NEGOTIABLE INSTRUMENT LAW CASE COMPILATION

[Atty. Romeo Lumagui, Jr.’s Case List]

Section 2A | 2nd Semester, AY 2018-2019

I. FORM AND INTERPRETATION [Sections 1 to 23]

Digested by: Agustin, Bautista and Morillo

Caltex Philippines, Inc. vs, CA & Security Bank and Trust

GR no. 97753 | August 10, 1992 | Ponente: Regalado, J:

FACTS: Security Bank issued 280 certificates of time deposits (CTDs) in favor of Angel Dela Cruz who deposited Php.
1,120,000.00 with them. Thereafter, Angel delivered the CTDs to Caltex Philippines in connection with his purchased
of fuel products. In March 18, 1982, Angel lost all the CTDs and informed Security Bank in which it advised him
toexecute an affidavit of Loss as replacement for it. Angle complied and was able to obtain another Php. 875, 000.00
loan from Security Bank. Likewise, he executed a Deed of Assignment of Time Deposit giving Security Bank full control
of the CTDs from and alleging Caltex Philippines as guarantee. In November 1982, Caltex presented to Security Bank
the CTDs lost by Angel and demand payment for the aforesaid CTDs. Security Bank rejected Caltex’s demand which
prompted the latter to file a complaint.

ISSUES:
1. W/N the CTDs in question are negotiable instruments
2. W/N Caltex Philippines can rightfully recover from the CTDs.

RULING:
1. YES, The CTDs are considered as negotiable instruments. The rule in determining the negotiability is determined
from the face of the instrument itself. The documents provide that the amount deposited shall be repayable to the
depositor which is the “Bearer” and not “Angel Dela Cruz”. If it was really the intention of Security Bank to pay the
amount to Angel, it could have with facility to 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 CTDs.
2. NO, Caltex cannot rightfully recover on the CTDs. The records reveal that Angel Dela Cruz delivered the CTDs to
Caltex Philippines without informing Security Bank thereof at any time. Unfortunately for Caltex, a valid
negotiation for the true purpose thereof and agreement between it and Angel requires both delivery and
indorsement. The CTDs were in reality delivered to Caltex as a security for Angel’s purchases of its fuel products.

Metropolitan Bank vs. CA

GR no. 88866 | February 18, 1991 | Ponente: Cruz, J.

FACTS: Eduardo Gomez opened an account with Golden Savings and Deposited 38 Treasury warrants of Php
1,755,228.37 for a period of 2 months, all were drawn by the Philippine Fish Marketing Authority. Six of these were
directly payable to Eduardo while the others makes Eduardo as their second indorser. All of these warrant were
subsequently indorsed by Golden Savings and deposited it in Metrobank. 2 weeks after the deposits, Golden Savings
went to Metrobank to ask whether the warrants had been cleared. Meanwhile, Eduardo was not allowed to withdraw from
his account. Later, “exasperated” over Golden Savings’s repeated inquiries and as a “Value client”, Metrobank finally
decided to allow Golden Savings and Eduardo to withdraw. On July 21, 1979, Metrobank informed Golden Savings that
32 warrants had been dishonored by the Bureau of Treasury and demanded refund to the latter but it rejected. Hence,
Metrobank filed a suit against Golden Savings. The RTC and CA ruled in favor of Goldden Savings.

ISSUE: W/N the treasury warrants involved are non-negotiable instruments.

RULING: YES, Treasury warrants are non-negotiable instruments. The SC held that treasury warrants are not within the
scope of the negotiable instruments law. For one thing, the document bearing on its face the words “payable from the
appropriation for food administration”, is actually an order of payment out of a “particular fund”, and it is not an
unconditional as well as it does not fulfill one f the essential requirements of a negotiable instrument.

Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were “genuine
and in all respecs what they purport to be”, in accordance with Sec. 66, of the Negotiable Instruments Law, because the
aforesaid sections does not apply to treasury warrants.

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 Consolidated Plywood vs. IFC Leasing
GR no. 72593 | April 30, 1987 | Ponente: Gutierrez, J.

FACTS: Consolidated Plywood Inc. (CPI) needed 2 additional tractors. Industrial Products Marketing (IPM), the seller-
assignor, offered to sell 2 “used tractors” to CPI. CPI agreed to purchase on installment and paid Php 210,000.00
downpayment. On April 5, 1978, IPM executed the deed of sale with chattel mortagage with promissory note and
delivered the 2 tractors to CPI. After 14 days from delivery, the tractors brown down. Due to the breakdown, CPI asked
IPM to pull out the tractors and offer it for sale after its recondition. IPM did not respond and it filed a case against CPI. In
defense, CPI raise the validity of the promissory note as a negotiable instrument.

ISSUE: W/N the promissory note involved in this case is a negotiable instrument.

RULING: NO, the promissory note involved in this case is not considered as negotiable instrument. The NIL requires that
a promissory note “must be payable to bearer or to order”. It cannot be denied that the promissory note in question is non-
negotiable because these words are not present in the promissory note. The said words serve as an expression of
consent that the instrument may be transferred.

Equitable Bank vs. IAC

GR no. 74451 | May 25, 1988

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 b
eing 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.

ISSUE: W/N Equitable is liable to Neil?

RULING: 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 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

DEVELOPMENT BANK OF RIZAL, vs. SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG,
ASIAN INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF THE PHILIPPINES,

G.R. No. 85419 | March 9, 1993

FACTS: On July 6, 1986, the Development Bank of Rizal filed a complaint for a sum of money against Sima Wei and/or
Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation (Plastic Corporation for short) and the
Producers Bank of the Philippines.

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In consideration for a loan extended by Bank to Sima Wei, Wei executed and delivered to the bank a promissory note,
engaging to pay the Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per
annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima
Wei issued two crossed checks payable to petitioner Bank drawn against China Banking Corporation. The said checks
were allegedly issued in full settlement of the drawer's account evidenced by the promissory note. These two checks
were not delivered to the petitioner-payee or to any of its authorized representatives. These checks came into the
possession of respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's indorsement (forged
or otherwise) to the account of respondent Plastic Corporation. Samson Tung, President of Plastic Corporation, thinking
that the transaction was legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit
and to credit to Plastic Corporation, inspite of the fact that the checks were crossed and payable to Bank and bore no
indorsement of the bank.

Issue: Whether Development Bank has a cause of action against any of the defendants.

Held: Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the
purpose of giving effect thereto.

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

The allegations of the petitioner in the original complaint show that the two (2) China Bank checks, numbered
384934 and 384935, were not delivered to the payee, the petitioner herein. Without the delivery of said checks to
petitioner-payee, the former did not acquire any right or interest therein and cannot therefore assert any cause of
action, founded on said checks, whether against the drawer Sima Wei or against the Producers Bank or any of
the other respondents.

Unless Sima Wei proves that she has been relieved from liability on the promissory note by some other cause, petitioner
Bank has a right of action against her for the balance due thereon.

However, insofar as the other respondents are concerned, petitioner Bank has no privity with them. Since petitioner
Bank never received the checks on which it based its action against said respondents, it never owned them (the checks)
nor did it acquire any interest therein.

NATIVIDAD GEMPESAW, vs. THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS

G.R. No. 92244 | February 9, 1993

FACTS: Natividad filed a Complaint against the private respondent Philippine Bank of Communications (respondent
drawee Bank) for recovery of the money value of eighty-two (82) checks charged against the petitioner's account with
the respondent drawee Bank on the ground that the payees' indorsements were forgeries.

Natividad owns and operates four grocery stores, among these groceries are D.G. Shopper's Mart and D.G. Whole Sale
Mart. Natividad maintains a checking account numbered 13-00038-1 with PBCBank. To facilitate payment of debts to
her suppliers, Natividad draws checks against her checking account with the respondent bank as drawee. Her
customary practice of issuing checks in payment of her suppliers was as follows: the checks were prepared and filled up
as to all material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than eight (8) years. After
the bookkeeper prepared the checks, the completed checks were submitted to the petitioner for her signature, together
with the corresponding invoice receipts which indicate the correct obligations due and payable to her suppliers.
Petitioner signed each and every check without bothering to verify the accuracy of the checks against the corresponding
invoices because she reposed full and implicit trust and confidence on her bookkeeper. The issuance and delivery of the
checks to the payees named therein were left to the bookkeeper. Petitioner admitted that she did not make any

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verification as to whether or not the checks were delivered to their respective payees. Although the respondent drawee
Bank notified her of all checks presented to and paid by the bank, petitioner did not verify he correctness of the returned
checks, much less check if the payees actually received the checks in payment for the supplies she received. In the
course of her business operations covering a period of two years, petitioner issued, following her usual practice stated
above, a total of eighty-two (82) checks in favor of several suppliers. These checks were all presented by the indorsees
as holders thereof to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly debited
the amounts thereof against petitioner's checking account numbered 30-00038-1. Most of the aforementioned checks
were for amounts in excess of her actual obligations to the various payees as shown in their corresponding invoices. To
mention a few:

All the checks issued and honored by the respondent drawee bank were crossed checks and daily notice was given to
natividad monthly statement was also being sent to her. It was only after the lapse of more two (2) years that Natividad
found out about the fraudulent manipulations of her bookkeeper. About thirty (30) of the payees whose names were
specifically written on the checks testified that they did not receive nor even see the subject checks and that the
indorsements appearing at the back of the checks were not theirs.

Natividad made a written demand on respondent drawee Bank to credit her account with the money value of the eighty-
two (82) checks totalling P1,208.606.89 for having been wrongfully charged against her account. Respondent drawee
Bank refused to grant petitioner's demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial
Court.

The Regional Trial Court dismissed the complaint as well as the respondent drawee Bank's counterclaim. On appeal, the
Court of Appeals in a decision rendered on February 22, 1990, affirmed the decision of the RTC on two grounds, namely
(1) that Natividad gross negligence in issuing the checks was the proximate cause of the loss and (2) assuming that the
bank was also negligent, the loss must nevertheless be borne by the party whose negligence was the proximate cause
of the loss.

Issue: W/N a negotiable instrument is valid when a signature is forged or made without the authority of the person
whose signature it purports to be.

Held: 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.

As matter of practical significance, problems arising from forged indorsements of checks may generally be broken into
two types of cases: (1) where forgery was accomplished by a person not associated with the drawer — for example a
mail robbery; and (2) where the indorsement was forged by an agent of the drawer. This difference in situations would
determine the effect of the drawer's negligence with respect to forged indorsements. While there is no duty resting on
the depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed upon him to look for
forgeries of his own name, a depositor is under a duty to set up an accounting system and a business procedure as are
reasonably calculated to prevent or render difficult the forgery of indorsements, particularly by the depositor's own
employees. And if the drawer (depositor) learns that a check drawn by him has been paid under a forged indorsement,
the drawer is under duty promptly to report such fact to the drawee bank.5 For his negligence or failure either to discover
or to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee who has
debited his account under a forged indorsement.6 In other words, he is precluded from using forgery as a basis for his
claim for re-crediting of his account.

In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted employee, Alicia
Galang, and were given to her for her signature. Her signing the checks made the negotiable instrument complete. Prior
to signing the checks, there was no valid contract yet.

Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument to the payee for
the purpose of giving effect thereto.7 The first delivery of the instrument, complete in form, to the payee who takes it as a
holder, is called issuance of the instrument.8 Without the initial delivery of the instrument from the drawer of the check to
the payee, there can be no valid and binding contract and no liability on the instrument.

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Since it was her negligence which caused the respondent drawee Bank to honor the forged checks or prevented it from
recovering the amount it had already paid on the checks, petitioner cannot now complain should the bank refuse to
recredit her account with the amount of such checks. 10 Under Section 23 of the NIL, she is now precluded from using
the forgery to prevent the bank's debiting of her account.

We hold that banking business is so impressed with public interest where the trust and confidence of the public in
general is of paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if
not the utmost diligence. Surely, respondent drawee Bank cannot claim it exercised such a degree of diligence that is
required of it. With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the decision
to hold the drawee bank liable is based on law and substantial justice and not on mere equity.

REPUBLIC PLANTERS BANK v COURT OF APPEALS and FERMIN CANLAS,

G.R. No. 93073 | December 21, 1992

FACTS: Defendant Shozo Yamaguchi and private respondent Fermin Canlas were President/Chief Operating Officer and
Treasurer respectively, of Worldwide Garment Manufacturing, Inc.. By virtue of Board Resolution No.1 dated August 1,
1979, defendant Shozo Yamaguchi and private respondent Fermin Canlas were authorized to apply for credit facilities
with the petitioner Republic Planters Bank in the forms of export advances and letters of credit/trust receipts
accommodations. Petitioner bank issued nine promissory notes. On the right bottom margin of the promissory notes
appeared the signatures of Shozo Yamaguchi and Fermin Canlas above their printed names with the phrase "and (in) his
personal capacity" typewritten below. At the bottom of the promissory notes appeared: "Please credit proceeds of this
note to: Savings Account Current Account No. 1372-00257-6 of WORLDWIDE GARMENT MFG. CORP.

On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate name to Pinch
Manufacturing Corporation.

On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered among others, by the
nine promissory notes with interest thereon, plus attorney's fees and penalty charges. The complainant was originally
brought against Worldwide Garment Manufacturing, Inc. inter alia, but it was later amended to drop Worldwide
Manufacturing, Inc. as defendant and substitute Pinch Manufacturing Corporation it its place. Defendants Pinch
Manufacturing Corporation and Shozo Yamaguchi did not file an Amended Answer and failed to appear at the scheduled
pre-trial conference despite due notice. Only private respondent Fermin Canlas filed an Amended Answer wherein he,
denied having issued the promissory notes in question since according to him, he was not an officer of Pinch
Manufacturing Corporation, but instead of Worldwide Garment Manufacturing, Inc., and that when he issued said
promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the same were in blank, the typewritten entries
not appearing therein prior to the time he affixed his signature.

Issue: Whether private respondent Fermin Canlas is solidarily liable with the other defendants, namely Pinch
Manufacturing Corporation and Shozo Yamaguchi, on the nine promissory notes.

HELD: We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes bearing his
signature for the following reasons:

The promissory motes are negotiable instruments and must be governed by the Negotiable Instruments Law.

Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are makers and
are liable as such.3 By signing the notes, the maker promises to pay to the order of the payee or any holder 4 according
to the tenor thereof.5 Based on the above provisions of law, there is no denying that private respondent Fermin Canlas is
one of the co-makers of the promissory notes. As such, he cannot escape liability arising therefrom.

In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and certain, without reason
for ambiguity, by the presence of the phrase "joint and several" as describing the unconditional promise to pay to the
order of Republic Planters Bank. By making a joint and several promise to pay to the order of Republic Planters Bank,

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private respondent Fermin Canlas assumed the solidary liability of a debtor and the payee may choose to enforce the
notes against him alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.

G.R. No. L-18751 & 18915| September 26, 1922

THE PHILIPPINE NATIONAL BANK vs. BARTOLOME PICORNELL, ET AL.,

Facts: Bartolome Picornell, following instruction of Hyndman, Tavera & Ventura, bought in Cebu 1,735 bales of tobacco;
that Picornell obtained from the branch of the National Bank in Cebu the sum of P39,529.83, the value of the tobacco,
together with his commission of 1 real per quintal , having, in turn, drawn the following bill of exchange,

No. 2-A. Cebu, 28 febrero, 1920. For P39,529.83

At treinta (30) days sight please pay this first of exchange (second unpaid) to the order of Philippine National
Bank treinta y nueve mil quinientos veintinueve pesos con 83/100. Value received.

To Sres. HYNDMAN, TAVERA Y VENTURA

Calle Soler 26 y 28.

(Sgd.) B. PICORNELL

This instrument was delivered to the branch of the National Bank in Cebu, together with the invoice and bill of lading of
the tobacco, which was shipped in the boat Don Ildefonso, on February 27, 1920, consigned to Hyndman, Tavera &
Ventura at Manila. The invoice and bill of lading were delivered to the National Bank with the understanding that the bank
should not delivered them to Hyndman, Tavera & Ventura except upon payment of the bill; which condition was
expressed by the well-known formula "D/P" (documents for [against] payment).

The central office of the National Bank in Manila received the bill and the aforesaid documents annexed thereto; and on
March 3, 1920, presented the bill to Hyndman, Tavera & Ventura, who accepted it stating on the face “Accepted, 3d
March, 1920. Due, 2d April, 1920. Hyndman, Tavera & Ventura, by (Sgd.) J. Pardo de Tavera, member of the firm.

The tobacco having arrived at Manila, the firm of Tambunting, owner of the ship Don Ildefonso, that brought the
shipment, requested Hyndman, Tavera & Ventura to send for the goods, which was done by the company without the
knowledge of the National Bank which retained and always had in its possession the invoice and bill of lading of the
tobacco, until it presented them as evidence at the trial.

Hyndman, Tavera & Ventura proceeded to the examination of the tobacco, which was deposited in their warehouses,
and wrote and cable to Bartolome Picornell, notifying him that of the tobacco received, there was a certain portion which
was no use and was damaged.

Through these communications, therefore, Picornell learned that Hyndman, Tavera & Ventura had in their possession the
tobacco aforementioned.

In view of the question raised by the said company as to the quality of the aforesaid tobacco, more correspondence was
exchange between the company and Picornell, who, upon the suggestion of the former, wrote on March 26, 1920 a
letter to extend thirty days the time for payment of the bill for P39,529.83 against Messrs. Hyndman, Tavera & Ventura of
Manila.

The bank granted this request of the defendants; wherefore Hyndman, Tavera & Ventura reaccepted the bill in the
following terms: Accepted for thirty days. Due May 2d, 1920. Hyndman, Tavera & Ventura, By (Sgd.) J Pardo de Tavera,
member of the firm.

May 2, 1920, arrived and the bill was not paid. Hyndman, Tavera & Ventura sent a letter to the plaintiff bank begging to
notify you that the said Lead Tobacco is at the disposal of your goodselves at our go-down No. 26-36 Calle Soler.
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The bank protested the bill, tool possession of the tobacco, and had it appraised on the 12th of the same month, its
value having been fixed at P28,790.72. That this valuation was just, reasonable and exact is not questioned by the
parties.

The bank brought this action, and about September, 1921, sold the tobacco, obtaining from the sale P6,708.82.

This action is for the recovery of the value of the bill of exchange above-mentioned. The Hyndman, Tavera & Ventura
company accepted it unconditionally, but did not pay it at its maturity; wherefore its responsibility, or that of its
successor, J. Pardo de Tavera, to pay the same, is clear. (Sec. 62, Negotiable Instruments Law.)

ISSUE: WON the Bank is a holder in due course and WON Bartolome is primary liable.

HELD: Bank is a Holder in due course and Bartolome is secondarily liable only. Such partial want of consideration, if it
was, does not exist with respect to the bank which paid to Picornell the full value of said bill of exchange. The bank was
a holder in due course, and was such for value full and complete. The Hyndman, Tavera & Ventura company cannot
escape liability in view of section 28 of the Negotiable Instruments Law.

As to Bartolome Picornell, he warranted, as drawer of the bill, that it would be accepted upon proper presentment and
paid in due course, and as it was not paid, he became liable to the payment of its value to the holder thereof, which is
the plaintiff bank. (Sec. 61, Negotiable Instruments Law.)

The fact that Picornell was a commission agent of Hyndman, Tavera & Ventura, in the purchase of the tobacco, does not
necessarily make him an agent of the company in its obligations arising from the drawing of the bill by him. His acts in
negotiating the bill constitute a different contract from that made by his having purchased the tobacco on behalf of
Hyndman, Tavera & Ventura.

Upon the non-payment of the bill by the drawee-acceptor, the bank had the right of recourse, which it exercised, against
the drawer. (Sec. 84, Negotiable Instruments Law.)

The drawee, the Hyndman, Tavera & Ventura company, or its successors, J. Pardo de Tavera, accepted the bill and is
primarily liable for the value of the negotiable instrument, while the drawer, Bartolome Picornell, is secondarily liable.

PHILIPPINE BANK OF COMMERCE vs. ARUEGO

GR no. L-25836-37 | January 31, 1981

Facts: Defendant, Jose M. Aruego obtained a credit accommodation from the plaintiff Philippine Bank of Commerce To
facilitate the payment of the printing of the "World Current Events," ," the printer, Encal Press and Photo Engraving,
collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for
acceptance. As an added security for the payment of the amounts advanced to Encal Press and Photo-Engraving, the
plaintiff bank also required defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant
undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the
proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft. December 1,
1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case for the recovery of the total sum of
about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid. The defendants defense is that he
signed the document upon which the plaintiff sues in his capacity as President of the Philippine Education Foundation;
that his liability is only secondary; and that he believed that he was signing only as an accommodation party.

Issue: Whether or not Aruego is liable for the drafts he accepted although he signed only as an agent.

Held: An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing
as a representative of the Philippine Education Foundation Company. He merely signed as follows: "JOSE ARUEGO
(Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he
accepted.

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Section 20 of the Negotiable Instruments Law provides that "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 filing a
representative character, without disclosing his principal, does not exempt him from personal liability."

An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value
therefor 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 only 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. Under the
Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have
signed as an acceptor/drawee. In doing so, he became primarily and personally liable for the drafts.

JAI-ALAI vs. BANK OF THE PHILIPPINE ISLANDS

GR no. L-29432 | August6, 1975

Facts: From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were deposited by the
petitioner in its current account with the respondent bank.

1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to the Inter-Island
Gas Service Inc. or order:

Date Check Exhibit

Deposited Number Amount Number
4/2/59 B-352680 P500.00 18
4/20/59 A-156907 372.32 19
4/24/59 A-156924 397.82 20
5/4/59 B-364764 250.00 23
5/6/59 B-364775 250.00 24

2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to the Inter-Island Gas
Service, Inc. or bearer:

4/13/59 B-335063 P 2108.70 21

4/27/59 B-335072 P2210.94 22

3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and payable to the Inter-Island
Gas Service, Inc. or bearer:

5/18/59 VN430188 P940.80 25

4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the Inter-Island
Gas Service, Inc. order:

5/14/59 1860160 P 500.00 26

5/18/59 1860660 P 500.00 27

All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a sales agent of the Inter-
Island Gas and a regular bettor at jai-alai games, were, upon deposit.
July 1959, after Ramirez had resigned from the Inter-Island Gas and after the checks had been submitted to inter-bank
clearing, the Inter-Island Gas discovered that all the indorsements made on the checks purportedly by its cashiers,
Santiago Amplayo and Vicenta Mucor as well as the rubber stamp impression thereon reading "Inter-Island Gas Service,
Inc.," were forgeries. Inter-Island Gas advised the petitioner, the respondent, the drawers and the drawee-banks of the
said checks about the forgeries, and filed a criminal complaint against Ramirez with the Office of the City Fiscal of
Manila. The drawers of the checks, having been notified of the forgeries, demanded reimbursement to their respective
accounts from the drawee-banks, which in turn demanded from the respondent, as collecting bank, the return of the

  8  
amounts they had paid on account thereof. When the drawee-banks returned the checks to the respondent, the latter
paid their value which the former in turn paid to the Inter-Island Gas. The respondent, for its part, debited the petitioner's
current account and forwarded to the latter the checks containing the forged indorsements, which the petitioner,
however, refused to accept. On October 8, 1959 the petitioner drew against its current account with the respondent a
check for P135,000 payable to the order of the Mariano Olondriz y Cia. The check was, however, dishonored because of
insufficient funds. The petitioner then filed a complaint against the respondent with the Court of First Instance of Manila,
which was however dismissed by the trial court after due trial, and as well by the Court of Appeals, on appeal.

Issue: Whether or not BPI has the right to debit Jai-Alai’s account for the value of the checks that was forged.

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

Sec. 23 of the NIL, a forged signature in a negotiable instrument is wholly inoperative and no right to discharge it or
enforce its payment can be acquired through or under the forged signature except against a party who cannot invoke
the forgery. It stands to reason, upon the facts of record, that the respondent, as a collecting bank which indorsed the
checks to the drawee-banks for clearing, should be liable to the latter for reimbursement, for the indorsements on the
checks had been forged prior to their delivery to the petitioner. In legal contemplation, therefore, the payments made by
the drawee-banks to the respondent on account of the said checks were ineffective; and, such being the case, the
relationship of creditor and debtor between the petitioner and the respondent had not been validly effected, the checks
not having been properly and legitimately converted into cash.

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

In contrast, it was petitioner’s duty to that the payee's endorsement was genuine before cashing the check. The
petitioner must in turn shoulder the loss of the amounts which the respondent; as its collecting agent, had to reimburse
to the drawee-banks. Having indorsed the checks to respondent bank, petitioner is deemed to have given the warranty
prescribed in Section 66 of the NIL that every single one of those checks "is genuine and in all respects what it purports
to be." Respondent which relied upon the petitioner's warranty should not be held liable for the resulting loss. (Issue on
Indorsement)

Jai Alai Corporation is negligent in accepting the checks without question from Antonio Ramirez notwithstanding that the
payee was the Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it.

Republic Bank vs Ebrada

GR no. L-40796 | July 31, 1975

Facts: On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check dated January 15, 1963
for P1,246.08 at the main office of the plaintiff Republic Bank at Escolta, Manila. Bureau advised Republic Bank that the
indorsement on the reverse side of the check by the payee, "Martin Lorenzo" was a forgery because he died as of July
14, 1952 and requested a refund. On July 11, 1966, defendant Ebrada alleged that she was a holder in due course of the
check in question, or at the very least, has acquired her rights from a holder in due course and therefore entitled to the
proceeds thereof. She also alleged that the plaintiff Bank has no cause of action against her; that it is in estoppel, or so
negligent as not to be entitled to recover anything from her. July 11, 1966 defendant Ebrada filed a Third-Party complaint
against Adelaida Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against defendant Ebrada.

Issue: Whether or not Ebrada Should return to the Republic Bank the face value of the check.

HELD: YES. The Court ruled that although the plaintiff Bank should suffer the loss when it paid the amount of the check
in question to defendant-appellant, it has the remedy to recover from the latter the amount it paid to her.

The existence of one forged signature in the check will not render void all other negotiations of the check with respect to
the other parties whose signatures are genuine. In the case at hand, the check was issued by Martin Lorenzo to Ramon

  9  
Lorenzo, and then it was indorsed to Dominguez and then indorsed to Ebrada, who had no knowledge of the forgery.
Since the forged signature was of Martin Lorenzo’s, only the issuance from the latter to Ramon Lorenzo was of no effect,
but the negotiation from Ramon Lorenzo to Dominguez then to Ebrada are valid and enforceable.

If the discovery of the signature being forged happened only after the bank has paid the amount of the check to the
holder, then the drawee of a check can recover from the holder the money paid to him on a forged instrument. It is not
supposed to be its duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This is because
the indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are genuine,
warranty not extending only to holders in due course.

Ebrada, upon receiving the check in question from Adelaida Dominguez, was duty-bound to ascertain whether the check
in question was genuine before presenting it to plaintiff Bank for payment. Her failure to do so makes her liable for the
loss and the plaintiff Bank may recover from her the money she received for the check.

THE GREAT EASTERN LIFE INSURANCE CO vs HSBC

GR no. 18657 | August 23, 1922

Facts: May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai Banking Corporation with
whom it had an account, payable to the order of Lazaro Melicor. E. M. Maasim fraudulently obtained possession of the
check, forged Melicor's signature, as an endorser, and then personally endorsed and presented it to the Philippine
National Bank where the amount of the check was placed to his credit. Philippine national Bank endorsed the check to
the Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the check to the account of
the plaintiff. Hongkong Shanghai Banking Corporation rendered a bank statement to the plaintiff showing that the
amount of the check was charged to its account, and no objection was then made to the statement. About four months
after the check was charged to the account of the plaintiff, it developed that Lazaro Melicor, to whom the check was
made payable, had never received it, and that his signature, as an endorser, was forged by Maasim. With this knowledge
, the plaintiff promptly made a demand upon the Hongkong and Shanghai Banking Corporation that it should be given
credit for the amount of the forged check, which the bank refused to do. Eastern filed against HSBC and PNB, judgment
was rendered against the plaintiff and in favor of the defendants.

Issue: Whether or not Eastern Life Insurance has the right to recover the amount of the forged check.

Held: YES. lower court is reversed. Eastern Life Insurance against HSBC who can claim against PNB. Forgery was that
of Melicor (payees and NOT the maker). Eastern Life Insurance received its banks statement, it had a right to assume
that Melicor had personally endorsed the check, and that, otherwise, the bank would not have paid it

Section 23: 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.

The Philippine National Bank had no license or authority to pay the money to Maasim or anyone else upon a forge
signature. Its remedy is against Maasim to whom it paid the money.

MWSS vs. CA
GR no. L-62943 | July 14, 1986

Facts: By special arrangement with respondent bank (PNB), Metropolitan Waterworks and Sewerage System (MWSS)
used personalize checks in drawing from one of its accounts with PNB. MWSS released twenty-three checks which
were deposited in the respective accounts of Raul Dizon, Arturo Sison and Antonio Mendoza with different banks. It was
later found that the three depositors were all fictitiouspersons.

ISSUE: Whether or not petitioner is barred from setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law.
  10  
RULING: YES. The petitioner was using its own personalized checks, instead of the official PNB Commercial blank
checks. In the exercise of this special privilege, however, the petitioner failed to provide the needed security measures.
Moreover, petitioner also did not furnishthe respondent bank with samples of checks, pens, and inks or took other
precautionary measures with the latter to safeguard its interests. The petitioner’s failure to reconcile its bank
statements with its own records facilitated the fraudulent encashment. Even if the twenty-three (23) checks in question
are considered forgeries, considering the petitioner’s gross negligence, it is barred from setting up the defense of forgery
under Section 23 of the Negotiable Instruments Law.

RAMON IILUSORIO vs. CA

GR no. 139130 | November 27, 2002

FACTS: Ramon Ilusorio entrusted his credit cards and checkbooks and blank checks to his secretary. Apparently, his
secretary was able to encash and deposit to her personal account 17 checks drawn against his account.

Ilusorio requested to restore to his account the value of the checks that were wrongfully encashed but the bank refused,
hence the case.

In court, the bank testified that they make sure that the sign on the check is verified. When asked by the NBI to submit
standard signs to compare, Ilusorio failed to comply. The lower held held in favor of defendant.

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

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

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

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

SAN CARLOS MILING vs. BPI

GR no. 37467| December 11, 1933

FACTS:
§ San Carlos Milling Co. Ltd. (San Carlos) was in the hands of Alfred D. Cooper, its agent under general power of
attorney with authority of substitution

§ The principal employee in the Manila office was Joseph L. Wilson, to whom had been given a general power of
attorney but without power of substitution.

§ 1926: Cooper, desiring to go on vacation, gave a general power of attorney to Newland Baldwin and at the same
time revoked the power of Wilson relative to the dealings with BPI

§ Wilson, conspiring together with Alfredo Dolores, a messenger-clerk in San Carlos' Manila office, sent a cable gram
in code to the company in Honolulu requesting a telegraphic transfer to the China Banking Corporation (China Bank)
of Manila of $100,00.

§ The money was transferred by cable, and upon its receipt China Bank sent an exchange contract to San Carlos
offering the sum of P201K, which was then the current rate of exchange.

§ September 28, 1927: A manager's check on the China Banking Corporation for P201K payable to San Carlos Milling
Company or order was receipted for by Dolores
  11  
 § deposited with the BPI having a fake endorsement (Baldwin forged as drawer)

For deposit only with Bank of the Philippine Islands, to credit of account of San Carlos Milling Co., Ltd.
By (Sgd.) NEWLAND BALDWIN
For Agent

§ San Carlos had frequently withdrawn currency for shipment to its mill but never in so large an amount, and never
under the sole supervision of Dolores

§ Before delivering the money, the bank asked Dolores for P1 to cover the cost of packing the money, and he left the
bank and shortly afterwards returned with another check for P1, purporting to be signed by Newland Baldwin

§ the crime was discovered and San Carlos filed against the BPI and China Bank (after ammendment complaint)

§ China Bank: as the prior endorsement had in law been guaranteed by the BPI, they are absolved even if the
endorsement of Newland Baldwin on the check was a forgery

§ BPI: guilty of no negligence, loss was due to the dishonesty of San Carlos employees and the negligence of San
Carlos general agent

§ RTC: BPI in GF and San Carlos could not recover

ISSUE: W/N BPI was bound to inspect the checks and shall therefore be liable in case of forgery

HELD: YES. judgment absolving the Bank of the Philippine Islands must therefore be reversed
§ duty was upon the BPI, and the China Banking Corporation was not bound to inspect and verify all endorsements of
the check, even if some of them were also those of depositors in that bank

§ 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 account of the
depositor whose name was forged.

§ under section 23 of the Negotiable Instruments Law they are not a charge against San Carlos nor are the checks of
any value to the BPI.

§ proximate cause of loss was due to the negligence of the Bank of the Philippine Islands in honoring and cashing the
two forged checks

PNB vs. NATIONAL CITY BANK OF NEW YORK

GR no. L-43596 | October 31, 1936

FACTS:
§ April 7 & 9, 1933: unknown person or persons purchased tires and paid Motor Service Company, Inc.(MSCI)
checks purporting to have been issued by the "Pangasinan Transportation Co., Inc. (Pantranco) by J. L. Klar,
Manager and Treasurer" against PNB and in favor of International Auto Repair Shop.
§ MSCI indorsed for deposit at the National City Bank of New York and MSCI was accordingly credited with the
amounts thereof, or P144.50 and P215.75
§ April 8 & 10, 1933: Checks were cleared and PNB credited the National City Bank
§ PNB found out that the signatures of J. L. Klar, Manager and Treasurer were forged and demanded from MSCI and
National City Bank New York
§ PNB filed the case in the municipal court of Manila against National City Bank and MSCI.
§ Pantranco objected to have the proceeds of said check deducted from their deposit.
§ RTC: Favored PNB
§ MSCI appealed

  12  
ISSUES:
1. W/N MSCI was negligent and therefore PNB should recover
2. W/N the drawee bank should be allowed recovery, as MSCI's position would not become worse than if the drawee
had refused the payment of these checks upon their presentation.

HELD:
1. YES.
• Circumstances:
• check number 637023-D was dated April 6, 1933, whereas check number 637020-D and is dated April 7, 1933.
(later check had prior number)
• accepted the 2 checks from unknown persons
• check 637023-D was indorsed by a subagent of the agent of the payee, International Auto Repair Shop and
cross generally
• Section 23 of the Negotiable Instruments Act provides that "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.
• PNB did not warrant to MCSI the genuineness of the checks in question, by its acceptance thereof, nor did it
perform any act which would have induced MSCI to believe in the genuineness
• PNB is NOT precluded from setting up the forgery

2. NO.
• A drawee of a check, who is deceived by a forgery of the drawer's signature may recover the payment back,
unless his mistake has placed an innocent holder of the paper in a worse position than he would have been in if
the discover of the forgery had been made on presentation.
• MSCI has lost nothing by anything which the drawee has done. It had in its hands some forged worthless
papers. It did not purchase or acquire these papers because of any representation made to it by the drawee.

II. CONSIDERATION AND ACCOMMODATION PARTY [Sections 24 to 29]

Digested by: Borlongan

TRAVEL-ON, INC vs. CA

GR no. 56169 | June 26, 1992

FACTS: Travel-On is a travel agency selling airline tickets on commission basis for and in behalf of different airline
companies. Private respondent Miranda had a revolving credit line with petitioner. He procured tickets from Travel-On on
behalf of airline passengers and derived commissions therefrom. Travel-On filed suit before the lower court to collect on
6 checks issued by Miranda. The complaint averred that petitioner sold and delivered various airline tickets to
respondent. To settle said account, Miranda paid various amounts in cash and in kind, and thereafter issued 6 postdated
checks which were all dishonored by the drawee banks.

The trial court ruled that Miranda's indebtedness to petitioner was not satisfactorily established and that the postdated
checks were issued not for payment to his indebtedness but to accommodate the General Manager of Travel-On to
enable her to show to the Board of Directors that Travel-On was financially stable. Court of Appeals affirmed.

ISSUE: Whether or not the checks here involved were issued for "accommodation".

HELD: No. The rule is quite settled that a negotiable instrument is presumed to have been given or indorsed for a
sufficient consideration unless otherwise contradicted and overcome by other competent evidence. It must be noted that
those checks were issued immediately after a demand letter had been sent by Travel-On to Miranda. The fact that all the
checks issued by Miranda to Travel-On were presented for payment by the latter would lead to no other conclusion than
that these checks were intended for encashment. There is nothing in the checks themselves that states otherwise. The
Court finds it unacceptable that the checks here involved were issued for "accommodation" and that accordingly
Miranda the maker of those checks was not liable thereon to Travel-On of those checks.

  13  
Here, Travel-On was payee of all 6 checks, it presented these checks for payment at the drawee bank but the checks
bounced. Travel-On obviously was not an accommodated party; it realized no value on the checks which bounced.
Those checks in themselves constituted evidence of Miranda's indebtedness, evidence not successfully overturned or
rebutted by private respondent.

Simeon Sadaya v. Francisco Sevilla

GR no. L-17845 | April 27, 1967

FACTS: Victor Sevilla, Varona and Sadaya executed, jointly and severally, in favor of the BPI, or its order, a promissory
note for P15,000.00 with interest at 8% per annum, payable on demand. Payments were made on account with an
outstanding balance of P4,850.00. No payment thereafter made. Sadaya paid the foregoing balance which, together with
interest, totalled P5,416.12. Varona failed to reimburse Sadaya despite repeated demands. Victor Sevilla died and
Francisco Sevilla was named administrator.

Sadaya filed a creditor's claim. The administrator resisted the claim since deceased Victor Sevilla "did not receive any
amount as consideration for the promissory note," but signed it only "as surety for Oscar Varona". The trial court
admitted the claim of Simeon Sadaya. But the CA, set aside the order and disallowed Sadaya's claim.

ISSUE: Whether or not Sadaya can claim against the estate of Sevilla as co-accomodation party when Verona as
principal debtor is not yet insolvent.

HELD: No. As such accommodation the makers, the individual obligation of each of them to the bank is no different
from, and no greater and no less than, that contract by Oscar Varona. For, while these two did not receive value on the
promissory note, they executed the same with, and for the purpose of lending their names to, Oscar Varona. It is beyond
debate that Simeon Sadaya could have sought reimbursement of the total amount paid from Oscar Varona. This is but
right and just. Varona received full value of the promissory note. Sadaya received nothing therefrom. He paid the bank
because he was a joint and several obligor.

On principle, a solidary accommodation maker — who made payment — has the right to contribution, from his co-
accommodation maker, in the absence of agreement to the contrary between them, and subject to conditions imposed
by law.

Requisites before one accommodation maker can seek reimbursement from a co-accommodation maker.
1) A joint and several accommodation maker of a negotiable promissory note may demand from the principal
debtor reimbursement for the amount that he paid to the payee; and
2) A joint and several accommodation maker who pays on the said promissory note may directly demand
reimbursement from his co-accommodation maker without first directing his action against the principal debtor
provided that:
a) He made the payment by virtue of a judicial demand, or
b) A principal debtor is insolvent.

Crisologo-Jose vs. CA
GR no. 80599 | September 15, 1989

FACTS: The president of Mover Enterprises Atty. Benares issued a check drawn against Traders Royal Bank, payable to
Crisologo-Jose in accommodation of its clients, spouses Jaime and Clarita Ong. The vice president Ricardo S. Santos,
Jr signed said check. The check was issued to defendant Crisologo-Jose in consideration of the waiver or quitclaim over
a certain property which the GSIS agreed to sell to the spouses Ong with the understanding that upon approval by the
GSIS of the compromise agreement, the check will be encashed accordingly. But compromise agreement was not
approved and Atty. Benares replaced the check with another Traders Royal Bank check still payable to Crisologo-Jose
but the said check was dishonored due to insufficient funds. A subsequent redepositing of the check was likewise
dishonored for the same reason.

Crisologo-Jose was constrained to file a criminal complaint for violation of BP. 22 against Atty. Benares and Santos.
During the preliminary investigation, Santos tendered a cashier's check to the Crisologo-Jose but it was refused. The

  14  
trial court dismissed the case but the CA reversed and set aside said judgment of dismissal and revived the complaint
for consignation. Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not private
respondent who merely signed the check in question in a representative capacity, that is, as vice president of said
corporation, hence he is not liable thereon under the Negotiable Instruments Law.

ISSUE: Whether or not Mover Enterprises may be held liable on the accommodation instrument, which is the check,
issued in favor of herein petitioner.

HELD: No. The pertinent provision of said law referred to provides:

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.

The aforequoted provision of the law does not include nor apply to corporations which are accommodation parties. One
who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is
such as to charge the indorsee with knowledge that the issue or indorsement of the instrument by the corporation is for
the accommodation of another, he cannot recover against the corporation thereon.

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 person only if specifically authorized to do so.
Corollarily, corporate officers, such as the president and vice president, have no power to execute for mere
accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in
relation to matters in which the corporation has no legitimate concern. There should be no legal obstacle, therefore, to
petitioner's claims being directed personally against Atty. Benares and Santos.

III. NEGOTIATION [Sections 30 to 50]

Digested by: Borlongan and Cambronero

Raul Sesbreño vs. CA

GR no. 89252 | May 24, 1993

FACTS: Raul Sesbreño made a money market placement in the amount of P300,000 with PhilFinance, with a term of 32
days. PhilFinance issued to Sesbreño the Certificate of Confirmation of Sale of a Delta Motor Corporation Promissory
Note (DMC PN No. 2731), the Certificate of Securities Delivery Receipt indicating the sale of the Note with notation that
said security was in the custody of Pilipinas Bank, and postdated checks drawn against the Insular Bank of Asia and
America for P304,533.33 payable on 13 March 1981. The checks were dishonored for having been drawn against
insufficient funds. Philfinance delivered to petitioner Denominated Custodian Receipt (DCR).

Sesbreño approached Ms. Elizabeth de Villa of private respondent Pilipinas, and handed her a demand letter informing
the bank that his placement with Philfinance in the amount reflected in the DCR had remained unpaid and outstanding,
and that he in effect was asking for the physical delivery of the underlying promissory note. He then examined the
original of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it would mature on
6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as “payee” and private respondent Delta
Motors Corporation (“Delta”) as “maker;” and that on face of the promissory note was stamped “NON NEGOTIABLE.”
Pilipinas did not deliver the Note, nor any certificate of participation in respect thereof, to petitioner.

Sesbreño later made similar demand letters again asking Pilipinas for physical delivery of the original of DMC PN No.
2731. He also made a written demand upon private respondent Delta for the partial satisfaction of DMC PN No. 2731,
explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta,
however, denied any liability to Sesbreño on the promissory note. As Sesbreño had failed to collect his investment and
interest thereon, he filed an action for damages against private respondents Delta and Pilipinas.

ISSUE: Whether or not DMC PN No. 2731 marked as non-negotiable may be assigned.

  15  
HELD: Yes. Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either
by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A
negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The legal
consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A
non-negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written in the face of the instrument:
The words “not negotiable,” stamped on the face of the bill of lading, did not destroy its assignability, but the
sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill, though not
negotiable, may be transferred by assignment; the assignee taking subject to the equities between the original
parties.

DMC PN No. 2731, while marked “non-negotiable,” was not at the same time stamped “non-transferable” or “non-
assignable.” It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part,
that Note.

BANK OF THE PHILIPPINE ISLAND vs. COURT OF APPEALS

G.R. No. 136202 | January 25, 2007

Facts: Private respondent Salazar prayed for the recovery of the amount of P267,707.70 debited by petitioner BPI from
her account. BPI alleged that on August 31, 1991, Julio R. Templonuevo, demanded from them payment of the amount
of P267,692.50 representing the aggregate value of three (3) checks, which were allegedly payable to him, but which
were deposited by BPI to Salazar’s account without his knowledge and corresponding endorsement.

Accepting that Templonuevo’s claim was a valid one, BPI froze account of A.A. Salazar and Construction and
Engineering Services, instead of the Account where the checks were deposited, since this account was already closed
by Salazar or had an insufficient balance.

Salazar was advised to settle the matter with Templonuevo but they did not arrive at any settlement. As it appeared that
Salazar was not entitled to the funds represented by the checks which were deposited and accepted for deposit, BPI
decided to debit the amount of P267,707.70 from her Account and the sum of P267,692.50 was paid to Templonuevo by
means of a cashier’s check. The difference between the value of the checks (P267,692.50) and the amount actually
debited from her account (P267,707.70) represented bank charges in connection with the issuance of a cashier’s check
to Templonuevo.

Templonuevo admitted the payment to him of P267,692.50 and argued that said payment was to correct the malicious
deposit made by Salazar to her private account, and that bank’s negligence and tolerance regarding the matter was
violative of the primary and ordinary rules of banking. He likewise contended that the debiting or taking of the
reimbursed amount from the account of Salazar by BPI was a matter exclusively between said parties and may be
pursuant to banking rules and regulations, but did not in any way affect him. The debiting from another account of
Salazar, considering that her other account was effectively closed, was not his concern.

RTC ruled in favor of Salazar.

On appeal, the Court of Appeals affirmed the decision of the RTC.

Hence, this petition.

Issue:
1. Did BPI have the authority to withdraw unilaterally from such depositor’s account the amount it had previously paid
upon certain unendorsed order instruments deposited by the depositor to another account that she later closed?

2. Did BPI act judiciously in debating Salazar’s account?

Held:
1. BPI, as the collecting bank, had the right to debit Salazar’s account for the value of the checks it previously credited in
her favor. It is of no moment that the account debited by petitioner was different from the original account to which the

  16  
proceeds of the check were credited because both admittedly belonged to Salazar, the former being the account of the
sole proprietorship which had no separate and distinct personality from her, and the latter being her personal account.

The right of set-off was explained in Associated Bank v. Tan.

“A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals on the part of a
depositor. The right of a collecting bank to debit a client’s account for the value of a dishonored check that has
previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code
provides that “fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loan.”

Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal
compensation under Article 1278 of the Civil Code may take place “when all the requisites mentioned in Article 1279 are
present,” as follows:

1. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
2. That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
3. That the two debts be due;
4. That they be liquidated and demandable;
5. That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.”

While, however, it is conceded that petitioner had the right of set-off over the amount it paid to Templonuevo against the
deposit of Salazar.

2. No. Solely upon the prompting of Templonuevo, BPI debited the account of Salazar without even serving due notice
upon her. Consequently, this caused damage to Salazar such as having checks she issued dishonored because she was
not given prior notice of the deduction from her account. As such, the award of damages must be sustained.

CALTEX PHILIPPINES INC. vs. COURT OF APPEALS

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

Facts: Security Bank and Trust Company, a commercial banking institution, through its Sucat Branch issued 280
certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited the aggregate amount of
P1,120,000.00. Angel delivered the CTDs to Caltex for his purchase of fuel products.

Sometime in March 18, 1982, Angel informed Mr. Tiangco, the Sucat Branch Manager that he lost all CTDs, he was
advised by Mr. Tiangco to submit a notarized Affidavit of Loss to replace the lost CTDs.

On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from Security Bank in the amount of P875,000 and
executed a notarized Deed of Assignment of Time Deposit.

Sometime in November, 1982, Mr. Aranas, Credit Manager of Caltex went to the Sucat branch to verify the CTDs
declared lost by Angel.

On November 26, 1982, Security Bank received a letter from Caltex formally informing it of its possession of the CTDs in
question and of its decision to pre-terminate the same.

On December 8, 1982, Caltex was requested by Security Bank to furnish a copy of the document evidencing the
guarantee agreement with Mr. Angel dela Cruz as well as the details of Mr. Angel's obligation against which Caltex
proposed to apply the time deposits.

Security Bank rejected Caltex demand for payment because it failed to furnish a copy of its agreement w/ Angel.

  17  
April 1983, the loan of Angel dela Cruz with Security Bank matured and fell due and on August 5, 1983 Security Bank
applied the time deposits to the payment of matured loan.

Caltex filed a complaint praying the bank to pay 1,120,000 plus 16% interest per annum, moral and exemplary damages
as well as attorney’s fee.

RTC rendered its decision dismissing the instant complaint.

On appeal, CA affirmed RTC to dismiss complaint, hence this petition.

Issue:
1. Whether or not the CTDs in question are negotiable instruments.
2. Whether or not Caltex Philippines Inc. can rightfully recover on the CTDs.

Held:
1. Yes, Section 1 of Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an
instrument to become negotiable, viz:

1. It must be in writing and signed by the maker or drawer;

2. Must contain an unconditional promise or order to pay a sum certain in money;
3. Must be payable on demand, or at a fixed or determinable future time;
4. Must be payable to order or to bearer; and
5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.”

The CTDs in question undoubtedly meet the requirements of the law for negotiability.

2. No, 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.

IV. RIGHTS OF THE HOLDER [Sections 51 to 59]

Digested by: Cambronero and De Guia

CONSOLIDATED PLYWOOD INDUSTRIES, INC. vs. IFC LEASING AND ACCEPTANCE CORPORATION
G.R. No. L-72593, April 30, 1987

Facts: Consolidated Plywood Industries, Inc. is a corporation engaged in the logging business. It had for its program of
logging activities for the year 1978 the opening of additional roads, and simultaneous logging operations. For this
purpose, it needed 2 additional units of tractors.

Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm, Industrial Products Marketing
(the "seller-assignor"), a corporation dealing in tractors and other heavy equipment business, offered to sell to
Consolidated Plywood two "Used" Allis Crawler Tractors, one an HD-21-B and the other an HD-16-B.

In order to ascertain the extent of work to which the tractors were to be exposed, and to determine the capability of the
"Used" tractors being offered, Consolidated Plywood requested the seller-assignor to inspect the jobsite. After
conducting said inspection, the seller-assignor assured Consolidated Plywood that the "Used" Allis Crawler Tractors

  18  
which were being offered were fit for the job, and gave the corresponding warranty of 90 days performance of the
machines and availability of parts.

With said assurance and warranty, Consolidated Plywood agreed to purchase on installment said 2 units of "Used" Allis
Crawler Tractors.

On April 5, 1978, the seller-assignor issued the sales invoice for the 2 units of tractors. At the same time, the deed of
sale with chattel mortgage with promissory note was executed.

Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the seller-assignor, by
means of a deed of assignment assigned its rights and interest in the chattel mortgage in favor of the IFC Leasing.

Immediately thereafter, the seller-assignor delivered said 2 units of "Used" tractors to the Consolidated Plywood jobsite
and as agreed, the seller-assignor stationed its own mechanics to supervise the operations of the machines.

Fourteen days had elapsed after their delivery when one of the tractors broke down and after another 9 days, the other
tractor likewise broke down.

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact that the tractors broke
down and requested for the seller-assignor's usual prompt attention under the warranty. In response to the formal advice
the seller-assignor sent to the jobsite its mechanics to conduct the necessary repairs but the tractors did not come out
to be what they should be after the repairs were undertaken because the units were no longer serviceable.

Because of the breaking down of the tractors, the road building and simultaneous logging operations of Consolidated
Plywood were delayed and they advised the seller-assignor that the payments of the installments as listed in the
promissory note would likewise be delayed until the seller-assignor completely fulfills its obligation under its warranty.

Since the tractors were no longer serviceable, Consolidated Plywood asked the seller-assignor to pull out the units and
have them reconditioned, and thereafter to offer them for sale.

No response to this letter was received by the Consolidated Plywood and despite several follow-up calls, the seller-
assignor did nothing with regard to the request, until the complaint in this case was filed by IFC Leasing and Acceptance
Corporation against Consolidated Plywood.

RTC ruled in favor of IFC Leasing.

Intermediate Appellate Court denied the motion for reconsideration filed by Consolidated Plywood.

Hence, this petition.

Issue: Whether or not the promissory note in question is a negotiable instrument so as to bar completely all the available
defenses of the Consolidated Plywood against IFC Leasing.

Held: It cannot be denied that the promissory note in question is not a negotiable instrument.

"The instrument in order to be considered negotiable must contain the so-called 'words of negotiability'—i.e., must be
payable to 'order' or 'bearer'. These words serve as an expression of consent that the instrument may be transferred.
This consent is indispensable since a maker assumes greater risk under a negotiable instrument than under a non-
negotiable one.

When instrument is payable to order.

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

These are the only two ways by which an instrument may be made payable to order. There must always be a specified
person named in the instrument. It means that 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 therefore non-negotiable. Any subsequent purchaser
  19  
thereof will not enjoy the advantages of being a holder of a negotiable instrument, but will merely 'step into the shoes' of
the person designated in the instrument and will thus be open to all defenses available against the latter.

Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that IFC Leasing can
never be a holder in due course but remains a mere assignee of the note in question.

Sections 52 and 56 of the Negotiable Instruments Law provide that:

"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:
xxx xxx xxx
xxx xxx xxx
"(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.

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

The petitioner “Consolidated Plywood” was clearly a victim of a warranty not honored by the maker.

CHAN WAN vs. TAN KIM AND CHEN SO

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

Facts: Chan Wan collect eleven checks with a total of P4,290.00. Such checks payable to "cash or bearer" and drawn
by defendant Tan Kim upon the Equitable Banking Corporation, were all presented for payment by Chan Wan to the
drawee bank, but they "were all dishonored and returned to him unpaid due to insufficient funds and/or causes
attributable to the drawer." This prompted Chan Wan to institute an action against Tan Kim.

Tan Kim declared without contradiction that the checks had been issued to two persons named Pinong and Muy for
some shoes the former had promised to make and "were intended as mere receipts". The court declined to order
payment for two principal reasons: (a) Chan Wan failed to prove he was a holder in due course, and (b) the checks being
crossed checks should not have been deposited instead with the bank mentioned in the crossing.

Issue: Whether Chan Wan has the right to collect against the eleven checks.

Held: Yes. The Negotiable Instruments Law regulating the issuance of negotiable checks, the rights and the liabilities
arising therefrom, does not mention "crossed checks". Art. 541 of the Code of Commerce refers to such instruments.

Considering the deficiency of important details on which a fair adjudication of the parties' right depends, we think the
record should be and is hereby returned, in the interest of justice, to the court below for additional evidence, and such
further proceedings as are not inconsistent with this opinion. With the understanding that, as defendants did not appeal,
their counterclaim must be and is hereby definitely dismissed.

VICENTE R. DE OCAMPO & CO., vs. ANITA GATCHALIAN, ET AL.,

GR NO L 15126, 1961 | November 30, 1961

FACTS:
• Anita C. Gatchalian who was then interested in looking for a car for the use of her husband and the family, was shown
and offered a car by Manuel Gonzales who was accompanied by Emil Fajardo, the latter being personally known to
defendant Anita C. Gatchalian;

• Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly authorized by the owner of the car,
Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish said sale, but which facts were not
known to plaintiff;
  20  
• Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales to her satisfaction, requested Manuel
Gonzales to bring the car the day following together with the certificate of registration of the car, so that her husband
would be able to see same; that on this request of defendant Anita C. Gatchalian, Manuel Gonzales advised her that the
owner of the car will not be willing to give the certificate of registration unless there is a showing that the party interested
in the purchase of said car is ready and willing to make such purchase and that for this purpose Manuel Gonzales
requested defendant Anita C. Gatchalian to give him (Manuel Gonzales) a check which will be shown to the owner as
evidence of buyer's good faith in the intention to purchase the said car, the said check to be for safekeeping only of
Manuel Gonzales and to be returned to defendant Anita C. Gatchalian the following day when Manuel Gonzales brings
the car and the certificate of registration, but which facts were not known to plaintiff;

• That relying on these representations of Manuel Gonzales and with his assurance that said check will be only for
safekeeping and which will be returned to said defendant the following day when the car and its certificate of registration
will be brought by Manuel Gonzales to defendants, but which facts were not known to plaintiff, defendant Anita C.
Gatchalian drew and issued a check, Exh. "B"; that Manuel Gonzales executed and issued a receipt for said check, Exh.
"1";

• Manuel Gonzales failed to appear the following day and on his failure to bring the car and its certificate of registration
and to return the check, Exh. "B", Hence, defendant Anita C. Gatchalian issued a "Stop Payment Order" on the check,
Exh. "3", with the drawee bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not being
know to defendant, Anita C.

• The plaintiff filed a complaint for estafa against Manuel Gonzales based on and arising from the acts of said Manuel
Gonzales in paying his obligations with plaintiff and receiving the cash balance of the check, Exh. "B" and that said
complaint was subsequently dropped;

ISSUE: Whether or not defendant Gatchalian is liable as the maker of the check?

HELD: NO Section 52, Negotiable Instruments Law, defines holder in due course, thus: A holder in due course is a
holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if
such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the
person negotiating it.

The stipulation of facts expressly states that De Ocampo was not aware of the circumstances under which the check
was delivered to Manuel Gonzales, but we agree with Gatchalian that the circumstances indicated by them in their
briefs, such as the fact that appellants had no obligation or liability to the Ocampo Clinic; that the amount of the check
did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two
parallel lines in the upper left hand corner, which practice means that the check could only be deposited but may not be
converted into cash — all these circumstances should have put de Ocampo to inquiry as to the why and wherefore of
the possession of the check by Manuel Gonzales, and why he used it to pay Matilde's account. It was payee's duty to
ascertain from the holder Manuel Gonzales what the nature of the latter's title to the check was or the nature of his
possession. Having failed in this respect, we must declare that de Ocampo was guilty of gross neglect in not finding out
the nature of the title and possession of Manuel Gonzales, amounting to legal absence of good faith, and it may not be
considered as a holder of the check in good faith. To such effect is the consensus of authority.
SC reverses the CA decision and absolves Gatchalian of liability.

B.A. GREEN ET. AL vs M. LOPEZ ET AL,

GR NO. L11526, 1917 | January 2, 1917

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

  21  
• A negotiable note was issued by LOPEZ ET AL (maker) to a certain payee. After that, this payee indorsed the note to
the present holders, GREEN ET AL. The note indorsed by the payee to GREEN ET AL said “for value received”

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

ISSUE: Whether or not the defendant could refuse payment on the note?

HELD: No. The court ruled that the allegations of the defendant were either wholly false or he failed to make himself
understood resulting to the fact that no knowledge of the existence of equitable defenses was made known to the
plaintiff, the purchaser of the note. There was nothing on the face of the note to put the purchasers on notice of the
existence of such equitable defenses. It was entirely regular in form and came into their possession in the usual course
of business. Under these circumstances the burden of proof was manifestly upon the maker of the note to establish the
fact of knowledge of the equitable defenses before they could be permitted to rely upon such defenses as against the
purchasers. Equitable defenses of this nature can in no event defeat the right of the holders of a negotiable note by
indorsement and for valuable consideration, until and unless knowledge of the existence of such equitable defenses is
brought home to them, or until it appears that the holders had such knowledge of the existence of defects in the
instrument as to charge them with bad faith in acquiring it under all the attendant circumstances. The indorsement was
made for a valuable consideration, the purchasers were clearly entitles to judgment for the face value of the note.

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

CHARLES A. FOSSUM vs. FERNANDEZ HERMANOS, a general partnership, and JOSE F. FERNANDEZ Y CASTRO
and RAMON FERNANDEZ Y CASTRO, members of the said partnership of FERNANDEZ HERMANOS,
GR NO. L-19461, 1923 | March 28, 1923

FACTS:
• Fossum, was the resident agent in Manila of the American Iron Products Company, Inc., a concern engaged in
business in New York City; • Fossum, acting as agent of that company, procured an order from Fernandez Hermanos, a
general commercial partnership engaged in business in the Philippine Islands, to deliver to said firm a tail shaft, to be
installed on the ship Romulus, then operated by Fernandez Hermanos, as managers of La Compañía Marítima.

• It was stipulated that said tail shaft would be in accordance with the specifications contained in a blueprint which had
been placed in the hands of Fossum; and it was further understood that the shaft should be shipped from New York
upon some steamer sailing in March or April of the year 1920.

• Considerable delay seems to have been encountered in the matter of the manufacture and shipment of the shaft; but in
the autumn of 1920 it was dispatched to Manila, having arrived in January, 1921.

• Meanwhile the American Iron Products Company, Inc., had drawn a time draft, at sixty days, upon Fernandez
Hermanos, for the purchase price of the shaft, the same being in the amount of $2,250, and payable to the Philippine
National Bank. In due course the draft was presented to Fernandez Hermanos for acceptance, and was accepted by
said firm on December 15, 1920, according to its tenor.

• Upon inspection after arrival in Manila the shaft was found not to be in conformity with the specifications and was
incapable of use for the purpose for which it had been intended. Upon discovering this, Fernandez Hermanos refused to
pay the draft, and it remained for a time dishonored in the hands of the Philippine National Bank in Manila.

• Later the bank indorsed the draft in blank, without consideration, and delivered it to the plaintiff, Fossum, who
thereupon instituted the present action on the instrument against the acceptor, Fernandez Hermanos, and the two
individuals named as defendants in the complaint, in the character of members of said partnership.

  22  
• RTC-absolved defendants of liability

ISSUE: Whether or not Fossum was a holder in due course?

HELD: NO
• To begin with, the plaintiff himself is far from being a holder of this draft in due course. In the fact place, he was himself
a party to the contract which supplied the consideration for the draft, albeit he there acted in a representative capacity.
In the second place, he procured the instrument to be indorsed by the bank and delivered to himself without the
payment of value, after it was overdue, and with full notice that, as between the original parties, the consideration had
completely failed. Under these circumstance recovery on this draft by the plaintiff by virtue of any merit in his own
position is out of the question. His attorney, however, calls attention to the familiar rule that a person who is not himself a
holder in due course may yet recover against the person primarily liable where it appears that such holder derives his
title through a holder in due course.

• The difficulty of the plaintiff's position from this point of view is that there is not a line of proof in the record tending to
show as a fact that the bank itself was ever a holder of this draft in due course. In this connection it was incumbent on
the plaintiff to show, as an independent claims, i.e., the bank, was a holder in due course; and upon this point the
plaintiff can have no assistance from the presumption, expressed in section 59 of the Negotiable Instrument Law, to the
effect that every holder is deemed prima facie to be a holder in due course. The presumption expressed in that section
arise only in favor of a person who is a holder in the sense defined in section 191 of the same Law, that is, a payee or
indorsee who is in possession of the draft, or the bearer thereof. Under this definition, in order to be a holder, one must
be in possession of the note or the bearer thereof. (Night & Day Bank vs. Rosenbaum, 191 Mo. App., 559, 574.) If this
action had been instituted by the bank itself, the presumption that the bank was a holder in due course would have
arisen from the tenor of the draft and the fact that it was in the bank's possession; but when the instrument passed out
of the possession of the bank and into the possession of the present plaintiff, no presumption arises as to the character
in which the bank held the paper. The bank's relation to the instrument became past history when it delivered the
document to the plaintiff; and it was incumbent upon the plaintiff in this action to show that the bank had in fact acquired
the instrument for value and under such conditions as would constitute it a holder in due course. In the entire absence of
proof on this point, the action must fail. Hence, the SC affirms the lower court.

V. LIABILITIES OF PARTIES [Sections 60 to 69]

Digested by: De Guia and De Jesus

STATE INVESTMENT HOUSE vs. INTERMEDIATE APPELLATE COURT, ANITA PEÑA CHUA and HARRIS CHUA,
GR NO. 72764, 1989 | 175 SCRA 310

FACTS:
• New Sikatuna Wood Industries, Inc. requested for a loan from private respondent Harris Chua. The latter agreed to
grant the same subject to the condition that the former should wait until December 1980 when he would have the
money. In view of this agreement, private respondent-wife, Anita Pena Chua issued three (3) crossed checks payable to
New Sikatuna Wood Industries, Inc. all postdated December 22, 1980 as follows:
DRAWEE BANK CHECK NO. DATE AMOUNT
CHINA BANK 589053 DEC 22, 1980 P98,750.00
INTERNATIONAL 04045549 DEC 22, 1980 102,313.00
CORPORATE BANK
METROPOLITAN BANK 036512 DEC 22, 1980 98,387.00
AND TRUST CO

• The total value of the three (3) postdated checks amounted to P 299,450.00.

• Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with herein petitioner State Investment
House, Inc. whereby for and in consideration of the sum of Pl,047,402.91 under a deed of sale, the former assigned and
discounted with petitioner eleven (11) postdated checks including the aforementioned three (3) postdated checks issued
by herein private respondent-wife Anita Peña Chua to New Sikatuna Wood Industries, Inc.

  23  
• When the three checks issued by private respondent Anita Pena Chua were allegedly deposited by petitioner, these
checks were dishonored by reason of "insufficient funds", "stop payment" and "account closed", respectively. Petitioner
claims that despite demands on private respondent Anita Peña to make good said checks, the latter failed to pay the
same necessitating the former to file an action for collection against the latter and her husband Harris Chua before the
Regional Trial Court of Manila, Branch XXXVII docketed as Civil Case No. 82-10547.

• Private respondents-defendants filed a third party complaint against New Sikatuna Wood Industries, Inc. for
reimbursement and indemnification in the event that they be held liable to petitionerplaintiff. For failure of third party
defendant to answer the third party complaint despite due service of summons, the latter was declared in default.

RTC-judgment is hereby rendered in favor of the plaintiff ordering the defendants to pay jointly and severally to the
plaintiff
IAC- REVERSED RTC

ISSUE: whether or not petitioner is a holder in due course as to entitle it to proceed against private respondents for the
amount stated in the dishonored checks?

HELD: NO
• Section 52(d) provides that in order that one may be a holder in due course, it is necessary that "at the time the
instrument was negotiated to him he had no notice of any x x x defect in the title of the person negotiating it." However,
under Section 59 every holder is deemed prima facie to be a holder in due course.

Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable checks as well as the lights and
liabilities arising therefrom, does not mention "crossed checks". But this Court has taken cognizance of 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 into cash. Consequently, such circumstance should put the payee on 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 is not a holder in good faith. Relying on the ruling in Ocampo v. Gatchalian (supra), the
Intermediate Appellate Court (now Court of Appeals), correctly elucidated that the effects of crossing a check are: the
check may not be encashed but only deposited in the bank; the check may be negotiated only once to one who has an
account with a bank; and 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 that purpose, otherwise he is not a
holder in due course. Hence, SC affirms CA.

CHAN WAN v. TAN KIM and CHEN SO

G.R. No. L-15380 | September 30, 1960

FACTS: Eleven checks payable to "cash or bearer" drawn by defendant Tan Kim upon the Equitable Banking
Corporation, were all presented for payment by Chan Wan to the drawee bank, but they "were all dishonored and
returned to him unpaid due to insufficient funds and/or causes attributable to the drawer." This prompted Chan Wan to
file a suit for the collection of the eleven checks totalling P4,290.00

At the hearing of the case before CFI Manila, Chan Wan did not take the witness stand. His attorney, however, testified
only to identify the checks plus the letters of demand upon defendants.

On the other hand, Tan Kim declared without contradiction that the checks had been issued to two persons named
Pinong and Muy for some shoes the former had promised to make and "were intended as mere receipts".

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

ISSUES:
1. Whether or not petitioner Chan Wan is a holder in due course. – NO
2. Whether or not a holder who is not a holder in due course may recover on the checks. – YES

  24  
HELD:
1. The circumstances, in the case at bar, would seem to show deposit of the checks with China Banking
Corporation and subsequent presentation by the latter through the clearing office; but as drawee had no funds,
they were unpaid and returned, some of them stamped "account closed". How the subject checks reached
petitioner’s hands was not indicated. The court surmised that petitioner got the checks after they had been
thus returned, because he presented them in court with such "account closed" stamps. Thus, the Supreme
Court held that Chan Wan is not a holder in due course because he knew, upon taking them up, that the checks
had already been dishonored.

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

DOCTRINES:

On liability of drawer – The drawer in drawing the check engaged that on due presentment, the check would be paid,
and that if it be dishonoured, he will pay the amount thereof to the holder. Wherefore, in the absence of due
presentment, the drawer did not become liable.

On liability of drawee or wrong payment – Where a check is crossed specially in favor of a certain bank, the check is
generally deposited with the bank mentioned in the crossing, so that the latter may take charge of the collection. If it is
not presented by said bank for payment, the drawee is liable to the true owner, in case of payment to persons not
entitled thereto.

FAR EAST BANK v. GOLD PALACE JEWELLERY CO.

G.R. No. 168274 | August 20, 2008

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

Judy Yang, the assistant general manager of Gold Palace, issued a Cash Invoice to the foreigner, asked him to come
back, and informed him that the pieces of jewelry would be released when the Foreign draft had already been cleared.
Yang consequently deposited the draft in the company's account with the Far East Bank & Trust Company (Far East).

Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the latter cleared the same.
UOB's account with LBP was debited, and Gold Palace's account with Far East was credited with the amount stated in
the draft. The foreigner eventually returned to respondent's store to acquire the jewellery and because the amount in the
draft was more than the value of the goods purchased, she issued, as his change, a Far East Check for P122,000.00
which was later encashed upon presentment.

3 weeks later, LBP informed Far East that the amount in said Foreign Draft had been materially altered from P300.00
to P380,000.00 and that it was returning the same. Intending to debit the amount from respondent's account, Far East
subsequently refunded the P380,000.00 earlier paid by LBP. However, Far East was able to debit only P168,053.36 from
respondent’s account due to inadequate funds as the latter had already utilized portions of the amount. This was done
without a prior written notice to respondent.

Petitioner demanded from respondents the payment of P211,946.64 or the difference between the amount in the
materially altered draft and the amount debited from the respondent company's account. Because Gold Palace did not
heed the demand, Far East consequently instituted a suit for sum of money and damages before the RTC of Makati City.

Trial Court ruled that on the basis of its warranties as a general indorser, Gold Palace was liable to Far East. However
this was later reversed by the CA ruling that Far East failed to undergo the proceedings on the protest of the foreign draft

  25  
or to notify Gold Palace of the draft's dishonor; thus, Far East could not charge Gold Palace on its secondary liability as
an indorser. It further ruled that the drawee bank had cleared the check, and its remedy should be against the party
responsible for the alteration.

ISSUE: Whether or not Gold Palace can be held liable.

HELD: NO. The Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the instrument,
engages that he will pay it according to the tenor of his acceptance.33 This provision applies with equal force in case the
drawee pays a bill without having previously accepted it. His actual payment of the amount in the check implies not only
his assent to the order of the drawer and a recognition of his corresponding obligation to pay the aforementioned sum,
but also, his clear compliance with that obligation.34 Actual payment by the drawee is greater than his acceptance, which
is merely a promise in writing to pay. The payment of a check includes its acceptance.35

Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and forwarded the
amount thereof to the collecting bank. The latter then credited to Gold Palace's account the payment it received.
Following the plain language of the law, the drawee, by the said payment, recognized and complied with its obligation to
pay in accordance with the tenor of his acceptance. The tenor of the acceptance is determined by the terms of the bill as
it is when the drawee accepts.36 Stated simply, LBP was liable on its payment of the check according to the tenor of the
check at the time of payment, which was the raised amount.

Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due course holder.
We note at this point that Gold Palace was not a participant in the alteration of the draft, was not negligent, and was a
holder in due course-it received the draft complete and regular on its face, before it became overdue and without notice
of any dishonor, in good faith and for value, and absent any knowledge of any infirmity in the instrument or defect in the
title of the person negotiating it.37 Having relied on the drawee bank's clearance and payment of the draft and not being
negligent (it delivered the purchased jewelry only when the draft was cleared and paid), respondent is amply protected
by the said Section 62.

Considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting agent, Far East, should
not have debited the money paid by the drawee bank from respondent company's account. When Gold Palace
deposited the check with Far East, the latter, under the terms of the deposit and the provisions of the NIL, became an
agent of the former for the collection of the amount in the draft. The subsequent payment by the drawee bank and the
collection of the amount by the collecting bank closed the transaction insofar as the drawee and the holder of the check
or his agent are concerned, and foreclosed the recovery by the drawee of the amount paid.

As the transaction in this case had been closed and the principal-agent relationship between the payee and the
collecting bank had already ceased, the latter in returning the amount to the drawee bank was already acting on its own
and should now be responsible for its own actions. Neither can petitioner be considered to have acted as the
representative of the drawee bank when it debited respondent's account, because, the drawee bank had no right to
recover what it paid. Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the instrument
for collection to shift the burden it brought upon itself. This is precisely because the said indorsement is only for
purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement. It did not in any way transfer the
title of the instrument to the collecting bank. Far East did not own the draft, it merely presented it for payment.
Considering that the warranties of a general indorser as provided in Section 66 of the NIL are based upon a transfer of
title and are available only to holders in due course, these warranties did not attach to the indorsement for deposit and
collection made by Gold Palace to Far East. Without any legal right to do so, the collecting bank, therefore, could not
debit respondent's account for the amount it refunded to the drawee bank.

Therefore, Far East should not have debited the account of Gold Palace, and for doing so, it must return what it had
erroneously taken. Far East's remedy under the law is not against Gold Palace but against the drawee-bank or the
person responsible for the alteration

ASSOCIATED BANK v. CA
G.R. No. 107382/G.R. No. 107612 | January 31, 1996

  26  
FACTS: The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where
the provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and
countersigned by the Provincial Auditor or the Secretary of the Sangguniang Bayan.

A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. The allotment checks for said
government hospital are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief,
Concepcion Emergency Hospital, Concepcion, Tarlac." The checks are released by the Office of the Provincial Treasurer
and received for the hospital by its administrative officer and cashier.

Upon audit, it was then discovered that the hospital did not receive several allotment checks drawn by the Province (30
checks amounting to P203,300.00). The Provincial Treasurer learned that the said 30 checks were encashed by one
Fausto Pangilinan, a former administrative officer and cashier of payee hospital, with the Associated Bank acting as
collecting bank.

Pangilinan sought to encash the first check with Associated Bank. However, the manager of Associated Bank refused
and suggested that Pangilinan deposit the check in his personal savings account with the same bank. Pangilinan was
able to withdraw the money when the check was cleared and paid by the drawee bank, PNB. After forging the signature
of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for the subsequent
checks. All the checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed
ASSOCIATED BANK." The manager of Associated Bank did not find as irregular the fact that the checks were not
payable to Pangilinan but to the Concepcion Emergency Hospital.

The Province of Tarlac brought suit against PNB which, in turn, impleaded Associated Bank as third-party defendant.
Trial court ruled in favor of the Province of Tarlac and against defendant Philippine National Bank (PNB), and on the
third-party complaint, in favor of Philippine National Bank (PNB) and against Associated Bank. CA affirmed.

ISSUE: Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee
bank or the collecting bank?

HELD: In this case, the drawer and the collecting bank.

The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to the
negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing
the retired hospital cashier to receive the checks for the payee hospital for a period close to three years and in not
properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to the
hospital's real cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the
PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00
from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its
warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of
all prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also
remiss in its duty to ascertain the genuineness of the payee's indorsement.

RATIONALE:

In cases involving checks with forged indorsements, such as the present petition, the drawee bank may not debit the
account of the drawer but may generally pass liability back through the collection chain to the party who took from the
forger and, of course, to the forger himself, if available. In other words, the drawee bank can seek reimbursement or a
return of the amount it paid from the presentor bank or person. Theoretically, the latter can demand reimbursement from
the person who indorsed the check to it and so on. The loss falls on the party who took the check from the forger, or on
the forger himself.

In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). The former
will necessarily be liable to the latter for the checks bearing forged indorsements. If the forgery is that of the payee's or
holder's indorsement, the collecting bank is held liable, without prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former
must necessarily return the money paid by the latter because it was paid wrongfully.

  27  
More importantly, by reason of the statutory warranty of a general indorser in section 66 of the Negotiable Instruments
Law, a collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank
guarantees all prior indorsements, including the forged indorsement. It warrants that the instrument is genuine, and that
it is valid and subsisting at the time of his indorsement. Because the indorsement is a forgery, the collecting bank
commits a breach of this warranty and will be accountable to the drawee bank.

The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss because it has the
duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of
the endorsements."

Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank
knows him, his address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better
position to detect forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting
bank.

Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the Province of
Tarlac because it paid checks which bore forged indorsements. However, if the Province of Tarlac as drawer was
negligent to the point of substantially contributing to the loss, then the drawee bank PNB can charge its account. If both
drawee bank-PNB and drawer-Province of Tarlac were negligent, the loss should be properly apportioned between
them. The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which
presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable.

After careful examination of the records, the Court finds that the Province of Tarlac was equally negligent and should,
therefore, share the burden of loss from the checks bearing a forged indorsement.

BANCO DE ORO v. EQUITABLE BANKING CORPORATION

G.R. No. 74917 January 20, 1988

FACTS: Equitable Banking Corp (Equitable) through its Visa Card Department, drew six crossed Manager's check having
an aggregate amount of P45,982.23 and payable to certain member establishments of Visa Card. Subsequently, the
Checks were deposited with Banco De Oro (BDO) to the credit of its depositor, a certain Aida Trencio.

Following normal procedures, and after stamping at the back of the Checks the usual endorsements “All prior and/or
lack of endorsement guaranteed” BDO sent the checks for clearing through the Philippine Clearing House Corporation
(PCHC). Accordingly, Equitable paid the Checks; its clearing account was debited for the value of the Checks and BDO’s
clearing account was credited for the same amount.

Thereafter, Equitable discovered that the endorsements appearing at the back of the Checks and purporting to be that of
the payees were forged and/or unauthorized or otherwise belong to persons other than the payees. This prompted
Equitable to present the Checks directly to BDO for the purpose of claiming reimbursement from the latter. However,
BDO refused to accept such direct presentation and to reimburse Equitable for the value of the Checks.
The arbiter, later affirmed by the Board of Directors of the PCHC and RTC, rendered a decision in favor of the Equitable
and against the BDO ordering the PCHC to debit the clearing account of the lattert, and to credit the clearing account of
the former.

ISSUE:
1. Whether or not is estopped from claiming that checks under consideration are non-negotiable
instruments.
2. Whether or not BDO can escape liability by reasons of forgery.

HELD:
1. YES. BDO is estopped from raising the defense of non-negotiability of the checks in question. It stamped its
guarantee on the back of the checks and subsequently presented these checks for clearing and it was on the
basis of these endorsements by the petitioner that the proceeds were credited in its clearing account.

  28  
 The petitioner by its own acts and representation cannot now deny liability because it assumed the liabilities of
an endorser by stamping its guarantee at the back of the checks.

The petitioner having stamped its guarantee of "all prior endorsements and/or lack of endorsements" is now
estopped from claiming that the checks under consideration are not negotiable instruments. The checks were
accepted for deposit by the petitioner stamping thereon its guarantee, in order that it can clear the said checks
with the respondent bank. By such deliberate and positive attitude of the petitioner it has for all legal intents and
purposes treated the said cheeks as negotiable instruments and accordingly assumed the warranty of the
endorser when it stamped its guarantee of prior endorsements at the back of the checks. It led the said
respondent to believe that it was acting as endorser of the checks and on the strength of this guarantee said
respondent cleared the checks in question and credited the account of the petitioner. Petitioner is now barred
from taking an opposite posture by claiming that the disputed checks are not negotiable instrument.

2. NO. A commercial bank cannot escape the liability of an endorser of a check and which may turn out to be a
forged endorsement. Whenever any bank treats the signature at the back of the checks as endorsements and
thus logically guarantees the same as such there can be no doubt said bank has considered the checks as
negotiable.

Apropos the matter of forgery in endorsements, this Court has succinctly emphasized that the collecting bank or
last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for payment to the drawee is an assertion that
the party making the presentment has done its duty to ascertain the genuineness of the endorsements.

The drawer generally owes no duty of diligence to the collecting bank, the law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and
regularity. The collecting bank being primarily engaged in banking holds itself out to the public as the expert and
the law holds it to a high standard of conduct.

And although the subject checks are non-negotiable the responsibility of petitioner as indorser thereof remains.

VI. PRESENTMENT FOR PAYMENT [Sections 70-88]

Digested by: Ellasus and Gigante
 
FAR EAST REALTY INVESTMENT INC., vs. CA, DY HIAN TAT, SIY CHEE and GAW SUY AN
G.R. No. L-36549 | October 5, 1988

Facts: Far East alleged that on September 13, 1960, Dy Hian Tat, Siy Chee and Gaw Suy An asked the company to
extend to them an accommodation loan which they needed in their business. They promised to pay, jointly and severally,
in one month time and delivered a check dated September 13, 1960 drawn by Dy Hian Tat, and signed by them at the
back of said check with the assurance that after one month, the said check would be redeemed by them by paying cash;
otherwise, the check can be presented to the bank for payment on or immediately after one month. Far East agreed with
the above conditions and the amount was delivered to the three.

On March 5, 1964, the check was presented for payment to the bank, but the check bounced and was not cashed for
the reason that the current account of the drawer had already been closed. Far East demanded from the three borrowers
the payment of their loan obligation, but they failed and refused to pay.

The RTC ordered the three to pay, jointly and severally, Far East for the loan. The Court of Appeals reversed this
decision, finding that the check was not presented within a reasonable time and after its issuance.

Issue: Whether or not presentment for payment of the questioned check were made within reasonable time.

Held: Section 71 of the Negotiable Instruments Law provides that, “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

  29  
reasonable time after issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if
made within a reasonable time after the last negotiation thereof.”
"Reasonable time" depends upon the peculiar facts and circumstances in each case. It has been defined as so much
time as is necessary under the circumstances for a reasonable prudent and diligent man to do, conveniently, what the
contract or duty requires should be done, having a regard for the rights, and possibility of loss, if any, to the other party.

In this case, the presentment was not made within a reasonable time. The check was issued on September 13, 1960 but
was presented to the drawee bank only on March 5, 1964. Under these circumstances, the holder undoubtedly failed to
exercise prudence and diligence on what he ought to do as required by law. A justification for the unreasonable delay
was also not shown.

 
PNB vs. BENITO SEETO
G.R. No. L-4388 August 13, 1952

Facts: On March 13, 1948, Seeto presented a check at PNB Surigao branch dated March 10, 1948 and drawn against
the PNB Cebu branch. Seeto made a general and unqualified indorsement of the check and the bank accepted it and
paid the amount.

The check was mailed to the Cebu branch on March 20, 1948, and was presented for payment on April 9, 1948, but the
check was dishonored for "insufficient funds." The check was returned to the Surigao branch, and upon receipt thereof
by it on April 14, 1948, the branch immediately sent a letter to Seeto demanding a refund of the value of the check.

Seeto refused, claiming that at the time of the negotiation of the check the drawer had sufficient funds in the drawee
bank, and that had the Surigao branch not delayed to forward the check until the drawer's funds were exhausted, the
same would have been paid.

PNB asserts that Section 84 of the Negotiable Instruments Law applies in this case, which provides that, “when the
instrument is dishonored by nonpayment, as immediate right of recourse to all parties secondarily liable thereon accrues
to the holder.”

Issue: Whether or not PNB has a right of recourse to the indorser after its delay for the presentment of payment of the
check

Held: The Supreme Court agreed that Section 84 applies, however, its application is subject to the condition imposed by
Section 186, to the effect that the 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.
PNB argues that Section 186 only provides for the liability of the drawer and is silent as to the liability of the indorser and
thus, the latter may not be considered discharged from liability by reason of the delay in the presentment of payment.

Decisions rendered by state courts in the US held that an indorser of a check is relieved of his liability by an
unreasonable delay for presentment of payment because the presentment within a reasonable time is a condition upon
which the liability of the indorser is dependent.

That an indorser of a check is not discharged from liability for an unreasonable delay in presentation for payment is
contrary to the negotiable nature and character of negotiable instruments. They are supposed to be passed on with
promptness in the ordinary course of business transactions; not to be retained or kept for such time as the holder may
want, otherwise the smooth flow of commercial transactions would be hindered.

International Corp. Bank vs. Spouses Gueco

G.R. No. 141968 | 351 SCRA 864

Facts: The Gueco Spouses obtained a loan from International Corporate Bank to purchase a car. They executed
promissory notes payable in monthly installments and chattel mortgage over the car to serve as security for the notes.

The Spouses then defaulted in payment of installments so the Bank filed a civil action, demanding payment of the
unpaid balance of the car loan amounting to P184,000.00. After some negotiations, the amount was lowered to
  30  
P150,000.00. Dr. Gueco delivered a manager's check that amount but the car was not released because of his refusal to
sign the Joint Motion to Dismiss.
Since Dr. Gueco refused to sign the joint motion to dismiss, he was made to execute a statement to the effect that he
was withholding the payment of the check. Subsequently, Dr. Gueco instructed the bank to disregard the 'hold order"
letter and demanded the immediate release of his car, to which the bank replied that the condition of signing the joint
motion to dismiss must be satisfied and that they had kept the check which could be claimed by Dr. Gueco anytime. The
said check has not been encashed.
After several demand letters and meetings with bank representatives, the Gueco spouses initiated a civil action for
damages. The RTC ordered the bank to return the car to the spouses and to deposit the manager's check. The check,
however, has become stale but no order as to its reissuance has been given.

Issue: Whether or not the bank was negligent in not presenting the check for payment and, thus, must bear the loss for
the manager’s check becoming stale.

Held: Under Section 71 of the negotiable instruments law, an instrument not payable on demand must be presented for
payment on the day it falls due. When the instrument is payable on demand, presentment must be made within a
reasonable time after its issue. In the case of a bill of exchange, presentment is sufficient if made within a reasonable
time after the last negotiation thereof.

A check must be presented for payment within a reasonable time after its issue, otherwise it becomes stale and thus,
valueless. The test in determining what is a “reasonable time” is whether the payee employed such diligence as a
prudent man exercises in his own affairs. This is because the nature and theory behind the use of a check points to its
immediate use and payability.

In this case, the check involved is not an ordinary bill of exchange but a manager's check. A manager's check is one
drawn by the bank's manager upon the bank itself. In effect, it is a bill of exchange drawn by the bank upon the itself,
and the mere issuance of it is considered an acceptance thereof. It may be treated as a promissory note with the bank
as a maker. As such, the drawer would be the maker and in which case the holder need not prove presentment for
payment or present the bill to the drawee for acceptance.

The spouses are ordered to pay the original obligation amounting to P150,000.00 to the bank upon surrender or
cancellation of the manager's check in the latter's possession, afterwhich, the bank is to return the subject motor vehicle
in good working condition.

METROPOL vs. SAMBOK MOTORS

G.R. No. L-39641 | 120 SCRA 864

Facts: A promissory note was executed in favor of Ng Sambok, payable in installments. It is provided that in case of
non-payment of any of the installments, the total remaining unpaid principal shall become due and payable. On the same
date, Sambok, a sister company of Ng Sambok, negotiated and indorsed the note in favor of Metropol with the following
indorsement:

Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of Demand;
Dishonor; Protest; and Presentment are hereby waived.

The maker failed to pay the promissory note, hence Metropol notified Sambok as indorsee that the note has been
dishonored and demanded payment. Sambok failed to pay so Metropol filed a complaint for collection of a sum of
money. Sambok did not deny its liability but contended that it could not be obliged to pay until the maker has been
declared insolvent. During the pendency of the case, the maker died, hence, the lower court dismissed the case against
him and ordered Sambok to pay Metropol.

Sambok argues that by adding the words "with recourse" in the indorsement of the note, it becomes a qualified indorser
that being a qualified indorser, it does not warrant that if said note is dishonored by the maker on presentment, it will pay
the amount to the holder; that it only warrants the following pursuant to Section 65 of the Negotiable Instruments Law:
(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.

  31  
Issue: Whether or not Sambok is a qualified endorser and thus, cannot be held liable upon failure of the maker to pay

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, relieving the indorser of
the obligation to pay if the instrument is dishonored. "Recourse" means resort to a person who is secondarily liable after
the default of the person who is primarily liable.

In this case, Sambok indorsed the note "with recourse," making itself a general indorser which is secondarily liable upon
failure of the maker to pay the note. The waiver of the notice of demand, dishonor, protest and presentment also confirm
his obligation as a general indorser.
Because the note was dishonored by non-payment, Sambok, which was secondarily liable, becomes a principal debtor.

RAYMUNDO A. CRYSTAL, v. COURT OF APPEALS and PELAGIA OCANG, PACITA, TEODULO, FELICISIMO,
PABLO, LYDIA, DIOSCORA and RODRIGO, all surnamed DE GRACIA,
[G.R. No. L-35767. June 18, 1976.]

FACTS:
• The Supreme Court affirmed the decision of the Court of Appeals dismissing the petition for certiorari which
sought the annulment and setting aside of the lower court’s order directing the issuance of a writ of possession
in favor of private respondents. Petitioner questioned the trial court’s jurisdiction to issue the writ of possession
sought by private respondents on the ground that the lower court itself had issued an order to the effect that the
legality and effectiveness of the redemption, as well as the question of ownership of the redemptioner, was to be
decided in another case, in view of which order petitioner filed a separate case which is still pending trial.
• Upon a motion for reconsideration, the Supreme Court reconsidered and modified its decision and remanded
the case to the trial court for further proceedings, taking into consideration the possible injustice that might
result from its unqualified reliance in its decision on the finding of the Court of Appeals insofar as the validity of
petitioner’s redemption is concerned.
• In his motion for reconsideration, petitioner insists that it was an act in excess of jurisdiction on the part of the
trial court in R-1666, to issue on May 31, 1971 the writ of possession sought by private respondents, thru
Pelagia Ocang, considering that court had previously pointedly observed in its order of March 24, 1960 that "the
question as to whether or not the redemption allegedly made by Mr. Crystal by paying the amount to Mrs.
Pelagia Ocang without using the said P11,200 deposited with the sheriff is legal and effective" has to be decided
in "another proper case" and, furthermore, in its order of June 4, 1960 in the same case, the same court had
more definitely ruled that "the question of ownership of Mr. Raymundo Crystal, the redemptioner, is not a proper
matter to be decided in this case but in another case where the legality or validity of the alleged deed of
redemption executed in favor of Mr. Crystal will be amply raised and threshed out" and, accordingly, in attention
to such observations and ruling, petitioner did file Civil Case No. 62-T, which is still pending trial.

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

HELD: The dishonoring of a check upon presentment, and its being stale for not being presented at all time, are
incompatible developments that naturally have variant legal consequences. Thus, if indeed the check in question had
been dishonored then there can be no doubt that petitioner’s redemption was null and void. On the other hand, if it had
only be come stale, then it becomes imperative that the circumstances that caused its non-presentment be determined,
for if this was not due to the fault of the petitioner, then it would be unfair to deprive him of the rights he had acquired as
redemptioner, particularly, if, after all, the value of the check has otherwise been received or realized by the party
concerned.
With these substantial considerations in view, We find no just alternative than to reconsider Our decision in so far as the
matter of validity or invalidity of petitioner’s redemption is concerned. It being shown that the pivotal finding of the Court
of Appeals regarding the check in question might actually belied in a more appropriate proceeding, the foundation of Our
own decision has been shaken. Indeed, We are now convinced that it is but fair and just that the trial court should be
  32  
allowed to receive all relevant and competent evidence the parties may wish to present relative to the issue of whether or
not respondent Pelagia Ocang has already received in one form or another, directly or indirectly, the full amount of
P11,200 as redemption price of the four (4) parcels of land in dispute, as well as to all other facts which might affect the
validity of the redemption here in controversy. Withal, should it be found by the trial court that the redemption was
invalid, because the redemption price has not been fully paid, it should further determine who made the improvements
found on said lands, in order that if it should turn out that they were introduced by petitioner, possession may not be
awarded to respondents unless said improvements are first properly and fully reimbursed to petitioner. It goes without
saying that the proceedings herein contemplated are to be held in Civil Case No. R-1666. Correspondingly, Civil Case
No. 62-T and the other case reviewing the same should be deemed academic.

WHEREFORE, the decision of this Court of February 25, 1975 is hereby reconsidered and modified in line with the
foregoing opinion and this case is remanded to the trial court for further proceedings as therein indicated.

STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS and NORA B. MOULIC, respondents.

G.R. No. 101163 January 11, 1993

FACTS:

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

ISSUES: Whether MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course,
STATE, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party
Defendants who had already been declared as in default.

HELD: The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pre-trial, the
parties agreed to limit the issue to whether or not STATE was a holder of the checks in due course.[
In this regard, Sec. 52 of the Negotiable Instruments Law provides –

"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 was 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."

  33  
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a holder in due
course.[2]Consequently, the burden of proving that STATE is not a holder in due course lies in the person who disputes
the presumption. In this regard, MOULIC failed.

The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular; (b) petitioner
bought these checks from the payee, Corazon Victoriano, before their due dates;[3] (c) petitioner took these checks in
good faith and for value, albeit at a discounted price; and, (d) petitioner was never informed nor made aware that these
checks were merely issued to payee as security and not for value.

Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any defect of title of
prior parties, and from defenses available to prior parties among themselves; STATE may, therefore, enforce full
payment of the checks.

MOULIC cannot set up against STATE the defense that there was failure or absence of consideration. MOULIC can only
invoke this defense against STATE if it was privy to the purpose for which they were issued and therefore is not a holder
in due course.

That the post-dated checks were merely issued as security is not a ground for the discharge of the instrument as against
a holder in due course. For, the only grounds are those outlined in Sec. 119 of the Negotiable Instruments Law:

"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 accomodated, where the
instrument is made or accepted for his accomodation; (c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal
debtor becomes the holder of the instrument at or after maturity in his own right."

Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument. But,
the intentional cancellation contemplated under paragraph (c) is that cancellation effected by destroying the instrument
either by tearing it up,[5]burning it,[6] or writing the word "cancelled" on the instrument. The act of destroying the
instrument must also be made by the holder of the instrument intentionally. Since MOULIC failed to get back possession
of the post-dated checks, the intentional cancellation of the said checks is altogether impossible.

On the other hand, the acts which will discharge a simple contract for the payment of money under paragraph (d) are
determined by other existing legislations since Sec. 119 does not specify what these acts are, e.g., Art. 1231 of the Civil
Code[7] which enumerates the modes of extinguishing obligations. Again, none of the modes outlined therein is
applicable in the instant case as Sec. 119 contemplates of a situation where the holder of the instrument is the creditor
while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no longer MOULIC's creditor at
the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency of withdrawing
her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks
to a holder in due course.

Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is
not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law:

"Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the
drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is
a fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the
instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or
acceptor will honor the instrument; (e) Where the drawer had countermanded payment."

Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she returned the jewelry.
She simply withdrew her funds from her drawee bank and transferred them to another to protect herself. After
withdrawing her funds, she could not have expected her checks to be honored. In other words, she was responsible for
the dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the
knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument,

  34  
upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to
pay it.

In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering
transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should
it be brushed aside in order to meet the necessities in a single case.

The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring of liability in
regard to the instrument by the transferor. The holder who takes the negotiated paper makes a contract with the parties
on the face of the instrument. There is an implied representation that funds or credit are available for the payment of the
instrument in the bank upon which it is drawn.[10] Consequently, the withdrawal of the money from the drawee bank to
avoid liability on the checks cannot prejudice the rights of holders in due course. In the instant case, such withdrawal
renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks.

Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee bank to meet
her obligation on the checks,[11] so that Notice of Dishonor would be futile.

The Court of Appeals also held that allowing recovery on the checks would constitute unjust enrichment on the part of
STATE Investment House, Inc. This is error.

The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon Victoriano and
her husband at the time their property mortagaged to STATE was extrajudicially foreclosed amounted to P1.9 million; the
bid price at public auction was only P1 million.[12] Thus, the value of the property foreclosed was not even enough to pay
the debt in full.

Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the
mortgagee is entitled to claim the deficiency from the debtor.[13] The step thus taken by the mortgagee-bank in resorting
to an extra-judicial foreclosure was merely to find a proceeding for the sale of the property and its action cannot be
taken to mean a waiver of its right to demand payment for the whole debt.[14] For, while Act 3135, as amended, does not
discuss the mortgagee's right to recover such deficiency, it does not contain any provision either, expressly or impliedly,
prohibiting recovery. In this jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any
deficiency resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For
instance, with respect to pledges, Art. 2115 of the Civil Code[15] does not allow the creditor to recover the deficiency from
the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on installment basis, in the
event of foreclosure, the vendor "shall have no further action against the purchaser to recover any unpaid balance of the
price. Any agreement to the contrary will be void".

It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be concluded that the
creditor loses his right recognized by the Rules of Court to take action for the recovery of any unpaid balance on the
principal obligation simply because he has chosen to extrajudicially foreclose the real estate mortgage pursuant to a
Special Power of Attorney given him by the mortgagor in the contract of mortgage.

The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and the VICTORIANO
spouses, respectively, is just another means of recovering the unpaid balance of the debt of the VICTORIANOs.

In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course, STATE, without
prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants who had
already been declared as in default.

VII. NOTICE OF DISHONOR [Sections 89 to 118]

Digested by: Gigante

PAULINO GULLAS, plaintiff-appellant, vs. THE PHILIPPINE NATIONAL BANK, defendant-appellant.

  35  
 G.R. No. L-43191 November 13, 1935

FACTS:

• The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a member of the
Philippine Bar, resident in the City of Cebu. The second named is a banking corporation with a branch in the
same city. Attorney Gullas has had a current account with the bank.
• It appears from the record that on August 2, 1933, the Treasurer of the United States for the United States
Veterans Bureau issued a Warrant in the amount of $361, payable to the order of Francisco Sabectoria Bacos.
Paulino Gullas and Pedro Lopez signed as endorsers of this check. Thereupon it was cashed by the Philippine
National Bank. Subsequently the treasury warrant was dishonored by the Insular Treasurer.
• At that time the outstanding balance of Attorney Gullas on the books of the bank was P509. Against this balance
he had issued certain cheeks which could not be paid when the money was sequestered by the On August 20,
1933, Attorney Gullas left his residence for Manila.
• The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas which could not
be delivered to him at that time because he was in Manila
• As a consequence of these happenings, two occurrences transpired which inconvenienced Attorney Gullas. In
the first place, as above indicated, checks including one for his insurance were not paid because of the lack of
funds standing to his credit in the bank. In the second place, periodicals in the vicinity gave prominence to the
news to the great mortification of Gullas.

ISSUE: Whether or not PNB has the right to apply petitioner’s deposit to his debt to the bank

HELD: NO, The Negotiable Instruments Law contains provisions establishing the liability of a general indorser and giving
the procedure for a notice of dishonor. The general indorser of negotiable instrument engages that if he 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 a long line of authorities that notice of dishonor is in order to charge all indorser and that the
right of action against him does not accrue until the notice is given.

As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on
the part of a depositor. In Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held that a bank has no
right, without an order from or special assent of the depositor to retain out of his deposit an amount sufficient to meet his
indebtedness. The basis of the Louisiana doctrine is the theory of confidential contracts arising from irregular
deposits, e. g., the deposit of money with a banker. With freedom of selection and after full preference to the minority
rule as more in harmony with modern banking practice.

Starting, therefore, from the premise that the Philippine National Bank had with respect to the deposit of Gullas a right of
set off, we next consider if that remedy was enforced properly. The fact we believe is undeniable that prior to the mailing
of notice of dishonor, and without waiting for any action by Gullas, the bank made use of the money standing in his
account to make good for the treasury warrant. At this point recall that Gullas was merely an indorser and had issued in
good faith.

As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party, it has been
held that he has a right of action against the bank for its refusal to pay such a check in the absence of notice to him that
the bank has applied the funds so deposited in extinguishment of past due claims held against him. (Callahan vs. Bank
of Anderson [1904], 2 Ann. Cas., 203.) The decision cited represents the minority doctrine, for on principle it would seem
that notice is not necessary to a maker because the right is based on the doctrine that the relationship is that of creditor
and debtor. However this may be, as to an indorser the situation is different, and notice should actually have been given
him in order that he might protect his interests.

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to follow up that statement
with others proving exact damages is not so easy. For instance, for alleged libelous articles the bank would not be
primarily liable. The same remark could be made relative to the loss of business which Gullas claims but which could not
be traced definitely to this occurrence. Also Gullas having eventually been reimbursed lost little through the actual levy
by the bank on his funds. On the other hand, it was not agreeable for one to draw checks in all good faith, then, leave for
Manila, and on return find that those checks had not been cashed because of the action taken by the bank. That caused
a disturbance in Gullas' finances, especially with reference to his insurance, which was injurious to him. All facts and

  36  
circumstances considered, we are of the opinion that Gullas should be awarded nominal damages because of the
premature action of the bank against which Gullas had no means of protection, and have finally determined that the
amount should be P250.

Agreeable to the foregoing, the errors assigned by the parties will in the main be overruled, with the result that the
judgment of the trial court will be modified by sentencing the defendant to pay the plaintiff the sum of P250, and the
costs of both instances.

METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION, plaintiff-appellee, vs. SAMBOK MOTORS
COMPANY and NG SAMBOK SONS MOTORS CO., LTD :

G.R. No. L-39641 | February 28, 1983

FACTS:

• On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd.,
in the amount of P15,939.00 payable in twelve (12) equal monthly installments, beginning May 18, 1969, with
interest at the rate of one percent per month. It is further provided that in case on non-payment of any of the
installments, the total principal sum then remaining unpaid shall become due and payable with an additional
interest equal to twenty-five percent of the total amount due.

• On the same date, Sambok Motors Company (hereinafter referred to as Sambok), a sister company of Ng
Sambok Sons Motors Co., Ltd., and under the same management as the former, negotiated and indorsed the
note in favor of plaintiff Metropol Financing & Investment Corporation.
• The maker, Dr. Villaruel defaulted in the payment of his installments when they became due, so on October 30,
1969 plaintiff formally presented the promissory note for payment to the maker. Dr. Villaruel failed to pay the
promissory note as demanded, hence plaintiff notified Sambok as indorsee of said note of the fact that the same
has been dishonored and demanded payment.
• Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for collection of a sum of money
before the Court of First Instance of Iloilo, Branch I. Sambok did not deny its liability but contended that it could
not be obliged to pay until after its co-defendant Dr. Villaruel has been declared insolvent.
• During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, on October 24, 1972 the
lower court, on motion, dismissed the case against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of
Court. 1
• On plaintiff's motion for summary judgment, the trial court rendered its decision ordering Sambok Motors
Company to pay to the plaintiff the sum of P15,939.00 plus the legal rate of interest from October 30, 1969;
Ordering same defendant to pay to plaintiff the sum equivalent to 25% of P15,939.00 plus interest thereon until
fully paid.

ISSUE: Whether the trial court erred in not dismissing the complaint by finding defendant appellant Sambok Motors
Company as assignor and a qualified indorsee of the subject promissory note and in not holding it as only secondarily
liable thereof.

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. 2 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
  37  
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.

Lastly, the lower court did not err in not declaring appellant as only secondarily liable because after an instrument is
dishonored by non-payment, the person secondarily liable thereon ceases to be such and becomes a principal
debtor. 5 His liabiliy becomes the same as that of the original obligor. 6 Consequently, the holder need not even proceed
against the maker before suing the indorser.

VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS [Sections 119 to 125]

Digested by: Gobres and Lavilla

TOMAS ANG v. ASSOCIATED BANK

532 SCRA 244

Facts: Respondent bank filed a collection suit against Antonio Eng Liong and Antonio Ang. The defendants obtained
loans from said bank amounting to P50,000 and P 30,000 respectively. The defendants executed two promissory notes
and had agreed that the loan would be payable jointly and severally. Defendants failed to pay despite repeated demands
for payment from the bank resulted to indebtedness of 539,638.

Tomas Ang interposed the affirmative defenses that: the bank is not the real party in interest as it is not the holder of the
promissory notes, much less a holder for value or a holder in due course; the bank knew that he did not receive any
valuable consideration for affixing his signatures on the notes but merely lent his name as an accommodation party; the
promissory notes did not indicate in what capacity he was intended to be bound; the bank granted his co-defendant
successive extensions of time within which to pay, without his (Tomas Ang) knowledge and consent; the bank caused
the inclusion in the promissory notes of stipulations such as waiver of presentment for payment and notice of dishonor
which are against public policy; and the notes had been impaired since they were never presented for payment and
demands were made only several years after they fell due when his co-defendant could no longer pay them.

Issue: Whether or not the promissory notes had been impaired

Ruling: As the promissory notes were not discharged or impaired through any act or omission of the bank, Sections 119
(d) and 122 of the NIL as well as Art. 1249[ of the Civil Code would necessarily find no application.

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

Under the law, upon the maturity of the note, a surety may pay the debt, demand the collateral security, if there be any,
and dispose of it to his benefit, or, if applicable, subrogate himself in the place of the creditor with the right to enforce
the guaranty against the other signers of the note for the reimbursement of what he is entitled to recover from
them. Regrettably, none of these were prudently done by petitioner. When he was first notified by the bank sometime in
1982 regarding his accountabilities under the promissory notes, he lackadaisically relied on Antonio Ang Eng Liong, who
represented that he would take care of the matter, instead of directly communicating with the bank for its settlement.

AMERICAN BANK, v. MACONDRAY & CO. and V. S. WOLFF

4 Phil. 695
  38  
Facts: V.S. Wolff drew bill of exchange against FH Taylor & Co. payable to himself (Wolff), Macrondray certified that the
signature of V.S. Wolff was genuine. Bill was indorsed to American Bank (US) and later on was protested because FH
Taylor & Co could not be found nor its representative after diligent search.

American Bank then claims right to recover from Macondray upon theory that they guaranteed payment of said bill.
Macondray denies the part of the statement which appears in his alleged indorsement “Payment guaranteed. Protest,
demand, and notice of nonpayment waived”

Lower court ruled in favor of American Bank. Macondray is liable.

Issue: Whether or not Macondray is liable as indorser

Ruling: NO, Macondray is not liable. LC reversed.

The liability of an indorser of a bill of exchange, after due protest and notice of nonpayment and dishonor, is the same as
that of the original obligors on such a contract, and any material alteration in the terms of this contract by the holder of
the same, without the consent of the obligor, will relieve such obligor from all liability thereon.

Notwithstanding that the defendant is relieved from liability by reason of this material alteration in his indorsement, his
original indorsement created no liability whatsoever.

The original indorsement was for the purpose only of assuring the plaintiff that the SIGNATURE of V.S. Wolff was
GENUINE – the person he represented himself to be.

It was an indorsement of identification of the person only and not for the purpose of incurring any liability as to the
payment of such bill of exchange. There was no attempt to show that the drawer of said bill was not the person who
actually drew and signed the bill.

MONTINOLA v PNB
88 Phil. 695

Facts: Ramos, disbursing officer of USAFE, made cash advancements with the Provincial Treas of Lanao (Lanao), Lanao
gave Ramos P500,000 check
Ramos encashed with Laya. Laya paid through the ff:
(1) Laya, Prov Treas of Misamis Oriental, issued check of P100,000 as drawer, PNB as drawee bank
(2) P400,000 military notes
Ramos sold P100,000 check to Montinola
Ramos sold P30,000 of the check to Montinola for P90,000 Japanese military notes, of which only P45,000 was paid by
the latter. The writing made by Ramos at the back of the check was to the effect that he was assigning only P30,000 of
the value of the documents with an instruction to the bank to pay P30,000 to Montinola and to deposit the balance to
Ramos’ 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 the check to
Montinola, the check was long overdue by 2 & 1//2 years.
Montinola instituted an action against PNB and Laya to collect P100,000, amount of check.
On the check appears words “Agent, PNB” under the signature of Laya, showing that check was issued by Laya as
agent of PNB

Issue: Whether or not the words “Agent, PNB” constituted material alteration

Ruling: Yes. Material alteration and therefore discharges the instrument.

The words “Agent, PNB” now appearing on the face of the check were added or placed in the instrument after it was
issued by Laya to Ramos. The check was issued by only the Prov Treas and as an official of the govt, which was under
obligation to proved the USAFE with advance funds, and not as agent of the bank, which had no such obligation. The
addition of the words “Agent, PNB” was made after the check had been transferred by Ramos to Montinola. The
alteration 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.

  39  
 METROPOLITAN BANK and TRUST COMPANY, v THE FIRST NATIONAL CITY BANK and THE COURT OF
APPEALS
118 SCRA 537

Facts: A check no 7166 for 50,000 payable to cash, drawn by Joaquin Cunanan & Company on First National City Bank
(FNCB) was deposited to Metrobank by Salvador Sales. On that day, Metrobank sent the check to Clearing House of
the Central Bank with the following notation on the back of the check, “Metropolitan Bank and Trust Company Cleared
(illegible) office All prior endorsements and/or Lack of endorsements Guaranteed”.

Subsequent withdrawals were made by Sales until the Account with Metrobank was closed.

Nine days later FNCB returned cancelled Check No. 7166 to drawer Joaquin Cunanan & Company. That same day, the
company notified FNCB that the check had been altered. The actual amount of P50.00 was raised to P50,000.00, and
over the name of the payee, Manila Polo Club, was superimposed the word CASH.

FNCB notified Metro Bank of the alteration and on that issue, asked Metrobank for reimbursement of 50,000. Metrobank
refused to reimburse FNCB. Thus, this complaint.

The Trial Court ordered Metrobank to reimburse FNCB the amount of P50,000.00, Appellate Court affirmed the
judgment of the Trial Court.

Issue: Which bank is liable for the payment of the altered check, the drawee bank (FNCB) or the collecting bank (Metro
Bank)?

Ruling: Consistent with this ruling, Metrobank cannot be held liable for the payment of the altered check.

The transaction occurred during the effectivity of Central Bank Circular No. 9 (February 17, 1949) as amended by
Circular No. 138 (January 30, 1962), and Circular No. 169 (March 30, 1964). Section 4 of said Circular, as amended,
states:

Section 4. Clearing Procedures.

(c) Procedures for Returned Items

Items which should be returned for any reason whatsoever shall be delivered to and received through the clearing Office
in the special red envelopes and shall be considered and accounted as debits to the banks to which the items are
returned. Nothing in this section shall prevent the returned items from being settled by reimbursement to the bank,
institution or entity returning the items. All items cleared on a particular clearing shall be returned not later than 3:30 P.M.
on the following business day.

In this case, the check was not returned to Metrobank in accordance with the 24-hour clearing house period, but was
cleared by FNCB. Failure of FNCB, therefore, to call the attention of Metrobank to the alteration of the check in question
until after the lapse of nine days, negates whatever right it might have had against Metrobank in the light of the said
Central Bank Circular.

STATE INVESTMENT HOUSE VS. CA

217 SCRA 32

FACTS: Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on
commission, two (2) post-dated Equitable Banking Corporation checks in the amount of Fifty Thousand Pesos
(P50,000.00) each, one dated 30 August 1979 and the other, 30 September 1979. Thereafter, the payee negotiated the
checks to petitioner State Investment House. Inc. (STATE). MOULIC failed to sell the pieces of jewelry, so she returned
them to the payee before maturity of the checks. The checks, however, could no longer be retrieved as they had already
been negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank. Upon
presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December 1979, STATE
allegedly notified MOULIC of the dishonor of the checks and requested that it be paid in cash instead, although MOULIC
avers that no such notice was given her. On 6 October 1983, STATE sued to recover the value of the checks plus
attorney's fees and expenses of litigation. In her Answer, MOULIC contends that she incurred no obligation on the
  40  
checks because the jewelry was never sold and the checks were negotiated without her knowledge and consent. She
also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility for the checks.

ISSUE: Whether or not the post dated checks issued as security is not a ground for the discharge of the instrument as
against a holder in due course.

HELD: YES. None of the modes outlined in Section 119 is applicable in the instant case. As Sec. 119 contemplates of a
situation where the holder of the instrument is the creditor while its drawer is the debtor. In the present action, the payee,
Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned. Correspondingly, MOULIC
may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds from the drawee
bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is
not absolute.

FAR EAST BANK VS. GOLD PLACE JEWELLERY

562 SCRA 604

FACTS: On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or the difference
between the amount in the materially altered draft and the amount debited from the respondent companys
account.] Because Gold Palace did not heed the demand, Far East consequently instituted an action for sum of money
and damages before the RTC.

ISSUE: Whether or not Far East Bank could debit respondents account for the amount it refunded to the drawee bank.

HELD: NO. As the transaction in this case had been closed and the principal-agent relationship between the payee and
the collecting bank had already ceased, the latter in returning the amount to the drawee bank was already acting on its
own and should now be responsible for its own actions. Neither can petitioner be considered to have acted as the
representative of the drawee bank when it debited respondents account, because, as already explained, the drawee
bank had no right to recover what it paid. Likewise, Far East cannot invoke the warranty of the payee/depositor who
indorsed the instrument for collection to shift the burden it brought upon itself. This is precisely because the said
indorsement is only for purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement. It did not
in any way transfer the title of the instrument to the collecting bank. Far East did not own the draft, it merely presented it
for payment. Considering that the warranties of a general indorser as provided in Section 66 of the NIL are based upon a
transfer of title and are available only to holders in due course, these warranties did not attach to the indorsement for
deposit and collection made by Gold Palace to Far East. Without any legal right to do so, the collecting bank, therefore,
could not debit respondents account for the amount it refunded to the drawee bank.

IX. BILLS OF EXCHANGE [Sections 126 to 183]

Digested by: Lavilla

NEW PACIFIC TIMBER VS. SENERIS

101 SCRA 686

FACTS: This case arose from the complaint filed by the private respondent for collection of sum of money against
petitioner herein State Investment House. Accordingly, writ of execution was issued for the amount of
P63,130.00 pursuant to which, the Ex-Officio Sheriff levied upon the following personal properties of the petitioner and
set the auction sale thereof on January 15, 1975. However, prior to January 15, 1975, petitioner deposited with the Clerk
of Court,in his capacity as Ex-Officio Sheriff of Zamboanga City, the sum of P63,130.00 for the payment of the judgment
obligation. However, private respondent through counsel, refused to accept the check as well as the cash deposit.
Hence, this petition.

ISSUE: Whether or not the private respondent can validly refuse acceptance of the payment of the judgment obligation
made by the petitioner consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash which it deposited with the
Ex-Officio Sheriff before the date of the scheduled auction sale.
  41  
HELD: NO.The Supreme Court is of the opinion that that the check deposited by the petitioner in the amount of
P50,000.00 is not an ordinary check but a Cashier's Check of the Equitable Banking Corporation, a bank of good
standing and reputation. It is a well-known and accepted practice in the business sector that a Cashier's Check is
deemed as cash. Moreover, since the said check had been certified by the drawee bank, by the certification, the funds
represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents
and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such
situation. Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance.

Obviously, the private respondent is more interested in the levied properties than in the mere satisfaction of the
judgment obligation. Thus, petitioner's motion for the issuance of a certificate of satisfaction of judgment is clearly
meritorious and the respondent Judge gravely abused his discretion in not granting the same under the circumstances.

PNB VS. THE NATIONAL CITY BANK OF NEW YORK

GR no. 43596 | October 31, 1936

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

ISSUE: Whether or not PNB has the right to recover from the respondent, under the circumstances of this case, the
value of the checks on which the signatures of the drawer were forged.

HELD: YES. The defendant in error contends that the payment of the check shows acceptance by the bank, urging that
there can be no more definite act by the bank upon which a check has been drawn, showing acceptance than the
payment of the check. Section 184 of the Negotiable Instruments Act (sec. 202) provides that the provisions of the act
applicable to bills of exchange apply to a check, and section 131 (sec. 149), that the acceptance of a bill must be in
writing signed by the drawee. Payment is the final act which extinguishes a bill. Acceptance is a promise to pay in the
future and continues the life of the bill. Payment of a check upon a forged indorsement did not operate as an acceptance
in favor of the true owner.
 
 

X. PROMISSORY NOTES AND CHECKS [Sections 184 to 189]

Digested by: Madrilejo, Martin, Monje, and Morillo

New Pacific Timber & Supply Co., Inc vs. Seneris

GR No. L-41764 | December19, 1980. | Concepcion Jr., J:

FACTS: Herein petitioner was the defendant in a complaint for collection of a sum of money filed by the private
respondent. On July 19, 1974, a compromise judgment was rendered by the respondent Judge in accordance
with an amicable settlement entered into by the parties. For failure of the petitioner to comply with his judgment
obligation, the respondent Judge, issued an order for the issuance of a writ of execution. Accordingly, writ of
  42  
 execution was issued for the amount of P63,130.00 pursuant to which, the Ex Officio Sheriff levied upon the
personal properties of the petitioner and set the auction sale thereof on January 15, 1975. Prior to January 15,
1975, petitioner deposited with the Clerk of CFI the sum ofP63,130.00 for the payment of the judgment
obligation, consisting of the following. (1) P50,000.00 in Cashier's Checks No. S-314361 dated January 3, 1975
of the Equitable Banking Corporation; and (2) P13,130.00 in cash. The private respondent refused to accept the
check as well as the cash deposit. The respondent judge upheld private respondent's claim that he has the right
to refuse payment by means of a check, the respondent Judge citing Section 63 of the Central Bank Act, and
Article 1248 and 1249 of the New Civil Code.

ISSUE: Whether or not the private respondent can validly refuse acceptance of the payment of the judgment obligation
made by the petitioner consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash which it deposited
with the Ex-Officio Sheriff before the date of the scheduled auction sale.

HELD: No, the private respondent cannot validly refuse the acceptance of the payment of the judgment obligation made
by petitioner. The check deposited by the petitioner in the amount of P50.000.00 is not an ordinary check but a
Cashier's Check of the Equitable Banking Corporation, a bank of good standing and reputation. It is a well-
known and accepted practice in the business sector that a Cashier's Check is deemed as cash. Where a check
is certified by the bank on which it is drawn, the certification is equivalent to acceptance and said certification
implies that the check is drawn upon sufficient funds in the hands of the drawee bank. The object of certifying a
check, as regards both parties, is to enable the holder to use it as money. The exception to the rule enunciated
under Section 63 of the Central Bank Act to the effect "that a check which has been cleared and credited to the
account of the creditors hall be equivalent to a delivery to the creditor in cash in an amount equal to the amount
credited to his account" shall apply in this case. Petition was granted ordering the private respondent to accept
the sum of P63,130.00 under deposit as payment of the judgment obligation in his favor. “Considering that the
whole amount deposited by the petitioner consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash
covers the judgment obligation of P63,130.00 as mentioned in the writ of execution.

Tibajia, et al. vs CA
GR No. L-100290 | June 4, 1993 | Padilla, J;

FACTS: A suit for collection of sum of money was ruled in favor of Eden Tan and against the spouses Norberto Jr. and
Carmen Tibajia. After the decision was made final, Tan filed a motion for execution and levied upon the
garnished funds which were deposited by the spouses with the cashier of the Regional Trial Court of Pasig. The
petitioner, however, delivered to the deputy sheriff the total money judgment in the form of Cashier’s Check
P262,750.00 and Cash P135,733.70. Private respondent refused the payment and insisted upon the garnished
funds to satisfy the judgment obligation. The petitioner filed a motion to lift the writ of execution on the ground
that the judgment debt had already been paid. The motion was denied by the trial court. The petitioner filed a
petition for certiorari, prohibition and injuction in the Court of Appeals and it was dismissed.
ISSUE: Whether or not payment by means of check is considered payment in legal tender as required by Civil Code.
HELD: No, it is not considered legal tender. The provisions of law applicable to the case at bar are the following:
a. Article 1249 of the Civil Code which provides:
Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal tender in the Philippines.
b. Section 1 of Republic Act No. 529, as amended, which provides:
Sec. 1. Every provision contained in, or made with respect to, any obligation which purports to give the obligee
the right to require payment in gold or in any particular kind of coin or currency other than Philippine currency or
in an amount of money of the Philippines measured thereby, shall be as it is hereby declared against public
policy null and void, and of no effect, and no such provision shall be contained in, or made with respect to,
any obligation thereafter incurred. Every obligation heretofore and hereafter incurred, whether or not any such
provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in
any coin or currency which at the time of payment is legal tender for public and private debts.
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:
Sec. 63. Legal character
- Checks representing deposit money do not have legal tender power and their acceptance in the payment of
debts, both public and private, is at the option of the creditor. Provided, however, that a check which has been

  43  
 cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an
amount equal to the amount credited to his account.
From the aforequoted provisions of law, it is clear that this petition must fail. A check, whether a manager’s
check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of
payment and may be refused receipt by the obligee or creditor.

NATIVIDAD GEMPESAW VS. COURT OF APPEALS

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

FACTS: Gempesaw owns grocery stores in Caloocan City. Petitioner maintains a checking account in Philippine Bank of
Communications. Her usual practice of paying for her suppliers is to have her bookkeeper, her employee for
more than 8 years, prepares the checks and presenting it to petitioner for her signature. Petitioner did this
without checking the details entailed therein on a total of 82 checks with a cumulative amount of P1,208,606.89
were debited to her account with forged indorsements; and according to the payees of the checks, they did not
receive nor even see these checks. All 82 checks were brought to Ernest L. Boon, Chief Accountant of the
drawee bank, who accepted them for deposit to the accounts of Alfredo Y. Romero and Benito Lam. This
continued on for two years. It was only upon the lapse of 2 years when she discovered the fraudulent acts of her
bookkeeper. The RTC dismissed her complaint. The CA affirmed the decision of the RTC.
ISSUE: Whether or not Gempesaw may rightfully recover from the drawee bank who pays a check with a forged
indorsement of the payee.

HELD: The SC held that there is negligence on part of both Gempesaw and Philippine Bank of Communications. Hence,
both were held liable on a 50-50 basis.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the
depositor to act as a prudent businessman would under the circumstances. In the case at bar, the petitioner
relied implicitly upon the honesty and loyalty of her bookkeeper, and did not even verify the accuracy of the
amounts of the checks she signed against the invoices attached thereto. Furthermore, although she regularly
received her bank statements, she apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the sales invoices. Otherwise, she could have easily discovered
the discrepancies between the checks and the documents serving as bases for the checks. With such discovery,
the subsequent forgeries would not have been accomplished. It was not until two years after the bookkeeper
commenced her fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully
charged to her account, at which time she notified the respondent drawee Bank.
The drawee bank is bound by internal rules and regulations, also violated when that second indorsement was
accepted by approval of the Chief Accountant and not the branch managers. This contravened the tenor of its
obligation at the very least, if it were not actually guilty of fraud or negligence. Furthermore, the fact that the
drawee bank did not discover the irregularity with respect to the acceptance of checks with second indorsement
for deposit without the approval of its branch managers despite periodic inspection by the auditors constitute
negligence on the part of the drawee bank.

ASSOCIATED BANK VS. COURT OF APPEALS

GR No. 89802 | May 7, 1992 | Cruz, J:

FACTS: Private respondent, Merle V. Reyes, is engaged in a business of ready-to-wear garments under the firm name
“Melissa’s RTW”. She deals with department stores, who pay through crossed checks payable to “Melissa’s
RTW”. However, she was informed that crossed checks in her name were already issued. Upon further inquiry,
she found out that the said checks had been deposited with petitioner Associated Bank and subsequently paid
by it to one Rafael Sayson, one of the bank’s “trusted depositors”, who had not been authorized by private
respondent to deposit and encash the said checks. Thereafter, private respondent filed a case against the bank
in the Regional Trial Court for recovery of the checks plus damages. The RTC rendered its decision in favor of
the private respondent, ordering the bank to pay private respondent amounting to P15,805.00 plus 12% interest,
attorney’s fees and damages. Associated Bank filed an appeal with the Court of Appeals. According to CA, the

  44  
 cause of action of the respondent arose from the illegal, anomalous and irregular acts of the petitioner in
violating common banking practices to the damage and prejudice of the respondent.

ISSUE: Whether or not the private respondent has a cause of action against the petitioners for their encashment and
payment to another person of certain crossed checks issued in her favor.

HELD: Yes, the private respondent has a cause of action against the petitioners.

The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson although they were
crossed checks and the payee was not Sayson but Melissa's RTW. The Bank stamped thereon its guarantee
that "all prior endorsements and/or lack of endorsements were 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. The petitioners were negligent when they permitted the
encashment of the checks by Sayson. The Bank should have first verified his right to endorse the crossed
checks, of which he was not the payee, and to deposit the proceeds of the checks to his own account. The
Bank was by reason of the nature of the checks put upon notice that they were issued for deposit only to the
private respondent's account. Its failure to inquire into Sayson's authority was a breach of a duty it owed to the
private respondent.

The Bank would still be liable to the private respondent because he was not authorized to make the endorsements. And
even if the endorsements were forged, as alleged, the Bank would still be liable to the private respondent for not
verifying the endorser's authority. There is no substantial difference between an actual forging of a name to a check as
an endorsement by a person not authorized to make the signature and the affixing of a name to a check as an
endorsement by a person not authorized to endorse it.

Spouses George Moran and Librada P. Moran, , vs. The Hon. Court of Appeals and CityTrust Banking
Corporation,.
230 SCRA 799

Facts: Sps. Moran regularly purchased bulk fuel & other related products from Petrophil Corporation on COD basis. The
payments are made by personal checks upon delivery. Petitioners maintained 2 savings and 1 current account with
Shaw Boulevard branch of CityTrust. The bank allowed them to maintain a zero balance in their account. They also gave
written authority to CityTrust to automatically transfer funds from their savings account to their current account at
anytime whenever the funds were insufficient to meet withdrawals or the so-called pre-authorized transfer (PAT)
agreement. On 2 occasions (December 13 & 14, 1983), Librada drew checks in the total amount of P106,666.00 in favor
of Petrophil. The following day, George went to the bank to personally oversee their daily transactions with the bank and
made deposits to their savings account, which then transferred to their current amount thru the PAT agreement.
However, George was informed by Librada, that Petrophil refused to deliver their orders on a credit basis because the 2
checks they had previously issued were dishonored upon presentment for payment by reason of insufficiency of funds.
The non-delivery of gasoline products, allegedly caused Sps. Moran to suffer loss of earnings. Furthermore, Petrophil
cancelled their credit accommodation, forcing them to pay in cash.

Six (6) months after the incident, petitioners through counsel, wrote CityTrust claiming that the bank's dishonor of the
checks caused them besmirched reputation, hence they were contemplating the filing of necessary legal actions unless
the bank issued a certification clearing their name and paid them P1M as moral damages. Due to bank's refusal,
petitioners filed a complaint for damages with the Pasig RTC. In turn, CityTrust filed a counterclaim for damages, alleging
that the case filed against it was unfounded and unjust.

The RTC dismissed both the complaint and counterclaim. On appeal, the CA rendered judgment affirming the decision
of the RTC.

Issue: Whether the bank is liable for damages for its refusal to pay a check on account of insufficient funds considering
the fact that a deposit may be made later in the day.

Ruling: No. A check is a bill of exchange drawn on a bank payable on demand. Thus, a check is a written order
addressed to a bank or persons carrying on the business of banking, by a party having money in their hands, requesting

  45  
them to pay on presentment, to a person named therein or to bearer or order, a named sum of money. The relationship
between the bank and the depositor is that of a debtor and creditor. By virtue of the contract of deposit between the
banker and its depositor, the banker agrees to pay checks drawn by the depositor provided that said depositor has
money in the hands of the bank. Hence, where the bank possesses funds of a depositor, it is bound to honor his checks
to the extent of the amount of his deposits. The failure of a bank to pay the check of a merchant or a trader, when the
deposit is sufficient, entitles the drawer to substantial damages without any proof of actual damages. Conversely, a bank
is not liable for its refusal to pay a check on account of insufficient funds, notwithstanding the fact that a deposit may be
made later in the day. Before a bank depositor may maintain a suit to recover a specific amount from his bank, he must
first show that he had on deposit sufficient funds to meet his demand. Furthermore, considering the clearing process
adopted, it is clear that the available balance on December 14, 1983 was used by the bank in determining whether or not
there was sufficient cash deposited to fund the two checks, although what was stamped on the dorsal side of the two
checks in question was "DAIF/12-15-83," since December 15, 1983 was the actual date when the checks were
processed. As earlier stated, when petitioners' checks were dishonored due to insufficiency of funds, the available
balance of Savings Account which was the subject of the PAT agreement, was not enough to cover either of the two
checks. It was only on December 15, 1983 at around 10:00 AM that the necessary funds were deposited, which
unfortunately was too late to prevent the dishonour of the checks.

PHILIPPINE NATIONAL BANK, vs. HON. ROMULO S. QUIMPO, and FRANCISCO S. GOZON II,
158 SCRA 582

Facts: While Gozon was in the bank with Santos left in the car, the latter took a check from his check book, filled it up
for the amount of P5000.00, forged his signature, and was able to encash the same. Santos was later apprehended by
the authorities and upon investigation he admitted of stealing the check and forging Gozon’s signature on the same.
Hence, Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest, damages, attorney’s fees and
costs against the bank in the CFI of Rizal. The CFI favored Gozon. Hence, PNB filed this petition for review, claiming that
Gozon was negligent in leaving his checkbook in the car, and that was the proximate cause of his loss.

Issue: W/N Gozon may recover from drawee bank.

Ruling: Yes. 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 change the amount so paid to the
account of the depositor whose name was forged. This rule is absolutely necessary to the circulation of drafts and
checks, and is based upon the presumed negligence of the drawee in failing to meet its obligation to know the signature
of its correspondent. . . . There is nothing inequitable in such a rule. If the paper comes to the drawee in the regular
course of business, and he, having the opportunity ascertaining its character, pronounces it to be valid and pays it, it is
not only a question of payment under mistake, but payment in neglect of duty which the commercial law places upon
him. Furthermore, the bank has the prime duty to ascertain the genuineness of the signature of the drawer or the
depositor on the check being encashed. It is expected to use reasonable business prudence in accepting and cashing a
check presented to it. Obviously, petitioner was negligent in encashing said forged check without carefully examining the
signature which shows marked variation from the genuine signature of private respondent. Lastly, the act of plaintiff in
leaving his checkbook in the car while he went out for a short while can not be considered negligence sufficient to
excuse the defendant bank from its own negligence. It should be borne in mind that when defendant left his car, Ernesto
Santos, a long time classmate and friend remained in the same. Defendant could not have been expected to know that
the said Ernesto Santos would remove a check from his checkbook. Defendant had trust in his classmate and friend. He
had no reason to suspect that the latter would breach that trust.

REPUBLIC BANK, , v. COURT OF APPEALS and FIRST NATIONAL CITY BANK,

196 SCRA 100

Facts: San Miguel Corporation (SM), drew a dividend for P240, on its account in the respondent First National City Bank
in favor of J. Roberto C. Delgado, a stockholder. After the check had been delivered to Delgado, the amount on its face
was fraudulently and without authority of the drawer, altered by increasing it from P240 to P9,240. The check was
indorsed and deposited by Delgado in his account with petitioner Republic Bank. Republic endorsed the same to FNCB
and presented it to FNCB for payment through the Central Bank Clearing House. Believing the check was genuine, and
relying on the guaranty and endorsement of Republic appearing on the back of the check, FNCB paid P9,240 to
Republic through the Central Bank Clearing House. SMC notified FNCB of the material alteration in the amount of the

  46  
check in question. FNCB then informed Republic of the same. By then, Delgado had already withdrawn his account from
Republic. Hence, FNCB demanded that Republic refund the P9,240. The trial court rendered judgment ordering Republic
to pay P9,240 to FNCB and it was affirmed by the CA.

Issue: Whether Republic, as the collecting bank, is protected, by the 24-hour clearing house rule, found in CB Circular
No. 9, as amended, from liability to refund the amount paid by FNCB, as drawee of the SMC dividend check.

Ruling: Yes. The 24-hour clearing house rule embodied in Section 4(c) of Central Bank Circular No. 9, as amended,
provides:

"Items which should be returned for any reason whatsoever shall be returned directly to the bank, institution or
entity from which the item was received. For this purpose, the Receipt for Returned Checks (Cash Form No. 9)
should be used. The original and duplicate copies of said Receipt shall be given to the Bank, institution or entity
which returned the items and the triplicate copy should be retained by the bank, institution or entity whose
demand is being returned. At the following clearing, the original of the Receipt for Returned Checks shall be
presented through the Clearing Office as a demand against the bank, institution or entity whose item has been
returned. Nothing in this section shall prevent the returned items from being settled by direct reimbursement to
the bank, institution or entity returning the items. All items cleared at 11:00 o’clock A.M. shall be returned not
later than 2:00 o’clock P.M. on the same day and all items cleared at 3:00 o’clock P.M. shall be returned not
later than 8:30 A.M. of the following business day except for items cleared on Saturday which may be returned
not later than 8:30 A.M. of the following day."

The 24-hour clearing house rule is valid rule applicable to commercial banks. It is true that when an indorsement is
forged, the collecting bank or last endorser, as general rule, bears the loss. But the unqualified endorsement of the
collecting bank on the check should be read together with the 24-hour regulation on the clearing house operation. Thus,
when the drawee bank fails to return a forged or altered check to the collecting bank is absolved from liability. Unless an
alteration is attributable to the fault or negligence of the drawer himself, such as when he leaves spaces on the check
which would allow the fraudulent insertion of additional numerals in the amount appearing thereon, the remedy of the
drawee bank that negligently clears a forged and/or honor altered check for payment is against the party responsible for
the forgery or alteration, otherwise, it bears the loss. It may not charge the amount so paid to the account of the drawer,
if the latter was free from blame, nor recover it from the collecting bank is the latter made payment after proper
clearance from the drawee.

Note: The CA erred in laying upon Republic, instead of on FNCB the drawee bank, the burden of loss for the payment of
the altered SMC check, the fraudulent character of which FNCB failed to detect and warn Republic about, within the 24-
hour clearing house rule. The Court of Appeals departed from the ruling of this Court in an earlier PNB case, that:

"Where a loss, which must be borne by one of two parties alike innocent of forgery, can be traced to the neglect
or fault of either, it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through
whose means it has succeeded.

WESTMONT BANK (formerly ASSOCIATED BANKING CORP.), , vs. EUGENE ONG,.

375 SCRA 212

Facts: Ong maintained a current account with petitioner. He sold certain shares of stocks through Island Securities
Corporation. To pay Ong, Island Securities purchased two (2) Pacific Banking Corporation managers checks, issued in
Ong’s name as payee. Before Ong could get hold of the checks, his friend Tanlimco got hold of them, forged Ong’s
signature and deposited these with petitioner, where Tanlimco was also a depositor. Even though Ong’s specimen
signature was on file, petitioner accepted and credited both checks to the account of Tanlimco, without verifying the
signature indorsements appearing at the back thereof. Tanlimco then immediately withdrew the money and absconded.
At first, Ong sought to collect the money from Tamlinco’s family before reporting the incident to the Central Bank. As
his efforts to recover his money, were unfortunately proved futile, he filed an action against the petitioner. The trial
court rendered judgment for the plaintiff and it was affirmed in toto by the CA.

Issue: W/N Ong may recover from Westmont.

  47  
Ruling: Yes. The present case is a desirable shortcut to reach the party who ought in any event to be ultimately liable. As
a general rule, a bank who has obtained possession of a check upon an unauthorized or forged indorsement of the
payees signature and who collects the amount of the check from the drawee is liable for the proceeds thereof to the
payee. The theory of said rule is that the collecting banks possession of such check is wrongful. Since the signature of
the payee, was forged to make it appear that he had made an indorsement in favor of the forger, such signature should
be deemed as inoperative and ineffectual. Petitioner, as the collecting bank, grossly erred in making payment by virtue of
said forged signature. The payee, herein respondent, should therefore be allowed to recover from the collecting bank.
Hence, it shall be held liable for the loss because it is its legal duty to ascertain that the payees endorsement was
genuine before cashing the check.

On the issue of laches: It cannot be said that respondent sat on his rights. He immediately acted after knowing of the
forgery by proceeding to seek help from the Tanlimco family and later the Central Bank, to remedy the situation and
recover his money from the forger. Only after he had exhausted possibilities of settling the matter amicably with the
family of Tanlimco and through the CB, about five months after the unlawful transaction took place, did he resort to
making the demand upon the petitioner and eventually before the court for recovery of the money value of the two
checks. These acts cannot be construed as undue delay in or abandonment of the assertion of his rights.

RAYMUNDO A. CRYSTAL, vs. COURT OF APPEALS and PELAGIA OCANG, PACITA, TEODULO, FELICISIMO,
PABLO, LYDIA, DIOSCORA and RODRIGO, all surnamed DE GRACIA,
G.R. No. L-35767 | June 18, 1976 | BARREDO, J.

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

ISSUE: Whether or not the conflicting circumstances of the check being dishonored and becoming stale affect the
validity of the redemption sale.

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

PHILIPPINE NATIONAL BANK, vs. BENITO SEETO,

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

FACTS: On March 13, 1948, Benito Seeto presented to the Philippine National Bank at Surigao a check in the amount of
P5,000, payable to cash or bearer, and drawn by one Gan Yek Kiao against the Cebu branch of the Philippine National
Bank of Communications. After consultation with the bank employees, Seeto made a general and unqualified
endorsement of the check, which was accepted by PNB’s agency, which paid Seeto the value of the check therefore.
Upon being presented to the drawee bank for payment, however, the check was dishonored for “insufficient funds.”
PNB demanded refund from Seeto. Seeto, however, refused, claiming that at the time of the negotiation of the check,
the drawer had sufficient funds in the drawee bank, and had not PNB delayed in forwarding the check until the drawer’s
funds were exhausted, the same would have been paid. PNB alleged that Seeto gave assurances that the drawer of the
check had sufficient funds with the bank, and that Seeto had made a general and unqualified indorsement thereon. As
evidence, PNB presented two witnesses at the trial, who testified that the check was cashed due to assurances given by
Seeto and the promise that he would refund the amount paid by PNB should the check be dishonored.

ISSUE: Whether or not unreasonable delay in presentation of payment discharges the indorser from liabilities.

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HELD: No. Innumerable decisions have already been rendered in the state courts of the United States to the effect that
although the drawer of a check is discharged only to the extent of loss caused by unreasonable delay in presentment, an
indorser is wholly discharged thereby irrespective of any question of loss or injury.

The Court said that they have been unable to find any authority sustaining the proposition that an indorser of a check is
not discharged from liability for an unreasonable delay in presentation for payment. This is contrary to the essential
nature and character of negotiable instruments — their negotiability. They are supposed to be passed on with
promptness in the ordinary course of business transactions; not to be retained or kept for such time as the holder may
want, otherwise the smooth flow of commercial transactions would be hindered.

There seems to be an intimation in the decision appealed from that inasmuch as the check was drawn payable
elsewhere than at the place of business of the drawer, it must be presented for acceptance or negotiable within a
reasonable time, and upon failure to do so the drawer and all indorsers thereof are discharged pursuant to Section 144
of the law. Against this insinuation the petitioner argues that the application of sections 143 and 144 is not proper, and
that it may not be presumed that the check in question was not drawn and executed in Cebu, the residence or place of
business of the drawer. There is no evidence at all as to the place where the check was drawn. However, as the Court
has already pointed out above that neither Section 143 nor Section 144 is applicable. But the ruling that respondent was
discharged upon the dishonor of the check is based on Sections 84 and 186, the latter expressly requiring that a check
must be presented for payment within a reasonable time after issue.

VIOLET MCGUIRE SUMACAD, ET AL., vs. THE PROVINCE OF SAMAR, ET AL.,

G.R. No. L-8155 | October 23, 1956 | PARAS, J.

FACTS: While the province of Samar was still occupied by Japanese military forces, a check was issued by said
province to Paulino M. Santos (then postmaster of Borongan) for the sum of P25,000, drawn against the Philippine
National Bank Cebu Branch. The payee negotiated the check with James McGuire, an American citizen and resident of
the municipality of Borongan. James McGuire presented the check to the municipal treasurer of Borongan for payment,
but the latter (who merely noted it) was not able or did not choose to pay the same.

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

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

ISSUE: Whether or not defendants are solidarily liable to pay the check.

HELD: No. PNB implied acceptance of the check was assumed. The request of PNB of photostatic copies of the check
and the subsequent requirement of presentment of the check for presentation by James McGuire would be a mere
empty gesture if the bank did not mean to assume the obligation of paying the check. However, PNBs liability is merely
subsidiary, Province of Samar is the one primarily liable.

PHILIPPINE NATIONAL BANK, vs.THE NATIONAL CITY BANK OF NEW YORK,

G.R. No. L-43596 | October 31, 1936 | RECTO, J.

FACTS: On April 7 and 9, 1933, an unknown person or persons negotiated with Motor Service Company, Inc., two
checks in payment for automobile tires purchased from MSCI's stores, purporting to have been issued by the
'Pangasinan Transportation Co., Inc. by J.L. Klar, Manager and Treasurer', against the Philippine National Bank (PNB)
and in favor of the International Auto Repair Shop, for P144.50 and P215.75. Said checks were indorsed by said
unknown persons in the manner indicated at the back thereof, the MSCI, believing at the time that the signatures of J.L.
Klar, Manager and Treasurer of Pantranco on both checks were genuine. The checks were then indorsed for deposit by
MSCI at the National City Bank of New York and the former was accordingly credited with the amounts thereof, or
P144.50 and P215.75. On April 8 and 10, 1933, the said checks were cleared at the clearing house and PNB credited the
  49  
National City Bank for the amounts thereof, believing at the time that the signatures of the drawer were genuine, that the
payee is an existing entity and the endorsements at the bank thereof regular and genuine. The PNB then found out that
the purported signatures of J.L. Klar, as Manager and Treasurer of Pantranco were forged when so informed by the said
Company, and it accordingly demanded from the National City Bank and MSCI and the reimbursement of the amounts
for which it credited the National City Bank at the clearing house and for which the latter credited MSCI, but MSCI and
National City Bank refused, and continue to refuse, to make such reimbursements. Pantranco objected to have the
proceeds of said check deducted from their deposit. PNB filed the case in the municipal court of Manila against National
City Bank and MSCI. Upon PNB's motion, the case was dismissed before trial as to the National City Bank. A decision
was thereafter rendered giving PNB judgment for the total amount of P360.25, with interest and costs. From this
decision MSCI appealed.

ISSUE: Whether or not the payment of the checks in question made by the drawee bank constitutes an "acceptance",
and, consequently, the case should be governed by the provisions of section 62 of the Negotiable Instruments Law.

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

Far East Bank & Trust Company vs. Gold Palace Jewellery Co.
GR no. 168274 | August 20, 2008 | Ponente: Nachura, J.:

Facts: Sometime in June 1998, Samuel Tagoe (foreigner) purchased from Gold Palace Jewellery several pices of jewelry
valued at Ph. 258,000.00. In payment of the same, Samuel offered Foreign Draft issued by the United Overseas Bank
(UOB) Malaysia, addressed to the Land Bank of the Philippines (Land Bank), and payable to Gold Palace for Php
380,000.00.

Samuel came back to Gold Palace to claim the purchased jewelries after the Foreign Draft was cleared by Land bank
and Gold Palace released the same to the former, however, because the amount in the Foreign Draft was more than the
value of the goods purchased, Gold Palace issued (as Samuel’s change) Far East Check for Php 122,000.00. Three
weeks after, Land Bank informed Far East the amount in the Foreign Draft has been materially altered form Php 300.00
to Php 380,000.00 and land Bank is returning it. Gold Palace has already utilized the portions of the amount, hence Far
East was only able to debit Php 168,053.36, this was done without prior written notice to the account. Thereafter, Far
East demanded Gold Palace to pay the difference between the amount in the materially altered draft and the amount
debited from Gold Palace’s account.

Due to non-response of Gold Palace, Far East initiated a case before the RTC against Gold Palace for sum of money and
damages. Gold Palace denied the allegations and interpose that the complaint state no cause of action because the
subject foreign draft having been cleared and that Gold Palace is not the party who made the material alteration. The
RTC ruled in favor of Far East however, on appeal to the CA, the CA reversed the RTC decision because Far East failed
to notify Gold Palace of the drafts dishonor; thus, Far East could not charge Gold Palace on its secondary liability as an
indorser. Furthermore, the drawee bank had cleared the check, and its only remedy should be against the party
responsible for the alteration. Considering that Gold Palace neither altered the draft nor knew of the alteration, it could
not be held liable.

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Issue: W/N Gold Palace is liable to pay the difference between the amount in the materially altered draft and the amount
debited from Gold Palace’s account to Far East Bank.

Held: NO, Gold Palace is not secondarily liable to Far East Bank or to pay the difference between the amount in the
materially altered draft and the amount debited from Gold Palace’s account.

Act no. 2031 (Negotiable Instruments Law explicitly provides that the acceptor, by accepting the instrument, engaged
that he will pay it according to the tenor of his acceptance. This provision applies with equal force in case the drawee
pays a bill without having previously accepted it. His actual payment of the amount in the check implies not only his
assent to the order of the drawer and a recognition of his corresponding obligation to pay the aforementioned sum, but
also, his clear compliance with that obligation. Actual payment by the drawee is greater then his acceptance, which is
merely a promise in writing to pay. The payment of a check includes its acceptance. LBP was liable on its payment of
the check according to the tenor of the check at the time of payment, which was the raised amount. Because of that
engagement, Land Bank could no longer repudiate the payment it erroneously made to a due course holder. We note at
this point that Gold Palace was not a participant in the alteration of the draft, was not negligent, and was a holder in due
course it received the draft complete and regular on its face, before it became overdue and without notice of any
dishonor, in good faith and for value, and absent any knowledge of any infirmity in the instrument or defect in the title of
the person negotiating it.

Allied Banking Corporation vs. Lim Sio Wan

GR no. 133179 | March 27, 2008 | Ponente: Velasco, Jr,, J.:

Facts: On September 21, 1983, FCC had deposited a money market placement for respondent Producers Bank which
was received and acknowledged in a letter. The placement matured on October 25, 1983 and was rolled-over until
December 5, 1983. FCC demanded payment of the proceeds of the placement the same day. Before FCC’s demand, on
November 14, 1983, Lim Sio Wan deposited with petitioner Allied Banking Corporation (Allied) a money market
placement of P 1,152,597.35 for a term of 31 days to mature on December 15, 1983. On December 5, 1983, a person
claiming to be Lim Sio Wan called up Allied, and instructed the latter to pre-terminate Lim Sio Wans money market
placement, to issue a managers check representing the proceeds of the placement, and to give the check to one
Deborah Dee Santos who would pick up the check. The manager’s check was issued in the name of Lim Sio Wan, as
payee. The check was cross-checked For Payees Account Only and given to Santos. Thereafter, the said managers
check was deposited in the account of Filipinas Cement Corporation (FCC) at respondent Metropolitan Bank and Trust
Co. (Metrobank), with the forged signature of Lim Sio Wan as indorser.In short, the Allied check was deposited in FCC’s
account in Metrobank purportingly representing the proceeds of FCC’s money market placement proceeds.

To clear the check and in compliance with the requirements of the Philippine Clearing House Corporation (PCHC) Rules
and Regulations, Metrobank stamped a guaranty on the check, which reads: All prior endorsements and/or lack of
endorsement guaranteed. The check was sent to Allied through the PCHC. Upon the presentment of the check, Allied
funded the check even without checking the authenticity of Lim Sio Wans purported indorsement. Thus, the amount on
the face of the check was credited to the account of FCC On the date of maturity of her money market placement, Lim
Sio Wan tried to withdraw the same and was informed that she called to preterminate it a few days earlier. She denied
giving any instructions and receiving the proceeds thereof. She desisted from further complaints when she was assured
by the banks manager that her money would be recovered. However, upon subsequent demand Allied refused to pay
Lim Sio Wan. Thus she filed with the RTC a Complaint against Allied to recover the proceeds of her money market
placement. Allied filed a third party complaint against Metrobank and Santos. The trial and appellate court ordered
Allied to pay sixty (60%) percent Metrobank forty (40%) of the amount of plus 12% interest per annum.

Issue: W/N Is petitioner’s liability to the extent of 60% of amount adjudged demandable and Metrobank to the extent of
40% as guarantor of all endorsement on the check, it being the collecting bank?

Held: Yes, the 60:40 ratio of the liabilities of Allied and Metrobank must be upheld.

Section 66. Liability of general indorser.Every indorser who indorses without qualification, warrants to all subsequent
holders in due course;

a) The matters and things mentioned in subdivisions (a), (b) and (c) of the next preceding section; and

  51  
 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.

Section 65. Warranty where negotiation by delivery, 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 of 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 persons negotiating public or corporation securities,
other than bills and notes.

As provided in Section 66 in relation to Sec. 65 of the Negotiable Instruments Law, the warranty “that the instrument is
genuine and in all respects what it purports to be” covers all the defects in the instrument affecting the validity thereof,
including a forged indorsement. Thus, the last indorser will be liable for the amount indicated in the negotiable
instrument even if a previous indorsement was forged. We held in a line of cases that “a collecting bank which indorses
a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including
the forged indorsement itself, and ultimately should be held liable therefor.” However, this general rule is subject to
exceptions. One such exception is when the issuance of the check itself was attended with negligence.

In the instant case, Allied was negligent in issuing the manager’s check and in transmitting it to Santos without even a
written authorization The liability of Allied, however, is concurrent with that of Metrobank as the last indorser of the
check. Given the relative participation of Allied and Metrobank to the instant case, both banks cannot be adjudged as
equally liable. Hence, the 60:40 ratio of the liabilities of Allied and Metrobank must be upheld.

XI. DOCUMENTS OF TITLE; Code of Commerce [Articles 567 to 572]

Digested by: Morillo

Bank of the Philippine Islands vs. Commissioner of Internal Revenue

GR no. 137002 | July 27, 2006 | Ponente: Chico-Nazario, J.:

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

Issue: W/N the transactions covered is a bill of exchange?

Held: Yes, the abovementioned transactions covered are under the coverage of a bill of exchange.

  52  
Under Sec. 39, NIRC: The term bill of exchange denotes checks, drafts, and all other kinds of orders for the payment of
money, payable at sight, or on demand or after a specific period after sight or from a stated date. On the other hand,
Sec, 126, NIL provides that A bill of exchange is an unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or
determinable future time a sum certain in money to order or to bearer. Arts. 567 and 568 of the Civil Code defines letters
of Credits. Letters of credit are those issued by one merchant to another or for the purpose of attending to a commercial
transaction. Its essential conditions shall be (1) To be issued in favor of a definite person and not to order; and (2) To be
limited to a fixed and specified amount, or to one or more undetermined amounts, but within a maximum the limits of
which has to be stated exactly.

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

Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et. al

GR no. 146717 | November 22, 2004 | Ponente: Tinga, J.:

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

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

Held: Transfield’s argument that any dispute must first be resolved by the parties, whether through negotiations or
arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into
a mere guarantee.

The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which
is identical with the same obligations under the underlying agreement. In both cases the payment may be enjoined if in
the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit.

Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a
dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the
argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement
of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and
beneficial use for letters of credit in commercial transactions.

The engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required
documents are presented to it. The so-called “independence principle” assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and precludes the issuing bank from determining whether the
main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the
form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or
particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or
responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or any other person whomsoever.
  53  
 XII. BILLS OF LADING; New Civil Code [Articles 349 to 354 & Articles 706 to 716]
Digested by: Morillo

Keng Hua Paper Products vs. CA

GR no. 116863 | February 12, 1998

FACTS: On June 29, 1982, Sea-Land Serivce reeceived at its Hong Kong terminal a sealed container, Container No.
SEAU 67523, containing seventy-six bales of unsorted waste paper for shipment to Keng Hua Paper Products, Co. in
Manila. A bill of lading to cover the shipment was issued by the plaintiff.
On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices of arrival were
transmitted to the defendant but the latter failed to discharge the shipment from the container during the free time
period or grace period. The said shipment remained inside the plaintiffs container from the moment the free time
period expired on July 29, 1982 until the time when the shipment was unloaded from the container on November
22, 1983, or a total of four hundred eighty-one (481) days. During the 481-day period, demurrage charges
accrued. Within the same period, letters demanding payment were sent by the plaintiff to the defendant who,
however, refused to settle its obligation which eventually amounted to P67,340.00. Numerous demands were made
on the defendant but the obligation remained unpaid. Plaintiff thereafter commenced this civil action for collection
and damages.
In its answer, defendant, by way of special and affirmative defense, alleged that it purchased fifty (50) tons of waste
paper from the shipper in Hong Kong, Ho Kee Waste Paper, as manifested in Letter of Credit No. 824858 (issued by
Equitable Banking Corporation, with partial shipment permitted; that under the letter of credit, the remaining
balance of the shipment was only ten (10) metric tons as shown in Invoice No. H-15/82 that the shipment plaintiff
was asking defendant to accept was twenty (20) metric tons which is ten (10) metric tons more than the remaining
balance; that if defendant were to accept the shipment, it would be violating Central Bank rules and regulations and
custom and tariff laws; that plaintiff had no cause of action against the defendant because the latter did not hire the
former to carry the merchandise; that the cause of action should be against the shipper which contracted the
plaintiffs services and not against defendant; and that the defendant duly notified the plaintiff about the wrong
shipment through a letter dated January 24, 1983
ISSUE: W/N petitioner Keng Hua Paper Products was bound by the bill of lading

RULING: YES, A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a contract by
which three parties, namely, the shipper, the carrier, and the consignee undertake specific responsibilities and assume
stipulated obligations. A bill of lading delivered and accepted constitutes the contract of carriage even though not
signed, because the acceptance of a paper containing the terms of a proposed contract generally constitutes an
acceptance of the contract and of all of its terms and conditions of which the acceptor has actual or constructive notice.
In a nutshell, the acceptance of a bill of lading by the shipper and the consignee, with full knowledge of its contents,
gives rise to the presumption that the same was a perfected and binding contract
In the case at bar, both lower courts held that the bill of lading was a valid and perfected contract between the shipper
(Ho Kee), the consignee (Petitioner Keng Hua), and the carrier (Private Respondent Sea-Land). Section 17 of the bill of
lading provided that the shipper and the consignee were liable for the payment of demurrage charges for the failure to
discharge the containerized shipment beyond the grace period allowed by tariff rules. Applying said stipulation, both
lower courts found petitioner liable.

XIII. TRUST RECEIPTS LAW:

Digested by:

Edward Ong vs. CA

GR no. 119858 | April 29, 2003

  54  
Facts: Assistant City Prosecutor Dina P. Teves of the City of Manila charged petitioner and Benito Ong with two counts
of estafa under separate Informations dated 11 October 1991.

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

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

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

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

Issue: WON PETITIONER WAS NECESSARILY THE ONE RESPONSIBLE FOR THE OFFENSE, BY THE MERE
CIRCUMSTANCE THAT PETITIONER ACTED AS AGENT AND SIGNED FOR THE ENTRUSTEE CORPORATION.

Held: Section 13 of the Trust Receipts Law which provides: x x x. If the violation is committed by a corporation,
partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the
civil liabilities arising from the offense. We hold that petitioner is a person responsible for violation of the Trust
Receipts Law.

The Trust Receipts Law is violated whenever the entrustee fails to: (1) turn over the proceeds of the sale of the goods, or
(2) return the goods covered by the trust receipts if the goods are not sold.[18] The mere failure to account or
return gives rise to the crime which is malum prohibitum.[19] There is no requirement to prove intent to defraud.[20]

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

Lee vs. Rodil

GR no. 80544 | July 5, 1989

FACTS: Rosemarie M. Lee was charged with estafa in an information which alleged:

"That on or about July 26, 1982 in the City of Manila, Philippines, the said accused, did then and there wilfully, unlawfully
and feloniously defraud the Philippine Bank of Communications, a banking institution duly organized and existing under
the laws of the Republic of the Philippines, in the following manner, to wit: the said accused, being then the duly
authorized representative of C.S. Lee Enterprises, Inc., after opening letter of credit with the said bank under L/C No.
63251 dated July 26, 1982, for the amount of P154,711.97, covering the purchase price of a certain merchandise
consisting of 23 ctns. Lab. Culture Media in favor of said bank, received from the latter the necessary document and
thereafter the said merchandise and forthwith, executed trust receipt for the aforesaid merchandise dated July 26, 1982,
by virtue of which, the said accused obligated herself to hold said merchandise in trust with liberty to sell the same in
cash for the account of the said bank and to account for the proceeds of the sale thereof, if sold or of returning the said
merchandise to said bank in case of failure to sell the same, on or before October 24, 1982, but the said accused, once

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in possession of the said merchandise, far from complying with her aforesaid obligation and despite the lapse of a long
period of time and repeated demands made upon her to that effect, did then and there willfully, unlawfully and
feloniously, with intent to defraud, misappropriate, misapply and convert the said merchandise or the value thereof, to
her own personal use and benefit, to the damage and prejudice of the said Philippine Bank of Communications in the
amount of P154,711.97, Philippine currency."

The accused moved to quash this information on the ground that the facts charged do not constitute an offense. She
alleges that the violation of a trust receipt agreement does not constitute estafa notwithstanding an express provision in
the "Trust Receipts Law" (P.D. 115) characterizing such violation as estafa. She attacks P.D. 115 for being
unconstitutional. The trial court, in its order dated August 21, 1987 denied the motion to quash the information and
upheld the constitutionality of P.D. No. 115.

ISSUE: W/N a violation of the trust receipts agreements constitutes as estafa.

RULING: YES, Sec. 13 of P.D. No. 115 provides:jgc:chanrobles.com.ph

". . . 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
terms 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."

An examination of P.D. 115 shows the growing importance of trust receipts in Philippine business, the need to provide
for the rights and obligations of parties to a trust receipt transaction, the study of the problems involved and the action
by monetary authorities, and the necessity of regulating the enforcement of rights arising from default or violations of
trust receipt agreements. The legislative intent to meet a pressing need is clearly expressed. We see no
unconstitutionality in the means deliberately employed to enforce the integrity of trust receipts

Sia vs. People

GR no. L-30896 | April 28, 1983

FACTS:
That in, about or during the period comprised' between July 24, 1963 and December 31, 1963, both dates inclusive, in
the City of Manila, Philippines, the said accused did then and there willfully, unlawfully and feloniously defraud the
Continental Bank, a banking institution duly organized and doing business in the City of Manila, in the following manner,
to wit: the said accused, in his capacity as president and general manager of the Metal Manufacturing of the Philippines,
Inc. (MEMAP) and on behalf of said company, obtained delivery of 150 M/T Cold Rolled Steel Sheets valued at P
71,023.60 under a trust receipt agreement under L/C No. 63/109, which cold rolled steel sheets were consigned to the
Continental Bank, under the express obligation on the part of said accused of holding the said steel sheets in trust and
selling them and turning over the proceeds of the sale to the Continental Bank; but the said accused, once in possession
of the said goods, far from complying with his aforesaid obligation and despite demands made upon him to do so, with
intent to defraud, failed and refused to return the said cold rolled sheets or account for the proceeds thereof, if sold,
which the said accused willfully, unlawfully and feloniously misappropriated, misapplied and converted to his own
personal use and benefit, to the damage and prejudice of the said Continental Bank in the total amount of P146,818.68,
that is the balance including the interest after deducting the sum of P28,736.47 deposited by the said accused with the
bank as marginal deposit and forfeited by the said from the value of the said goods, in the said sum of P71,023.60.

ISSUE: Whether the violation of a trust receipt constitutes estafa under Art. 315 (1-[2]) of the Revised Penal Code, as
also raised by the petitioner.

RULING: The SC consider the view that the trust receipt arrangement gives rise only to civil liability as the more feasible,
before the promulgation of P.D. 115. The transaction being contractual, the intent of the parties should govern. Since the
trust receipt has, by its nature, to be executed upon the arrival of the goods imported, and acquires legal standing as
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such receipt only upon acceptance by the "entrustee," the trust receipt transaction itself, the antecedent acts consisting
of the application of the L/C, the approval of the L/C and the making of the marginal deposit and the effective
importation of the goods, all through the efforts of the importer who has to find his supplier, arrange for the payment and
shipment of the imported goods-all these circumstances would negate any intent of subjecting the importer to criminal
prosecution, which could possibly give rise to a case of imprisonment for non-payment of a debt. The parties, therefore,
are deemed to have consciously entered into a purely commercial transaction that could give rise only to civil liability,
never to subject the "entrustee" to criminal prosecution. Unlike, for instance, when several pieces of jewelry are received
by a person from the owner for sale on commission, and the former misappropriates for his personal use and benefit,
either the jewelries or the proceeds of the sale, instead of returning them to the owner as is his obligation, the bank is not
in the same concept as the jewelry owner with full power of disposition of the goods, which the bank does not have, 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 really 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, a feature totally absent in the case of the transaction between the jewel-owner and his
agent.

Consequently, if only from the fact that the trust receipt transaction is susceptible to two reasonable interpretation, one
as giving rise only to civil liability for the violation of the condition thereof, and the other, as generating also criminal
liability, the former should be adopted as more favorable to the supposed offender

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