Basic Principles of Negotiable Instruments Law

VIP: SEC. 1, Negotiable Instruments Law

Functions of NI
*Substitute for money, transferrable from one hand to another
*Medium of Commercial transactions
*Proof of Indebtedness

(NI is only a substitute and not legal tender)

Characteristic:
*Negotiability is the attribute of a NI, whereby it can be passed on from one to another
*Accumulation of secondary contracts, other parties are involved, creation of juridical ties during
the negotiation.

I. FORM AND INTERPRETATION

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

following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

*Section 1 is the form of a negotiable instrument. If all requisites are present, then The NI Law will
apply, and if not, then other law will apply.

*There is no oral negotiable instrument because it should be in writing. Oral NI is not transferrable.
Hence, NI must be in writing.

Difference of a NI and NNI

Kinds of negotiable instruments

Promissory notes (PN) – An unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a
sum certain in money to order or to bearer (NIL, Sec. 184).
Parties: Maker; Payee- oblige, to receive payment
*Not an order

1. When the drawer and the drawee is the same person

2. The drawee is a fictitious person
3.
Bill of exchange (BOE) – An unconditional order in writing addressed by one person to another
signed by the person giving it, requiring the person to whom it is addressed to pay on demand or
at a fixed or determinable future time a sum certain in money to order or to bearer (NIL, Sec.
126).
Parties: Maker; Drawee; Payee

Check – A special kind of bill of exchange drawn on a bank payable on demand (NIL, Sec. 185).
Parties: Maker; Drawee(Bank);Payee
A check is always withdrawn in a bank and always payable on demand.

GR: Full name and signature

XPN: The burden is on the payee to prove that the initials are the initials of the drawer.

Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular,
the person in possession thereof has a prima facie authority to complete it by filling up the blanks
therein. And a signature on a blank paper delivered by the person making the signature in order
that the paper may be converted into a negotiable instrument operates as a prima facie
authority to fill it up as such for any amount. In order, however, that any such instrument when
completed may be enforced against any person who became a party thereto prior to its
completion, it must be filled up strictly in accordance with the authority given and within a
reasonable time. But if any such instrument, after completion, is negotiated to a holder in due
course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had
been filled up strictly in accordance with the authority given and within a reasonable time.
Check vs Promissory Note

As to order and promise:

Check: It contains order to pay.

Promissory note : A promissory note contains promise to pay.

As to parties:

Check: In case of check there may be three parties, the drawer, drawee and payee.
Promissory note : In case of promissory note are only two parties, the maker and the payee.

As to Object :
Check : Check is used because it is a simple and easy medium of exchange and serving of
metalic money.
Promissory note : It is used for receiving and giving credit.

As to payable to bearer :
Check : A checkis often drawn as payable to bearer.
Promissory note : A pro-note cannot be drawn payable to bearer.

As to stop of payment:
Check : Its payment can be stopped by giving the notice to the bank.
Promissory note : A pro-note payment can not be stopped if once issued.

As to nature of Liability:
Check : In case of cheque when it is dishonored, the drawer is liable.
Promissory note : In case of promissory note liability is primary.

As to Use Of Form:
Check: It is drawn on a printed form issued by a particular bank.
Promissory note : Promissory note may be drawn on any paper and there is no need of any
particular form.

As to the drawee :
Check: A check is always drawn to a particular bank where account is available.
Promissory note : A promissory note can be drawn on any person.

As to the drawer and payee :

Check : In case of check drawee and payee can be the same person.
Promissory note : In case of pro-note there are two parties and maker cannot be the payee.
VIP: Sec. 2. Certainty as to sum; What constitutes - The sum payable is a sum certain within the
meaning of this Act, although it is to be paid:
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a provision that, upon default in payment of any installment or of
interest, the whole shall become due; or
(d) with exchange, whether at a fixed rate or at the current rate; or
(e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.

GR: It is a sum certain

VIP Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional
within the meaning of this Act though coupled with:
(a) An indication of a particular fund out of which reimbursement is to be made or a particular
account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument.

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

Order- a command/ imperative action, it must not be a mere request

This not subject to a contingency.

Promise- it is an undertaking for you to pay like “I guarantee, I promise”; maybe expressed or
implied but not an acknowledgement/admission that you owe an amount.

Why it should be unconditional? So that NI can circulate from one person to another.

Quiz:
1.) What constitutes sum certain?
The sum payable is a sum certain within the meaning of this Act, although it is to be paid:
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a provision that, upon default in payment of any installment
or of interest, the whole shall become due; or
(d) with exchange, whether at a fixed rate or at the current rate; or
(e) with costs of collection or an attorney's fee, in case payment shall not be made at
maturity. (Section 2, NIL)

2.) What is the test that a sum is certain?

Payment of fixed amount of money and permissible clauses or stipulations.
3.) Why NI should be unconditional?
So that NI can circulate from one person to another.
4.) When an order or promise to pay conditional?
But an order or promise to pay out of a particular fund is not unconditional. (Section 3, NIL)

Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable

future time, within the meaning of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified therein; or
(c) On or at a fixed period after the occurrence of a specified event which is certain to happen,
though the time of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the happening of the event
does not cure the defect.

Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order
or promise to do any act in addition to the payment of money is not negotiable. But the negotiable
character of an instrument otherwise negotiable is not affected by a provision which:
(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or -
After maturity, any additional act, would not affect the negotiability of the instrument. As long as
there is no other act to be done before maturity, it is still negotiable.
(b) authorizes a confession of judgment if the instrument be not paid at maturity; or - void due to
violation of public policy ; there is no effect, does not render the instrument non-negotiable, it
remains valid as to amount.
(c) waives the benefit of any law intended for the advantage or protection of the obligor; or -
Despite of any waiver, the instrument is negotiable.
(d) gives the holder an election to require something to be done in lieu of payment of money.

But nothing in this section shall validate any provision or stipulation otherwise illegal.

Exceptions:

Sale of collateral securities

Ex.

I promise to pay P or order the sum of P10K on or before March 5, 2019 secured by a mobile phone
I delivered by way of pledge which I authorized him to sell should I fail to pay at maturity.

*Pledge – “prenda”

Ex. I promise to pay P or order the sum of P10K or a textbook on NIL at the option of the holder.
Before, if the choice is in the maker or drawer, it is non-negotiable. In this case, the instrument is
still negotiable because it is the choice of the holder.

Sec. 6. Omissions; seal; particular money. - The validity and negotiable character
of an instrument are not affected by the fact that:
a) it is not dated; or – even if the instrument is not dates, it is still negotiable, except if
you need to know when the interest will start to run
Promissory notes- it is important for presentment of payment, to identify a reasonable
time of presentment; BOE- same reason; The holder may insert the true date, refer to
Sec 13.
(b) does not specify the value given, or that any value had been given therefor;
or – “Value given” because it is presumed by the law that you have received money for
the issuance of the instrument.
(c) does not specify the place where it is drawn or the place where it is payable;
or – it does not matter where it is drawn, the law already specifies where payment
should be made
(d) bears a seal; or
(e) designates a particular kind of current money in which payment is to be
made.- it maybe paid by exchange as long as it has an equivalent in pesos.

But nothing in this section shall alter or repeal any statute requiring in certain
cases the nature of the consideration to be stated in the instrument.

Sec. 7. When payable on demand. - An instrument is payable on

demand:
(a) When it is so expressed to be payable on demand, or at sight, or on
presentation; or
Once you received the NI, you can reinforce it immediately after delivery.
“on demand” – it is not a condition precedent in action, that you need to make a deman orally
or by letter, it means that the debt is due and demandable.
“time instrument”- demandable at a fixed time or fixed time of maturity.
“demand instrument” mag mature agad, after delivery (payable anytime)

Ex. I promise to pay P or order the sum of P10K.

No date given, so immediately due and demandable.

I promise to pay P or order the sum of P10K, 30 days after issue. – This is a time instrument, it has
determinable future time

I promise to pay P or order the sum of P10K on March 30. – Not negotiable. No determinable
future time because there is no date.

(b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as

regards the person so issuing, accepting, or indorsing it, payable on demand.

Sec. 8. When payable to order. - The instrument is payable to order where it is

drawn payable to the order of a specified person or to him or his order. It may be
drawn payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.

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

There should be an “order to pay” so that it can be indorsed or negotiated from

one person to another.

Ex.
I promise to pay P the sum of P10K on March 30, 2019. Not negotiable because it is payable only
to one person.
I promise to pay P or order the sum of P10K on March 30, 2019. Negotiable.
Case List:
1. Kauffman vs. PNB 42 Phil 182

GEORGE A. KAUFFMAN, plaintiff and appellee, vs. THE PHILIPPINE NATIONAL BANK, defendant and
appellant. [No. 16454. September 29, 1921]

FYI.
 PFPC – Philippine Fiber & Produce Company
 George A. Kauffman - was the president of a domestic corporation (PFPC) engaged
chiefly in the exportation of hemp known as the, of which company the Kauffman
apparently held in his own right nearly the entire issue of capital stock.
 The board of directors of PFPC declared a dividend of P100,000 from its surplus earnings for
the year 1917 (so this is why Kauffman was entitled to P98,000)
 George Wicks – Treasurer of PFPC

FACTS: George Kauffman was entitled to the sum of P98,000 from the surplus earnings of PFPC
which was placed to his credit on the company’s books.

On October 9, 1918, George B. Wicks, TREASURER of PFPC requested from PNB Manila that a
telegraphic transfer of $45,000 should be made to Kauffman in New York City, upon account of
the PFPC. The TREASURER was informed that the total cost of said transfer, including exchange
and cost of message, would be P90,355.50. Accordingly, Wicks, drew and delivered a check for
that amount on the PNB which is the total costs of said transfer. As evidence of this transaction a
document was made out and delivered to Wicks, which is referred to by the bank's assistant
cashier as its official receipt.

On the same day, PNB dispatched to its New York agency a cablegram to the following effect:
Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000. (Sgd.)
PHILIPPINE NATIONAL BANK, Manila.

Upon receipt of the telegraphic message, PNB’s representative advised the withholding of the
money from Kauffman, in view of his reluctance to accept certain bills of the PFPC. The PNB
agreed and sent to its NY agency another message to withhold the payment as suggested.

WICKS, the PFPC treasurer, advice Kauffman that $45,000 had been placed to his credit in the NY
agency, he presented himself at the PNB NY and demanded the money but was refused due to
the direction of the withholding of payment. Kauffman instituted the present action in the CFI to
recover said sum, with interest and costs; and judgment was rendered in his favor. PNB appealed

ISSUE: Is the Negotiable Instruments Law applicable to this case?

HELD: NO. The provisions of the Negotiable Instruments Law can come into operation there must
be a document in existence of the character described in section 1 of the Law; and no rights
properly speaking arise in respect to said instrument until it is delivered.

In the case. It is true that there was an order by the PNB to its New York branch, for the payment
of a specified sum of money to George A. Kauffman. BUT this order was not made payable "to
order or "to bearer," as required in subsection (d) of that Act; and inasmuch as it never left the
possession of the bank, or its representative in New York City, there was no delivery in the sense
intended in section 16 of the same Law. The Negotiable Instrument Law cannot come into
operation unless the document in existence is of the character described in Section 1 of the law.
In this connection it is unnecessary to point out that the official receipt delivered by the bank to
the purchaser of the telegraphic order, and already set out above, cannot itself be viewed in the
light of a negotiable instrument, although it affords complete proof of the obligation actually
assumed by the bank.

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

following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
 2. GSIS v. CA 170 SCRA 533

GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner, vs. COURT OF APPEALS and MR. & MRS.
ISABELO R. RACHO, respondents.
G.R. No. 40824. February 23, 1989

FACTS:

Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs Flaviano
Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor of petitioner
Government Service Insurance System (hereinafter referred to as GSIS) and subsequently, another
deed of mortgage, dated April 14, 1958, in connection with two loans granted by the latter in the
sums of P11,500.00 and P3,000.00, respectively.1 A parcel of land covered by Transfer Certificate
of Title No. 38989 of the Register of Deed of Quezon City, co-owned by said mortgagor spouses,
was given as security under the aforesaid two deeds.2 They also executed a “promissory note”
which states in part:

“x x x for value received, we the undersigned . . . JOINTLY, SEVERALLY and SOLIDARILY, promise to
pay the GOVERNMENT SERVICE INSURANCE SYSTEM the sum of . . . (P11,500.00) Philippine Currency,
with interest at the rate of six (6%) per centum compounded monthly payable in . . . (120) equal
monthly installments of . . .(P127.65) each.”3

On July 11, 1961, the Lagasca spouses executed an instrument denominated “Assumption of
Mortgage” under which they obligated themselves to assume the aforesaid obligation to the GSIS
and to secure the release of the mortgage covering that portion of the land belonging to herein
private respondents and which was mortgaged to the GSIS.4 This undertaking was not fulfilled.5

Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the
payment of the amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the
mortgaged property to be sold at public auction on December 3, 1962.

More than two years thereafter, or on August 23, 1965, herein private respondents filed a
complaint against the petitioner and the Lagasca spouses in the former Court of First Instance of
Quezon City,7 praying that the extrajudicial foreclosure “made on their property and all other
documents executed in relation thereto in favor of the Government Service Insurance System” be
declared null and void. It was further prayed that they be allowed to recover said property, and/or
the GSIS be ordered to pay them the value thereof, and/or they be allowed to repurchase the
land. Additionally, they asked for actual and moral damages and attorney’s fees.

In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts
not as sureties or guarantors for the Lagasca spouses but they merely gave their common property
to the said co-owners who were solely benefited by the loans from the GSIS.

In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No.
2031, otherwise known as the Negotiable Instruments Law, which provide that an
accommodation party is one who has signed an instrument as maker, drawer, acceptor of
indorser without receiving value therefor, but is held liable on the instrument to a holder for value
although the latter knew him to be only an accommodation party.
ISSUE:
Whether or not the promissory note and mortgage deed are negotiable instruments?

HELD: NO. The promissory note and the mortgage deeds in question are not negotiable
instruments because they are neither payable to order nor to bearer.
These documents do not comply with the fourth requisite to be considered as such under Section
1 of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable
to a specified party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would
not apply; governance shall be afforded, instead, by the provisions of the Civil Code and special
laws on mortgages.

Note.—Promissory note must be payable to order or bearer to be negotiable. (Consolidated

Plywood Industries, Inc. vs. IFC Leasing and Acceptance Corporation, 149 SCRA 448.)
 3. Papa v. Valencia GR No. 105188

MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte, petitioner, vs. A. U.
VALENCIA and CO. INC., FELIX PEARROYO, SPS. ARSENIO B. REYES & AMANDA SANTOS, and DELFIN
JAO, respondents.
[G.R. No. 105188. January 23, 1998]

FACTS:
Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc. (hereinafter
referred to as respondent Valencia, for brevity) and Felix Peñarroyo (hereinafter called
respondent Peñarroyo), filed a complaint for specific performance against herein petitioner
Myron C. Papa, in his capacity as administrator of the Testate Estate of one Angela M. Butte.

On 15 June 1973, petitioner Myron C. Papa, acting as attorney-in-fact of Angela M. Butte, sold to
respondent Peñarroyo, through respondent Valencia, a parcel of land, in Quezon City, and
covered by Transfer Certificate of Title No. 28993 of the Register of Deeds of Quezon City; that prior
to the alleged sale, the said property, together with several other parcels of land likewise owned
by Angela M. Butte, had been mortgaged by her to the Associated Banking Corporation (now
Associated Citizens Bank); that after the alleged sale, but before the title to the subject property
had been released, Angela M. Butte passed away; that despite representations made by herein
respondents to the bank to release the title to the property sold to respondent Peñarroyo, the
bank refused to release it unless and until all the mortgaged properties of the late Angela M. Butte
were also redeemed; that in order to protect his rights and interests over the property, respondent
Peñarroyo caused the annotation on the title of an adverse claim as evidenced by Entry No. P.E.-
6118/T-28993, inscribed on 18 January 1977.

The complaint further alleged that it was only upon the release of the title to the property,
sometime in April 1977, that respondents Valencia and Peñarroyo discovered that the mortgage
rights of the bank had been assigned to one Tomas L. Parpana (now deceased), as special
administrator of the Estate of Ramon Papa, Jr., on 12 April 1977; that since then, herein petitioner
had been collecting monthly rentals in the amount of P800.00 from the tenants of the property,
knowing that said property had already been sold to private respondents on 15 June 1973; that
despite repeated demands from said respondents, petitioner refused and failed to deliver the title
to the property. Thereupon, respondents Valencia and Peñarroyo filed a complaint for specific
performance, praying that petitioner be ordered to deliver to respondent Peñarroyo the title to
the subject property (TCT 28993); to turn over to the latter the sum of P72,000.00 as accrued rentals
as of April 1982, and the monthly rental of P800.00 until the property is delivered to respondent
Peñarroyo; to pay respondents the sum of P20,000.00 as attorney’s fees; and to pay the costs of
the suit.

ISSUE:
If the holder intentionally did not encash the check will the sale be consummated in the light of
Article 1249 of the Civil Code?

HELD:
YES. After more than ten (10) years from the payment in part by cash and in part by check, the
presumption is that the check had been encashed.

GR: Encashment is the operative act and not the tender of the negotiable instrument.
It is an undisputed fact that respondents Valencia and Peñarroyo had given petitioner Myron C.
Papa the amounts of Five Thousand Pesos (P5,000.00) in cash on 24 May 1973, and Forty Thousand
Pesos (P40,000.00) in check on 15 June 1973, in payment of the purchase price of the subject lot.
Petitioner himself admits having received said amounts, and having issued receipts therefor.
Petitioner’s assertion that he never encashed the aforesaid check is not substantiated and is at
odds with his statement in his answer that “he can no longer recall the transaction which is
supposed to have happened 10 years ago.” After more than ten (10) years from the payment in
part by cash and in part by check, the presumption is that the check had been encashed. As
already stated, he even waived the presentation of oral evidence.

Note: Failure of a payee to encash a check for more than ten (10) years undoubtedly resulted in
the impairment of the check through his unreasonable and unexplained delay.—Granting that
petitioner had never encashed the check, his failure to do so for more than ten (10) years
undoubtedly resulted in the impairment of the check through his unreasonable and unexplained
delay.
 4. Cebu International v. CA G.R. No. 123031
CEBU INTERNATIONAL FINANCE CORPORATION, petitioner, vs. COURT OF APPEALS, VICENTE
ALEGRE, respondents.
G.R. No. 123031. October 12, 1999

FACTS:
Cebu International Finance Corporation (CIFC), a quasibanking institution, is engaged in money
market operations.

On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred thousand
(P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on May 27, 1991. The
note for five hundred sixteen thousand, two hundred thirty-eight pesos and sixty-seven centavos
(P516,238.67) covered private respondent’s placement plus interest at twenty and a half (20.5%)
percent for thirty-two (32) days.

On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for five hundred
fourteen thousand, three hundred ninety pesos and ninety-four centavos (P514,390.94) in favor of
the private respondent as proceeds of his matured investment plus interest. The CHECK was
drawn from petitioner’s current account number 0011-0803-59, maintained with the Bank of the
Philippine Islands (BPI), main branch at Makati City.

On June 17, 1991, private respondent’s wife deposited the CHECK with Rizal Commercial Banking
Corp. (RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK with the annotation, that
the “Check (is) Subject of an Investigation.” BPI took custody of the CHECK pending an
investigation of several counterfeit checks drawn against CIFC’s afore-stated checking account.
BPI used the check to trace the perpetrators of the forgery.

Immediately, private respondent notified CIFC of the dishonored CHECK and demanded, on
several occasions, that he be paid in cash. CIFC refused the request, and instead instructed
private respondent to wait for its ongoing bank reconciliation with BPI. Thereafter, private
respondent, through counsel, made a formal demand for the payment of his money market
placement. In turn, CIFC promised to replace the CHECK but required an impossible condition
that the original must first be surrendered.

ISSUE:
Whether or not the Negotiable Instruments Law is applicable in this case?

HELD:
NO. The provision applicable in this case is Article 1249 of the New Civil Code.
In the case at bar, the transaction is in the nature of a loan. Petitioner accepted the check but
when he tried to encash it, it was dishonored.

The holder has an immediate recourse against the drawer, and consequently could immediately
file an action for the recovery of the value of the check. Further, in a loan transaction, the
obligation to pay a sum certain in money may be paid in money, which is the legal tender or, by
the use of a check. A check is not legal tender, and therefore cannot constitute valid tender
of payment.
Article 1249 of the New Civil Code deals with a mode of extinction of an obligation and expressly
provides for the medium in the “payment of debts.” It provides that:
“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.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.”

Considering the nature of a money market transaction, the above-quoted provision should be
applied in the present controversy. As held in Perez vs. Court of Appeals,10 a “money market is a
market dealing in standardized short-term credit instruments (involving large amounts) where
lenders and borrowers do not deal directly with each other but through a middle man or dealer
in open market. In a money market transaction, the investor is a lender who loans his money to a
borrower through a middleman or dealer.

In the case at bar, the money market transaction between the petitioner and the private
respondent is in the nature of a loan. The private respondent accepted the CHECK, instead of
requiring payment in money. Yet, when he presented it to RCBC for encashment, as early as June
17, 1991, the same was dishonored by non-acceptance, with BPI’s annotation: “Check (is) subject
of an investigation.” These facts were testified to by BPI’s manager. Under these circumstances,
and after the notice of dishonor, the holder has an immediate right of recourse against the
drawer, and consequently could immediately file an action for the recovery of the value of the
check.

Note:

What law governs the money market transaction of CIFC with Alegre?
Article 1249 of the Civil Code

Is a check a legal tender? NO. A check is not a legal tender, and therefore cannot constitute valid
tender of payment.

In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which
is the legal tender or, by the use of a check. A check is not a legal tender, and therefore cannot
constitute valid tender of payment. In the case of Philippine Airlines, Inc. vs. Court of Appeals, this
Court held: “Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment (citation omitted). 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. Mere delivery of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the payment by commercial
document is actually realized (Art. 1249, Civil Code, par. 3.)”

Was Alegre bound by the compromise agreement of CICF and BPI? NO. The compromise
agreement could not bind a party who did not sign the compromise agreement nor avail of its
benefits.

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a

litigation or put an end to one already commenced. It is an agreement between two or more
persons who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual
consent in the manner which they agree on, and which everyone of them prefers in the hope of
gaining, balanced by the danger of losing. The compromise agreement could not bind a party
who did not sign the compromise agreement nor avail of its benefits. Thus, the stipulations in the
compromise agreement is unenforceable against Vicente Alegre, not a party thereto. His money
could not be the subject of an agreement between CIFC and BPI. Although Alegre’s money was
in custody of the bank, the bank’s possession of it was not in the concept of an owner. BPI cannot
validly appropriate the money as its own.

When the BPI deducted the amount of the check from CIFC’s current account, did this ipso facto
operate as a discharge or payment of the check?

NO.CIFC has not yet tendered a valid payment of its obligation to the private respondent. Tender
of payment involves a positive and unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the former’s obligation and demanding that the latter
accept the same. Tender of payment cannot be presumed by a mere inference from surrounding
circumstances.

To whom was the proceeds given?

 5. Rueda v. Sandiganbayan G.R. No. 129064

JUAN A. RUEDA, JR., petitioner, vs. HONORABLE SANDIGAN-BAYAN and PEOPLE OF THE PHILIPPINES,
respondents.
G.R. No. 129064. November 29, 2000

FACTS:
At times material hereto, petitioner Rueda was the municipal treasurer of Tigaon, Camarines Sur.
On September 20, 1989, a team of state auditors, headed by Amparo O. Albeus, conducted an
audit examination of the accountabilities of petitioner Rueda as municipal treasurer of Tigaon,
Camarines Sur, covering the period February 8, 1989 to September 20, 1989. As a result of the
audit, it was assumed that petitioner had a “cash shortage” of P107,299.02 (Exh. “A-2”). The
corresponding report of cash examination was thereafter accomplished. When confronted
therewith, petitioner affixed his signature (Exh. “A-1”) on the certification on the dorsal portion of
the report to the effect that his accountability for the funds of the municipal government of
Tigaon, Camarines Sur was correctly stated.

On October 3, 1989, the auditors sent a formal written demand to petitioner Rueda, requiring him
to immediately produce the sum of P107,299.02, representing the “shortage” on his
accountabilities as municipal treasurer of Tigaon, Camarines, Sur, and to explain in writing within
seventy-two (72) hours why the shortage occurred (Exh. “B”). Notwithstanding receipt of the letter
(Exh. “B-1”), petitioner failed to have the said amount forthcoming or to tender his written
explanation why the shortage occurred.

In his defense, petitioner Rueda disclaimed any criminal liability on the ground that the assumed
“shortage” was the result of unliquidated cash advances made by several municipal officials and
employees of Tigaon, Camarines Sur, spanning the period covered by the audit as evidenced by
various “chits” or “vales” (Exhs. 11-15), and expenses of the municipal government of Tigaon as
evidenced by several disbursement vouchers (Exhs. 16, 17, 18, 20, 21, 25, 26, 27, 28, 29 and 30).
Petitioner Rueda declared that the municipal officials and employees took the cash advances
from the cash collections of the municipal collectors before the cash collections, in the total
amount of P41,234.71, were turned over to him as municipal treasurer. What they turned over to
him were the “chits” and “vales” evidencing such cash advances. Although he never tolerated
the practice and had verbally warned the municipal officials and employees from making those
cash advances, they continued to do so.7

Petitioner Rueda stressed that the cash advances were made with the consent of the municipal
mayor, and had been the practice in the municipality of Tigaon long before he assumed office
as municipal treasurer. He would later on deduct the cash advances made from their respective
salaries in installment, and after they were paid, he would turn over the amount to the office of
the municipal treasurer. With respect to the subject “chits” and “vales,” petitioner Rueda declared
that after the same were paid, he turned over the amount to the office of the municipal treasurer
who then credited those payments as “restitution” of the shortage on his total cash
accountability.8 Thus, the “debtors” themselves liquidated the cash advances and petitioner’s
accountabilities had been fully restituted before the start of the preliminary investigation in the
office of the Ombudsman.

A day before the state auditors from the Commission on Audit conducted an audit examination
of his cash accountabilities, the internal auditors from the provincial treasurer’s office conducted
a similar examination. This group of internal auditors advised him not to bring the matter about
“vales” or cash advances to the COA audit team because they would only disallow them for lack
of supporting documents. This is the reason why he did not present the disbursement vouchers in
the course of the audit conducted by the State Auditors on September 20, 1989.

After the audit of September 20, 1989, petitioner Rueda began completing the supporting
documents of those disbursement vouchers. Upon completion of those “vales” and “chits” as
supporting documents, he submitted the same together with the disbursement vouchers to the in-
charge-of office of the municipal treasurer, who credited the amounts reflected on those
disbursement vouchers as “restitution” of the shortage on his total accountability.

ISSUE:
a. What does “cash” mean in a generally accepted auditing practice?
b. Whether or not Negotiable Instruments are cash? YES. Petty cash funds or change funds
and negotiable instruments, such as personal checks, travelers’ checks, cashiers’ checks,
bank drafts, and money orders are also items commonly reported as cash.
GR: NI are not cash, only substitute for cash.
XPN: This case.

HELD:
a. “Cash” as consisting of those items that serve as a medium of exchange and provide a
basis for accounting measurement, and to be reported as “cash,” an item must be readily
available and not restricted for use in the payment of current obligations.

The auditor’s finding of a “cash shortage” is definitely wrong. In fact and under accounting
principles, there is no cash shortage. The cash and other valid cash items were produced
by petitioner and counted by the auditors in the total amount of P170,195.26. The amount
is intact in cash. The assumed shortage of P107,229.02 represented “vales,” “chits” and
“disbursement vouchers” considered as part of the general fund. This is an auditing error. It
is a generally accepted auditing principle that cash means “cash on hand or in bank.”

b. YES. A general guideline is whether an item is acceptable for deposit at face value by a
bank or other financial institution. “Items that are classified as cash include coin and
currency on hand, and unrestricted funds available on deposit in a bank, which are often
called demand deposits since they can be withdrawn upon demand. Petty cash funds or
change funds and negotiable instruments, such as personal checks, travelers’ checks,
cashiers’ checks, bank drafts, and money orders are also items commonly reported as
cash. The total of these items plus undeposited coin and currency is sometimes called cash
on hand. Interest-bearing accounts, or time deposits, also are usually classified as cash,
even though a bank legally can demand prior notification before a withdrawal can be
made. In practice, banks generally do not exercise this legal right.
 6. Barreto v. CA G.R. No. 132362

PIO BARRETTO REALTY DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS, JUDGE
PERFECTO A.S. LAGUIO, JR., RTC-Branch 18, Manila, and HONOR P. MOSLARES, respondents.
G.R. No. 132362. June 28, 2001

FACTS:

On 2 October 1984 respondent Honor P. Moslares instituted an action for annulment of sale with
damages before the Regional Trial Court of Manila against the Testate Estate of Nicolai Drepin
represented by its Judicial Administrator Atty. Tomas Trinidad and petitioner Pio Barretto Realty
Development Corporation. Moslares alleged that the Deed of Sale over four (4) parcels of land of
the Drepin Estate executed in favor of the Barretto Realty was null and void on the ground that
the same parcels of land had already been sold to him by the deceased Nicolai Drepin. The case
was docketed as Civil Case No. 84-27008 and raffled to respondent Judge Perfecto A.S. Laguio,
Jr., RTC-Br. 18, Manila.

On 2 May 1986 the parties, to settle the case, executed a Compromise Agreement. On 24 July
1986 the trial court rendered a decision approving the Compromise Agreement.2 However,
subsequent disagreements arose on the question of who bought the properties first.

It must be noted that the Compromise Agreement merely gave Moslares and Barretto Realty
options to buy the disputed lots thus implicitly recognizing that the one who paid first had priority
in right. Moslares claimed that he bought the lots first on 15 January 1990 by delivering to Atty.
Tomas Trinidad two (2) PBCom checks, one (1) in favor of Barretto Realty for P3 million, and the
other, in favor of the Drepin Estate for P1.35 million.

But petitioner Barretto Realty denied receiving the check. Instead, it claimed that it bought the
properties on 7 March 1990 by tendering a Traders Royal Bank Manager’s Check for P1 million to
Moslares, and a Far East Bank and Trust Company Cashier’s Check for P1 million and a Traders
Royal Bank Manager’s Check for P350,000.00 to Atty. Tomas Trinidad as Judicial Administrator of
the Estate. However, Moslares and Atty. Trinidad refused to accept the checks.

Consequently, Barretto Realty filed a motion before the trial court alleging that it complied with
its monetary obligations under the Compromise Agreement but that its offers of payment were
refused, and prayed that a writ of execution be issued to compel Moslares and Atty. Trinidad to
comply with the Compromise Agreement and that the latter be directed to turn over the owner’s
duplicate certificates of title over the lots.

On 10 May 19903 Judge Laguio, Jr. ordered that “a writ of execution be issued for the enforcement
of the decision of this Court for the parties to deposit with this Court, thru the City Treasurer’s Office
of Manila, their respective monetary obligations under the compromise agreement that had been
executed by them x x x x”

Reacting to the order, Atty. Trinidad for the Estate filed an urgent motion to hold the execution in
abeyance on the ground that there was another case involving the issue of ownership over
subject lots pending before the Regional Trial Court of Antipolo City. Moslares in turn filed a motion
for reconsideration while Barretto Realty moved to amend the order since the lower court did not
exactly grant what it prayed for.
Issue/Held:

a. What is the effect of the delivery of the check?

While delivery of a check produces the effect of payment only when it is encashed, the rule is
otherwise if the debtor was prejudiced by the creditor’s unreasonable delay in presentments —
acceptance of a check implies an undertaking of due diligence in presenting it for payment.
Clearly then respondent Judge Laguio no longer had any jurisdiction whatsoever to act on, much
less grant, the motion for execution and supplement thereto filed by Moslares on 17 September
1993 or more than three (3) years later, claiming that he had already bought the lots. The fact that
the check paid to him by Barretto Realty was never encashed should not be invoked against the
latter. As already stated, Moslares never questioned the tender done three (3) years earlier.

b. Is it not that payment takes effect only when the check is encashed?
Besides, while delivery of a check produces the effect of payment only when it is encashed, the
rule is otherwise if the debtor was prejudiced by the creditor’s unreasonable delay in presentment.
Acceptance of a check implies an undertaking of due diligence in presenting it for payment. If
no such presentment was made, the drawer cannot be held liable irrespective of loss or injury
sustained by the payee. Payment will be deemed effected and the obligation for which the
check was given as conditional payment will be discharged.

Moslares accepted the check so Article 1249 should apply. SC held and exception to the rule,
when the drawer is prejudiced by the drawee. There is deemed a discharge of the check.
 7. BPI v. Spouses Reynaldo & Royeca G.R. No. 176664
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. SPOUSES REYNALDO AND VICTORIA ROYECA,
respondents.
G.R. No. 176664. July 21, 2008.

FACTS:
On August 23, 1993, spouses Reynaldo and Victoria Royeca (respondents) executed and
delivered to Toyota Shaw, Inc. a Promissory Note3 for P577,008.00 payable in 48 equal monthly
installments of P12,021.00, with a maturity date of August 18, 1997. The Promissory Note provides
for a penalty of 3% for every month or fraction of a month that an installment remains unpaid.

To secure the payment of said Promissory Note, respondents executed a Chattel Mortgage 4 in
favor of Toyota over a certain motor vehicle. Toyota, with notice to respondents, executed a
Deed of Assignment5 transferring all its rights, title, and interest in the Chattel Mortgage to Far East
Bank and Trust Company (FEBTC).

Claiming that the respondents failed to pay four (4) monthly amortizations covering the period
from May 18, 1997 to August 18, 1997, FEBTC sent a formal demand to respondents on March 14,
2000 asking for the payment thereof, plus penalty.6 The respondents refused to pay on the ground
that they had already paid their obligation to FEBTC.

On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the respondents
with the Metropolitan Trial Court (MeTC) of Manila praying for the delivery of the vehicle, with an
alternative prayer for the payment of P48,084.00 plus interest and/or late payment charges at the
rate of 36% per annum from May 18, 1997 until fully paid. The complaint likewise prayed for the
payment of P24,462.73 as attorney’s fees, liquidated damages, bonding fees and other expenses
incurred in the seizure of the vehicle. The complaint was later amended to substitute BPI as plaintiff
when it merged with and absorbed FEBTC.7

In their Answer, respondents alleged that on May 20, 1997, they delivered to the Auto Financing
Department of FEBTC eight (8) postdated checks in different amounts totaling P97,281.78. The
Acknowledgment Receipt,8 which they attached to the Answer, showed that FEBTC received
checks. The respondents further averred that they did not receive any notice from the drawee
banks or from FEBTC that these checks were dishonored. They explained that, considering this and
the fact that the checks were issued three years ago, they believed in good faith that their
obligation had already been fully paid. They alleged that the complaint is frivolous and plainly
vexatious. They then prayed that they be awarded moral and exemplary damages, attorney’s
fees and costs of suit.9

During trial, Mr. Vicente Magpusao testified that he had been connected with FEBTC since 1994
and had assumed the position of Account Analyst since its merger with BPI. He admitted that they
had, in fact, received the eight checks from the respondents. However, two of these checks
(Landbank Check No. 0610947 and FEBTC Check No. 17A00-11551P) amounting to P23,692.00
were dishonored. He recalled that the remaining two checks were not deposited anymore due
to the previous dishonor of the two checks. He said that after deducting these payments, the total
outstanding balance of the obligation was P48,084.00, which represented the last four monthly
installments.
Issue: Whether the tender of the check constitutes payment?

HELD:

NO. Settled is the rule that payment must be made in legal tender. A check is not legal tender
and, therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only
a substitute for money and not money, the delivery of such an instrument does not, by itself,
operate as payment. Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized.

Note: Reasonable banking practice and prudence dictates that, when a check given to a
creditor bank in payment of an obligation is dishonored, the bank should immediately return it to
the debtor and demand its replacement or payment lest it causes any prejudice to the drawer.
 8. Mitra v. People & Tarcel G.R. No. 191404

FACTS:

Petitioner Eumelia R. Mitra (Mitra) was the Treasurer, and Florencio L. Cabrera, Jr. (now deceased)
was the President, of Lucky Nine Credit Corporation (LNCC), a corporation engaged in money
lending activities.

Between 1996 and 1999, private respondent Felicisimo S. Tarcelo (Tarcelo) invested money in
LNCC. As the usual practice in money placement transactions, Tarcelo was issued checks
equivalent to the amounts he invested plus the interest on his investments. The following checks,
signed by Mitra and Cabrera, were issued by LNCC to Tarcelo.

When Tarcelo presented these checks for payment, they were dishonored for the reason
“account closed.” Tarcelo made several oral demands on LNCC for the payment of these checks
but he was frustrated. Constrained, in 2002, he caused the filing of seven informations for violation
of Batas Pambansa Blg. 22 (BP 22) in the total amount of P925,000.00 with the MTCC in Batangas
City.

Issue: What are the functions and importance of Negotiable Instrument.

HELD:
A check is a negotiable instrument that serves as a substitute for money and as a convenient form
of payment in financial transactions and obligations.— The use of checks as payment allows
commercial and banking transactions to proceed without the actual handling of money, thus,
doing away with the need to physically count bills and coins whenever payment is made. It
permits commercial and banking transactions to be carried out quickly and efficiently. But the
convenience afforded by checks is damaged by unfunded checks that adversely affect
confidence in our commercial and banking activities, and ultimately injure public interest.

Negotiable Instrument; definition.

A negotiable instrument is a special contract which on its face is signed by the maker or drawer,
making an unqualified promise or order to pay on demand or at a fixed or determinable future
time, a sum certain in money, to order or bearer, and when it is addressed to a drawee, the latter
must be named or otherwise indicated therein with reasonable certainty.

Or simply stated: It is a special contract which complies with the requirements laid down under
Section 1 of the Negotiable Instruments Law.

Purpose of the enactment of the Negotiable Instruments Law

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. (Osmeña vs. Citibank, March 23, 2004)

Functions of a Negotiable Instrument.

 Substitute for money—merchants often do not want to carry cash for fear of loss or theft
 Credit device—some forms of negotiable instruments extend credit from one party to
another.
 Recordkeeping device—these records are used for financial statements, tax returns, and
the like.
 9. Halley v. Printwell G.R. No. 157549

FACTS:

The petitioner was an incorporator and original director of Business Media Philippines, Inc. (BMPI),
which, at its incorporation on November 12, 1987,3 had an authorized capital stock of
P3,000,000.00 divided into 300,000 shares each with a par value of P10.00, of which 75,000 were
initially subscribed.

Printwell engaged in commercial and industrial printing. BMPI commissioned Printwell for the
printing of the magazine Philippines, Inc. (together with wrappers and subscription cards) that
BMPI published and sold. For that purpose, Printwell extended 30-day credit accommodations to
BMPI.

In the period from October 11, 1988 until July 12, 1989, BMPI placed with Printwell several orders
on credit, evidenced by invoices and delivery receipts totaling P316,342.76. Considering that BMPI
paid only P25,000.00, Printwell sued BMPI on January 26, 1990 for the collection of the unpaid
balance of P291,342.76 in the RTC.4On February 8, 1990, Printwell amended the complaint in order
to implead as defendants all the original stockholders and incorporators to recover on their
unpaid subscriptions.

The defendants filed a consolidated answer,6 averring that they all had paid their subscriptions in
full; that BMPI had a separate personality from those of its stockholders; that Rizalino C. Viñeza had
assigned his fully-paid up shares to a certain Gerardo R. Jacinto in 1989; and that the directors
and stockholders of BMPI had resolved to dissolve BMPI during the annual meeting held on
February 5, 1990.

To prove payment of their subscriptions, the defendant stockholders submitted in evidence BMPI
official receipt (OR) In addition, the stockholders submitted other documents in evidence, namely:
(a) an audit report dated March 30, 1989 prepared by Ilagan, Cepillo & Associates (submitted to
the SEC and the BIR);7 (b) BMPI balance sheet8 and income statement9 as of December 31, 1988;
(c) BMPI income tax return for the year 1988 (stamped “received” by the BIR); 10 (d) journal
vouchers;11 (e) cash deposit slips;12 and (f) Bank of the Philippine Islands (BPI) savings account
passbook in the name of BMPI.

Issue/Held:

a. Is check money?
NO, check is not money.
Payment is defined as the delivery of money.45 Yet, because a check is not money and only
substitutes for money, the delivery of a check does not operate as payment and does not
discharge the obligation under a judgment.46The delivery of a bill of exchange only produces the
fact of payment when the bill has been encashed.47 The following passage from Bank of Philippine
Islands v. Royeca48 is enlightening:
“Settled is the rule that payment must be made in legal tender. A check is not legal tender
and, therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only
a substitute for money and not money, the delivery of such an instrument does not, by itself,
operate as payment. Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized.
 To establish their defense, the respondents therefore had to present proof, not only that they
delivered the checks to the petitioner, but also that the checks were encashed. The respondents
failed to do so. Had the checks been actually encashed, the respondents could have easily
produced the cancelled checks as evidence to prove the same. Instead, they merely averred
that they believed in good faith that the checks were encashed because they were not notified
of the dishonor of the checks and three years had already lapsed since they issued the checks.
Because of this failure of the respondents to present sufficient proof of payment, it was no
longer necessary for the petitioner to prove non-payment, particularly proof that the checks were
dishonored. The burden of evidence is shifted only if the party upon whom it is lodged was able
to adduce preponderant evidence to prove its claim.”

b. When does a bill of exchange produce the fact of payment?

The delivery of a bill of exchange only produces the fact of payment when the bill has been
encashed.

Ostensibly, therefore, the petitioner’s mere submission of the receipt issued in exchange of the
check did not satisfactorily establish her allegation of full payment of her subscription. Indeed, she
could not even inform the trial court about the identity of her drawee bank,49 and about whether
the check was cleared and its amount paid to BMPI.50 In fact, she did not present the check itself.

(Note instructive as to the principle of the “trust fund doctrine” in corporation law. But this topic is
outside the scope of the negotiable instrument law which is the prime subject of this work. The
trust fund doctrine enunciates a – xxx rule that the property of a corporation is a trust fund for the
payment of creditors, but such property can be called a trust fund ‘only by way of analogy or
metaphor.’ As between the corporation itself and its creditors it is a simple debtor, and as between
its creditors and stockholders its assets are in equity a fund for the payment of its debts)
 10. People v. Tongko G.R. No. 123567

FACTS:

“That on or about the 20th day of August, 1993, in the Municipality of Pasig, Metro Manila,
Philippines and within the jurisdiction of this Honorable Court, the above-named accused, by
means of deceit and false pretenses committed prior to or simultaneously with the commission of
the fraudulent acts, did then and there willfully, unlawfully and feloniously make or draw and issue
to one, Carmelita Santos to apply on account or for value with the checks and said accused well
knowing at the time of issue he did not have sufficient funds in or credit with the drawee bank for
the payment in full of the face amount of such check upon presentment which check when
presented for payment within ninety (90) days from the date thereof was subsequently dishonored
by the drawee bank for the reason “Account Closed” and despite the lapse of three (3) banking
days from receipt of notice that said check has been dishonored, the accused failed to pay said
payee the face amount of such check or to make arrangement for full payment thereof, to the
damage and prejudice of said Carmelita Santos in the total amount of P100,000.00. CONTRARY
TO LAW.”Accused pled not guilty and underwent trial.

The evidence for the prosecution shows that on September 21, 1990, accused opened savings
and current accounts with Amanah Bank.1 In the morning of August 20, 1993, Marites Bo-ot
brought the accused to the office of Carmelita V. Santos at Room 504 Pacific Place, Pearl Drive,
Ortigas Center, Pasig City to borrow money.2 The accused asked for P50,000.00 to be paid not
later than December 1993.3 He assured Santos that his receivables would come in by November
1993. He persuaded Santos to give the loan by issuing five (5) checks, each in the sum of
P10,000.00, postdated December 20, 1993 and by signing a promissory note.4 The promissory note
was co-signed by Bo-ot. In the afternoon of the same date, the accused returned to Santos and
borrowed an additional P50,000.00. Again, he issued five (5) checks, each worth P10,000.00
postdated December 20, 1993. He also signed a promissory note together with Bo-ot.5

On September 14, 1993, Amanah Bank closed accused’s current account for lack of funds. On
October 19, 1993, accused himself requested for the closing of his savings account.6
Santos did not present accused’s checks to the drawee bank on their due date upon the request
of accused himself.7 Instead, the checks were presented on March 1, 1994 but were dishonored
as accused’s accounts had been closed.8 Accused was informed that his checks had bounced.
He promised to ence, the case at bar.The accused testified for himself. Nobody corroborated his
testimony. He admitted the evidence of the prosecution but alleged that the postdated checks
were issued a day or two after he signed the promissory notes.10 Obviously, he was relying on the
defense that the checks were in payment of a preexisting obligation.

Issue/Held: What is the history of Article 315 (2) (d) of the Revised Penal Code?

The legislature was not thoughtless in imposing severe penalties for violation of par. 2(d) of Article
315 of the Revised Penal Code. The history of the law will show that the severe penalties were
intended to stop the upsurge of swindling by issuance of bouncing checks. It was felt that unless
aborted, this kind of estafa “. . . would erode the people’s confidence in the use of negotiable
instruments as a medium of commercial transaction and consequently result in the retardation of
trade and commerce and the undermining of the banking system of the country.” The Court
cannot impugn the wisdom of Congress in setting this policy.

Is a NI a medium of commercial transaction? YES, a NI is a medium of commercial transaction.

 11. Pacheco v. CA G.R. No. 126670

FACTS:

Petitioner spouses are engaged in the construction business. Complainant Romualdo Vicencio
was a former Judge and his wife, Luz Vicencio, owns a pawnshop in Samar. On May 17, 1989, due
to financial difficulties arising from the repeated delays in the payment of their receivables for the
construction projects from the DPWH,1petitioners were con strained to obtain a loan of P10,000.00
from Mrs. Vicencio. The latter acceded. Instead of merely requiring a note of indebtedness,
however, her husband Mr. Vicencio required petitioners to issue an undated check as evidence
of the loan which allegedly will not be presented to the bank. Despite being informed by
petitioners that their bank account no longer had any funds, Mrs. Vicencio insisted that they issue
the check, which according to her was only a formality. Thus, petitioner Virginia Pacheco issued
on May 17, 1989 an undated RCBC2 check with number CT 101756 for P10,000.00. However, she
only received the amount of P9,000.00 as the 10% interest on the loan was already deducted. Mrs.
Vicencio also required Virginia’s husband, herein petitioner Ernesto Pacheco, to sign the check
on the same understanding that the check is not to be encashed but merely intended as an
evidence of indebtedness which cannot be negotiated.

On June 14, 1989, Virginia obtained another loan of P50,000.00 from Mrs. Vicencio. She received
only P35,000.00 as the previous loan of P10,000.00 as well as the 10% interest amounting to
P5,000.00 on the new loan were deducted by the latter. With the payment of the previous debt,
Virginia asked for the return of the first check (RCBC check no. 101756) but Mrs. Vicencio told her
that her filing clerk was absent. Despite several demands for the return of the first check, Mrs.
Vicencio told Virginia that they can no longer locate the folder containing that check. For the
new loan, she also required Virginia to issue three (3) more checks in various amounts—two checks
for P20,000.00 each and the third check for P10,000.00. Petitioners were not amenable to these
requirements, but Mrs. Vicencio insisted that they issue the same assuring them that the checks
will not be presented to the banks but will merely serve as guarantee for the loan since there was
no promissory note required of them. Due to her dire financial needs, Virginia issued three undated
RCBC checks numbered 101783 and 101784 in the sum of P20,000.00 each and 101785 for
P10,000.00, and again in ormed Mrs. Vicencio that the checks cannot be encashed as the same
were not funded. Petitioner Ernesto also signed the three checks as required by Mrs. Vicencio on
the same conditions as the first check.

On June 20 and July 21, 1989, petitioner Virginia obtained two more loans, one for P10,000.00 and
another for P15,000.00. Again she issued two more RCBC checks (No. 101768 for P10,000.00 and
No. 101774 for P15,000.00) as required by Mrs. Vicencio with the same assurance that the checks
shall not be presented for payment but shall stand only as evidence of indebtedness in lieu of the
usual promissory note.

All the checks were undated at the time petitioners handed them to Mrs. Vicencio. The six checks
represent a total obligation of P85,000.00. However, since the loan of P10,000.00 under the first
check was already paid when the amount thereof was deducted from the proceeds of the
second loan, the remaining account was only P75,000.00. Of this amount, petitioners were able
to settle and pay in cash P60,000.00 in July 1989. Petitioners never had any transaction nor ever
dealt with Mrs. Vicencio’s husband, the complainant herein.

When the remaining balance of P15,000.00 on the loans became due and demandable,
petitioners were not able to pay despite demands to do so. On August 3, 1992, Mrs. Vicencio
together with her husband and their daughter Lucille, went to petitioners’ residence to persuade
Virginia to place the date “August 15, 1992” on checks nos. 101756 and 101774, although said
checks were respectively given undated to Mrs. Vicencio on May 17, 1989 and July 21, 1989.
Check no. 101756 was required by Mrs. Vicencio to be dated as additional guarantee for the
P15,000.00 unpaid balance allegedly under check no. 101774. Despite being informed by
petitioner Virginia that their account with RCBC had been closed as early as August 17, 1989, Mrs.
Vicencio and her daughter insisted that she place a date on the checks allegedly so that it will
become evidence of their indebtedness. The former reluctantly wrote the date on the checks for
fear that she might not be able to obtain future loans from Mrs. Vicencio.

Later, petitioners were surprised to receive on August 29, 1992 a demand letter from Mrs.
Vicencio’s spouse informing them that the checks when presented for payment on August 25,
1992 were dishonored due to “Account Closed.” Consequently, upon the complaint of Mrs.
Vicencio’s husband with whom petitioners never had any transaction, two informations for estafa,
defined in Article 315(2)(d) of the Revised Penal Code, were filed against them. The informations
which were amended on April 1, 1993 alleged that petitioners “through fraud and false pretenses
and in payment of a diamond ring (gold necklace)” issued checks which when presented for
payment were dishonored due to account closed.3 After entering a plea of not guilty during
arraignment, petitioners were tried and sentenced to suffer imprisonment and ordered to
indemnify the complainant in the total amount of P25,000.00.4

Issue/Held:

What are the elements of the felony of estafa under Article 315 (2) (d) of the Revised Penal Code?

The essential elements in order to sustain a conviction under the above paragraph are: 1. that the
offender postdated or issued a check in payment of an obligation contracted at the time the
check was issued; 2. that such postdating or issuing a check was done when the offender had no
funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the
check; 3. deceit or damage to the payee thereof.

Can one waive the negotiable character of the check and treat it simply as proof of an obligation
(evidence of indebtedness)?

YES. A check has the character of negotiability and at the same time it constitutes an evidence
of indebtedness; A drawer who issues a check as security or evidence of investment is not liable
for estafa.—The first and third elements are not present in this case. A check has the character of
negotiability and at the same time it constitutes an evidence of indebtedness. By mutual
agreement of the parties, the negotiable character of a check may be waived and the
instrument may be treated simply as proof of an obligation. There cannot be deceit on the part
of the obligor, petitioners herein, because they agreed with the obligee at the time of the issuance
and postdating of the checks that the same shall not be encashed or presented to the banks. As
per assurance of the lender, the checks are nothing but evidence of the loan or security thereof
in lieu of and for the same purpose as a promissory note. By their own covenant, therefore, the
checks became mere evidence of indebtedness. It has been ruled that a drawer who issues a
check as security or evidence of investment is not liable for estafa.

How material is the fact that the check was issued undated? Not material as long as it is not done
for an illegal or fradualent purpose.

Note: When date may be inserted.—Where an instrument expressed to be payable at a fixed

period after date is issued undated, or where the acceptance of an instrument payable at a fixed
period after sight is undated, any holder may insert therein the true date of issue or acceptance,
and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid
the instrument in the hands of a subsequent holder in due course; but as to him, the date so
inserted is to be regarded as the true date. (Italics supplied).

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

What is the effect of a stale check?

Section 186, NIL. Within what time a check must be presented.—A check must be presented for
payment within a reasonable time after its issue or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay.

A check must be presented within a reasonable time from issue. By current banking practice, a
check becomes stale after more than six (6) months. In fact a check long overdue for more than
two and one-half years is considered stale. In this case, the checks were issued more than three
years prior to their presentment. In his complaint, complainant alleged that petitioners bought
jewelry from him and that he would not have parted with his jewelry had not petitioners issued the
checks. The evidence on record, however, does not support the theory of the crime.
 12. Go v. Bacaron G.R. No. 159048
FACTS:

“As evidenced by the Transfer of Rights dated October 1, 1993, Eliodoro Bacaron conveyed a
15.3955-hectare parcel of land located in Langub, Talomo, Davao City, in favor of Benny Go for
P20,000.00.
“About a year thereafter, Bacaron, seeking to recover his property, went to Go to pay his
alleged P20,000.00 ‘loan’ but the latter refused to receive the same and to return his property
saying that the transaction between the two of them was a sale and not a mortgage as claimed
by Bacaron.
“Consequently, on March 5, 1997, Eliodoro Bacaron, as plaintiff [herein respondent], filed
a Complaint for Reformation of Instrument with Damages and prayer for the issuance of a writ of
preliminary injunction, with the Regional Trial Court of Davao City,
Branch 12, against the [petitioner] Benny Go, which case was docketed as Civil Case No. 25,101-
97.
“In his Complaint, [respondent] alleged that in the middle part of 1993, he suffered business
reversals which prompted him, being in urgent need of funds, to borrow P20,000.00 from the
[petitioner]. He however averred that prior to extending said loan to him, the [petitioner] required
him to execute a document purporting to be a Transfer of Rights but was told that the same would
only be a formality as he could redeem the unregistered land the moment he pays the loan.
Admitting that he signed the instrument despite knowing that the same did not express the true
intention of the parties’ agreement, i.e., that the transaction was a mere equitable mortgage, the
[respondent] explained that he did so only because he was in a very tight financial situation and
because he was assured by the [petitioner] that he could redeem his property. To support this
claim, [respondent] stressed the fact that the consideration in the instrument was merely
P20,000.00, which is grossly inadequate as the selling price of a 15-hectare land considering that,
at that time, the market value of land in Davao City amounts to P100,000.00 per hectare.
[Respondent] narrated that a year thereafter, or in a middle part of 1994, he was able to raise the
P20,000.00 and went to the [petitioner] to pay his loan but the latter refused to accept his
payment, insisting that the transaction entered into by the parties was not an equitable mortgage,
as the [respondent] insists, but a real transfer of right over the property. Because of said refusal,
[respondent] continued, he was compelled to refer the matter to his lawyer in order to request
the [petitioner] to accept his payment otherwise he would file the necessary action in court.
Despite said formal demand by the [respondent], however, [petitioner] allegedly continued to
refuse to recognize the ‘equitable mortgage’, prompting [respondent] to consign the P20,000.00
with the Clerk of Court of the RTC of Davao City, Branch 12. He thus insisted that it is [petitioner]
who is ‘dead wrong’ in not recognizing the equitable mortgage since, aside from the fact that
the consideration was unusually inadequate, [respondent] allegedly remained in possession of
the property.
“[Respondent] thus prayed for an award for moral damages, in view of the [petitioner’s]
evident bad faith in refusing to recognize the equitable mortgage, and for attorney’s fees as
[petitioner’s] alleged stubbornness compelled him to engage the services of counsel. He likewise
sought an award for exemplary damages to deter others from committing similar acts and at the
same time asked the court
to issue a writ of preliminary injunction and/or temporary restraining order to prevent [petitioner]
from dispossessing [respondent] of the subject property or from disposing of the same in favor of
third parties as these acts would certainly work injustice for and cause irreparable damage to
the [respondent]. The prayer for the issuance of a restraining order was however denied by the
court in an Order.
“[Petitioner] filed his Answer on May 5, 1997, denying [respondent’s] claim that the transaction
was only an equitable mortgage and not an actual transfer of right. He asserted that the truth of
the matter was that when [respondent] suffered business reverses, his accounts with the
[petitioner], as evidenced by postdated checks, cash vouchers and promissory notes, remained
unpaid and his total indebtedness, exclusive of interests, amounted to P985,423.70. [Petitioner]
further averred that, in order to avoid the filing of cases against him, [respondent] offered to pay
his indebtedness through dacion en pago, giving the land in question as full payment thereof. In
addition, he stressed that considering that the property is still untitled and the [respondent] bought
the same from one Meliton Bacarro for only P50,000.00, it is most unreasonable for him to agree to
accept said land in exchange for over a million pesos of indebtedness. He claimed though that
he was only forced to do so when [respondent] told him that if he did not accept the offer, other
creditors would grab the same.
“By way of affirmative defenses, the [petitioner] pointed out that [respondent] has no cause
of action against him as the [respondent] failed to comply with the essential requisites for an
action for reformation of instrument. He moreover alleged that the [respondent] is in estoppel
because, by his own admission, he signed the document knowing that the same did not express
the true intention of the parties. Further, [petitioner] claimed that there was a valid transfer of the
property herein since the consideration is not only the actual amount written in the instrument but
it also includes the outstanding obligation of [respondent] to the [petitioner] amounting to almost
P1 million.
“As counterclaim, [petitioner] averred that, because of this baseless complaint, he suffered
mental anguish, wounded feelings and besmirched reputation, entitling him to moral damages
amounting to P20,000.00, and that in order to deter others from doing similar acts, exemplary
damages amounting to P20,000.00 should likewise be awarded in his favor. [Petitioner] also
prayed for attorney’s fees and litigation expenses claiming that, because he was constrained to
litigate, he was forced to hire the services of counsel.

Issue: Are checks evidence of indebtedness? YES.

HELD:
Checks presented by petitioner may indeed evince respondent’s indebtedness to him in the
amounts stated on the faces of those instruments.—Checks have the character of negotiability.
At the same time, they may constitute evidence of indebtedness. Those presented by petitioner
may indeed evince respondent’s indebtedness to him in the amounts stated on the faces of
those instruments. He, however, acknowledges (1) that respondent paid some of the obligations
through the coprax delivered to petitioner’s father; and (2) that petitioner owed and
subsequently paid respondent P214,000.
 13. Spouses Tan v. Villapaz G.R. No. 160892
Issue: Can a check prove a loan transaction that was required to be in writing under Article 1358
of the Civil Code (All other contracts where the amount involved exceeds P500.00 must appear
in writing, even private one)?

HELD:
YES.
A check, the entries of which are no doubt in writing, could prove a loan transaction.—As for
petitioners’ reliance on Art. 1358 of the Civil Code, the same is misplaced for the requirement
that contracts where the amount involved exceeds P500.00 must appear in writing is only for
convenience. At all events, a check, the entries of which are no doubt in writing, could prove a
loan transaction.

Note.—There is a binding contract between parties whose minds have met on a certain matter
notwithstanding that they did not affix their signatures to its written form. (People’s Industrial and
Commercial Corporation vs. Court of Appeals, 281 SCRA 206 [1997])

Is this contract enforceable under the Civil Code?

Yes, because a check is in writing and it is enough to prove the loan.

14. Chua Gaw v. Chua G.R. No. 160855

15. Tibajia v. CA 223 SCRA 163
 16. PAL v. CA G.R. No. 49188
PHILIPPINE AIRLINES, INC., petitioner, vs. HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GAL
ANO, Court of First Instance of Manila, BranchXIII, JAIME K. DEL ROSARIO, Deputy Sheriff, Court
of First Instance, Manila, and AMELIA TAN, respondents.
G.R. No. 49188. January 30, 1990

FACTS:
Amelia Tan commenced a complaint for damages before the Court of First Instance against
Philippine Airlines, Inc. (PAL). The Court rendered a judgment in favor of the former and against
the latter.

PAL filed its appeal with the Court of Appeals (CA), and the appellate court affirmed the
judgment of the lower court with the modification that PAL is condemned to pay the latter the
sum of P25, 000.00 as damages and P5, 000.00 as attorney’s fee.

Judgment became final and executory and was correspondingly entered in the case, which was
remanded to the trial court for execution. The trial court upon the motion of Amelia Tan issued an
order of execution with the corresponding writ in favor of the respondent. Said writ was duly
referred to Deputy Sheriff Reyes for enforcement.

Amelia Tan moved for the issuance of an alias writ of execution, stating that the judgment
rendered by the lower court, and affirmed with modification by the CA, remained unsatisfied. PAL
opposed the motion, stating that it had already fully paid its obligation to plaintiff through the
issuance of checks payable to the deputy sheriff who later did not appear with his return and
instead absconded.

The CA denied the issuance of the alias writ for being premature. CA granted her an alias writ of
execution for the full satisfaction of the judgment rendered, when she filed another motion.
Deputy Sheriff del Rosario is appointed special sheriff for enforcement thereof.

PAL filed an urgent motion to quash the alias writ of execution stating that no return of the writ
had as yet been made by Deputy Sheriff Reyes and that judgment debt had already been fully
satisfied by the former as evidenced by the cash vouchers signed and received by the executing
sheriff.

Deputy Sheriff del Rosario served a notice of garnishment on the depository bank of PAL, through
its manager and garnished the latter’s deposit. Hence, PAL brought the case to the Supreme
Court and filed a petition for certiorari.

ISSUE:
a. Whether or not an alias writ of execution can be issued without prior return of the original
writ by the implementing officer.

Affirmative. Technicality cannot be countenanced to defeat the execution of a judgment

for execution is the fruit and end of the suit and is very aptly called the life of the law. A
judgment cannot be rendered nugatory by unreasonable application of a strict rule of
procedure. Vested right were never intended to rest on the requirement of a return. So
long as judgment is not satisfied, a plaintiff is entitled to other writs of execution.

b. Whether or not payment of judgment to the implementing officer as directed in the writ of
execution constitutes satisfaction of judgment.
 Negative. In general, a payment, in order to be effective to discharge an obligation, must
be made to the proper person. Article 1240 of the Civil Code provides:

“Payment made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it.”

Under ordinary circumstances, payment by the judgment debtor in the case at bar, to the
sheriff should be valid payment to extinguish judgment of debt.

However, under the peculiar circumstances of this case, the payment to the absconding
sheriff by check in his name did not operate as a satisfaction of the judgment debt.

c. Whether or not payment made in checks to the sheriff and under his name is a valid
payment to extinguish judgment of debt.

Negative. Article 1249 of the Civil Code provides:

“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”.

Unless authorized to do so by law or by consent of the obligee, a public officer has no authority to
accept anything other than money in payment of an obligation under a judgment being
executed. Strictly speaking, the acceptance by the sheriff of the petitioner’s checks does not, per
se, operate as a discharge of the judgment of debt.

A check, whether 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 or payment and may be refused receipt by the obligee
or creditor. Hence, the obligation is not extinguished.

THE TWIST: Payment in cash is logical, but it was not proper.

Payment in cash to the implementing officer may be deemed absolute payment of judgment
debt but the Court has never, in the least bit, suggested that judgment debtors should settle their
obligations by turning over huge amounts of cash or legal tender to the executing officers.
Payment in cash would result in damage or endless litigations each time a sheriff with huge
amounts of cash in his hands decides to abscond.

As a protective measure, the courts encourage the practice of payment of check provided
adequate controls are instituted to prevent wrongful payment and illegal withdrawal or
disbursement of funds.

However, in the case at bar, it is out of the ordinary that checks intended for a particular payee
are made out in the name of another. The issuance of the checks in the name of the sheriff clearly
made possible the misappropriation of the funds that were withdrawn.

The Court of Appeals explained:

“Knowing as it does that the intended payment was for the respondent Amelia Tan, the petitioner
corporation, utilizing the services of its personnel who are or should be knowledgeable about the
accepted procedure and resulting consequences of the checks drawn, nevertheless, in this
instance, without prudence, departed from what is generally observed and done, and placed as
payee in the checks the name of the errant Sheriff and not the name of the rightful payee.
Petitioner thereby created a situation which permitted the said Sheriff to personally encash said
checks and misappropriate the proceeds thereof to his exclusive benefit. For the prejudice that
resulted, the petitioner himself must bear the fault…”

Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act
made possible the loss had but itself to blame. In this case, PAL should be the one to blame and
bear the loss.
17. Sesbreno v. CA G.R. No. 89252
18. Phil. Education Co. v. Soriano G.R. No. L-22405
19. Metropolitan Bank v. CA 192 SCRA 169
20. Caltex v.CA 212 SCRA 448
21. Banco de Oro v. Equitable Banking Corp. 157 SCRA 188
22. Phil. Bank of Commerce v. Aruego 102 SCRA 530
23. Traders v. CA G.R. No. 93397 y
24. Firestone v. CA G.R. No. 113236
25. Astro v. Phil. Export G.R. No. 136729
26. Garcia v. Llamas G.R. No. 154127
27. Transfield vs. Luzon Hydro G.R. No. 146717