificate, full set of bills of lading, and the packing list are presented to the confirming bank. When the bank receives these documents, it issues its bank draft to seller’s order and transmits the documents by air mail to issuing bank, which will reimburse the confirming bank. c. The documents, sent by airmail, will reach the buyer’s bank well ahead of the ocean shipment. The time for release of the documents to buyer and reimbursement to the bank will depend upon the arrangement which was made between the bank and buyer when the letter of credit was initially established. d. If the buyer plans to resell the goods, he may not be able to reimburse the bank until the goods arrive and he resells the goods. In this event, the issuing bank may need to take further steps to secure its claim against the buyer.

ICC UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS (U 500) GENERAL PROVISIONS AND DEFINITIONS


ARTICLE 1: Application of U The Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No. 50O, shall apply to all Documentary Credits (including to the extent to which they may be applicable, Standby Letter(s) of Credit) where they are incorporated into the text of the Credit. They are binding on all parties thereto, unless otherwise expressly stipulated in the Credit. ARTICLE 2: Meaning of Credit For the purposes of these Articles, the expressions "Documentary Credit(s)" and "Standby Letter(s) of Credit" (hereinafter referred to as "Credit(s)"), mean any arrangement, however named or described, whereby a bank (the "Issuing Bank") acting at the request and on the instructions of a customer (the "Applicant") or on its own behalf, i. is to make a payment to or to the order of a third party (the "Beneficiary"), or is to accept and pay bills of exchange (Draft(s)) drawn by the Beneficiary, or ii. authorizes another bank to effect such payment, or to accept and pay such bills of exchange (Draft(s)), or iii. authorizes another bank to negotiate, against stipulated document(s), provided that the and conditions of the Credit are complied with. For the purposes of these Articles, branches of a bank in different countries are considered another bank. ARTICLE 3: Credits v. Contracts A. Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit. Consequently, the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfill any other obligation under the Credit, is not subject to claims or defenses by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary.


B. A Beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the Applicant and the Issuing Bank. ARTICLE 4: Documents v. Goods/Services/Performances In Credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate. FORM AND NOTIFICATION OF CREDITS ARTICLE 6: Revocable v. Irrevocable Credits

ARTICLE 8: Revocation of a Credit A. A revocable Credit may be amended or canceled by the Issuing Bank at any moment and without prior notice to the Beneficiary. B. However, the Issuing Bank must: i. reimburse another bank with which a revocable Credit has been made available for sight payment, acceptance or negotiation for any payment, acceptance or negotiation made by such bank prior to receipt by it of notice of amendment or cancellation, against documents which appear on their face to be in compliance with the and conditions of the Credit;

i. revocable,

ii. reimburse another bank with which a revocable Credit has been made available for deferred payment, if such a bank has, prior to receipt by it of notice of amendment or cancellation, taken up documents which appear on their face to be in compliance with the and conditions of the Credit.

or

ARTICLE 9: Liability of Issuing and Confirming Banks

ii. irrevocable.

A. An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the and conditions of the Credit are complied with:

A. A Credit may be either

B. The Credit, therefore, should clearly indicate whether it is revocable or irrevocable. C. In the absence of such indication the Credit shall be deemed to be irrevocable. ARTICLE 7: Advising Bank's Liability A. A Credit may be advised to a Beneficiary through another bank (the "Advising Bank") without engagement on the part of the Advising Bank, but that bank, if it elects to advise the Credit, shall take reasonable care to check the apparent authenticity of the Credit which it advises. If the bank elects not to advise the Credit, it must so inform the Issuing Bank without delay. B. If the Advising Bank cannot establish such apparent authenticity it must inform, without delay, the bank from which the instructions appear to have been received that it has been unable to establish the authenticity of the Credit and if it elects nonetheless to advise the Credit it must inform the Beneficiary that it has not been able to establish the authenticity of the Credit.


i. if the Credit provides for sight payment to pay at sight; ii. if the Credit provides for deferred payment to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit; iii. if the Credit provides for acceptance; a. by the Issuing Bank to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity, or b. by another drawee bank to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Drafts(s) accepted but not paid by such drawee bank at maturity; iv. if the Credit provides for negotiation to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued


available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s).

D. i. Except as otherwise provided by Article 48, an irrevocable Credit can neither be amended nor canceled without the agreement of the Issuing Bank, the Confirming Bank, if any, and the Beneficiary.

B. A confirmation of an irrevocable Credit by another bank (the "Confirming Bank") upon the authorization or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the and conditions of the Credit are complied with:

ii. The Issuing Bank shall be irrevocably bound by an amendment(s) issued by it from the time of the issuance of such amendment(s). A Confirming Bank may extend its confirmation to an amendment and shall be irrevocably bound as of the time of its advice of the amendment. A Confirming Bank may, however, choose to advise an amendment to the Beneficiary without extending its confirmation and if so, must inform the Issuing Bank and the Beneficiary without delay.

i. If the Credit provides for sight payment to pay at sight; ii. if the Credit provides for deferred payment to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit; iii. if the Credit provides for acceptance: a. by the Confirming Bank to accept Draft(s) drawn by the Beneficiary on the Confirming Bank and pay them at maturity, or b. by another drawee bank to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Confirming Bank, in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity; iv. if the Credit provides for negotiation to negotiate without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s). C. i. If another bank is authorized or requested by the Issuing Bank to add its confirmation to a Credit but is not prepared to do so, it must so inform the Issuing Bank without delay. ii. Unless the Issuing Bank specifies otherwise in its authorization or request to add confirmation, the Advising Bank may advise the Credit to the Beneficiary without adding its confirmation.


iii. The of the original Credit (or a Credit incorporating previously accepted amendment(s)) will remain in force for the Beneficiary until the Beneficiary communicates his acceptance of the amendment to the bank that advised such amendment. The Beneficiary should give notification of acceptance or rejection of amendment(s). If the Beneficiary fails to give such notification, the tender of documents to the Nominated Bank or Issuing Bank, that conform to the Credit and to not yet accepted amendment(s), will be deemed to be notification of acceptance by the Beneficiary of such amendment(s) and as of that moment the Credit will be amended. iv. Partial acceptance of amendments contained in one and the same advice of amendment is not allowed and consequently will not be given any effect. ARTICLE 10: Types of Credit A. All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation. B. i. Unless the Credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank (the "Nominated Bank") which is authorized to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate. In a freely negotiable Credit, any bank is a Nominated Bank. Presentation of documents must be made to the Issuing Bank or the Confirming Bank, if any, or any other Nominated Bank. ii. Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorized to negotiate. Mere examination of the documents without giving of value does not constitute a negotiation.


C. Unless the Nominated Bank is the Confirming Bank, nomination by the Issuing Bank does not constitute any undertaking by the Nominated Bank to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate. Except where expressly agreed to by the Nominated Bank and so communicated to the Beneficiary, the Nominated Bank's receipt of and/or examination and/or forwarding of the documents does not make that bank liable to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate. D. By nominating another bank, or by allowing for negotiation by any bank, or by authorizing or requesting another bank to add its confirmation, the Issuing Bank authorizes such bank to pay, accept Draft(s) or negotiate as the case may be, against documents which appear on their face to be in compliance with the and conditions of the Credit and undertakes to reimburse such bank in accordance with the provisions of these Articles. LIABILITIES AND RESPONSIBI LITIES ARTICLE 13: Standard for Examination of Documents A. Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the and conditions of the Credit. Compliance of the stipulated documents on their face with the and conditions of the Credit, shall be determined by international standard banking practice as reflected in these Articles. Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the and conditions of the Credit. Documents not stipulated in the Credit will not be examined by banks. If they receive such documents, they shall return them to the presenter or them on without responsibility. B. The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly. C. If a Credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will deem such conditions as not stated and will disregard them.


ARTICLE 14: Discrepant Documents and Notice A. When the Issuing Bank authorizes another bank to pay, incur a deferred payment undertaking, accept Draft(s), or negotiate against documents which appear on their face to be in compliance with the and conditions of the Credit, the Issuing Bank and the Confirming Bank, if any, are bound: i. to reimburse the Nominated Bank which has paid, incurred a deferred payment undertaking, accepted Draft(s), or negotiated, ii. to take up the documents. B. Upon receipt of the documents the Issuing Bank and /or Confirming Bank, if any, or a Nominated Bank acting on their behalf, must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the and conditions of the Credit. If the documents appear on their face not to be in compliance with the and conditions of the Credit, such banks may refuse to take up the documents. C. If the Issuing Bank determines that the documents appear on their face not to be in compliance with the and conditions of the Credit, it may in its sole judgment approach the Applicant for a waiver of the discrepancy(ies). This does not, however, extend the period mentioned in sub Article 13 (b). D. i. If the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but no later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him. ii. Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presenter. iii. The Issuing Bank and/or Confirming Bank, if any, shall then be entitled to claim from the remitting bank refund, with interest, of any reimbursement which has been made to that bank.


E. If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this Article and/or fails to hold the documents at the disposal of, or return them to the presenter, the Issuing Bank and/ or Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the and conditions of the Credit.

strikes or lockouts. Unless specifically authorized, banks will not, upon resumption of their business, pay, incur a deferred payment undertaking, accept Draft(s) or negotiate under Credits which expired during such interruption of their business.

F. If the remitting bank draws the attention of the Issuing Bank and/or Confirming Bank, if any, to any discrepancy(ies) in the document(s) or advises such banks that it has paid, incurred a deferred payment undertaking, accepted Draft(s) or negotiated under reserve or against an indemnity in respect of such discrepancy(ies), the Issuing Bank and/or Confirming Bank, if any, shall not be thereby relieved from any of their obligations under any provision of this Article. Such reserve or indemnity concerns only the relations between the remitting bank and the party towards whom the reserve was made, or from whom, or on whose behalf, the indemnity was obtained.

A. Banks utilizing the services of another bank or other banks for the purpose of giving effect to the instructions of the Applicant do so for the and at the risk of such Applicant.

ARTICLE 15: Disclaimer on Effectiveness of Documents Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s), or for the general and/or particular conditions stipulated in the document(s) or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s), or for the good faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of the goods, or any other person whomsoever. ARTICLE 16: Disclaimer on the Transmission of Messages Banks assume no liability or responsibility for the consequences arising out of delay and/or loss in transit of any message(s), letter(s) or document(s), or for delay, mutilation or other error(s) arising in the transmission of any telecommunication. Banks assume no liability or responsibility for errors in translation and/or interpretation of technical , and reserve the right to transmit Credit without translating them. ARTICLE 17: Force Majeure Banks assume no liability or responsibility for the consequences arising out of the interruption of their business by Acts of God, riots, civil commotions, insurrections, wars or any other causes beyond their control, or by any


ARTICLE 18: Disclaimer for Acts of an Instructed Party

B. Banks assume no liability or responsibility should the instructions they transmit not be carried out, even if they have themselves taken the initiative in the choice of such other bank(s). C. i. A party instructing another party to perform services is liable for any charges, including commissions, fees, costs or expenses incurred by the instructed party in connection with its instructions. iu. Where a credit stipulates that such charges are for the of a party other than the instructing party, and charges cannot be collected, the instructing party remains ultimately liable for the payment thereof. D. The Applicant shall be bound by and liable to indemnify the banks against all obligations and responsibilities imposed by foreign laws and usages. UNIFORM COMMERCIAL CODE ARTICLE 5 LETTERS OF CREDIT § 5-102. Definitions. (a) In this article: (1) "Adviser" means a person who, at the request of the issuer, a confirmer, or another adviser, notifies or requests another adviser to notify the beneficiary that a letter of credit has been issued, confirmed, or amended. (2) "Applicant" means a person at whose request or for whose a letter of credit is issued. The term includes a person who requests an issuer to issue a letter of credit on behalf of another if the person making the request undertakes an obligation to reimburse the issuer.


(3) "Beneficiary" means a person who under the of a letter of credit is entitled to have its complying presentation honored. The term includes a person to whom drawing rights have been transferred under a transferable letter of credit.

(11) "Nominated person" means a person whom the issuer (i) designates or authorizes to pay, accept, negotiate, or otherwise give value under a letter of credit and (ii) undertakes by agreement or custom and practice to reimburse.

(4) "Confirmer" means a nominated person who undertakes, at the request or with the consent of the issuer, to honor a presentation under a letter of credit issued by another.

(12) "Presentation" means delivery of a document to an issuer or nominated person for honor or giving of value under a letter of credit.

(5) "Dishonor" of a letter of credit means failure timely to honor or to take an interim action, such as acceptance of a draft, that may be required by the letter of credit. (6) "Document" means a draft or other demand, document of title, investment security, certificate, invoice, or other record, statement, or representation of fact, law, right, or opinion (i) which is presented in a written or other medium permitted by the letter of credit or, unless prohibited by the letter of credit, by the standard practice referred to in Section 5-108(e) and (ii) which is capable of being examined for compliance with the and conditions of the letter of credit. A document may not be oral. (7) "Good faith" means honesty in fact in the conduct or transaction concerned. (8) "Honor" of a letter of credit means performance of the issuer's undertaking in the letter of credit to pay or deliver an item of value. Unless the letter of credit otherwise provides, "honor" occurs (i) upon payment,(ii) if the letter of credit provides for acceptance, upon acceptance of a draft and, at maturity, its payment, or(iii) if the letter of credit provides for incurring a deferred obligation, upon incurring the obligation and, at maturity, its performance. (9) "Issuer" means a bank or other person that issues a letter of credit, but does not include an individual who makes an engagement for personal, family, or household purposes. (10) "Letter of credit" means a definite undertaking that satisfies the requirements of Section 5-104 by an issuer to a beneficiary at the request or for the of an applicant or, in the case of a financial institution, to itself or for its own , to honor a documentary presentation by payment or delivery of an item of value.


(13) "Presenter" means a person making a presentation as or on behalf of a beneficiary or nominated person. (14) "Record" means information that is inscribed on a tangible medium, or that is stored in an electronic or other medium and is retrievable in perceivable form. (15) "Successor of a beneficiary" means a person who succeeds to substantially all of the rights of a beneficiary by operation of law, including a corporation with or into which the beneficiary has been merged or consolidated, an , executor, personal representative, trustee in bankruptcy, debtor in possession, liquidator, and receiver. (b) Definitions in other Articles applying to this article and the sections in which they appear are: "Accept" or "Acceptance" "Value"

Section 3-409

Sections 3-303, 4-211

(c) Article 1 contains certain additional general definitions and principles of construction and interpretation applicable throughout this article. § 5-108. Issuer's Rights and Obligations (a) Except as otherwise provided in Section 5-109, an issuer shall honor a presentation that, as determined by the standard practice referred to in subsection (e), appears on its face strictly to comply with the and conditions of the letter of credit. Except as otherwise provided in Section 5-113 and unless otherwise agreed with the applicant, an issuer shall dishonor a presentation that does not appear so to comply. (b) An issuer has a reasonable time after presentation, but not beyond the end of the seventh business day of the issuer after the day of its receipt of documents:


(1) to honor, (2) if the letter of credit provides for honor to be completed more than seven business days after presentation, to accept a draft or incur a deferred obligation, or

(1) is entitled to be reimbursed by the applicant in immediately available funds not later than the date of its payment of funds; (2) takes the documents free of claims of the beneficiary or presenter;

(3) to give notice to the presenter of discrepancies in the presentation.

(3) is precluded from asserting a right of recourse on a draft under Sections 3-414 and 3-415;

(c) Except as otherwise provided in subsection (d), an issuer is precluded from asserting as a basis for dishonor any discrepancy if timely notice is not given, or any discrepancy not stated in the notice if timely notice is given.

(4) except as otherwise provided in Sections 5-110 and 5-117, is precluded from restitution of money paid or other value given by mistake to the extent the mistake concerns discrepancies in the documents or tender which are apparent on the face of the presentation; and

(d) Failure to give the notice specified in subsection (b) or to mention fraud, forgery, or expiration in the notice does not preclude the issuer from asserting as a basis for dishonor fraud or forgery as described in Section 5-109(a) or expiration of the letter of credit before presentation.

(5) is discharged to the extent of its performance under the letter of credit unless the issuer honored a presentation in which a required signature of a beneficiary was forged.

(e) An issuer shall observe standard practice of financial institutions that regularly issue letters of credit. Determination of the issuer's observance of the standard practice is a matter of interpretation for the court. The court shall offer the parties a reasonable opportunity to present evidence of the standard practice.

CASE DIGESTS: LETTERS OF CREDIT

(f) An issuer is not responsible for:

FACTS: Dameron ordered t-shirts from National Marketing, which was based in Amman, Jordan. To facilitate the transaction, Dameron sought the issuance of 2 letters of Credit from First American Bank of Virginia. Dameron executed an application and agreement for international commercial letter of credit, as well as signed two commercial notes, to secure the letters of credit. Consequently, Dameron executed continuing guaranties to further secure any debts it owed to First American. First American issued then its irrevocable letters of credit. These letters stated that they were in favor of National Marketing and for the of Dameron. These letters authorized drafts to be drawn on First American within 30 days of submission to First American of specific, listed documents. At the request of National Marketing and Petra bank, the letters were amended to provide that the drafts under the letters could be drawn directly on Petra International in Washington DC, Petra’s American . In this transaction, PIBC became the confirming bank, First American is the issuing bank, Dameron is the customer, and National was the beneficiary.

(1) the performance or nonperformance of the underlying contract, arrangement, or transaction, (2) an act or omission of others, or (3) observance or knowledge of the usage of a particular trade other than the standard practice referred to in subsection (e). (g) If an undertaking constituting a letter of credit under Section 5102(a)(10) contains nondocumentary conditions, an issuer shall disregard the nondocumentary conditions and treat them as if they were not stated. (h) An issuer that has dishonored a presentation shall return the documents or hold them at the disposal of, and send advice to that effect to, the presenter. (i) An issuer that has honored a presentation as permitted or required by this article:


152

PETRA INTERNATIONAL BANKING AMERICAN BANK OF VIRGINIA 758 F. SUPP. 1120

CORP.

V.

FIRST



One of the required documents to be submitted is the certification of the quality of the shirts by an independent inspection company and statement by the beneficiary. The shirts were received by Dameron and PIBC made the corresponding payments to National Marketing. Another shipment was made and National demanded payment. Dameron was informed that there was discrepancies on the documents submitted, specifically the one pertaining to the inspection of the quality of the shirts. This was waived by Dameron and payment would be subsequently made. Dameron was subsequently dissatisfied with the quality of the shirts shipped. It then undertook negotiations with National about the payment. Dameron then undertook to get extensions of time for payment. It then informed First American that it didn’t want to pay National for the defective shirts. Negotiations were made but were unfruitful. Dameron was able to obtain from court an order of attachment, precluding First American from making payments to PIBC. It then filed a suit against National, which ended in a compromise agreement between the two— Dameron was able to keep the shirts and was paid an amount by National. The order of attachment was subsequently lifted. PIBC demanded then payment from First American but the latter refused, alleging that PIBC overlooked the lack of statement of the beneficiary as part of the documents. Dameron in turn refused to pay First American. HELD: On First American’s obligation to pay PIBC… PIBC requests summary judgment on Count I of its Complaint, which alleges that First American wrongfully refused to honor the Letters and pay the $95,904 plus interest to PIBC. First American contends that PIBC's failure to note the missing Statement of the Beneficiary relieves it of any obligation to honor the drafts drawn under the Letters. The threshold issue is the choice of governing law. The Letters state on their face that they are to be governed by the Uniform Customs and Practices for Documentary Credits (1983 Revision), International Chamber of Commerce Publication No. 400 (“the U”). Given this, the Court finds that the U should be applied in this case. The pertinent U provision is Article 16, which states that if an issuing bank desires to “refuse documents,” it must do so “without delay” by stating the discrepancies it has found and “holding the documents at the disposal of, or ... returning them to, the presentor (remitting bank or the beneficiary, as the case may be).” If the issuing bank fails to perform these


requirements, it “shall be precluded from claiming that the documents are not in accordance with the and conditions of the credit.” In the instant case, First American received the documents on or about October 25, 1988. Not only did it fail to note any discrepancies or to hold the documents at PIBC's disposal, it transferred the documents to its customer and formally notified PIBC on November 16, 1988 that “the transaction was accepted and, at maturity, we will remit proceeds....” First American did not mention any discrepancies to PIBC until more than one year after receipt of the documents. In the interim, it made several promises to pay in exchange for extensions of time. First American is therefore precluded by Article 16 from asserting noncompliance. The full text of Article 16 of the U is as follows: (a) If a bank so authorized effects payment, or incurs a deferred payment undertaking, or accepts or negotiates against documents which appear on their face to be in accordance with the and conditions of a credit, the party giving such authority shall be bound to reimburse the bank which has effected payment, or incurred a deferred payment undertaking, or has accepted or negotiated, and to take up the documents. (b) If, upon receipt of the documents, the issuing bank considers that they appear on their face not to be in accordance with the and conditions of the credit, it must determine, on the basis of the documents alone, whether to take up such documents, or to refuse them and claim that they appear on their face not to be in accordance with the and conditions of the credit. (c) The issuing bank shall have a reasonable time in which to examine the documents and to determine as above whether to take up the documents or to refuse the documents. (d) If the issuing bank decides to refuse the documents, it must give notice to that effect without delay by telecommunication or, if that is not possible, by other expeditious means, to the bank from which it received the documents (the remitting bank), or to the beneficiary, if it received the documents directly from him. Such notice must state the discrepancies in respect of which the issuing bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presentor (remitting bank or the beneficiary, as the case may be). The issuing bank shall then be entitled to claim from the remitting bank any refund of any reimbursement which may have been made to that bank.



(e) If the issuing bank fails to act in accordance with the provisions of paragraphs (c) and (d) of this article and/or fails to hold the documents at the disposal of, or to return them to, the presentor, the issuing bank shall be precluded from claiming that the documents are not in accordance with the and conditions of the credit. The abovementioned Article 16 of the U reflects commercial practices and the rules developed in the preceding common law of letters of credit. Article 16, when interpreted according to the plain meaning of its , adequately provides for the insertion of one or more confirming banks between the issuing bank and the beneficiary. As each bank, including the issuer, receives a documentary draft, it must reject it “expeditiously” if it finds inconsistencies. It must then hold the documents at the disposal of the prior holder in the chain, or be bound to pay the draft and keep the documents. If the documentary draft is dishonored by one party, the preceding party, who has already bound itself to pay the draft by not itself rejecting the draft in timely fashion, is still bound to honor the draft. The preceding party nevertheless receives the documents, and hence has a claim on the goods underlying the transaction, which it can use to compensate itself for having paid for the goods. On the obligation of Dameron to First American… Having found that PIBC has a legal right to payment from First American, but not from Dameron, the Court turns next to First American's claim that Dameron must reimburse it for any amount it must pay PIBC under the Letters. First American relies on the Agreements executed by Dameron to obtain the Letters. In the Agreements, Dameron pledged to indemnify First American for the latter's acts with respect to the Letters as long as such acts were taken in good faith. And, First American correctly notes that Dameron has not shown any bad faith on the part of First American with respect to accepting the documents. Dameron argues, however, that the good faith standard in the Agreements violates Virginia law and hence is void. Therefore, Dameron continues, First American's failure to note the missing Statement of the Beneficiary, though not a breach of good faith, nevertheless relieves Dameron of any obligation to reimburse First American. A review of the few existing, apposite cases indicates that under the common law of letters of credit an customer, by accepting documents from the issuing bank and subsequently “surrendering the documents [to shippers or customs officials] and accepting a substantial portion of the goods ... waive [s] its right to seek strict enforcement of the


letter of credit.” Fundamental to letter of credit transactions is the principle that both the letter of credit and also the separate agreement between customer and issuing bank are transactions in documents entirely independent from the underlying sale of goods. This principle compels the conclusion that an customer who has failed to reject documents in timely fashion and, instead, has used them to obtain the goods is deemed to have waived any claim of documentary inconsistencies. Even if the Court were to accept the notion that an customer should be able to accept documents and goods and then sue for direct damages resulting from a bank's acceptance of nonconforming documents, it would not permit Dameron to reduce the payment owed to First American by any damages stemming from National Marketing's delivery of faulty goods. Such damages stem from the seller's breach, not First American's. Moreover, even if the court were to hold that an customer could receive damages from the issuing bank stemming from the receipt of faulty goods, Dameron has already been compensated for such receipt through its settlement with National Marketing. There is no reason in this case for Dameron not to reimburse First American for the full amount First American paid for the goods. 153

UNION EXPORT COMPANY V. NIB INTERMARKET 756 S.W.2D 628

FACTS: The facts in this case are undisputed. Sometime prior to August 26, 1986, Union, a Nashville based company, agreed to purchase 1500 metric tons of calcium chloride, a chemical used in snow removal, from N.I.B., a Swedish exporter. In order to guarantee payment, Union had First American issue N.I.B. an irrevocable letter of credit in the amount of $345,000. The letter of credit required the presentment of a draft payable 150 days after sight along with certain other documents. On December 1, 1986, First American received from Skanska Banken (Skanska) a $345,000 time draft, drawn and endorsed in blank by N.I.B., together with other documents, all of which complied with the letter of credit. First American accepted the draft on December 1, 1986 by affixing its signature thereto, and on the next day, December 2, sent notice of its acceptance by Telex to Skanska. The acceptance had a maturity date of April 30, 1987. Upon receiving notice of the acceptance, Skanska made two loans to N.I.B. totaling $345,000, taking as security N.I.B.'s claim under the letter of credit.



In February, 1987, Union notified First American that the shipment of chemicals it purchased from N.I.B. was defective. Because First American indicated it would pay its acceptance when it matured, Union commenced this action. HELD: A commercial letter of credit transaction involves three separate contractual relationships: (1) the underlying contract between the buyer (in this case, Union) and the seller (N.I.B.); (2) the agreement between the issuer (First American) and its customer (Union) in which the issuer agrees to issue the letter of credit in return for the customer's promise to reimburse it and pay a commission; and (3) the letter of credit itself which is an engagement by the issuer that it will honor drafts presented by the beneficiary or a transferee beneficiary upon compliance with the and conditions specified in the letter of credit. The fundamental principle governing these transactions is the doctrine of independent contracts, which provides that the issuing bank's obligation to honor drafts drawn on a letter of credit by the beneficiary is separate and independent from any obligation of its customer to the beneficiary under the sale of goods contract and separate as well from any obligation of the issuer to its customer under their agreement. In the case at bar, both the trial court and the Court of Appeals found that the injunction against payment under the letter of credit was proper under the limited exception to the doctrine of independence found at Tenn.Code Ann. § 47-5-114(2). Under the general rule the issuer must honor the draft when the documents presented comply with the of the letter of credit, however, when a required document does not conform to the necessary warranties, is forged, is fraudulent, or there is fraud in the transaction, an issuer acting in good faith is not required to, but may honor a draft drawn under a letter of credit if the documents presented appear on their face to comply with the of the letter of credit. In addition, a court may en an issuer from honoring such a draft if the issuer fails to do so on its own. Notwithstanding this exception, if the person presenting a draft drawn on a letter of credit is a holder in due course (Tenn.Code Ann. § 47-3-302), the issuer must pay the draft, whether or not it has notice of forgery or fraud. In this case, the element of fraud is undisputed. whether or not Skanska is a holder in due course.


Now, on the issue of

The issuing bank accepted two drafts drawn under a letter of credit. The drafts were payable after sight in 60 days. After acceptance, but before payment, the customer discovered fraud in the transaction, and the trial court ened the issuer from payment. The intermediate appellate court reversed and vacated the injunction, and the Court of Appeals affirmed, both acting under § 4-303. In addition to holding that § 4-303 prevailed by its own , the Court noted the following policy reason ing the result: Important policy considerations suggest the result also. Letters of credit provide a quick, economic and predictable means of financing transactions for parties not willing to deal on open s by permitting the seller to rely not only on the credit of the buyer but also on that of the issuing bank. By its , the credit often reflects a conscious negotiation of risk allocation between customer and beneficiary and its utility rests heavily on strict adherence to the agreed and the doctrine of independent contract ( see, J. White & R. Summers, Handbook on Uniform Commercial Code § 18-1, at 704-08 [2d ed.] ). It is this predictability of credit arrangements which permits not only the financing of sale of goods transactions between widely separated parties in different jurisdictions but also has permitted the development of a market in trade or bankers' acceptances of time drafts. Once a draft payable in the future is accepted by a bank, it becomes known as a bankers' *632 acceptance, and such acceptances can be, and regularly are, sold in conjunction with letter of credit transactions to obtain financing prior to the date of maturity in a market sanctioned by the Federal Reserve Board ( see, 12 U.S.C. § 372; PLI, Letters of Credit and Bankers' Acceptances 231-34, 236). If the courts intervene to en issuing banks from paying drafts they have previously accepted they seriously undermine this market and limit the use of acceptances as a financing tool. The same policy considerations apply in Tennessee. We therefore hold that, under Tenn.Code Ann. § 47-4-303(1), Union's injunction against payment of the time draft drawn pursuant to the letter of credit was untimely because it was issued after First American had already accepted the draft. We therefore reverse the decision of the Court of Appeals, and we order the injunction vacated. 154 FACTS:

ANDINA COFFEE V. NATIONAL WESTMINSTER BANK 160 A.D.2D 104


Plaintiff Andina Coffee, Inc., a New York corporation, was engaged in the importation of coffee from defendant Gonchecol, Ltda., at one time a major Columbian exporter of coffee. To pay for its purchases, Andina delivered to Gonchecol letters of credit which it obtained from a number of commercial banks in New York, including defendants National Westminster Bank USA (NatWest) and Cooperatieve Centrale Raiffeisenboerenleenbank B.A. (Rabobank). As the beneficiary of *106 the letters of credit, Gonchecol apparently used all or some of the funds to borrow money from defendant Banco Credito y Commercio de Columbia (BCCC) and other Colombian banks in order to finance its business operations. In June 1986, BCCC advanced $2,100,000 to Gonchecol in exchange for which it was to be reimbursed through a $2,100,000 check drawn on a Panamanian bank. However, Gonchecol's check bounced, and BCCC was left with an unpaid $2,100,000 loan. According to NatWest and Rabobank, this event could only have served to confirm what BCCC had already learned from its own sources; that is, that Gonchecol had already lost millions of dollars and was experiencing severe financial difficulties. As was the situation with most of the moneys made available by BCCC to Gonchecol, the source of repayment would have to be proceeds from the letters of credit provided to Gonchecol from the issuing banks. Beginning in May of 1986, coffee financed under the various letters of credit, which were to be paid on the presentation of interior truck bills of lading, failed to materialize. Consequently, representatives of the New York banks were dispatched to Colombia in August of 1986 when it was discovered that Gonchecol had caused fraudulent truck bills of lading to be furnished for large quantities of coffee which were, in fact, never shipped, thereby resulting in substantial financial losses to New York banks. The four letters of credit involved here are the last outstanding instruments which were not drawn against prior to the disclosure of the exporter's dishonest practices. In that regard, NatWest and Rabobank had each supplied two of the letters of credit, one for $2,104,000 and the other three in the amount of $1,000,000, pursuant to which they agreed to make payment upon the presentation within a specified period of time of drafts and certain documents, among which were to be the "original railroad and/or truck bill of lading". The bill of lading was supposed to show that the coffee was actually in existence, that it had left the control of the growers and that it was in the hands of the shipper and en route from the interior of Colombia to a seaport. On July 9, 1986, 15 days after BCCC had already advanced $2,100,000 to Gonchecol against the latter's bad check, it received from NatWest a letter of credit in the amount of $2,104,000. The following day, almost six weeks before the earliest possible date for presentment under that instrument,


BCCC accepted from Gonchecol its draft and accompanying *107 documents. These documents included truck bills of lading which were dated August 22, 1986, almost six weeks after the date submitted to BCCC, and purported to show that 8,000 bags of coffee had been delivered to a trucking company for transport to a Colombian port. BCCC sent the draft and documents to NatWest with a cover letter dated July 15, 1986. By telex dated July 22, 1986, NatWest advised BCCC that it would not pay under the letter of credit because of four enumerated discrepancies in the documents, including the fact that the draft and documents were presented prior to the earliest date mentioned in the letter of credit and that the truck bills of lading were postdated. BCCC thereupon requested that the bills of lading and other documents be returned to it by mail. It then reviewed the documents received under the other three letters of credit and perceived that the bills of lading in those instances were similarly postdated. Consequently, it sent all of the bills of lading back to Gonchecol so that the exporter could revise the dates to comply with the letters of credit. Indeed, some of the changes were made twice in an attempt to bring the documents into conformity with both the form and date mandates of the letters of credit. Thus, it appears that the documents were designed more to effect payment under the letters of credit than to reflect accurately the business transactions that they were intended to evince. In any event, by the time that the documents had been altered and realtered, the full extent of Gonchecol's fraud had been detected, and payment was rejected by NatWest and Rabobank on the ground that, in part, the bills of lading were postdated and fraudulent. HELD: The mere fact that the documents presented in connection with the letters of credit may have been complete forgeries and that no coffee was delivered to the trucker for export is insufficient to avoid payment under the letter of credit (see, First Commercial Bank v Gotham Originals, 64 NY2d 287; Barclay Knitwear Co. v king'swear Enters., supra). What is critical is whether the bills of lading complied with the requirements of the letters of credit or whether BCCC possessed actual knowledge of the fraud (see, Chemical Bank v Haskell, 51 NY2d 85) or otherwise acted in bad faith. Thus, according to the Court of Appeals in First Commercial Bank v Gotham Originals (supra, at 295): "Under the general rule the issuer must honor the draft when the documents presented comply with the of the letter of credit (Uniform Commercial Code § 5-114 [1]). But when a required document does not conform to the necessary warranties or is forged or fraudulent or there is fraud in the transaction, an issuer acting in good faith may, but is not required to, refuse to honor a draft under a letter of credit when the documents *110 presented appear on their face to


comply with the of the letter of credit. Further than that, a customer may also en an issuer from honoring such a draft if the issuer fails to do so on its own .... Notwithstanding this exception, if the person presenting a draft drawn on a letter of credit is a holder in due course ... the issuer must pay the draft, whether it has notice of forgery or fraud or not".

in due course has the burden of establishing that he or some person under whom he claims is in all respects a holder in due course" (Uniform Commercial Code § 3-307 [3]). Since NatWest and Rabobank have demonstrated a viable defense with respect to the letters of credit, BCCC must now prove that it is a holder in due course, and, consequently, summary judgment in its favor is not warranted.

It is settled that New York law mandates strict compliance with the of a letter of credit (United Commodities-Greece v Fidelity Intl. Bank, 64 NY2d 449, 455; Eximetals Corp. v Pinheiro Guimaraes, 73 AD2d 526, affd 51 NY2d 865). The postdating of bills of lading is not only a departure from the requirements of the letters of credit but also constitutes a form of fraudulent practice. Contrary to the Supreme Court's characterization that the objections to the accompanying documents raised by NatWest and Rabobank were frivolous and highly technical, the discrepancies were, in reality, material. At the very least, they would have had the effect of concealing the actual shipment dates (even assuming that they had represented genuine, and not fictitious, transactions) and, in fact, did not, as required by the letters of credit, "evidence shipment" of the coffee. Further, while there is authority that by its previous acceptance of nonconforming documents, as ittedly occurred herein, the issuing bank does not waive the right to reject future defects (Courtaulds N. Am. v North Carolina Natl. Bank, 528 F2d 802; Texpor Traders v Trust Co. Bank, 720 F Supp 1100; Far E. Textile v City Natl. Bank & Trust Co., 430 F Supp 193), and the preclusion rule contained in the U (Uniform Customs and Practice for Documentary Credits) is by no means absolute, at most the failure to assert an objection on a previous occasion presents a question of fact as to whether there was a waiver (see, Eximetals Corp. v Pinheiro Guimaraes, supra).

A South American bank which accepted drafts drawn upon letters of credit is not a holder in due course of the letters as a matter of law and, thus, may not compel the issuing banks to make payment under the letters where the accompanying documents, whose presentation was necessary to trigger payment, consisted of postdated bills of lading, since New York law mandates strict compliance with the of a letter of credit and the *105 postdating of bills of lading is not only a departure from the requirements of the letters of credit, but also constitutes a form of fraud. The discrepancies in the bills of lading were material, having the effect of concealing actual shipment dates, and did not, as required by the letters, evidence shipment of the goods for which payment was intended under the letters. Failure of the issuing banks to assert an objection on a previous occasion merely presents a question of fact as to whether there was a waiver of the right to reject future defects. Moreover, in light of the fact that the South American bank played an active role in revising the bills of lading, particularly after it had proof of the financial instability of the beneficiary of the letters in the form of a bad check issued by the beneficiary, raises questions of fact as to whether it was acting in good faith and without actual knowledge of the beneficiary--exporter's fraud, the intended goods having never been shipped.

Unless the postdating was expressly allowed under the letters of credit, and there is no indication that this is the situation, or the parties' prior course of conduct conclusively demonstrates otherwise, the documents provided under the letters of credit did not comply with the thereof, and BCCC may not compel payment. Equally significant is the BCCC's apparently active role in obtaining the revisions of the documents, particularly after it was confirmed with definite proof of Gonchecol's financial instability in the form of a bad check, raises questions of fact as to whether it was acting in good faith and without actual knowledge of the exporter's *111 fraud. The record of the present matter clearly presents sufficient unresolved matters precluding summary judgment as to whether BCCC participated in a scheme whereby the bills of lading were altered simply to render them in conformity with the letters of credit. Once it has been "shown that a defense exists a person claiming the rights of a holder


155

BANK OF AMERICA V. CA 228 SCRA 357

FACTS: Petitioner Bank of America received by mail an Irrevocable Letter of Credit purportedly issued by Bank of Ayudhya for the of General Chemicals of Thailand in the amount of $2.7M to cover the sale of plastic ropes and "agricultural files," with the petitioner as advising bank and private respondent Inter-Resin Industrial Corporation as beneficiary. Bank of America then wrote Inter-Resin informing the latter of the foregoing and transmitting, along with the bank's communication, the letter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty. Tanay to Bank of America to have the letter of credit confirmed. The bank did not; the bank employee in charge of letters of credit explained to Atty. Tanay that there was no need for confirmation because the letter of



credit would not have been transmitted if it were not genuine. Inter-Resin sought to partially avail under the letter of credit by submitting to Bank of America invoices, the corresponding packing list, export declaration and bill of lading. After being satisfied that Inter-Resin's documents conformed with the conditions expressed in the letter of credit, Bank of America issued in favor of Inter-Resin a Cashier's Check for P10M, the Peso equivalent of the draft drawn by Inter-Resin. This check was picked up by Inter-Resin's Executive Vice-President Barcelina Tio. Thereafter, the Bank of America wrote Bank of Ayudhya advising the latter of the availment under the letter of credit and sought the corresponding reimbursement therefor. Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the second availment under the same letter of credit consisting of a packing list, bill of lading, invoices, export declaration and bills in set, evidencing the second shipment of goods. Upon receipt of a telex from Bank of Ayudhya declaring the letter of credit fraudulent, Bank of America stopped the processing of Inter-Resin's documents and sent a telex to its branch office in Bangkok, Thailand, requesting assistance in determining the authenticity of the letter of credit. Bank of America kept Inter-resin informed of the developments. Sensing a fraud, Bank of America sought the assistance of the NBI. The latter discovered that the vans exported by Inter-Resin did not contain ropes but plastic strips, wrappers, rags and waste materials. NBI also investigated Inter-Resin's President and Executive Vice President Barcelina who, thereafter, were criminally charged for estafa through falsification of commercial documents. Bank of America sued Inter-Resin for the recovery of P10M, the peso equivalent of the draft on the partial availment of the now disowned letter of credit. Inter-Resin claimed that not only was it entitled to retain P10M on its first shipment but also to the balance covering the second shipment. HELD: Bank of America cannot be held liable. Bank of America has only been an advising bank, not confirming, as reflected by the provisions of the letter of credit itself, the petitioner bank's letter of advice, its request for payment of advising fee, and the ission of Inter-Resin that it has paid the same. It was the one that asked InterResin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. The fact, too, that the draft required by the letter of credit is to be drawn under the of General Chemicals (buyer) only means that the same had to be presented to Bank of Ayudhya (issuing bank) for payment.


The letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit The bare statement of the bank employee in responding to the inquiry made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of credit certainly did not have the effect of novating the letter of credit and Bank of America's letter of advise, nor can it justify the conclusion that the bank must now assume total liability on the letter of credit. Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The view that Bank of America should have first checked the authenticity of the letter of credit with Bank of Ayudhya, by using advanced mode of business communications, before dispatching the same to Inter-Resin is not ed in U.C.P w/c states that: "Banks assume no liability or responsibility for the consequences arising out of the delay and/or loss in transit of any messages, letters or documents, or for delay, mutilation or other errors arising in the transmission of any telecommunication . . ." As advising bank, Bank of America is bound only to check the apparent authenticity of the letter of credit, which it did. As to the issue on whether or not Bank of America can recover on the letter of credit, the answer is yes. The transaction in issue is a discounting arrangement. Bank of America, has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment. As a negotiating bank, Bank of America has a right of recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon. While Bank of America failed to allege material facts in its complaint that might have likewise warranted the application of the Negotiable Instruments Law and possibly then allowed it to even go after the indorsers of the draft, this failure does not preclude petitioner bank's right (as a negotiating bank) of recovery from Inter-Resin itself. InterResin its having received P10M from Bank of America on the letter of credit transaction and in having executed the corresponding draft. That payment to Inter-Resin has given Bank of America the right of reimbursement from the issuing bank, Bank of Ayudhya which, in turn, could then seek indemnification from the buyer (the General Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank of America may now turn to Inter-Resin for restitution.


156

FEATI BANK AND TRUST COMPANY V. CA 196 SCRA 576

FACTS: Villaluz sold lauan logs to Christiansen. After inspecting the logs, buyer issued a purchase order. Christiansen later on made arrangements with Hanmi Trade. Hanmi caused Security Pacific National Bank to issue an Irrevocable Letter of Credit available at sight in favor of Villaluz for the logs. The LOC was mailed to FEATI with the instruction that the enclosed letter of credit be forwarded to the beneficiary. The LOC further provided that the draft to be drawn should be accompanied with certain documents (i.e. Signed Commercial Invoice, Tally sheets. Ocean Bills of Lading; Certification by Christiansen). The logs, as loaded on the shipping vessel were inspected and found to be in good condition. But Christiansen refused to issue a certification despite the requests of Villaluz. And because of the absence of this certification, FEATI refused to advance the payment on the LOC. The logs arrived in Korea and were received by Hanmi. It later sold the logs to Taisung Lumber. Meanwhile, Villaluz instituted an action for mandamus and specific performance against Christiansen and FEATI.

bank—that the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank’s obligation as its own according to the and conditions of the credit. A notifying bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the LOC. A negotiating bank, buys or discounts a draft under the LOC. Whereas a confirming bank assumes a direct obligation to the seller and its liability is a primary one as is it in itself issued the LOC. The instructions upon FEATI clearly indicate that it is merely a notifying bank. Since FEATI is merely a notifying bank, it is not a privy to the contract between buyer and seller. Unless it is shown that FEATI has confirmed the LOC, Villaluz has no cause of action against it. In any event, even if Villaluz tenders all the documents required under the LOC, FEATI may refuse to negotiate or accept the draft drawn thereunder and it will not be held liable for its only engagement is to notify and/or transmit to the seller the LOC. If however, FEATI is a confirming bank, it still cannot pay the amount as there was a failure on the part of Villaluz to comply with the of the LOC.

While the case is pending, Christiansen left the country so Villaluz sought to have FEATI be solidarily liable.

Though there is injustice caused to seller, the court is constrained to apply what the law is...dura lex sed lex.

HELD: FEATI cannot be held liable on the LOC due to the non-compliance with the by the beneficiary.

157

In commercial transactions involving letters of credit, the documents tendered must strictly conform to the of the LOC. The tender of documents by the beneficiary (seller) must include all documents required by the letter. The Uniform Customs and Practice for Documentary Credit (U) further provided that the bank may only negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the and conditions of the documentary credit. The absence of any required document justifies a refusal of payment. FEATI was just a notifying bank (in contrast to being a confirming bank). When FEATI accepted the obligation to notify Villaluz that the irrevocable credit has been transmitted to it, such does not amount to a confirmation of the letter. An irrevocable credit is not synonymous to a confirmed credit. The former refers to the duration of the letter of credit—it simply means that the issuing bank may not without the consent of the beneficiary and the buyer revoke his undertaking under the letter. Whereas a confirmed credit pertains to the kind of obligation assumed by the correspondent


KENG HUA PAPER PRODUCTS V. CA 286 SCRA 257

FACTS: Sea land Service is a shipping company. On a relevant date, it received in its Hong Kong terminal a sealed container with 76 bales of unsorted waste paper. A bill of lading was issued for this. On the next month, this shipment was discharged in Manila. Notices of arrival were transmitted to Keng Hua but the shipment remained in Sea land's container. After 481 days, the shipment was unloaded from the container. Keng Hua refuses to settle its obligation because the shipment was 10 metric tons more than it asked from Ho Kee (seller). Keng Hua contends that first, it did not consent to the shipment as evidenced by the "Notice of Refused or On Hand Frieght" which it received from Sea land. Second, acceptance of the shipment would amount to smuggling. And third the amount of the demurrage ballooned from 37K to 67K. HELD:


Keng Hua received the bill of lading immediately after the arrival of the shipment. It had every opportunity to show its dissent, however, it was only after six months that it sent a letter to Sea land informing the latter that it could not accept the shipment. Such inaction conveys the clear inference that it accepted the of the bill of lading. Moreover, the letter merely proves the petitioner's refusal to pick up the cargo and not its rejection to the bill of lading. First, the notice of refused or on hand freight has no value because it was not made by Keng Hua. It was sent by Sea Land to the former. Its significance is to highlight the fact that Keng Hua failed to object to the bill of lading. Second, mere apprehension of violating said laws without a clear demonstration that taking delivery of the shipment has become impossible cannot defeat petitioner's contractual oblifation under the bill of lading. Third, the discrepancy was a result of the variance in the dates when such claims were made. Of course, the longer the cargo remained unclaimed, the higher the demurrage. Any discrepancy between the amount of the goods in the commercial invoice and the amount allowed in the letter of credit will not affect the validity of the contract of carriage. The carrier is not expected to go beyond the representations of the shipper in the bill of lading. The contract was under the arrangement of Shippers Load and Count. Hence, Ho Kee is responsible for the loading and Sea land was oblivios to the contents of the shipment. Keng Hua's remedy is against Ho Kee. STANDBY LETTERS OF CREDIT OR GUARANTEES HISTORY AND PURPOSE  Sometime ago, it is common in international dealings to require the furnishing of a cash deposit as security, but with the expansion of international trade this became prohibitively expensive for the counterparty and in due course gave way to a more convenient safeguard, the provision of a written undertaking by a bank in favor of the buyer or employer payable on demand  Demand guarantees as substitute for cash are designed to provide the beneficiary with a speedy monetary remedy against the counterparty to the underlying contract and to that end are primary in form and documentary in character.  The demand guarantee is expressed to be payable solely on presentation of a written demand and any other specified documents. Accordingly, any demand within the maximum amount stated must in principle be paid by the guarantor, regardless whether the underlying


contract has in fact been broken and regardless of the loss actually suffered by the beneficiary A CONCISE DEFINITION: DEMAND GUARANTEES  Undertaking given for payment of a stated or maximum sum of money on presentation to the party giving the undertaking of a demand or payment and such other documents as may be specified in the guarantee within the period and in conformity with the other conditions of the guarantee  Procured by the seller in favor of the buyer for the latter to be paid in case the seller doesn’t comply with contract provisions. The economic burder is upon the party who breaches the contract TYPICAL USES OF DEMAND GUARANTEES  Employed typically in construction contracts and contracts for international sale of goods  Demand guarantees are intended to safeguard the other party against non-performance or late or defective performance by the supplier or contractor RD

GUARANTEE STRUCTURES AND TERMINOLOGY: DIRECT (3 PARTY) GUARANTEES  Involves a minimum of three parties 1. party/principal—party to the underlying contract whose performance is required to be covered by the guarantee and who gives instruction for its 2. Issuer/guarantor—the bank or other party issuing the guarantee on behalf of the customer the principal 3. The beneficiary—the other party to the underlying contract, in whose favor the guarantee is issued  Usually the guarantee in the 3-party structure is the principal’s bank and carries on business in the same country as the principal, whilst the beneficiary carries on business in a foreign country  Known as direct guarantees because the guarantee is issued to directly by the principal’s bank, not by the local bank in the beneficiary’s country P (ENGLAND)CONSTRUCTION OF A PLANT IN SAUDI ARABIAB (S.A.) BENEFICIARY BANK DEMAND GUARANTEE G BANK (GUARANTY)



1.  G bank may decide to have the guarantee advised and transmitted to B by LB, a local bank in buyer’s location. LB’s function in this case is limited to the checking that the signatures on the guarantee appear to be genuine and advising and transmitting the guarantee issued by G bank. It incurs no liability under the guarantee itself unless it is requested and agrees to confirm it.  There are three distinct contracts 1. Underlying contract between P and B 2. The counter-indemnity or reimbursement contract between P and G bank 3. Contract established by the guarantee issued by G INDIRECT OR 4-PARTY GUARANTEES  Where the beneficiary requires the guarantee to be issued by a bank in his own country and the principal doesn’t bank with such a bank, the principal asks his bank to arrange for the issue of the guarantee by the local bank  Instructions are then given by the principal’s bank/instructing party to a bank in the beneficiary’s country to issue a guarantee against a counter-guarantee by the instructing party, who in turn is entitled to an indemnity from its customer, the principal.  Its an indirect guarantee because instead of P’s bank issuing it directly to B as in the direct guarantee structure, that bank as instructing party arranges for its issue by C bank against a counterguarantee  In this structure, there are 4 distinct contracts 1. The underlying contract between P and B 2. Counter-indemnity or reimbursement contract between P and IP bank 3. Counter-guarantee issued by IP bank to C bank 4. Guarantee issued by C bank to B

2.

3.

4.

P (ENGLAND)CONSTRUCTION OF PLANT IN SAUDI ARABIAB (SAUDI A.)

IP BANK (INSTRUCTING PARTY)

PRINCIPAL TYPES OF DEMAND GUARANTEES

G BANK (GUARANTEE)

5.

Tender or bid guarantee a. Where tenders are invited it is often a condition of consideration of the tender that the tenderer undertakes to sign the contract if its awarded to him, to procure the issue of any performance or other guarantee required by the guarantee and not to modify or withdraw his tender in the meantime b. Purpose—safeguard the beneficiary against breach of such an undertaking c. If the tenderer is successful and fails to sign the contract and to furnish the requisite performance or other guarantee, or withdraws his tender before its expiry, the beneficiary can call upon the guarantor to pay a specified sum designed to compensate him for the trouble and expense he suffered in reawarding the contract, as well as any additional cost of the contract Performance guarantee a. Guarantee of the central performance of the contract from commencement to completion b. Given for a specified percentage of the contract sum c. But there are stages in the relationship between the parties which precede and follow the central performance, and there may be distinct segments of liability to be covered within that performance Advance payment or repayment guarantee a. Underlying contract may entitle the principal to payment of stated sums in advance of performance b. The advance payment guarantee is designed to secure the beneficiary’s right to repayment of the advance if the performance to which it relates is not furnished Retention guarantee a. Construction contracts usually provide for stage payments against architect’s or engineer’s certificate and for a specified percentage of the amount certified in each certificate to be retained by the employer for a specified period of time as safeguard against defects b. The employer may be willing to release such retention moneys against a retention guarantee securing repayment of the released retention moneys if defects are later found or if the contractor fails to complete the contract Maintenance or warranty guarantee a. Construction contracts usually provide that on completion part of the retention moneys are to be retained for a



specified period to cover the cost of any defects or malfunction which become manifest during that period GUARANTEES NOT GUARANTEED BY UNDERLYING CONTRACT  Not all guarantees are meant to be in favor of a party in the underlying contract  For example are customs guarantees which are issued to the customs to cover any duty that may become payable when imported goods which would be exempt from duty if reexported within a specified time are not in fact reexported within that time THE LEGAL NATURE OF A DEMAND GUARANTEE  A demand guarantee is an abstract payment undertaking that is, a promise of payment which, though intended to preserve the beneficiary from loss in connection with the underlying transaction is detached from the underlying contract between principal and beneficiary and is in form a primary undertaking between the guarantor and beneficiary which becomes binding solely by virtue of its issue  A secondary guarantee is both secondary in form and intent. The intention of the parties is that the guarantor will be called upon to pay only if the principal defaults in performance, and then only to the extent of the principal’s liability and subject to any defenses available to the principal  A documentary credit is both primary in intent and form. The parties to the underlying contract intend that the bank issuing the credit is a to be the first port of call for payment, and this is the effect of the agreement between them. Whereas in the case of a suretyship guarantee, the beneficiary cannot look to the guarantor without establishing default by the principal, the reverse is true of the documentary credit. The parties have designated payment by the bank as the primary payment method and only if it fails without fault on the part of the beneficiary is entitled to resort to the buyer under the contract of sale.  DEMAND GUARANTEE STANDS BETWEEN THE SURETYSHIP GUARANTEE AND THE DOCUMENTARY CREDIT—SECONDARY IN INTENT AND PRIMARY IN FORM. Performance is due in the first instance from the principal, and the guarantee is intended to be resorted to only if the principal has failed to perform. But though this is the intent of the parties, the guarantee isn’t in form linked to default under the underlying contract, nor there is any question of performance to hold the beneficiary harmless up to the agreed maximum; and the sole condition of the guarantors payment liability is

the presentation of a demand and other documents specified in the guarantee in the manner of and within the period of the guarantee  THE GUARANTOR HAS NO CONCERN WITH THE UNDERLYING CONTRACT AND IF DEMAND IS DULY PRESENTED, PAYMENT MUST BE MADE DESPITE ALLEGATIONS BY THE PRINCIPAL HAS FULLY PERFORMED THE CONTRACT—IN THE ABSENCE OF ESTABLISHED FRAUD OR OTHER EVENT CONSTITUTING GROUND FOR NON-PAYMENT STANDBY LETTERS OF CREDIT  Undertaking primary in form but intended to be used only as a fallback in the event of default by the principal under the underlying contract  Standby credit in legal perspective is simply another term for demand guarantees  The standby credit has developed into an all-purpose financial instrument embracing a much wider range of uses than the normal demand guarantee. Thus, standby credits are used to financial and non-financial obligations of the principal and to provide credit enhancement for the primary financial undertaking KEY ELEMENTS IN A DEMAND GUARANTEE 1. The parties 2. A reference to the underlying contract 3. The amount or maximum amount of the guarantee and any agreement for reduction or increase 4. The currency of payment 5. The documents, if any, to be presented for the purpose of a demand or of reduction or expiry 6. The expiry date or other expiry provisions as well as any agreement for extension  Where it is intended that the guarantee shall not commence until presentation of a particular document, this fact should be specified  Direct guarantee: principal, guarantor, and beneficiary should be identified  Indirect guarantee: principal, instructing party, beneficiary, and counter-guarantee  Central to the demand guarantee is its documentary character: the rights and obligations it creates are to be determined solely from the of the guarantee and from any document presented in accordance with the guarantee, without the need to ascertain external facts DISTINCT NATURE OF CONTRACTUAL RELATIONSHIPS



 Guarantor’s commitment to the beneficiary arises solely by virtue of the issue of the guarantee and his duty to pay is conditioned only on presentation of demand and other specified documents in conformity with the and within the duration of the guarantee  Principal is not concerned with the contract between the guarantor and beneficiary  Beneficiary has no concern with the contract between the principal and guarantor  The relationship of principal and guarantor has an internal mandate — the guarantor is obliged to act in accordance with the of the contract, failing which he may forfeit his right to reimbursement but those are of no concern to the beneficiary, whose right to payment depends solely on his acting on conformity with the of the guarantee  In indirect contracts, there is an additional mandate which has 2 facets—the mandate from the instructing party to the guarantor as to the issue of the guarantee, which the guarantor as mandatory must comply with if he accepts the instruction; and two, the counter-guarantee which the guarantor exacts from the instructing party as a precondition of issuing the guarantee and which is separate from the mandate 1. Abstract character of the payment undertaking—binding solely by virtue of issue of the guarantee, subject to the beneficiary not rejecting it 2. Independence of the guarantee from the underlying transaction  Guarantee is separate from that contract and the rights and obligations created by the guarantee are independent of those arising under the underlying contract  In the absence of established fraud by the beneficiary, the guarantor is not entitled to refuse payment and the principal is not entitled to have payment restrained merely because of a dispute between the principal and beneficiary 3. Independence of the guarantee from the principal-guarantor relationship—the guarantee is separate from the contract between the principal and the guarantor is not entitled to invoke a breach of that contract 4. Documentary character of guarantee—amount and duration of the duty to pay, the conditions of payment and termination of payment obligation depend solely on the of the guarantee itself and presentation of required documents


5. 6. 7. 8. 9.

Requirement of compliance of the demand with the of the guarantee Guarantor’s duty of examination limited to apparent good order of the document Guarantor’s duty limited the exercise of good faith and reasonable care Independence of counter-guarantee from guarantee Independence of counter-guarantee from mandate received from instructing party

UNITED NATIONS CONVENTION ON INDEPENDENT GUARANTEES AND STAND-BY LETTERS OF CREDIT CHAPTER I. SCOPE OF APPLICATION Article 2 Undertaking 1. For the purposes of this Convention, an undertaking is an independent commitment, known in international practice as an independent guarantee or as a stand-by letter of credit, given by a bank or other institution or persons ("guarantor/issuer") to pay to the beneficiary a certain or determinable amount upon simple demand or upon demand accompanied by other documents, in conformity with the and any documentary conditions of the undertaking, indicating, or from which it is to be inferred, that payment is due because of a default in the performance of an obligation, or because of another contingency, or for money borrowed or advanced, or on of any mature indebtedness undertaken by the principal/applicant or another person. 2.

The undertaking may be given:

(a) At the request or on the instruction ("principal/applicant") of the guarantor/issuer;

of

the

customer

(b) On the instruction of another bank, institution or person ("instructing party") that acts at the request of the customer ("principal/applicant") of that instructing party; or (c)

On behalf of the guarantor/issuer itself.

3. Payment may be stipulated in the undertaking to be made in any form, including:


(a) (b) (c) (d)

Payment in a specified currency or unit of ; Acceptance of a bill of exchange (draft); Payment on a deferred basis; Supply of a specified item of value.

4. The undertaking may stipulate that the guarantor/issuer itself is the beneficiary when acting in favour of another person.

(c) "Counter-guarantee" means an undertaking given to the guarantor/issuer of another undertaking by its instructing party and providing for payment upon simple demand or upon demand accompanied by other documents, in conformity with the and any documentary conditions of the undertaking, indicating, or from which it is to be inferred, that payment under that other undertaking has been demanded from, or made by, the person issuing that other undertaking;

Article 3 Independence of undertaking

(d) "Counter-guarantor" guarantee;

For the purposes of this Convention, an undertaking is independent where the guarantor/issuer's obligation to the beneficiary is not: (a) Dependent upon the existence or validity of any underlying transaction, or upon any other undertaking (including stand-by letters of credit or independent guarantees to which confirmations or counterguarantees relate); or

(e) "Confirmation" of an undertaking means an undertaking added to that of the guarantor/issuer, and authorized by the guarantor/issuer, providing the beneficiary with the option of demanding payment from the confirmer instead of from the guarantor/issuer, upon simple demand or upon demand accompanied by other documents, in conformity with the and any documentary conditions of the confirmed undertaking, without prejudice to the beneficiary's right to demand payment from the guarantor/issuer;

(b) Subject to any term or condition not appearing in the undertaking, or to any future, uncertain act or event except presentation of documents or another such act or event within a guarantor/issuer's sphere of operations. CHAPTER II. INTERPRETATION Article 5 Principles of interpretation In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in the international practice of independent guarantees and stand-by letters of credit. Article 6 Definitions For the purposes of this Convention and unless otherwise indicated in a provision of this Convention or required by the context: (a) "Undertaking" includes "counter-guarantee" and "confirmation of an undertaking"; (b) "Guarantor/issuer" includes "counter-guarantor" and "confirmer";

means

the person

issuing

a counter-

(f) "Confirmer" means the person adding a confirmation to an undertaking; (g) "Document" means a communication made in a form that provides a complete record thereof. CHAPTER III. FORM AND CONTENT OF UNDERTAKING Article 7: Issuance, form and irrevocability of undertaking 1. Issuance of an undertaking occurs when and where the undertaking leaves the sphere of control of the guarantor/issuer concerned. 2. An undertaking may be issued in any form which preserves a complete record of the text of the undertaking and provides authentication of its source by generally accepted means or by a procedure agreed upon by the guarantor/issuer and the beneficiary. 3. From the time of issuance of an undertaking, a demand for payment may be made in accordance with the and conditions of the undertaking, unless the undertaking stipulates a different time. 4. An undertaking is irrevocable upon issuance, unless it stipulates that it is revocable.



CHAPTER IV. RIGHTS, OBLIGATIONS AND DEFENCES Article 13: Determination of rights and obligations 1. The rights and obligations of the guarantor/issuer and the beneficiary arising from the undertaking are determined by the and conditions set forth in the undertaking, including any rules, general conditions or usages specifically referred to therein, and by the provisions of this Convention. 2. In interpreting and conditions of the undertaking and in settling questions that are not addressed by the and conditions of the undertaking or by the provisions of this Convention, regard shall be had to generally accepted international rules and usages of independent guarantee or stand-by letter of credit practice. Article 14: Standard of conduct and liability of guarantor/issuer 1. In discharging its obligations under the undertaking and this Convention, the guarantor/issuer shall act in good faith and exercise reasonable care having due regard to generally accepted standards of international practice of independent guarantees or stand-by letters of credit. 2. A guarantor/issuer may not be exempted from liability for its failure to act in good faith or for any grossly negligent conduct. Article 15: Demand 1. Any demand for payment under the undertaking shall be made in a form referred to in paragraph 2 of article 7 and in conformity with the and conditions of the undertaking. 2. Unless otherwise stipulated in the undertaking, the demand and any certification or other document required by the undertaking shall be presented, within the time that a demand for payment may be made, to the guarantor/issuer at the place where the undertaking was issued. 3. The beneficiary, when demanding payment, is deemed to certify that the demand is not in bad faith and that none of the elements referred to in subparagraphs (a), (b) and (c) of paragraph 1 of article 19 are present. Article 16: Examination of demand and accompanying documents


1. The guarantor/issuer shall examine the demand and any accompanying documents in accordance with the standard of conduct referred to in paragraph 1 of article 14. In determining whether documents are in facial conformity with the and conditions of the undertaking, and are consistent with one another, the guarantor/issuer shall have due regard to the applicable international standard of independent guarantee or stand-by letter of credit. 2. Unless otherwise stipulated in the undertaking or elsewhere agreed by the guarantor/issuer and the beneficiary, the guarantor/issuer shall have reasonable time, but not more than seven business days following the day of receipt of the demand and any accompanying documents, in which to: (a) Examine the demand and any accompanying documents; (b) Decide whether or not to pay; (c) If the decision is not to pay, issue notice thereof to the beneficiary. The notice referred to in subparagraph (c) above shall, unless otherwise stipulated in the undertaking or elsewhere agreed by the guarantor/issuer and the beneficiary, be made by teletransmission or, if that is not possible, by other expeditious means and indicate the reason for the decision not to pay. Article 17: Payment 1. Subject to article 19, the guarantor/issuer shall pay against a demand made in accordance with the provisions of article 15. Following a determination that a demand for payment so conforms, payment shall be made promptly, unless the undertaking stipulates payment on a deferred basis, in which case payment shall be made at the stipulated time. 2. Any payment against a demand that is not in accordance with the provisions of article 15 does not prejudice the rights of the principal/applicant. Article 18: Set-off Unless otherwise stipulated in the undertaking or elsewhere agreed by the guarantor/issuer and the beneficiary, the guarantor/issuer may discharge the payment obligation under the undertaking by availing itself of a right of set-off, except with any



claim assigned to it by the principal/applicant or the instructing party. Article 19: Exception to payment obligation

3. In the circumstances set out in subparagraphs (a), (b) and (c) of paragraph 1 of this article, the principal/applicant is entitled to provisional court measures in accordance with article 20.

1.

CHAPTER V. PROVISIONAL COURT MEASURES

If it is manifest and clear that: (a) Any document is not genuine or has been falsified;

(b) No payment is due on the basis asserted in the demand and the ing documents; or (c) Judging by the type and purpose of the undertaking, the demand has no conceivable basis, the guarantor/issuer, acting in good faith, has a right, as against the beneficiary, to withhold payment. 2. For the purposes of subparagraph (c) of paragraph 1 of this article, the following are types of situations in which a demand has no conceivable basis: (a) The contingency or risk against which the undertaking was designed to secure the beneficiary has undoubtedly not materialized; (b) The underlying obligation of the principal/applicant has been declared invalid by a court or arbitral tribunal, unless the undertaking indicates that such contingency falls within the risk to be covered by the undertaking; (c) The underlying obligation has undoubtedly been fulfilled to the satisfaction of the beneficiary; (d) Fulfilment of the underlying obligation has clearly been prevented by wilful misconduct of the beneficiary; (e) In the case of a demand under a counter-guarantee, the beneficiary of the counter-guarantee has made payment in bad faith as guarantor/issuer of the undertaking to which the counter-guarantee relates.

Article 20: Provisional court measures 1. Where, on an application by the principal/applicant or the instructing party, it is shown that there is a high probability that, with regard to a demand made, or expected to be made, by the beneficiary, one of the circumstances referred in subparagraphs (a), (b) and (c) of paragraph 1 of article 19 is present, the court, on the basis of immediately available strong evidence, may: (a) Issue a provisional order to the effect that the beneficiary does not receive payment, including an order that the guarantor/issuer hold the amount of the undertaking, or (b) Issue a provisional order to the effect that the proceeds of the undertaking paid to the beneficiary are blocked, taking into whether in the absence of such an order the principal/applicant would be likely to suffer serious harm. 2. The court, when issuing a provisional order referred to in paragraph 1 of this article, may require the person applying therefor to furnish such form of security as the court deems appropriate. 3. The court may not issue a provisional order of the kind referred to in paragraph 1 of this article based on any objection to payment other than those referred to in subparagraphs (a), (b) and (c) of paragraph 1 of article 19, or use of the undertaking for a criminal purpose. 159 FACTS:

EDWARD OWEN ENGINEERING V. BARCLAYS BANK 1977 QB 159 (TRIVIA: QB STANDS FOR QUEEN’S BENCH)

EDWARD OWEN ENGRSUPPLY & INSTALL GREENHOUSESADC (LIBYA) 20% payable in advance of delivery 50% presentation of shipping documents 10% when materials on site 15% wh


Y CREDIT


5% final handling over

PERFORMANCE BOND AT 10%

(GUARANTEE) BARCLAY’S

(GUARANTEE) UNCONFIRMED LETTER OF CREDIT) UMMA BANK GUARANTEE *LC expressly provided that payment only to be made when the Libyan customers authorized it. The English suppliers made every effort to get the Libyan customers to amend the LC but to no avail. Then it consulted with its bank, Barclay’s. it wrote a letter to the Libyan customers stating that the LC was unacceptable to them because among other things, it was agreed that the LC should be confirmed but it is not. And more importantly, it said in its letter that since the LC was inoperative, the guarantee is also inoperative. Nonetheless, the Libyan customers demanded from the guarantee. Consequently, Umma bank claimed from Barclay’s bank. The English suppliers were able to obtain a writ of injunction to restrain the bank from paying. Later on, Barclay’s was able to get the discharge of the injunction. In granting its motion, the court held that the relations of the banks with each other were independent of the underlying contract and Barclay’s should have paid Umma bank. HELD: A performance bond is similar to a letter of credit. It has been long established that when a LC is issued and confirmed by the bank, the bank must pay it if the documents are in order and the of the credit are satisfied. Any dispute between the buyer and seller must be settled between themselves. The bank must honor the credit. The only exception to this is when there is established or obvious fraud to the knowledge of the bank. Such is the principle with letters of credit. performance guarantees?

How about with regard

Performance guarantees are virtually promissory notes payable on demand. So long as the Libyan customers make an honest demand, the banks are bound to pay and the banks will rarely if ever be in a position to know whether the demand is honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to pay. All this leads to the conclusion that the performance guarantee is in the same footing as a letter of credit. A bank which gives a performance


guarantee must honor the guarantee according to its . It is not concerned in the least with the relations of the buyer and seller. The bank must pay according to its guarantee, on demand, if so stipulated without proof or conditions. The only exception is when there is clear fraud of which bank has notice. With respect to the English supplier, the only remedy available to it would be to file for damages against the Libyan customers. 160

GROUND AIR TRANSFER V. WESTATES AIRLINES 899 F.2D. 1269

FACTS: WESTATES AIRLINESCHARTER AIR SERVICECHARTER ONE STANDBY LETTER OF CREDIT MICHIGAN BANK Each alleged breach of contract of the other party. This led Westates to call the standby letter of credit. Charter One was able to obtain an injunction and this prompted Westates to appeal the same. HELD: The courts may not “normally ” issue an injunction because of an important exception to the general “no injunction” rule. The exception concerns “fraud” so serious as to make it obviously pointless and unjust to permit the beneficiary to obtain the money. Where the circumstances “plainly ” show that the underlying contract forbids the beneficiary to call a letter of credit, where they show that the contract deprives the beneficiary of even a “colorable ” right to do so, where the contract and circumstances reveal that the beneficiary's demand for payment has “absolutely no basis in fact,”; where the beneficiary's conduct has “so vitiated the entire transaction that the legitimate purposes of the independence of the issuer's obligation would no longer be served,”; then a court may en payment. The Uniform Commercial Code, as adopted in most states, says: Unless otherwise agreed when documents appear on their face to comply with the of a credit but a required document ... is forged or fraudulent or there is fraud in the transaction: .... (b) [except in certain circumstances listed in subsection (a) not here applicable] an issuer acting in good faith may honor the draft or demand


for payment despite notification from the customer of fraud, forgery or other defect not apparent on the face of the documents but a court of appropriate jurisdiction may en such honor. The “fraud” exception does not apply in this case, however, for the record shows nothing “fraudulent” about Westates' demand for payment, nor did the district court find to the contrary. As our earlier discussion of the contract dispute makes clear, the record reveals that Westates' claims and defenses are, at the least, “colorable.” Since the letter of credit at issue is an ordinary “standby” or “guarantee” letter, since Westates can readily fulfill the letter's expressed “call” conditions, and since, in doing so, Westates' call would not amount to “fraud,” commercial law, as embodied in the law of most states, would forbid a court to en Westates from calling the letter, whether or not that court believed that eventually Westates would lose its case on the underlying contract. 161

INSULAR BANK OF ASIA AND AMERICA V. IAC 167 SCRA 450

FACTS: SPOUSES MENDOZA

LOAN K (X) PHILAM LIFE TWO IRREVOCABLE STANDBY LC

REAL ESTATE MORTGAGE (X) TWO PROMISSORY NOTES (X) INSULAR BANK OF ASIA AND AMERICA *FIRST: P500000 *SECOND: P100000 IBAA sued Spouses Mendoza. In the trial court’s decision, the trial court deducted from the supposed liability of IBAA the payments made by the spouses to Philam Life. This was affirmed by the appellate court. HELD: The subject standby LC secure the payment of any obligation of the spouses to Philam Life including all interests, surcharges and expenses. But while they are security arrangements they are not converted into contracts of guaranty. That would make them ultra vires rather than a letter of credit, which is within the powers of a bank. The standby LC are


in effect an absolute undertaking to pay the money advanced or the amount for which the credit is given on the faith of the instrument. They are primary obligations and not accessory contract. Being separate and independent contracts, the payments made by the spouses cannot be added in computing the liability of IBAA under its own standby LC. 162

TRANSFIELD PHILIPPINES V. LUZON HYDRO CORP. 443 SCRA 307

FACTS:

TRANSFIELD TURNKEY CONTRACT: POWER PLANT LUZON HYDRO SECURED STANDBY LC’S ($75000/DAY OF DELAY)

ANZ BANK, SECURITY BANK Petitioner asked for several extensions in completing construction due to different reasons but were denied by Luzon Hydro. These resulted to different legal actions. And upon foreseeing that Luzon Hydro would call on the standby letters of credit, petitioner advised the banks that proceedings were pending between the two parties and that Luzon Hydro doesn’t have any right to call on the LCs. And like a self-fulfilling prophecy, Luzon did notified petitioner of its failure to comply with the contract and that it would call in the standby letters of credit. Petitioner filed a complaint for injunction but this was denied ultimately. HELD: At the core of the present controversy is the applicability of the “independence principle” and “fraud exception rule” in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as “credits,” would provide a better perspective of the case. The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in


the underlying contract. Since the bank’s customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable. In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. However, credits are also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as standby credits. There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft ten d to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract. By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee. A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto. Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to time updates on the Uniform Customs and Practice (U) for Documentary Credits to standardize practices in the letter of credit area. The vast majority of


letters of credit incorporate the U. First published in 1933, the U for Documentary Credits has undergone several revisions, the latest of which was in 1993. The engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are presented to it. The so-called “independence principle ” assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. In both cases the payment may be ened if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit. Can the beneficiary invoke the independence principle? Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it would be contrary to common sense to deny the benefit of an independent contract to the very party for whom the benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle. Given the nature of letters of credit, petitioner’s argument—that it is only the issuing bank that may invoke the independence principle on letters of credit—does not impress this Court. To say that the independence principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary. Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business transaction. On the



other hand, the other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the letter of credit as a security in case the commercial transaction does not push through, or the applicant fails to perform his part of the transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately called “beneficiary.” Petitioner’s argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in commercial transactions. While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioner’s posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as parties by petitioner itself. Furthermore, Luzon Hydro is given the right to call as provided in their contract. Next, petitioner invokes the “fraud exception” principle. It avers that LHC’s call on the Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the “fraud exception” exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it. Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities? Fraud is an exception to the independence principle. The untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to an injunction against payment.


The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged. Generally, injunction is a preservative remedy for the protection of one’s substantive right or interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law. Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right. It must be shown that the invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage. Moreover, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences, which cannot be remedied under any standard compensation. In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC’s call on the Securities which would justify the issuance of preliminary injunction. By petitioner’s own ission, the right of LHC to call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract. PRESIDENTIAL DECREE No. 115 January 29, 1973 PROVIDING FOR TRANSACTIONS

THE

REGULATION

OF

TRUST

RECEIPTS

WHEREAS, the utilization of trust receipts, as a convenient business device to assist importers and merchants solve their financing problems, had gained popular acceptance in international and domestic business practices, particularly in commercial banking transactions;


WHEREAS, there is no specific law in the Philippines that governs trust receipt transactions, especially the rights and obligations of the parties involved therein and the enforcement of the said rights in case of default or violation of the of the trust receipt agreement; WHEREAS, the recommendations contained in the report on the financial system which have been accepted, with certain modifications by the monetary authorities included, among others, the enactment of a law regulating the trust receipt transactions; NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, as Commander-in-Chief of all the Armed Forces of the Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and General Order No. 1, dated September 22, 1972, as amended, and in order to effect the desired changes and reforms in the social, economic, and political structure of our society, do hereby order and decree and make as part of the law of the land the following: Section 1. Short Title. This Decree shall be known as the Trust Receipts Law. Section 2. Declaration of Policy. It is hereby declared to be the policy of the state (a) to encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade; (b) to provide for the regulation of trust receipts transactions in order to assure the protection of the rights and enforcement of obligations of the parties involved therein; and (c) to declare the misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or instruments released under trust receipts as a criminal offense punishable under Article Three hundred and fifteen of the Revised Penal Code. Section 3. Definition of . As used in this Decree, unless the context otherwise requires, the term (a) "Document" shall mean written or printed evidence of title to goods.


(b) "Entrustee" shall refer to the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement. (c) "Entruster" shall refer to the person holding title over the goods, documents, or instruments subject of a trust receipt transaction, and any successor in interest of such person. (d) "Goods" shall include chattels and personal property other than: money, things in action, or things so affixed to land as to become a part thereof. (e) "Instrument" means any negotiable instrument as defined in the Negotiable Instrument Law; any certificate of stock, or bond or debenture for the payment of money issued by a public or private corporation, or any certificate of deposit, participation certificate or receipt, any credit or investment instrument of a sort marketed in the ordinary course of business or finance, whereby the entrustee, after the issuance of the trust receipt, appears by virtue of possession and the face of the instrument to be the owner. "Instrument" shall not include a document as defined in this Decree. (f) "Purchase" means taking by sale, conditional sale, lease, mortgage, or pledge, legal or equitable. (g) "Purchaser" means any person taking by purchase. (h) "Security Interest" means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. (i) "Person" means, as the case may be, an individual, trustee, receiver, or other fiduciary, partnership, corporation, business trust or other association, and two more persons having a t or common interest. (j) "Trust Receipt" shall refer to the written or printed document signed by the entrustee in favor of the entruster containing



and conditions substantially complying with the provisions of this Decree. No further formality of execution or authentication shall be necessary to the validity of a trust receipt. (k) "Value" means any consideration sufficient to a simple contract. TRUST RECEIPT  Shall refer to the written or printed document signed by the entrustee in favor of the entruster containing and conditions substantially complying with the provisions of this Decree. No further formality of execution or authentication shall be necessary to the validity of a trust receipt ENTRUSTER  Person holding title over the goods, documents, or instruments subject of a trust receipt transaction, and any successor in interest of such person  Has security interest—property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only ENTRUSTEE  Person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the

goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: 1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or 2. In the case of instruments, a) to sell or procure their sale or exchange; or b) to deliver them to a principal; or c) to effect the consummation of some transactions involving delivery to a depository or ; or d) to effect their presentation, collection or renewal The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree. Section 5. Form of trust receipts; contents. A trust receipt need not be in any particular form, but every such receipt must substantially contain (a) a description of the goods, documents or instruments subject of the trust receipt; (2) the total invoice value of the goods and the amount of the draft to be paid by the entrustee; (3) an undertaking or a commitment of the entrustee (a) to hold in trust for the entruster the goods, documents or instruments therein described; (b) to dispose of them in the manner provided for in the trust receipt; and (c) to turn over the proceeds of the sale of the



goods, documents or instruments to the entruster to the extent of the amount owing to the entruster or as appears in the trust receipt or to return the goods, documents or instruments in the event of their non-sale within the period specified therein. The trust receipt may contain other and conditions agreed upon by the parties in addition to those hereinabove enumerated provided that such and conditions shall not be contrary to the provisions of this Decree, any existing laws, public policy or morals, public order or good customs. Section 6. Currency in which a trust receipt may be denominated. A trust receipt may be denominated in the Philippine currency or any foreign currency acceptable and eligible as part of international reserves of the Philippines, the provisions of existing law, executive orders, rules and regulations to the contrary notwithstanding: Provided, however, That in the case of trust receipts denominated in foreign currency, payment shall be made in its equivalent in Philippine currency computed at the prevailing exchange rate on the date the proceeds of sale of the goods, documents or instruments held in trust by the entrustee are turned over to the entruster or on such other date as may be stipulated in the trust receipt or other agreements executed between the entruster and the entrustee. Section 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree. The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the and conditions of the trust receipt or any other agreement between the entruster and the entrustee, and the entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a

public sale, become a purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by postpaid ordinary mail to the entrustee's last known business address. RIGHTS OF THE ENTRUSTER 1. He shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree. 2. He may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the and conditions of the trust receipt or any other agreement between the entruster and the entrustee, and the entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. 3. The proceeds shall be applied a. To the payment of the expenses thereof; b. To the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; c. To the satisfaction of the entrustee's indebtedness to the entruster. d. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. 4. Notice of sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee's last known business address. 5. The entruster holding a security interest shall not, merely by virtue of such interest or having given the entrustee liberty of sale



or other disposition of the goods, documents or instruments under the of the trust receipt transaction be responsible as principal or as vendor under any sale or contract to sell made by the entrustee. Section 8. Entruster not responsible on sale by entrustee. The entruster holding a security interest shall not, merely by virtue of such interest or having given the entrustee liberty of sale or other disposition of the goods, documents or instruments under the of the trust receipt transaction be responsible as principal or as vendor under any sale or contract to sell made by the entrustee. Section 9. Obligations of the entrustee. The entrustee shall (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other and conditions of the trust receipt not contrary to the provisions of this Decree. OBLIGATIONS OF THE ENTRUSTEE 1. Hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the and conditions of the trust receipt; 2. Receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; 3. Insure the goods for their total value against loss from fire, theft, pilferage or other casualties; 4. Keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; 5. Return the goods, documents or instruments in the event of nonsale or upon demand of the entruster; and 6. Observe all other and conditions of the trust receipt not contrary to the provisions of this Decree.

Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof. LIABILITY OF ENTRUSTEE FOR LOSS  The risk of loss is borne by the entrustee  Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof. Section 11. Rights of purchaser for value and in good faith. Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest. RIGHTS OF PURCHASER FOR VALUE AND IN GOOD FAITH  Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest.  Doesn’t have recourse against the entrustor when there are warranty claims or defects with regard the sale of the goods Section 12. Validity of entruster's security interest as against creditors. The entruster's security interest in goods, documents, or instruments pursuant to the written of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. VALIDITY OF ENTRUSTER’S SECURITY INTEREST AS AGAINST CREDITORS  The entruster's security interest in goods, documents, or instruments pursuant to the written of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.



Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. FAILURE OF AN ENTRUSTEE TO TURN OVER THE PROCEEDS OF THE SALE OF THE GOODS, DOCUMENTS OR INSTRUMENTS COVERED BY A TRUST RECEIPT TO THE EXTENT OF THE AMOUNT OWING TO THE ENTRUSTER OR AS APPEARS IN THE TRUST RECEIPT OR TO RETURN SUCH GOODS, DOCUMENTS OR INSTRUMENTS IF THEY WERE NOT SOLD OR DISPOSED OF IN ACCORDANCE WITH THE OF THE TRUST RECEIPT  Shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code  If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. Section 14. Cases not covered by this Decree. Cases not provided for in this Decree shall be governed by the applicable provisions of existing laws. CASE DIGESTS: TRUST RECEIPTS LAW 163 FACTS:

VINTOLA V. IBAA 150 SCRA 140

LETTER OF CREDIT TRUST RECEIPT AGREEMENT IBAA HELD: A trust receipt is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. "It secures an indebtedness and there can be no such thing as security interest that secures no obligation. ... As elucidated in Samo vs. People "a trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. " Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was merely the the holder of appeals security title for the advances it had made to the VINTOLAS the goods the VINTOLAS had purchased through IBAA financing remain their own property and they hold it at their own risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter remained a lender and creditor. ... for the bank has previously extended a loan which the L/C represents to the importer, and by that loan, the importer should be the real owner of the goods. If under the trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of a legal fiction than fact, for if it were so, it could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with the purpose of the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof. ... Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that because they have surrendered the goods to IBAA and subsequently deposited them in the custody of the court, they are absolutely relieved of their obligation to pay their loan because of their inability to dispose of the goods. The fact that they were unable to sell the

SPOUSES VINTOLA SALE OF PUCA & OLIVE SHELLS E. ALANI


seashells in question does not affect IBAA's right to recover the advances it had made under the Letter of Credit.


To their case, the VINTOLAS argue that their return of the goods amounted to recovery by IBAA and to order them to further make payment would be tantamount to double recovery. According to them, "the situation is akin to an act or omission constituting both a quasi-delict under the Civil Code and also criminal negligence under the Revised Penal Code" hence they invoke the rule under Art. 2177 of the New Civil Code against double recovery. The VINTOLAS' reliance on said provision of law is erroneous. As correctly argued by IBAA, there is no double recovery since the bank has not yet recovered from them, The VINTOLAS' deposit in court of the puka and olive shells does not amount to recovery by IBAA. 164

PRUDENCIAL BANK V. IAC 216 SCRA 257

FACTS: PHIL RAYON IMPORTATION OF TEXTILE MACHINES NISSHO JAPAN LETTER OF CREDIT TRUST RECEIPT (SURETY SOLIDARILY LIABLE TO PB UPON FAILURE OF PHIL RAYON TO PAY) (X) PRUDENTIAL BANK The trial court held Phil Rayon liable but not for the reimbursement of what the bank paid for the machineries. This was appealed to the appellate court. HELD: A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for


acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of exchange or indebtedness shall not be extinguished or modified" does not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued were sight drafts And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner and not Philippine Rayon which had to accept the same for the latter was not the drawee. Presentment for acceptance is defined an the production of a bill of exchange to a drawee for acceptance. THE TRIAL COURT AND THE PUBLIC RESPONDENT, THEREFORE, ERRED IN RULING THAT PRESENTMENT FOR ACCEPTANCE WAS AN INDISPENSABLE REQUISITE FOR PHILIPPINE RAYON'S LIABILITY ON THE DRAFTS TO ATTACH. Contrary to both courts' pronouncements, Philippine Rayon immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon. Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests' over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in


accordance with the and conditions specified in the trusts receipt, or for other purposes substantially equivalent to any one of the following"

 The recourse would be to go after the parties secondarily liable, namely, the drawer

It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have profited by its operation and/or disposition but very recent information that (sic) reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to for the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease, sale or other disposition of the same that they may have made, notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their own use any money realized from the lease, sale, and other disposition of said machinery." While there is no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such further and other relief as may be just and equitable on the premises." And although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appear in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from t he criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud.

CAN DRAWER THEN SUE THE DRAWEE BASED ON THE ABOVEMENTIONED CHECK WHEN THE LATTER DISHONORS THE CHECK?  No, there is no right of recourse against drawee  But is there any other right of recourse using another law than the NIL? Yes. There could be an action for breach of contract. When there are sufficient funds, the bank is bound to pay. But if the bank refuses to pay, then there will be a breach of contract.

Sec. 127. Bill not an assignment of funds in hands of drawee. A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same. CAN A PAYEE SUE A BANK FOR DISHONORING A CHECK FOR NONPAYMENT?  No, since until the drawee bank pays or accepts the check, it will not be liable for the instrument



REPUBLIC V. NATIONAL CITY BANK 3 SCRA 851

FACTS: The government filed a complaint for escheat of certain unclaimed bank deposits balances pursuant to a law, which provides that unclaimed balances—credits, money, bullion, security or other evidence of indebtedness of any kind, and interest with banks—shall be deposited with the government if it remains to be unclaimed within a period of 10 years of more. One of the banks against the complaint has been filed is First National City Bank. Although it concedes that the government had the right to claim the unclaimed deposit balances, it seeks to exclude some which, according to it, are not within the purview of credits and deposits as defined in law. the trial court held in favor of the bank, excluding from the claim the manager’s checks and other demand drafts. HELD: Credit is a sum credited on the books of a company to a person who appears to be entitled to it. it presupposes a creditor-debtor relationship and may be said to imply ability, by reason of property or estates, to make a promised payment. It is correlative to indebtedness, and that which is due to any person, as distinguished to that which he owes. Do demand drafts and telegraphic orders come within the purview of credits or deposits employed in the law? Since the demand drafts herein involved have not been presented either for acceptance or payment, the inevitable consequence is that the bank never had the chance of accepting or receiving them. Verily, the bank


never became a debtor of the payee concerned and as such the aforesaid drafts cannot be considered as credits subject to escheat within the meaning of the law. Further, a demand draft is different from a cashier’s check for this is a primary obligation of the bank which issues it and constitutes a written promise to pay upon demand. It is an order to a third party purporting to be drawn upon a deposit of funds. If there is any consolation, the telegraphic orders can be escheated in favor of the government. The agreement to remit creates a contractual obligation and has been termed a purchase and sale transaction. The purchaser of a telegraphic transfer upon making payment completes the transaction insofar as he is concerned, though insofar as the remitting bank is concerned the contract is executory until the credit is established. The drawer bank has already been paid the value of the telegraphic order. It appears in the books of the bank that the amounts represented by the orders appear in the names of respective payees. If the latter choose to demand payment, the bank had the obligation to pay them. Sec. 128. Bill addressed to more than one drawee. - A bill may be addressed to two or more drawees tly, whether they are partners or not; but not to two or more drawees in the alternative or in succession. BILL ADDRESSED TO MORE THAN ONE DRAWEE: VALID Pay to X or order P1000. Sgd. A To: Y and Z BILL ADDRESSED TO MORE THAN ONE DRAWEE: INVALID Pay to X or order P1000.

To: Y or Z Pay to X or order P1000.

of Sgd. A

Sgd. A To: Y or in default of Y, Z Sec. 129. Inland and foreign bills of exchange. - An inland of exchange is a bill which is, or on its face purports to both drawn and payable within the Philippines. Any other bill foreign bill. Unless the contrary appears on the face of the the holder may treat it as an inland bill.

bill be, is a bill,

INLAND BILL  Where the instrument is drawn and made payable in the Philippines Pay to X or order P1000.

Sgd. A To: Y, Manila, Philippines FOREIGN BILL 1. Where the bill is not drawn and not payable in the Philippines 2. Where the bill is drawn in but not made payable in the Philippines 3. Where the bill is not drawn but made payable in the Philippines Sec. 130. When bill may be treated as promissory note. - Where in a bill the drawer and drawee are the same person or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note. WHEN BILL MAY BE TREATED AS PROMISSORY NOTE 1. Where the drawer and drawee are the same person 2. Where the drawee is a fictitious person 3. Where the drawee is a person not having capacity to contract  The holder may treat the instrument at his option either as a bill exchange or a promissory note Sec. 131. Referee in case of need. - The drawer of a bill and any indorser may insert thereon the name of a person to whom the holder may resort in case of need; that is to say, in case the bill is dishonored by non-acceptance or non-payment. Such person is called a referee in case of need. It is in the option of the holder to resort to the referee in case of need or not as he may see fit.



 NOTES: WEEK #13 , SEPTEMBER 17 TO 21, 2007 X. ACCEPTANCE Sec. 132. Acceptance; how made, by and so forth. - The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money. ACCEPTANCE, DEFINED.  The signification of the drawee of his assent to the order of the drawer  Act by which a person on whome the bill of exchange is drawn assents to the request of the drawer to pay it  It may be actual, constructive, general or qualified REQUISITES OF ACCEPTANCE 1. Must be in writing 2. Signed by the drawee 3. It must not express that the drawee will perform his promise by any other means than payment of money 4. It must be communicated or delivered to the holder ACCEPTANCE MUST BE IN WRITING  The acceptance cannot be made orally  Sound public policy requires substantial and tangible evidence of contract, and more reliable in its nature than the statement or recollection of witnesses  An oral acceptance is not binding on the drawee  Acceptance by phone is not acceptance ACCEPTANCE, HOW MADE  Usually done by writing across the face of the bill the word “accepted” followed by the signature of the drawee  But any words written by the drawee not negativing directly the order of the drawer, would constitute sufficient acceptance, such as “holder”, “presented” or “seen”, or “honored” or “I will pay the bill” or the signature of the drawee, without more  Acceptance by telegram has been held to be sufficient WHEN ACCEPTANCE NOT REQUIRED

In general, acceptance in the sense in which the term is used in NIL isn’t required for checks, for the same are payable on demand

THE DRAWEE MUST SIGN  Without the signature of the drawee, he would not be bound pursuant to the principle enumerated in Section 18 PAYMENT IN MONEY  Acceptance must be expressed to be payable in money only NECESSITY OF DELIVERY  The acceptance is incomplete until delivery or notification  And the acceptor or drawee who hasn’t communicated his acceptance or transmitted the accepted bill to the holder, may revoke an acceptance before delivery and cancel the written acceptance EFFECT OF ACCEPTANCE  Upon acceptance, the drawee becomes liable on the bill  The bill becomes in effect a note, the acceptor standing in the place of the maker, and the drawer, in the place of the first indorser  But should the drawee refuse to accept, the payee or other holder has no recourse against him but only against the drawer or indorsers, if any PAYMENT NOT ACCEPTANCE  Payment of a check doesn’t include or imply its acceptance in the sense that this word is used in Section 62 of the NIL  Payment is the actual performance while acceptance is the promise to perform an act CASE DIGESTS: SECTION 132 166

SUMACAD V. PROVINCE OF SAMAR 100 PHIL 72

FACTS: While the Province of Samar was still occupied by Japanese military forces, it issued a check in favor of Santos. This check was then negotiated to McGuire, an American citizen and resident of Borongan. After the liberation, McGuire presented the check to the municipal treasurer of Borongan for payment but the latter wasn’t able or didn’t choose to pay the same. This prompted McGuire to write letters seeking payment of the check. This matter was referred to PNB. The bank received photostatic copies of the check to its authencity. The bank then instructed



McGuire to present the check to the provincial treasurer as the province still had funds with the bank. Again, McGuire requested to expedite the actions taken on his check. Before the check was certified by the authorities however, the province withdrew a substantial amount from its , leaving a balance insufficient to fund the check. This happened when McGuire has transferred his rights to McGuire Sumacad. This led to a complaint filed against the province and PNB. The position of PNB is that it didn’t issue the check and was merely called upon to pay the same upon being presented for encashment if and when funds for the purpose were available. That it couldn’t have paid said check because it was never presented to it with the required certification under the circular of the Secretary of Finance. That the relationship between the bank and the province is of debtor and creditor. That there is nothing in the records to show that the holder of the check ever requested the bank to withhold the amount of the check or ever filed with the proper authorities any order to withhold the amount covered by the check. That in any event, the bank cannot be held solidarily liable because the province is the drawee of the check and therefore primarily liable to pay the same. HELD: Bank’s contentions are in the main correct. But in view of the fact that upon its own request, it was furnished with photostatic copies of the check in question and went to the trouble of requiring to present the check to the provincial treasurer for necessary certification, it voluntarily assumed the obligation of holding so much of the deposit of the province as would be sufficient to cover the amount of the check, or before allowing the withdrawal that exhausted said deposit, of making the necessary inquiry on the matter. There was implied acceptance of the check by the bank was thereby created. The request by the bank from Bureau of Posts for photostatic copies of the check and the subsequent requirement by it for its presentation by McGuire to the provincial treasurer and the auditor for certification, would be an empty gesture if the appellant didn’t thereby mean to assume the obligation of paying the check and holding sufficient deposit of the drawer for the purpose. Even so, appellant’s resulting obligation is merely subsidiary, the province being primarily liable to pay the check. DISSENTING OPINION: there was no proper presentment for acceptance and payment and thus, there couldn’t have been acceptance made by the bank of the bill.

167


FACTS: Lim deposited in his PCIB a GSIS check drawn against PNB. Following standard banking procedures, the check was sent to petitioner for clearing. He didn’t return said check but paid the amount to PCIB as well as debited it against the of GSIS. Thereafter, a demand was received from GSIS asking for the credit of the amount since the signatures found in the check were forged. This was done by PNB and it now comes after PCIB but the latter wouldn’t want to return the money. HELD: Acceptance is not required for checks, for the same are payable on demand. Acceptance and payment are distinguished with each other. The former pertains to a promise to perform an act while the latter is the actual performance of the act. PNB had also been negligent with the particularity that it had been guilty of a greater degree of negligence because it had a previous and formal notice from GSIS that the check had been lost, with the request that payment be stopped. Just as important is that it is its acts, which are the proximate cause of the loss. Sec. 133. Holder entitled to acceptance on face of bill. - The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored. Sec. 134. Acceptance by separate instrument. - Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value. Sec. 135. Promise to accept; when equivalent to acceptance. An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value. WHERE ACCEPTANCE IS WRITTEN Acceptance may be made 1. On the bill itself 2. On a separate paper



3.

If on a separate paper, a. It may be acceptance as to the existing bill b. It may be acceptance as to a non-existing bill (virtual acceptance). If the bill is non-existent, the acceptance on a separate paper must comply with the following requirements i. That the contemplated drawee shall describe the bill to be drawn, and promise to accept it ii. That the bill shall be drawn within a reasonable time after such promise is written iii. That the holder shall take the bill upon the credit of the promise

RIGHT TO REQUIRE ACCEPTANCE ON BILL  The holder has the right to require that the acceptance must be written on the bill itself  If the drawee refuses, the holder may treat the bill as dishonored, and he must therefore, give a notice of dishonor  Otherwise, persons secondarily liable are discharged  This section isn’t applicable to sight bills but to bills of exchange ILLUSTRATION OF SECTION 134  B the payee of the bill writes to X drawee, asking him whether he would accept the bill  X write back stating that he accepts the bill  But a telegram that a draft is good in answer to a telegram asking a bank if it would pay the draft isn’t acceptance nor an agreement to accept  Court says that “good” constitutes an acceptance if written on the bill or check but not when written in a collateral document such as a telegram ILLUSTRATION OF SECTION 135  Before the bill is drawn, B prospective payee, writes to X, prospective drawee, if he would accept A’s bill for P1000 to cover cost of goods purchased.  X writes through telegram “yes”  The promise to accept must be in writing  But although the acceptance of a bill may be conditional, a collateral written promise to accept a bill upon a condition isn’t an acceptance EFFECT OF ACCEPTANCE ON SEPARATE PAPER  Suppose that B payee, indorses the bill to C who neither saw nor knew of the letter of acceptance.


 C indorses the bill to D who saw the letter, and on faith thereof, received the bill.  Can C enforce the bill against A? No, because the acceptance binds X only in favor of those whom it is shown and who, on faith thereof, receive the bill for value, and C neither saw nor knew of the acceptance  But B and D can enforce the bill against X because they received the bill for value on faith of the separate acceptance Sec. 136. Time allowed drawee to accept. - The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation. ILLUSTRATION  A bill is payable 30 days after sight  B the payee presents it for acceptance on January 2, 1950 to X drawee  X has 24 hours to accept the bill  But even if he accepts the bill on the next day, the acceptance will date back to January 2  Hence the date of maturity of the bill would be February 1 and not February 2  The time allowed begins from the time of delivery and not after demand for a return of the bill and the time for returning the bill to the holder doesn’t begin to run from the demand for its return but from the date of its delivery SECTION 136 NOT APPLICABLE TO CHECKS  But a drawee bank isn’t entitled to 24 hours to decide whether to pay a check or not since a check is presented for payment, not acceptance NEGLIGENCE OF DRAWEE  The drawee bank contends that the collecting bank is guilty of negligence in not discovering that the signatures of the drawer are forged  Assuming this to be true, the drawee bank is guilty of a greater degree of negligence because it has a previous and formal notice from the drawer that the check had been lost, with the request that payment thereof be stopped.  The collecting bank didn’t cash the check upon its presentation by the last indorser and on the same day sent it for clearing through the Central Bank



 The drawee bank didn’t return the check and said failure to return the check implied that it did considered the check good and would honor it, as it in fact did honor and pay  The drawee bank may not recover from the collecting bank

 Rule forces uniform treatment of instruments whether presented for payment or acceptance and establishes certain and predictable results where it is not clear for which purpose the instrument was presented

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


CONSTRUCTIVE ACCEPTANCE 1. Where the drawee to whom the bill is delivered for acceptance destroys it 2. Where the drawee refuses, within 24 hours after such delivery, or within such time as is given him, to return the bill acceptected or not accepted  In any of these cases, the drawee will be deemed to have accepted the bill even if there is no actual written acceptance by him  Accordingly, the drawee will be primarily liable as an acceptor DRAWEE NOT ENTITLED TO KEEP BILL  The drawee isn’t entitled to keep the bill while he makes up his mind  The bill is at all times the property of the holder and he is entitled to have it when he wants it  If the holder should demand its return before 24 hours, the drawee would be required to comply on pain of being held as an acceptor; but return within 24 hours unaccepted wouldn’t be a dishonor  The drawee could still accept by notification within 24 hours MERE RETENTION IS EQUIVALENT TO ACCEPTANCE  Mere failure to return the bill within 24 hours is an acceptance  The presentation for acceptance is a demand for acceptance which, if the bill is retained by the drawee, implies a demand for its return if acceptance is declined SECTION 136 AND 137 COVER PRESENTMENT FOR ACCEPTANCE AND PAYMENT  It expressly mentions presentment for acceptance but not presentment for payment  The considerations for both are the same  He must return the instrument or be liable for its face value as acceptor


168


FACTS: Petitioner is a quasi-banking institution involved in money market transactions. Alegre invested with petitioner P500,000. Petitioner issued then a promissory note, which would mature approximately after a month. The note covered for Alegre’s placement plus interest. On the maturity of the note, petitioner issued a check payable to Alegre, covering the whole amount due. It was drawn from petitioner’s current in BPI. When the wife of Alegre tried to deposit the check, the bank dishonored the check. Petitioner was notified of this matter and Alegre demanded the immediate payment in cash. In turn, petitioner promised to replace the check on the impossible premise that the first issued be returned to them. This prompted Alegre to file a complaint against petitioner and petitioner in turn, filed a case against BPI for allegedly unlawfully deducting from its counterfeit checks. The trial court decided in favor of Alegre. ISSUE: W/N NIL is applicable to the money market transaction held between petitioner and Alegre? HELD: Considering the nature of the money market transaction, Article 1249 of the CC is the applicable provision should be applied. A money market has been defined to be a market dealing in standardized short-term credit instruments where lenders and borrowers don’t deal directly with each other but through a middleman or dealer in the open market. In a money market transaction, the investor is the lender who loans his money to a borrower through a middleman or dealer. In the case at bar, the transaction is in the nature of a loan. Petitioner accepted the check but when he tried to encash it, it was dishonored. The holder has an immediate recourse against the drawer, and consequently could immediately file an action for the recovery of the value of the check. Further, in a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal tender or, by the use of a check. A check is not legal tender, and therefore cannot constitute valid tender of payment.



Sec. 138. Acceptance of incomplete bill. - A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non payment. But when a bill payable after sight is dishonored by nonacceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment. WHEN ACCEPTANCE MAY BE MADE 1. Before the bill has been signed by the drawer 2. Even when the bill is otherwise incomplete 3. Even when the bill is overdue 4. Even after it has been dishonored by non-acceptance or nonpayment Sec. 139. Kinds of acceptance. - An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express varies the effect of the bill as drawn. Sec. 140. What constitutes a general acceptance. - An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere.

OTHER KINDS OF ACCEPTANCE 1. General acceptance—assents without qualification to the order of the drawer 2. Qualified acceptance—which in express varies the effect of the bills as drawn a. Conditional PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT. SGD. A TO X BANK X could accept the bill with the qualification he will pay upon the happening of a condition, let’s say when D would sell out his shares in a company. b.

Partial

PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT. SGD.A TO: X X would accept but only accept to pay P500. c.

Local

PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT. SGD. A

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

TO: X

(a) Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition therein stated;

X would accept but make a qualification that he would pay only in RCBC Rockwell.

(b) Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn;

PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT.

(c) Local; that is to say, an acceptance to pay only at a particular place; (d) Qualified as to time; (e) The acceptance of some, one or more of the drawees but not of all.


d.

Qualified as to time

SGD. A TO: X X accepts but will pay 20 days after sight. e.

The acceptance of some, one or more of the drawees but not all



PAYMENT AT A PARTICULAR PLACE  But the mere fact that the acceptance is to pay at a particular place doesn’t make the acceptance qualified Sec. 142. Rights of parties as to qualified acceptance. - The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto. RIGHTS OF HOLDER TO REQUIRE GENERAL ACCEPTANCE  The holder has the right to require the drawee to accept the bill without qualification  If the drawee refuses, the holder can treat the bill as dishonored by non-acceptance  Accordingly, the holder must give notice of dishonor EFFECT OF TAKING QUALIFIED ACCEPTANCE  Where the holder takes a qualified acceptance, the drawer and indorsers are discharged  Reason? The drawer and indorsers warrant that the bill would be paid as drawn, or as indorsed by them, and a qualified acceptance would vary their contract without their consent  If the drawer or indorsers give their consent to the qualified acceptance, then they are not discharged. They will be considered to have given consent when after receiving notice of the qualified acceptance, he doesn’t express his dissent thereto within a reasonable time XI. PRESENTMENT FOR ACCEPTANCE Sec. 143. When presentment for acceptance must be made. -Presentment for acceptance must be made: (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or


(b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. CASE DIGESTS: SECTION 143 169

PRUDENTIAL BANK V. IAC 216 SCRA 257

FACTS: PHIL RAYON IMPORTATION OF TEXTILE MACHINES NISSHO JAPAN LETTER OF CREDIT TRUST RECEIPT (SURETY SOLIDARILY LIABLE TO PB UPON FAILURE OF PHIL RAYON TO PAY) (X) PRUDENTIAL BANK The trial court held Phil Rayon liable but not for the reimbursement of what the bank paid for the machineries. This was appealed to the appellate court. HELD: A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL).



Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of exchange or indebtedness shall not be extinguished or modified" does not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued were sight drafts And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner and not Philippine Rayon which had to accept the same for the latter was not the drawee. Presentment for acceptance is defined an the production of a bill of exchange to a drawee for acceptance. THE TRIAL COURT AND THE PUBLIC RESPONDENT, THEREFORE, ERRED IN RULING THAT PRESENTMENT FOR ACCEPTANCE WAS AN INDISPENSABLE REQUISITE FOR PHILIPPINE RAYON'S LIABILITY ON THE DRAFTS TO ATTACH. Contrary to both courts' pronouncements, Philippine Rayon immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. 170

PHIL. BANK OF COMMERCE V. ARUEGO 102 SCRA 530

FACTS: Aruego, on behalf of World Current Events, entered into a Credit Agreement with PBCom, for the publication of the company’s periodicals. At every printing endeavor by the printing press, a bill of exchange is drawn against PBCom. The instruments are signed by Aruego, without any indication that he is an agent of World Current Events. When he was being held liable by PBCom, he averred that he only signed the instrument in the capacity of agent of the company. HELD: An inspection of the drafts accepted by the defendant would show nowhere that he has disclosed that he was g in representation of the Philippine Education Foundation Company. He merely signed his name. For failure to disclose his principal, Aruego was personally liable for the drafts he accepted. Sec. 144. When failure to present releases drawer and indorser. -Except as herein otherwise provided, the holder of a bill which is


required by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do so, the drawer and all indorsers are discharged. PRESENTMENT FOR PAYMENT, DEFINED  Production of a bill of exchange to the drawee for his acceptance GENERAL RULE AS TO PRESENTMENT FOR ACCEPTANCE  Presentment for acceptance is not necessary for cases aside from the three enumerated above  In those three cases, to charge persons secondarily liable it is necessary o To make presentment for acceptance o To negotiate the bill within a reasonable time ILLUSTRATION 1. Where the bill is payable after sight. A bill is payable 30 days after sight. The law requires the bill to be presented for acceptance. The date of maturity will not be fixed if the bill isn’t presented. 2. Where there is express stipulation. The bill contains a stipulation that it must be presented for acceptance. Such a bill must be presented for acceptance. 3. Where bill is drawn elsewhere than at the residence of drawee. The bill reads as follows a. The bill must be presented for acceptance in order to inform the drawee X of the existence of the bill so that he can make arrangements for its payment at the PNB Manila Pay to B or order P1000 at the PNB, Manila. Sgd. A To X, Davao City Sec. 145. Presentment; how made. Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and



(a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only; (b) Where the drawee is dead, presentment may be made to his personal representative; (c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee.

 Where presentment is for acceptance, it may be made for all kinds of bills before 12 o’clock noon on Saturday provided that day isn’t a holiday Sec. 147. Presentment where time is insufficient. - Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers.

TIME FOR MAKING PRESENTMENT FOR ACCEPTANCE 1. Before the bill is overdue 2. And within reasonable time after acquisition thereof TO WHOM PRESENTMENT MADE 1. Generally, presentment must be made to the drawee or some person authorized to accept or refuse acceptance on his behalf 2. Where there are two or more drawees, presentment must be made to both of them unless— a. One is duly authorized to accept or refuse acceptance b. They are partners, subject to the limitation set forth in the partnership law 3. With regard to a drawee who is dead, paragraph b is merely permissive since presentment is excused where the drawee is dead 4. With regard to an insolvent or bankrupt drawee, it indicates merely a permission to adopt either one of two alternative methods of presentment stated—not permission to omit presentment altogether Sec. 146. On what days presentment may be made. - A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day. SECTION 146 COMPARED WITH SECTIONS 72 AND 85  The only difference between Sections 72 and 85 is that under Section 146, there is no distinction between in strumen ts payable at a fixed or determinable future time and instrument s payable on demand


MANILA, PHILS. September 17, 2007 PAY TO B OR ORDER AT THE PNB MANILA P1000 ON SEPTEMBER 20, 2007. SGD. A TO X, WASHINGTON, DC.  Presentment where time is insufficient  The delay for presentment for acceptance is excused  Nonetheless, still, the payee must do everything in the process in presenting to the drawee for acceptance the instrument Sec. 148. Where presentment is excused. - Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases: (a) Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill. (b) Where, after the exercise presentment cannot be made.

of

reasonable

diligence,

(c) Where, although presentment has been acceptance has been refused on some other ground.

irregular,

APPLICATION OF SECTION 148 1. Where the drawee is dead, presentment for acceptance is not necessary. Hence, it seems that under paragraph b of Section


2. 3.

145, the presentment to the representative is merely optional. Presentment is excused in this case and in case the drawee has absconded, or is fictitious or a person not having capacity to contract because it would then be futile Where presentment cannot be made notwithstanding the exercise of due diligence, presentment is excused An irregular indorsement in which acceptance is refused on some other ground is where presentment is made on a Sunday, it is irregular but the acceptance is refused on the ground that the drawer has no funds in the hands of the drawee

Sec. 149. When dishonored by nonacceptance. - A bill is dishonored by non-acceptance: (a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted. Sec. 150. Duty of holder where bill not accepted. - Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. DUTY OF HOLDER WHERE BILL IS DISHONORED BY NON-ACCEPTANCE  Where the bill is dishonored by non-acceptance, the holder must give notice of dishonor and protest, when required  Otherwise, the drawer and indorsers will be discharged Sec. 151. Rights of holder where bill not accepted. - When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary. RIGHTS OF HOLDER WHERE BILL DISHONORED BY NON-ACCEPTANCE  When a bill is dishonored by non-acceptance, there is no necessity of making a presentment of the bill for payment  But of course, if after previous non-acceptance, the bill is subsequently accepted, presentment for payment is necessary  And when the bill has been accepted for honor, to charge the acceptor for honor, presentment for payment is also necessary

 The holder, after giving notice of dishonor, and protesting when required, can IMMEDIATELY file an action against the parties secondarily liable on the bill. This is true even when the bill is payable at a fixed or determinable future time and the date of maturity hasn’t yet arrived. The holder need not wait for that day to arrive. XII. PROTEST Sec. 152. In what cases protest necessary. - Where a foreign bill appearing on its face to be such is dishonored by nonacceptance, it must be duly protested for nonacceptance, by nonacceptance is dishonored and where such a bill which has not previously been dishonored by nonpayment, it must be duly protested for nonpayment. If it is not so protested, the drawer and indorsers are discharged. Where a bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary. NECESSITY OF PROTEST  Protest is required only for foreign bills but not for inland bills or notes. However, they may also be protested if desired.  Omission of protest, where protest is required, will discharge the drawer and the indorsers  Protest is required— 1. Where the foreign bill is dishonored by non-acceptance 2. Where the foreign bill is dishonored by non-payment, it not having been previously dishonored by non-acceptance 3. Where the bill has been accepted for honor, it must be protested for non-payment before it is presented for payment to the acceptor for honor 4. Where the bill contains a referee in case of need, it must be protested for non-payment before it is presented for payment to the referee in case of need MEANING OF PROTEST  A formal statement in writing made by a notary under his seal of office at the request of the holder of a bill or note, in which it is declared that the same was on a certain day presented for payment was refused, whereupon the notary protests against all parties to such instrument and declares that they will be held responsible for all loss or damage arising from its dishonor  All the steps or acts accompanying the dishonor of a bill or note necessary to charge an indorser CASE DIGESTS: SECTION 152



171

ALLIED BANKING CORPORATION V. CA 494 SCRA 467

FACTS: ALLIEDDISCOUNTING AGREEMENT: EXPORT BILLGG SPORTSWEAR

GUARANTYGIDWANI; ALCRON SURETYDE VILLA; GIDWANI

Allied purchased from GG Sportswear an export bill to which the latter is the beneficiary. It was drawn under a letter of credit for the transit of training suits to West . It was issued by Chekiang First Bank of Hong Kong. With the purchase, it credited the of GG Sportswear. On this same date, Gidwani and Alcron executed their respective letters of guaranty for the export bill, holding themselves liable in case the bill is not paid. Consequently, de Villa and Gidwani issued a letter of surety, guaranteeing payment of the bill. Part of the stipulations of these two guarantee arrangements is that any notice of protest is waived. The date came when Allied presented the check for payment to Chekiang Bank but such was dishonored for lacking material documents with regard the letter of credit. This prompted Allied Bank to demand payment from the respondents but the latter refused to do so. One of their averments is that they couldn’t be made liable on the export bill absent any notice of protest coming from petitioner. The trial court dismissed the case filed by petitioner and this was modified by the appellate court by holding GGS liable but exonerating the guarantors from any liability. HELD: What transpired in this case was a discounting arrangment. The beneficiary, GGS, instead of proceeding to the issuing bank, negotiated the draft with petitioner. Before petitioner agreed to purchase the export bill, it required letters of guaranty and surety to cover the payment of the bill in case it wouldn’t be paid. In this case, it must be stressed that obligations from contracts have the force of law between the parties and should be complied with in good faith. Nothing can stop the parties from establishing stipulations and clauses as they may deem convenient.


Here, the provisions on guaranty is pertinent. The respondents undertook and bound themselves as guarantors and sureties to pay the full amount of the export bill. Respondents claim that the petitioner failed to give a notice of protest and given such, they are exonerated of their liabilities. Nonetheless, their contention should fail. The provisions on indorsers is not applicable to this case. The contract of indorsement is primarily of transfer and a guaranty is a personal security. The liability of a guarantor is broader than that of an indorser. Unless the bill is promptly presented for payment at maturity and due notice of dishonor given to the indorser, he will be discharged from liability thereon. On the other hand, except where required by the provisions of the contract of suretyship, a demand or notice of default is not required to fix the liability of the surety. Therefore, no notice of protest is necessary to charge the respondents solidarily on the export bill. Sec. 153. Protest; how made. - The protest must be annexed to the bill or must contain a copy thereof, and must be under the hand and seal of the notary making it and must specify: (a) The time and place of presentment; (b) The fact that presentment was made and the manner thereof; (c) The cause or reason for protesting the bill; (d) The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found. PROCEDURE FOR PROTEST  Where the instrument is presented for payment and payment is refused, the instrument may be taken by the notary public to the party and the party may state that he refuses to pay it; the notary makes a statement to that effect and attaches his seal that it has been dishonored, and he has protested it for non-payment.  The notary keeps this or he may send his sworn statement, one copy to one person and one to the other  The above is the protest. It is not the notice of protest.  The protest is a solemn declaration made by the notary public that the paper has been dishonored CERTIFICATE OF PROTEST AS EVIDENCE


 When suit is brought on the paper, it is absolutely necessary that proof be shown  So when one comes to prove his case as the holder of an instrument he must prove that there has been a protest of the instrument, that it has been presented for payment or acceptance to the person liable and that it has been refused.  At the trial, the statement of the protest by the notary is a part of his case NOTICE OF PROTEST  After the notary protests the instrument, he sends notice to all the parties on the instrument  He can do this in several ways. He might send it to the person who sent the paper for collection. Then the notary public would send the notice of protest for the other parties on the instrument, to the last person on the instrument, and he would say “Notices enclosed herewith to be sent to the other parties”  If the holder has sent notice to all parties he is entield to come in and recover because he has performed the contract. He has sent notices to all the parties on the instrument that he intends to recover against them. REASONS FOR REQUIRING PROTEST 1. For uniformity in international transactions because most countries require it 2. In order to furnish authentic and satisfactory evidence of the dishonor to the drawer who, from his residence abroad, may experience difficulty in ing the matter and may be forced to rely on the representations of the holder MEASURE OF DAMAGES 1. Face value of the bill 2. Interest thereon 3. Protest fees 4. Re-exchange, being the additional expense of procuring a new bill for the same amolunt payable in the same place as day of dishonor Sec. 154. Protest, by whom made. - Protest may be made by: (a) A notary public; or (b) By any respectable resident of the place where the bill is dishonored, in the presence of two or more credible witnesses.


Sec. 155. Protest; when to be made. - When a bill is protested, such protest must be made on the day of its dishonor unless delay is excused as herein provided. When a bill has been duly noted, the protest may be subsequently extended as of the date of the noting. MEANING OF “DULY NOTED”  The notary public jots down a note on the bill, or a paper attached thereto, or in his registry book, consisting of his initials or signature and those matters required to be stated in Section 153  The noting must be made on the day of dishonor but it may be extended into a formal protest afterwards  The protest may even be made in the trial Sec. 156. Protest; where made. - A bill must be protested at the place where it is dishonored, except that when a bill drawn payable at the place of business or residence of some person other than the drawee has been dishonored by nonacceptance, it must be protested for non-payment at the place where it is expressed to be payable, and no further presentment for payment to, or demand on, the drawee is necessary. PLACE FOR MAKING PROTEST  Generally, the protest must be made at the place where the instrument is dishonored  The exception is where the bill is payable at a place other than the residence of the payee Sec. 157. Protest both for non-acceptance and non-payment. A bill which has been protested for non-acceptance may be subsequently protested for non-payment. PROTEST FOR NON-PAYMENT OPTIONAL AFTER PROTEST FOR NONACCEPTANCE  Where a bill has already been protested for non-acceptance, protest for non-payment is merely optional  Under Section 151, after a bill has been dishonored by non-acceptance, presentment for payment is not necessary Sec. 158. Protest before maturity where acceptor insolvent. -Where the acceptor has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors before the bill matures, the holder may cause the bill to be protested for better security against the drawer and indorsers.



PROTEST FOR BETTER SECURITY  One made by the holder against the drawer and indorsers where the acceptor has been adjudged bankrupt or an insolvent or has made an assignment for the benefit of creditors before the bill matures  Such a protest isn’t necessary to charge the drawer or indorsers  It is optional on the part of the holder WHEN PROTEST FOR BETTER SECURITY MADE 1. After acceptance 2. But before the date of maturity 3. When the acceptor has been adjudged bankrupt or insolvent or has made an assignment for the benefit of creditors PURPOSE OF PROTEST FOR BETTER SECURITY  When the acceptor is declared bankrupt, he probably wouldn’t be able to pay for the bill  The protest for better security is to give notice to the drawer or indorsers of this fact in order to enable them to make the necessary arrangements so that they will not be held liable thereon and prevent loss of re-exchange Sec. 159. When protest dispensed with. - Protest is dispensed with by any circumstances which would dispense with notice of dishonor. Delay in noting or protesting is excused when delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, the bill must be noted or protested with reasonable diligence. Sec. 160. Protest where bill is lost and so forth. - When a bill is lost or destroyed or is wrongly detained from the person entitled to hold it, protest may be made on a copy or written particulars thereof. EFFECT OF LOSS OR DESTRUCTION OF BILL  Loss or destruction of the bill doesn’t excuse the making of the protest  In a case, checks indorsed without restriction and deposited in the defendant bank which credited the amount to the depositor’s and mailed them to its correspondent for collection, were lost and not found until after the drawer became bankrupt  They were not dishonored due to the failure of defendant to attempt to collect them as lost paper


 It was held that the bank must stand the loss and cannot charge the amount of the checks to the depositor’s XIII. ACCEPTANCE FOR HONOR Sec. 161. When bill may be accepted for honor. - When a bill of exchange has been protested for dishonor by non-acceptance or protested for better security and is not overdue, any person not being a party already liable thereon may, with the consent of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose the bill is drawn. The acceptance for honor may be for part only of the sum for which the bill is drawn; and where there has been an acceptance for honor for one party, there may be a further acceptance by a different person for the honor of another party. ACCEPTANCE FOR HONOR  An acceptance of bill made by a stranger to it before maturity, where the drawee of the bill has refused to accept it, and the bill has been protested for non-acceptance, or where the bill has been protested for better security  Such an acceptance is also called an acceptance supra protest  This is a peculiar kind of acceptance. It most frequently happens when the original drawee refuses to accept the bill in which case a stranger may accept the bill for the honor of some one of the parties thereto, which acceptance will inure to the benefit of all parties subsequent to him for whose honor it was accepted PURPOSE FOR ACCEPTANCE FOR HONOR  To save the credit of the parties to the instrument or some party to it, as the drawer, drawee, or indorser or somebody else  Someone desires to save the credit of another on the bill and he does so by writing accepted on the bill  The court holds that the consideration is presumed and the presumption is that he does have funds or money for the party for whose honor he accepts REQUISITES FOR ACCEPTANCE FOR HONOR 1. The bill must have been previously protested for non-acceptance or for better security 2. The bill isn’t overdue at the time of the acceptance for honor 3. The acceptor for honor must be a stranger to the bill. If he is a party, his acceptance for honor wouldn’t give any additional security to the holder, as such a party is already liable thereon



4.

The holder must give his consent

Sec. 162. Acceptance for honor; how made. - An acceptance for honor supra protest must be in writing and indicate that it is an acceptance for honor and must be signed by the acceptor for honor. HOW ACCEPTANCE IS MADE  Acceptance for honor must be in writing and indicate that it is an acceptance for honor and signed by the person making the acceptance ACCEPTOR FOR HONOR MUST APPEAR BEFORE NOTARY  It is essential that the acceptor for honor appear before the notary and declare that he accepts the protested bill in honor of the drawer or indorser, as the case may be, and that he will pay it at the appointed time

 He agrees to pay if—presentment for payment has been made; the drawee doesn’t pay; the bill is protested for non-payment; and notice of dishonor is given to him Sec. 166. Maturity of bill payable after sight; accepted for honor. -Where a bill payable after sight is accepted for honor, its maturity is calculated from the date of the noting for nonacceptance and not from the date of the acceptance for honor. Sec. 167. Protest of bill accepted for honor, and so forth. - Where a dishonored bill has been accepted for honor supra protest or contains a referee in case of need, it must be protested for non-payment before it is presented for payment to the acceptor for honor or referee in case of need. Sec. 168. Presentment for payment to acceptor for honor, how made. - Presentment for payment to the acceptor for honor must be made as follows:

Sec. 163. When deemed to be an acceptance for honor of the drawer. - Where an acceptance for honor does not expressly state for whose honor it is made, it is deemed to be an acceptance for the honor of the drawer.

(a) If it is to be presented in the place where the protest for non-payment was made, it must be presented not later than the day following its maturity.

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

(b) If it is to be presented in some other place than the place where it was protested, then it must be forwarded within the time specified in Section one hundred and four.

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

Sec. 169. When delay in making presentment is excused. The provisions of Section eighty-one apply where there is delay in making presentment to the acceptor for honor or referee in case of need.

TO WHOM ACCEPTOR IS LIABLE  Suppose A is the drawer of a bill with B as payee and X as drawee  It is successively indorsed to C, D, E and F. X drawee at maturity refuses to accept the bill and F protests it.  Before the date of maturity, Y as a stranger accepts the bill for the honor of C.  Subject to 165, Y is liable to F holder, and to D and E, parties subsequent to C, the party for whose honor Y accepted the bill CONTRACT OF ACCEPTOR FOR HONOR  The liability of an acceptor for honor is secondary and not primary or absolute

Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is dishonored by the acceptor for honor, it must be protested for non-payment by him. NECESSITY OF PROTEST  The holder must protest for non-payment by the acceptor for honor in order to fix the liabilities of the indorsers NOTES: WEEK #14 SEPTEMBER 24-28, , 2007



XIV. PAYMENT FOR HONOR Sec. 171. Who may make payment for honor. - Where a bill has been protested for non-payment, any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose it was drawn. Sec. 172. Payment for honor; how made. - The payment honor supra protest, in order to operate as such and not a mere voluntary payment, must be attested by a notarial of honor which may be appended to the protest or form extension to it.

for as act an

Sec. 173. Declaration before payment for honor. - The notarial act of honor must be founded on a declaration made by the payer for honor or by his agent in that behalf declaring his intention to pay the bill for honor and for whose honor he pays. REQUISITES FOR PAYMENT FOR HONOR 1. The bill has been protested for non-payment 2. And any person even a party thereto, may pay supra protest FORM FOR PAYMENT FOR HONOR 1. The payment must be attested by notarial act appended to the protest or form an extension of it 2. The notarial act must be based on a declaration by the payer for honor PROCEDURE FOR PAYMENT FOR HONOR 1. The payer or his agent goes to a notary public and declares his intention to pay the bill and for whose honor he pays 2. The notary then records the declaration in the protest or in a separate paper attached to it 3. The payer then notifies the person for whose honor he pays within reasonable time PURPOSE FOR PAYMENT FOR HONOR  Instead of simple negotiation to the person desiring to pay, payment for honor may be availed of when the holder doesn’t want to indorse the bill and thereby incur the liabilities of an indorser or of one negotiating by mere delivery Sec. 174. Preference of parties offering to pay for honor. Where two or more persons offer to pay a bill for the honor of different

parties, the person whose payment will discharge most parties to the bill is to be given the preference. Sec. 175. Effect on subsequent parties where bill is paid for honor. - Where a bill has been paid for honor, all parties subsequent to the party for whose honor it is paid are discharged but the payer for honor is subrogated for, and succeeds to, both the rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter. ILLUSTRATION OF EFFECT OF PAYMENT FOR HONOR PAY TO B OR ORDER P1000. SGD.A TO: X DRAWEE BCDEF X REFUSES TO PAY. F HAS DULY PROTESTED FOR NON-PAYMENT Y PAYS FOR THE HONOR OF C  D and E, being subsequent to C, for whose honor the payment is made, are discharged  Y acquires the rights of F, as against C, A, B and X parties who are liable to C but the payor for honor shall notify within reasonable time, the party for whose honor he pays.  Otherwise, the party is not bound to refund. PREFERENCE OF PARTIES OFFERING TO PAY  If Z offers to pay for the honor of B, he is to be preferred as Z’s payment for the honor of B will discharge C, D, and E while Y’s payment for C would only discharge D and E Sec. 176. Where holder refuses to receive payment supra protest. -Where the holder of a bill refuses to receive payment supra protest, he loses his right of recourse against any party who would have been discharged by such payment. Sec. 177. Rights of payer for honor. - The payer for honor, on paying to the holder the amount of the bill and the notarial expenses incidental to its dishonor, is entitled to receive both the bill itself and the protest. RIGHTS OF PAYER FOR HONOR



1. 2.

He acquires the rights of a holder under Section 175 and in addition The payor for honor has also the right to receive both the bill and the protest. This is to enable him to enforce his rights against those who are liable to him.

Wednesday: 185 and 186 plus cases XV. BILLS IN SET Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill. BILL IN SET  One composed of various parts, each part being numbered, and containing a reference to the other parts, all of which parts constitute one bill ILLUSTRATION OF A BILL IN SET CONSISTING OF TWO PARTS Exchange for P2000 First

First part Manila, Philippines September 24, 2007

30 days after sight of this First of Exchange (Second part unpaid), pay to the order of B P2000. Sgd. A To X 48 Exchange Place New York City

Exchange for P2000 Second

Second part Manila, Philippines September 24, 2007

30 days after sight of this Second of Exchange (First part unpaid), pay to the order of B, P2000. Sgd. A


To X 48 Exchange Place New York City PURPOSE OF BILL IN SET  Bills in set are for the purpose of increasing the probability of the bill reaching its destination  For this reason, each part is sent by different conveyances  B, the payee, is supposed to negotiate only one part, or if he is paid on one, he cannot be paid on the second part Sec. 179. Right of holders where different parts are negotiated. -Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is, as between such holders, the true owner of the bill. But nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him. ILLUSTRATION OF SECTION 179  B, payee, wants to raise P4000. In violation of his rights, he negotiates the first part of the bill to C and the second part to D, both of whom are holders in due course. Who is the true owner of the bill?  If B negotiates to C on September 25 and to D on September 27, C is the true owner, as C’s title accrues first.  But if D succeeds in presenting his part of the bill for acceptance for payment and X the drawee, accepts or pays the second part in due course, X is protected and X can refuse to accept C’s part of the bill. Sec. 180. Liability of holder who indorses two or more parts of a set to different persons. - Where the holder of a set indorses two or more parts to different persons he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills. LIABILITY OF HOLDER WHO INDORSES TWO OR MORE PARTS  B is liable on both parts as if there are two bills, on the first to C and on the second to D  In other words, as a result of his negotiation of the 2 parts, B is liable for a total of P4000  But A, the drawer, or X, the drawee, is liable only on one part or for P2000 unless the drawee accepts both parts


 Suppose that C and D respectively negotiate the parts they have to E, the first part, and F, the second part. C is liable to E for the part he endorsed to E and D is liable to F for the part he indorsed to F. Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill. DRAWEE MUST ACCEPT ONLY ONE PART  The drawee X must accept only one part  But if he accepts both parts and they are negotiated to holders in due course, he is liable on every such part as if it were a separate bill, that is, for a total of P4000  But he can ask for reimbursement from A, drawer, on only one part, that is P2000, because the order of the drawer to him is to pay only one part, not both parts Sec. 182. Payment by acceptor of bills drawn in sets. - When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon. ILLUSTRATION  Suppose that X accepts only the first part. Then he pays the second part without requiring the return of the first part.  On the date of maturity, X would still be liable to the holder of the first part on which it appears his acceptance Sec. 183. Effect of discharging one of a set. - Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or otherwise, the whole bill is discharged. EFFECT OF DISCHARGE ON ONE PART  Subject to the exceptions in Section 180, 181, and 182, if one part is discharged, the whole bill is discharged  The reason is that the bill constitutes only one bill  Thus, suppose that in the illustration, X the acceptor pays the first part which he accepted.  The second and third parts are also discharged XVI. PROMISSORY NOTES AND CHECKS

Sec. 184. Promissory note, defined. A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him. IS MAKER LIABLE AS INDORSER?  The maker of a note payabloe to himself who indorses it is not liable as indorser but only as maker.  Since the indorsement by the maker-payee isn’t part of a sale of the note, it should not give rise to any warranty.  In the absence of such warranties, it is immaterial whether the defendant is sued as an indorser or as maker since, in either event, he may set up the defense of fraud against the plaintiff unless the plaintiff is a holder in due course. SPECIAL TYPES OF PROMISSORY NOTES 1. Certificate of deposit 2. Bonds 3. Bank notes 4. Due bills CERTIFICATE OF DEPOSIT  Written acknowledgement by a bank of the receipt of money on deposit which the bank promises to pay to the depositor, bearer, or to some other person or order BONDS  A promise, under seal to pay money  More formal in character  Runs for a longer period of time  Issued under different legal circumstances CLASSES OF BONDS 1. Mortgage bonds 2. Equipment bonds 3. Collateral trust bonds 4. Guaranteed bonds 5. Debentures 6. Income bonds 7. Convertible



8. Redeemable 9. ed bonds 10. Coupon bonds BANK NOTES  Bank notes are the promissory notes of the issuing bank payable to bearer on demand and intended to circulate as money  Regarded as cash and from hand to hand without any evidence of title in the holder than that which arises from possessession  However, they are not money DUE BILL  Instrument whereby one person acknowledges his indebtedness to another CLEARING HOUSE DUE BILL  Device of clearing house associations to save inconvenience and labor incident to the settling of balances between the of the association  The certificates or due bills are issued, instead of actual payment of money, by one member of the association to another  They are not merely certificates of deposit creating a contract of bailment but are negotiable as checks payable to bearer, or as promissory notes payable to order or bearer Sec. 185. Check, defined. - A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check. CHECK, DEFINED  Bill of exchange drawn on a bank payable on demand CHECK DISTINGUISHED FROM A PROMISSORY NOTE; USED AS SUBSTITUTE FOR MONEY; EFFECT OF WORTHLESS CHECKS ON TRADE CIRCLES AND BANKING COMMUNITY  A check is not a mere undertaking to pay an amount of money  It is an order addressed to a bank and partakes of a representation that the drawer has funds on deposit against which the check is drawn, sufficient to ensure payment upon its presentment to the bank  Element of assurance or certainity that the instrument will be paid upon presentation ISSUING CHECK WITHOUT FUNDS AS ESTAFA


 Issuing a check without sufficient funds in the drawee bank constitutes estafa if it is done as a means of obtaining money and merchandise but not if the check is given for a pre-existing debt BP 22: BOUNCING CHECKS LAW ELEMENTS OF OFFENSE DEFINED IN THE FIRST PARAGRAPH OF SECTION 1: BP 22 1. That a person makes or draws and issues any check. 2. That the check is made or drawn and issued to apply on or for value. 3. That the person who makes or draws and issues the check knows at the time of issue that he does not have sufficient funds 4. In or credit with the drawee bank for the payment of such check in full upon its presentment. 5. That the check is subsequently dishonored by the drawee bank for insufficiency of funds or credit, or would have been dishonored for the same reason had not the drawee, without any valid reason, ordered the bank to stop payment. NOTE: Failure to make good within 5 banking days prima facie evidence of knowledge of lack and insufficiency ELEMENTS OF THE OFFENSE DEFINED IN THE SECOND PARAGRAPH OF SECTION 1: BP 22 1. That a person has sufficient funds in or credit with the drawee bank when he makes or draws and issues a check. 2. That he fails to keep sufficient funds or to maintain a credit to cover the full amount of the check if presented within 3. A period of 90 days from the date appearing thereon. 4. That the check is dishonored by the drawee bank. NOTE: Failure to make good within 5 banking days prima facie evididence of knowledge of lack and insufficiency BP 22 IS CONSTITUTIONAL; NOT VIOLATIVE OF PROHIBITION AGAINST IMPRISONMENT FOR DEBT, FREEDOM OF CONTRACT; EQUAL PROTECTION OF LAW, PROHIBITION AGAINST UNDUE DELEGATION OF POWER; AND PROHIBITION ON AMENDMENTS ON THIRD READING ISSUING CHECKS WITHOUT OR WITH INSUFFICIENT FUNDS UNDER BP22 1. Issuing a check with knowledge of insufficiency of funds to pay for the check, and the check is subsequently dishonored by the drawer bank for insufficiency of funds or credit or would have



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been dishonored for the same reason had not the drawer, without any valid reason, ordered the bank to stop payment Issuing a check with sufficient funds or credit to pay for the same, but with failure to keep sufficient funds or maintain a credit to cover a full amount of the check if presented within 90 days from the date appearing thereon, for which reason the check is dishonored

ELEMENTS OF THE OFFENSE OF ISSUING BOUNCING CHECKS 1. The making, drawing and issuance of any check to apply to or for value 2. The maker, drawer, or issuer knows at the time of issue that he doesn’t have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its presentment 3. The check is subsequently dishonored by the drawee bank for insufficiency of funds or credit or would have been dishonored for the same reason had not the drawer, without any valid reason, ordered the bank to stop payment ISSUANCE OF BUM CHECKS GIVE RISE TO PRIMA FACIE PRESUMPTION OF KNOWLEDGE  Gravamen of the offense under BP22 is the act of making and issuing a worthless check or a check that is dishonored upon its presentment for payment  The law made the mere act of issuing a bum check a malum prohibitum BP22 PENALIZES ACT OF MAKING OR DRAWING AND ISSUANCE OF BOUNCING CHECKS, NOT ONLY DISHONOR  The law penalizes the act or making or drawing and issuance of a bouncing check and not only the fact of dishonor  Where the bouncing check was issued before the effectivity of BP22, but dishonored after such effectivity, the accused who issued the bouncing check didn’t commit a violation thereof as there was no law that was violated KNOWLEDGE OF MAKER OR DRAWER OF CHECK OF INSUFFICIENCY OF FUNDS ESSENTIAL ELEMENT OF OFFENSE FILING OF ACTION TO ANNUL DEED OF SALE ON WHICH BOUNCING CHECK WAS ISSUED, NOT A PREJUDICIAL QUESTION IT IS NOT A DEFENSE THAT THE CHECK WAS ISSUED TO GUARANTEE OR SECURE PAYMENT OF OBLIGATION


FOREIGN CHECKS ARE COVERED BY BP22 ACCUSED MAY BE CONVICTED OF BOTH BP22 AND ESTAFA AS ELEMENT OF VIOLATION OF BP22, KNOWLEDGE OF INSUFFICIENCY OF FUNDS IS CONTINUING EVENTUALITY FROM ISSUANCE OF DISHONOR

VIOLATION OF BOUNCING CHECKS LAW IS TRANSITORY AND CONTINUING CRIME AND ITS VENUE IS ANY OF PLACES WHERE IN PART COMMITTED IS ISSUANCE OF CHECK FOR PREEXISTING DEBT DEFENSE UNDER BP22?  Under the cases, the issuance of a check without or with insufficient funds is not estafa where it is issued for a preexisting debt. But would the issuance of such check be a defense under BP22?  Section 1 of said law in making the drawing or issuance of a check under the circumstances stated in the law of a crime, uses the words “to apply for or for value”  —to refer to a claim or demand growing out of the sale of goods, performance on services and the like; preexisting debt JURISDICTION ON BOUNCING CHECKS LAW VIOLATION IS DETERMINED BY ALLEGATIONS IN INFORMATION, PLACE OF ISSUANCE OF CHECKS ELEMENTS OF ESTAFA BY POSTDATING A CHECK OR ISSUING A CHECK IN PAYMENT OF AN OBLIGATION 1. That the offender postdated a check, or issued a check in payment of an obligation. 2. That such postdating or issuing a check was done when the offender had no funds in the bank or his funds deposited therein were not sufficient to cover the amount of the check. WHEN POSTDATING CHECK IS NOT ESTAFA 1. Postdating a check or issuing it for payment of an obligation, the offender knowing that at the time he had no funds in the bank, or the funds deposited by him in the bank weren’t sufficient to cover the amount of the check, and without informing the payee of such circumstances isn’t a crime in itself as estafa 2. However, under BP22, such issuance of a check would be a crime, where subsequently, the check is dishonored for insufficiency of fund or credit, or would have been dishonored for the same



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reason had not the drawer, without any valid reason ordered the bank to stop payment If the payee was informed that the check wasn’t covered by adequate funds and it is expected that such funds would be available when the check became due, the drawer isn’t guilty of bad faith in issuing it. Where a person issued a post dated check without funds to cover it and informs the payee of that fact, he isn’t guilty of estafa because there is no deceit Accused issuing unfunded check but with OD or DAUD privilege not guilty of fraudulent intent

DRAWING OF A CHECK WITH INSUFFICIENT FUNDS ISN’T FALSIFICATION WHEN POSTDATING CHECK IS A CRIME  The payee or the person receving the check must be defrauded by the act of the offender  To defraud is to deprive of some right, interest, or property by a deceitful device DISTINCTIONS BETWEEN ESTAFA CONSISTING OF ISSUING CHECKS WITHOUT FUNDS AND VIOLATION OF BP22 ESTAFA Deceit and damage are essential elements of the crime

BP22 Deceit and damage are not essential elements of the crime

Mala in se

Malum prohibitum

THEFT OF CHECKS  Checks are personal property and may be subject to theft even when they are not indorsed SPECIAL TYPES OF CHECKS 1. Cashier’s check—one drawn by the cashier of a bank in the name of the bank against the bank itself payable to a third person or order 2. Manager’s check—check drawn by the manager of a bank in the name of the bank against the bank itself payable to a third person 3. Memorandum check—check on which is written the word “memorandum” signifying that the drawer engages to pay the bona fide holder absolutely and not upon a condition to pay upon presentment or non-payment

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Certified checks—a check on which the drawee bank has written an agreement whereby it undertakes to pay the check at any future time when presented for payment, such as, by stamping on the check the word “certified” and underneath it is written the signature of the cashier Crossed checks

HOW CROSSING OF CHECK IS DONE  Usually done by drawing two parallel lines transversally on the face of the check  A check may be crossed specially or generally CROSSING SPECIALLY  A check is crossed specially when the name of a particular banker or a company is written between parallel lines drawn transversally on the face of the check

PNB

Check #1234 Phil. Trust Co. Manila, Philippines

September 24, 2007

Pay to B or order P1000 only. Sgd. A CROSSING GENERALLY  A check is crossed generally when only the words “And company” are written between the parallel lines, or when nothing is written at all between the parallel lines  In this case, payment must be made through the intervention of any company which is duly authorized.  Otherwise, the payment will be not valid.  In actual practice, the holder of a crossed check merely deposits it for collection with the bank indicated between the parallel lines or with any bank where he keeps an in the case of a check crossed generally Check #1234 Phil. Trust Co. Manila, Philippines September 24, 2007



172 Pay to B or order P1000 only. Sgd. A UNDER CROSSED CHECK, THE PAYEE HAS DUTY TO ASCERTAIN HOLDER’S TITLE TO CHECKS  The SC recognizes the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and may not be converted to cash  Such circumstances should put the payee into inquiry and upon him devolves the duty to ascertain the holder’s title to the check or the nature of his possession  Failing in this respect, the payee is declared guilty of gross negligence amounting to legal absence of good faith and as such the consensus of authority is to the effect that the holder of the check isn’t holder in good faith  The NIL doesn’t provide that a holder isn’t a holder in due course may not in any case recover on the instrument if the drawee if the latter has no valid excuse for refusing payment DRAWEE SHOULDN’T ENCASH A CROSSED CHECK BUT MERELY ACCEPT THE SAME FOR DEPOSIT  Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the check  The crossing may be special wherein between two 2 parallel lines is written the name of a bank or a business institution, in which case the drawee should pay only with the intervention of that bank or company, or crossing may be general wherein between 2 parallel diagonal lines are written the words “And Co.” or none at all as in the case at bar, in which case the drawee shouldn’t encash the same but merely accept the same for deposit WHERE OTHER THAN PAYEE OF CROSSED CHECKS PRESENTED IT FOR PAYMENT, THERE IS NO PROPER PRESENTMENT AND DRAWER IS NOT LIABLE THEREON ADVANTAGES OF CROSSING A CHECK  It is good precaution when it is to be forwarded by mail or when it is entrusted to an agent and the drawer wants to be sure that it will be paid to the rightful owner CASE DIGESTS: SECTION 185


MORAN V. CA 230 SCRA 799

FACTS: Spouses Moran were the owners of a gasoline station. They regularly purchased bulk fuel products on COD basis. These orders were made through telephone and payments were effectuated through personal checks upon delivery. Since the spouses were valued clients of the bank, they had with the latter a pre-authorized transfer wherein they were allowed to maintain a zero balance current and transfers were allowed from their savings . Two checks were drawn by petitioners and made payable to Petrophil. Subsequently, these were deposited with PNB, the collecting bank. The check underwent clearing and it was seen that the current had zero balance. Thereafter, the husband deposited in their savings money. The wife then informed her husband days after that there was refusal to deliver the orders since the checks they paid previously have both been dishonored upon presentment for payment. This incident prompted the spouses to stop business operations, which caused losses and damages. In addition, Petrophil cancelled their credit accommodation and this led them to pay in cash. This prompted the spouses to demand an explanation from the bank. They were informed that a bank officer committed a grave error. The bank manager then visited the spouses, made them sign an agreement for the issuance of a manager’s check to replace the 2 dishonored checks payable to Petrophil. The husband then on a chance meeting with Petrophil’s credit manager, was informed that Petrophil received notification that the two checks were dishonored due to operational error. The spouses six months after wrote the bank claiming that due to the dishonor of their checks, they suffered besmirched business and personal reputation. The bank didn’t act on their demands however. HELD: Where the bank possesses funds of a depositor, it is bound to honor his checks to the extent of the amount of the deposits. The failure of the bank to pay the check of a merchant or trader, when the deposit is sufficient, entitles the drawer to substantial damages without any proof of actual damages.


However, a bank isn’t liable for its refusal to pay a check on of insufficient funds, notwithstanding the fact that a deposit may be made later in the day. Before a depositor may maintain a suit to recover a specific amount from his bank, he must show first that he had on deposit sufficient funds to meet his demand. The issue in this case is that whether or not petitioners had sufficient funds in their when the checks were dishonored. Following clearing house rules, it is supposed to be processed on the date it was presented for clearing. It was the available balance the day before the date the funds were deposited was used by the bank in determining whether or not there was sufficient cash deposited to fund the checks since it was December 15 was the actual date when the checks were processed. The funds during which the checks were dishonored wasn’t enough to cover the two checks. When the check was presented for payment, there was insufficiency of funds. It was only the next day when the funds to cover the checks were deposited, which unfortunately was too late to prevent the dishonor of the checks. Petitioner had no reason to complain, for they alone were at fault. A drawer must his responsibilities every time he issues a check. He must personally keep track of his available balance in the bank and not rely on the bank to notify him of the necessity to fund certain checks he previously issued. A check as distinguished from a bill of exchange, is supposed to be drawn against a previously deposit of funds for it is ordinarily intended for immediate payment. Moreover, on the issuance of the checks on day 1 and 2, and the time for presentment on day 3, the petitioners had more than 24 hours to replenish their s in the bank. It should also be noted that the bank has no responsibility to pay a check partly when the amount drawn on the check is larger than the amount deposited in the . There would naturally be a conflict of interests between the payee and the bank. The bank would then want the return of the check while the payee will not want to do so since there is still balance left unpaid. Furthermore, when the drawer has two s—a savings and open —and a check was drawn with the open having insufficient funds, the bank has no authority to use the funds to be found in the savings to cover the insufficiency of the funds.


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FIRESTONE TIRE V. INES CHAVEZ 18 SCRA 356

FACTS: Firestone filed a complaint against Chavez for an amount representing the price of automobile tires, tubes, and other accessories, which the former had sold and delivered to Chavez on different dates. The trial court held in favor of Firestone and awarded the principal as well as attorney’s fees. Chavez questioned this in the appellate court and in the SC as well. It raised the argument that the court erred in finding her to be in bad faith. The claim is made that when the check was issued, Firestone knew that there were no funds to back it up and that Chavez expected that such funds would be available when the check became due. HELD: Of course, if Firestone agreed to accept the check, knowing that it wasn’t covered by adequate funds, no finding of bad faith can be made against Chavez. In a number of cases it was held that where a person issues a post dated check without funds to cover it and informs the payee of this fact, he cannot be held guilty of estafa because there is no deceit. Nonetheless, it was nowhere to be found in the records that there was knowledge on the part of Firestone. 174

BATAAN CIGAR V. CA 230 SCRA 643

FACTS: Bataan Cigar has engaged one of its suppliers, George King, to deliver bales of tobacco leaves. Petititoner then issued postdated crossed checks in favor of King. This was continued despite the failure to deliver the bales. Simultaneous to these transactions was the discounting of King of the checks to State Investment House. Bataan then stopped payment and SIHI tried to collect. HELD: The negotiability of the check isn’t affected by it being crossed, whether specially or generally. It may be legally negotiated from one person to another as long as the one who encashes the check with the drawee bank or if its specially crossed, by the bank mentioned between the parallel lines. Jurisprudence provides the following effects of crossing a check: 1. The check may not be encashed but only deposited in the bank


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The check may be negotiated only once—to one who has an with a bank The act of crossing the check serves the warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course.

Since the demand drafts herein involved have not been presented either for acceptance or payment, the inevitable consequence is that the bank never had the chance of accepting or receiving them. Verily, the bank never became a debtor of the payee concerned and as such the aforesaid drafts cannot be considered as credits subject to escheat within the meaning of the law.

The check should have placed the holder in inquiry and upon him devolves the duty to ascertain the indorser’s title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amount to legal absence of good faith.

Further, a demand draft is different from a cashier’s check for this is a primary obligation of the bank which issues it and constitutes a written promise to pay upon demand. It is an order to a third party purporting to be drawn upon a deposit of funds.

In the present case, petitioner’s defense in stopping payment is as good to SIHI as it is to King because really the consideration for the checks were the delivery of the bales of tobacco leaves which King failed to do. There being failure of consideration, SIHI is not a holder in due course.

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REPUBLIC V. PNB 3 SCRA 851

FACTS: The government filed a complaint for escheat of certain unclaimed bank deposits balances pursuant to a law, which provides that unclaimed balances—credits, money, bullion, security or other evidence of indebtedness of any kind, and interest with banks—shall be deposited with the government if it remains to be unclaimed within a period of 10 years of more. One of the banks against the complaint has been filed is First National City Bank. Although it concedes that the government had the right to claim the unclaimed deposit balances, it seeks to exclude some which, according to it, are not within the purview of credits and deposits as defined in law. the trial court held in favor of the bank, excluding from the claim the manager’s checks and other demand drafts. HELD: Credit is a sum credited on the books of a company to a person who appears to be entitled to it. it presupposes a creditor-debtor relationship and may be said to imply ability, by reason of property or estates, to make a promised payment. It is correlative to indebtedness, and that which is due to any person, as distinguished to that which he owes. Do demand drafts and telegraphic orders come within the purview of credits or deposits employed in the law?


MESINA V. IAC 145 SCRA 497

FACTS: Jose Go purchased from Associate Bank a Cashier’s Check, which he left on top of the manager’s desk when left the bank. The bank manager then had it kept for safekeeping by one of its employees. The employee was then in conference with one Alexander Lim. He left the check in his desk and upon his return, Lim and the check were gone. When Go inquired about his check, the same couldn't be found and Go was advised to request for the stoppage of payment which he did. He executed also an affidavit of loss as well as reported it to the police. The bank then received the check twice for clearing. For these two times, they dishonored the payment by saying that payment has been stopped. After the second time, a lawyer ed it demanding payment. He refused to disclose the name of his client and threatened to sue. Later, the name of Mesina was revealed. When asked by the police on how he possessed the check, he said it was paid to him Lim. An information for theft was then filed against Lim. A case of interpleader was filed by the bank and Go moved to participate as intervenor in the complaint for damages. Mesina moved for the dismissal of the case but was denied. The trial court ruled in the interpleader case ordering the bank to replace the cashier’s check in favor of Go. HELD: Petitioner cannot raise as arguments that a cashier’s check cannot be countermanded from the hands of a holder in due course and that a cashier’s check is a check drawn by the bank against itself. Petitioner



failed to substantiate that he was a holder in due course. Upon questioning, he itted that he got the check from Lim who stole the check. He refused to disclose how and why it has ed to him. It simply means that he has notice of the defect of his title over the check from the start. The holder of a cashier’s check who is not a holder in due course cannot enforce payment against the issuing bank which dishonors the same. If a payee of a cashier’ s check obtained it from the issuing bank by fraud, or if there is some other reason why the payee is not entitled to collect the check, the bank would of course have the right to refuse payment of the check when presented by payee, since the bank was aware of the facts surrounding the loss of the check in question. 177

PEOPLE V. REYES 454 SCRA 635

FACTS: Reyes was charged with estafa. The facts that led to this are as follows— She together with her daughter and another person issued a check in favor of Alabastro for payment of an obligation. Alabastro was never able to get the value of the check because when he presented it for payment in the bank, it was dishonored for the it was drawn upon is closed. Reyes alleges that her liability should only be civil and not criminal for the check was issued for payment of a pre-existing obligation. As per the testimony of the bank manager, the accused maintained a negotiable order of withdrawal under her name. It was explained that checks may be drawn against the but only to a specific payee. He verified also that the check issued to Alabastro is a NOW check. As per the testimony of Alabastro, he established that the checks issued to him were for a discounting agreement. This was countered by the accused by saying also that the checks were dated and completed by Alabastro. The trial court convicted the accused and she avers that the checks issued by her doesn’t fall within the meaning of checks under the NIL. First, the NOW check was drawn against a savings . Second, it is only payable to a certain payee or specific person. HELD: It is inconsequential that the check shall be only payable to a specific person. The same restriction is produced when the check is crossed, only the payee named therein in the check may deposit it in the bank. If a third

person accepts a crossed check and pays cash for value despite the warning of the crossing, he cannot be considered in good faith and thus, not a holder in due course. The purpose of the crossing is to ensure that the check will be encashed by the rightful payee only. Yet, despite the restriction on negotiability of crossed checks, they were held to be negotiable instruments. To be sure, it is the fraud or deceit employed which is the gravamen of the offense of estafa and not the negotiability of the check. Nonetheless, the accused should be acquitted of estafa. It was held in a prior case that when the payee knew that the check was drawn on an with insufficient funds, there would be no liability for estafa. First, Alabastro presented 4 different checks with 4 different dates. When he deposited the first check, he was then informed that the was closed and yet, on later dates, he still deposited the other four checks. Second, was his own ission to this knowledge. (Doctrine of Concomitance) Sec. 186. Within what time a check must be presented. - A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. WHEN CHECK MUST BE PRESENTED FOR PAYMENT  A check must be presented within a reasonable time after its issue  The whole theory and use of a check points to its immediate payability  A depositor places his money with his bank or banker; where it is subject at any time to his order; and by his check or order, he desires to appropriate so much of it to another person, and the bank or banker, in consideration of its temporary use of the money, agrees to pay it in whole, or in parcels, to the depositor’s order when demanded  But he doesn’t agree to contract to pay at a future day by acceptance and the depositor cannot require it  Although under Section 185, a check is a bill of exchange payable on demand, it is intended for immediate use and not to circulate as a promissory note. Therefore, the transfer of a check to successive holders, where it is drawn and delivered in the place where the drawee bank is located, doesn’t extend the time for presentment. If the check isn’t delivered on one day and isn’t presented before the close of banking hours the next business day, the drawer is discharged to the extent of any loss suffered from the failure to present. REASONABLE TIME



 Did the payee employ such diligence as a prudent man exercises his own affairs?  The payee’s failure to present a check to the drawee bank and who didn’t present the check for one week after its receipt, was held to have delayed presentment for an unreasonable time as a matter of law FAILURE TO PRESENT ON TIME DOESN’T TOTALLY WIPE OUT ALL LIABILITY WHEN DELAY IS EXCUSED  Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence.  When the cause of delay ceases to operate, presentment must be made with reasonable diligence. STALE CHECK  One which isn’t presented for payment within reasonable time after its issue EFFECT OF DELAY ON LIABILITY OF DRAWER  When a check isn’t presented for payment within a reasonable time after its issue, the drawer is discharged but only to the extent of the loss caused by the delay  Hence, if no loss or injury is shown, the drawer is not discharged  The only injury which would be sustained by the drawer in case presentment wasn’t made within a reasonable time would be caused by the failure of the bank subsequent to the delivery and prior to the presentment of the check EFFECT OF FAILURE TO GIVE NOTICE TO DRAWER  Where the check is dishonored by non-payment and the drawer isn’t given notice of dishonor, the drawer is totally discharged from liability on the instrument  But the drawer may be held liable by the payee on the basis of the original consideration between him and said payee HOLDERS OF STALE CHECKS  But it is clear that the maturity of the check for the purpose of presentment for payment and of dishonor in order to bind parties to it, is not identical with the maturity which will charge subsequent holders with notice of defect of title or infirmities in the instrument  In applying the rule, the courts are disposed to be governed rather by the circumstances under which the plaintiff received the check than by


the precise age of the instrument—that is, the good or bad faith exercised the prime consideration. The result is that the plaintiff has been treated as a holder in due course of checks transferred several months after their issue EFFECT OF DELAY AS TO INDORSERS  An unreasonable delay in the presentment of a check for payment will discharge the indorsers thereon, whether or not he is injured by the delay as it is presumed that he is prejudiced  Exception: when there is affirmative proof that the indorsers knew that there was delay in presentment CASE DIGESTS: SECTION 186 178

PNB V. SEETO 91 PHIL 756

FACTS: Seeto called at a branch of bank and presented a check payable to cash or bearer, and drawn by Kiao against PBC. After consultation with the employees, Seeto made a general and qualified indorsement of the check. He was then paid the amount of the check by bank. The check was consequently dishonored, a letter was sent to Seeto and was asked to refund the money given to him. A second letter was sent to him and he averred that case against him be deferred while he inquired about why the check was dishonored. Thereafter, he refused to pay, alleging that the against the check was drawn had sufficient funds when the check was drawn and if the bank didn’t delay in clearing the check, there would have been sufficient funds. The appellate court reversed the lower court in its decision. It ruled that the bank was guilty of unreasonably retaining and withholding the check, and that the delay in the presentment was inexcusable, so that respondent thereby was discharged from liability. HELD: Section 84 is applicable, nonetheless, it should be read in correlation with Section 186, which says that presentment should be within reasonable time. *Section 186 applies when the bank suddenly becomes bankrupt. 179

CRYSTAL V. CA 71 SCRA 443



FACTS: Petitioner redeemed property, which has been sold upon execution, with a check issued to the buyer Ocang. The CA found that the check for P11200 paid by petitioner for the redemption in dispute has been dishonored, in the face of the other findings in the same decision of the CA indicating that instead of having been dishonored, the said check had only become stale, albeit it being replaced with new ones from time to time. HELD: Surely, for a check to be dishonored upon presentment, on the one hand, and to be stale for not being presented at all in time, are incompatible developments that naturally have variantly legal consequences. Thus, if indeed the check in question had been dishonored, then there can be no doubt that the petitioner’s redemption was null and void. On the other hand, if it had only become stale, then it becomes imperative that the circumstances that caused its non-presentment be determined, for if this wasn’t due to the fault of petitioner, then it would be unfair to deprive him of the rights he acquired as redemptioner, particularly, if after all, the value of the check has otherwise been received or realized by the party concerned. The case was remanded to the trial court to receive all relevant and competent evidence to the issue of whether or not Ocang has received in one form or another, the full amount as redemption price of the four parcels of land in dispute as well as to the other facts. It was found out that Ocang, when he applied for a writ of possession, there was payment of redemption price by Crystal. Thus, there was a proper redemption. 180

MONTINOLA V. PNB 88 SCRA 178

FACTS: Ramos, as a disbursing officer of an army division of the USAFE, made cash advancements w/ the Provincial Treasurer of Lanao. In exchange, the Prov’l Treasurer of Lanao gave him a P500,000 check. Thereafter, Ramos presented the check to Laya for encashment. Laya in his capacity as Provincial Treasurer of Misamis Oriental as drawer, issued a check to Ramos in the sum of P100000, on the Philippines National Bank as drawee; the P400000 value of the check was paid in military notes. Ramos was unable to encash the said check for he was captured by the Japanese. But after his release, he sold P30000 of the check to Montinola


for P90000 Japanese Military notes, of which only P45000 was paid by the latter. The writing made by Ramos at the back of the check was to the effect that he was asg only P30000 of the value of the document with an instruction to the bank to pay P30000 to Montinola and to deposit the balance to Ramos's credit. This writing was, however, mysteriously obliterated and in its place, a supposed indorsement appearing on the back of the check was made for the whole amount of the check. At the time of the transfer of this check to Montinola, the check was long overdue by about 2-1/2 years. Montinola instituted an action against the PNB and the Provincial Treasurer of Misamis Oriental to collect the sum of P100,000, the amount of the aforesaid check. There now appears on the face of said check the words in parenthesis "Agent, Phil. National Bank" under the signature of Laya purportedly showing that Laya issued the check as agent of the Philippine National Bank. HELD: Montinola could not be considered as a holder in due course. Why? For one to be a holder in due course, one should take the instrument before it has become overdue. that in this case, Montinola took the check which has long become overdue. He cannot even be in the slightest be considered as a holder because the NIL defines a holder as being the payee or the indorsee of the negotiable instrument. In this case, he wasn't the payee nor was he the indorsee of the check in issue. 181

PACHECO V. CA 319 SCRA 595

FACTS: Due to dire financial needs of petitioner spouses who were engaged in the construction business, they secured loans from Vicencio. At every loan secured, the lender compelled the spouses to issue an undated check despite the ission of spouses that their bank has insufficient funds or as on a later date, already closed. Lender assured them that the issuance of the check was only evidence of indebtedness, that it would not be presented to the bank, and it would be for formalities only. On the date wherein there was an unpaid balance to the loans secured by the spouses, the lender had them place a date on two of the later checks issued. Surprised later on, the spouses were charged with estafa as the checks were presented for encashment and was dishonored. HELD:


BY MUTUAL AGREEMENT OF THE PARTIES, THE NEGOTIABLE CHARACTER OF A CHECK MAY BE WAIVED AND THE INSTRUMENT BE SIMPLY TREATED AS PROOF OF AN OBLIGATION. There cannot be deceit on the part of the spouses because they agreed with the lender at the time of the issuance and postdating of the checks that the same shall not be encashed or presented to the bank. As per assurance of the lender, the checks are nothing but evidence of the loan or security thereof in lieu of and for the same purpose as a promissory note. 182

THE INTERNATIONAL SPOUSES GUECO 315 SCRA 516

CORPORATE

BANK

V.

FACTS: Gueco spouses obtained a loan from ICB (now Union Bank) to purchase a car. In consideration thereof, the debtors executed PNs, and a chattel mortgage was made over the car. As the usual story goes, the spouses defaulted in payment of their obligations and despite the lowering of the amount to be paid, they still failed to pay. Thereafter, they tendered a manager’s check in favor of the bank. Nonetheless, the car was still detained for the spouses refused to sign the t motion to dismiss. The bank averred that the t motion to dismiss is part of standard office procedure to preclude the filing of other claims. Because of this, the spouses filed an action for damages against the bank. And by the time the case was instituted, the check had become stale in the hands of the bank. HELD: The main issue though unrelated to NIL in this case was whether or not the g of the t motion to dismiss a part of the compromise agreement between the spouses and the bank. The answer is no, it is not a part of the compromise agreement entered by the parties. And thus, the g is dispensible in releasing the car to the spouses. And on the ancillary issue of the case, which is the relevant issue for the subject, whether or not the spouses should replace the check they paid to the bank after it became stale, the answer is yes. It appeared that the check has not been encashed. The delivery of the manager’s check did not constitute payment. The original obligation to pay still exists. Indeed, the circumstances that caused the non-presentment of the check should be considered to determine who should bear the loss. In this case, ICB held on the check and refused to encash the same because of the controversy surrounding the g of the t motion to dismiss. There is no bad faith or negligence on the part of ICB.


A stale check is one which has not been presented for payment within a reasonable time after its issue. It is valueless and, therefore, should not be paid. A check should be presented for payment within a reasonable time after its issue. Here, what is involved is a manager’s check, which is essentially a bank’s own check and may be treated as a PN with the bank as a maker. Even assuming that presentment is needed, failure to present for payment within a reasonable time will result to the discharge of the drawer only to the extent of the loss caused by the delay—but here there is no loss sustained. Still, such failure to present on time does not wipe out liability. 183

WONG V. CA 351 SCRA 100

FACTS: Petitioner was an agent for Limtong Press, a manufacturer of calendars. LPI would give sample calendars to their agents and the agents would get the purchase orders of customers and present them to the company. The company would then make the calendars and ship them to the customers. The agents would then collect the payments and remit it to the company. He had a record of unremitted payments and a confirmation receipt evidenced this. Because of this, it became a company policy that postdated checks must be issued by customers to secure payment for the orders. Thereafter, Wong issued 6 postdated checks. But this wasn’t accepted by the company since it was against its policy to accept checks from its agents. It was then agreed upon that the checks would be applied to its unremitted payments. When the checks were about to be deposited, Wong requested that it be deferred and he will replace the same. But this didn’t happen. The checks were then subsequently deposited and dishonored which prompted the company to sue Wong. HELD: The trial and appellate court both ruled that Wong’s checks were to be used as guarantees but due to refusal of the company, it was agreed upon that it will be used as payment for Wong’s unremitted payments. On the issue if all the elements of violations of BP22 has been committed, there are two ways of violating BP22: 1. By making or drawing or issuing a check to apply on or for value knowing at the time of issue that the check isn’t sufficiently funded 2. By having sufficient funds in or credit with the drawee bank at the time of issue but failing to keep sufficient funds therein or credit with said bank to cover the full amount of the check when


presented to the drawee bank for payment within a period of 90 days ELEMENTS OF OFFENSE DEFINED IN THE FIRST PARAGRAPH OF SECTION 1: BP 22 1. That a person makes or draws and issues any check. 2. That the check is made or drawn and issued to apply on or for value. 3. That the person who makes or draws and issues the check knows at the time of issue that he does not have sufficient funds 4. In or credit with the drawee bank for the payment of such check in full upon its presentment. 5. That the check is subsequently dishonored by the drawee bank for insufficiency of funds or credit, or would have been dishonored for the same reason had not the drawee, without any valid reason, ordered the bank to stop payment. For the first act, the petitioner averred that the first element is not present for he didn’t issue the checks for value or for . This was established by the trial and appellate courts to be false and uned by evidence. 184

NAGRAMPA V. PEOPLE 386 SCRA 412

FACTS: The sales manager of Fedcor brought into the plant Nagrampa in order for the latter to purchase an excavation machine. He made a downpayment and for the balance, he issued a postdated check. The checks were drawn against Security Bank. Upon the guarantee of the salesman, the equipment was delivered. However, when the checks were presented for payment, they were dishonored on the ground that the against which it is drawn has long been closed. The company notified petitioner but it still failed to make payments. This prompted the company to file a case for estafa and violation of BP22 against Nagrampa. The trial court and appellate court both found him guilty. HELD: Petitioner itted the issuance of the two checks but he would like to argue that the same had been presented more than the 90-day period stated in the law. This is to no avail though since the 90-day period is for the presumption of knowledge to arise. It is not an essential element of the offenses committed within the purview of BP22.


In this case, the checks were presented within 6 months from the issuance of the checks and wouldn’t therefore have been considered stale had petitioner’s had been existing. Although the presumption of knowledge didn’t arise, such knowledge was sufficiently proven during the trial upon the testimony of one of the bank’s employees. Likewise, for estafa, it is the same. All the elements were present. It was the allegation however of accused that there was no damage done against the company. He even averred that there was a return of the equipment. Nonetheless, damage contemplated in estafa may consist in the offended party being deprived of his money or property as a result of the defraudation, disturbance in property rights, or temporary prejudice. In this case, the deprivation of property was apparent. The backhoe was delivered precisely to the accused because of his downpayment and the issuance of the checks. 185

TY V. PEOPLE 439 SCRA 220

FACTS: Ty’s mother was confined in Manila Doctors. As the daughter, she signed the acknowledgement of responsibility for payment. Her sister was also subsequently confined in the same hospital. She then drew promissory notes, promising to pay her obligations to the hospital. She issued 7 checks and these were thereafter deposited on their due dates. But these checks were dishonored for the against which they were drawn against had been closed. The hospital then sent demand letters but to no avail. This prompted it to file a complaint for 7 counts of violations of BP22. HELD: Ty doesn’t deny to have issued the checks in issue. She claims that the issuance was under the impulse of an uncontrollable fear of a greater injury or in avoidance of a greater evil or injury. It seems that all the factual findings are not disputed except for the allegation of uncontrollable fear or injury. Nonetheless, this is insufficient to exempt the accused of her liabilities. For uncontrollable fear or injury to become an exempting circumstance— 1. Existence of an uncontrollable fear 2. The fear must be real and imminent 3. The fear of injury is greater than or at least equal to that committed


In this case, far from it, the fear, if any, harbored by Ty wasn’t real or imminent. Ty claims that she was compelled to issue the checks—a condition the hospital commanded of her before her mother can be discharged. This is only speculative fear. It is also bereft of merit to raise the justifying circumstance of state of necessity, which has the following elements— 1. That the evil sought to be avoided actually exists 2. That the injury feared be greater than the one done to avoid it 3. That there be no other practical and less harmful means of preventing it And to her claim of lack of consideration because she wasn’t the patient, it is no defense to an action on a promissory note for the maker to say that there was no consideration which was beneficial to him personally. It is sufficient if the consideration was a benefit conferred upon a third person, or a detriment suffered by the promisee, at the instance of the promissor. It is enough that the obligee foresees some right or privilege or suffers some detriment and the release and extinguishment of the original obligation. 186

GREAT ASIAN SALES V. CA 381 SCRA 557

FACTS: Great Asian Sales was a business engaged in the selling and buying of merchandise. In 2 of its board resolutions, it first authorized Arsenio, its treasurer, to secure a loan from Bancasia as well as to sign any pertinent documents related to such. Second, it authorized Arsenio to obtain from Bancasia a discounting line. Pursuant to these, deeds of assignments were issued by Great Asian in favor of Bancasia for receivables—specifically checks. Almost all the checks assigned by Great Asian were dishonored. Notice of dishonor was sent by the bank and its lawyer to Tan Chong Lin. Later, Great Asian filed for insolvency and in its petition, Bancasia was one of those listed as its creditors. In the meanwhile, a complaint was filed against Great Asian and Tan Chong Lin because of the surety agreement it signed in favor of Bancasia. HELD: First, under the 2 board resolutions, indeed Arsenio was authorized to obtain a loan and sign any document related to the securing of the loan. The question is whether the deeds of assignment signed by Arsenio was within the ambits of his authority.


The deeds of assignment enabled Great Asian to generate instant cash, with checks which were not due and demandable then. In the financing industry, a discounting line means a credit facility with a financing bank or company, which allows a business entity to sell, on a continuing basis, its s receivable at a discount. The term discount means the sale of a receivable at less than its face value. The purpose of discounting line is to enable a business entity to generate instate cash out of its receivables which are still to mature at future debts. The financing company or bank which buys the receivables makes its profits out of the difference between the face value of the receivable and the discounted price. Clearly, the discounting arrangements entered into by Arsenio were the same arrangements authorized under the board resolutions. Second, on the issue of breach of contract, Bancasia alleged that Great Asian committed a breach. In the deeds of assignment, it was stipulated that there is a vital suspensive condition—in case the drawers fail to pay the checks on maturity, Great Asian obligated itself to pay Bancasia the full face value of the dishonored checks, including penalties and other costs. Failure to pay would give rise to the obligation to pay Bancasia. Great Asian and Bancasia agreed on this specific with recourse stipulation, despite that the receivables were negotiable instruments. The contracting parties are allowed such stipulation in addition to the warranties of an indorser under the NIL. The explicit with recourse stipulation against Great Asian enlarges the liability of Great Asian beyond that of a mere indorser of a negotiable instrument. Thus, whether or not Bancasia gives notice of dishonor to Great Asian, the latter remains liable because of the with recourse stipulation. The recourse of Bancasia to file an action for breach of contract doesn’t leave Great Asian with an empty bag. It is then subrogated back as creditor of the receivables. Great Asian can now proceed against the drawers who issued the checks. Even if there was no timely notice of dishonor, Great Asian is not prejudiced. A notice of dishonor is not required if the drawer has no right to expect or require the bank to honor the check, or if the drawer has countermanded payment. Wednesday: 187 and 189 NOTES: L AST WEEK


OCTOBER 1-6, , 2007 Sec. 187. Certification of check; effect of. - Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance. CERTIFICATION OF CHECK  A certification is an agreement whereby the bank against whom a check is drawn, undertakes to pay it at any future time when presented for payment  But a bank is not obligated to the depositor to certify checks  And the drawee is not liable to the holder for refusal of the bank to certify the fcheck  The refusal of the bank doesn’t dispense with the requirement of presentment for payment since a check is of right presentable only for payment at the bank on which it is drawn FORM OF CERTIFICATION  No particular form is required but it must be in writing  The usual method is by stamping on the check the word “certified” and underneath it the signature of the cashier, or by writing upon the check the word “good” with the date of certification and signature of the officer of the bank having the express or implied authority to certify checks, has been held to be a sufficient certification  The letters “OK” with the initials of the cashier of a bank doesn’t constitute a sufficient certification under modern banking practice EFFECT OF CERTIFICATION 1. Equivalent to acceptance and is the operative act that makes the drawee bank liable 2. It operates as an assignment of the funds of the drawer in the hands of the drawee bank 3. If obtained by the holder, it discharges the persons secondarily liable CERTIFICATION EQUIVALENT TO ACCEPTANCE  Certification is equivalent to acceptance in the drawee bank is bound on the instrument upon certification  And it is immaterial to such liability in favor of a holder in due course whether the drawer had funds or not in the bank or the drawer was indebted to the bank for more than the amount of the check  The certifying bank has all the liabilities of an acceptor under Section 62

IMPLICATION OF CERTIFICATION FURTHER EXPLAINED  The bank virtually says that the check is good and we have the mo0ney of the drawer here ready to pay it. We will pay it now if you will receive it. The holder says no, I will not take the money; you may now certify the check and retain the money for me until this check is presented. The law will not permit a check, when due, to be thus presented, and the money to be left with the bank for the accommodation of the holder without discharging the drawer. The money being due and the check presented, it is his fault if the holder declines to receive the payment, and for his own convenience has the money appropriated to that check subject to its future presentment at any time within the statute of limitations. FUNCTIONS OF CERTIFIED CHECKS  Although a check doesn’t call for acceptance and the holder can present it only for payment, the certification of checks is a means in constant and extensive use in the business of banking and its effects and consequences are regulated by the law merchant. Checks drawn against banks, thus marked and certified, enter largely into the commercial and financial transactions of the country; they from hand to hand, in the payment of balances from one house and one bank to another. In the great commercial centers, they make up no inconsiderable portion of the circulation and thus perform a useful, valuable and an almost indispensable office PURPOSE OF PROCURING CHECKS TO BE CERTIFIED  To impart strength and credit to the paper by acknowledgment from the certifying bank that the drawer has funds therein sufficient to cover the check and securing the engagement of the bank that the check will be paid upon presentation  When a check is certified, it ceases to possess the character, or to perform its functions, of a check, and represents so much money on deposit, payable to the holder on demand.  The check becomes a basis for credit and an easy mode of ing money from hand to hadn and answers the purposes of money PAYMENT NEITHER INCLUDES NOR IMPLIES ACCEPTANCE  Acceptance and payment are entirely different. If the drawee accepts the paper after seeing it, and then permits it to go into circulation as genuine, on all the principles of estoppel, he ought to be prevented from setting up forgery to defeat liability to one who has taken the paper on the faith of the acceptance or certification



 On the other hand, mere payment of the paper at the termination of its course doesn’t act as an act of estoppel  Payment is the final act which extinguishes a bill  Acceptance is the promise to pay in the future and continues the life of the bill RIGHT OF THE HOLDER TO SUE DRAWER WHERE CHECK NOT CERTIFIED  The drawer of a check certifies that it will be paid on presentment but not that it will be certified  This is the theory on which the law discharging the drawer and indorsers upon certification is based  Certification is different from acceptance in that the refusal of the drawee bank to certify doesn’t amount to a dishonor of the check  There is no need for a notice of non-certification and the check must still be presented for paymenht CASE DIGESTS: SECTION 187 187

PANLILIO V. DAVID 50 PHIL 105

FACTS: Panlilio and David are both bidders for lease of a big chunk of land owned by the government. Panlilio had a higher bid than David. Both of their bids were accompanied by uncertified checks, the amount for David’s is lesser than that of Panlilio’s. Later, David equaled the bid of Panlilo by adding cash to the amount of his check. With this, the lease was awarded to David. His check was encashed and the proceeds were deposited with the Treasury. This award was questioned by Panlilio by averting that the bid of David should have been denied since the check he offered was uncertified. This prompted the withdrawal of the award to David and instead, the lease was awarded to Panlilio, whom it was thought to have submitted a certified check. After knowing that he too didn’t have a certified check, his award was cancelled. Both appealed this to the appellate court. HELD: The rule that the check to be offered should be certified is an office rule. It sought to prevent the presentation of frivolous bids and to avoid difficulties in the collection of the amount of the accepted bid. The Director of Lands therefore had the authority to reject both bids in question on the ground that they weren’t accompanied by certified checks. Nonetheless, this doesn’t mean that if he accepted one of them, a merely formal defect would vitiate the award. When David’s bid was accepted and the amount


of the bid was paid and covered into the Treasury, the government could hardly be heard to say that the award was invalid because the amount paid was originally represented in part by an uncertified check. 188

NEW PACIFIC TIMBER V. SENERIS 101 SCRA 686

FACTS: New Pacific Timber and Supply was the defendant in a case for collection of money. Upon failure to comply with the compromise agreement, a writ of execution was issued and its properties were levied. Prior though to the auction sale, petitioner deposited with the trial court a cashier’s check but private respondent refused to accept. HELD: The check deposited by the petitioner is no ordinary check but a cashier’s check. It is a well-known and accepted practice in the business sector that a cashier’s check is deemed as cash. Moreover, since the said check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation. The certification by the bank is equivalent to acceptance. It is an understanding that the check is good then, and shall continuegood, and this agreement is binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The object of certifying the check as regards both parties is to enable the holder to use it as money. Hence the exception to the rule on Section 64 of the CB Act to the effect “that a check which has been cleared and credited to the of the creditor shall be equivalent to a delivery to a creditor in cash in an amount equal to the amount credited to his ” shall apply in this case. 189

PNB V. NATIONAL CITY BANK OF NY 63 PHIL 711

FACTS: Unknown persons negotiated with Motor Services Company checks, which were part of the stipulation in payment of automobile tires purchased from the latter’s store. It purported to have been issued by Pangasinan Transportation Company. The said checks were indorsed at the back by said unknown persons, the Motor company believing at that time that the signatures contained therein were genuine. The checks were later deposited with the company’s in National City Bank of NY. The


said checks were consequently cleared and PNB credited National City Bank with the amounts. Thereafter, PNB discovered that the signatures were forged and it demanded the reimbursement of the amounts for which it credited the other bank. HELD: A check is a bill of exchange payable on demand and only the rules governing bills of exchanges payable on demand are applicable to it. in view of the fact that acceptance is a step necessary insofar as negotiable instruments are concerned, it follows that the provisions relative to acceptance are without application to checks. Acceptance impies subsequent negotiation of the instrument, which is not true in the case of checks because from the moment it is paid, it is withdrawn from circulation. When the drawee banks cashes or pays a check, the cycle of negotiation is terminated and it is illogical thereafter to speak of subsequent holders who can invoke the warrant against the drawee. Further, in determining the relative rights of a drawee who under a mistake of fact, has paid, a holder who has received such payment, upon a check to which the name of the drawer has been forged, it is only fair to consider the question of diligence and negligence of the parties in respect thereto. The responsibility of the drawee who pays a forged check, for the genuineness of the drawer’s signature is absolute only in favor of one who has not, by his own fault or negligence, contributed to the success of the fraud or to mislead the drawee. According to the undisputed facts, National City Bank in purchasing the papers in question from unknown persons without making any inquiry as to the identity and authority of said persons negotiating and indorsing them, acted negligently and contributed to the constructive loss of PNB in failing to detect the forgery. Under the circumstances of the case, if the appellee bank is allowed to recover, there will be no change in position as to the injury or prejudice of the appellant. DRAWER: PANGASINAN PAYEE: IASMOTOR SERVICE DRAWEE: PNB COLLECTING BANK: NATIONAL CITY BANK OF NEW YORK 190

ARANETA V. PAZ TUAZON 91 PHIL 786

FACTS:


Tuazon owned a big parcel of land, which was subdivided into smaller lots. These lots were leased to people and under the contract of lease, the lessees had the right of first refusal, in case Tuazon decides to sell the lots. Tuazon then obtained loans from Vidal, which was secured by mortgages over the same land. Thereafter, Tuazon and Araneta entered into a promise to buy and sell, subject to the decision of the lessees if they will purchase the lots. Many lessees took advantage of this proposition and bought the lots. The only encumbrance left is the mortgage to Vidal. Tuazon tried to tender a check for payment of the full mortgage obligation but Vidal refused to accept the check, prompting the former to file an action against the latter. Attached to the complaint was the check refused by Vidal, another certified check, and an ordinary check. This action however wasn’t pursued. The records and the checks were destroyed in a fire and wasn’t reconstituted. Since one of the checks was issued by Araneta in favor of Vidal, and there was a stipulation that Tuazon would be held liable, Araneta ran after Tuazon for the value of the checks. HELD: The stipulation holding Tuazon liable for the loss of the checks issued was a valid stipulation, nonetheless, Tuazon should not be held liable for the loss of the certified checks. The matter of who should bear the loss doesn’t depend upon the validity of the sale but on the extent and scope of the clause hereinbefore quoted as applied to the facts of the present case. Some of the checks was issued by Araneta and payable to Vidal, and were drawn against BPI with which Araneta had a deposit in the current . They were certified and the certification stated that they were to be void if not presented for payment at the office within 90 days from date of acceptance. Under banking laws and practices, by the certification, the funds represented by the check were transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter became the depositor of the bank, with rights and duties of one in such relation. But the transfer of the corresponding funds from the credit of the depositor to that of the payee had to be co-extensive with the life of the checks, which in this case was 90 days. If the checks were not presented for payment within that period they became invalid and the funds were automatically restored to the credit of the drawer though not as a current deposit but as special deposit. The checks were never collected and the against which they were drawn wasn’t used or claimed by Araneta and since the was opened during the Japanese occupation and in Japanese currency, the checks became obsolete as the subject thereto is considered null and void.



Whether BPI could lawfully limit the negotiability of the certified checks to a period less than what is provided by the statute of limitations doesn’t seem material. The limitation imposed by the bank as to the time would adversely only affect the payee Vidal but in this case, Vidal actually refused to accept the checks. But as to Araneta and Tuazon, the conditions specified in the certification and the prevailing regulations of the bank were the law of the case. Not only this, but they were aware of and abided by those reghulations and practice, as instanced by the fact that the parties presented testimony to prove those regulations and practice. And that Araneta knew that Vidal hadn’t cashed the checks within 90 days is not, and couldn’t successfully be, denied. In these circumstances, the stipulation that the defendant or seller shall not hold the buyer responsible for the loss of the checks is unconscionable and void insofar as this would stretch Tuazon’s liability for more than 90 days. 191

EQUITABLE PCI BANK V. ONG 502 SCRA 119

FACTS: Sarande deposited a check with her . After getting assurance that the said check had been cleared, she issued two checks in the same amount as of the proceeds of the check. One of the checks issued was given to Ong. Thereafter, Ong instead of depositing the check given, had a manager’s check issued to him in the same value of the check. This she tried to deposit but she received a notice that the bank has stopped payment of the check. Despite her demands to make good the value of her check, she was refused. HELD: PCI should be held liable. It had certified the check and since certification is equivalent to acceptance, the bank as drawee bank is bound on the instrument upon certification and it is immaterial to such liability in favor of the plaintiff who is a holder in due course whether the drawer had funds or not with the bank or the drawer was indebted to the bank for more than the amount of the check as the certifying bank had the same liabilities as acceptor. It may be true that the check which was paid to her had no funds to it, nonetheless, as a holder in due course, the bank cannot


interpose the defense of want of consideration because that defense is only personal. Therefore, when the check was accepted and certified, there was already a valid consideration. Furthermore, what was issued was a manager’s check. It stands in the same footing as a certified check. Where a check is certified by a bank on which it is drawn, the certification is equivalent to acceptance. Sec. 188. Effect where the holder of check procures it to be certified. - Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. EFFECT WHERE HOLDER OBTAINS CERTIFICATION  When the certification is obtained by the holder, the drawer and the indorsers are discharged  The certification has the same effect as if the holder has drawn the money redeposited it and taken a certificate of deposit for it  Only the indorsers at the time of the certification are discharged REASON FOR THE RULE  The moment that the check is certified, the funds ceased to exist to be under the control of the original depositrors and under the control of the person who procures the certification of the check drawn in his favor EFFECT WHERE CERTIFICATION OBTAINED BY OTHERS  Where the certification is obtained by the drawer, even when the drawer procures the certification at the instance of the payee  Where the certification is obtained by a person who is neither the holder nor drawer Sec. 189. When check operates as an assignment. - A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder unless and until it accepts or certifies the check. CERTIFICATION OPERATES AS ASSIGNMENT OF FUNDS  When the holder procures the check to be certified, the check operates as an assignment of a part of the funds to the credit of the drawer with the bank DURATION OF TRANSFER OF FUND


 As stated, “Under banking laws and practices, by the certification, the funds represented by the check were transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter became the depositor of the bank, with rights and duties of one in such relation. But the transfer of the corresponding funds from the credit of the depositor to that of the payee had to be co-extensive with the life of the checks, which in this case was 90 days. If the checks were not presented for payment within that period they became invalid and the funds were automatically restored to the credit of the drawer though not as a current deposit but as special deposit.” UNCERTIFIED CHECK IS NOT AN ASSIGNMENT OF FUNDS  A check of itself is not an assignment of the funds of the drawer in the bank  A general deposit in the bank is so much money to the depositor’s credit. It is a debt to him by the bank, payable on demand to his order, not property capable of identification and specific appropriation. A check drawn upon the bank in usual form, not accepted or certified by its cashier to be good, doesn’t constitute transfer of any money to the credit of the holder. It is simply an order which may be countermanded and payment forbidden by the drawer at any time before it is actually cashed. It creates no lien on the money which the holder can enforce against the bank. It doesn’t of itself operate as an equitable assignment. DRAWEE BANK NOT LIABLE TO HOLDER ON CHECK UNLESS ACCEPTED OR CERTIFIED  Before acceptance or certification, the bank isn’t liable and the holder has no right to sue the drawee bank on the check  On this question, we conclude that the general rule is that an action cannot be maintained by the payee of the check against the bank on which it is drawn, unless the check has been certified or accepted by the bank in compliance with the statute, even though at the time the check is that an action cannot be maintained by the payee of the drawer of the check out of which the check is legally payable; and that the payment of the check by the bank on which it is drawn, even though paid on the unauthorized indorsement of the name of the holder; doesn’t constitute as certification thereof, neither is it an acceptance thereof; and without acceptance or certification, as provided by statute, there is no privity of contract between the drawee bank and the payee, or the holder of the check. Neither is there assignment of the funds where the check isn’t drawn on a particular fund, or doesn’t show on its face that it is an assignment of a particular fund.

SUMMARY OF RIGHTS AND LIABILITIES OF PARTIES 1. The holder has no action against it as a check is not in itself an assignment of funds of the drawer in the hands of the drawee bank, and the drawee bank isn’t liable on the check until it has accepted or certified it 2. Neither has the holder a right of action against the drawer where the drawee bank refuses to accept or certify the check but he has a right of action against the drawer where the drawee bank refuses to pay 3. And while the holder has no right of action against the drawee bank which refuses to pay, accept or certify the check, the drawer has a right of action against the drawee bank so refusing. Such right of action, however, isn’t based on the check drawn but on the original contract of deposit between them DUTY OF DEPOSITOR TO BANK  Where a drawer of a check has prepared his check so negligentlythat it can be altered easily without giving the instrument a suspicious appearance and alterations are afterwards made, he cannot blame anyone but himself and in such case, he cannot hold the bank liable for the consequences of his own negligence in the respect  But negligence of depositor in drawing a check will not excuse the paying bank unless it is misled by such negligent act, and if the drawer of a check is first in fault and if his negligence contributes directly to its wrongful and fraudulent appropriation, he isn’t entitled to recover DUTY OF DEPOSITOR WHERE BOOK RETURNED TO HIM  It is his duty to examine such checks within a reasonable time and if they disclose forgeries or alterations, to report them to the bank, dispute the correctness of payments thereafter made by it on similar checks.  This rule assumes that the bank itself hasn’t been guilty of negligence in making the payment for when, by the exercise of proper case, it could have discovered the alteration of forgery, it must bear the loss notwithstanding that the depositor failed in his duty to examine the s STOPPING PAYMENT  As a check is itself doesn’t operate as an assignment of funds to the credit of the drawer, the latter may countermand payment before its acceptance or certification.  The order to stop payment must be communicated to the bank before the check to which it refers has been paid; and in the absence of this



rule of the bank that stop orders must be in writing, a verbal notice is sufficient. WHEN STOPPING PAYMENT CONSTITUTES A CRIME  It would constitute the crime of estafa where the accused issues a check and receives money, not goods, for them to the offended party, and where at the time the accused has received money for the check from the offended party, he has the intention of stopping payment on it. CASE DIGESTS: SECTION 189 190

TAN V. CA 239 SCRA 310

FACTS: Tan was a businessman who maintained an with RCBC. To avoid the risk of bringing with him cash, he bought a manager’s check from PCIB and deposited it in his . On the same day, RCBC erroneously sent the check for clearing which was sent back for having been missent or misrouted. This caused RCBC to debit the of Tan. Thereafter, without being informed of his being debited, Tan issued two checks with the same value of the manager’s check he deposited. This naturally bounced and this prompted Tan to file an action against RCBC. HELD: RCBC cannot exculpate itself from liability by claiming that the depositor has implied instructed it to send the check for clearing by filling a local check deposit slip. Such posture is disingenuous to say the least. First, why would the bank follow a patently erroneous act born of ignorance or inattention or both. Second, bank transactions through a succession of bank personnel whose duty is to check and countercheck transactions for possible errors. As soon as their deposits are accepted by the bank teller, they wholly repose trust in the bank personnel’s mastery of banking, their and the bank’s sworn profession of diligence and meticulousness in giving irreproachable service. In the instant case, it was the bank which was remiss in its duties. The two checks were issued 45 days after the cashier’s check was deposited. The bank had ample time to have cleared the cashier’s check had it corrected its missending the same upon the return from CB using the correct slip this time so that it can be cleared properly. Instead, the bank has promptly debited the of Tan.


RCBC insists that immediate payment of a certified check is discretionary on the bank whom the check was presented and such being the case, its refusal to immediately pay the check in this case is not to be equated with negligence on its part. This is without merit. An ordinary check is not a mere undertaking to pay an amount of money. There is an element of certainty or assurance that it will be paid upon presentation that is why it is perceived as a convenient substitute for currency in commercial transactions. The basis of perception being confidence. Any practice which destroys this confidence will impair the usefulness of the check. What was presented in this case was a cashier’s check payable to the of the depositor himself. A cashier’s check is a primary obligation of the issuing bank and accepted in advance by its mere issuance. By its very nature, a cashier’s check is a bank’s order to pay drawn upon itself, committing in effect its total resources, integrity and honor behind the check. It is regarded to be as good as the money which it represents. In this case, PCIB by issuing the check created an unconditional credit in favor of the collecting bank. 191

VILLANUEVA V. NITE 496 SCRA 459

FACTS: Nite obtained a loan from Villanueva. This was secured by an ABC check but when the check was deposited, it was dishonored for having been materially altered. Afterwards, Nite remitted to Villanueva partial payment of the loan. Nonetheless, the latter filed an action for collection of sum of money from the former for the whole value of the check. The lower court decided in favor of Villanueva and ordered ABC to pay the former. Thereafter, when Nite tried to withdraw money from her she couldn’t do so. This prompted Nite to file with the CA for annulment of judgment which she was granted. HELD: Villanueva obviously acted on bad faith. Barely 6 days after accepting the partial payment from Nite, he acted with haste in filing the action. He didn’t even implead Nite in his action against the bank, showing his intent to prevent Nite from opposing his action.



Furthermore, if a bank refuses to pay a check notwithstanding the sufficiency of funds, the payee cannot sue the bank. The payee should instead sue the drawer who might in turn sue the bank. Villanueva should have not sued ABC. Contracts take effect only between the parties, assigns and heirs, except in cases where the rights and obligations arising from the contract are not transmissible in nature, by stipulation or by provision of law. None of the foregoing exceptions to the relativity of contracts applies in this case. The contract of loan was between Villanueva and Nite. Consequentially, Nite should have been made an indispensable party in the former’s action against ABC. 192

MIRANDA V. PDIC; BSP AND PRIME 501 SCRA 288

FACTS: Miranda had an with Prime Savings. She withdrew some of her money but instead of asking for cash, she requested that she be issued two crossed cashier’s check. She then deposited these in another . But these checks weren’t paid, since the BSP suspended the clearing privileges of Prime Savings. Thereafter, Prime Savings declared bank holiday and was placed under receivership. The checks were then returned to Miranda unpaid and this prompted her to file an action for collection of sum of money from PDIC, the receiver. HELD: The two cashier’s check in issued don’t constitute an assignment of funds in the hands of Miranda as there were no funds in the first place. The bank was insolvent for sometime even before the checks were issued in favor of Miranda. Second, the claim of Miranda is subject to the jurisdiction of the liquidation court. Regular courts don’t have jurisdiction over claims against insolvent bank. Third, it is only Prime Savings that is liable to pay for the amount of the cashier’s check. Solidary liability cannot attach to the BSP in its capacity as regulator of banks, and the PDIC as statutory receiver because they are principal government agencies mandated by law to determine the financial viability of banks and quasi-banks, and facilitate receivership and liquidation of closed financial institutions upon factual determination of the latter’s insolvency.


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