NIL DIGESTS | TOPIC 2

PHILIPPINE EDUCATION CO. INC. vs SORIANO RULING:

[GR L-22405, 30 June 1971] No, it is not a negotiable instrument.

Given that Philippine postal statutes were patterned after similar statutes in force in the United
States, they are generally construed in accordance with the construction given in the United
FACTS: States to their own postal statutes. The weight of authority in the United States is that postal
money orders are not negotiable instruments, the reason behind this rule being that, in
Enrique Montinola attempted to purchase 10 Money Orders worth P200.00 each from the Manila
establishing and operating a postal money order system, the government is not engaging in
Post Office. Montinola offered to pay them with a private check. However, since private checks
commercial transactions but merely exercises a governmental power for the public benefit.
were not generally accepted in payment of money orders, the teller advised him to see the Chief
of the Money Order Division. Instead of doing so, Montinola managed to leave the building with Some of the restrictions imposed upon money orders by postal laws and regulations are
his check and the 10 Money Orders without the knowledge of the teller. inconsistent with the character of negotiable instruments. For instance, such laws and
regulations usually provide for not more than one endorsement; payment of money orders may
An urgent message was the sent to all postmasters with regard to the unpaid money orders. One
be withheld under a variety of circumstances.
of those who received the notification was the Bank of America. Petitioner Philippine Education
Co. received one of the money orders as part of its sales receipts. They deposited it with the Bank
of America who cleared it with the Bureau of Posts and received its face value of P200.00.
Soriano, the Chief of the Money Order Division, notified the Bank of America that the same
money order had been found to have been irregularly issued. Thus, the amount it had
represented had been deducted from the bank’s clearing account. The Bank then debited
Philippine Education Co’s account with the same amount and gave notice by means of a debit
memo.
Phil. Education Co. comes to the court and claims that the money orders were negotiable
instruments. They further argue that once it is issued, it creates a contractual relationship of
debtor and creditor, respectively, between the government, on the one hand, and the remitters
payees or endorsees, on the other hand.

ISSUE:
Whether the postal money order is a negotiable instrument.

1

CALTEX (PHILIPPINES), INC. vs COURT OF APPEALS AND SECURITY BANK AND
TRUST COMPANY
G.R. No. 97753August 10, 1992
FACTS:
Security Bank and Trust Company (Security Bank), a commercial banking institution, through its
Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of Angel dela Cruz who
deposited with Security Bank the total amount of P1,120,000.
Angel delivered the CTDs to Caltex for his purchase of fuel products
However, on March, 1982, Angel informed Mr. Tiangco, the Sucat Branch Manager that he lost
all CTDs, he submitted the required Affidavit of Loss and received the replacement.
Few weeks later, 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. The said
deed of assignment provides:
“full control of the indicated time deposits from and after date" of the assignment and further
authorizes said bank to pre-terminate, set-off and "apply the said time deposits to the payment
of whatever amount or amounts may be due" on the loan upon its maturity”
On November, 1982, Mr. Aranas, Credit Manager of Caltex went to the Sucat branch to verify the
CTDs declared lost by Angel alleging that the same were delivered to herein plaintiff "as security
for purchases made with Caltex Philippines, Inc." by said depositor.
The same month, 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.
Thereafter, Caltex was requested by Security Bank to furnish:
a) a copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz
b) the details of Mr. Angel's obligation against which Caltex proposed to apply the time
deposits
Security Bank rejected Caltex demand for payment of the value of the CTDs because it failed to
furnish the requested documents.
In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due. On
August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the
matured loan
Caltex filed a complaint praying the bank to pay 1,120,000 plus 16% interest
NIL DIGESTS | TOPIC 2
RTC dismiss the complaint.
CA affirmed decision of the RTC
ISSUE:
(1) Whether the said CTDs were negotiable instruments
(2) Whether Caltex can rightfully recover on the CTDs
RULING:
Petition is Denied and appealed decision is affirmed.
(1) The CTDs were negotiable instruments
LEGAL PRINCIPLE: Negotiability or non-negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. If it was the intent of the bank that the said
instrument be payable to a specific person alone, it must have done so.
Otherwise, it is deemed payable to the bearer.
The issue revolved on the fourth requisite.
Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
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 -check
e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
The documents provide that the amounts deposited shall be repayable to the depositor. The
term depositor in this case is construed by the Court to mean bearer. The documents do not say
that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically
to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that
matter, whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it
could have with facility so expressed that fact in clear and categorical terms in the documents,
instead of having the word "BEARER" stamped on the space provided for the name of the
depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are
repayable to whoever may be the bearer thereof. Thus, the fourth requisite is properly complied
with.
2
 NIL DIGESTS | TOPIC 2

(2) Caltex cannot recover on the CTDs.

LEGAL PRINCIPLE: Mere delivery of an instrument which is for security cannot effect proper
negotiation.

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.
In this case, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its
fuel products and not for payment. In effect, the delivery thereof only as security for the
purchases of Angel de la Cruz could at the most constitute petitioner only as a holder for value
by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition of such security,
in the event of non-payment of the principal obligation, must be contractually provided for.

3

METROBANK vs CA, GOLDEN SAVINGS, ET AL.
G.R. No. 88866. February 18, 1991
LEGAL PRINCIPLE:
An instrument with an order or promise to pay out of a particular fund is not unconditional,
therefore, non-negotiable; Forgery cannot be presumed.
It must be established by clear, positive and convincing evidence. This was not done in the
present case.
FACTS:
Eduardo Gomez opened an account with Golden Savings and deposited over a period of two
months 38 treasury warrants. Six of these were directly payable to Gomez while the others
appeared to have been indorsed by their respective payees, followed by Gomez as second
indorser.
On various dates, all these warrants were subsequently indorsed by Gloria Castillo as Cashier of
Golden Savings and deposited to its Savings Account in Metrobank. They were then sent for
clearing by the branch office to the principal office of Metrobank.
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times
to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was
meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over
Gloria's repeated inquiries and also as an accommodation for a "valued client," Metrobank finally
decided to allow Golden Savings to withdraw from the proceeds of the warrants.
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own
account, eventually collecting the total amount of P1.1 Million from the proceeds of the
apparently cleared warrants.
A week after, Metrobank informed Golden Savings that 32 of the warrants had been dishonored
by the Bureau of Treasury and demanded the refund by Golden Savings of the amount it had
previously withdrawn, to make up the deficit in its account.
Metrobank argues that Golden Savings should have exercised more care in checking the personal
circumstances of Gomez before accepting his deposit.
ISSUES:
1) Whether or not treasury warrants are negotiable instruments?
2) Whether or not Metrobank can demand refund from Golden Savings with regard to the
amount withdraws?
3) Whether or not there was forgery?
NIL DIGESTS | TOPIC 2
RULING:
(1) No. The treasury warrants in question are not negotiable instruments.
Clearly stamped on their face is the word "non-negotiable." Moreover, and this is of equal
significance, it is indicated that they are payable from a particular fund, to wit, Fund 501.
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 judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional" and the warrants themselves non-
negotiable.
(2) No. Metrobank was negligent in giving Golden Savings the impression that the treasury
warrants had been cleared.
It was only when Metrobank gave the go-signal that Gomez was finally allowed by Golden
Savings to withdraw them from his own account. Golden Savings had no clearing facilities of its
own. It relied on Metrobank to determine the validity of the warrants through its own services.
The proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden
Savings itself to withdraw them from its own deposit.
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed
that they were genuine and in all respects what they purport to be,” in accordance with Section
66 of NIL. The simple reason that NIL is not applicable to non-negotiable instruments, treasury
warrants. It was actually Gomez who was entrusting the warrants, not Golden Savings that was
extending him a loan. There was no question of Gomez's identity or of the genuineness of his
signature was checked by Golden Savings. In fact, the treasury warrants were dishonored
allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or
indorser.
The amount involved was more than one and a half million pesos. There was no reason why
Metrobank should not have waited until the treasury warrants had been cleared. It allowed
Golden Savings to withdraw not once, not twice, but thrice from the uncleared treasury warrants
in the total amount of P968,000.00
(3) No. The forgery of the signatures of the general manager and the auditor of the drawer
corporation, has not been established.
Forgery cannot be presumed. It must be established by clear, positive and convincing evidence.
This was not done in the present case.
4
 NIL DIGESTS | TOPIC 2
SESBRENO vs COURT OF APPEALS
GR 89252, 24 May 1993

FACTS:
Petitioner Sesbreno made a money market placement in the amount of P300,000 with the
Philippine Underwriters Finance Corporation (PhilFinance), with a term of 32 days.
PhilFinance issued to Sesbreno the Certificate of Confirmation of Sale of a Delta Motor
Corporation Promissory Note, 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 March 13,
1981.
The checks were dishonored for having been drawn against insufficient funds. Pilipinas Bank
never released the note, nor any instrument related thereto, to Sesbreno; but Sesbreno learned
that the security which was issued on April 10, 1980, maturing on 6 April 1981, has a face value
of P2,300,833.33 with PhilFinance as payee and Delta Motors as maker; and was stamped “non-
negotiable” on its face.
As Sesbreno was unable to collect his investment and interest thereon, he filed an action for
damages against Delta Motors and Pilipinas Bank.
Delta Motors contents that said promissory note was not intended to be negotiated or otherwise
transferred by Philfinance as manifested by the word "non-negotiable" stamped across the face
of the Note.

ISSUE:
Whether the non-negotiability of a promissory note prevents its assignment.

RULING:
A negotiable instrument, instead of being negotiated, may also be assigned or transferred. The
legal consequences of negotiation and assignment of the instrument are different.
A non-negotiable instrument may not be negotiated but may be assigned or transferred, absent
an express prohibition against assignment or transfer written in the face of the instrument.
The subject promissory note, 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 such note,
in whole or in part.
**A non-negotiable instrument may not be negotiated but may be assigned or transferred, absent
an express prohibition against assignment or transfer written on the face of the instrument.

5

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES vs CA AND
LUZON DEVELOPMENT BANK
GR No. 113236, March 5, 2001
The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in
its freedom to circulate freely as a substitute for money.
If an instrument is non-negotiable, then the rules governing of immediate notice of dishonor of
negotiable instruments do not apply.
NIL DIGESTS | TOPIC 2
RULING:
No. The special withdrawal slips were not negotiable instruments, nor was it even made to
appear as a negotiable instrument. On the slips were written “non-negotiable”.
Citibank should have known that these slips were not negotiable instruments. It bears stressing
that Citibank could not have missed the non-negotiable nature of the withdrawal slips.
The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in
its freedom to circulate freely as a substitute for money. The withdrawal slips in question lacked
this character.
Being non-negotiable, Luzon Development Bank did not have an obligation to give immediate
notice of dishonor. Thus, Luzon Development was not remiss in this case. It cannot be held liable.

FACTS: It there was one who was negligent in the situation, it was Citibank for

Fojas-Arca enterprises had a special savings account with defendant, Luzon Development bank, 1) Treating a non-negotiable instrument as negotiable, and
of which the bank allowed withdrawals of funds therefrom through a medium of special
2) Presuming that the slips would be cleared thus automatically crediting its amount to
withdrawal slips which were marked non-negotiable.
firestone before it was presented to Luzon Development Bank.
Foras-Arca transacted with petitioner Firestone to procure materials. As payment, they delivered
6 of those special withdrawal slips. These special withdrawal slips were deposited by Firestone in
their current account with Citibank. All special withdrawal slips here honored and paid by
defendant Luzon Development.
More transactions were entered between Fojas-Arca and Firestone where Fojas-Arca continued
paying Firestone with those special withdrawal slips. These slips were constantly deposited by
Firestone to Citibank.
Citibank, because of their previous clearing with the special withdrawal slips automatically
credited the amount to the current account of Fojas-Arca. It was only after the crediting that they
presented the slips to Luzon Development Bank for actual clearing.
However, this time, Luzon Development dishonored and refused to pay the slips for the reason
of “NO ARRANGEMENT”.
As a consequence, Citibank debited from the current account of Firestone the amount that
represented the slips, which caused pecuniary losses to Firestone.
Firestone then filed a claim of damages against Luzon Development (not Citibank) for these
damages.

ISSUE:
Was Citibank correct in treating the special withdrawal slips as if it were a negotiable instrument
(check)? May Luzon Development be held liable for the damaged caused?

6

ANG TEK LIAN vs CA
LEGAL PRINCIPLE:
A check drawn payable to the order of "cash" is a check payable to bearer, and the bank may pay
it to the person presenting it for payment without the drawer's indorsement.
FACTS:
Ang Tek Lian went to Lee Hua Hong’s office and asked Lee to exchange his check with cash
alleging that he needed badly the sum of P4,000 represented by the check, but could not
withdraw it from the bank, it being already closed.
Relying upon Ang’s assurance that he has sufficient funds in the bank and because they used to
borrow money from each other, Lee delivered to him the said P4,000 in cash.
The next business day, Lee presented the check to the drawee bank, which was payable to order
of “cash”.
However, it was dishonored for insufficiency of funds. Ang only had P335 in his account. The
dishonored check had not been endorsed by Ang.
ISSUE:
WON a check made payable to “cash” needs indorsement from the drawer
NIL DIGESTS | TOPIC 2
RULING:
No. Under the Negotiable Instruments Law (sec. 9 [d]), a check drawn payable to the order of
"cash" is a check payable to bearer, and the bank may pay it to the person presenting it for
payment without the drawer's indorsement.
A check payable to the order of cash is a bearer instrument. The word “cash” does not purport
to be the name of any person, and hence the instrument is payable to bearer.
The drawee bank need not obtain any indorsement of the check, but may pay it to the person
presenting it without any indorsement. The bank is not negligent in doing so.
Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to
demand identification and/or assurance against possible complications, — for instance,
a) Forgery of drawer's signature,
b) loss of the check by the rightful owner,
c) Raising of the amount payable, etc.
The bank may therefore require, for its protection, that the indorsement of the drawer — or of
some other person known to it — be obtained. But where the Bank is satisfied of the identity
and/or the economic standing of the bearer who tenders the check for collection, it will pay the
instrument without further question; and it would incur no liability to the drawer in thus acting.
7
 NIL DIGESTS | TOPIC 2
PHILIPPINE NATIONAL BANK vs MANILA OIL REFINING & BY-PRODUCTS RULING:
COMPANY, INC. A provision in a promissory note whereby in case the same is not paid at maturity, the maker
authorizes any attorney to appear and confess judgment thereon for the principal amount, with
G.R. No. L-18103
interest, costs, and attorney's fees, and waives all errors, rights to inquisition, and appeal, and all
property exemptions, is not valid in the Philippine jurisdiction.

FACTS: Warrants of attorney to confess judgment are not authorized nor contemplated by our law. In
the absence of express legislative sanction, provisions in notes authorizing attorneys to appear
The manager and the treasurer of the Manila Oil Refining & By-Products Company, Inc., executed and confess judgments against makers should not be recognized by implication.
and delivered to the Philippine National Bank, a written instrument reading as follows:
The practice of entering judgments in debt on warrants of attorney is of ancient origin. In the
RENEWAL.
course of time a warrant of attorney to confess judgement became a familiar common law
P61,000.00 security.
MANILA, P.I., May 8, 1920. At common law, there were two kinds of judgments by confession; the one a judgment by
On demand after date we promise to pay to the order of the Philippine National Bank sixty-one thousand cognovit actionem, and the other by confession relicta verificatione.
only pesos at Philippine National Bank, Manila, P.I.
Judgments by confession, in one sense, were considered an amicable, easy, and cheap way to
settle and secure debts. They are a quick remedy and serve to save the court's time, time and
Without defalcation, value received; and to hereby authorize any attorney in the Philippine Islands, in case money of the litigants and the government.
this note be not paid at maturity, to appear in my name and confess judgment for the above sum with
interest, cost of suit and attorney's fees of ten (10) per cent for collection, a release of all errors and waiver On the other hand, disadvantages to the commercial world outweigh the considerations just
of all rights to inquisition and appeal, and to the benefit of all laws exempting property, real or personal, from mentioned. Such warrants of attorney are void as against public policy because they enlarge the
levy or sale. Value received. No. ____ Due ____
field for fraud.
Under these instruments the promisor bargains away his right to a day in court. The effect of the
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
instrument is to strike down the right of appeal accorded by statute.
(Sgd.) VICENTE SOTELO,
The recognition of such a form of obligation would bring about a complete reorganization of
Manager.
commercial customs and practices with reference to short-term obligations.
It can readily be seen that judgement notes instead of resulting to the advantage of commercial
MANILA OIL REFINING & BY-PRODUCTS CO., INC., life might be the source of abuse and oppression and make the courts involuntary parties thereto.
(Sgd.) RAFAEL LOPEZ,
If the bank has a meritorious case, the judgement is ultimately certain in the courts.
Treasurer

Manila Oil failed to pay on demand. PNB brought action to recover the P61,000 together with
interest and costs. Mr. Elias N. Rector, an attorney associated with PNB entered his appearance
in representation of the defendant and filed a motion confessing judgment.
PNB objected strongly to the unsolicited representation of Atty. Rector.
Atty. Rector contends that the Negotiable Instruments Law expressly recognizes judgment notes
and that they are enforcible.
Sec 5 provides that "The negotiable character of an instrument otherwise negotiable is not
affected by a provision which ". . . (b) Authorizes a confession of judgment if the instrument be
not paid at maturity."
Sec 5 concludes with these words: "But nothing in this section shall validate any provision or
stipulation otherwise illegal."

8

REPUBLIC PLANTERS BANK vs COURT OF APPEALS AND FERMIN CANLAS
FACTS:
Shozo Yamaguchi (President/Chief Operating Officer) and Fermin Canlas (Treasurer) by virtue of
Board Resolution of Worldwide Garment Manufacturing, Inc. were authorized to apply for credit
facilities with the Republic Planters Bank in the forms of export advances and letters of
credit/trust receipts accommodations.
Apparently 9 promissory notes with Worldwide Garment Manufacturing, Inc. was rubber
stamped above the signatures of Yamaguchi and Canlas were issued to Republic Planters Bank.
Each promissory note was uniformly written in the following manner:
___________, after date, for value received, I/we, jointly and severally promise to pay to the ORDER
of the REPUBLIC PLANTERS BANK, at its office in Manila, Philippines, the sum of ___________
PESOS(….) Philippine Currency…
Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6 of WORLDWIDE GARMENT MFG. CORP.
Sgd. Shozo Yamaguchi
Sgd. Fermin Canlas
On December 20, 1982, Worldwide Garment Manufacturing, Inc. changed its corporate name to
Pinch Manufacturing Corporation. On February 5, 1982, Republic Planters filed a complaint for
the recovery of sums of money against Pinch Manufacturing (they amended the complaint from
WGMI).
Canlas, in his defense, averred that he should not be held personally liable for such authorized
corporate acts that he performed inasmuch as he signed the promissory notes in his capacity as
officer of the defunct Worldwide Garment Manufacturing and it was in blank (typewritten entries
not appearing when he signed).
RTC, ruled in favor of Bank. CA affirmed and modified RTC’s decision absolving Fermin Canlas.
ISSUE: W/N Fermin Canlas is solidarily liable with the other defendants, on the 9 promissory
notes bearing his signature.
NIL DIGESTS | TOPIC 2
RULING:
Yes.
First, promissory notes are negotiable instruments and must be governed by the Negotiable
Instruments Law. And under the Negotiable Instruments Law, persons who write their names on
the face of promissory notes are makers and are liable as such. By signing the notes, the maker
promises to pay to the order of the payee or any holder.
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.
Second, 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.
An instrument which begins with "I", "We", or "Either of us" promise to pay, when signed by two
or more persons, makes them solidarily liable. The fact that the singular pronoun is used indicates
that the promise is individual as to each other; meaning that each of the co-signers is deemed to
have made an independent singular promise to pay the notes in full.
Third, the phrase "and (in) his personal capacity" below the signatures of the makers in the notes
is immaterial and will not affect the liability of private respondent Fermin Canlas as a joint and
several debtor of the notes. With or without the presence of said phrase, private respondent
Fermin Canlas is primarily liable as a co maker of each of the notes and his liability is that of a
solidary debtor.
Fourth, change in the corporate name does not make a new corporation, and whether effected
by special act or under a general law, has no effect on the identity of the corporation, or on its
property, rights, or liabilities. The corporation continues, as before, responsible in its new name
for all debts or other liabilities which it had previously contracted or incurred.
Lastly, Section 14 of the NegotiabIe Instruments Law is not applicable.
The notes were not incomplete instruments, they are the stereotype printed form of promissory
notes generally used by commercial banking institutions to be signed by their clients in obtaining
loans. Proof of Canlas that they were signed in blank was his self-serving testimony.
The court take judicial notice of the customary procedure of commercial banks of requiring their
clientele to sign promissory notes prepared by the banks in printed form with blank spaces
already filled up as per agreed terms of the loan, leaving the borrowers-debtors to do nothing
but read the terms and conditions therein printed and to sign as makers or co-makers.
Thus when the notes were given to private respondent Fermin Canlas for his signature, the notes
were complete in the sense that the spaces for the material particular had been filled up by the
bank as per agreement.
9

CONSOLIDATED PLYWOOD INDUSTRIES vs IFC LEASING & ACCEPTANCE
CORP.
LEGAL PRINCIPLE:
In order for an instrument to become negotiable, it must be payable to order or bearer
as what is required of Section 1(d) of the Negotiable Instruments Law
FACTS:
Consolidated Plywood Industries Inc. (CPII) is a corporation engaged in the logging
business. It had for its program of logging activities the opening of additional roads, and
simultaneous logging operations along the route of said roads. With this, it requires two
more units of tractors to attain its objective.
Atlantic Gulf and Pacific Company of Manila’s sister company, Industrial Products Marketing (IPM seller-
assignor), offered to sell to CPII 2 "Used" Allis Crawler Tractors.
IPM assured CPII that the "Used" Allis Crawler Tractors which were offered are fit for
the job, and gave the corresponding warranty of 90 days performance of the machines
and availability of parts.
The president and vice president of CPII, agreed to purchase on installment said 2 units
of "Used" Allis Crawler Tractors relying on IPM’s guarantee.
They paid a down payment of 210,000.00. After issuance of the sales invoice, 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, IPM, by means of a deed of assignment, assigned its rights and
interest in the chattel mortgage in favor of IFC Leasing and Acceptance Corporation.
Immediately thereafter, IPM delivered said 2 units of "Used “tractors to CPII's jobsite as agreed upon.
Bur eventually, one of the tractors broke down, 9 days subsequent to the incident; the
other tractor also broke down. IPM sent mechanics to fix the tractors but was unable
to do so as the units were not serviceable.
The Vice President of CPII advised IPM that the payments of the installments as listed
in the promissory note would likewise be delayed until IPM completely fulfills its
obligation under its warranty.
Since the tractors were no longer serviceable, the President asked IPM to pull out the
units and have them reconditioned, and thereafter to offer them for sale.
The proceeds were to be given to IFC Leasing and the excess, if any, to be divided
between IPM and CPII which offered to bear 1/2 of their conditioning cost.
NIL DIGESTS | TOPIC 2
No response to this letter was received by CPII and despite several follow-up calls; IPM
did nothing with regard to the request, until the complaint in the case was filed by IFC
Leasing against CPII.
ISSUE:
Whether the promissory note in question is a negotiable instrument?
RULING:
No. The pertinent portion of the note provides that:
"FORVALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONEMILLION NINETYTHREE
THOUSAND SEVEN HUNDRED EIGHTYNINE PESOS & 71/100 only
(P1,093,789.71), Philippine Currency, the said principal sum, to be payable in
24 monthly installments starting July 1978 and every 15th of the month
thereafter until fully paid."
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires
that a promissory note "must be payable to order or bearer," 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 maybe transferred.
This consent is indispensable since a maker assumes greater risk under a negotiable
instrument than under a non-negotiable one.
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 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.
Thus, CPII may raise against IFC Leasing all defenses available to it as against IPM. This
being so, there was no need for CPII to implead IPM when it was sued by IFC Leasing
because CPII's defenses apply to both or either of them.
10
 NIL DIGESTS | TOPIC 2
FRANCISCO vs CA RULING:
Yes.

The Negotiable Instruments Law provides that where any person is under obligation to indorse Based upon the findings of handwriting experts from the National Bureau of Investigation (NBI),
in a representative capacity, he may indorse in such terms as to negative personal liability. petitioner had indeed forged the signature of Ong to make it appear that he had indorsed the
checks.
An agent, when so signing, should indicate that he is merely signing in behalf of the principal and
must disclose the name of his principal; otherwise he shall be held personally liable. Also, there were no loans extended, it was unbelievable that HCCC was experiencing financial
difficulties so as to compel it to obtain the loans from AFRDC in view of the fact that the GSIS had
issued checks in favor of HCCC at about the same time that the alleged advances were made.
FACTS: It was plausible that petitioner concealed the fact of issuance of the checks from private
A Land Development and Construction Contract was entered into by A. Francisco Realty & respondents in order to make it appear as if she were accommodating private respondents, when
Development Corporation (AFRDC), represented by its president, herein petitioner, and in truth she was lending HCCC its own money.
respondent HERBY Commercial & Construction Corporation (HCCC), represented by its President The Negotiable Instruments Law provides that where any person is under obligation to indorse
and General Manager respondent Jaime C. Ong, pursuant to a housing project financed by the in a representative capacity, he may indorse in such terms as to negative personal liability.
GSIS.
An agent, when so signing, should indicate that he is merely signing in behalf of the principal and
Under the contract, HCCC agreed to undertake the construction of 35 housing units and the must disclose the name of his principal; otherwise he shall be held personally liable.
development of 35 hectares of land.
Even assuming that petitioner was authorized by HCCC to sign Ong's name, still, petitioner did
The GSIS and AFRDC put up an Executive Committee Account with the Insular Bank of Asia in not indorse the instrument in accordance with law.
America (IBAA) from which checks would be issued and co-signed by petitioner and GSIS Vice-
President, Armando Diaz. Instead of signing Ong's name, petitioner should have signed her own name and expressly
indicated that she was signing as an agent of HCCC.
After examination of the records of the GSIS, Ong discovered that Diaz and petitioner had
executed and signed seven checks of various dates and amounts, drawn against IBAA and payable Thus, the Certification cannot be used by Francisco to validate her act of forgery.
to HCCC for completed and delivered work under the contract.
Petitioner forged the signature of Ong without his knowledge or consent, to make it appear as if
he had indorsed said checks and that, after indorsing the checks for a second time by signing her
name at the back of the checks, she deposited said checks in her savings account with the IBAA.
Ong filed a complaint charging petitioner with estafa thru falsification of commercial documents.
Petitioner, on the other hand, denied having forged respondent Ong's signature on the checks,
claiming that Ong himself indorsed the checks and delivered the same to her in payment of the
loans which she extended to respondent HCCC.
As a means of repayment, respondent Ong allegedly issued a Certification authorizing petitioner
to collect respondent HCCC's receivables from the GSIS.
Petitioner's claim was given credence, hence, the complaint was dismissed.
Thereafter, private respondents filed the present case against petitioner for the recovery of the
total value of the seven checks.

ISSUE:
Whether the checks were forged

11
 NIL DIGESTS | TOPIC 2
JAI-ALAI vs BPI
G.R. No. L-29432

FACTS:
Ramirez, a sales agent of Inter-Island Gas, and a consistent better of petitioner, issued a check in
favor of petitioner or its bearer. The petitioner deposited the checks to the respondent.
Inter-Island discovered that the checks were forgeries, and informed all the parties involved in
the checks.
As a collecting bank, the petitioner debited the account of the petitioner upon demand.
Then, the petitioner drew against its current account, but was dishonored by the respondent.

ISSUEs:
1) Whether or not the bank legally debited petitioner's account
2) What are the effects of forged negotiable instruments
3) Whether or not warranty applies in this case

RULING:
(1) Yes. The bank acted within its legal bound in debiting the account.
In relation to the second issue, a forged negotiable instrument is deemed as ineffective.
When the [petitioner deposited the checks with the respondent, the nature of the
relationship created was one of agency.
The petitioner is liable for reimbursement when the instrument at hand was a forgery. This
is be further explained in the third issue.

(3) Yes. Warranty applies in this case.

When petitioner indorsed the checks to respondent, the latter may now apply the rules on
warranty.
The respondent has the warranty that the instrument is genuine and in all its respects as it
purports to be.
In relation to the first issue, the respondent may claim from petitioner. It is because there is
a breach of warranty due to the forgeries. As such, respondent may now debit the account
of petitioner.

12
 NIL DIGESTS | TOPIC 2
REPUBLIC BANK V. EBRADA MWSS vs CA
143 SCRA 20
FACTS:
Ebrada encashed a Back Pay Check at the Republic Bank at Escolta, Manila. The check was issued FACTS:
by the Bureau of Treasury.
MWSS had an account from PNB.
Said Bank was later advised by the Bureau that the alleged indorsement of the check by the
payee, “Martin Lorenzo” was forgery since the latter died 11 years ago. Its treasurer, auditor, and General Manager are the ones authorized to sign checks.
The bank was requested to refund the amount and to recover, the Bank went after Ebrada for During a period of time, 23 checks were drawn and debited against the account of
reimbursement. Ebara interposed the defense as she was a holder in due course, and therefore, petitioner.
entitled to the proceeds.
Bearing the same check numbers, the amounts stated therein were again debited from
Ebrada later filed against the other parties who indorsed the check to her.
the account of petitioner.
The amounts drawn were deposited in the accounts of the payees in PCIB.
ISSUE/S:
It was found out though that the names stated in the drawn checks were all fictitious.
1) Whether Ebrada was a holder in due course
Petitioner demanded the return of the amounts debited but the bank refused to do so.
2) Whether the Bank can recover from Ebrada
Thus, it filed a complaint.

RULING:
(1) Yes. Where a check has several indorsements on it, it was held that only the negotiation RULING:
based on the forged or unauthorized signature which is operative. There was no categorical finding that the 23 checks were signed by persons other than
In the case provided, the negotiation from Martin Lorenzo to the original payee, Ramon those authorized to sign.
Lorenzo should be declared of no effect but the negotiation from Ramon Lorenzo to
On the contrary, the NBI reports shows that the fraud was an “inside job” and that the
Adelaida Dominguez(3rd indorser) and from the latter to Ebrada, who did not know the
forgery, should be considered valid and enforceable. delay in the reconciliation of the bank statements and the laxity and loss of records
control in the printing of the personalized checks facilitated the fraud.
It further doesn’t provide that the signatures were forgeries.
(2) Yes. The drawee of a check can recover from the holder the money paid to him on a forged
document. Forgery cannot be presumed. It should be proven by clear, convincing and positive
evidence. This wasn’t done in the present case.
It is not the duty of the drawee to ascertain whether the signature of the payee or indorsers
are genuine or not. The petitioner cannot invoke Section 23 because it was guilty of negligence not only
This is because the indorser is supposed to warrant to the drawee that the signatures of the before the questioned checks but even after the same had already been negotiated.
payee and previous indorsers are genuine.
Defendant-appellant, upon receiving the check in question from 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.
As reasoned out above, had she performed the duty of ascertaining the genuineness of the
check, in all probability the forgery would have been detected and the fraud defeated.

13

GEMPESAW vs CA
FACTS:
To facilitate payment of debts to her suppliers in her grocery store, petitioner draws checks
against her checking account with the respondent bank (Philippine Bank Communication) as
drawee.
In the normal course of business, petitioner signs a check and designates her bookkeeper to be
issued and delivered to the payee.
The petitioner does not bother with verifying the contents and delivery of the checks; relying
merely on the word of her bookkeeper.
However, the controversy arose when 82 checks supposedly for her suppliers, covering a period
of two years, were deposited instead in the accounts of other individuals not named as the
payees.
It was later found out that the incident occurred with the participation of her bookkeeper by
forging the indorsement of the supposed payees.
Unfortunately, the drawee bank honored the indorsement and gave due course to the
transaction.
Because of this, the petitioner demanded the respondent bank to credit the amount of the forged
checks that did not reach the payees.
When the bank refused to do so, the case then ensued.
ISSUE:
Whether or not the respondent can be held liable for giving due course to the forged checks.
NIL DIGESTS | TOPIC 2
RULING:
No. As a general rule, forgery can be used as a defense against a drawee bank for acts committed
by third parties upon which the bank relied upon.
However, when forgery is committed by an agent of a drawer, another rule applies.
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.
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 the
forged indorsement.
In other words, he is precluded from using forgery as a basis for his claim for recrediting of his
account.
In the case at bar, the facts clearly show that the petitioner did not even undertake to observe
due diligence in verifying the regularity of the payments to the supplier.
By relying solely on the acts of her employee, and considering the length of time that the illegal
act persisted, it can be concluded that petitioner is indeed negligent in observing proper business
procedure which resulted in the act committed by her own employee.
14

ASSOCIATED BANK, PETITIONER, vs HON. COURT OF APPEALS, PROVINCE OF
TARLAC AND PHILIPPINE NATIONAL
G.R. No. 107382. January 31, 1996
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.
In January 1981, the books of account of the Provincial Treasurer were post-audited by the
Provincial Auditor. It was then discovered that the hospital did not receive several allotment
checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all
of its cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their
encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks
amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank
acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee
hospital until his retirement on February 28, 1978, collected the questioned checks from the
office of the Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the
release of the checks and had official receipts.
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 second check, in the amount of P5,000.00 and dated April
20, 1978, as well as for twenty-eight other checks of various amounts and on various dates. The
last check negotiated by Pangilinan was for P8,000.00 and dated February 10, 1981. All the checks
bore the stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED
BANK.”
Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the
checks were paid to him for certain projects with the hospital. He did not find as irregular the fact
that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While
he admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given
Pangilinan preferential treatment on this account.
As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn,
impleaded Associated Bank as third-party defendant.
After trial on the merits, the lower court rendered its decision against Associated Bank
NIL DIGESTS | TOPIC 2
ISSUE:
Associated Bank argues that the order of liability should be totally reversed, with the drawee
bank (PNB) solely and ultimately bearing the loss.
It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of
guarantee of prior indorsements against Associated Bank, the collecting bank.
In stamping the guarantee (for all prior indorsements), it merely followed a mandatory
requirement for clearing and had no choice but to place the stamp of guarantee; otherwise, there
would be no clearing.
The bank will be in a "no-win" situation and will always bear the loss as against the drawee bank.
Associated Bank also claims that since PNB already cleared and paid the value of the forged
checks in question, it is now estopped from asserting the defense that Associated Bank
guaranteed prior indorsements.
The drawee bank allegedly has the primary duty to verify the genuineness of payee's indorsement
before paying the check.
RULING:
The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its
Chief. They were properly issued and bear the genuine signatures of the drawer, the Province of
Tarlac. The infirmity in the questioned checks lies in the payee’s (Concepcion Emergency
Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were
order instruments.
A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no
one can gain title to the instrument through it. A person whose signature to an instrument was
forged was never a party and never consented to the contract which allegedly gave rise to such
instrument. Section 23 does not avoid the instrument but only the forged signature. Thus, a
forged indorsement does not operate as the payee’s indorsement.
The exception to the general rule in Section 23 is where "a party against whom it is sought to
enforce a right is precluded from setting up the forgery or want of authority." Parties who
warrant or admit the genuineness of the signature in question and those who, by their acts,
silence or negligence are estopped from setting up the defense of forgery, are precluded from
using this defense. Indorsers, persons negotiating by delivery and acceptors are warrantors of
the genuineness of the signatures on the instrument.
In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the
instrument. Hence, when the indorsement is a forgery, only the person whose signature is forged
can raise the defense of forgery against a holder in due course.
The checks involved in this case are order instruments, hence, the following discussion is made
with reference to the effects of a forged indorsement on an instrument payable to order.
15
 NIL DIGESTS | TOPIC 2
Where the instrument is payable to order at the time of the forgery, such as the checks in this Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated
case, the signature of its rightful holder (here, the payee hospital) is essential to transfer title to the check. The bank knows him, his address and history because he is a client. It has taken a risk
the same instrument. When the holder's indorsement is forged, all parties prior to the forgery on his deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the
may raise the real defense of forgery against all parties subsequent thereto. indorsement.
An indorser of an order instrument warrants "that the instrument is genuine and in all respects Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement
what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; from the collecting bank. However, a drawee bank has the duty to promptly inform the presentor
and that the instrument is at the time of his indorsement valid and subsisting." He cannot of the forgery upon discovery. If the drawee bank delays in informing the presentor of the
interpose the defense that signatures prior to him are forged. forgery, thereby depriving said presentor of the right to recover from the forger, the former is
deemed negligent and can no longer recover from the presentor.
A collecting bank where a check is deposited and which indorses the check upon presentment
with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by
the banks' client is forged, the collecting bank is bound by his warranties as an indorser and
After careful examination of the records, the Court finds that the Province of Tarlac was equally
cannot set up the defense of forgery as against the drawee bank.
negligent and should, therefore, share the burden of loss from the checks bearing a forged
The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the indorsement.
check to the order of the payee. The drawer's instructions are reflected on the face and by the
The failure of the Province of Tarlac to exercise due care contributed to a significant degree to
terms of the check. Payment under a forged indorsement is not to the drawer’s order. When the
the loss tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the
drawee bank pays a person other than the payee, it does not comply with the terms of the check
total amount paid on the questioned checks.
and violates its duty to charge its customer's (the drawer) account only for properly payable
items. Six crossed checks with forged indorsements were deposited in the forger's account with the
collecting bank and were later paid by four different drawee banks. The Court found the
Since the drawee bank did not pay a holder or other person entitled to receive payment, it has
collecting bank (Associated) to be negligent
no right to reimbursement from the drawer. The general rule then is that the drawee bank may
not debit the drawer's account and is not entitled to indemnification from the drawer. The risk
of loss must perforce fall on the drawee bank.
In cases involving a forged check, where the drawer's signature is forged, the drawer can recover
from the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have
to recredit the amount of the check to the account of the drawer. The liability chain ends with
the drawee bank whose responsibility it is to know the drawer’s signature since the latter is its
customer.
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.
The drawee bank is not similarly situated as the collecting bank because the former makes no
warranty as to the genuineness of any indorsement. 32 The drawee bank's duty is but to verify
the genuineness of the drawer's signature and not of the indorsement because the drawer is its
client.

16

REPUBLIC BANK vs COURT OF APPEALS AND FIRST NATIONAL CITY BANK
G.R. No. L-42725 April 22, 1991
FACTS:
On January 25, 1966, San Miguel Corporation (SMC) issued a P240.00 check in favor of Roberto
Delgado against SMC’s account with the First National City Bank (FNCB).
Delgado fraudulently changed the amount written on the check to P9,240.00.
Delgado made a check deposit with Republic Bank. Republic Bank accepted the check and
endorsed it to FNCB by stamping on the back of the check “all prior and/or lack of indorsement
guaranteed.“ The check cleared and FNCB paid Republic Bank P9,240.00.
On April 19, 1966, SMC notified FNCB that the check involved was forged. FNCB refunded SMC
the amount of the check.
On May 19, 1966, FNCB informed Republic bank about the forgery, by then Delgado withdrew
his account from Republic Bank.
On August 15, 1966, FNCB demanded Republic Bank to refund the amount of the check.
ISSUE:
Whether or not FNCB, the drawee bank, bears 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.
NIL DIGESTS | TOPIC 2
RULING:
Yes. The 24-hour clearing house rule embodied in Section 4(c) of Central Bank Circular No. 9, as
amended, applies to this case.
This rule mandates banks that after a clearing, all cleared items must be returned not later than
3:00 PM of the following business day.
It is true that when an endorsement is forged, the collecting bank or last endorser, as a 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 clearing house operation.
Thus, when the drawee bank (FNCB) fails to return a forged or altered check to the collecting
bank (Republic Bank) within the 24-hour clearing period, the collecting bank is absolved from
liability.
Every bank that issues checks for the use of its customers should know whether or not the
drawer's signature thereon is genuine, whether there are sufficient funds in the drawer's account
to cover checks issued, and it should be able to detect alterations, erasures, superimpositions or
intercalations thereon, for these instruments are prepared, printed and issued by itself, it has
control of the drawer's account, and it is supposed to be familiar with the drawer's signature.
It should possess appropriate detecting devices for uncovering forgeries and/or alterations on
these instruments.
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 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 if the latter made payment after proper clearance
from the drawee.
17
 NIL DIGESTS | TOPIC 2
PHILIPPINE COMMERCIAL INTERNATIONAL BANK vs COURT OF APPEALS G.R. No. 128604
(2001) In July 1978 and in April 1979, Ford drew two checks in the amounts of P5,851,706.37 and
P6,311,591.73 respectively. Both checks are again for tax payments.

TOPIC: Rights of the Holder – What Constitutes a Holder in Due Course Both checks are for “Payee’s account only” or for the CIR’s bank savings account only with
Metrobank. Again, these checks never reached the CIR.
In an investigation, it was found that these checks were embezzled by the same syndicate to
There are three cases consolidated here: G.R. No. 121413 (PCIB vs CA and Ford and Citibank), which Rivera was a member.
G.R. No. 121479 (Ford vs CA and Citibank and PCIB), and G.R. No. 128604 (Ford vs Citibank and
PCIB and CA). It was established that an employee of PCIB, also a member of the syndicate, created a PCIB
account under a fictitious name upon which the two checks, through high end manipulation,
were deposited.
FACTS: PCIB unwittingly endorsed the checks to Citibank which the latter cleared. Upon clearing, the
amount was withdrawn from the fictitious account by syndicate members.
G.R. No. 121413/G.R. No. 121479
In October 1977, Ford Philippines drew a Citibank check in the amount of P4,746,114.41 in favor
of the Commissioner of the Internal Revenue (CIR). The check represents Ford’s tax payment for ISSUE:
the third quarter of 1977.
What are the liabilities of each party?
On the face of the check was written “Payee’s account only” which means that the check cannot
be encashed and can only be deposited with the CIR’s savings account (which is with Metrobank).
The said check was however presented to PCIB and PCIB accepted the same.
PCIB then indorsed the check for clearing to Citibank. Citibank cleared the check and paid PCIB
P4,746,114.41. CIR later informed Ford that it never received the tax payment.
An investigation ensued and it was discovered that Ford’s accountant Godofredo Rivera, when
the check was deposited with PCIB, recalled the check since there was allegedly an error in the
computation of the tax to be paid. PCIB, as instructed by Rivera, replaced the check with two of
its manager’s checks.
It was further discovered that Rivera was actually a member of a syndicate and the manager’s
checks were subsequently deposited with the Pacific Banking Corporation by other members of
the syndicate.
Thereafter, Rivera and the other members became fugitives of justice.

18
 NIL DIGESTS | TOPIC 2
RULING:

G.R. No. 121413/G.R. No. 121479

PCIB is liable for the amount of the check (P4,746,114.41).
PCIB, as a collecting bank has been negligent in verifying the authority of Rivera to negotiate the
check.
It failed to ascertain whether or not Rivera can validly recall the check and have them be replaced
with PCIB’s manager’s checks as in fact, Ford has no knowledge and did not authorize such.
A bank (in this case PCIB) which cashes a check drawn upon another bank (in this case Citibank),
without requiring proof as to the identity of persons presenting it, or making inquiries with regard
to them, cannot hold the proceeds against the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party.
Hence, PCIB is liable for the amount of the embezzled check.

G.R. No. 128604

PCIB and Citibank are liable for the amount of the checks on a 50-50 basis.
As a general rule, a bank is liable for the negligent or tortuous act of its employees within the
course and apparent scope of their employment or authority. Hence, PCIB is liable for the
fraudulent act of its employee who set up the savings account under a fictitious name.
Citibank is likewise liable because it was negligent in the performance of its obligations with
respect to its agreement with Ford.
The checks which were drawn against Ford’s account with Citibank clearly states that they are
payable to the CIR only yet Citibank delivered said payments to PCIB.
Citibank however argues that the checks were indorsed by PCIB to Citibank and that the latter
has nothing to do but to pay it.
The Supreme Court cited Section 62 of the Negotiable Instruments Law which mandates the
Citibank, as an acceptor of the checks, to engage in paying the checks according to the tenor of
the acceptance which is to deliver the payment to the “payee’s account only”.

But the Supreme Court ruled that in the consolidated cases, that PCIB and Citibank are not the
only negligent parties.
Ford is also negligent for failing to examine its passbook in a timely manner which could have
avoided further loss. But this negligence is not the proximate cause of the loss but is merely
contributory.
Nevertheless, this mitigates the liability of PCIB and Citibank hence the rate of interest, with
which PCIB and Citibank is to pay Ford, is lowered from 12% to 6% per annum.

19

RAMON ILUSORIO vs CA
FACTS:
Petitioner is a prominent businessman, and as he was going out of the country a number of times,
he entrusted to his secretary his credit cards and his checkbook with blank checks.
Subsequently, petitioner filed a criminal action against his aforesaid secretary for estafa thru
falsification for encashing and depositing to her personal account seventeen checks drawn
against the account of the petitioner at respondent bank.
Petitioner then requested the respondent bank to credit back and restore to his account the
value of the checks which were wrongfully encashed, but respondent bank refused.
Hence, petitioner filed the instant case. Manila Bank sought the expertise of the National Bureau
of Investigation in determining the genuineness of the signatures appearing on the checks.
However, petitioner failed to submit his specimen signatures for purposes of comparison with
those on the questioned checks.
Consequently, the trial court dismissed the case.
On appeal, the Court of Appeals held that petitioner's own negligence was the proximate cause
of his loss.
Hence, this petition.
ISSUE:
Whether or not petitioner has a cause of action against respondent bank.
NIL DIGESTS | TOPIC 2
RULING:
The SC ruled that petitioner has no cause of action against Manila Bank.
To be entitled to damages, petitioner has the burden of proving negligence on the part of the
bank for failure to detect the discrepancy in the signatures on the checks.
It is incumbent upon petitioner to establish the fact of forgery, i.e., by submitting his specimen
signatures and comparing them with those on the questioned checks.
Petitioner, by his own inaction, was precluded from setting up forgery.
Petitioner further contends that under Section 23 of the Negotiable Instruments Law a forged
check is inoperative, and that Manila Bank had no authority to pay the forged checks.
True, it is a rule that when a signature is forged or made without the authority of the person
whose signature it purports to be, the check is wholly inoperative.
No right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party, can be acquired through or under such signature.
However, the rule does provide for an exception, namely: "unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of authority."
In the instant case, it is the exception that applies. In our view, petitioner is precluded from
setting up the forgery, assuming there is forgery, due to his own negligence in entrusting to his
secretary his credit cards and checkbook including the verification of his statements of account.
20

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC. vs FAR EAST BANK
AND TRUST AND CA
FACTS:
Samsung Construction maintained a current account with Far East Bank and Trust Bank (FETBC)
in its Bel-Air Makati Branch, with Jong Kyu Lee who is the Project Manager as the sole signatory
and Kyu Yong Lee having the checks in his custody as the company’s accountant.
A certain Roberto Gonzaga presented an FETBC Check on the same branch. The check was
payable to cash and drawn against the account of Samsung Construction amounting to P995,
500.00.
The teller and the bank officers were satisfied with the genuineness of the signature in the check
and confirmed the identity of Gonzaga with the assistant accountant of Samsung Construction
who was also familiar and known to them, the latter being present at the bank premises at that
time. In the end, the check was authorized to be encashed.
The Project Manager and the Accountant of the company found out the next day that the last
blank check was missing and that the check was encashed with Jong’s signature being forged.
Samsung Construction demanded reimbursement of the amount encashed and when it was not
heeded immediately, it filed a Complaint against the bank for violation of Sec. 23 of Negotiable
Instruments Law.
In the RTC, it held that Jong’s signature on the check was forged and ordered the bank to pay
company for the amount plus interest. During appeal in CA, this decision was reversed by stating
that even assuming there was forgery, it occurred due to the negligence of Samsung Construction
specifically the accountant for lack of care in keeping the checks.
The decision was appealed to SC, based on the grounds that the CA misapprehended the facts
and erred when it said that the company has been negligent in safekeeping the check.
NIL DIGESTS | TOPIC 2
RULING:
Yes, the bank is liable to pay Samsung Construction. Therefore, the decision of CA is set aside.
Under Sec. 23 of Negotiable Instruments Law, forgery is a real or absolute defense by the party
whose signature is forged. The general rule remains that the drawee who has paid upon the
forged signature bears the loss.
The exception to this rule arises only when negligence can be traced on the part of the drawer
whose signature was forged, and the need arises to weigh the comparative negligence between
the drawer and the drawee to determine who should bear the burden of loss.
The Court finds no basis to conclude that Samsung Construction was negligent in the safekeeping
of its checks especially that Samsung Construction reported the forgery almost immediately upon
discovery.
The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
The circumstances should have aroused the suspicion of the bank, as it is not ordinary business
practice for a check for such large amount to be made payable to cash or to bearer, instead of to
the order of a specified person.
Extraordinary diligence dictates that FEBTC should have ascertained from Jong personally that
the signature in the questionable check was his. Still, even if the bank performed with utmost
diligence, the drawer whose signature was forged may still recover from the bank as long as he
or she is not precluded from setting up the defense of forgery.
After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the
payment of a check can arise out of a forged signature.
Since the drawer, Samsung Construction, is not precluded by negligence from setting up the
forgery, the general rule should apply. Consequently, if a bank pays a forged check, it must be
considered as paying out of its funds and cannot charge the amount so paid to the account of the
depositor.
A bank is liable, irrespective of its good faith, in paying a forged check.

ISSUE:
Is bank liable to reimburse the amount encashed through forgery?

21

CESAR vs EXPRESS SAVINGS
FACTS:
Petitioners Cesar V. Areza and Lolita B. Areza have two bank deposits with respondent Express
Savings Bank. They were engaged in the business of “buy and sell” of brand new and second-
hand motor vehicles. On May 2, 2000, they received an order from a certain Gerry Mambuay for
the purchase of a second-hand Mitsubishi Pajero and a brand-new Honda CRV.
The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs Office (PVAO)
checks payable to different payees and drawn against the Philippine Veterans Bank, each valued
at Two Hundred Thousand Pesos (P200,000.00) for a total of One Million Eight Hundred Thousand
Pesos (P1,800,000.00).
Michael Potenciano, the branch manager of Express Savings Bank, was present during the
transaction and immediately offered the services of the bank for the processing and eventual
crediting of the checks to the account of the petitioners because the Arezas were valued clients
of the bank.
The petitioners then deposited the checks to Express Savings Bank which in turn deposited the
checks with its depository bank, Equitable-PCI Bank. Equitable-PCI Bank then presented the
checks to the drawee bank, Philippine Veterans Bank, which honoured the checks.
Sometime in July 2000, the checks were returned by PVAO to the drawee on the ground that the
amount on the face of the checks was altered from the original amount of P4,000.00 to
P200,000.00. The drawee bank, in turn, returned the checks to Equitable-PCI Bank.
Equitable-PCI Bank then informed Express Savings Bank that the drawee dishonored the checks
on the ground of material alterations. It also debited the deposit account of Express Savings Bank
in the amount of P1,800,000.00. Express Savings Bank insisted that it informed the petitioners of
what happened to the checks. On the other hand, the petitioners maintained that the said bank
never informed them of the said progress.
The petitioners then issued a check in the amount of P500,000.00 but it was dishonored. They
demanded the bank to honor the check but it refused. Instead, it closed the Special Savings
Account of the petitioners with a balance of P1,179,659.69 and transferred said amount to their
savings account. Express Savings Bank then withdrew the amount of P1,800,000.00 representing
the returned checks from petitioners’ savings account.
The petitioners filed a Complaint for Sum of Money with Damages against Express Savings Bank
and Potenciano for the alleged arbitrary and groundless dishonouring of their checks and the
unlawful and unilateral withdrawal from their savings account.
The RTC, through Judge Antonio S. Pozas, initially ruled in favor of the petitioners but the same
court, through Pairing Judge Romeo C. De Leon, eventually granted the Motion for
Reconsideration filed by the respondents and set aside the Pozas Decision.
On appeal, the Court of Appeals affirmed the ruling of the RTC. Hence, this petition for review on
certiorari.
NIL DIGESTS | TOPIC 2
ISSUEs:
1) Whether or not the drawee bank is liable for the altered tenor of acceptance in case
the negotiable instrument is altered before acceptance.
2) Whether or not the respondent bank has the right to debit P1,800,000.00 from the
petitioners’ accounts.
RULING:
I
Section 63 of Act No. 2031 or the Negotiable Instruments Law provides that the acceptor, by
accepting the instrument, engages that he will pay it according to the tenor of his acceptance.
The acceptor is a drawee who accepts the bill. In Philippine National Bank v. Court of Appeals,
the payment of the amount of a check implies not only acceptance but also compliance with the
drawee’s obligation.
In case the negotiable instrument is altered before acceptance, is the drawee liable for the
original or the altered tenor of acceptance? There are two divergent interpretations proffered by
legal analysts.
The first view is that the obligation of the acceptor should be limited to the tenor of the
instrument as drawn by the maker, as was the rule at common law, but that it should be
enforceable in favor of a holder in due course against the acceptor according to its tenor at the
time of its acceptance or certification.
The second view is that the acceptor/drawee despite the tenor of his acceptance is liable only
to the extent of the bill prior to alteration.
This view appears to be in consonance with Section 124 of the Negotiable Instruments Law
which states that a material alteration avoids an instrument except as against an assenting
party and subsequent indorsers, but a holder in due course may enforce payment according to
its original tenor.
Thus, when the drawee bank pays a materially altered check, it violates the terms of the check,
as well as its duty to charge its client’s account only for bona fide disbursements he had made.
If the drawee did not pay according to the original tenor of the instrument, as directed by the
drawer, then it has no right to claim reimbursement from the drawer, much less, the right to
deduct the erroneous payment it made from the drawer’s account which it was expected to treat
with utmost fidelity.
The drawee, however, still has recourse to recover its loss. It may pass the liability back to the
collecting bank which is what the drawee bank exactly did in this case. It debited the account of
Equitable-PCI Bank for the altered amount of the checks.
22
 NIL DIGESTS | TOPIC 2
II
No. The Bank cannot debit the savings account of petitioners.
A depositary/collecting bank may resist or defend against a claim for breach of warranty if the
drawer, the payee, or either the drawee bank or depositary bank was negligent and such
negligence substantially contributed to the loss from alteration.
In the instant case, no negligence can be attributed to petitioners. We lend credence to their
claim that at the time of the sales transaction, the Bank’s branch manager was present and even
offered the Bank’s services for the processing and eventual crediting of the checks.
True to the branch manager’s words, the checks were cleared three days later when deposited
by petitioners and the entire amount of the checks was credited to their savings account.
Moreover, the Bank cannot set-off the amount it paid to Equitable-PCI Bank with petitioners’
savings account.
Under Art. 1278 of the New Civil Code, compensation shall take place when two persons, in their
own right, are creditors and debtors of each other.
It is well-settled that the relationship of the depositors and the Bank or similar institution is that
of creditor-debtor. But as previously discussed, petitioners are not liable for the deposit of the
altered checks. The Bank, as the depositary and collecting bank ultimately bears the loss.
Thus, there being no indebtedness to the Bank on the part of petitioners, legal compensation
cannot take place.
To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable to the extent of
the check prior to alteration.
Since Philippine Veterans Bank paid the altered amount of the check, it may pass the liability back
as it did, to Equitable-PCI Bank, the collecting bank.
The collecting banks, Equitable-PCI Bank and Express Savings Bank, are ultimately liable for the
amount of the materially altered check. It cannot further pass the liability back to the petitioners
absent any showing in the negligence on the part of the petitioners which substantially
contributed to the loss from alteration.
Based on the foregoing, the SC granted the petition and affirmed the Pozas decision only insofar
as it ordered respondents to jointly and severally pay petitioners P1,800,000.00, representing the
amount withdrawn from the latter’s account.

23
 NIL DIGESTS | TOPIC 2
PNB vs CA
256 SCRA 491

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

RULING:
An alteration is said to be material if it alters the effect of the instrument.
It means an unauthorized change in the instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of the party.
In other words, a material alteration is one which changes the items which are required to be
stated under Section 1 of the NIL.
In this case, the alleged material alteration was the alteration of the serial number of the check
in issue which is not an essential element of a negotiable instrument under Section 1.
PNB alleges that the alteration was material since it is an accepted concept that a TCAA check by
its very nature is the medium of exchange of governments, instrumentalities and agencies.
As a safety measure, every government office or agency is assigned checks bearing different serial
numbers.
But this contention has to fail. The check’s serial number is not the sole indicia of its origin. The
name of the government agency issuing the check is clearly stated therein.
Thus, the check’s drawer is sufficiently identified, rendering redundant the referral to its serial
number.
Therefore, there being no material alteration in the check committed, PNB could not return the
check to PBCOM. It should pay the same.

24

FAR EAST BANK & TRUST COMPANY vs GOLD PALACE JEWELLERY CO.
FACTS:
Samue Tagoe, a foreigner, purchased jewelry valued at P258,000 from Gold Palace Jewelry Co.
As payment, he offered Foreign Draft No. M-06970 issued by United Overseas Bank (OUB)
amounting to P380,000, addressed to Land Bank of the Philippines and payable to Gold Palace
for P380,000.
Following the advice of Far East Bank, Judy Yang, assistant general manager of Gold Palace issued
Cash Invoice to Tagoe and informed him that the jewelry will be released when the draft had
already been cleared.
Yang consequently deposited the draft in the company's account in Far East. Upon presentation,
LBP, the drawee bank, cleared the said draft debiting UOB's account and crediting Far East's
account.
The jewelry was then released to Tagoe together with a Far East Check amounting to P122,000
representing the excess of the Draft.
Three weeks later, LBP informed Far East that the amount in the Draft had been materially altered
from P300 to P380,000.
This was discovered by UOB after LBP had informed it that its funds were being depleted
following encashment of the draft.
Intending to debit the amount from Gold Palace’s account, Far East refunded the P380,000 earlier
paid by LBP.
Far East, without prior written notice to the account holder, debited P168,053.36 from Gold
Palace.
Far East sued Gold Jewelery after it refused to heed the demand for payment of P211,946.64
difference of the amount reimbursed and amount debited to their account.
ISSUE:
Whether or not Far East Bank could proceed against Gold Palace
NIL DIGESTS | TOPIC 2
RULING:
No. The Negotiable Instruments Law (Act. No. 2031) explicitly provides that the acceptor, by
accepting the instrument, engages 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 than his acceptance, which is merely a promise. The
payment of a check includes its acceptance.
In this case, the drawee bank (LBP) cleared and paid the subject foreign draft and forwarded the
amount thereof to the collecting bank (Far East).
The latter then credited to Gold Palace's account the payment it received. Following the plain
language of the law, the drawee (LBP), by paying Far East, recognized and complied with its
obligation to pay in accordance with the tenor of his acceptance.
Thus, LBP could no longer repudiate the payment it erroneously made to a holder in due course.
Gold Palace was not a participant in the alteration of the draft, was not negligent, and was a
holder in due course.
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 Section 62.
Thus, Far East, as its collecting agent, should not have debited the money paid by the drawee
bank from Golden Palace’s account.
As the transaction in this case had been closed (by payment of LBP & collection by FarEast) and
the principal-agent relationship between the payee and the collecting bank had already ceased,
the latter (Far East) in returning the amount to the drawee bank (LBP) was already acting on its
own and should now be responsible for its own actions.
Further, Far East cannot 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 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.
25

METROPOLITAN BANK and TRUST COMPANY vs RENATO D. CABILZO
FACTS:
On November 12, 1994, Cabilzo issued cash payable to “cash” and was postdated on November
24, 1994 for 1,000 pesos in favor of Marquez.
When the said check was presented to Westmont Bank, the latter presented it to Metrobank
(this is because Cabilzo was one of Metrobank’s clients). Metrobank then cleared it for payment.
When one of Cabilzo’s representative went to Metrobank to make some transaction, Metrobank
personnel asked the former If Cabilzo had issued a check for 91,000 pesos. He answered that
Cabilzo hadn’t done such a thing.
It was later discovered that the check Cabilzo had issued in favor of Marquez was altered.
The 1,000 pesos to 91,000 pesos and the date of maturity from November 24 to November 14.
Despite repeated demands, Metrobank refused to recredit the amount of 90,000 pesos to
Cabilzo’s account.
ISSUES:
(1) Was the change of the sum payable to 91, 000 pesos and the date of maturity to
November 24 a “material alteration” as contemplated under the Negotiable
Instruments Law?
(2) Which party was negligent? Was it Cablizo, or Metrobank?
(3) Metrobank claims that Westmont Bank should be held liable since the former merely
relied on the latter’s indorsement. Is this argument tenable?
NIL DIGESTS | TOPIC 2
RULING:
With regard to Issue#1:
Yes, it was a material alteration. Material alterations are those which change any of the items
required under Section 1 of the NIL.
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 determinable future time;
(c) Must be payable to order or to bearer; and
(d) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
Furthermore, Section 125 of the NIL enumerates what constitutes a material alteration.
Section 125. What constitutes material alteration. – Any alteration which changes:
a) The date;
b) The sum payable, either for principal or interest;
c) The time or place of payment;
d) The number or the relation of the parties;
e) The medium or currency in which payment is to be made.
Since November 24 was altered to reflect November 14, and the original amount of 1,000 pesos
was altered to reflect 91,000 pesos, it is clear that both the date and sum payable were tampered
with respectively.
Lastly, Section 124 of the NIL provides for the effect of material alteration on Negotiable
Instruments.
Section 124. Alteration of instrument; effect of. – Where a negotiable instrument is
materially altered without the assent of all parties liable thereon, it is avoided, except as
against a party who has himself made, authorized, and assented to the alteration and
subsequent indorsers.
But when the instrument has been materially altered and is in the hands of a holder in due
course not a party to the alteration, he may enforce the payment thereof according to its
original tenor.
26
 NIL DIGESTS | TOPIC 2
With regard to Issue#2:

It was Metrobank and not Cabilzo. Cabilzo cannot be held to be negligent as he was way enough
to place asterisks between and after the amounts, not only those stated in words but also the
numerical accounts.

Metrobank was not able to produce an ounce of evidence proving that Cabilzo failed to exercise
the diligence of a reasonable man.

On the other hand, the degree of diligence required of banking institution is utmost diligence.
This is due to the nature of functions which is imbued with public interest.

Metrobank’s negligence is shown by its failure to notice that there were no asterisks before the
amount of 91,000. (as stated earlier, Cablizo placed asterisks before AND after the amounts)

The bank also failed to notice that the word “NINETY” was larger compared to the words “one
thousand pesos and was typed with a lighter ink.

Metrobank’s negligence is also manifested by the fact that only a cash custodian examined the
check, it is not the duty nor the expertise of cash custodians to examine checks.

With regard to Issue#3:

The argument is untenable. It runs contrary to the dictum that banks, being impressed with public
interest, must exercise the highest degree of diligence to its clients.

Therefore, it should not rely on indorsements made by other banks.

What is even more deplorable is that Metrobank, after learning about the material alterations,
refused to recredit the amount and permitted a full – blown trial.

However, Metrobank is not left without any recourse. It may still go after the person who made
the alterations.

27
 NIL DIGESTS | TOPIC 2
INTERNATIONAL CORPORATE BANK, INC. vs CA RULING:
NO. Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable Instruments Law,
provide:
FACTS:
SEC. 124. Alteration of instrument; effect of. ― Where a negotiable instrument is
The Ministry of Education issued various checks with PNB as drawee in which The International materially altered without the assent of all parties liable thereon, it is avoided, except as
Corporate Bank (ICB) accepted for deposit. against a party who has himself made, authorized, or assented to the alteration and
After 24 hours from submission of the checks to PNB for clearing, ICB paid the value of the checks subsequent indorsers.
and allowed the withdrawals of the deposits. But when an instrument has been materially altered and is in the hands of a holder in due
However, on 14 October 1981, PNB returned all the checks to ICB without clearing them on the course, not a party to the alteration, he may enforce payment thereof according to its
ground that they were materially altered. The material alteration that PNB claimed to be a ground original tenor.
for dishonoring the checks is the alteration of the serial number of the checks.
With this, ICB instituted a case for collection of sum of money against PNB. SEC. 125. What constitutes a material alteration. ― Any alteration which changes:
a) The date;
ISSUE: b) The sum payable, either for principal or interest;
c) The time or place of payment;
WON the alterations in the serial number constitute material alteration which would warrant the d) The number or the relations of the parties;
dishonor of the checks. e) The medium or currency in which payment is to be made;
Or which adds a place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect, is a material
alteration.

The SC has ruled that alteration of the serial number is not material alteration covered by the NIL.
In PNB v. CA, the SC ruled, to wit:
An alteration is said to be material if it alters the effect of the instrument. It means an
unauthorized change in an instrument that purports to modify in any respect the obligation of a
party or an unauthorized addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party.
In other words, a material alteration is one which changes the items which are required to be
stated under Section 1 of the Negotiable Instrument[s] Law.
The case at the bench is unique in the sense that what was altered is the serial number of the
check in question, an item which, it can readily be observed, is not an essential requisite for
negotiability under Section 1 of the Negotiable Instruments Law.
The aforementioned alteration did not change the relations between the parties. The name of
the drawer and the drawee were not altered.
The intended payee was the same. The sum of money due to the payee remained the same

28

VICKY C. TY vs PEOPLE OF THE PHILIPPINES
G.R. No. 149275, September 27, 2004
FACTS:
Ty’s mother and sister were confined at the Manila Doctors’ Hospital.
To assure payment of the hospital bills Ty signed the "Acknowledgment of Responsibility for
Payment" in the Contract of Admission.
The total hospital bills of the two patients amounted to ₱1,075,592.95.
Ty executed a promissory note wherein she assumed payment of the obligation in installments.
To assure payment of the obligation, she drew several postdated checks against Metrobank
payable to the hospital.
The seven (7) checks, each covering the amount of ₱30,000.00, were all deposited on their due
dates. But they were all dishonored by the drawee bank and returned unpaid to the hospital due
to insufficiency of funds, with the "Account Closed" advice.
Soon thereafter, the complainant hospital sent demand letters to Ty by registered mail.
As the demand letters were not heeded, complainant filed the seven (7) Informations for
violation of BP 22.
Ty argued that there was an absence of valuable consideration for the issuance of the checks and
the payee had knowledge of the insufficiency of funds in the account.
ISSUE:
1) Whether or not the checks were issued for a valuable consideration?
2) Whether valid valuable consideration requires benefit to be given to the payor?
NIL DIGESTS | TOPIC 3
RULING:
(1) NO
It is presumed, upon issuance of the checks, in the absence of evidence to the contrary, that the
same was issued for valuable consideration.
Sec. 24 of the Negotiable Instruments Law creates a presumption that every party to an
instrument acquired the same for a consideration or for value. In alleging otherwise, Ty has the
burden to prove that the checks were issued without consideration. She must present convincing
evidence to overthrow the presumption. Ty in this case failed to discharge her burden of proof.
Simply defined, valuable consideration means an obligation to give, to do, or not to do in favor
of the party who makes the contract, such as the maker or indorser."
Ty’s mother and sister availed of the services and the facilities of the hospital. For the care given
to her kin, Ty had a legitimate obligation to pay the hospital by virtue of her relationship with
them and by force of her signature on her mother’s Contract of Admission acknowledging
responsibility for payment, and on the promissory note she executed in favor of the hospital.
(2) NO
Ty’s claim that the obligation to pay the hospital bills was not her personal obligation because
she was not the patient, and therefore there was no consideration for the checks. The case of
Bridges v. Vann, et al. tells us that "it is no defense to an action on a promissory note for the
maker to say that there was no consideration which was beneficial to him personally; it is
sufficient if the consideration was a benefit conferred upon a third person, or a detriment
suffered by the promisee, at the instance of the promisor.
It is enough if the obligee foregoes some right or privilege or suffers some detriment and the
release and extinguishment of the original obligation. Appellee accepted one debtor in place of
another and gave up a valid, subsisting obligation for the note executed by the appellants. This,
of itself, is sufficient consideration for the new notes."
Ultimately, the law punishes the mere act of issuing a bouncing check, not the purpose for which
it was issued nor the terms and conditions relating to its issuance. B.P. 22 does not make any
distinction as to whether the checks within its contemplation are issued in payment of an
obligation or to merely guarantee the obligation.
The thrust of the law is to prohibit the making of worthless checks and putting them into
circulation. The law itself creates a prima facie presumption of knowledge of insufficiency of
funds (Sec. 2, B.P. 22). The knowledge of the payee of the insufficiency or lack of funds of the
drawer with the drawee bank is immaterial as deceit is not an essential element of an offense
penalized by B.P. 22. The gravamen of the offense is the issuance of a bad check, hence, malice
and intent in the issuance thereof is inconsequential.
In addition, Ty invokes the ruling in Magno v. Court of Appeals wherein this Court inquired into
the true nature of transaction between the drawer and the payee and finally acquitted the
accused. Ty’s reliance on the case is misplaced. In Magno the checks were used as collateral for
an accommodation and not to cover the receipt of an actual account or credit for value WHILE in
this case Ty’s checks were issued in payment of the hospital bills of her mother.
29
 NIL DIGESTS | TOPIC 3
CARIÑO vs DE CASTRO RULING:

G.R. No. 176084. April 30, 2008. Although the petition for review before the Court of Appeals was filed with the conformity of
the Assistant City Prosecutor, such conformity is insufficient, as the rules and jurisprudence
mandate that the same should be filed by the Solicitor General.
FACTS: Only the OSG can bring or defend actions on behalf of the Republic or represent the People or
state in criminal proceedings pending in the Supreme Court and the Court of Appeals.
Petitioner Carmencita G. Cariño filed a complaint for violation of Batas Pambansa Blg. 22 (BP
22) against respondent Merlin de Castro. Accordingly, respondent was charged with five (5) However, the Supreme Court acknowledged that a private offended party, in the interest of
counts of violation of BP 22. substantial justice, and where there appears to be a grave error committed by the judge, or
where there is lack of due process (petition for certiorari under Rule 65), may allow and give
Respondent filed a Motion for Preliminary Determination of Existence of Probable Cause which
due course to the petition filed.
was granted. Accordingly, the Metropolitan Trial Court found that
However, in the instant case, the petition that was filed was under Rule 45.
1) The checks were issued by respondent without valuable consideration;
2) That petitioner was not authorized to collect rental payments from respondent; and Moreover, both the Metropolitan Trial Court and the Regional Trial Court found that petitioner
3) That consequently, respondent can legally refuse payment on the ground that said was not duly authorized by the owner of the subject property to collect and receive rentals
checks were issued without valuable and legal consideration. thereon.
Petitioner appealed to the Regional Trial Court. It held that petitioner failed to controvert the
Joint-Affidavit executed by the owners of the property that they did not authorize petitioner Thus, not only were the checks without valuable consideration; they were also issued for a
to lease their property and to collect rentals thereon. non-existing account. With these undisputed findings, the Supreme Court could reconcile
petitioner's allegation that she is the aggrieved party.
Hence, the checks were issued for a non-existing account or without legal and valuable
consideration.
Thereafter, petitioner, through counsel and with the conformity of Asst. City Prosecutor, filed
a petition for review before the Court of Appeals.
The Court of Appeals dismissed the petition because it was filed only by the private prosecutor
and not by the Office of the Solicitor General as mandated by law.

ISSUE:
Whether or not the instant petition for review to the Court of Appeals suffers from a basic
infirmity of having been filed merely by the private prosecutor or counsel of the private
complainant, though with the conformity of the Assistant City Prosecutor, and not by the
authorized representative of the People of the Philippines — the Solicitor General.

30
 NIL DIGESTS | TOPIC 3
TAN TIONG TICK vs PMC (1964)

FACTS:
Ernesto (vice-president of PMC) and Tick were friends.
PMC saw an opportunity to buy textile goods from Lucilo. It issued Lucilo a check for the amount
of goods, payable to Tick. The check was drawn on China Bank, dated 21 March 1951, indorsed
by Tick and cashed, and the proceeds turned over to Lucilo. But Lucilo failed to deliver the textiles.
Thus, PMC sued Tick for the collection of the face value of the check.
Tick’s defense was that the check was made out in his name by PMC; that he signed it on the back
because PMC wanted a witness to its encashment and to the delivery of the money to Lucilo; that
Lucilo did not accept a check, instead wanted a cash, so Lucilo received a cash from him.

ISSUE:
Will the case of PMC against Tick prosper?

RULING:
Yes. The check payable to Tick was under an agreement that the amount of the check was to be
given to Lucilo in payment of textiles and that the profits from the investment be equally divided
between PMC and Tick.
It does not show that anyone else received the cash representing the face value thereof but Tick
himself. PMC’s books of account contain an entry that an indebtedness of Tick and PMC sent Tick
confirmation slips of said indebtedness.

31

TOWN SAVINGS AND LOAN BANK INC. vs CA
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.
FACTS:
Spouses Hipolito were granted a loan in the amount of P700,000.00 with interest of 24% per
annum, for which they executed and delivered to Town Savings and Loan Bank (TSLB) a
promissory note with a maturity period of 3 years and an acceleration clause upon default in the
payment of any amortization.
They defaulted in their monthly amortization and so notices of past due account and demands
for payment were sent.
The Hipolitos denied being personally liable on the P700,000.00 promissory note that they
executed.
The loan was allegedly for the account of Pilarita H. Reyes, the sister of Miguel Hipolito.
She was the real party-in-interest. Not having received any part of the loan, they argued that they
were mere guarantors for Pilarita.
ISSUE:
Whether the Hipolitos are liable on the promissory note that they executed in favor of TSLB.
NIL DIGESTS | TOPIC 3
RULING:
Yes. The Hipolitos signed the promissory note in order to enable Pilarita H. Reyes to borrow the
total sum of P1.4 million from TSLB. The actual beneficiary of the loan was Pilarita H. Reyes and
no other.
The Hipolitos accommodated her by signing a promissory note for half of the loan that she
applied for because TSLB may not lend any single borrower more than the authorized limit of its
loan portfolio.
Under Section 29 of the Negotiable Instruments Law, the Hipolitos are liable to the bank on the
promissory note that they signed to accommodate Pilarita.
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.
He receives no part of the consideration for the instrument but assumes liability to the other
parties thereto because he wants to accommodate another.
32
 NIL DIGESTS | TOPIC 3
CLARK vs SELLNER ISSUE:
Won defendant Sellner is liable on the note.

The fact that a joint and several note has been signed by one or various of the makers thereof for
the accommodation by one or more of his or their comakers, does not render him or them an
accommodation maker or makers with respect to the creditor who, upon the receipt of the note,
pays the full value thereof.
FACTS:
Sellner with two other persons, signed a promissory note solidarily binding themselves to pay to
the order of R.N. Clark.
RULING:
Yes.
(1) The liability of Sellner as one of the signers of the note, is not dependent on whether he has
or has not, received any part of the debt.
The defendant is really and expressly one of the joint and several debtors of the nore and as such
he is liable under the provisions of Section 60 of the Negotiable Instruments Law.

(2) As to the presentment or payment, such action is not necessary in order to charge the person
"P12,000.00 MANILA, July 1, 1914 . primarily liable, as is the defendant Sellner.

"Six months after date, for value received, we jointly and severally promise to pay to the order of
R. N. Clark at his office in the city of Manila, the sum of twelve thousand pesos, Philippine
currency, with interest thereon in like currency from date until paid at the rate of ten per cent per
annum, payable quarterly. "If suit is necessary to collect this note, we hereby agree to pay as
attorney's fees ten per centum of the amount found due.
(Sgd.)
"W. H. CLARKE, [INTERNAL REVENUE STAMP.]
"JOHN MAYE. "BY W. H. CLARKE, his attorney .
(3) As to whether Sellner is an accommodation party, it should be taken into account that by
putting his signature to the note, he lent his name, not to the creditor, but to those who
signed with him placing him in the same position and with the same liability as the said
signers.
It should be noted that the phrase “without receiving value therefor” as used in Section 29 means
“without receiving value by virtue of the instrument” and not, as it apparently is supposed to
mean, “without receiving payment for lending his name.”
If, as in the instant case, a sum of money was received by virtue of the note, it is immaterial as far
as the creditor is concerned, whether one of the signers has or has not received anything in
payment for the use of his name.
In this case, the legal situation of Sellner is that of a joint surety rather than that of an
accommodation party, who upon the maturity of the note, may pay the debt, demand the
collateral security and dispose of it to his benefit.

"GEO C. SELLNER." As to the plaintiff, he is a holder for value under the phrase of said section 29, for he had paid the
money to the signers at the time the note was executed and delivered to him, and as such holder,
he has the right to demand payment of the debt from the signer of the note, even though he
knows that said person is merely an accommodation party (section 29 above cited), assuming the
The note matured but the amount wasn’t paid. The defendant alleges that:
defendant to be such, which, as has been stated, is not the case.
1) He didn’t receive any amount of the debt;
2) That the instrument wasn’t presented to him for payment and
3) Being an accommodation party, he is not liable unless the note is negotiated, which
wasn’t done.

33

SADAYA vs SEVILLA
19 SCRA 24
Where a co-accommodation maker paid voluntarily the outstanding balance of the account of
the principal debtor without previous judicial demand and when the principal debtor is not
insolvent, he cannot, as a matter of right, demand from his co- accommodation maker of the
share which is proportionately owing him.
FACTS:
Victor Sevilla, Oscar Varona and Simeon Sadaya executed, jointly and severally, in favor of the
Bank of the Philippine Islands, or its order, a promissory note for P15,000.00 with interest at 8%
per annum, payable on demand.
Victor Sevilla and Simeon Sadaya signed the promissory note as co-makers only as a favor to
Oscar Varona. After payments were made by Varona, there stood an outstanding balance of
4,850. The balance was paid by Sadaya including the interest. He then go after Varona for
reimbursement but despite repeated demands he failed.
When Victor Sevilla died, Sadaya filed a creditor's claim in the former’s intestate estate
proceeding. The administrator resisted the claim upon the averment that the deceased Victor
Sevilla "did not receive any amount as consideration for the promissory note," but signed it only
"as surety for Oscar Varona".
ISSUE:
WON one accommodation maker can seek reimbursement from co-accommodation maker
NIL DIGESTS | TOPIC 3
RULING:
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.
This right springs from an implied promise between the accommodation makers to share equally
the burdens that may ensue from having consented to stamp their signatures on the promissory
note.
Under Sec. 29 of the Negotiable Instruments Law, an accommodation party is liable to a holder
for value even if such holder at the time of taking the instrument knew him to be only an
accommodation party.
However, this does not define the right of one accommodation maker to seek reimbursement
from another. Perforce, the Civil Code must be applied.
Article 2073 of the Civil Code deals with the situation which arises when one surety has paid the
debt to the creditor and is seeking contribution from the co-sureties, with the following rules:
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) The principal debtor is insolvent.
Applying the said article, Sadaya cannot claim reimbursement from the estate of Sevilla.
For the reason that it was found by the lower court that Sadaya's payment to the bank "was made
voluntarily and without any judicial demand," and that "there is an absolute absence of evidence
showing that Varona is insolvent".
This combination of fact and lack of fact epitomizes the fatal distance between payment by
Sadaya and Sadaya's right to demand of Sevilla "the share which is proportionately owing from
him."
34

BPI vs CA and BENJAMIN C. NAPIZA
Person negotiating an instrument by delivery by qualified indorsement or as an accommodation
party provides for warranties & thus can be held liable to a holder for value.
However, due to attending circumstances in this case (e.g. bank’s negligence on clearing
requirement) then the bank should suffer the resulting damage.
FACTS:
A certain Henry Chan owned a Continental Bank Manager’s Check payable to "cash" in the
amount of Two Thousand Five Hundred Dollars ($2,500.00).
Chan went to the office of Benjamin Napiza (respondent) and requested him to deposit the check
in his (Napiza’s) dollar account by way of accommodation and for the purpose of clearing the
same. Private respondent acceded and so on September 3, 1987 he deposited the check to his
account which maintained by BPI (petitioner).
Napiza agreed to deliver to Chan a signed blank withdrawal slip, with the understanding that as
soon as the check is cleared, both of them would go to the bank to withdraw the amount of the
check upon private respondent's presentation to the bank of his passbook.
However, using the blank withdrawal slip given by private respondent to Chan, on October 23,
1984, a certain Ruben Gayon, Jr. was able to withdraw the amount of $2,541.67 from Napiza’s
Account.
Notably, the withdrawal slip shows that the amount was payable to Ramon A. de Guzman and
Agnes C. de Guzman and was duly initialed by the branch assistant manager, Teresita Lindo.
On November 20, 1984, petitioner received communication from the Wells Fargo Bank
International of New York (drawee bank) that the said check deposited by private respondent
was a counterfeit check.
Mr. Reyes the petitioner’s branch manager informed respondent that the check bounced. Upon
learning dishonor of the check, he immediately tried to contact Chan but the latter was out of
town.BPI demanded the return of $2,500.00.
Private respondent claimed that he deposited the check "for clearing purposes" only to
accommodate Chan.
Petitioner claims that private respondent, having affixed his signature at the dorsal side of the
check, should be liable for the amount stated therein in accordance with the provision of the
Negotiable Instruments Law on the liability of a general indorser (Sec. 66).
ISSUE:
W/N respondent Napiza is liable under his warranties as a general indorser or as an
accommodation party.
NIL DIGESTS | TOPIC 3
RULING:
In Sec. 29. Of the Negotiable Instruments Law it states that an accomodation party is one who
has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value
therefore, 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.
Ordinarily, respondent may be held liable as an indorser of the check or even as an
accommodation party. The withdrawal slip was a blank one with only private respondent's two
signatures affixed on the proper spaces. Petitioner contends that in failing to name his authorized
agent, he practically authorized any possessor thereof to write any amount & to collect the same.
Such contention would’ve been valid if not for the fact that the withdrawal slip itself indicates a
special instruction that the amount is payable to "Ramon A. de Guzman &/or Agnes C. de
Guzman." As such, petitioner's personnel should’ve been warned that Gayon wasn’t the proper
payee of the proceeds.
To hold respondent liable for the amount of the check he deposited by strict application of the
law & without considering the attending circumstances in the case would result in the erosion of
the public trust in the banking system. Hence SC looked into the events that led to the
encashment of the check.
Notably in the bank’s rules, to be able to withdraw from the savings account deposit, two
requisites must be presented to petitioner bank by the person withdrawing an amount:
a) A duly filled-up withdrawal slip, and
b) The depositor's passbook.
The requirement of presentation of the passbook when withdrawing an amount cannot be given
mere lip service even though the person making the withdrawal is authorized by the depositor
to do so. In the case at bar, the passbook was not presented during withdrawal.
Furthermore, in depositing the check in his name, respondent did not become the outright owner
of the amount stated therein. Under the petitioner bank’s rules, by depositing the check with
petitioner, respondent was merely designating petitioner as the collecting bank.
This is in consonance with the rule that a negotiable instrument, such as a check is not legal
tender. And so after receiving the deposit, petitioner shall credit the amount in respondent's
account ONLY after the drawee bank has cleared the check for deposit.
It is true that respondent's having signed a blank withdrawal slip set in motion the events that
resulted to the encashment of the counterfeit check.
However, the proximate cause of the eventual loss of the amount of $2,500.00 on petitioner's
part was its personnel's negligence in allowing such withdrawal in disregard of its own rules and
the clearing requirement in the banking system.
Hence, it should suffer the resulting damage.
35

AGRO CONGLOMERATES INC. vs CA
Consideration: Accommodation of party and its liabilities
FACTS:
On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of land to
Wonderland Food Industries, Inc. In their Memorandum of Agreement, the parties covenanted
that the purchase price of Five Million (P5,000,000.00) Pesos would be settled by the vendee,
under different terms and conditions.
On July 19, 1982, the vendor, the vendee, and the respondent bank Regent Savings & Loan Bank
(formerly Summa Savings & Loan Association), executed an Addendum to the previous
Memorandum of Agreement. The new arrangement pertained to the revision of settlement of
the initial payments of P1,000,000.00 and prepaid interest of P360,000.00. This addendum was
not notarized.
Consequently, petitioner Mario Soriano signed as maker several promissory notes, payable to
the respondent bank. Thereafter, the bank released the proceeds of the loan to petitioners.
However, petitioners failed to meet their obligations as they fell due.
Respondent bank filed three separate complaints before the Regional Trial Court of Manila for
Collection of Sums of money. Petitioners interposed the defense of novation and insisted there
was a valid substitution of debtor.
ISSUE:
Whether or not the petitioner should be held liable as an accommodation party?
NIL DIGESTS | TOPIC 3
RULING:
NO. Revealed by the facts on record, the conflict among the parties started from a contract of
sale of a farmland between petitioners and Wonderland Food Industries, Inc. as found by the trial
court, no such sale materialized.
Subsequently, the parties (with the participation of respondent bank) executed an addendum
providing instead, that the petitioners would secure a loan in the name of Agro Conglomerates
Inc. for the total amount of the initial payments, while the settlement of said loan would be
assumed by Wonderland.
Thereafter, petitioner Soriano signed several promissory notes and received the proceeds in
behalf of petitioner-company.
By this time, we note a subsidiary contract of suretyship had taken effect since petitioners signed
the promissory notes as maker and accommodation party for the benefit of Wonderland.
Petitioners became liable as accommodation party.
An accommodation party is a person who has signed the instrument as maker, acceptor, or
endorser, without receiving value therefore, and for the purpose of lending his name to some
other person and is liable on the instrument to a holder for value, notwithstanding such holder
at the time of taking the instrument knew (the signatory) to be an accommodation party.
He has the right, after paying the holder, to obtain reimbursement from the party
accommodated, since the relation between them has in effect become one of principal and
surety, the accommodation party being the surety.
The addendum modified the contract of sale, not the stipulations in the promissory notes which
pertain to the surety contract. At this instance, Wonderland apparently assured the payment of
future debts to be incurred by the petitioners.
Consequently, only a contract of surety arose. The contract of surety between Wonderland and
the petitioners was extinguished by the rescission of the contract of sale of the farmland.
With the rescission, there was confusion or merger in the persons of the principal obligor and the
surety, namely the petitioners herein. The addendum which was dependent thereon likewise lost
its efficacy.
The contract of sale between Wonderland and petitioners did not materialize. But it was
admitted that petitioners received the proceeds of the promissory notes obtained from
respondent bank.
Petitioners had no legal or just ground to retain the proceeds of the loan at the expense of private
respondent.
Neither could petitioners excuse themselves and hold Wonderland still liable to pay the loan
upon the rescission of their sales contract.
36

DE OCAMPO vs GATCHALIAN
FACTS:
Anita Gatchalian was interested in buying a car. Manuel Gonzales offered to her a car owned by
Ocampo.
Anita requested to bring the car together with the certificate of registration of the car so that she
and her husband would be able to see it.
However, according to Gonzales, the owner of the car will not heed to her request unless she will
issue a check to show that she is really interested in buying the car.
Anita issued a check for the purposes of safekeeping by Gonzales and with the agreement that
the said check will be returned the next day. After that, Manuel never showed himself to
Gatchalian.
Meanwhile, Manuel gave the check to De Ocampo as payment of the fees and expenses arising
from the hospitalization of his wife.
De Ocampo accepted said check and gave the amount of P158.25 representing Gonzales change.
On the other hand, since Gatchalian never saw Manuel again, she placed a stop-payment on the
P600.00 check, so De Ocampo was not able to cash on the check.
De Ocampo now demands Gatchalian for payment of the check, in which Gatchalian refused
citing that plaintiff is a not a holder in due course.
The lower court held that Gatchalian should pay De Ocampo.
ISSUE:
Whether or not De Ocampo is a holder in due course?
NIL DIGESTS | TOPIC 5
RULING:
No. Section 52 of the 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 SC held that plaintiff is a not a holder in due course. There were obvious instances to show
that the check was negligently acquired like Gatchalian having no liability with De Ocampo, that
the check was crossed, and that the amount of the check did not correspond exactly with the
obligation of Gonzales, all these circumstances should have put De Ocampo to question why is
Gonzales in the possession of the said check.
It was De Ocampo as the payee who has the 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.
Failure of De Ocampo to comply which such obligation shows his gross negligence amounting to
legal absence of good faith.
Further, the presumption of good faith will not apply, since it cannot be stated that the payee
acquired the check without knowledge of said defect in holder's title to plaintiff because the
defect was apparent on the instruments face, such that the instrument is not payable to him or
to bearer.
37

MESINA vs IAC
FACTS:
Jose Go He needed to transfer P800,000.00 from Associated Bank to another bank but he realized
that he does not want to be carrying that cash so he bought a cashier’s check from Associated
Bank worth P800,000.00, but he left the check on top of the manager’s desk.
NIL DIGESTS | TOPIC 5
RULING:
No. Mesina failed to substantiate his claim that he is a holder in due course and for consideration
or value as shown by the established facts of the case.
Admittedly, Mesina became the holder of the cashier’s check as endorsed by Alexander Lim who
stole the check. Mesina however refused to say how and why it was passed to him.
Mesina had therefore notice of the defect of his title over the check from the start.

The bank manager then had it kept bank manager for safekeeping by one of its employees. The The holder of a cashier’s check who is not a holder in due course cannot enforce such check
employee was Uy who was with Alexander Lim, a visitor. against the issuing bank which dishonors the same.

Uy left the check in his desk as he needed to answer a telephone call and to use the men’s room The moment said cashier's check was lost and/or stolen no one outside of Jose Go can be termed
and upon his return, Lim and the check were gone. a holder in due course because Jose Go had not indorsed it in due course.

When Go inquired about his check, the same couldn't be found, Go was advised to request for The check in question suffers from the infirmity of not having been properly negotiated and for
the stoppage of payment, which he did. value by respondent Jose Go who has already been said is the real owner of said instrument.

He executed also an affidavit of loss as well as reported it to the police.

Associated Bank received the lost check for clearing, the check was immediately dishonored by
Associated Bank by sending it back to Prudential Bank.
However, the same was again returned to Associated Bank and for the second time it was
dishonored.
After the second time, a lawyer contacted it demanding payment. He refused to disclose the
name of his client and threatened to sue.
Later, the name of Mesina was revealed. When asked by the police on how he possessed the
check, he said it was paid to him by Alexander Lim.
The trial court ruled ordering the bank to replace the cashier’s check in favor of Go.

ISSUE:
Whether or not Mesina is a holder in due course?

38
 NIL DIGESTS | TOPIC 7
PRUDENTIAL BANK vs INTERMEDIATE APPELLATE COURT RULING:

G.R. No. 74886 December 8, 1992 In the case at bar, the drawee was necessarily the herein petitioner.
It was to the latter that the drafts were presented for payment.

LEGAL PRINCIPLE: There was in fact no need for acceptance as the issued drafts are sight drafts. Presentment for
acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable
There was no need for acceptance as the issued drafts are sight drafts. Instruments Law (NIL).
They are, pursuant to Section 7 of the Negotiable Instruments Law (NIL), payable on demand. The said section provides that presentment for acceptance must be made:
Presentment for acceptance is defined as the production of a bill of exchange to a drawee for a) Where the bill is payable after sight, or in any other case, where presentment for
acceptance. acceptance is necessary in order to fix the maturity of the instrument; or
b) Where the bill expressly stipulates that it shall be presented for acceptance; or
c) Where the bill is drawn payable elsewhere than at the residence or place of business
FACTS: of the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill
Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the
liable.
importation of textile machineries under a five-year deferred payment plan.
Obviously then, sight drafts do not require presentment for acceptance.
To effect payment for said machineries, Philippine Rayon Mills opened a commercial letter of
credit with the Prudential Bank and Trust Company in favor of Nissho.
Against this letter of credit, drafts were drawn and issued by Nissho, which were all paid by the
Prudential Bank through its correspondent in Japan.
Two of these drafts were accepted by Philippine Rayon Mills while the others were not.
Petitioner instituted an action for the recovery of the sum of money it paid to Nissho as Philippine
Rayon Mills was not able to pay its obligations arising from the letter of credit.
Respondent court ruled that with regard to the ten drafts which were not presented and
accepted, no valid demand for payment can be made. Petitioner however claims that the drafts
were sight drafts which did not require presentment for acceptance to Philippine Rayon.

ISSUE:
Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon
liable thereon.

39