FARINAS COMMERCIAL LAW CASE DIGESTS

LETTERS OF CREDIT
PRUDENTIAL BANK vs. INTERMEDIATE APPELLATE COURT
G.R. No. 74886 December 8, 1992, 216 scra 257
--presentment for payment
FACTS:
Philippine Rayon Mills, Inc. entered into a contract with Nissho Co.,
Ltd. of Japan for the importation of textile machineries under a fiveyear deferred payment plan. To effect payment for said machineries,
Philippine Rayon Mills opened a commercial letter of credit with the
Prudential Bank and Trust Company in favor of Nissho. Against this
letter of credit, drafts were drawn and issued by Nissho, which were
all paid by the Prudential Bank through its correspondent in Japan.
Two of these drafts were accepted by Philippine Rayon Mills while
the others were not. Petitioner instituted an action for the recovery of
the sum of money it paid to Nissho as Philippine Rayon Mills was not
able to pay its obligations arising from the letter of credit.
Respondent court ruled that with regard to the ten drafts which were
not presented and accepted, no valid demand for payment can be
made. Petitioner however claims that the drafts were sight drafts
which did not require presentment for acceptance to Philippine
Rayon.
ISSUE:
Whether presentment for acceptance of the drafts was indispensable
to make Philippine Rayon liable thereon.
RULING:
In the case at bar, the drawee was necessarily the herein petitioner. It
was to the latter that the drafts were presented for payment. There
was in fact 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). The said section provides that 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. Obviously then, sight drafts do not
require presentment for acceptance.
Bank of America, NT v. Court of Appeals
228 SCRA 357
Bank of America received by registered mail an irrevocable letter of
credit purportedly issued by Bank of Ayudhya Samyek Branch, for the
account of General Chemicals, Ltd., of Thailand in the amount of
$2,782,000.00 to cover the sale of plastic ropes and agricultural files,

with Bank of America as the advising bank and Inter-Resin Industrial

Corporation as beneficiary.
Bank of America notified Inter-Resin of the letter of credit. Upon
request by Inter-Resin for Bank of America to confirm the letter of
credit, latter refused although one of its employee explained to InterResin that there was no need for confirmation because the letter of
credit is genuine.
Inter-Resin therefore twice sought availment under the letter of credit.
Bank of America issued P10,219,093 in the first availment upon
being satisfied of the documents submitted by Inter-Resin.
However, Bank of America stopped the processing of the second
availment upon being informed by Bank of Ayudhya that the letter of
credit was fraudulent. Further, upon conducting an examination of the
vans sent by Inter-Resin, it found out that they contain not ropes but
plastic strips, wrappers, rags and waste materials.
Bank of America sued Inter-Resin for recovery of the money it gave
under the first availment, considering the letter of credit has been
disowned by Bank of Ayudhya. However, the trial court ruled in favor
of Inter-Resin which was affirmed by the Court of Appeals.
Supreme Court reversed the decision of the lower courts. It ruled that
the crucial point of dispute in this case is whether, under the letter of
credit, Bank of America has incurred any liability to the beneficiary
thereof, an issue that largely is dependent on the banks participation
in that transaction: as a mere advising or notifying bank, it would not
be liable, but as a confirming bank, had this been the case, it could
be considered as having incurred that liability.
It cannot seriously be disputed, looking at this case, that Bank of
America has, in fact, only been an advising, not confirming, bank,
and this much is clearly evident, among other things, by the
provisions of the letter of credit itself, the petitioner banks letter of
advice, its request for payment of advising fee, and the admission of
Inter-Resin that it has paid the same. That Bank of America has
asked Inter-Resin to submit documents required by the letter of credit
and eventually has paid the proceeds thereof, did not obviously make
it a confirming bank.
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.
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 finds no
real support in the UCP.
As advising bank, Bank of America is bound only to check the
apparent authenticity of the letter of credit, which it did. Websters
explains that the word apparent suggests appearance to unaided
senses that is not or may not be borne out by more rigorous
examination or greater knowledge.
May Bank of America then recover what it has paid under the letter of
credit when the corresponding draft for partial availment thereunder
and the required documents therefore were later negotiated with it by
Inter-Resin? The answer is yes.
This kind of transaction is what is commonly referred to as a
discounting arrangement. This time, 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

1 | Page

FARINAS COMMERCIAL LAW CASE DIGESTS

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.
SC noted that the additional ground raised by Bank of America, i.e.
that Inter-Resin sent waste instead of its products, is really of no
consequence. In the operation of a letter of credit, the involved banks
deal only with documents and not on goods described in those
documents.
CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP,
RICHARD VELASCO and ALFONSO CO, petitioners, vs. COURT
OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS,
respondents.
Facts:
On March 2, 1979, Charles Lee, as President of MICO wrote private
respondent Philippine Bank of Communications (PBCom) requesting
for a grant of a discounting loan/credit line in the sum of Three Million
Pesos (P3,000,000.00) for the purpose of carrying out MICOs line of
business as well as to maintain its volume of business.
On the same day, Charles Lee requested for another discounting
loan/credit line of Three Million Pesos (P3,000,000.00) from PBCom
for the purpose of opening letters of credit and trust receipts.
As per agreement, the proceeds of all the loan availments were
credited to MICOs current checking account with PBCom. To induce
the PBCom to increase the credit line of MICO, petitioners executed
another surety agreement in favor of PBCom on July 28, 1980,
whereby they jointly and severally guaranteed the prompt payment
on due dates or at maturity of overdrafts, promissory notes,
discounts, drafts, letters of credit, bills of exchange, trust receipts and
all other obligations of any kind and nature for which MICO may be
held accountable by PBCom
Upon maturity of all credit availments obtained by MICO from
PBCom, the latter made a demand for payment. Private respondent
PBCom extrajudicially foreclosed MICOs real estate mortgage upon
repeated demands & emerged as the highest bidder. For the unpaid
balance, PBCom then demanded the settlement of the aforesaid
obligations from herein petitioners-sureties who, however, refused to
acknowledge their obligations to PBCom under the surety
agreements. Hence, PBCom filed a complaint with prayer for writ of
preliminary attachment before the Regional Trial Court of Manila.
Petitioners (MICO and herein petitioners-sureties) denied all the
allegations of the complaint filed by respondent PBCom, and alleged
that: a) MICO was not granted the alleged loans and neither did it
receive the proceeds of the aforesaid loans; b) Chua Siok Suy was
never granted any valid Board Resolution to sign for and in behalf of
MICO; c) PBCom acted in bad faith in granting the alleged loans and
in releasing the proceeds thereof; d) petitioners were never advised
of the alleged grant of loans and the subsequent releases therefor, if
any; e) since no loan was ever released to or received by MICO, the
corresponding real estate mortgage and the surety agreements
signed concededly by the petitioners-sureties are null and void.
Issue: WON the proceeds of the loans or the goods under the trust
receipts were ever delivered to and received by MICO.

Held: It is clear that letters of credit, being usually bank to bank

transactions, involve more than just one bank. Consequently, there is
nothing unusual in the fact that the drafts presented in evidence by
respondent bank were not made payable to PBCom.
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.
A trust receipt, therefor, is a document of security pursuant to which a
bank acquires a security interest in the goods under trust receipt.
Under a letter of credit-trust receipt arrangement, a bank extends a
loan covered by a letter of credit, with the trust receipt as a security
for the loan. The transaction involves a loan feature represented by a
letter of credit, and a security feature which is in the covering trust
receipt which secures an indebtedness.
G.R. No. L-24821 October 16, 1970
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and
AURORA CARCERENY alias AURORA C. GONZALES,
defendants-appellants.
FACTS : De Reny Fabric Industries, Inc. applied to the Bank for four
(4) irrevocable commercial letters of credit to cover the purchase by
the corporation of goods from its American supplier, the J.B.
Distributing Company.
As each shipment arrived in the Philippines, the De Reny Fabric
Industries, Inc. made partial payments to the Bank amounting.
Further payments were, however, subsequently discontinued by the
corporation when it became established, as a result of a chemical
test conducted by the National Science Development Board, that the
goods that arrived in Manila were colored chalks instead of dyestuffs.
The corporation also refused to take possession of these goods, and
for this reason, the Bank caused them to be deposited with a bonded
warehouse paying therefor the amount of P12,609.64 up to the filing
of its complaint with the court.
ISSUE : Whether or not De Reny fabrics is liable under the letter of
Credit?
HLED : Under the terms of their Commercial Letter of Credit
Agreements with the Bank, the appellants agreed that the Bank
shall not be responsible for the "existence, character, quality,

2 | Page

FARINAS COMMERCIAL LAW CASE DIGESTS

quantity, conditions, packing, value, or delivery of the property
purporting to be represented by documents; for any difference in
character, quality, quantity, condition, or value of the property from
that expressed in documents," or for "partial or incomplete shipment,
or failure or omission to ship any or all of the property referred to in
the Credit," as well as "for any deviation from instructions, delay,
default or fraud by the shipper or anyone else in connection with the
property the shippers or vendors and ourselves [purchasers] or any
of us." Having agreed to these terms, the appellants have,
therefore, no recourse but to comply with their covenant.
But even without the stipulation recited above, the appellants cannot
shift the burden of loss to the Bank on account of the violation by
their vendor of its prestation.
It was uncontrovertibly proven by the Bank during the trial below that
banks, in providing financing in international business transactions
such as those entered into by the appellants, do not deal with the
property to be exported or shipped to the importer, but deal only
with documents.
The existence of a custom in international banking and financing
circles negating any duty on the part of a bank to verify whether what
has been described in letters of credits or drafts or shipping
documents actually tallies with what was loaded aboard ship, having
been positively proven as a fact, the appellants are bound by this
established usage. They were, after all, the ones who tapped the
facilities afforded by the Bank in order to engage in international
business.
FEATI BANK VS. CA
FACTS:
Note: Feati as a notifying bank is only obliged to notify and transmit
to the seller the LC.
Bernardo Villaluz (seller) agreed to sell to Christiansen (buyer) 2,000
cubic meters of lauan logs at a price of $27 per cubic meter FOB.
Security Pacific National Bank of LA (Security) issued an Irrevocable
Letter of Credit. Said letter of credit was mailed to FEATI bank and
one of the documents required to be submitted by the seller to the
bank is the Certification from Han Axel Christiansen that the logs
have been approved prior to shipping in accordance with terms and
conditions of corresponding purchase order. Also incorporated by
reference in the letter of credit is the Uniform Customs and Practice
for Documentary Credits (UCP).
The logs were thereafter loaded on the vessel Zenlin Glory which
was chartered by Christiansen. It was certified to be in good
condition and exportable. The logs arrived at Korea and were
received by the consignee Hanmi Trade Devt Comp. and were
subsequently sold to another party.
However Christiansen failed and refused to issue the certificate
despite repeated demands by Villaluz. Due to the absence of the said
certificate, Feati Bank refused to advance the payment on the letter

of credit. because of the situation of Villaluz, Central Bank issued a

memorandum declaring that the requirement of CERTIFICATION is
not allowed. However such memo only came out after the letter of
credit has already lapsed.
RTC ruled in favor of Villaluz and held Feati Bank and Christiansen
solildarily liable, it held that:
1. Feati Bank is liable because it failed to negotiate the letter
of credit in the absence of the certification even if the
Central Bank held such requirement as void.
2. That because the LC is irrevocable, the issuing bank,
Security, is deemed to honor the LC upon presentment.
And by accepting the instructions from the issuing bank
Feati assumed the same undertaking.
3. Under the principles and laws on both trust and estoppels.
When Feati Bank accepted its role as the notifying and
negotiating bank in behalf of the issuing bank, it in effect
accepted a trust reposed on it and became a trustee in
relation to Villaluz.
CA affirmed and further held:
1. The LC was a confirmed LC in which the notifying bank
gives its assurance also that the opening banks obligation
will be performed. The notifying bank in such a case will not
simply transmit but will confirm the opening banks
obligation by making it also its own understanding,
commitment or guaranty or obligation.
ISSUE:
1. W/N Feati Bank can be held liable for the LC absence the
certification required by the LC.
RULING:
NO, Feati Bank is not liable. It is already a settled rule in Commercial
transaction involving letter of credit that the documents tendered
must strictly conform to the terms of the LC. In this case, the mere
fact that the certification was required by the LC means that the
document is of vital importance to the buyer and therefore must be
submitted before the notifying bank is compelled to honor the LC.
Thus failure of Villaluz to surrender the Certification is fatal.
Under the UCP1 the bank may negotiate, accept or pay, if the
documents tendered to it are on their face in accordance with the
terms and conditions of the documentary credit. And since Feati
Bank deals only with documents, the absence of any document

1 Article 3.An irrevocable credit is a definite undertaking on the part of

the issuing bank and constitutes the engagement of that bank to the
beneficiary and bona fide holders of drafts drawn and/or documents
presented thereunder, that the provisions for payment, acceptance or
negotiation contained in the credit will be duly fulfilled, provided that all
the terms and conditions of the credit are complied with.
An irrevocable credit may be advised to a beneficiary through another
bank (the advising bank) without engagement on the part of that bank,
but when an issuing bank authorizes or requests another bank to
confirm its irrevocable credit and the latter does so, such confirmation
constitutes a definite undertaking of the confirming bank. . . .
Article 7.

3 | Page

FARINAS COMMERCIAL LAW CASE DIGESTS

required in the LC justifies the refusal by the correspondent bank to
negotiate, accept, or pay the beneficiary, as it is not its obligation to
look beyond the documents. It merely has to rely on the
completeness of the documents.
SC also held that the decision of the TC was wrong in holding that
irrevocable and confirmed credit is synonymous. It held that an
irrevocable credit refers to the duration of the LC. On the other hand
confirmed letter pertains to the obligation assumed by the bank, in
this case, the correspondent bank gives an assurance to the
beneficiary that it will undertake the issuing banks obligation as its
own according to the terms and conditions of the credit. Hence it
does not mean that the mere fact that a LC is irrevocable imply that
the Correspondent bank in accepting the instructions of the issuing
bank has also confirmed the LC.
The SC also held that in this case Feati Bank was merely a notifying
bank2 and not a negotiating bank3 nor a confirming bank4. In this case
the LC merely provided Feati Bank forward the enclosed original
credit to Villaluz. As a notifying bank, its responsibility was solely to
notify and/or transmit the documentary of credit to Villaluz and its
obligation ends there. There is neither proof that Feati Bank
confirmed the letter, the $75,000 loan granted by Feati Bank to
Villaluz was not in anticipation of the loan but was an isolated
transaction, the logical conclusion is that the LC was merely a
collateral. By extending the loan it assumed the character of a
Banks must examine all documents with reasonable care to ascertain
that they appear on their face to be in accordance with the terms and
conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear
on their face to be in accordance with the terms and conditions of a
credit by a bank authorized to do so, binds the party giving the
authorization to take up documents and reimburse the bank which has
effected the payment, acceptance or negotiation. (Emphasis Supplied)

2 In case of a notifying bank, the correspondent bank assumes no

liability except to notify and/or transmit to the beneficiary the existence
of the letter of credit. (no contractual relationship with seller/benificiary)

3 A negotiating bank, on the other hand, is a correspondent bank

which buys or discounts a draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation. If before negotiation, it
has no liability with respect to the seller but after negotiation, a
contractual relationship will then prevail between the negotiating bank
and the seller. (no contractual relationship with seller/benificiary)

4 a confirming bank, the correspondent bank assumes a direct

obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit.

negotiating bank but even then Feati bank was still not liable
because there was no contractual relationship between Feati and
Villaluz.
Neither was there a trust5 between Feati Bank (trustee) and Villaluz
(beneficiary). the mere opening of a LC does not involve a specific
appropriation of a sum of money in favor of the beneficiary. It only
signifies that the beneficiary may be able to draw funds upon the
letter of credit up to the designated amount specified in the LC. The
correspondent bank does not receive in advance the sum of money
from the issuing bank. On the contrary, when they accept the tender
and pays the amount, it gets the money from its own funds and then
later seeks reimbursement from the issuing bank. Also as notifying
bank it cannot be held liable even if there is a trust created.
Neither was there a guarantee. It is fundamental that an irrevocable
credit is independent not only of the contract between the buyer and
the seller but also of the credit agreement between the issuing bank
and the buyer. Feati Bank has no business with the relationship of
Christiansen and Security it merely being a notifying bank. Feati
Bank was only following instruction of the issuing bank.
But even if all of this argument existed (trust, guarantee, and
confirming bank, Feati Bank cannot be compelled to pay because
there was a failure on the part of Villaluz to comply with the terms of
the LC which is the absence of the certificate. It cannot be argued
that such a requirement is illegal because such pronouncement by
the Central Bank was only done after the issuance of the LC, when
the LC was issued there was still no such prohibition.

Transfield Philippines vs Luzon Hydro Electric Corp.

(GR No 146717, Nov 22, 2004, Tinga)
Transfield entered into a turn-key contract with Luzon Hydro Corp.
(LHC). Under the contract, Transfield were to construct a hydroelectric plants in Benguet and Ilocos. The contract provides for a
period for which the project is to be completed and also allows for the
extension of the period provided that the extension is based on
justifiable grounds such as fortuitous event. In order to guarantee
performance by Transfield, two stand-by letters of credit were
required to be opened. During the construction of the plant,
Transfield requested for extension of time citing fortuitous events
brought about by typhoon, barricades and demonstration. LHC did
not give due course to the extension of the period prayed for but
referred the matter to arbitration committee.
In the meanwhile, because of the delay in the construction of the
plant, LHC called on the stand-by letters of credit because of default.
However, the demand was objected by Transfield on the ground that
there is still pending arbitration on their request for extension of time.
LHC invoked the independence principle. On the other hand,

5 trust has been defined as the "right, enforceable solely in equity, to

the beneficial enjoyment of property the legal title to which is vested to
another." Therefore, In order therefore for the trust theory to be
sustained, Feati Bank should have had in its possession a sum of
money as specific fund advanced to it by the issuing bank and to be
held in trust by it in favor Viallaluz. This does not obtain in this case.

4 | Page

FARINAS COMMERCIAL LAW CASE DIGESTS

Transfield claims fraud on the part of LHC on calling the stand-by
letters of credit.
Under the independence principle, a LC accommodation is entirely
distinct and separate, independent agreement. It is not supposed to
be affected by the main contract upon which it rests.
The court held for the LHC. Following the independence principle,
even granting that there is still issue to be resolved arising from the
turn-key project. This issue is not supposed to affect the obligation of
the bank to pay the letter of credit in question. The court stressed
that a LC accommodation is intended to benefit not only the
beneficiary therein but the applicant thereon. On the issue of fraud,
the SC held that there is nothing in the turn-key contract which states
that all issues between the parties must be resolved first before LHC
can call on the stand-by LC but the contract provides that if Transfield
defaults, then LHC can call on these stand-by LC.
MWSS vs. DAWAY AND MAYNILAD
G.R. No. 160732.
June 21, 2004
FACTS: MWSS granted Maynilad under a Concession Agreement to
manage, operate, repair, decommission and refurbish the existing
MWSS water delivery and sewerage services in the West Zone
Service Area, for which Maynilad undertook to pay the corresponding
concession fees which, among other things, consisted of payments
of petitioners mostly foreign loans.
To secure the concessionaires performance of its obligations,
Maynilad was required under Section 6.9 of said contract to put up a
bond, bank guarantee or other security acceptable to MWSS.
In compliance with this requirement, Maynilad arranged for a threeyear facility with a number of foreign banks, led by Citicorp Intl Ltd.,
for the issuance of an Irrevocable Standby Letter of Credit in favor of
MWSS for the full and prompt performance of Maynilads obligations
to MWSS as aforestated.
Later, the parties agreed to resolve the issues between them
[Maynilad is asking for a mechanism by which it hoped to recover the
losses it had allegedly incurred and would be incurring as a result of
the depreciation of the Philippine Peso against the US Dollar and in
filing to get what it desired, Maynilad unilaterally suspended the
payment of the concession fees] through an amendment of the
Concession Agreement which was based on the terms set down in
MWSS Board of Trustees Resolution which provided inter alia for a
formula that would allow Maynilad to recover foreign exchange
losses it had incurred or would incur under the terms of the
Concession Agreement.
However Maynilad served upon MWSS a Notice of Event of
Termination, claiming that MWSS failed to comply with its obligations
under the Concession Agreement and its Amendment regarding the
adjustment mechanism that would cover Maynilads foreign exchange
losses. Maynilad filed a Notice of Early Termination of the
concession, which was challenged by MWSS. This matter was
eventually brought before the Appeals Panel by MWSS. the Appeals
Panel ruled that there was no Event of Termination as defined under
Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that,
therefore, Maynilad should pay the concession fees that had fallen
due.
The award of the Appeals Panel became final. MWSS, thereafter,
submitted a written notice to Citicorp Intl Ltd, as agent for the
participating banks, that by virtue of Maynilads failure to perform its

obligations under the Concession Agreement, it was drawing on the

Irrevocable Standby Letter of Credit and thereby demanded
payment.
Prior to this, however, Maynilad had filed on a petition for
rehabilitation before the RTC of Quezon City which resulted in the
issuance of the Stay Order and the disputed Order of November 27,
2003.
ISSUE: WON the rehabilitation court sitting as such, act in excess of
its authority or jurisdiction when it enjoined herein petitioner from
seeking the payment of the concession fees from the banks that
issued the Irrevocable Standby Letter of Credit in its favor
HELD: the petition for certiorari is granted.The Order of November
27, 2003 of the RTC of Quezon City 90, is hereby declared null and
voidand set aside.
YES
First, the claim is not one against the debtor but against an entity that
respondent Maynilad has procured to answer for its non-performance
of certain terms and conditions of the Concession Agreement,
particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin
the enforcement of all claims against guarantors and sureties, but
only those claims against guarantors and sureties who are not
solidarily liable with the debtor. Respondent Maynilads claim that
the banks are not solidarily liable with the debtor does not find
support in jurisprudence.
Letters of credit were developed for the purpose of insuring to a
seller payment of a definite amount upon the presentation of
documentsand is thus a commitment by the issuer that the party in
whose favor it is issued and who can collect upon it will have his
credit against the applicant of the letter, duly paid in the amount
specified in the letter They are in effect absolute undertakings to pay
the money advanced or the amount for which credit is given on the
faith of the instrument. They are primary obligations and not
accessory contracts and while they are security arrangements, they
are not converted thereby into contracts of guaranty. What
distinguishes letters of credit from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and
other required shipping documents are presented to it. They are
definite undertakings to pay at sight once the documents stipulated
therein are presented.
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does
not apply to herein petitioner as the prohibition is on the enforcement
of claims against guarantors or sureties of the debtors whose
obligations are not solidary with the debtor. The participating banks
obligation are solidary with respondent Maynilad in that it is a
primary, direct, definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the debtors assets. These are
the same characteristics of a surety or solidary obligor. And being
solidary, the claims against them can be pursued separately from and
independently of the rehabilitation case.
The terms of the Irrevocable Standby Letter of Credit do not show
that the obligations of the banks are not solidary with those of
respondent Maynilad. On the contrary, it is issued at the request of
and for the account of Maynilad in favor of the MWSS as a bond for
the full and prompt performance of the obligations by the
concessionaire under the Concession Agreement and herein MWSS
is authorized by the banks to draw on it by the simple act of

5 | Page

FARINAS COMMERCIAL LAW CASE DIGESTS

delivering to the agent a written certification substantially in the form
of the Letter of Credit.
Taking into consideration our own rulings on the nature of letters of
credit and the customs and usage developed over the years in the
banking and commercial practice of letters of credit, we hold that
except when a letter of credit specifically stipulates otherwise, the
obligation of the banks issuing letters of credit are solidary with that
of the person or entity requesting for its issuance, the same being a
direct, primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documents required
therein.
The public respondent, therefore, exceeded his jurisdiction, in
holding that he was competent to act on the obligation of the banks
under the Letter of Credit under the argument that this was not a
solidary obligation with that of the debtor. Being a solidary obligation,
the letter of credit is excluded from the jurisdiction of the rehabilitation
court and therefore in enjoining petitioner from proceeding against
the Standby Letters of Credit to which it had a clear right under the
law and the terms of said Standby Letter of Credit, public respondent
acted in excess of his jurisdiction.
NOTES:
We held in Feati Bank & Trust Company v. Court of Appeals that the
concept of guarantee visvis the concept of an irrevocable letter of
credit are inconsistent with each other.The guarantee theory destroys
the independence of the banks responsibility from the contract upon
which it was opened and the nature of both contracts is mutually in
conflict with each other. In contracts of guarantee, the guarantors
obligation is merely collateral and it arises only upon the default of
the person primarily liable. On the other hand, in an irrevocable letter
of credit, the bank undertakes a primary obligation. We have also
defined a letter of credit as an engagement by a bank or other person
made at the request of a customer that the issuer shall honor drafts
or other demands of payment upon compliance with the conditions
specified in the credit.
TRUST RECEIPTS LAW
Rosario Textile Mills Corp. v. Home Bankers Savings and Trust
Company, 462 SCRA 88 (2005)

letters, RTMC failed to pay its loans. Hence, the bank filed a
complaint for sum of money against RTMC and Yujuico.

FACTS:

ISSUE:
-Whether or not RMTC and Yujuico are not relieved of their obligation
to pay their loan after they rtried to tender te goods to the bank which
the bank refused to accept the same, and which goods
weresubsequently lost in fire.

- Rosario Textile Mills Corporation (RTMC) applied from Home

Bankers Savings & Trust Co. for an Omnibus Credit Line for
P10 million.
-The bank approved RTMCs credit line but for only P8 million.
The bank notified RTMC of the grant of the said loan thru a
letter which contains terms and conditions conformed by RTMC
thru Edilberto V. Yujuico. Yujuico signed a Surety Agreement in
favor of the bank, in which he bound himself jointly and
severally with RTMC for the payment of all RTMCs
indebtedness to the bank.
-RTMC availed of the credit line by making numerous
drawdowns, each drawdown being covered by a separate
promissory note and trust receipt. RTMC, represented by
Yujuico, executed in favor of the bank a total of eleven (11)
promissory notes.
-Despite the lapse of the respective due dates under the
promissory notes and notwithstanding the banks demand

CONTENTION OF RTMC AND YUJUICO:

They claimed that although the grant of the credit line and the
execution of the suretyship agreement are admitted, the bank
gave assurance that the suretyship agreement was merely a
formality under which Yujuico will not be personally liable; that
the importation of raw materials under the credit line was with a
grant of option to them to turn-over to the bank the imported
raw materials should these fail to meet their manufacturing
requirements.
-RTMC offered to make such turn-over since the imported
materials did not conform to the required specifications.
However, the bank refused to accept the same, until the
materials were destroyed by a fire which gutted down RTMCs
premises.
For failure of the parties to amicably settle the case, trial on the
merits proceeded.
TC:
-In favor of the bank and orderd RTMC and Yujuico to pay.
-RMTC appealed contending that under the trust receipt contracts
between the parties, they merely held the goods described therein in
trust for Home Bankers Savings and Trust Company (the bank)
which owns the same. Since the ownership of the goods remains
with the bank, then it should bear the loss. With the destruction of
the goods by fire, petitioners should have been relieved of any
obligation to pay.
CA:
-Affirmed the trial courts judgment, holding that the bank is merely
the holder of the security for its advance payments to petitioners; and
that the goods they purchased, through the credit line extended by
the bank, belong to them and hold said goods at their own risk.

HELD:
-Petitioners theorize that when petitioner RTMC imported the raw
materials needed for its manufacture, using the credit line, it was
merely acting on behalf of the bank, the true owner of the goods by
virtue of the trust receipts. Hence, under the doctrine of res perit
domino, the bank took the risk of the loss of said raw materials.
RTMCs role in the transaction was that of end user of the raw
materials and when it did not accept those materials as they did not
meet the manufacturing requirements, RTMC made a valid and
effective tender of the goods to the bank. Since the bank refused to
accept the raw materials, RTMC stored them in its warehouse.
When the warehouse and its contents were gutted by fire, petitioners
obligation to the bank was accordingly extinguished.

6 | Page

FARINAS COMMERCIAL LAW CASE DIGESTS

-Petitioners stance, however, conveniently ignores the true nature of
its transaction with the bank. We recall that RTMC filed with the bank
an application for a credit line in the amount of P10 million, but only
P8 million was approved. RTMC then made withdrawals from this
credit line and issued several promissory notes in favor of the bank.
In banking and commerce, a credit line is that amount of money or
merchandise which a banker, merchant, or supplier agrees to supply
to a person on credit and generally agreed to in advance. It is the
fixed limit of credit granted by a bank, retailer, or credit card issuer to
a customer, to the full extent of which the latter may avail himself of
his dealings with the former but which he must not exceed and is
usually intended to cover a series of transactions in which case,
when the customers line of credit is nearly exhausted, he is
expected to reduce his indebtedness by payments before making
any further drawings.
-It is thus clear that the principal transaction between petitioner
RTMC and the bank is a contract of loan. RTMC used the proceeds
of this loan to purchase raw materials from a supplier abroad. In
order to secure the payment of the loan, RTMC delivered the raw
materials to the bank as collateral. Trust receipts were executed by
the parties to evidence this security arrangement. Simply stated, the
trust receipts were mere securities.
Bank of Commerce v. Serrano
G.R. No. 151895
February 16, 2005
Petitioner: Bank of Commerce
Respondent: TERESITA S. SERRANO
FACTS:
Petitioner Bank of Commerce (Boston Bank of the
Philippines) banking institution
Teresita Serrano GM and Treasurer of Via Moda Intl,
importer and exporter of Textile materials and fabrics.
Via Moda obtained an export packing loan from petitioner
Bank of Commerce in amount of $50,000 secured by Deed
of Assignment over Irrevocable Letter of Credit. Serrano
executed a promissory note. She then opened a deposit
account for the proceeds of the said loan.
BOC issued to Via Moda an irrevocable letter of credit in
the amount of $56,735 for the purchase and importation of
fabric and textile products from Tiger Ear Fabric of Taiwn.
To secure the release of the goods, she executed a trust
receipt.
Under the terms of the trust receipt, Via Moda agreed to
hold the goods in trust for petitioner as the latters property
and to sell the same for the latters account.
In case of sale, the proceeds are to be remitted to the bank
as soon as it is received, but not later than the maturity
date or in the alternative, to return the goods in case of
non-sale.6
The goods covered by the trust receipt were shipped by Via
Moda to its consignee in New Jersey, USA, who sent an
Export Letter of Credit issued by the Bank of New York, in
favor of BOC. The Regional Operations Officer of BOC
signed the export declarations to show consent to the
shipment.

The proceeds of the entrusted goods sold were not

credited to the trust receipt but, were applied by the bank to
the principal, penalties and interest of the export packing
loan. The excess P472,114.85 was applied to the trust
receipt, leaving a balance of P1,444,802.28 as of
November 15, 1994.7
On November 16, 1994, petitioner sent a demand letter to
Via Moda to pay the said amount plus interest and penalty
charges, or to return the goods covered by Trust Receipt
within 5 days from receipt. The demand was not heeded.
As of December 15, 1998, the outstanding balance of Via
Moda was P4,783,487.15.
Respondent was charged with the crime of estafa under
Article 315 (b) of the Revised Penal Code in relation to
Presidential Decree No. 115.9
RTC rendered a decision finding Serrano Guilty.
CA reversed the RTC decision. It held that the element of
misappropriation or conversion in relation to the crime of
estafa, was absent in this case.
Hence this Petition

ISSUE:
Whether or not CA erred in Reversing RTC decision? NO
HELD:

A letter of credit is a separate document from a trust

receipt. While the trust receipt may have been
executed as a security on the letter of credit, still the
two documents involve different undertakings and
obligations.
A letter of credit is 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 the promise to pay of 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.
By contrast, a trust receipt transaction is one where the
entruster, who holds an absolute title or security interests
over certain goods, documents or instruments, released
the same to the entrustee, who executes a trust receipt
binding himself to hold the goods, documents or
instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents and
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 return
the goods, documents or instruments themselves if they
are unsold, or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust receipt.
Worthy of mention at this point is the Court of Appeals
finding that there was no misappropriation or

7 | Page

FARINAS COMMERCIAL LAW CASE DIGESTS

conversion by the respondent of the proceeds of the
sale in the goods, subject of the trust receipt since the
proceeds were actually received by petitioner but the
latter applied the same to Via Modas other obligations
under the export packing loan.

It further stated that such application of payment to

another obligation was done by petitioner on its own and
should not create a criminal liability on the part of
respondent who did not take part nor had any knowledge
thereof. It is on this premise that the respondent was
acquitted of the crime charged.18
*Metrobank vs. Gonzales
Landl & Company v. Metropolitan Bank, 435 SCRA 639 (2004)
FACTS:
-Landl and Company is engaged in the business of selling imported
welding rods and alloys.
-It opened a commercial letter of credit with MBTC for the purchase
of various welding rods and electrons from PERMA ALLOYS Inc.,
New York, USA. Landl put up a marginal deposit of P50, 000.00 from
the proceeds of a separate clean loan.
-As an additional security, and as a condition for the approval of the
application, MBTC required Percival Llaban and Manuel Lucente to
execute a continuing surety agreement. Lucente also executed a
Deed of assignment in favor of MBTC to cover the amount of the
corporations obligation to the bank. Upon compliance with these
requisites, MBTC opened an irrevocable Letter of Credit for Landl.
-Trust Receipt was executed to secure indebtedness of Landl.
-Upon Maturity, Landl defaulted payment of its obligation or to return
the goods to MBTC.
-The goods were sold at public auction to MBTC as the highest
bidder.
-However, the proceeds of the auction sale were insufficient to
completely satisfy the outstanding obligation of Landl notwithstanding
the application of the time deposit account of its director Lucente.
-Accordingly, MBTC demanded that Landl pay the remaining balance
of their obligation.
-Landl failed to do so.
-MBTC filed a complaint for sum of money against Landl and its
directors for the amount of the deficiency.
TC and CA:
-Ordered Landl to pay the bank.

ISSUE:
-Whether or not in a trust receipt transaction, an entruster which had
taken actual and juridical possession of the goods covered by trust
receipt may subsequently avail of the right to demand from the
entrustee the deficiency of the amount covered by the trust receipt.
HELD
- A trust receipt agreement is merely a collateral agreement, the
purpose of which is to serve as security for a loan.
-In the event of default or failure of the entrustee to comply with the
terms of the trust receipt agreement, the entruster may cancel the
trust and take possession of the goods subject of the trust receipt
and while in possession cause the sale of the goods after at least five
(5) day notice to the entrustee, in a private or public sale. The
entruster may at public sale become a purchaser. If the proceeds of
the sale were insufficient to satisfy entirely entrustees indebtedness,
the entruster is well within its rights to file an action to collect the
deficiency.
NEGOTIABLE INSTRUMENTS LAW:
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 wasnt initially non-negotiable. Neither was it crosschecked. 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.

8 | Page

FARINAS COMMERCIAL LAW CASE DIGESTS

whosoever may be the bearer at the time of presentment.
The payee was not indicated with reasonable certainty in
contravention of Section 8. As worded, it could be accepted as
deposit to the account of the party named therein after the symbols
of A/C, or payable to the bank as trustee, or as an agent, for
Casville with the latter being the ultimate beneficiary.
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,

If it was really the intention of respondent bank to pay the

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

9 | Page

FARINAS COMMERCIAL LAW CASE DIGESTS

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.
PNB V. SEETO, 91 SCRA 757
FACTS:
Seeto called at a branch of bank and presented a check payable to
cash or bearer, and drawn by Kiao against PBC. After
consultation with the employees, Seeto made a general and
qualified indorsement of the check. He was then paid the amount
of the check by bank. The check was consequently
dishonored, a letter was sent to Seeto and was asked to
refund the money given to him. A second letter was sent to him and
he averred that case against him be deferred while he inquired about
why the
check was dishonored. Thereafter, he refused to pay, alleging
that the account against the check was drawn had sufficient funds
when the check was drawn and if the bank didnt 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.
*quiros vs. tan guinlay: it was held that the article cited by
appellees (which was Article 1100 of the Old Civil Code read in
relation to Art. 1101) is applicable only when the obligation is to do
something other than the payment of money
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 account with petitioner bank.
He opted to sell his shares of stock through Island Securities.
The company in turn issued checks in favor of Ong but
unfortunately, the latter wasn't able to receive any. His signatures

were forged by Tamlinco and the checks were deposited in his own
account with petitioner. Ong then sought to collect the money
from the family of Tamlinco first before filing a complaint with the
Central Bank. As his efforts were futile to recover his money, he filed
an action against the petitioner. The trial and appellate court
decided in favor of Ong.
HELD:
Since the signature of the payee was forged, such signature
should be deemed inoperative and ineffectual. Petitioner, as
the collecting bank, grossly erred in making payment by virtue of
said forged signature. The payee, herein respondent, should
therefore be allowed to collect from the collecting bank.
It should be liable for the loss because it is its legal duty to ascertain
that the payees 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 payees 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 CUTplaintiff 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 Tamlincos 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.
ILLUSORIO V. CA
393 SCRA 89
FACTS:
Petitioner was a prominent businessman who, because of different
business commitments, entrusted to his then secretary the
handling of his credit cards and checkbooks. For a material
period of time, the secretary was able to encash and deposit
in her personal account money from the account of petitioner.
Upon knowledge of her acts, she was fired immediately and
criminal actions were filed against her. Thereafter, petitioner
requested the bank to restore its money but the bank refused to
do so.
HELD:
The petitioner doesnt 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 didnt

10 | P a g e

FARINAS COMMERCIAL LAW CASE DIGESTS

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.
Bank of Philippine Islands vs Court of Appeals
Benjamin Napiza maintains an account with the Bank of the
Philippine Islands (BPI). In 1987, Napiza was approached by Henry
Chan and the latter gave him a $2,500 Continental Bank Managers
check. Chan asked if Napiza can deposit the check to his (Napizas
BPI account) by way of accommodation and for the purpose of
clearing the said check. Napiza agreed and so he deposited the
check on September 3, 1987. Napiza then delivered a signed blank
withdrawal slip to Chan with the condition that the $2,500.00 may
only be withdrawn if the check cleared. For some reason, the
withdrawal slip ended up in the hands of one Ruben Gayon who went
to BPI and successfully withdrew the $2,500.00. At the time of the
withdrawal, the check was not yet cleared. Then days later, BPI was
notified by the drawee bank named in the check that the check is
actually a counterfeit.
ISSUE: Whether or not Napiza may be held liable to refund the
amount of the check.
HELD: No. The Supreme Court ruled that ordinarily, Napiza would
have been liable because he is an accommodation indorser. But due
to the attendant circumstances, Napiza is discharged from liability.
The withdrawal slip indicates as well as the rules promulgated by BPI
that withdrawal from the bank should be accompanied by the
presentment of the account holders (Napizas) savings bankbook.
This was not done so in the case at bar because Gayon was able to
withdraw without it. Further, BPI allowed the withdrawal even before
the check cleared. BPI already credited the $2,500.00 to Napizas
account even without the drawee bank clearing the check. This is
contrary to common banking practices and because of such
negligence and lack of diligence, BPI, as the collecting bank, shall
suffer the loss.
Ang vs. associated bank
FACTS:
August 28, 1990: Associated Bank (formerly Associated
Banking Corporation and now known as United Overseas
Bank Philippines) filed a collection suit against Antonio Ang
Eng Liong (principal debtor) and petitioner Tomas Ang (comaker) for the 2 promissory notes
October 3 and 9, 1978: obtained a loan of
P50,000 and P30,000 evidenced by promissory
note payable, jointly and severally, on January 31, 1979
and December 8, 1978
Despite repeated demands for payment, the latest on
September 13, 1988 and September 9, 1986, they failed to
settle their obligations totalling to P539,638.96 as of July
31, 1990
Antonio Ang Eng Liong only admitted to have secured a
loan amounting to P80,000

Tomas Ang: bank is not the real party in interest as it is not

the holder of the promissory notes, much less a holder for
value or a holder in due course; the bank knew that he did
not receive any valuable consideration for affixing his
signatures on the notes but merely lent his name as an
accommodation party
o bank granted his co-defendant successive
extensions of time within which to pay, without his
knowledge and consent
o the bank imposed new and additional stipulations
on interest, penalties, services charges and
attorney's fees more onerous than the terms of
the notes, without his knowledge and consent
o he should be reimbursed by his co-defendant any
and all sums that he may be adjudged liable to
pay, plus P30,000, P20,000 and P50,000 for
moral and exemplary damages, and attorney's
fees, respectively.
October 19, 1990: RTC held Antonio Ang Eng Liong was
ordered to pay the principal amount of P80,000 plus 14%
interest per annum and 2% service charge per annum
Lower Court: Granted against the bank, dismissing the
complaint for lack of cause of action.
CA: ordered Ang to pay the bank - bank is a holder
o CA observed that the bank, as the payee, did not
indorse the notes to the Asset Privatization Trust
despite the execution of the Deeds of Transfer
and Trust Agreement and that the notes
continued to remain with the bank until the
institution of the collection suit.
o With the bank as the "holder" of the promissory
notes, the Court of Appeals held that Tomas Ang
is accountable therefor in his capacity as an
accommodation party.
o Tomas Ang cannot validly set up the defense that
he did not receive any consideration therefor as
the fact that the loan was granted to the principal
debtor already constitutes a sufficient
consideration.
ISSUE: W/N Ang is liable as accomodation party even without
consideration and his co-accomodation party was granted
accomodation w/o his knowledge
HELD: CA AFFIRMED
At the time the complaint was filed in the trial court, it was
the Asset Privatization Trust which had the authority to
enforce its claims against both debtors
accommodation party as a person "who has signed the
instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his
name to some other person." As gleaned from the text, an
accommodation party is one who meets all the three
requisites, viz: (1) he must be a party to the instrument,
signing as maker, drawer, acceptor, or indorser; (2) he
must not receive value therefor; and (3) he must sign for

11 | P a g e

FARINAS COMMERCIAL LAW CASE DIGESTS

the purpose of lending his name or credit to some other

person
petitioner signed the promissory note as a solidary comaker and not as a guarantor. This is patent even from the
first sentence of the promissory note which states as
follows:
"Ninety one (91) days after date, for value received, I/we,
JOINTLY and SEVERALLY promise to pay to the
PHILIPPINE BANK OF COMMUNICATIONS at its office in
the City of Cagayan de Oro, Philippines the sum of FIFTY
THOUSAND ONLY (P50,000.00) Pesos, Philippine
Currency, together with interest x x x at the rate of
SIXTEEN (16) per cent per annum until fully paid."
immaterial so far as the bank is concerned whether one of
the signers, particularly petitioner, has or has not received
anything in payment of the use of his name.
since the liability of an accommodation party remains not
only primary but also unconditional to a holder for value,
even if the accommodated party receives an extension of
the period for payment without the consent of the
accommodation party, the latter is still liable for the whole
obligation and such extension does not release him
because as far as a holder for value is concerned, he is a
solidary co-debtor.
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 managers checks from
petitioner bank. None of these checks were paid to the BIR.
They were found to have been deposited in the account of a third
person in Security Bank. As the taxes remained unpaid, the BIR
issued a levy, distraint and garnishment against the three
networks. An action was filed wherein it was decided that the
networks should be reimbursed for the amounts of the checks by
petitioner bank and the latter in turn, must be reimbursed by Security
Bank. In the appellate court, it was held that Traders Bank
should be the only bank liable.
HELD:
Petitioner ought to have known that where a check is drawn payable
to the order of one person and is presented for payment by another
and purports upon its face to have been duly indorsed by the payee
of the check, it is the primary duty of the petitioner to know that
the check was duly indorsed by the original payee, and it pays the
amount of the check to the third person, who has forged the
signature of the payee, the loss falls upon the petitioner who cashed
the check. Its only remedy is against the person
to whom it paid the money.
It should be further noted that one of the checks was a crossed
check. The crossing of the check should have put petitioner on
guard; it was duty-bound to ascertain the indorsers title to the
check or the nature of his possession.

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 managers 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 Yangs
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 believe 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 isnt a holder in due coursefirst, because he took the
checks without valuable consideration; and second, he failed to
inquire on Chandimaris title to the checks given to him. The law
gives rise to the presumption of valuable consideration. Petitioner
has the burden of debunking such presumption, which it failed
to do so. Her allegation that David received the checks without
consideration is unsupported and devoid of any evidence.
Furthermore, petitioner wasn't able to show any circumstance which
should have placed David in inquiry as to why and wherefore of the
possession of the checks by Chandimari. David wasn't a privy
to the transactions between Yang and Chandimari. Instead,
Chandimari and David had the agreement between themselves of
the delivery of the checks. David even inquired with the banks on the
genuineness of the checks in issue. At that time, he wasn't aware of
any request for the stoppage of payment. Under these
circumstances, David had no obligation to ascertain from Chandimari
what the nature of the latters title to the checks was, if any, or the
nature of his possession.
G.R. No. 152071May 8, 2009
PRODUCERS BANK OF THE PHILIPPINES vs. EXCELSA
INDUSTRIES, INC.

12 | P a g e

FARINAS COMMERCIAL LAW CASE DIGESTS

Facts: Excelsa Industries, Inc. is a manufacturer and exporter of fuel
products, particularly charcoal briquettes, as an alternative fuel
source. Sometime in January 1987, Excelsa applied for a packing
credit line or a credit export advance with Producers Bank of the
Philippines.
The application was supported by Letter of Credit No.
M3411610NS2970 dated 14 October 1986. Kwang Ju Bank, Ltd. of
Seoul, Korea issued the letter of credit through its correspondent
bank, the Bank of the Philippine Islands, in the amount of
US$23,000.00 for the account of Shin Sung Commercial Co., Ltd.,
also located in Seoul, Korea. T.L. World Development Corporation
was the original beneficiary of the letter of credit. On 05 December
1986, for value received, T.L. World transferred to respondent all its
rights and obligations under the said letter of credit. Petitioner
approved respondents application for a packing credit line in the
amount of P300,000.00, of which about P96,000.00 in principal
remained outstanding. Respondent executed the corresponding
promissory notes evidencing the indebtedness.
Prior to the application for the packing credit line, respondent had
obtained a loan from petitioner in the form of a bill discounted and
secured credit accommodation in the amount of P200,000.00, of
which P110,000.00 was outstanding at the time of the approval of the
packing credit line. The loan was secured by a real estate mortgage
dated 05 December 1986 over respondents properties. Significantly,
the real estate mortgage contained the following clause:
For and in consideration of those certain loans, overdraft and/or other
credit accommodations on this date obtained from the
MORTGAGEE, and to secure the payment of the same, the principal
of all of which is hereby fixed at FIVE HUNDRED THOUSAND
PESOS ONLY (P500,000.00) Pesos, Philippine Currency, as well as
those that the MORTGAGEE may hereafter extend to the
MORTGAGOR, including interest and expenses or any other
obligation owing to the MORTGAGEE, the MORTGAGOR does
hereby transfer and convey by way of mortgage unto the
MORTGAGEE, its successors or assigns, the parcel(s) of land which
is/are described in the list inserted on the back of this document,
and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or
constructed thereon, of which the MORTGAGOR declares that he/it
is the absolute owner, free from all liens and encumbrances.
On 24 April 1987, Kwang Ju Bank, Ltd. notified petitioner through
cable that the Korean buyer refused to pay respondents export
documents on account of typographical discrepancies. Kwang Ju
Bank, Ltd. returned to petitioner the export documents. Upon learning
about the Korean importers non-payment, respondent sent petitioner
a letter dated 27 July 1987, informing the latter that respondent had
brought the matter before the Korea Trade Court and that it was
ready to liquidate its past due account with petitioner.
Respondent sent another letter dated 08 September 1987, reiterating
the same assurance. In a letter 05 October 1987, Kwang Ju Bank,
Ltd. informed petitioner that it would be returning the export
documents on account of the non-acceptance by the importer.

Petitioner demanded from respondent the payment of the peso

equivalent of the export documents, plus interest and other charges,
and also of the other due and unpaid loans.Due to respondents
failure to heed the demand, petitioner moved for the extrajudicial
foreclosure on the real estate mortgage over respondents
properties.
At the public auction held on 05 January 1988, the Sheriff of Antipolo,
Rizal issued a Certificate of Sale in favor of petitioner as the highest
bidder. The certificate of sale was registered on 24 March 1988.
On 12 June 1989, petitioner executed an affidavit of consolidation
over the foreclosed properties after respondent failed to redeem the
same. As a result, the Register of Deeds of Marikina issued new
certificates of title in the name of petitioner. On 17 November 1989,
respondent instituted an action for the annulment of the extrajudicial
foreclosure with prayer for preliminary injunction and damages
against petitioner and the Register of Deeds of Marikina. On 18
December 1997, the RTC rendered a decision upholding the validity
of the extrajudicial foreclosure and ordering the issuance of a writ of
possession in favor of petitioner, as the RTC also found that by its
admission, respondent had other loan obligations obtained
from petitioner which were due and demandable; hence, petitioner
correctly exercised its right to foreclose the real estate mortgage,
which provided that the same secured the payment of not only the
loans already obtained but also the export advances. The CA
invalidated the extrajudicial foreclosure of the real estate mortgage
on the ground that the posting and publication of the notice of
extrajudicial foreclosure proceedings did not comply with the
personal notice requirement under paragraph 12 of the real estate
mortgage executed between petitioner and respondent. The Court of
Appeals also overturned the RTCs finding that respondent was guilty
of estoppel by laches in questioning the extrajudicial foreclosure
sale.
Issue: Was there a valid foreclosure of the real estate mortgage?
Held: Respondent executed a real estate mortgage containing a
"blanket mortgage clause," also known as a "dragnet clause." It has
been settled in a long line of decisions that mortgages given to
secure future advancements are valid and legal contracts, and the
amounts named as consideration in said contracts do not limit the
amount for which the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and
other indebtedness can be gathered. In Union Bank of the
Philippines v. Court of Appeals, the nature of a dragnet clause was
explained, thus:
Is one which is specifically phrased to subsume all debts of past and
future origins. Such clauses are "carefully scrutinized and strictly
construed." Mortgages of this character enable the parties to provide
continuous dealings, the nature or extent of which may not be known
or anticipated at the time, and they avoid the expense and
inconvenience of executing a new security on each new transaction.
A "dragnet clause" operates as a convenience and accommodation
to the borrowers as it makes available additional funds without their
having to execute additional security documents, thereby saving

13 | P a g e

FARINAS COMMERCIAL LAW CASE DIGESTS

time, travel, loan closing costs, costs of extra legal services,
recording fees, et cetera.
xxx
Petitioner, therefore, was not precluded from seeking the foreclosure
of the real estate mortgage based on the unpaid drafts drawn by
respondent. In any case, respondent had admitted that aside from
the unpaid drafts, respondent also had due and demandable loans
secured from another account as evidenced by Promissory Notes
(PN Nos.) BDS-001-87, BDS030/86 A, BDS-PC-002-/87 and BDS005/87.
However, the Court of Appeals invalidated the extrajudicial
foreclosure of the mortgage on the ground that petitioner had failed
to furnish respondent personal notice of the sale contrary to the
stipulation in the real estate mortgage.
Petitioner, on the other hand, claims that under paragraph 12 of the
real estate mortgage, personal notice of the foreclosure sale is not a
requirement to the validity of the foreclosure sale.
A perusal of the records of the case shows that a notice of sheriffs
sale was sent by registered mail to respondent and received in due
course. Yet, respondent claims that it did not receive the notice but
only learned about it from petitioner. In any event, paragraph 12 of
the real estate mortgage requires petitioner merely to furnish
respondent with the notice and does not oblige petitioner to ensure
that respondent actually receives the notice. On this score, the
Court holds that petitioner has performed its obligation under
paragraph 12 of the real estate mortgage.
As regards the issue of whether respondent may still question the
foreclosure sale, the RTC held that the sale was conducted
according to the legal procedure, to wit:
Plaintiff is estopped from questioning the foreclosure. The plaintiff is
guilty of laches and cannot at this point in time question the
foreclosure of the subject properties. Defendant bank made demands
against the plaintiff for the payment of plaintiffs outstanding loans
and advances with the defendant as early as July 1997. Plaintiff
acknowledged such outstanding loans and advances to the
defendant bank and committed to liquidate the same. For failure of
the plaintiff to pay its obligations on maturity, defendant bank
foreclosed the mortgage on subject properties on January 5, 1988
the certificate of sale was annotated on March 24, 1988 and there
being no redemption made by the plaintiff, title to said properties
were consolidated in the name of defendant in July 1989.
Undeniably, subject foreclosure was done in accordance with the
prescribed rules as may be borne out by the exhibits submitted to
this Court which are Exhibit "33," a notice of extrajudicial sale
executed by the Sheriff of Antipolo, Exhibit "34" certificate posting of
extrajudicial sale, Exhibit "35" return card evidencing receipt by
plaintiff of the notice of extrajudicial sale and Exhibit "21" affidavit of
publication. The Court adopts and approves the aforequoted findings
by the RTC, the same being fully supported by the evidence on
record.

METROBANK V. CABLIZO
510 SCRA 259
FACTS:
Cablizo maintained an account with petitioner. It drew a check
payable to cash payable to a certain Marquez, for the latters 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 banks 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 clients
money is involved.

14 | P a g e