PACHECO V.
COURT OF APPEALS from the bank and/or the payee or holder that the check is dishonored
319 SCRA 595
Sec. 12 – 13 / 186
FACTS:
Spouses Pacheco were in the construction business. Due to the delay in
payment of receivables from DPWH they were constrained to obtain loans
from Mrs. Vicencio who owns a pawnshop and whose husband was a
former Judge. The Spouses Pacheco loaned a total of P85,000 from Mrs.
Vicencio. As a condition for the loan, Mrs. Vicencio required the Spouses
Pacheco to issue an undated check every time they contracted a loan
assuring the Pachecos that the check are merely evidence of their
indebtedness and will not be presented to the bank for payment since the
bank account of the Pachecos no longer had funds.
Of the P85,000 loaned, the Pachecos were able to settle P70,000. When
the remaining balance of P15,000 became due and demandable the
Pachecos were not able to pay. Mrs. Vicencio, her husband and daughter
asked the Pachecos to place a date of Aug. 15, 1992 on two of the six
undated checks. Despite being informed by the Pachecos that their RCBC
account was already closed in Aug. 17, 1989 Mrs. Vicencio insisted on the
dating of the check and again assuring the Pachecos that the checks will
not be presented to the bank and will only serve as evidence of their
indebtedness. The Pachecos placed the date on the checks fearing that
they would not be able to obtain loans in the future from Mrs. Vicencio if
they did not comply with the request.
On Aug. 29, 1992 the Pachecos received a demand letter informing them
that the two dated checks were presented for payment and were
dishonored due to the closing of the account. A complaint was then filed by
Mrs. Vicencio’s husband against the Pachecos and two informations for
estafa were filed against them.
The informations alleged that the dishonored checks were issued in
payment of a diamond ring.
ISSUE:
W/N the Spouses Pacheco are guilty of estafa
RULING:
Estafa may be committed in several ways, one of which is by postdating a
check or issuing a check in payment of an obligation when the offender has
no funds in the bank or his funds deposited are not sufficient to cover the
amount of the check. The failure of the drawer of the check to deposit the
amount necessary to cover the check within 3 days from receipt of notice
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
shall be prima facie evidence of deceit constituting a fraudulent act.
Elements of Estafa
1. that the offender postdated or issued a check in payment of an
obligation contracted at the time the check was issued
2. that such postdating or issuing a check was done when the
offender had no funds in the bank, or his funds deposited therein
were not sufficient to cover the amount of the check
3. deceit or damage to the payee
In this case the first and third elements are not present. A check has the
character of negotiability and at the same time constitutes an evidence of
indebtedness.
By mutual agreement of parties the negotiable character of the check may
be waived which is exactly what happened in this case. Hence there
cannot be deceit on the part of the Pachecos because there was an
agreement with Mrs. Vicencio at the time of the issuance of the checks that
the same will not be encashed or presented to the banks. The checks
therefore became mere evidence of indebtedness. It has been ruled that a
drawer who issues a check as security or evidence of investment is not
liable for estafa.
Also, Mrs. Vicencio was informed that the Spouses Pacheco no longer had
funds with RCBC when the checks were issued and that when she asked for
the postdating of the checks in 1992 she was also made aware that the
account was closed as early as 1989.
Knowledge of the complainant that the drawer does not have sufficient
funds in the bank at the time it was issued to him does not give rise to a
case for estafa through bouncing checks.
Also, the checks were not presented within reasonable time from issue.
The current banking practice is that a check becomes stale after more than
6 months. In this case, the checks were issued more than 3 years prior to
their presentment. There were a total of 6 check issued, but only 2
presented for payment, this fact shows that the 2 checks were chosen to
cover the remaining balance of the loan and that the checks were not to be
modes of payment but mere promissory notes.
The argument that the checks were issued as payment for jewelry
purchased in 1992 is also untenable since as mentioned earlier the RCBC
account was closed as early as 1989. The Pachecos, however, remain liable
for the amount of P15,000.
P 1 of 51
2D Negotiable Instruments – Atty. Mercado
HSBC v. PEOPLES BANK & TRUST CO.
35 SCRA 140
Sec. 124 and 125
FACTS:
 PLDT drew a check worth P14,608.05 on HSBC in favor of the same
bank
 The check was sent by mail to the payee
 Check fell in the hands of Florentino Changco who was able to
erase the name of HSBC and typed his own name as payee
 Altered check was deposited with Peoples Bank
 Check was presented by Peoples Bank for clearing wherein Peoples
Bank made the indorsement: “For clearance, clearing office. All
prior endorsements and/or lack of endorsements guaranteed.
Peoples Bank and Trust Company.”
 Check was duly cleared by HSBC. Peoples Bank credited Changco’s
account
 Changco began to withdraw his account and eventually closed it
 Cancelled check went the regular route of the regular routine and it
was returned to PLDT when the alteration was discovered
 Peoples Bank was notified of the alteration on the same day; HSBC
requested Peoples Bank to refund the amount. Peoples Bank
refused
ISSUE:
 Whether or not Peoples Bank should refund HSBC
HELD:
 NO, Peoples Bank is not liable to refund HSBC
 HSBC’s failure to call the attention of Peoples Bank as to the
alteration until after the lapse of 27 days would negate whatever
right it might have had against Peoples Bank in the light of the 24-
hour clearing house rule.
 It is a settled rule that a person who presents for payment checks
such as are here involved guarantees the genuineness of the
check, and the drawee bank need concern itself with nothing but
the genuineness of the signature, and the state of the account with
it of the drawee.
 Whatever remedy the HSBC has would lie not against the Peoples
Bank but against the party responsible for changing the name of
the payee.
 The attempted distinction sought to be made by HSBC to the effect
that it refers to forged but not to altered checks is not warranted.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
REPUBLIC BANK v. CA
196 SCRA 100
Sec. 124 and 125
FACTS:
 San Miguel Corporation drew a dividend check on its account in
First National City Bank (FNCB) in favor of J. Roberto Delgado, one
of its stockholders. After delivery to Delgado, the amount was
altered by increasing it from P240 to P9,240.
 The check was indorsed and deposited by Delgado in his account
with Republic Bank.
 Republic accepted the check without ascertaining its genuineness.
Republic endorsed the check to FNCB by stamping on the back of
the check “all prior and/or lack of indorsement guaranteed” and
presented it to FNCB for payment through the Central Bank
Clearing House.
 FNCB paid P9,240 to Republic through the CB Clearing House.
 SMC notified FNCB of alteration; FNCB recredited SMC.
 FNCB informed Republic Bank of alteration and forgery. FNCB
demanded refund but Republic refused.
Petitioner’s Contentions (Republic Bank):
 Republic refused to refund claiming that there was delay on the
part of FNCB in giving them notice of the alteration.
 Republic also said that it was not guilty of negligence and that it
was SMC’s fault in drawing the check in such a way as to permit
the insertion of numerals increasing the amount.
Private Respondent’s Contentions (FNCB):
 FNCB demanded that Republic refund the P9,240 on the basis of
the latter’s endorsement and guaranty.
ISSUE:
 Whether or not Republic Bank is liable to refund FNCB
HELD:
 NO, Republic is not liable. FNCB failed to detect the fraudulent
character of the SMC check and so it failed to warn Republic within
the 24-hour clearing house rule.
 The unqualified endorsement of the collecting bank on the check
should be read together with the 24-hour regulation on clearing
house operation.
 When the drawee bank fails to return a forged or altered check to
the collecting bank within the 24-hour clearing period, the
collecting bank is absolved from liability.
 Unless an alteration is attributable to the fault or negligence of the
drawer himself, the remedy of the drawee bank that negligently
clears a forged and/or altered check for payment is against the
P 2 of 51
2D Negotiable Instruments – Atty. Mercado
 party responsible for the forgery or alteration. Otherwise, it bears
the loss.
 CA erred in laying upon Republic, instead of on FNCB the drawee
bank, the burden of loss for the payment of the altered SMC check.
BANCO ATLANTICO V. AUDITOR GENERAL
81 SCRA 335
Sec. 124 and 125
NATURE:
An appeal from the decision of the Auditor General who disallowed the
claim of Banco Atlantico against the Philippine Embassy in Spain
FACTS:
The case involves three checks all issued by the Philippine Embassy with
Luis Gonzales (ambassador) and Virginia Boncan (finance officer) as
signatories and all paid by Banco Atlantico to Boncan.
1. A $ 10K check issued by the Philippine Embassy, with Azucena
Pace as payee and drawn against the Philippine National Bank in
New York, was negotiated by Boncan with Banco Atlantico. Said
check was said to be indorsed by the payee and Boncan. Banco
Atlantico paid the check in full without clearing with the drawee
bank, PNB New York.
2. A $ 35K check issued by the Philippine Embasy, with Virginia
Boncan as payee, was negotiated by Boncan with Banco Atlantico.
Banco Atlantico paid the check in full without clearing with the
drawee bank, PNB New York.
3. A $ 90K check issued by the Philippine Embassy, with Virginia
Boncan as payee, was negotiated by Boncan with Banco Atlantico.
Banco Atlantico paid the check in full without clearing with the
drawee bank, PNB New York.
Banco Atlantico presented the check to PNB for payment. PNB dishonored
the check on the ground that the Philippine Embassy, the drawer, had
ordered the payments stopped. It then sent notices of protests to the
Philippine Embassy and Boncan who both refused to pay the value of the
checks. Banco Atlantico filed the corresponding money claim with the
Auditor General. The Auditor General denied the claim and concurred with
the views of Luis Gonzales, the ambassador that:
1. The Embassy did not have an account with Banco Atlantico. Only
the embassy’s employee Virginia Boncan did.
2. That the 3 checks were not honored and paid out to Boncan in the
ordinary course of its banking transactions. Boncan had special
personal relations with the bank’s employees and enjoyed a
preferential treatment.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
3. The $10K and $35K checks were materially altered. They were
originally only $109 and $75 respectively. While the $90K check
was a demand note and Boncan requested that it not be presented
to the drawee bank until a later date. The fact that Boncan did not
want the check to be presented for collection was proof of the
glaring infirmity of the instrument. Yet the bank took the check and
paid the amount to Boncan.
4. Bank is not a holder in due course. The conditions set in Sec. 52 for
it to be a holder in due course are not present.
HELD:
The petitioner asked the court to rule on two issues:
1. If there was forgery according to Sec. 23 which bars it from
collecting from the Philippine Embassy
2. Do the payment of the checks without clearing them with the
drawee bank constitute actual notice of defective title in the
indorser or an assumption of risk by the petitioner as to defeat its
claim?
The court ruled that Banco Atlantico paid the checks contrary to normal or
ordinary banking practice. The large amounts and the fact that the drawee
bank was a foreign bank should have been a red flag that required prior
clearance. It is also apparent that Boncan altered the amounts of the check
and that it was because of her special relations with the bank that the
latter encashed the checks without clearing them first.
Therefore, the Philippine Embassy as drawer of the checks cannot be held
liable for the amounts. The material alterations made by Boncan made the
checks wholly inoperative. No right of payment thereof against any party
thereto could have been acquired.
AMERICAN BANK V. MACONDRAY
4 Phil. 695
Sec. 124 and 125
FACTS:
- V.S. Wolff – Drawer
- Macondray & Co. - Indorser
- (magulo un facts sorry basta sure ako sa nakasulat sa taas)
$300.00
At sight pay to my order 300$, value received, charge to my account
V.S. Wolff
To F.H. Taylor
“V.S. Wolff. The signature is ok. Payment guaranteed. Protest,
demand, and notice of nonpayment waived. Macondray & Company.
P 3 of 51
2D Negotiable Instruments – Atty. Mercado

- This bill of exchange was sent to American Bank (plaintiff- BANK)
but the company (F.H. Taylor which was supposed to pay the
amount could not be found
- BANK claims the right to recover from the Macondray & Co.
(defendant-MACONDRAY), the amount of the bill of exchange,
together with the expenses incurred by the protest
- BANK claims that MACONDRAY guaranteed the bill of exchange
“V.S. Wolff. The signature is ok. Payment guaranteed. Protest,
demand, and notice of nonpayment waived. Macondray &
Company.”
- MACONDRAY claims, on the other hand, through its representative
that he did not guarantee the payment of the bill of exchange; that
he only certified that the signature, V.S. Wolff was genuine; that
the statement which appears in the indorsement “Payment
guaranteed. Protest, demand, and notice of nonpayment
waived.” was not written on the indorsement at the time he
signed the firm name of Macondray &Co.
ISSUE:
- W/N MACONDRAY is liable upon said bill of exchange as an indorser
- If indorsement was made by Macondray in the form alleged by the
BANK, then MACONDRAY is clearly liable
RULING:
- MACONDRAY is not liable
- “Payment guaranteed. Protest, demand, and notice of
nonpayment waived.” was added by some person after the
signature of the defendant was affixed
- The liability of an indorser of a bill of exchange after due protest
and notice of nonpayment and dishonor, is the same as that of
original obligors on such a contract, any material alteration in
the terms of the contract by the holder of the same,
without the consent of the obligor, will RELIEVE obligor
from all liability
- There was a material alteration in this case and the original
indorsement created no liability on the part of MACONDRAY
- The orig indorsement was only for the purpose of assuring the
BANK that the signature of VS Wolff was genuine (that it was in fact
VS Wolff who signed the bill of exchange); it was an indorsement
for the identification of the person only and not for the purpose of
incurring liability
PNB v. CA
88 Phil. 178
Sec. 124 and 125
FACTS:
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
- DECS issued a check with serial no. 7-3666-223-3, dated Aug. 1981
in the amount of P97,650
- It was payable to F. Abante marketing and drawn against PNB
- Drawee – DECS
- Drawee Bank – PNB
- Payee – F. Abante
- On Aug. 11, 1981, Abante, deposited the check in its savings account
with Capitol bank
- Capitol, on the other hand, deposited the same in its account with
PBCOM
- PBCOM, in turn, sent it to PNB for clearing
- PNB cleared the check as good; PBCOM then credited Capitol’s
account with the amount of the check
- On Oct 19, 1981, PNB returned the check to PBCOM and debited its
account for the reason that there was a ‘material alteration’ in the
check number
- PBCOM then debited Capitol’s account; however, Capitol could not
debit Abante’s account since the latter had already withdrawn the
amount of the check as early as Oct 15 (4 days before)
- PNB’S main contention is that there was a material alteration in the
check (serial no.) and that the TCAA check (a medium of exchange of
governments) through its serial number is determined to have been issued
by a particular office of the gov.
ISSUE:
1) w/n the change of the serial no. of the check was a material alteration
2) w/n the certification issued by Batonghinog (cashier of DECS) saying the
check was not issued by DECS should be given due course by the court
3) w/n the drawee bank may still recover the value of the check from the
collecting bank if it failed to return the check within the 24-hour clearing
period
RULING:
1)NO. An alteration is said to be material if it alters the effect of the
instrument or if it modifies the obligation of the parties.
- serial number is not an essential requisite for negotiability
- it did not change the relations of the parties
- name of drawer and drawee was not altered
- the contention that the serial no. determines the origin of the
check is erroneous since the issuer of the check is clearly printed
on its face “MINISTRY OF EDUCATION AND CULTURE” and below the
name of the payee are rubber-stamped words”Ministry of Educ and
Culture”
- ownership of check is still clearly established
P 4 of 51
2D Negotiable Instruments – Atty. Mercado
2) NO. Even if there was a claim by PNB that Batonghinog as cashier MONTINOLA V. PNB
prepared a letter saying the check was altered and was not issued by 88 SCRA 179
DECS, no person appeared before the trial court to be cross-examined and Sec. 124 / 32 / 52-59 / 186
to attest to the fact of preparing that certification
NATURE:
3) Since there was no material alteration in the check, PNB has no right to
dishonor it and return it to PBCOM (no right to recover since the check was Collection suit instituted by Montinola against PNB and the Provincial
in fact a negotiable instrument without any material alteration) Treasurer of Misamis Oriental

FACTS:

 Ubaldo Laya is the Provincial Treasurer of Misamis Oriental and ex-

officio agent of PNB
 Manzano Ramos is an assistant agent who through the
recommendation of Laya was inducted into the USAFFE as
disbursing officer of an army division
 As disbursing officer Ramos went to Lanao to procure a cash
advance of P880K for USAFFE
 The Treasurer of Lanao gave Ramos P300K in emergency notes
(which were being used prior to the occupation of Japan) and a
check for P500K
 Ramos went to Misamis Oriental to encash the check. Laya did not
have enough cash to cover the checks so he gave Ramos P400K in
emergency notes and a check for P100K drawn on PNB
 Ramos was not able to cash the check because he was imprisoned
by the Japanese. He was in prison until 1943, after which, he was
released and he resumed his status as a civilian.
 Ramos allegedly indorsed the P100K check to Montinola in 1944.
Montinola now seeks to enforce payment of the said check against
PNB and the Provincial Treasurer of Misamis Oriental who issued
the check supposedly as agent of PNB.
 According to Montinola, Ramos indorsed the check to him because
Ramos needed money to buy food and medicine. Montinola
allegedly went to the president of PNB in Manila to ensure that the
check was genuine and negotiable. Said president certified the
genuineness and negotiability of the check. After the examination,
Ramos and Montinola finally agreed to the sale of the check.
 The indorsement of Ramos to Montinola now appear at the back of
the check, the words ‘pay to the order of’ rubber stamped in violet
ink and placed one inch from the top of the check. The words are
followed by ‘Enrique Montinola’ typewritten. The edges of the
check appear to have been burned. The signature ‘M.V. Ramos’ in
green ink can also be found.
 Ramos on the other hand claims that he was only selling P30K of
the check and for this reason he wrote the following at the back of
the check:

P 5 of 51
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim 2D Negotiable Instruments – Atty. Mercado
 ‘Pay to the order of Enrique Montinola P30,000 only. The balance to a government official and nothing else. Hence the liability of PNB as
be deposited in the PNB to the credit of M.V. Ramos.’ These words, drawee cannot be converted into that of a drawer.
now, can no longer be found at the back of the check.

ISSUE:

W/N Montinola can claim payment from PNB

Sub-issue (on material alteration): W/N PNB is also the drawer of the check

HELD:

From SC inquiries it was found that: The check was issued by Laya in his
capacity as Provincial Treasurer of Misamis with PNB as drawee. Ramos
only sold 30,000 of the check to Montinola. The wirting made by Ramos at
the back of the check was an instruction to PNB to pay only P30,000 and to
deposit the remaining in Ramos’ account. At the time of the transfer of the
check from Ramos to Montinola the check which was payable on demand
was long overdue (by 2 and ½ years)

No. Aside from the reason of the material alterations made by Montinola on
the check and the lack of authority of Ramos to negotiate or assign the
check in his personal capacity the following arguments were made by the
SC

The check was not legally negotiated within the meaning of the Negotiable
Instruments Law.

Sec. 32 provides: the indorsement must be an indorsement of the entire

instrument. An indorsement which purports to transfer to the indorsee a
part only of the amount payable (as in this case) does not operate as
negotiation of the instrument

Montinola may therefore not be considered as an indorsee. At most he may

be regarded as mere assignee of the P30K sold to him by M.V. Ramos. As
assignee, he is subject to all defenses available to the drawer and against
Ramos.

Montinola is also not a holder in due course because he became holder of

the check long after it was overdue. In fact, Montinola is not even a holder
because he is neither a payee or an indorsee but a mere assignee. He also
did not take the check in good faith, since he still has not paid the full
amount of consideration for the P30K value of the check.

Hence, Montinola cannot claim from PNB

Sub-issue: PNB is not the drawer of the check, the treasurer is not an agent
of PNB. The words “agent of” were placed by Montinola after the check was
issued. The check was issued by the Treasurer of Misamis in his capacity as

P 6 of 51
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim 2D Negotiable Instruments – Atty. Mercado
INTERNATIONAL CORP BANK INC v CA
501 SCRA 20
Sec. 124 and 125
FACTS:
The Ministry of Education and Culture issued checks drawn against
Philippine National Bank (hereinafter, PNB) which International Corporate
Bank, Inc (hereinafter, International) accepted for deposit. After 24 hours
from submission of the checks to PNB for clearing, International paid the
value of the checks and allowed the withdrawals of the deposits. On Oct 14
1981, PNB returned all the checks to International without clearing them on
the ground that they were materially altered. It appears that the serial
numbers on the checks were altered. Thus, International instituted an
action for collection against PNB to recover the value of the checks.
Trial Court: International is liable and cannot recover from PNB. PNB
cannot be faulted for the delay in clearing the checks considering the
ingenuity in which the alterations were affected. On the other hand,
International, as collecting bank, should have inquired from PNB regarding
the status of the checks, but this it failed to do.
CA: CA reversed, applying CB Circular 580 which mandated the 24-Hour
Clearing Time. It held that checks which have been materially altered
should be returned within the 24-hour clearing time to relieve the drawee
bank of liability. It also said that even if the return of the checks in question
is done within 24 hours after discovery of the alteration and not within the
24-hour clearing time, the drawee bank will still not be relieved of liability.
Moreover, if it can be shown that the drawee bank had been patently
negligent in the performance of its verification function, then such bank
should not be relieved of liability. Thus it declared PNB liable for failure to
recognize the within a reasonable period the altered checks and in not
returning the checks within the period.
PNB filed for reconsideration and CA reversed itself holding International
liable this time, affirming the Trial Court’s decision that International’s loss
was caused by the lack of caution of its personnel.
Thus International appealed to the SC.
ISSUES AND HELD:
1) W/N the checks were materially altered----NO
The alterations in the checks were made on their serial numbers. In PNB v
CA, the court held that the alteration on the serial number of a check in
NOT a material alteration. A material alteration is an alteration changing
the effect of the instrument; an unauthorized change that purports to
modify in any respect the obligation of a party or an authorized addition of
words or numbers or other change to an incomplete instrument relating to
the obligation of a party. A material alteration is one which changes the
items which are required to be stated under Sec 1 of NIL. An alteration of
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
the serial number is not an alteration of any of the requisites under Sec 1.
The serial number is not the sole indication of the check’s origin.
2) W/N the 24-Hour Clearing period should be applied----NO
The Court did not deem it necessary to rule on the application of the CB
Circular 580 on the 24-Hour Clearing Time because there were NO material
alterations made on the checks. PNB therefore, had no right to dishonor
the checks and return them to International. Thus, PNB is liable to
International for the value of the checks.
METROPOLITAN BANK and TRUST COMPANY v CABILZO
510 SCRA 259
Sec. 124 and 125
FACTS:
Renato Cabilzo was one of Metrobank’s clients who maintained a current
account with them. On Nov 12, 1994 Cabilzo issued a Metrobank Check
payable to “CASH” and postdated on Nov 24, 1994 in the amount of
P1,000. The check was paid by Cabilzo to a certain Mr. Marquez, as his
sales commission. The check was presented to Westmont Bank for
payment. Westmont in turn indorsed the check to Metrobank for
appropriate clearing. Metrobank cleared the check in accordance with the
Phil Clearing House Corporation (PCHC) Rules.
On Nov 16, 1994 Cabilzo’s representative was asked by a Metrobank
personnel if Cabilzo had issued a check amounting to P91,000. Cabilzo’s
rep answered in the negative. Cabilzo then called Metrobank and said he
did not issue such check and requested that said check be returned to him
for verification. The said check with P91,000 was apparently the check
issued to Marquez with the original amount of P1,000. Cabilzo demanded
Metrobank to re-credit the amount of P91,000 to his account. After several
demands, Metrobank still failed to re-credtit such amount. Thus the present
case.
Metrobank’s Defense: Upon receipt of said check through the PCHC, it
examined the genuineness and authenticity of drawer’s signature and the
technical entries and no alterations were noted. After verifying as well as
the indorsement that stated, “all prior indorsements and lack of
indorsement guaranteed,” Metrobank cleared the check.
It also claimed that as collecting bank and the last indorser, Westmont
should be held liable because it assumed the liability of a general indorser.
Also, it claimed that Cabilzo was partly liable for leaving spaces on the
check which made the fraudulent insertion of the amount and figures
possible. Cabilzo’s negligence was the proximate cause of the loss.
RTC: Metrobank is liable to Cabilzo because of its negligence in not
detecting the alteration.
CA affirmed RTC decision.
ISSUES AND HELD:
P 7 of 51
2D Negotiable Instruments – Atty. Mercado

W/N Metrobank as drawee bank should be held liable----YES
An alteration is said to be material if it changes the effect of the
instrument. 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. A material alteration is one which changes the
items which are required to be stated under Sec 1 of NIL.
The check was altered so that the amount was increased from P1,000 to
P91,000 and the date was changed from Nov 24, 1994 to Nov 14, 1994.
These alterations are therefore material.
Cabilzo was not the one who made nor authorized the alteration. Neither
did he assent to the alteration by his express or implied acts. There is no
showing that he failed to exercise such reasonable degree of diligence
required of a prudent man which could have otherwise prevented the loss.
Cabilzo was never remiss in the preparation and issuance of the check.
Cabilzo even placed asterisks before and after the amount in words and
figures in order to forewarn the subsequent holders that nothing follows
before and after the amount indicated. Therefore, he cannot be held liable
The doctrine of equitable estoppel cannot also apply against Cabilzo. This
doctrine states that when one of the two innocent persons, each guiltless
of an intentional or moral wrong, must suffer a loss, it must be borne by
the one whose erroneous conduct, either by omission or commission, was
the cause of injury. Negligence is never presumed.
Metrobank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their
relationship. The CA observed that the material alterations on the check
were actually visible to the naked eye which Metrobank failed to detect:
a) The number “1” in the date is imposed with a white figure in the
shape of a number “2”
b) The 4 asterisks before the amount in words were noticeable
erased.
c) The numeral “9” was superimposed over a whitish mark.
d) The word “NINETY” was typed differently and with lighter ink than
the other words that followed.
The check was examined by the cash custodian whose functions do not
include the examination of checks. The employee allowed by Metrobank to
examine the check was not competent to handle such duty. This proves
Metrobank’s negligence.
Metobank cannot also rely on Westmont’s indorsement of the check.
Metrobank owes the highest degree of fidelity to its clients and should not
therefore lightly rely on the judgment of other banks on occasions where
its client’s money is involved. Metrobank therefore, is held liable to Cabilzo.
Metrobank may still run after the author of the alteration.
And as it already did, Metrobank may still pursue its separate case against
Westmont (collecting bank).
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
BANK OF THE PHILIPPINE ISLANDS VS. LAGUNA OIL CO.
48 Phil. 5
Sec. 24
FACTS:
 Laguna Coconut Oil Company (LCOC), thru its president Baldomero
Cosme, executed the following promissory note in favor of the Philippine
Vegetable Oil Company (PVOC) for P50k.
“One month after date we promise to pay the Philippine Vegetable
Co. Inc, or order…the sum of 50K; Value received. In case of non-payment
at maturity, we are to pay interest (9%/annum), and P5k in full…”
 The Fidelity Surety Co. of the Philippine Islands duly represented by the
vice President J. Elmer Delaney and its secretary Treasurer A.D. Tanner
stated the ff at the bottom of the note
“For Value received, we hereby obligate ourselves to hold the
Laguna Coconut oil Co. harmless against loss for having discounted the
foregoing note at the value stated therein.”
Therefore binding itself to any holder of the note.
 On the following day, the PVOC indorsed the note in blank and delivered
it to the plaintiff. Plaintiff then paid it, signing in the back of the Note:
“PHILIPPINE VEGETABLE OIL CO. INC, BY CHAS. D. AYTON, Treasurer.”
 The Laguna Coconut Oil Company became Insolvent (had no property to
make the payment) and failed to pay the note.
 Plaintiff: Notwithstanding demands made upon LCOC, and as well as
Fidelity & Surety Co. of the Philippine Islands, for payment of the note with
interest, none of them has paid any amount (whether principal or interest)
 Fidelity & Surety Co: admitted its corporate existence and the due
execution of the note but denied all other allegations in the complaint.
LCOC: made no defense
 In the action brought by the Bank of the Philippine Islands upon the
guarantee, the complaint contained to allegation that this guarantee did
not express the true intent of the parties, BUT at the trial of the case, the
plaintiff contended that the words “Laguna Coconut Oil Company” in said
guarantee were erroneous and should be read as “Bank of the Philippine
Islands”.
HELD:
 Reformation: The interpretation contended by the plaintiff amounted to
reformation of the instrument and in the absence of the corresponding
averment in the complaint, could not be considered by the court.
Allegations must show that the instrument sought to be reformed fails to
express the real agreement or transaction between the parties by reason
of their mutual mistake, fraud, inequitable condition in one side and
mistake on the other.
 It is true as asserted by the council for the appealees, that there are
cases where the courts have proceeded as mere matter of construction of
a contact to substitute the real name of a party for that of a party
P 8 of 51
2D Negotiable Instruments – Atty. Mercado
erroneously written, but in all these cases it will be found that the
contracts themselves left no possible doubt as to who the real parties were
and as to the real intent of the document. (best example : Richard vs.
Woodward where Woodward executed a bond $10k to the sheriff (Richard)
…tho the name “Minot Wheeler” occurred nowhere else in the instrument,
it was held that the bond should be construed as if the name Harvey
Woodward had been originally written therein instead of “Minot Wheeler”.)
 The writing upon which the action is brought does not in terms show ant
obligation in favor of the plaintiff and the action can only be maintained
upon the theory that the writing does not express the true intent of the
parties. We may surmise that the guarantee in question was intended for
the benefit of the party who subsequently discounted the note, but we
cannot be certain. The note may have been merely an accommodation
note and the guarantee may have been intended for the protection of the
maker in the event of the discounting of the note or its transfer to 3 rd
parties.
 Apealee contends that this hypothesis is negatived by the fact that the
words “value received” appear in the note as quoted in the stipulation of
facts. But that proves nothing. Unless otherwise stated in the instrument, a
negotiable promissory note IMPLES prima facie valuable consideration
moving to the maker, whether the words “value received” appeared in it or
not. Nothing in the note that distinguishes it from an accommodation note.
Remember: Contracts of guarantee and Surety ship are strictly construed
in favor of the surety or guarantor.
TRAVEL ON INC. VS. CA
210 SCRA 351
Sec. 24
FACTS:
 Travel-On is a travel agency selling airline tickets on commission basis
for and on behalf of diff airline companies. PR, Arturo Miranda had a
revolving credit line with petitioner, Travel-On (a travel agency). He
procured the tickets on behalf of airline passengers and derived
commissions there from.
 Travel-On fileled a suit to collect amount of 6 checks which was issued
by Miranda worth P115k. Pet. Said that it sold and delivered various
airline tickets to respondent totalling P200k+. To settle the amounts, he
pain in cash and in kind and later on issued 6 post-dated checks, which
were dishonored upon presentment to the drawee banks.
 Miranda said that he paid, and even overpaid his obligations and infact
he is entitled to a refund. He argued that these checks were merely given
for the purpose of accommodation only. He says these were given in order
that the Gen. Manager Elita Montilla, manager of Travel-On, could show the
company’s Board of Directors that their accounts receivable are still good
and that Montilla tried to encash the same but were dishonoured and
returned to him.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
 Travel-Ons witness Montinolla explained the accommodation exrended
to Travel on by Miranda related to situations where one or more of its
passengers needed money in Hongkong, and upon request of his friends in
travel On, Miranda would contact his friends in HK to advance money to
the passengers. The Passenger paid Travel-on upon his return to Manila
and payment would be credited by Travel-on to respondent’s running
account.
 Both the RTC and CA absolved him from payment. They considered the
fact
that the financial statements adduced in evidence did not show that
Miranda was indebted to the company.
ISSUE:
 Whether or not Miranda is liable for the check that he issued.
HELD:
 The decision of the CA was reversed by the SC. They say that the
reliance of the RTC and CA on the financial statements of the company was
wrong. The statements reviewed by the lower courts were not updated to
show the recent indebtedness of Miranda. SC says that the most telling
piece of evidence are the checks themselves.
 Sec. 24 says that there is a prima facie presumption that a check was
issued for valuable consideration and that the signatories thereto are liable
for such. This provision puts the burden on the drawer to prove that the
check was not issued for valuable consideration. The Court considers that
Miranda was unable to rebut this legal presumption.
 Only clear and convincing evidence, not mere self-serving testimony of
drawer, can rebut presumption. Travel on was entitled to the benefit of the
statutory presumption that it was a holder in due course, that the checks
were supported by valuable consideration. In this case, Miranda failed to
prove that the check was not for valuable consideration. His defense that
the checks were for the purpose of accommodation does not hold water
because the check clearly treats Travel-On as a payee and not an
accommodated party. The SC also took note of the fact that Miranda only
issued the checks after a letter was sent to him, reminding him of his
liabilities to the company. In fact, his contentions that these were given in
order that the Gen. Manager Elita Montilla, manager of Travel-On, could
show the company’s Board of Directors that their accounts receivable are
still good
was a claim that the checks were merely simulated and he did not intend
to be bound by it. In addition the accommodation extended to Travel ons
passengers are not the accommodation transactions recognized by NIL but
rather a circumvention of then existing foreign exchange regulations.
PINEDA V. DELA RAMA
121 SCRA 671
P 9 of 51
2D Negotiable Instruments – Atty. Mercado
Sec. 24
FACTS:
Pineda was involved in a case against the National Rice and Corn
Administration (NARIC) for allegedly misappropriating 11,000 cavans of
palay deposited in a ricemill located at Concepcion, Tarlac. He then hired
Atty. Dela Rama to “delay” the filing of the action against him while he
worked out an amicable settlement with NARIC. Pineda hired Dela Rama
because the latter is a close friend of the NARIC administrator Jose
Rodriguez having worked with him at the Philippine consulate at Hongkong.
Later on, Pineda signed a promissory note for P9,300.00 in favor of Dela
Rama. This note is now subject of a collection claim by Dela Rama together
with P5,000.00 as Attorney’s fees.
Pineda’s claim: He only signed the promissory note because Dela
Rama told him that the amount was already advanced to “grease” the
palms of the Chairman and General Manager of NARIC, but Pineda later
found out that no such amount was forwarded to the NARIC authorities.
Dela Rama’s claim: He loaned the amount in two installments in
two occasions 5 days apart. First loan was 5k, 2nd loan was for 4.3k.
CA ruled for Dela Rama, relying on section24 of NIL:
Every negotiable instrument is deemed prima facie to have been
issued for a valuable consideration; and every person whose signature
appears thereon to have become a party thereto for value.
ISSUE:
W/N Dela Rama has a right to collect.
RULING:
No. presumption that a negotiable instrument is issued for a valuable
consideration is only prima facie, thus it can be rebutted by proof to the
contrary.
Dela Rama’s claim that the 9.3k was a loan by the second sentence of the
promissory note that states: “this represents the cash advances made by
him in connection with my case for which he is my attorney in law”
Note: Pineda’s son also purchased an airconditioning unit valued at
1,250.00 and gave it to Dela Rama because according to Dela Rama,
Rodriguez requested for such to be installed in his NARIC office, this
together with 6 cavans of first class rice also intended for Rodriquez were
never delivered to him and were kept by Dela Rama.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
Grant of loan by a lawyer to a moneyed client without security and interest
for the loan and whom he had known only for 3 months, not believed;case
at bar; Pineda had just purchased a hacienda in Mindoro for P210,000,
owned sugar and rice lands in Tarlac of around 800 hectares , and had
P60,000 in deposits. It would be more logical to believe that he would not
borrow 9.3k 5 days apart.
The Promissory note was VOID AB INITIO because the consideration to
influence public officials is contrary to law and public policy.
CLARK V. SELINER
42 Phil. 384
Sec. 29 / 66
Keyword: Accommodation maker
FACTS:
Sellner together with Clarke (with an e!) and Maye signed a note in favor of
Clark (without an e!), the note dated July 1, 1914 states:
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 percent 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
John Maye.
By W.H. Clarke, his
attorney.
Geo. C. Sellner.
Defendant claims the following:
1. He did not receive any part of the debt
2.the instrument was not presented to him for payment and
3. That he is only an accommodation party and should only be held liable if
the note is negotiated.
ISSUE:
W/N Clark can collect payment from Sellner.
RULING:
Yes.
P 10 of 51
2D Negotiable Instruments – Atty. Mercado
1.As one of the signers of the note his liability is not dependent on whether
or not he has received any part of the amount of the debt. In fact, he is
expressly liable as one of the joint and several debtors on the noteand is
liable under sec 60 of NIL
2.Presentment for payment is not necessary to charge the person primarily
liable such as the defendant ( Sec 70 of NIL)
3.By putting his signature on the note, he lent his name, not to the
creditor, but to those who signed with him placing himself with respect to
the creditor in the same position and with the same liability as the said
signers
a. “with out receiving value by virtue of the therefore” as
used in sec29 of NIL 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.”
b. He can also be regarded as a joint surety and as to the
plaintiff he is the “holder for value” under sec29.
Doctrine: the mere 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 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.
Note: mere delay in the part of the creditor, after the maturity of the note,
in enforcing said note, does not affect the liability of the maker and the
latter is not released even if the guaranty becomes worthless by the lapse
of time.
CANEDA, JR. V. COURT OF APPEALS
181 SCRA 762
Sec. 29
FACTS:
On November 8, 1977, Buenaventura Gueson executed a promissory note
(PN) of Php 18,960 (payable every month Php790 for 24 months with 14%
interest per annum) in favor of Gregorio Caneda, Jr. To secure the
obligation, Gueson executed a chattel mortgage (CM) and with a Toyota
Jiffy as collateral. The PN and CM were assigned by Caneda to Investors
Finance Corporation (FNCB). Gueson defaulted and refused to pay despite
repeated demands. FNCB filed for replevin and/or sum of money against
Gueson and John Doe (who will turn out to be Caneda).
Undisputed Facts:
 Gueson knew and consented to the PN and CM being assigned to
FNCB.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
 When FNCB tried to collect from Gueson, Caneda affixed his
signature on an undertaking acknowledging his debt.
In RTC, Gueson presented testimonies that he merely accommodated
Caneda upon prodding of his townmates Spouses Rivera; that the jeep and
registration papers were always in the possession of Caneda. Caneda failed
to attend hearing. Caneda filed for postponement and was denied. RTC
held that there was novation absolving Gueson when Caneda signed the
acknowledgment of debt (a substitution of debtors).
Caneda’s appealed to the CA and it was dismissed.
Caneda elevated it to the SC saying he was not served a copy of the CA
November 28, 1986 decision. Decision of CA was mailed to Caneda’s
neighbor thus he never received it. The SC recognized this but did not
remand case to RTC to be retried. Instead the found sufficient facts in the
RTC and CA decisions to give final judgment.
ISSUES:
(1) Whether Gueson can be held liable considering he is only an
accommodating party.
(2) Whether novation occurred, extinguishing the debt.
HELD:
Caneda is liable. (Dapat Gueson din as a surety)
(1) Sec 29- An accommodation party is a person who signed the
instrument as maker, drawer, indorser, without receiving value therefore,
and for the purpose of lending his name to some other person is liable on
the instrument to a holder for value, notwithstanding the fact that such
holder at the time of taking the instrument knew him to be only an
accommodation party.
As between Gueson and Caneda, their private agreement is binding
between them alone and not to FNCB. FNCB can go against Caneda as the
principal debtor and Gueson as surety. If Gueson paid the obligation, he
has the right to recover what he paid from Caneda. Here, the lower court
erred in dismissing the claim against Gueson, but FNCB did not appeal it.
FNCB can still collect the full amount from Caneda.
(2) There was no novation as it cannot be presumed. Caneda’s
acknowledgment of debt did not novate the obligation and release Gueson
by substituting the person of the debtor.
TOWN SAVING & LOAN BANK, INC. V. CA
223 SCRA 459
Sec. 29
P 11 of 51
2D Negotiable Instruments – Atty. Mercado

FACTS:
Spouses Hipolito contracted a loan from TSLB for Php 700k with 24%
interest and issued a PN with maturity date in 3 years. They They defaulted
in their payment. Hipolitos contend that they were not personally liable
because the loan was for the account of Pilarita Reyes (sister of Miguel
Hipolito). Spouses Hipolito only signed the note because they were
persuaded by Joey Santos, president of TSLB. They said that Santos told
them the demand letters were mere formality for Pilarita’s obligation.
Hipolitos contend they were merely guarantors.
RTC- Hipolitos liable as accommodation party.
CA- Reversed saying that Hipolitos accommodated TSLB. This is because
TSLB could only loan a maximum of Php 700k pursuant to a Central Bank
regulation while Pilarita needed to borrow Php 1.4M.
ISSUE:
Whether Hipolitos are liable on the PB they executed.
HELD:
Yes, they are liable as an accommodation party.
There is no credibility that the bank would go out of its way to convince
Hipolito to accommodate Pilarita. It was Pilarita who asked her brother to
accommodate her so she could borrow Php 1.4M.
*The case of Maulini v. Serrano was used by CA to justify decision absolving
Hipolitos. In that case, the one signing the PN was acting as an agent for
the actual lender. The Hipolitos were agents of the debtor, Pilarita.
MAULINI V. SERRANO
28 Phil. 640
Sec. 29
FACTS:
“Broker”
Serrano was in the practice of being a broker between borrowers and
lenders by acting as a mediary and negotiating between the parties. His
practice was to collect a certain amount, sometimes in percentage of the
transacted amount between lender and borrower, or as a percentage of the
interest to be paid to the lender, with the lender taking 1 percent, and
Serrano (the broker) taking ½ percent. Serrano would deliver the money
personally to the borrower, take the note in his own name, and
immediately transfer it by indorsement to the lender.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
In this case, Maulini, a client, obtained a promissory note from Serrano in
the amount of Php3000, originally payable to Serrano, with Padern, Moreno
and Co.. Maulini did not want his name to appear on the books of the
borrowing company as the lender of money, and thus requested Serrano to
take the note in his own name, then, at once, transfer to Maulini title by
indorsement. Serrano did so as a favor to Maulini.
Maulini now goes to court on appeal regarding the collection of money in
the promissory note.
Trial Court
Trial court held that 1) parol evidence was not admissible to alter, vary, or
modify the terms of the contract of indorsement therefore, it refused to
consider evidence showing that by verbal agreement the indorser was a
mere vehicle for the transfer of title and thus without consideration and 2)
it was immaterial whether there was consideration because the indorser
was a mere accommodation party
ISSUES:
W/N PN was indorsed without consideration
W/N Serrano was accommodation indorser
W/N Parol evidence should be considered
HELD:
1) Yes. There was never a moment when Serrano owned the note. It
was Maulini, who provided for the money borrowed, which was the
consideration of the instrument, who owned it. Serrano acted
merely as an agent by which naked title was passed, his only
payment would be for the transaction of the loan. He was paid
nothing as to be an indorser, nor did Maulini lose or forego
anything nor alter his position.
2) No. An accommodation note is one which the accommodation
party has put his name, without consideration, for the purpose of
accommodating some other party who is to use it and is expected
to pay it. The reference to “accommodation party” in Nego.In. law
refers to the maker, not the lender nor indorser. A favor was made
by Serrano to Maulini, but this is not the same situation
contemplated by the law.
3) Yes. The prohibition of accepting parol evidence in the civil code is
to prevent alteration, change and modification of the terms of a
written contract. In this case, the purpose of the evidence was to
show that no contract of indorsement ever existed. The prohibition
therefore does not apply in the case at hand. Parole evidence is
deemed admissible, and since no counter evidence was presented,
was considered true as to the merits of the case.
P 12 of 51
2D Negotiable Instruments – Atty. Mercado

ACUNA VS. VELOSO AND XAVIER
50 Phil 241
Sec. 29
FACTS:
Xavier wanted to buy a land situated in Legarda. However, he lacks funds
which would enable him to acquire the property. He then asked Veloso his
principal (Xavier, being an agent of Veloso with regards the latter’s
properties in Manila) to help him secure the funds. Veloso then
approached Gonzales who was described as a “man of means”. Gonzales
promised to advance the money. It turned out that Gonzales approached
one of his clients named Rosario who then issued a check worth Php
25,000.00 This same check was delivered by Gonzales to Xavier. In turn,
Xavier gave Gonzales a promissory note signed by him and Veloso saying
that they are jointly and severally liable to pay the payee. Xavier turned
over the check to Ramon Sotelo, the vendor of the Legarda property.
It turned out that the Legarda property was already mortgaged to
Shanghai Life Insurance Company. A foreclosure proceeding took place.
But while waiting for the results of the proceeding, the note became due.
It turned out that Gonzales transferred the note to a certain Mariano Acuna
who filed an action in court to recover the Php 25,000 plus the interest.
The trial court held that Veloso is an accommodation maker of the note and
ordered that Veloso be subrogated to the rights of the plaintiff Acuna in a
mortgage given by Xavier to secure the debt. The defendants cite the
case of Rylee vs. Wilkinson in their contention that where an
accommodation paper is not negotiated after maturity, the
accommodation party cannot be held liable thereon.
ISSUE:
W/N Veloso should still be held liable considering that the promissory note
was transferred to Acuna only two years after the note became due.
DECISION:
Yes. Rylee vs. Wilkinson cannot be applied in the case at bar for in said
case, the accommodation maker draws a note payable to the
accommodated payee and the payee first negotiates the note after the
date of maturity. In the case at bar, the accommodating party and the
accommodated party unite in making a joint and several note to a person
who advanced such at the time of the its creation. It cannot be said that
the note is lacking of consideration just because Veloso received no
amount whatsoever. Value was given for the note, and this is enough. In
equity, Veloso is entitled to all rights of a surety while Xavier is the real
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
debtor. But in the eyes of the creditor, both of them are mere joint and
several makers.
Note: The fact is, Acuna became a holder only two years after the note
became due. we are to follow section 52, he will not be considered as
holder in due course. Thus, Veloso can raise this defense. The decision is
questionable.
PNB V. MAZA AND MACENAS
48 Phil 207
Sec. 29
NATURE:
Collection suit of PNB against Maza and Macenas
FACTS:
Maza and Macenas executed 5 promissory notes in favor of PNB, with 2
due 3 months after date and 3 due 4 months after date. The notes were
not paid at maturity. PNB is now suing for collection of the amounts due
with interest totaling to P65K.
PNB brought the case to CFI-Iloilo. The court ruled in favor of PNB despite
the following arguments and special defense that the defendants
interposed:
1. The promissory notes were given to them in blank by Enrique
Echaus, who asked them to sign so that he (Echaus) could
negotiate with PNB
2. They did not negotiate with PNB or receive value for the notes or
deliver the notes as payment for a prior debt
3. Echaus is the real party in interest and should therefore be
included as party defendant and should be the one held liable.
HELD:
On appeal Maza and Macenas assigned 4 errors. The first is on the refusal
of the lower court to include Echaus as party-defendant. The SC said that
Echaus is not an indispensable party. The 3 errors go to the merits and rest
on the same foundation as their special defense. Maza and Macenas admit
to the genuineness and due execution of the notes and that there was no
mistake or alteration in the amounts on the notes.
Hence, whether they are principals and Echaus their agent or they are
makers which is exactly what they appear to be, both must keep their
engagement and pay as promised. They are primarily and unconditionally
liable.
P 13 of 51
2D Negotiable Instruments – Atty. Mercado

Also even if they claim that they are just accommodation parties, lending
their names to some other person, they are still liable according to terms
of the notes as if they were really financially interested in the transaction.
And, although they never received the value of the notes, to fasten liability
of an accommodation party, it is not necessary that any consideration
should move to him. The consideration of the accommodation party is the
principal consideration of the person taking the note and the person
accommodated.
Obiter: An accommodation party that makes payment to the holder has the
right to sue and ask reimbursement from the accommodated party. Their
relationship is that of a principal and a surety, the accommodation party
being the surety.
PRUDENCIO VS. COURT OF APPEALS
143 SCRA 7
Sec. 29 / 66
FACTS:
Appellants mortgaged their property (a parcel of land in Sampaloc, Manila)
to PNB to guarantee a loan of P1,000.00 extended to one Domingo
Prudencio.
Sometime in 1955, the Concepcion & Tamayo Construction Co. (the
company) had a pending contract with the Bureau of Public Works (the
bureau) for the construction of the municipal building in Palawan, in the
amount of P 36,800.00. As said company needed funds for said
construction, Jose Torribio ,Appellant’s relative and Atty-in-fact of the
Company ask the appellants to mortgage their property to secure the loan
of 10,000 which the Company was negotiating with PNB.
After some persuasion appellants signed the ‘Amendment of real Estate
Mortgage’. The promissory note covering the loan of 10,000 dated Dec 29,
1955 to mature on April 27 1956 was signed by Toribio and the appellants.
Toribio also executed the ‘Deed of Assignment’ assigning all payments to
be made by the Bureau to the Company on account for the contract of
construction in favor of PNB. The Bureau’s last request for P5,000 was
denied by PNB for the reason that since the loan was already overdue as of
Apr 28 1956, the remaining balance of the contract should be applied to
the loan.
As a consequence, the Company abandoned the work and the Bureau
rescinded the construction contract. . Petitioners contend that as
accommodation makers, their liability is only that of mere sureties instead
of solidary co-debtors such that “a material alteration in the principal
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
contract, effected by the creditor w/o knowledge and consent of sureties,
completely discharges the sureties from liability on the contract of
suretyship. They state that when respondent PNB did not apply the initial
and subsequent payments to the petitioners’ debt as provided for in the
deed of assignment, they were released from their obligation as sureties
and the REM executed by them should be cancelled.
ISSUE:
1) Petitioners as accommodation makers are discharged from liability
2) W/N PNB can be considered a holder for value under Sec29 of the NIL
(barring the petitioners from setting up the defense of what
consideration or some other personal defenses which may be set up
against a party who is not a holder in due course)
HELD:
xxxin lending his name to the accommodated party, the accommodation
party is in effect a surety.xxxhowever, unlike in a contract of suretyship,
the liability of the accommodation party remains not only primary but also
unconditional to a holder for value such thateven if the accommodated
party receives an extension of the period of payment w/o consent of the
accommodation party, the latter is still liable for the whole obligation and
such extension does not release him bec as far as a holder for value is
concerned, he is a solidary co-debtor.
A holder for value under Sec29 of the NIL is one who must meet all the
requirements of a holder in due course under Sec52 of the same law
except notice of want of consideration.
Gen.Rule: a payee may be regarded as a holder in due course but such
rule cannot apply w/ respect to the respondent PNB. PNB cannot be
regarded as having acted in GoodFaith w/c is one of the requisites of a
holder in due course under Sec52 of the NIL. The PNB as privy to the PN
knew that the promissory note w/c it took from the accommodation makers
was signed by the latter bec of full reliance on the Deed of Assignment, w/c
PNB had no intention to comply with.
STELCO MARKETING CORP VS CA
210 SCRA 51
Sec. 29 / 52-59
FACTS:
Stelco sold to RYL Construction quantities of steel bars worth P126,859.
Corresponding invoices issued by Stleco stipulated that RYL would pay
“COD” but no payments were made despite demands.
P 14 of 51
2D Negotiable Instruments – Atty. Mercado

RYL gave to Armstrong Industries(sister corp and manufacturing arm of
STELCO), a check drawn against Metrobank amounting to P126,129. The
check was a company check of Steelweld corp. of the Phil.,signed by its
President, Peter Liamson, and its VPres., Artemio Torres.The check was
issued by Limson at Romeo Lim’s request (Pres. Of RYL). Limson agreed to
give Lim a check only by way of accommodation (only as guaranty but not
to pay for anything) when the former asked for financial assistance. The
check was given by RYLim to Armstrong Industries, when the check was
deposited, it was dishonored bec. “drawn against insufficiency of funds”.
The check bore 2 indorsements, that of the RYL and Armstrong.
On complaint of Armstrong due to the dishonored check, Limson and Torres
were charged in the RTC of Manila for violating BP22 but were acquitted on
the ground that the check in question was not issued by the drawer ‘to
apply on account for value’, it being merely for accommodation purposes.
4 years after issuance of check, STELCO filed a complaint for recovery
against RYL and steelweld but RYL cannot be found. Steelweld contends
that it was a complete stranger to the contract and that the check was only
given as collateral.
ISSUE:
1) W/N Stelco was a holder in due course such that it can recover
from RYL and Steelweld
HELD:
The record does not show any intervention b/w Steelweld and Stelco, or
b/w either of them and Armstrong, anytime before the dishonor of the
check, neither it shows that after the check had been deposited and
dishonored, Stelco came into possession of it several years after the check
is dishonored.
Possession of a negotiable instrument after presentment and dishonor is
utterly consequential; it does not make the possessor a holder for value
within the meaning of the law.
It is clear from the circumstances that Stelco cannot be deemed a holder of
the check for value. It does not meet the two essential requisites
prescribed by the statute. It did not become “the holder of it before it was
overdue, and w/o notice that it had been previously dishonored,” and it did
not take the check “in good faith for value.”
ANG TIONG V. TING
22 SCRA 713
Sec. 29
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
NATURE:
Collection for a sum of money
FACTS:
Lorenzo Ting issued a PBCOM check for P4,000 payable to cash or bearer.
The check later on found its way into the hands of Ang Tiong with the
signature of Felipe Ang on the back (indorsement in blank). Ang Tiong
presented the check for payment to the drawee bank. PBCOM dishonored
the check. Ang Tiong made written demands on Ting and Ang, but the two
did not pay the amount of the check. He then filed a collection suit against
the two.
CIF ruled in favor of Ang Tiong. Ang elevated the case to the CA which
forwarded it to the SC since the issues are questions of law
ISSUES:
1) W/N Art. 2071 which deals with the right of a guarantor to collect
from the principal debtor is applicable to the case
2) W/N Felipe Ang is a general indorser
3) W/N Felipe Ang can obtain release from the suretyship or obtain a
security to protect himself against any proccedings on the part of
the creditor and against the danger of insolvency of the principal
debtor because he is jointly and severally liable on the instrument
HELD:
The instrument is genuine and duly executed, hence Ang Tiong is a holder
for value.
1) The bank check is a negotiable instrument, hence Art. 2071 of the
Civil Code is not applicable.
2) Felipe Ang is a general indorser according to Sec. 63 (He who signs
the instrument not as a maker, drawer or acceptor is a general
indorser unless he clearly indicates that he is to be bound in
another capacity) of the Negotiable Instruments Law. As general
indorser he warrants to all subsequent holders in due course:
a) the genuiness of the instrument
b) that he has good title to it
c) that all parties to it have capacity to contract and
d) the instrument is at the time of his indorsement valid and
subsisting.
As general indorser he also engages that the instrument on due
presentment will be accepted and paid and if dishonored he shall
pay the amount to the holder
P 15 of 51
2D Negotiable Instruments – Atty. Mercado
 3) Even on the assumption that Felipe Ang is only an accommodation
party, he is still liable on the instrument to a holder for value,
notwithstanding that such holder at the time of taking the
instrument knew him to be only an accommodation party
4) That appellant can obtain a security from the maker to protect
himself against insolvency of the latter cannot affect his liability to
Ang Tiong as accommodation party. The remedy of obtaining a
security is between Felipe Ang and Lorenzo Ting only and is
immaterial to the claim of Ang Tiong. The liability of Felipe Ang is
primary and unconditional
SADAYA V. SEVILLA
19 SCRA 924
Sec. 29
FACTS:
Sadaya, Sevilla and Varona executed jointly and severally a promissory
note in favor of BPI for P15K. Only Varona received the proceeds of the
note with Sadaya and Sevilla signing the note as co-makers only as a favor
to Varona. Payments were made on the note but a balance of P4,850
remained. The bank collected from Sadaya. Varona failed to reimburse
Sadaya despite the demands of the latter. Sevilla on the other hand died.
Sadaya then filed a creditor’s claim on the estate of Sevilla which was
opposed by the estate administrator on the ground that Sevilla did not
receive any amount as consideration for the promissory note and that
Sevilla signed only as a surety.
The trial court issued judgment in favor of Sadaya while the CA reversed
the judgment.
HELD:
Sevilla and Sadaya were joint and several accommodation parties of the
P15K note. Their individual obligation is no different to the obligation of
Varona notwithstanding that they did not receive the proceeds of the loan.
They executed the note for the purpose of lending their names to Varona
and the bank can claim against any one of them as it did against Sadaya.
Sadaya can seek for reimbursement from Varona of what he paid out.
There is an implied contract of indemnity between the two, Varona is
bound by the obligation to reimburse Sadaya.
The relationship of the three signatories to the bank is that of joint and
several obligors. But the obligation of Varona and Sevilla to Sadaya (who
paid the balance) cannot be said to be joint and several. If the payment
was made by Varona, he cannot seek reimbursement from Sevilla and
Sadaya who are merely accommodation parties.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
An accommodation party on the other hand who made payment has the
right to contribution from his co-accomodation maker, in the absence of
stipulation to the contrary. This rights comes from the implied promise
between the accommodation makers to share equally the burdens that
they might encounter in placing their signatures on the promissory note.
They placed themselves as joint guarantors of the former.
The requisites before an accommodation party can seek reimbursement
are governed by Art. 2073 of the Civil Code (the negotiable instruments
law has no specific provision that defines the rights of one accommodation
party to seek reimbursement from another).
When there are two or more guarantors of the same debtor and for the
same debt, the one among them who has paid may demand of each of the
others the share which is proportionally owing from him.
If any guarantors should be insolvent, his share shall be borne by the
others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment
has been made by virtue of a judicial demand or unless the principal
debtor is insolvent.
Hence:
1) A joint and several accommodation maker may demand from the
principal debtor reimbursement for the amount he paid to the
payee
2) A joint and several accommodation maker may demand
reimbursement from his co-accomodation maker without first
directing his action to the principal debtor provided that he made
payment by virtue of a judicial demand or the principal debtor is
insolvent
In the case at bar, Sadaya’s payment to BPI was voluntary and not made
because of a judicial demand. There is also no cogent proof that Varona is
insolvent. Hence he cannot demand reimbursement from Sevilla’s estate.
Ca judgment affirmed
P 16 of 51
2D Negotiable Instruments – Atty. Mercado
AGRO CONGLOMERATES, INC. V. CA.
348 SCRA 450
Sec. 29
FACTS:
Petitioner Agro Conglomerates sold 2 parcels of land to Wonderland Food
Industries, inc. In their MOA the purchase price was P5,000,000.00 (5M)
subject to payment in the following manner: 1M in cash upon signing of the
agreement. 2M worth of common shares of stock of Wonderland and the
balance of 2m in four equal instalments ( 1 st instalment 180 days after the
signing of the agreement, subsequent instalments after every 6 months.
With an interest rate of 18%/ annum)
Subsequently, the vendor, vendee and Regent Savings & Loan Bank
executed an addendum to the MOA concerning the initial payment of
1,000,000.00 and P360,000 (18% interest) wherein instead of paying
P1,360,000 in cash, the Vendor will be given a loan from Summa Savings
and Loan Association. In addition to this the vendee undertakes to pay the
full amount to the Financier.
Consequently, Petitioner Mario Soriano signed as the maker of several
promissory notes, payable to respondent bank. The bank eventually filed
three separate complaints of Sums of money.
The petitioners argue that according to the promissory note, Wonderland
should be liable for the payment thereof.
ISSUE:
W/N the addendum constitutes a novation of the contract by substitution of
debtor which exempts the petitioners from any liability over the promissory
notes.
HELD:
No. 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.
Requirements of novation:
1. Previous valid obligation
2. Agreement of the parties to a new contract
3. Extinguishment of the old contract
4. Validity of the new contract
There was no novation by substitution of debtor because there was no
prior obligation which was substituted by a new contract. It will be noted
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
that the promissory notes, which bound the petitioners to pay, were
executed after the addendum.
CRISOLOGO-JOSE V. CA.
177 SCRA 594
Sec. 29
FACTS:
Ricardo Santos Jr the Vp of Mover Enterprises while Atty. Benares was the
President. Atty. Benares, in accommodation of his clients, the spouses Ong,
issued a check drawn against Traders Royal Bank. The check should have
been signed by the treasurer, but in his absence, Benares asked Santos to
sign the instrument.
The check (45,000) was issued to Ernestina Crisologo- Jose in consideration
of the waiver or quitclaim by her over a certain property which the GSIS
agreed to sell to the spouses Ong .
The check was dishonoured for insufficiency of funds.
Petitioner alleges that the accommodation party is Movers enterprise and
not the private respondent who merely signed the check in question in a
representative capacity.
ISSUE:
1) Whether or not Mover Enterprises may be held liable on the
accommodation instrument.
HELD:
No. The provision of the Negotiable Instruments Law which holds an
accommodation party liable on the instrument to a holder for value,
although such holder at the time of taking the instrument knew him to be
the only accommodation party, DOES NOT INCLUDE OR APPLY TO
CORPORATIONS WHICH ARE ACCOMODATION PARTIES. This is because the
issue or indorsement of negotiable paper by the corporation without
consideration and for the accommodation of another is ultra vires. Except
when the officer is specifically authorized to do so. Since such
accommodation paper cannot thus be enforced against the corporation,
the inescapable conclusion is that the signatories thereof shall be
personally liable.
P 17 of 51
2D Negotiable Instruments – Atty. Mercado
CALTEX V. CA
212 SCRA 449
Sec. 30
FACTS:
 Angel dela Cruz deposited Php 1.12M with Security Bank and Trust
Company (SBTC), Sucat Branch. For this he was issued 280
Certificate of Time Deposit (CTD).
 Dela Cruz delivered these CTDS to Caltex for the purchase of fuel.
 Dela Cruz gave SBTC an affidavit of loss for the CTDS. He was
issued new ones.
 Caltex presented the lost CTDs to SBTC for payment alleging the
CTDs were securities for purchases made with Caltex.
 SBTC refused to pay when Caltex did not furnish documents
evidencing guarantee agreement with dela Cruz.
 Caltex filed complaint for collection
 CA ruled CTDs not NI.
ISSUE:
(1) Whether CTD’s were negotiable instruments
(2) Whether CTD’s were validly negotiated and W/N Caltex can recover
from Security Bank. (this is the important part)
HELD:
(1) Yes. They were negotiable to bearer because it was payable to
‘depositor’ which courts interpreted to mean bearer.
(2) No. Being a bearer instrument, a valid negotiation requires both
delivery and indorsement. The CTDs were only delivered as security
and not payment. Caltex verified this in a letter made by its Credit
Manager. Hence it is estopped from claiming otherwise.
Sec 30 of NIL an instrument is negotiated when it is transferred from one
person to another in such as manner as to constitute the transferee the
holder thereof. In this case, there was no negotiation to transfer legal title
of the CTDs in favor of Caltex even though there was delivery. Delivery
without indorsement means there was no valid negotiation.
The CTDs were not for payment as evidenced by the inability of Caltex to
produce a Bill of Particulars which would show how the CTDs would be
applied to the indebtedness of dela Cruz. They also could not produce
receipts evidencing payment made through the CTDs. Hence, the
possession of Caltex of the CTDs is in effect possession of a security as in
the case of a pledge.
Absent indorsement or a public document proving a contract of pledge or
guarantee Caltex has no right over the CTDs. Mere delivery of the CTD’s
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
did not legally vest in petitioner any right effective against and binding
upon the respondent bank.
When a bearer instrument is not delivered for purposes of negotiation but
physically delivered merely as security for another obligation, there is no
negotiation in the sense of transfer of legal title to the instrument and
would constitute the subsequent holder merely as a holder for value and
not a holder in due course. Accordingly, 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
proved.
The assignment of the CTDs by Angel Dela Cruz to the bank, on the other
hand, was evidenced by a public instrument and is therefore valid.
MANUEL LIM V. CA
251 SCRA 408
Sec. 30
FACTS:
 Manuel and Rosita Lim charged with Estafa and violating BP 22 for
issuing 7 checks that bounced.
 Lims were president and treasurer of Rigi Bilt Industries Inc.
 They purchased several construction materials from Linton, an old
business partner. (steel plates, purlins)
 Lims allege that they told bank to stop payment because the
materials were not in accordance with purchase orders.
 Checks were issued and delivered at Navotas, dishonored in
Kalookan.
 Linton sent a collector who received the checks in Kalookan.
 RTC found them guilty of both estafa and BP 22
 CA acquitted them of estafa because the checks were not made in
payment of an obligation contracted at the time of their issuance,
but affirmed conviction for BP 22
ISSUES:
(1) Whether RTC of Malabon acquired jurisdiction as Lim contends the
elements of the crime all happened in Kalookan. (recall crimpro venue and
jurisdiction)
(2) Whether delivery to collector constituted issuance and delivery
HELD:
(1) A violation of BP 22 is a transitory crime and may be convicted
anywhere the offense was in part committed. Information alleged that
P 18 of 51
2D Negotiable Instruments – Atty. Mercado
crime was committed in municipality of Navotas and is sufficient to confer
jurisdiction to RTC of Malabon.
(2) The receipt of the checks by the collector of Linton was not the
issuance and delivery to the payee in contemplation of the law. Collector
was not the person who could take the checks as a holder (as a payee or
indorsee with the intent to transfer title thereto)
BP 22 is a transitory/continuing crime and may be validly tried in a any
municipality or territory where the offense was in part committed. The
checks were issued and delivered in Navotas and not in Kalookan as what
is being claimed by petitioners. Although the checks were received by
Linton’s collector in Kalookan, there was no proper issue or delivery to
Linton, since the collector cannot be considered as a holder of the said
instrument. It was only when Linton received the check in its office in
Navotas was there actual issue and delivery. The checks were then
dishonored in Kalookan.
Knowledge on the part of the maker or drawer of the check of the
insufficiency of his funds is by itself a continuing enventuality, whether the
accused be within one territory or another. Consequently, venue or
jurisdiction lies either in the RTC of Kalookan or Malabon. Venue or
jurisdiction is determined by the information and the information alleged
that the offenses were committed in the municipality of Navotas vesting
jurisdiction to the RTC of Malabon.
CA ruling affirmed. Lim convicted of violation of BP 22 because they were
not able to overcome the prima facie presumption (drawing and issuance
of check that is refused for insufficient funds). They also did not make
arrangements to pay in full within 5 days from notice that checks were not
paid.
Issue – the first delivery of the instrument complete in form to a person
who takes it as a holder
Holder – the payee or indorsee of a bill or note who is in possession of it or
the bearer therefor. Collector or messenger could not take checks as holder
(payee or indorser). He is also not an agent of Linton with respect to the
checks because he is a mere employee.
Delivery – final act essential to its consummation as an obligation. It must
be made to a person who takes it as a holder or an agent of the holder. It
signifies transfer of possession whether actual or constructive, from one
person to another with intent to transfer title thereto
METROPOL (BACOLOD) FINANCING & INVESTMENT CORP.
SAMBOK MOTORS CO.
120 SCRA 864
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
Sec. 38 / 65
FACTS:
Dr. Javier Villaruel executed a promissory note in favor of Ng
Sambok Sons Motors Co., Ltd., in the amount of P15,939 payable in 12
equal monthly installments.
On the same day Sambok Motors Company (Sambok), sister
company of Ng Sambok Sons and under the same management,
negotiated and indorsed the note in favor of Metropol with the following
indorsement:
“Pay to the order of Metropol Bacolod Financing & Investment
Corporation with recourse. Notice of Demand; Dishonor; Protest: and
Presentment are hereby waived.
SAMBOK MOTORS CO. (BACOLOD)
By:
RODOLFO G. NONILLO
Asst. General Manager”
Dr. Villaruel defaulted in the payment of his installments, so
Metropol presented the PN for payment to the maker (Dr. Villaruel). Dr.
Villaruel failed to pay the PN as demanded, hence Metropol notified
Sambok as indorsee of the fact that the same has been dishonored and
demanded payment.
Sambok likewise failed to pay, hence this collection case. Sambok
contended that it could not be obliged to pay until after its co-defendant
Dr. Villaruel has been declared insolvent.
During the pendency of the case, Dr. Villaruel died and the case
against him was dismissed. Sambok was held liable by trial court.
Sambok’s contentions: that by adding the words “with recourse” in
the indorsement, it becomes a qualified indorser; that being a qualified
indorser, it does not warrant that if said note is dishonored by the maker
on the presentment, it will pay the amount to the holder; that it only
warrants the following pursuant to Sec 65 of NIL: a) that the instrument is
genuine and in all respects what it purports to be; b) that he has good title
to it; c) that all prior parties had capacity to contract; d) that he has
knowledge of any fact which would impair the validity of the instrument or
render it valueless.
ISSUE: Whether Sambok is a general indorser making it liable ---- YES!
A qualified indorsement constitutes the indorser a mere assignor of
the title to the instrument. It may be made by adding to the indorser’s
signature the words “without recourse” or any words of similar import.
Such an indorsement relieves the indorser of the general obligation to pay
v. if the instrument is dishonored but not of the liability arising from
warranties on the instrument as provided in Sec 65 of NIL. Sambok
P 19 of 51
2D Negotiable Instruments – Atty. Mercado
indorsed the note “with recourse” and even waived the notice of demand,
dishonor, protest and presentment.
“Recourse” means resort to a person who is secondarily liable after
the default of the person who is primarily liable. Sambok by indorsing the
note “with recourse” does not make itself a qualified indorser but a
general indorser who is secondarily liable because by such
indorsersement, it agreed that if Dr. Villaruel fails to pay the note, Metropol
can go after Sambok. The note was indorsed without qualification. A
person who indorses without qualification engages that on due
presentment, the note shall be accepted or paid, or both as the case may
be, and that if it be dishonored, he will pay the amount thereof to the
holder. Sambok’s intention of indorsing the note without qualification is
made even more apparent by the fact that the notice of demand, dishonor,
protest and presentment were all waived.
Moreover, after an instrument is dishonored by non-payment, the
person secondarily liable thereon ceases to be such and becomes a
principal debtor. His liability becomes the same as that of the original
obligor. The holder need not even proceed against the maker before suing
the indorser.
BPI v CA, et al.
GR No. 136202
Sec. 49
FACTS:
 AA Salazar and Engineering Services filed an action for a sum of
money with damages against BPI.
 Private respondent Salazar prayed for the recovery of P267,707.70
debited by BPI from her account.
 BPI alleged that Templonuevo demanded from the former payment
of the amount P267,692.50 representing the aggregate value of 3
checks which were allegedly payable to him but which were
deposited with BPI to Salazar’s account without his knowledge and
corresponding endorsement.
 Accepting Templonuevo’s claim as a valid one, BPI froze the
account of AA Salazar instead of Salazar’s personal account where
the checks were deposited since this was already closed by Salazar
or had insufficient balance.
 Salazar was advised to settle the matter with Templonuevo but
they did not arrive at a settlement.
 BPI decided to debit the amount of P267,707.70 from the AA
Salazar account since Salazar was not entitled to the funds
represented by the checks.
 The sum of P267,692.50 was paid to Templonuevo by means of a
cashier’s check.
 RTC ruled in favor of private respondent Salazar; CA affirmed.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
ISSUE:
 Does a collecting bank, over the objections of its depositor, have
the authority to withdraw unilaterally such depositor’s account the
amount it had previously paid upon certain unendorsed order
instruments deposited by the depositor to another account that
she later closed?
HELD:
 YES, petitioner had the right to debit Salazar’s account for the
value of the checks it previously credited in her favor.
 It is of no moment that the account debited by the petitioner was
different from the original account to which the proceeds of the
check were credited because both admittedly belonged to Salazar.
 The transaction is an equitable assignment and the transferee
acquires the instrument subject to defenses and equities available
among other prior parties.
 The weight of authority is that the mere possession of a negotiable
instrument does not in itself conclusively establish either the right
of the possessor to receive payment, or of the right of one who has
made payment to be discharged from liability.
 Something more than mere possession by persons who are not
payees or indorsers of the instrument is necessary to authorize
payment to them in the absence of any facts from which the
authority to receive payment may be inferred.
 It is an exception to the general rule for a payee of an order
instrument to transfer the instrument without indorsement. It is but
fair to the maker and prior holders to require possessors to prove
without aid of an initial presumption in their favor, that they came
into possession by virtue of a legitimate transaction with the last
holder.
 Salazar failed to discharge this burden, and the return of the check
proceeds to Templonuevo was therefore warranted under the
circumstance despite the fact that Templonuevo may not have
clearly demonstrated that he never authorized Salazar to deposit
the checks or to encash the same.
 Petitioner’s liability is that of a general indorser. His liability to the
designated payee cannot be denied.
CHAN WAN v. TAN KIM and CHEN SO
Sec. 52-59
FACTS:
 This is a suit to collect 11 checks totaling P4,290.
 Checks were payable to “cash or bearer” and drawn by Tan Kim
upon Equitable Bank.
P 20 of 51
2D Negotiable Instruments – Atty. Mercado
  Checks were presented for payment by Chan Wan to Equitable but
they were all dishonored and returned to him due to insufficient
funds and/or causes attributable to the drawer.
 Tan Kim claims that the checks had been issued to two persons
named Pinong and Muy for some shoes they promised to make.
Checks were intended as mere receipts.
 Lower court declined to order payment to Chan Wan.
ISSUE:
 W/N Chan Wan was a holder in due course
HELD:
 NO, Chan Wan was not a holder in due course.
 Eight of the checks have been crossed specially to China Banking
Corporation and should have been presented for payment by
China Bank and not by Chan Wan.
 Circumstances would seem to show deposit of the checks with
China Banking Corporation and subsequent presentation by the
latter through the clearing office; but as drawee had no funds,
they were unpaid and returned, some of them stamped “account
closed”.
 There was no indication of how plaintiff got hold of the checks.
Most probably, as the trial court surmised, he got them after they
had been returned because he presented them in court with such
“account closed” stamps without bothering to explain.
 Lower court rightly held Chan Wan not to be a holder in due course
since he knew, upon taking the checks, that they had already been
dishonored.
 It does not follow that simply because Chan Wan was not a holder
in due course that he could not recover the checks.
 NIL does not provide that a holder who is not a holder in due
course may not recover on the instrument.
 The only disadvantage of a holder who is not a holder in due
course is that the negotiable instrument is subject to defenses as if
it were non-negotiable.
 If it were true that checks had been issued in payment for shoes
that were never made and delivered, Tan Kim would have a good
defense as against a holder who is not a holder in due course.
BATAAN CIGAR AND CIGARETTE FACTORY INC. VS. COURT OF
APPEALS
230 SCRA 642
Sec. 52 to 59 / 185
FACTS:
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
 Bataan Cigar and Cigarette Factory Inc. (BCCFI) engaged one of its
suppliers, George King, to deliver 2k bales of tobacco leaf. In
consideration thereof, BCCFI issued crossed checks that post dated in
the total amount of P820k.
 Relying on the supplier’s representation that he would complete
delivery within 3months, the petitioner agreed to purchase additional
2,500 bales of tobacco leaves, despite the supplier’s failure to deliver
in accordance with their earlier agreement. Petitioner, once again
issued postdated crossed checks in the total amount of P1,100,000.00
(payable Sept.)
 At the same time, George King was also dealing with SIHI (private
resp.). He sold to SIHI at a discount the postdated check bearing the
amount of P164k drawn by pet. In favor of George King. Later on, he
sold 2 more post dated checks both worth 100k drawn by petitioner in
favor of George King. (so 3 post dated checks sold)
 George King failed to deliver the bales of tobacco leaf as agreed upon
despite pet’s demands.
 BCCFI issued a stop payment order on all checks payable to George
King.
 SIHI (private resp.), tried to collect from BCCFI but failed. So SIHI
instituted the present case. The trial court ruled in favor of SIHI as
having a valid claim as a holder in due course and that the non-
inclusion of George King as a party defendant is immaterial since as a
payee, he was not an indispensable party.
ISSUE:
1) Whether SIHI, a second indorser, and holder of crossed checks, is a
holder in due course, to be able to collect from the drawer BCCFI.
HELD and RATIO:
Sec. 59 of the NIL gives prima facie presumption that every holder is a
holder in due course. However, if it is shown that the title of any person
who negotiated the instrument is defective then the holder has the burden
of proving that he is a holder in due course.
SIHI is not a holder in due course. It is settled that crossing of checks
should put the holder on inquiry and upon him devolves the duty to
ascertain the indorser's title to the check or the nature of his possession.
Failing in this respect, the holder is declared guilty of gross negligence
amounting to legal absence of good faith, contrary to Sec. 52(c) of the
Negotiable Instruments Law, and as such the consensus of authority is to
the effect that the holder of the check is not a holder in due course.
In the present case, BCCFI's defense in stopping payment is as good to SIHI
as it is to George King. Because, really, the checks were issued with the
intention that George King would supply BCCFI with the bales of tobacco
P 21 of 51
2D Negotiable Instruments – Atty. Mercado
leaf. There being failure of consideration, SIHI is not a holder in due course.
Consequently, BCCFI cannot be obliged to pay the checks.
The foregoing does not mean, however, that respondent could not recover
from the checks. The only disadvantage of a holder who is not a holder in
due course is that the instrument is subject to defenses as if it were non-
negotiable. Hence, respondent can collect from the immediate indorser, in
this case, George King.
Notes:
 (This case mentions the next case, State Investment house vs. IAC,
because their facts are on all fours. They’re the same)
 A check is defined by law as a bill of exchange drawn on a bank
payable on demand. Crossed check is one where two parallel lines are
drawn across its face or across a corner thereof. It may be crossed
generally or specially.
 A check is crossed specially when the name of a particular banker or
a company is written between the parallel lines drawn. It is crossed
generally when only the words "and company" are written or nothing
is written at all between the parallel lines. It may be issued so that the
presentment can be made only by a bank. Veritably the Negotiable
Instruments Law (NIL) does not mention "crossed checks," although
Article 541 of the Code of Commerce refers to such instruments.
 The negotiability of a check is not affected by it being crossed. It may
still be legally negotiated form one person to another so long as the
one who encashes the check with the drawee bank is another bank or
if specially crossed, by the bank mentioned between the parallel lines
 In the Philippine business setting, however, we used to be beset with
bouncing checks, forging of checks, and so forth that banks have
become quite guarded in encashing checks, particularly those which
name a specific payee. Unless one is a valued client, a bank will not
even accept second indorsements on checks.
 In order to preserve the credit worthiness of checks, jurisprudence has
pronounced that crossing of a check should have the following
effects:
o the check may not be encashed but only deposited in the
bank;
o the check may be negotiated only once — to one who has an
account with a bank;
o and the act of crossing the check serves as warning to the
holder that the check has been issued for a definite purpose so
that he must inquire if he has received the check pursuant to
that purpose, otherwise, he is not a holder in due course.
STATE INVESTMENT HOUSE vs. INTERMEDIATE APPELLATE COURT
175 SCRA 310
Sec. 52 – 59 / 72
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
FACTS:
 New Sikatuna Wood Industries, Inc. (Sikatuna) requested for a loan
from private respondent Harris Chua.
 The Harris Chua (private resp.) agreed to grant the same subject to
the condition that the former should wait until December 1980
when he would have the money. In view of this agreement, private
respondent-wife (Anita Pena Chua) issued 3 crossed checks
payable Sikatuna all post dated which amounted to a total of P
299,450.00.
 Sikatuna entered into an agreement with herein petitioner State
Investment House, Inc. (SIHI) whereby for and in consideration of
the sum of Pl,047,402.91 under a deed of sale, the former assigned
and discounted with petitioner 11 postdated checks including the 3
postdated checks mentioned earlier.
 When the 3 checks issued by private respondent Anita Pena Chua
were allegedly deposited by petitioner, these checks were
dishonored by reason of "insufficient funds", "stop payment" and
"account closed", respectively.
 SIHI (pet) claims that despite demands on private respondent Anita
Peña to make good said checks, the latter failed to pay the same
necessitating the former to file an action for collection against the
latter and her husband Harris Chua before the RTC of Manila. (The
Chua’s filed a third party complaint against Sikatuna for
reimbursement and indemnification in the event that they be held
liable to SIHI. For failure of third party defendant to answer the
third party complaint despite due service of summons, the latter
was declared in default.)
 RTC rendered judgement against the Chua spouses and in the 3rd
party complaint Sikatuna was ordered to pay the Chua spouses for
the amount they will pay SIHI.
 SIHI  Chuas  Sikatuna.
 CA reversed the decision.
 Pet’s Contention : at the time of the negotiation and endorsement
of the checks in question Sikatuna, it had no knowledge of the
transaction and/or arrangement made between the latter and
private respondents.
ISSUE:
1) Whether or not petitioner is a holder in due course as to entitle it
to proceed against private respondents for the amount stated in
the dishonored checks.
 Under usual practice, crossing a check is done by placing two parallel
lines diagonally on the left top portion of the check. The crossing may
be special wherein between the two parallel lines is written the name
P 22 of 51
2D Negotiable Instruments – Atty. Mercado
 of a bank or a business institution, in which case the drawee should
pay only with the intervention of that bank or company, or crossing
may be general wherein between two parallel diagonal lines are
written the words "and Co." or none at all as in the case at bar, in
which case the drawee should not encash the same but merely accept
the same for deposit.
 The effect of crossing a check relates to the mode of its presentment
for payment. Under Section 72 of the Negotiable Instruments Law,
presentment for payment to be sufficient must be made (a) by the
holder, or by some person authorized to receive payment on his
behalf ... As to who the holder or authorized person will be depends on
the instructions stated on the face of the check.
 The three subject checks in the case at bar had been crossed generally
and issued payable to Sikatuna, which could only mean that the drawer
had intended the same for deposit only by the rightful person, i.e., the
payee named therein. Apparently, it was not the payee who presented
the same for payment and therefore, there was no proper
presentment, and the liability did not attach to the drawer.
 When SIHI rediscounted the check knowing that it was a crossed check
he was knowingly violating the avowed intention of crossing the check.
Furthermore, his failure to inquire from the holder, Sikatuna, the
purpose for which the three checks were cross despite the warning of
the crossing, prevents him from being considered in good faith and
thus he is not a holder in due course. Being not a holder in due course,
plaintiff is subject to personal defenses, such as lack of consideration
between appellants and Sikatuna.
 Thus, in the absence of due presentment, the drawer did not become
liable. Consequently, no right of recourse is available to petitioner
against the drawer of the subject checks (private respondent wife)
considering that petitioner is not the proper party authorized to make
presentment of the checks in question.
 That the subject checks had been issued subject to the condition that
private respondents on due date would make the back up deposit for
said checks but which condition apparently was not made, thus
resulting in the non-consummation of the loan intended to be granted
by private respondents to Sikatuna, constitutes a good defense (which
is lack of consideration) against petitioner who is not a holder in due
course.
Notes:
 Section 52 of the NIL defines a holder in due course as one who takes
the instrument "in good faith and for value" and that in order that one
may be a holder in due course, it is necessary that "at the time the
instrument was negotiated to him he had no notice of any defect in the
title of the person negotiating it." However, under Section 59 every
holder is deemed prima facie to be a holder in due course.
 Admittedly, the Negotiable Instruments Law regulating the issuance of
negotiable checks as well as the lights and liabilities arising therefrom,
does not mention "crossed checks". But this Court has taken
cognizance of the practice that a check with two parallel lines in the
upper left hand corner means that it could only be deposited and may
not be converted into cash.
 New Sikatuna Wood Industries negotiated the three checks in breach of
faith in violation of Article (sic) 55, Negotiable Instruments Law, which
is a personal defense available to the drawer of the check, Anita Chua.
 Section 541 of the Negotiable Instruments Law as follows: The maker
or any legal holder of a check shall be entitled to indicate therein that
it be paid to a certain banker or institution, which he shall do by writing
across the face the name of said banker or institution, or only the
words "and company." The payment made to a person other than the
banker or institution shall not exempt the person on whom it is drawn,
if the payment was not correctly made.
 Read notes in previous case

 Yet it does not follow as a legal proposition that simply because

petitioner was not a holder in due course as found by the appellate
court for having taken the instruments in question with notice that the
same is for deposit only to the account of payee named in the subject
checks, petitioner could not recover on the checks. The NIL does not
provide that a holder who is not a holder in due course may not in any
case recover on the instrument for in the case at bar, petitioner may
recover from the Sikatuna if the latter has no valid excuse for refusing
payment. The only disadvantage of a holder who is not in due course is
that the negotiable instrument is subject to defenses as if it were non-
negotiable.
P 23 of 51
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim 2D Negotiable Instruments – Atty. Mercado
STATE INVESTMENT V. CA
217 SCRA 32
Sec. 52-59 / 119
FACTS:
- Nora B. Moulic issued to Corazon Victoriano, as security for pieces
of jewelry to be sold on commission 2 post-dated checks ( from
Equitable Bank) in the amount of P50,000
- Each one dated 30 Aug 1979 and 30 Aug 1979
- Payee (Victoriano) then negotiated the checks to State Investment
House (STATE)
- Moulic failed to sell the jewelry so she returned the jewelry before
the maturity of the check
- The checks could no longer be negotiated coz they were already
negotiated
- Before maturity date, MOULIC withdrew her funds
- Upon presentment for payment, the checks were dishonored
- STATE alleges that the checks were dishonored and that she pay in
cash instead
- STATE sued to recover the amount of the checks
- MOULIC’s defense: she incurred no liability since the jewelry was
not sold and checks were negotiated without her consent
- She instituted a 3rd party complaint against Victoriano who later
assumed responsibility for the checks
- TC: STATE lost
- CA: affirmed TC; that checks should never have been presented for
payment since the jewelry were returned
ISSUE: w/n STATE is a holder in due course
HELD:
YES it is an HDC
- there is always a prima facie presumption of being an HDC
- evidence shows that:
- 1)on their face the checks were complete and regular
- 2) pertitioner boufht the checks from the payee, before their due
dates
- 3) pet. Took the checks in good faith and for value, albeit
discounted price
- 4) pet was never informed no r made aware that the checks were
merely issued as a security and not for value
- STATE holds it free from all defects of title of prior parties and may
enforce full payment
- MOULIC cant set up defense of failure of consideration since it is a
personal defense which she can invoke only if STATE was privy to
the purpose for which they were issued
- MOULIC cant also invoke SEC 119 of the NIL (on discharge of
instrument):
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
a) payment on behalf of principal debtor
b) paument in DC by accommodated party
c) intentional cancellation of holder
d) other act that will discharge contract
e) principal debtor becomes holder of instrument after maturity or
after maturity in his own right
- MOULIC can only invoke c and d as grounds
- However, there was no intentional burning, tearing or writing of the
word ‘CANCELLED’; MOULIC didn’t get back the possession of the
checks
- 1231 of the CIVIL CODE cant apply to them because in the present
action, payee Victoriano was no longer MOULIC’s creditor at the
time the jewelry was returned (par d cant apply)
- Failure of STATE to give Notice of Dishonor is also immaterial since
it is not absolute in all instances
- Also she merely withdrew her funds so she should not expect that
her check would be honored
- It would also not be unjust enrichment on the part of STATE
- There was a prior transaction between STATE and Victoriano (a real
estate mortgage where property mortgaged to STATE was 1.9m
while the bid price at the auction sale was only 1m) STATE as
mortgagee can claim deficiency (STATE has a right to recover
balance)
- MOULIC as drawer to STATE as a holder indue course without
prejudice to action for recompense against Victoriano for being in
default
SALAS V. CA
181 SCRA
Sec. 8 / 52-59
FACTS:
- Juanita Salas bought a motor vehicle from the Violago Motor Sales
Corporation (VMS) for P58,138.20 as evedienced by a promissory
note
- PN was subsequently indorsed to Filinvest Finance and Leasing
Corp which financed the purchase
- Salas defaulted in the payment of the PN allegedly due to
discrepancies in the engine and chassis numbers in the sales
invoice, certificate of registration and deed of chattel mortgage
which she allegedly discovered when the motor vehicle got into an
accident
- Filinvest then filed for collection of the sum of money against Salas
- TC: ordered Salas to pay P28,414
- CA: ordered Salas to pay balance of P54,908
- Salas filed petition before SC alleging fraud, bad faith and
misrepresentation of Violago Motors which supposedly released
Salas from liability to Filinvest who should instead go against
Violago
P 24 of 51
2D Negotiable Instruments – Atty. Mercado
 - She contends it is not necessary to implead VMS in this case, since
there is already a case for ‘breach of contract’ pending in a
separate case (which was still on appeal)
ISSUE:
W/N Filinvest is a mere assignee of the Promissory note or a holder in due
course
RULING:
-Filinvest is a holder in due course
The promissory note has all the earmarks of negotiability:
1) it is in writing and signed by the maker Juanita Salas
2) it contains an unconditional promise to pay the amount of
P58,138.20
3) it is payable at a fixed or determinable future time which is
P1,614.95 monthly for 36 monthly installments
4) it is payable to violago or order
5) drawee was named with certainty
It was an HDC
1) the PN was complete and regular upon its face
2) It became the holder before it was overdue or without notice that it was
previously dishonored
3) It took the same in good faith and for value
4) when it was negotiated to Filinvest, the latter had no notice of any
infirmity in the instrument or defect in the title of VMS
 Filinvest now holds it free from all defenses and defects that Salas may
set up against Violago
CONSOLIDATED PLYWOOD INDUSTRIES V. IFC LEASING
149 SCRA 448
Sec. 52-59
FACTS:
Consolidated Plywood bought two used tractors from Atlantic Gulf and
Pacific Company through its sister company and marketing arm, Industrial
Products Marketing. Industrial assured Consolidated, after inspecting the
jobsite, that the used tractors were fit for the job. It even gave
Consolidated a 90-day warranty.
Consolidated, through president and vice-president, agreed to purchase
the tractors on installment and with a 210K downpayment. Simultaneously
with the execution of the deed of sale, the chattel mortgage and
promissory note, Industrial assigned its rights and interest in the chattel
mortgage to IFC Leasing.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
The tractors were delivered with mechanics of Industrial stationed at the
jobsite to supervise the operations of the machines. One of the tractors
broke down after just 14 days, the other followed after 9 days.
Consolidated asked Industrial to repair the tractors based on the warranty.
The tractors, however, were no longer serviceable.
Consolidated stopped payment of installments as listed on the promissory
note. The president of Consolidated suggested to Industrial that the
tractors should be reconditioned and sold. The proceeds would then be
given to IFC Leasing and the excess to be divided between Consolidated
and Industrial.
Industrial did not respond to the letter. Instead, IFC Leasing filed a
complaint against Consolidated for collection for non-payment of its
obligation.
The trial court ruled in favor of IFC Leasing and ordered Consolidated to
pay 1M. Consolidated brought the case to the CA which also ruled in favor
of IFC Leasing saying that:
1. there was no provision of warranty and therefore no breach on the
part of Industrial
2. the breach of warranty cannot therefore be used by Consolidated
as a defense in order to be free from its liability under the
promissory note
3. the promissory note is a negotiable instrument and IFC Leasing is a
holder in due course and is entitled to recover from Consolidated
the full amount of the obligation
Consolidated brought the case to the SC with the following assignment of
errors:
1. the promissory note is not a negotiable instrument
2. IFC leasing is not a holder in due course, it is at best a mere
assignee
3. Consolidated can raise the defense of breach of warranty against
IFC Leasing since it is not a holder in due course, but a mere
assignee
4. Consolidated is not liable for payment of the promissory note
because Industrial is guilty of breach of warranty
5. the transaction cannot be transformed from being a sale on
installments to a pure loan
6. the promissory note cannot be accepted as evidence in court
because the requisite documentary stamps were not affixed.
ISSUE: (in order of importance)
1. W/N the promissory note is negotiable
2. W/N IFC Leasing is a holder in due course
3. W/N there was a breach of warranty
P 25 of 51
2D Negotiable Instruments – Atty. Mercado

RULING
1. There was a breach in the warranty given by Industrial to
Consolidated. Industrial then is liable to Consolidated and this
liability extends to the corporation to whom it assigned its rights
and interests unless the assignee is a holder in due course of the
promissory note in question.
2. The promissory note is not a negotiable instrument, it is only
payable to Industrial and not to its order or to bearer.
3. Consequently, since the note is not a negotiable instrument, IFC
Leasing cannot be a holder in due course. It is but a mere assignee
who steps into the shoes of the assignor and being such,
Consolidated may raise against IFC all defenses available to it as
against Industrial. This fact was even admitted by IFC Leasing as
evidenced by the records of the court.
4. Even assuming that the instrument is negotiable, IFC Leasing
cannot be considered a holder in due course. The Deed of Sale with
Chattel Mortgage, the Deed of Assignment and the Disclosure of
Loan/Credit Transaction were all executed on the same day by
Consolidated, Industrial and IFC Leasing. Threfore, IFC Leasing had
actual knowledge of the fact that Industrial’s right to collect the
purchase price was not unconditional, and that it was subject to
the condition that the tractors sold were not defective. It knew that
if the tractors turned out to be defective, it would be subject tot
the defense of failure of consideration and cannot recover the
purchase price. IFC’s taking of the promissory note with actual
knowledge of the foregoing facts amounted to bad faith and
therefore cannot be considered as a holder in due course and is
subject to all defenses which Consolidated may raise against
Industrial.
Sections 52 and 56 of the NIL are applicable. IFC Leasing failed to take the
promissory note (1) in good faith and for value and (2) he had notice of the
infirmity or defect in title of the person negotiating it, in this case
Industrial. He had actual knowledge of the infirmity and the defect in title.
Campos v. Campos and Commercial Credit Corp v. Orange Country: a
financing company is not a holder in good faith. It is a moving force in the
transaction from its inception.
Sec. 58 also provides that in the hands of a holder other than a holder in
due course, a negotiable instrument is subject to the same defenses as if it
were non-negotiable.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
VICENTE R. de OCAMPO & Co. v. GATCHALIAN
3 SCRA 596
Sec. 52-59
FACTS:
Anita Gatchalian, interested in looking for a car, was shown and offered a
car by Manuel Gonzales. Gonzales represented to Gatchalian that he was
duly authorized by the owner of the car, Ocampo Clinic (hereinafter
Ocampo), to look for a buyer of said car and to negotiate for and
accomplish said sale, but these facts were not known to Ocampo.
Gatchalian requested Gonzales to bring the car the following day together
with the certificate of registration of the car. Gonzales however, advised
her that the owner of the car will not be willing to give the certificate of
registration unless there is showing that the party interested in the
purchase of said car is ready and willing to make such purchase and that
for this purpose Gonzales requested Gatchalian to give him a check which
will be shown to the owner as evidence of the buyer’s good faith in the
intention to purchase the car. The said check was to be for safekeeping
only of Gonzales and to be returned to Gatchalian the following day when
Gonzales brings the car and certificate of registration. Gatchalian then
issued a check. These facts were again not known to Ocampo.
On the failure of Gonzales to appear with the car and its certificate the
following day, Gatchalian issued a “Stop Payment Order” on the check with
the drawee bank.
Subsequently, Gonzales, having received the check from Gatchalian,
delivered the same to Ocampo Clinic, in payment of fees and expenses
arising from the hospitalization of his wife, Matilde. Ocampo, for and in
consideration of fees of hospitalization accepted the said check from
Gonzales. As the check was issued for P600, while the hospital bills
amounted to P441.75, Ocampo delivered to Gatchalian the difference of
P158.25. This transaction was made without inquiry by Ocampo from
Gonzales.
A case for estafa was thereafter filed by Ocampo against Gonzales as the
check bounced (by virtue of Gatchalian’s “Stop Payment Order”). The
estafa case was dropped and now a collection case against Gatchalian was
filed.
GATCHALIAN’s CONTENTIONS:
The check is not a negotiable instrument because it was only for
safekeeping, hence, there was no delivery required by law. Assuming that
there was delivery, it was subject to a condition which was not fulfilled.
Ocampo is not a holder in due course because Ocampo as the following
facts brought suspicion about Gonzales’ possession of the check:
1) Check is not personal check of Manual Gonzales
2) Maker, Gatchalian, a complete stranger, is not in any manner
obligated both to Gonzales and Ocampo
P 26 of 51
2D Negotiable Instruments – Atty. Mercado
 3) The check could not have been initiated to pay the hospital fees
as it was in the amount of P600 and not P441.75.
4) Check is payable to bearer, hence any person who holds it should
have been subject to inquiries.
ISSUE:
Whether Ocampo is a holder in due course ---NO, requisite of good faith is
lacking.
Gatchalian had no obligation to Ocampo; the amount of the check did not
correspond exactly with Gonzales’ obligation to Ocampo; and the check
was a crossed check- these facts should have put Ocampo to inquiry as to
the why and wherefore of the possession of the check by Gonzales. It was
Ocampo’s duty to ascertain from Gonzales what the nature of the latter’s
title to the check was or the nature of his possession. Ocampo is therefore
guilty of gross neglect in not finding out the nature and title and
possession of Gonzales, amounting to legal absence of good faith. It is
sufficient to show that Ocampo had notice that there was something wrong
about his assignor’s acquisition of title to show absence of good faith
because actual knowledge of the particulars or nature of the fraud
committed are not necessary.
*Story of the 15-year old boy, less than 5 ft tall, immature in appearance
and bearing on his face the stamp of a degenerate, who presented stolen
liberty bonds to a clerk of Liberty Loan department for sale. The boy
claimed the bonds belonged to his mother and so the clerk paid the bonds
without inquiry. Held: Owner of the bonds can recover the value from Loan
department. “Bad faith” here is used in the commercial sense. Although
gross negligence does not of itself constitute bad faith, it is evidence from
which bad faith may be inferred.
*The rule that a possessor of the instrument is prima facie a holder in due
course does not apply because there was a defect in the title of the holder.
The burden was placed upon the payee to show that notwithstanding the
suspicious circumstances, it acquired the check in actual good faith, this it
failed to do.
*Gill v. Cubitt: the purchaser of a negotiable paper must exercise
reasonable prudence and caution and that if the circumstances were such
as ought to have excited the suspicion of a prudent and careful man, and
he made no inquiry, he did not stand the legal position of a bona fide
holder.
*Goodman v. Harvey: nothing short of actual bad faith or fraud in the
purchaser would deprive him of the character of a bona fide purchaser and
let in defenses existing between prior parties, that no circumstances of
suspicion merely, or want of proper caution in the purchaser, would have
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
this effect, and that even gross negligence would have no effect, except as
evidence tending to establish bad faith or fraud.
*It is finally settled that negligence on the part of the plaintiff, or suspicious
circumstances sufficient to put a prudent man on inquiry, will not of
themselves prevent a recovery, but are to be considered merely as
evidence bearing on the question of bad faith. When the plaintiff is called
upon to prove himself a holder in due course to be entitled to recover, he is
required to establish the conditions entitling him to standing as such,
including good faith in taking the instrument. It devolves upon him to
disclose the facts and circumstances attending the transfer, from which
good or bad faith in the transaction may be inferred.
PEOPLE VS. MANIEGO
148 SCRA 30
Sec. 52-59
FACTS:
CFI of Rizal indicted Lt.Rizalino Ubay, Milagros Pamintuan, and Julia
Maniego for the crime of Malversation.
Lt.Rizalino, officer of the Armed Forces of the Phil., was designated as
Disbursing Officer in the Office of the Chief of Finance and entrusted with
the control of public funds. He accepted from his co-accused several
personal checks drawn against the Philippine National Bank and the Bank
of the Phil Islands, of which the accused Pamintuan is the drawer and
Maniego, the indorser. They cashed said checks in the amount of
P66,434.50 and using for this purpose the public funds entrusted to Lt.
Ubay though they all knew that said checks are worthless.
Maniego prayed that she be absolved from civil liability. She(Maniego)
contends that as mere indorser, she may not be made liable on account of
the dishonor of the checks indorsed by her.
ISSUE:
W/N a mere indorser is liable on account of the dishonor of the checks
indorsed
HELD: (YES)
Under the law, the holder or last indorsee of a negotiable instrument for
the full amount thereof against all parties liable thereon. Among the
“parties liable thereon” is an indorser of the instrument.
Maniego may also be deemed an accommodation party in the light of the
facts i.e. “a person who has signed the instrument as a maker, drawer,
P 27 of 51
2D Negotiable Instruments – Atty. Mercado
acceptor., or indorser, without receiving value therefore, and for the
purpose of lending his name to some other person.” As such, she is under
the law “liable on the instrument to a holder for value, notwithstanding
such holder at the time of taking the instrument knew **(her) to be only an
accommodation party.
UCPB vs. IAC
183 SCRA 38
Sec. 52-59
FACTS:
Altiura delivered a check to Makati Bel-Air as part of the payment on an
office condominium unit. Petitioner Bank received from Altiura instructions
to hold payment on the manager’s checks, in view of a material
discrepancy in the area of the office unit purchased by Altiura. Makati Bel-
Air proposed a possible reduction in the price. Altiura requested Bank to
give both parties 15 days within which to settle their differences. The Bank
requested Makati Bel-Air that the presentation of the manager’s check be
held in abeyance until after 15 days but Makati refused.
Bank filed a complaint-interpleader against Makati and Altiura to require
both to litigate within them their respective claims over the funds
represented by the manager’s check. Altiura rescinded the contract of sale
of the condominium unit. Makati delivered to petitioner Bank the original
Manager’s check and funds were released to Alturia.
ISSUE:
W/N Makati Bel-Air is a holder in due course
HELD: (NO)
Makati was a party to the contract of sale. Makati was fully aware, at the
time it had received the manager’s check, that there was at least a partial
failure of consideration since it was unable to comply with its obligation to
deliver office space amounting to 165 square meters to Altiura.
YANG V. CA
409 SCRA 159
Sec. 52-59
FACTS:
Agreement between Cely Yang and Prem Chandiramani:
Yang obliges himself to:
1. Deliver 2 managers checks worth Php 2.087M
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
2. Secure and deliver a Usd 200,000 dollar draft.
Chandiramani obliges himself to:
1. In exchange for the 2 manager’s checks, deliver 1 managers check
worth Php 4.2M from Philippine Commercial International Bank
(PCIB)
2. In exchange for the dollar draft, deliver another dollar draft also
worth Usd 200,000 from Han Seng Bank of Hong Kong.
Yang and Chandiramani would then split the difference of Php 26,000.
To reiterate, Yang drew 3 Instruments:
1. Equitable cashier’s check worth Php 2.087M payable to order of
Fernando David
2. FEBTC cashier’s check worth Php 2.087M payable to order of
Fernando David
3. FEBTC dollar draft drawn on Chemical Bank of NY worth Usd
200,000 payable to PCIB FCDU account no. 4195-01165-2.
On December 22, 1987
1PM- Yang gave the 3 instruments to business associate Liong who gave it
to his messenger for delivery to Prem Chandiramani at Philippine Trust
Banks. Prem would then give the Php 4.2M Manager’s check and Han Seng
dollar draft to the messenger. Messenger alleged that Prem was not there
and the 3 instruments were lost.
3PM- Chandiramani delivered to Fernando David the 2 checks payable to
order of Fernando David. Chandiramani received Usd 360,000 for the 2
checks. Chandiramani also deposited the FEBTC dollar draft into PCIB
account.
430PM- Yang reported the loss to the police.
Yang requested FEBTC and Equitable to stop payment. Both banks
complied but the Usd 200,000 dollar draft was paid upon representation of
PCIB.
Yang filed a case against Equitable, Chandiramani and David for injunction
and damages, amended for Equitable to return Php 2.087M with interest
until paid.
Yang filed a similar case against FEBTC amended to return Php 2.087M and
the value of the FEBTC dollar draft with interest 18% until fully paid.
While the case was pending, amount of the checks were converted to Tbills
so as to earn interest to be awarded to the winner.
RTC- Fernando David is a holder in due course. He is entitled to the checks
and proceeds and Yang must collect from Chandiramani.
CA- Affirmed RTC’s ruling
MAIN ISSUE:
P 28 of 51
2D Negotiable Instruments – Atty. Mercado

Whether Fernando David was a holder in due course and therefore entitled
to the proceeds of the 2 checks.
Yang contended to SC that (1) Lack of proof the David tendered valuable
consideration for the 2 checks and (2) David failed to inquire from
Chandiramani how he came to possess the checks, resulting in David’s
intentional ignorance tantamount to bad faith.
HELD:
Yes, David is a holder in due course.
The checks were complete in form. They were not yet overdue and he had
no notice of their dishonor. He paid for it in good faith and for value. He
had no notice of any infirmity or defect in title of the drawer. In fact, he
even asked the manager of China Banking Corp to inquire on genuineness
of the checks.
Every holder of a negotiable instrument is deemed prima facie a holder in
due course. A ‘holder’ is the payee in possession. David was the payee and
had possession. Since there was no evidence to the contrary, the
presumption holds.
(1) Sec 24 presumes valuable consideration. No evidence was
presented to overcome this presumption.
(2) There is no circumstance that should raise David’s suspicion. It was
Yang and Chandiramani who had an agreement which David knew
nothing about. David’s own dealing with Chandiramani was for the
latter to deliver the checks with David as payee. David also took
every step to inquire about the genuineness of the checks and only
accepted them after being assured that there was nothing wrong
with them. David did not close his eyes to the fraud Chandiramani
committed because he had no knowledge of it. He is not in bad
faith.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
MESINA V. IAC
145 SCRA 497
Sec. 52 – 59 / 185
FACTS:
Jose Go purchased a manager’s check from Associated Bank (AB) worth
800,000. He left the check on the manager’s table when he left the bank.
So, the bank manager entrusted the check to a bank official (Uy). Uy, in
turn, had a visitor (Lim). Uy answered a telephone call, then proceeded to
the men’s room. When he returned, the Go’s managers check was gone.
Go issues a stop order. Uy on the other hand goes to the police pointing to
Lim as the perpetrator. Later, AB receives the check for clearing from
Prudential Bank. It dishonors it. It receives it for clearing again, and
Associated Bank dishonors it for the 2 nd time, saying that it was a stolen
check. AB subsequently receives a letter from a certain Atty. Navarro
demanding payment on the cashier’s check. Navarro however refuses to
reveal the name of his client. The police sends a letter to Prudential asking
how it had acquired the stolen check. Prudential does not divulge
information, as it wanted to protect its client.
AB then files an action for Interpleader with Jose Go and a John Doe.
Prudential later discloses that the John Doe is Mesina, who allegedly
received the check from Lim in “a certain transaction”. He would not
disclose further. Mesina posits that he was a holder in due course, as the
check was validly negotiated to him by Lim.
TC denies Mesinas motion to dismiss, holds Mesina in default. IAC affirms
the denial of the motion
ISSUES:
W/N Mesina was holder in due course
W/N interpleader was proper remedy
W/N Mesina was in default in TC
HELD:
1) NO. Not willing to explain how the check came to be in his possession,
and as indorsed by Lim, Mesina was said to have known the defect in his
title over the check. Moreover, Go purchased the check from AB to
transport funds to another bank. AB had no other intention that to issue it
to Go alone. When the check was lost, no one except Go could be said to
be a holder in due course as he had not indorsed it in due course. The
check was never properly negotiated and was never for value.
A holder of a cashier’s check who is not a holder in due course cannot
enforce such check against the issuing bank which dishonors it. If a payee
obtained the check by fraud or there is some other reason that the payee
is not entitled to collect, the bank can refuse payment since the bank is
aware of the facts surrounding the loss.
P 29 of 51
2D Negotiable Instruments – Atty. Mercado

2) YES. The bank in filing an interpleader took proper precaution on whom
as between Go and Mesina to pay the money. The Bank is not avoiding
liability by the filing of the interpleader, in fact it expressed willingness to
deposit the amount of the check with the clerk of court for whoever will be
found by the court as validly entitled to it.
3) YES. Petitioner here argues that since he is presumably a holder in due
course and for value, he cannot be compelled to litigate against Go who
was not named in the check. The court ruled that, following such line of
thought, even Mesina himself was not privy, not being named therein as
well.
ASIA BANKING CORPORATION V TEN SEN GUAN Y SOBRINOS
44 PHIL 511
Sec. 52-59
FACTS:
 Defendants ordered from “Snow’ Ltd.” Ten cases of mercerized
batiste of the value of $10,266.98
 The batiste was to be shipped from New York to be received by the
defendants in Manila
 A draft for the amount alleged drawn by “Snow’s Ltd.” Against the
defendants was presented to them through the plaintiff as agent of
“Snow’s Ltd.” For acceptance
 Delivery of the bill of lading and other documents relating to the
merchandise was refused by the plaintiff until the draft was
accepted by the defendants, and that delivery was contingent
upon the acceptance of the draft.
 Being assured by the plaintiff that the cases contained the batiste,
they accepted the draft.
 When the cases were opened they contained “burlap” of little
value, which was not in any sense or manner the batiste ordered.
 Defendants declined to receive the goods and left them in the
possession of the customs authorities.
ISSUE:
W/N the plaintiff is a holder in due course
HELD:
 No. It would have been a very easy matter to give an account of
the whole transaction but there is no such evidence on record.
 Evidence tends to show that it was held for collection only, it
follows that the defendants would have a right to make any
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
defense to the draft which they would have a right to make against
“Snow’s Ltd.” (fraud)
 The defendants conditionally accepted the draft and upon
discovery of the fraud the defendants promptly notified the bank.
FOSSUM V FERNANDEZ HERMANOS
44 PHIL 675
Sec. 52-59
FACTS:
 The defendants placed an order with the American Iron Products
Co Inc for “300 Fathoms, best quality Iron Chain Links 6 ½” x 3
7/8” x 1 ¼ “ to be made in accordance with blueprint which you
submitted in your inquiry of 18 December 1919”
 “this chain is to fit into a gipsy wheel, so therefore, the size must
be exact. Material is to be made up according to Lloyd’s rules and
the material is to be stamped with test marks and certificate of
origin is to be sent with shipping documents. Price, $18.70 per 100
lbs, FLF Manila.”
 The defendants received the chain and accepted the draft.
However, when demand was made, the defendant refused to pay.
 The defendant claims that they accepted the chain believing that
the chain was in conformity to the specifications made. However,
they claim that the chain did not follow the specifications
ISSUE:
W/N the defendants are liable on the draft
HELD:
 Yes. Having received the chain and accepted the draft, the
defendants became at least primarily liable for the payment of the
draft. The defendants have the burden of proving that the chain
did not meet the standard.
 The defendant’s answer did not specify or point out any specific
defect in the chain, or how, or in what manner or particular it does
not comply with the conditions and terms of the contract.
 Furthermore, the chain came with the proper test marks and
certificate of origin.
NO DIGESTS FOR SEC. 60 to 63
P 30 of 51
2D Negotiable Instruments – Atty. Mercado
VELASCO VS. TAN LIUAN & CO.
43 PHIL 196
Sec. 66
FACTS:
Tan Liuan & Co. executed to Aw Yong Chiow Soo four certain
promissory notes, each payable six months after its respective date.
March 17, 1919, Aw Yong Chiow Soo drew a bill of exchange or sight
draft, for 33,500 Yen on Jing Kee & Co., 2 Kaisandori 5-Chone, Kobe, in
favor of the Philippine National Bank, which at first it refused to cash.
Velasco was then induced to endorse the draft as condition for
encashment. The bank cashed the draft but no part of which was received
by Velasco, as all of the money was paid to Tan Liuan & Co, whose name
does not appear on the instrument.
In the ordinary course of business, the draft was dishonored when
presented, and later Velasco was requested to personally execute to the
Philippine National Bank his promissory note, for the amount of the draft,
interest and expenses.
August 18, 1919, as consideration for Velasco’s indorsement, Tan
Liuan made a statement promising to pay Velasco or order within 10 days
after he has been obligated to pay.
The four promissory notes originally drawn by Tan Liuan was
unqualifiedly endorsed by Aw Yong Chiow Soo to Velasco. Velasco made a
statement that in case he is released from liability, he will reassign the
notes back to Aw Yong Chiow Soo.
Tan Liuan failed to pay Velasco, thus Velasco notified Aw Chong of
Liuan’s non-payment. Aw Yong Chiow Soo alleged that Velasco cannot hold
him liable upon failure of Tan Liuan to pay because he (Aw Yong Chiow Soo)
is merely an accommodation party.
ISSUE: Whether Aw Yong Chiow Soo is liable as unqualified indorser---YES
The indorsement of Aw Yong Chiow Soo of the notes to Velasco was
unqualified, and the law fixes the liability of an unqualified indorser. Oral
testimony is not admissible to vary or contradict the terms of the written
instrument. If it was not its purpose or intent to assume and agree to pay
the notes, it should have indorsed them “without recourse” or in such a
manner as to disclaim liability. Moreover, the testimony is conclusive that
Tan Liuan & Co. was insolvent and that Aw Yong Chiow Soo knew that none
of the notes would be paid if presented. At the time the unqualified
indorsement was made, 2 of the notes had been protested and Aw Yong
Chiow Soo knew that Tan Liuan & Co. was insolvent, and had no reason to
expect that the notes would be paid. Aw Yong Chiow Soo therefore as
unqualified indorser is liable to Velasco.
GULLAS V PNB
62 PHIL 519
Sec. 66
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
FACTS:
The Treasurer of the United States for the United States Veterans
Bureau issued a warrant in the amount of $361, payable to the order of
Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as
indorsers. Thereupon it was cashed by PNB. Subsequently the treasury
warrant was dishonored by the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the
books of PNB was P509. Against this balance he had issued certain checks
which could not be paid when the money was sequestered by the bank.
Without giving notice to Gullas, PNB applied the P509 in his account to the
treasury warrant that was dishonored. PNB subsequently sent a letter to
Gullas informing him of the dishonored checks and the fact that they
applied his account as part payment for the said treasury warrant. As a
consequence, Gullas’ insurance was left unpaid since his check was
dishonored for lack of sufficient funds. Moreover, periodicals in the vicinity
gave prominence to the news to the great mortification of Gullas.
PNB claims the right to set-off the account of Gullas against that
indorsed treasury warrant by virtue of the NCC provisions on
compensation. It further claims that there is a creditor-debtor relationship
between the bank and its client.
ISSUE: Whether PNB has the right to apply the deposit of a depositor to the
bank—Generally yes, but if the depositor is an indorser and not maker (as
in this case), he should first be notified before applying compensation.
NIL contains provisions establishing the liability of a general
indorser and giving the procedure for notice of dishonor. The general
indorser of a negotiable instrument engages that if it be dishonored and
the necessary proceedings of dishonor be duly taken, he will pay the
amount thereof to the holder. Notice of dishonor is therefore necessary in
order to charge an indorser and that the right of action against him does
not accrue until the notice is given.
As a general rule, a bank has a right of set off-of the deposits in its
hands for the payment of any indebtedness to it on the part of a depositor.
However, the fact is undeniable that prior to the mailing of notice of
dishonor, and without waiting for any action by Gullas, the bank made use
of the money standing in his account to make good for the treasury
warrant.
As to a depositor who has funds sufficient to meet payment of a
check drawn by him in favor of a third party, it has been held that he has a
right of action against the bank for its refusal to pay such a check in the
absence of notice to him that the bank has applied the funds so deposited
in extinguishment of past due claims held against him. However this rule
should be differently applied to an indorser because NIL clearly provides
that notice should actually have first been given him in order that he might
protect his interests before compensation may be applied by the bank. The
action of the bank was clearly prejudicial to Gullas.
ASSOCIATED BANK V. TAN
P 31 of 51
2D Negotiable Instruments – Atty. Mercado
446 SCRA 282
Sec. 66 (NO DIGEST)
GONZALES V. RCBC
508 SCRA 459
Sec. 66 (NO DIGEST)
FAR EAST REALTY INVESTMENT INC. VS CA
166 SCRA 256
Sec. 71
Facts:
 Petitioner (Far East Realty Investment, Inc.) alleged that Dy Hian Tat,
Siy Chee, and Gaw Suy An approached the petitioner at its office in
Manila on September 13, 1960 and obtained a loan in the amount of
P4,500 (Philippine currency).
 The defendants promised to repay the amount solidarily plus a 14%
per annum interest rate in one month in cash.
 And to to back this promise up, Dy Hian Tat drew a check from his
bank, China Banking Corporation to Far East on the same day the loan
was obtained and in the same amount which was P4,500.
 He assured that the check would be redeemed by them in one months
time by paying P4,500 in cash or that the check can be presented for
payment immediately after one month and the bank would honor the
same.
 Siy Chee and Gaw Suy An, signed on the back of the check as
accommodation parties.
 The check was dated September 13, 1960 (which was the time they
obtained the loan)
 March 4, 1964 (around 4 years later), Far East presented the check to
China bank but the check bounced and was not cashed by the bank
because the current account of the drawer had already been closed.
 Far East gave formal notice of the check’s dishonor by letter dated
April 27, 1968 (around 4 years later) and demanded payment.
 Far East then brought suit in the City Court of Manila, which ruled in
their favor.
 The defendants appealed the decision to the Court of First Instance of
Manila, which affirmed the decision. However, when brought to the
Court of Appeals, it reversed the previous rulings.
 The Court of Appeals held that Far East had failed to present the check
for payment “within a reasonable time”.
 Far East appealed to the Philippine Supreme Court hence this petition.
 Petitioner contends that presentment for payment may be dispensed
with if its useless like in this case where there was insufficiency of
funds so the drawer is still liable. Plus drawer cant be included in the
exception because he hasn’t proven any loss.
 Defendants contends that the petitioner is not a holder for value
because the drawer drew the check and it was delivered to Sin Chin
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
Juat Grocery in payment of grocery goods for Goodyear Lumber and
not the Far East which it had no transactions with. The check was not
delivered to Far East as consideration.
Issue: Whether or not presentment for payment and notice of dishonor of
the questioned check were made within reasonable time
Held and Ratio:
 No. Where an instrument is payable on demand, presentment must be
made within a reasonable time after issue, except that in the case of a
bill of exchange, presentment for payment will be sufficient if made
within a reasonable time after the last negotiation thereof.
 Notice may be given as soon as the instrument is dishonored and
unless delay is excused, it must be given within the time fixed by law.
 “reasonable or unreasonable time” depends upon the peculiar facts
and circumstances in each case.
 Reasonable time is so much time as is necessary under the
circumstances for a reasonable prudent and diligent man to do,
conveniently, what the contract or duty requires should be done,
having a regard for the rights and possibility of liss, if any, to the other
party.
 The check in question was issued on Spetemnet 13, 1960, BUT was
presented by the drawee ONLY on March 5, 1964 (around 4 years
later), and dishonored on the same date.
 After dishonor, a formal notice of dishonor was made only 4 more years
after on April 27, 1968.
 Under these circumstances, the petitioner undoubtedly failed to
exercise prudence and diligence on what he ought to do as required by
law. There was also no justification as to his delay.
REPUBLIC VS PNB/ THE FIRST NATIONAL CITY BANK OF NEW YORK
3 SCRA 851
Sec. 71 / 127 / 185
FACTS:
 The Republic of the Philippines filed a complaint for escheat of
certain unclaimed bank deposits balances under the provisions of
Act No. 3936 against several banks, among them the First National
City Bank of New York.
 It is alleged that pursuant to Section 2 of said Act defendant banks
forwarded to the Treasurer of the Philippines a statement under
oath of their respective managing officials of all the credits and
deposits held by them in favor of persons known to be dead or who
have not made further deposits or withdrawals during the period of
10 years or more. Wherefore, it is prayed that said credits and
P 32 of 51
2D Negotiable Instruments – Atty. Mercado
 deposits be escheated to the Republic of the Philippines by
ordering defendant banks to deposit them to its credit with the
Treasurer of the Philippines.
 In its answer the First National City Bank of New York claims that,
while it admits that various savings deposits, pre-war inactive
accounts, and sundry accounts contained in its report submitted to
the Treasurer of the Philippines pursuant to the Act, totalling more
than P100k, which remained dormant for 10 years or more, are
subject to escheat however, it has inadvertently included in said
report certain items amounting to P18,589.89 which, properly
speaking, are not credits or deposits within the contemplation of
Act No. 3936. Hence, it prayed that said items be not included in
the claim of plaintiff.
 After hearing the court a quo rendered judgment holding that
cashier's is or manager's checks and demand drafts (as those
which defendant wants excluded from the complaint) come within
the purview of Act No. 3936, BUT not the telegraphic transfer
payment which orders are of different category.
 The complaint was dismissed with regard to the telegraphic
transfer payment. But, after a motion to reconsider was filed by
defendant, the court a quo changed its view and held that even
said demand drafts do not come within the purview of said Act and
so amended its decision accordingly. Plaintiff has
appealed.lawphil.net
ISSUE: Do demand draft and telegraphic orders come within the meaning
of the term "credits" or "deposits" employed in the law? Can their import
be considered as a sum credited on the books of the bank to a person who
appears to be entitled to it? Do they create a creditor-debtor relationship
between drawee and the payee therefore subject o eschaeat?
HELD and RATIO: No. a demand draft is a bill of exchange payable on
demand. Considered as a bill of exchange, a draft is said to be, like the
former, an open letter of request from, and an order by, one person on
another to pay a sum of money therein mentioned to a third person, on
demand or at a future time therein specified.
On the other hand, a bill of exchange within the meaning of our Negotiable
Instruments Law does not operate as an assignment of funds in the hands
of the drawee who is not liable on the instrument until he accepts it. This is
the clear import of Section 127. It says: "A bill of exchange of itself does
not operate as an assignment of the funds in the hands of the drawee
available for the payment thereon and the drawee is not liable on the bill
unless and until he accepts the same."
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
In other words, in order that a drawee may be liable on the draft and then
become obligated to the payee it is necessary that he first accepts the
same. In fact, our law requires that with regard to drafts or bills of
exchange there is need that they be presented either for acceptance or for
payment within a reasonable time after their issuance or after their last
negotiation thereof as the case may be (Section 71, Act 2031). Failure to
make such presentment will discharge the drawer from liability or to the
extent of the loss caused by the delay
Since it is admitted that the demand drafts herein involved have not been
presented either for acceptance or for payment, the inevitable
consequence is that the appellee bank never had any chance of accepting
or rejecting them. Verily, appellee bank never became a debtor of the
payee concerned and as such the aforesaid drafts cannot be considered as
credits subject to escheat within the meaning of the law.
(Re telegraphic orders: If the latter choose to demand payment of their
telegraphic transfers at the time the same were received by the defendant
bank, there could be no question that this bank would have to pay them.
Now, the question is, if the payees decide to have their money remain for
sometime in the defendant bank, can the latter maintain that the
ownership of said telegraphic payment orders is now with the drawer
bank? The latter was already paid the value of the telegraphic payment
orders otherwise it would not have transmitted the same to the defendant
bank. Hence, it is absurd to say that the drawer banks are still the owners
of said telegraphic payment orders)
INTERNATIONAL CORPORATE BANK V. SPOUSES GUECO
315 SCRA 516
Sec. 71 / 186
FACTS:
Spouses Gueco obtained a loan from International Corporate Banik (Union
Bank) for the purchase of a car (Nissan Sentra 1600 4DR 19889 Model). As
evidence of the loan, they issued a promissory note payable in monthly
installments and a chattel mortgage on the car as security for the note.
They defaulted in payment of the installments and Union Bank instituted a
Civil Case for collection of sum of money with a prayer for a writ of
replevin. Spouses Gueco were served summons, after which they had a
meeting with the Bank representatives and entered into negotiations for
the reduction of their debt.
On Aug. 25, 1995 the Bank agreed to reduce the debt from 184K to 154K
and on Aug. 28, 1995 to further reduce it to 150K. On Aug. 29, 1995 Dr.
Gueco delivered a manager’s check for 150K to the bank but the car was
not released because of his refusal to sign the Joint Motion to Dismiss. Dr.
P 33 of 51
2D Negotiable Instruments – Atty. Mercado
Gueco argued that the joint motion was unnecessary since he has not yet
filed an answer. However, the bank insisted saying that it is a standard
operating procedure.
The Spouses Gueco initiated a civil action for damages after several
demands and meetings with the bank representatives. The MTC dismissed
the case but the RTC reversed the decision. It said that there was a
meeting of the minds as to the reduction of the debt but said agreement
did not include the signing of a joint motion to dismiss. Hence the car
should be returned to the Spouses Gueco immediately and the Bank may
deposit the Manager’s check. The court also awarded damages to the
Spouses Gueco.
The CA affirmed the decision
ISSUES:
1. W/N the signing of the Joint Motion to Dismiss is a condition sine
qua non of the compromise agreement
2. W/N the car should be returned without making any provision for
the issuance of a new manager’s check by the Spouses Gueco in
favor of the Bank in lieu of the original cashier’s check that already
became stale
HELD:
1. The signing of the Joint Motion to Dismiss is not a condition sine
qua non of the compromise agreement. It has been established
and resolved by the trial court that the parties had agreed to the
reduction of the loan through an oral compromise agreement made
on Aug. 28, 1995 and that the compromise agreement did not
include the condition of signing a Joint Motion to Dismiss. The
requirement of the Bank that Dr. Gueco sign a Joint Motion to
Dismiss only surfaced in Aug. 29, 1995 when he was to make
payment of the 150K. There is no need to reverse the ruling of the
trial court and the CA on this matter. However the award of
damages is deleted as fraud on the part of the Bank was not
proven by its insistence that Dr. Gueco sign the Joint Motion to
Dismiss.
2. It is not correct to say that the Bank was negligent in opting not to
deposit the check and should therefore suffer the loss occasioned
by the fact that the original check had become stale.
a. Stale check - a check which is not presented for payment
within a reasonable time after its issue. It is valueless and
therefore should not be paid. Under the NIL an instrument
not payable on demand should be presented for payment
on the day it falls due. An instrument payable on demand
should be presented within reasonable time after its issue.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
In the case of the bill of exchange presentment is sufficient
if made within a reasonable time after its issue.
b. Reasonable time – depends on the circumstances of each
case.
c. A check must be presented for payment within a
reasonable time after its issue. This is because of the
nature and theory behind the use of a check points to its
immediate use and payability.
d. In the case at bar the check involved is not an ordinary
check, but a manager’s check, similar to a cashier’s check,
which the manager of the bank draws upon the bank itself.
Its issue is equivalent to acceptance. If treated as a
promissory note, the drawer is the maker. Holder need not
prove presentment for payment or present the bill to the
drawee for acceptance. The check becomes the primary
obligation of the bank which issues it and constitutes its
written promise to pay upon demand.
e. Even if assuming that presentment is needed. Failure to
present for payment within a reasonable time will result to
the discharge of the drawer only to the extent of the
loss caused by the delay. Failure to present on time
does not wipe out all liability. The Gueco spouses nor the
bank upon whom the check was drawn did not suffer
damage or loss caused by the delay of presentment.
Hence the original obligation to pay the 150K has not been
erased.
f. Union Bank held on to the check and refused to encash it
because of the controversy surrounding the signing of the
joint motion to dismiss. There is no bad faith or negligence
in the position taken by the Bank and the Spouses Gueco
are ordered to pay 150K.
ANSALDO V. CA
177 SCRA 8
Sec. 74
FACTS:
Transoceanic Factors Corporation (TFC) issued 6 promissory notes signed
by its President A.S. Moreno in favor PCIB. The notes were made out in
various amounts totaling to 150K.
During the same span of time TFC extended two loans, one for the
petitioner Jose Ansaldo for the amount of 28,697.39 and another for Teofilo
Reyes for the amount of 26,000.00. The loans were evidenced by
negotiable promissory notes wherein Ansaldo and Reyes both (1) waived
“demand, presentment, protest and notice of protest and non-payment”
and (2) undertook in case of default the payment of damages.
P 34 of 51
2D Negotiable Instruments – Atty. Mercado
TFC only paid 78K of its total obligation to PCIB. It endorsed Ansaldo’s and
Reyes’ promissory notes to PCIB. Despite repeated demands made by
PCIB, TFC, Ansaldo and Reyes still failed to pay. PCIB now asks for the
enforcement of the notes.
The trial court and the CA ruled in favor of PCIB. Only Ansaldo is appealing
the judgment of the CA.
ISSUES:
1. W/N there was a valid assignment of credit by TFC to PCIB
2. W/N Sec. 74 of the NIL was violated by alleged failure of PCIB to
present the note for payment to Ansaldo
HELD:
1. There was a valid assignment of credit according to the provisions
of articles 1625, 1626 and 1627 of the civil code. Consent of the
debtor need not be secured for the credit to be assigned to a third
person. Notice is the only requirement of the law. Evidence shows
that Ansaldo received the required notice of assignment of credit. It
is of no consequence that the notice was given by PCIB and not the
assignor TFC. The assignee, PCIB, has a greater interest in
notifying the debtor than TFC. It is not necessary that the
assignment be evidenced by a public document. The public
document is only for the purpose of binding third persons. Ansaldo
and Reyes are not third persons.
2. Sec. 74 provides that “the instrument must be exhibited to the
person from whom payment is demanded, and when it is paid must
be delivered to the party paying it”
a. This is issue was never raised in either the CA or trial court
and cannot be raised first time on appeal.
b. If the exhibition was necessary to determine the
genuineness of the note, this has already been rendered
unnecessary not only by Ansaldo’s own omission to contest
the note but also from his admission of the authenticity of
the note implicit of his averments that he had made
substantial payments thereon (3,011.40 – which were
credited by the trial court to him)
c. Also Ansaldo had expressly waived “demand, presentment,
protest and notice of protest and non-payment” of the
note.
Judgment of CA affirmed.
PHILIPPINE NATIONAL BANK v. SEETO
91 Phil 757
Sec. 84 / 186
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
FACTS:
 Benito Seeto called Philippine National Bank (PNB) Surigao and
presented a check worth P5,000 dated at Cebu on March 10, 1948,
payable to cash or bearer and drawn by Gan Yek Kiao against
Philippine Bank of Communications (PBC) Cebu.
 Seeto made a general and unqualified indorsement of the check to
PNB. PNB Surigao accepted and paid Seeto P5,000.
 The check was made to PNB Cebu on March 20 and presented to
PBC for payment on April 9. The check was dishonored for
insufficient funds.
 Check was returned to PNB Surigao and PNB demanded immediate
refund from Seeto.
 Seeto asked PNB to delay the filing of the suit so he could inquire
as to why the check was dishonored. Thereafter, Seeto refused to
refund saying that the drawer had sufficient funds at the time the
check was issued and that PNB delayed in forwarding the check to
PBC until the funds of Gan Yek Kiao were exhausted. Had it not
delayed, it would have been paid.
 Trial court ruled in favor of PNB saying that Seeto undertook to
refund in case of dishonor and that this assurance was what
motivated PNB (testified by witnesses) to pay the check and that
there was no unreasonable delay in forwarding the check for
payment
 CA reversed. There is delay, parol evidence is incompetent and an
indorser is merely a surety or guarantor
ISSUE:
 Whether or not Seeto is liable
HELD:
 No, Seeto is not liable.
 Sections 143 and 144 of the Negotiable Intstruments Law are not
applicable because these provisions refer to presentation of bills
of exchange and not to checks. In checks, presentment for
acceptance is not required.
 Section 84 s the applicable provision. Section 84 says that when
an instrument is dishonored an immediate right of recourse is
given to the holder against the persons secondarily liable such as
an indorser
 Applicability of Section 84 is subject to Section 186 which provides
that presentment must be made within a reasonable time after
issuen otherwise the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay.
P 35 of 51
2D Negotiable Instruments – Atty. Mercado
  The silence of Section 186 1 as to the indorser is due to the fact
that his discharge is already expressly covered by Section 84, the
indorser being a person secondarily liable on the instrument.
 The reason for the difference between the liability of the indorser
and that of the drawer is not probably or necessarily prejudiced
thereby, while an indorser is actually or by legally presumed to be
prejudiced. (US Case: only when there is proof that the indorser
knew that when he cashed the check that there would be no funds
in the bank to meet it can the rule be avoided)
 The fact that checks of the drawer subsequent to March 13, 1948,
drawn against the same bank and cashed at the same Surigao
agency, were not dishonored positively shows that the drawer had
enough funds when he issued the check in question, and that had
it not been for the unreasonable delay in its presentation for
payment, PNB would have been able to receive payment.
 We find no reason for disturbing the conclusion of the CA that
there was unreasonable delay in the presentation of the check for
payment at the drawee bank, and that as a consequence thereof,
the indorser (Seeto) was thereby discharged.
 Negotiable instruments – character of negotiability  must be
passed on with promptness
Even if there were assurances made by Seeto to refund the check, the
assurances are the ordinary obligations of an indorser which are
considered discharged by the unreasonable delay in presentation of the
check for payment
1
Sec. 186.—Within what time a check must be presented.—A check must
be presented for payment within a reasonable time after issue or the
drawer will be discharged from liability thereon to the extent of the loss
caused by the delay.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
ASIA BANKING CORPORATION v. JAVIER
44 Phil 777
Sec. 89
FACTS:
 On May 10, 1920, Salvador Chaves drew a check on PNB worth
P11,000 in favor of La Insular.
 Limited partners of La Insular indorsed the check and then
deposited by Chaves in his current account with Asia Banking
Corporation on July 14.
 On June 25, Chaves drew another check worth P18,000++ on PNB
in favor of La Insular; again indorsed by limited partners and again
deposited by Chaves in Asia Banking on July 6.
 Amounts in both checks were used by Chaves after deposit by
drawing checks against Asia Banking.
 Checks were presented by Asia Banking to PNB for payment but
PNB refused to pay (no funds).
 Lower court ruled in favor of Asia Banking.
ISSUE:
 Whether or nor liability of Javier as indorser was extinguished
HELD:
 Yes, liability of Javier was extinguished.
 We may say in connection with this assignment of error that the
liability of Javier never arose.
 According to Section 89, indorsers are not liable unless they are
notified that the document was dishonored.
 It will be incumbent upon plaintiff, who seeks to enforce
defendant’s liability upon the checks as indorser, to establish said
liability by proving that notice was given to Javier within the time,
and in the manner, required by the law that the checks in question
had been dishonored.
There is no proof in the record tending to show that plaintiff gave any
notice whatsoever to the defendant that the checks in question had been
dishonored, and therefore it had not established a cause of action.
P 36 of 51
2D Negotiable Instruments – Atty. Mercado
FIRESTONE TIRE & RUBBER CO V. CA AND LUZON DEVELOPMENT
BANK.
353 SCRA 601
Sec. 89
FACTS:
Forca-Arca Enterprises Co maintains and account with Luzon Development
Bank (LDB). They are given special privileges like a special savings account
where withdrawal of funds is made through special withdrawal slips give by
LDB. Forca-Arca bought products from Firestone and paid Php 4.9M thru the
withdrawals slips which was honored. Relying on this transaction, Forca-
Arca received around Php 2.08M worth of products using the withdrawals
slips. Firestone deposited the withdrawal slips to Citibank which presented
it for payment from LDB. LDB did not honor the withdrawal slips due to lack
of funds. LDB did not inform Firestone of its dishonor until 6 months from
the date of Forca-Arca’s purchase. Firestone sues LDB for damages due to
giving the withdrawal slips the treatment as if it were checks and for failure
to inform them within reasonable time of its dishonor. Firestone lost in the
RTC and CA.
ISSUE:
Whether the belated notice of dishonor makes LDB liable for damages.
HELD/RATIO:
No. The withdrawal slip being a non-negotiable instrument, no obligation to
give notice of dishonor arises. Firestone is negligent for assuming that the
withdrawal slips were ‘good’ when it is clearly marked ‘non-negotiable’.
FAR EAST REALTY INVESTMENT V. CA
166 SCRA 256
Sec. 102
FACTS:
On September 13, 1960, Dy Hian Tat, Siy Chee and Gaw Sun An
(RESPONDENTS) approached Far East Realty Investment (FERI) in their
Manila branch for an accommodation loan worth Php 4,500. The terms of
the loan were that respondent would be solidarily laible, interest of 14%
per annum and payable in one month. The respondents delivered a check
to FERI drawn against China Banking Corp (CBC) for Php 4,500, signed by
all of them at the back and dated September 13, 1960. Respondents
assured CBC that they would pay the loan in one month or that FERI could
present the check to CBC, which CBC will honor. FERI presented the check
to CBC for payment only on March 5, 1964 and was dishonored because
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
the account had been closed. FERI demanded payment from the
respondents and was refused.
Gaw Sun An raised the defense that he was merely an agent of Victory
Hardware (VH). Or even if he was considered an indorser, he was
discharged by FERI’s delay in presentment for payment.
Dy Hian Tat raised the defense that he never approached FERI; that his
signature appeared on the check because it was delivered to him by Sin
Chin Juat Grocery and not FERI. He says according to Gaw Sun An, FERI
being an accommodation party of VH because the check was delivered to
Asian Surety and Insurance Co for VH’s indebtedness, FERI is not a holder
for value and cannot collect from Dy being an indorser. He also raised the
same defense of delay in presentment for payment.
FERI argues that presentment may be dispensed with if it will be useless,
as when drawer has insufficient funds. Thus drawer will be liable without
the check having been presented to the bank for payment.
ISSUE:
Whether presentment for payment and notice of dishonor was made within
reasonable time.
HELD/RATIO:
Respondents are not liable. Presentment must be paid on the date it falls
due, or within reasonable time after issue if it is payable on demand.
"Reasonable time" has been defined as so much time as is necessary
under the circumstances for a reasonable prudent and diligent man to do,
conveniently, what the contract or duty requires should be done, having a
regard for the rights, and possibility of loss, if any, to the other party.
In the instant case, the check in question was issued on September 13,
1960, but was presented to the drawee bank only on March 5, 1964, and
dishonored on the same date. After dishonor by the drawee bank, a formal
notice of dishonor was made by the petitioner through a letter dated April
27, 1968. Under these circumstances, the petitioner undoubtedly failed to
exercise prudence and diligence on what he ought to do al. required by
law. The petitioner likewise failed to show any justification for the
unreasonable delay.
LAO V. CA
274 SCRA 572
Sec. 102
FACTS:
Lina Lim Lao (hereinafter Lim) was a junior officer of Premiere Investment
House and as such is authorized to sign checks for and on behalf of the
corporation. Father Artelijo Palijo (Society of Divine Word Treasurer)
invested donations in Premiere totaling Php 514,484.04. He received 3
checks as payment for interest; 2 of them for Php 150,000 and the other
P 37 of 51
2D Negotiable Instruments – Atty. Mercado
for Php 26,010.73. The checks were signed by Lim and Teodulo Asprec
(Head of Operations). The checks were dishonored. Palijo went to the
corporation president and was paid Php 5,000 but no other payments were
made. Premiere was subsequently placed under receivership.
Palijo filed three cases of BP22 violation against Lim and Asprec (1 case for
each check that bounced). Asprec could not be found and Lim was found
guilty for 2 counts corresponding to the 2 checks worth Php 150,000.
Requisites for BP22
1. person makes or draws and issues any check
2. the check is to apply on account or for value
3. the person knows at the time of issue he does not have
sufficient funds for full payment upon presentation
4. checks is subsequently dishonored for lack of funds, or would
have been dishonored for the same reason if the drawer,
without any valid reason, ordered the bank to stop payment
Lim raised the defense of lack of knowledge of insufficiency of funds. In the
normal course of business, she signs the check in blank and Asprec takes
care of filling up the amount and payee. Her job took her mostly out on the
field and gives strength to her defense of lack of knowledge.
Another defense she raises is lack of adequate notice of dishonor. Lim was
not informed that the checked bounced.
ISSUE:
Whether she can be convicted for violating BP 22.
Whether notice of dishonor is required.
HELD/RATIO:
Lim is acquitted. Lack of knowledge of insufficiency of funds and lack of
notice of dishonor are valid defenses. Without notice of dishonor, there can
be no prima facie evidence of knowledge of insufficiency of funds. BP22
provides for a presumption that the drawer had knowledge of the lack of
funds. However, BP22 states that this presumption only applies if after
receiving the notice of dishonor, there is no payment after 5 banking day.
Without the notice, this presumption will not apply.
Sec 102 of NIL states that notice must be given as soon as the instrument
is dishonored and, unless delay is excused as hereinafter provided, must
be given within the time fixed by this act.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
CITY TRUST BANK
196 SCRA 553
Sec. 126
FACTS:
On Dec. 10. 1980 Samara purchased from Citytrust Bank a Bank Draft
worth 40,000$usd , the payee being Thai International airways and the
drawee bank in the US being Marine Midland. On Dec. 23, 1980, Samara
executed a stop-payment order of the bank draft instructing Citytrust to
inform Marine Midland about the order through Teletex. Citytrust
transmitted the message to MM the next day and followed it up with cable,
which MM acknowledged to have received on Jan 14, 1981 stating that it
has not paid the bank draft. Citytrust credited Samara’s account due to
the non-payment. But after 7 months, Citytrust re-debited S’s account
after discovering that MM debited the account of Citytrust.
TC: MM is bound by its letter that it did not pay the bank draft and did not
give credence to defense of Citytrust that MM debited Citytrust’s account
before the stop-payment order was made by Samara
ISSUE:
What are the liabilities of citytrust and MM
RULING:
Citytrust form which Samara purchased the bank draft, was the drawer of
the draft throught which it ordered MM, the drawee bank, to pay the
amount of 40k USD in facor of Thai International, payee. The drawee bank
acting as a “payor” bank is solely liable for acts not done in accordance
with the instructions of the drawer bank or the purchaser of the draft. The
drawee bank has the burden of proving that id did not violate. Meanwhile,
the drawer, if sued by the purchaser of the draft is liable for the act of
debiting the customer’s account despite an instruction to stop payment.
The drawer has the duty to prove that he complied with the order to inform
the drawee. MM was the primary cause of the loss to Samara and is held
primarily liable.
**** The joint and several obligation to pay the private respondent and the
right of the petitioner to be reimbursed are retained. But the decision is
modified in so far as the amount of liability is concerned:
a. Citytrust- 40usd plus 12% compounded interest per annum
plus damages
b. MM- 40usd plus 6% simple interest plus attorney’s fees
- because the previous decision was appealed only by MM, the
modified or reduced amount of liability inured only to its benefit
- the Court will not allow a situation where a codefendant who is
primarily liable would be charged for a lesser amount than its co-
defendant. MM is the source of injury and cant be unjustly
enriched
P 38 of 51
2D Negotiable Instruments – Atty. Mercado
 THE PHILIPPINE BANK OF COMMERCE V. ARUEGO
102 SCRA 530
Sec. 19-20 / 126 / 143

FACTS:
 The PBC filed a complaint against Aruego based on 22 causes of
action resulting from 22 different transactions for the sum of
P35,000 plus interest.
 Aruego published a periodical entitled “ WORLD CURRENT EVENTS”
and to facilitate the printing, he obtained a credit accommodation
from the plaintiff. Thus, for every printing , ENCAL PRESS AND
PHOTO-ENGRAVING, collected the cost of printing by drawing a
draft against the plaintiff, which were sent to defendant for
acceptance.
 Aruego also executed a trust receipt wherein he held in trust for
plaintiff the periodicals and to sell them and use the proceeds to
pay off his obligation to the bank.
 The defendant argues that:
o He signed the bills in a representative capacity as the
President of the Philippine Education Foundation Company,
publisher of the periodical.
o He merely signed as an accommodation party and as such,
should be made liable only after a showing that the drawer
is incapable of paying
o The drafts are not bills of exchange, rather they are
pieces of evidence of indebtedness.

ISSUE:

W/N Aruego is liable on the said drafts.

HELD: Yes

 A party who signs a bill of exchange as an agent, but failed to

disclose his principal becomes personally liable for the draft he
accepted. Nowhere did the defendant disclose that he was signing
as representative of the Philippine Education Company. He merely
signed as follows. “Jose Aruego(acceptor) Sgd Jose Aruego”
 In lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter.
 Liability of an acceptor or drawee is primary; A party, a lawyer,
who intends to be secondarily liable should not have signed as an
acceptor drawee.
 A commercial paper which conforms under the definition of
a bill of exchange is a bill of exchange. The nature of the
acceptance is important only in the determination of the
liability of the parties , but not to determine whether a
commercial paper is a bill of exchange or not.
P 39 of 51
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim 2D Negotiable Instruments – Atty. Mercado
 BANK OF AMERICA V. CA
228 SCRA 357
Letters of Credit

FACTS:

Bank of America received by registered maul an Irrevocable Letter of

Credit purportedly issued by Bank of Ayudha in Thailand for the account of
General Chemicals (Thailand) for $2,782,000 to cover the sale of plastic
ropes and agricultural files.

Bank of America acted as the advising bank to the beneficiary Inter-Resin

Industrial Corporation.

Bank of America notified Inter-resin of the letter of credit. Inter-resin then

sent its lawyer to confirm the letter of credit. A bank official said that there
was no need to confirm because the letter of credit would not have been
transmitted if it was not genuine.

Inter-resin sought to make partial availment of the letter of credit for the
shipment of goods worth $1,320,600. Bank of America issued a cashier’s
check in pesos and subsequently asked for reimbursement from the Bank
of Ayudha.

Inter-resin again wanted to make a second availment of the letter of credit.

Bank of America received a telex from the Bank of Ayudha declaring the
letter of credit as fraudulent. The letter of credit had been issued for the
account of Siam Union Metal in favor of Electrolutic Zinc Co. and not for the
account of General Chemicals in favor of Inter-resin. Hence, Bank of
America stopped processing Inter-resin’s request.

Bank of America sought the help of its branch in Thailand and the NBI to
determine the authenticity of the letter of credit.

It was found that the vans exported by Inter-resin did not contain plastic
ropes but plastic strips and waste materials.

Bank of America files criminal charges against the officials of Inter-resin for
estafa which was dismissed for insufficiency of evidence. It is now seeking
recovery of the payment it made to Inter-resin. Inter-resin on the other
hand is claiming that it is entitled to be paid for the remaining balance of
the letter of credit covering the second shipment of goods. It is arguing
that Bank of America made assurances that enticed it to send merchandise
to Thailand and that Bank of America was at fault for not verifying the
authenticity of the letter of credit.

The trial court and the CA ruled in favor of Inter-resin and held the Bank of
America as liable for payment of the balance. Hence, this petition.

P 40 of 51
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim 2D Negotiable Instruments – Atty. Mercado
ISSUE:
1. Whether or not Bank of America warranted the genuineness and
authenticity of the letter of credit
2. Whether or not it has acted merely as an advising bank of a
confirming bank
3. Whether or not Bank of America following the dishonor of the letter
of credit by the Bank of Ayudha may recover from Inter-resin
HELD:
Read the annotations on letters of credit. The court explained the structure
and relationship of parties in letters of credit.
1. The Bank of America is merely an advising bank and not a
confirming bank as proved by the letter of credit itself, the letter of
advice, the bank’s request for payment of the advising fee and the
admission of Inter-resin that it has paid the same. The letter of
credit is an engagement of the issuing bank and not the advising
bank. In this case the draft to be drawn was under the name of
General Chemicals to be paid by the Bank of Ayudha and not the
Bank of America.
a. Also the Bank of America’s letter of advice to Inter-resin
said that “the enclosure is solely an advise of credit
opened by the abovementioned correspondent and
conveys no engagement by us.” The written reservation
limits the obligation of the Bank of America merely as an
advising bank.
b. As an advising bank the Bank of America did not incur any
obligation other than notifying Inter-resin of the letter or
credit. The statement of the bank employee did not
effectively novate the letter of credit or the letter of advise
and hold the bank wholly liable
2. Inter-resin cannot argue that the Bank of America induced it to
send merchandise to Thailand. It is strange if it did not enter into a
contract with General Chemicals prior to the issuance of the letter
of credit. A perfected contract precedes the issuance of a letter of
credit
3. Art. 18 of the UCP: Banks assume no liability or responsibility for
the consequences arising out of the delay and or loss of any
messages, letters or documents, or for delay, mutilation or other
errors arising in the transmission of any telecommunication
4. The Bank of America as advising Bank is bound only to check the
apparent authenticity of the letter of credit.
a. Apparent – unaided senses that is not or may not be borne
out by more rigorous examination or greater knowledge
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
5. The Bank of America may also recover what it has paid to Inter-
resin. What happened was a discounting arrangement, where Bank
of America acted independently as a negotiating bank. Inter-resin
did not have to present the documents to the Bank of Ayudha in
Thailand to recover payment.
a. As negotiating bank, Bank of America has a right of
recourse against the issuing bank and until reimbursement
Inter-resin has contingent liability
b. Bank of Ayudha in turn can claim reimbursement from
General Chemicals. But since the Bank of Ayudha disowned
the letter of credit, Bank of America may now turn to Inter-
resin for payment
FEATI V. CA
196 SCRA 576
Letters of Credit
FACTS:
Villaluz and Christiansen entered into an agreement to sell lauan logs.
Christiansen issued a purchase order for the logs in favor of Hanmi Trade
and Development Corp. Christiansen acted as the broker of the sale.
Hanmi instructed the Security Pacific and National Bank to issue an
irrevocable letter of credit for $54,000 available at sight in favor of Villaluz.
The letter of credit was sent to Feati Bank (now Citytrust) with the
instruction that it “forward the enclosed letter of credit to the beneficiary.”
The letter of credit provided that the draft be drawn by Villlaluz against the
Security Pacific and National Bank and that it be accompanied by certain
documents including the certification of Christiansen stating that the logs
have been approved prior to shipment. Also incorporated by reference in
the letter of credit is the Uniform Customs and Practice for Documentary
Credits.
The logs were then loaded on the vessel Zenlin Glory and were inspected
and certified by the representatives from the Bureau of Customs and
Bureau of Forestry. The logs were also approved by the Chief Mate of the
vessel. Christiansen, however, refused to issue his certification. As a
consequence, Feati refused to advance payment on the letter of credit.
Although it had allowed Villaluz to obtain a loan for P45,000 in order to
cover the cost of shipment.
Villauz appealed to the Central Bank and the Central Bank issued a
memorandum stating that the certification of the Bureau of Forestry is
sufficient to approve the shipment of the logs.
P 41 of 51
2D Negotiable Instruments – Atty. Mercado

The logs arrived at Korea and received by Hanmi and were later on sold to
Taitsung Lumber Company.
The demand of Villauz for payment of the draft were unheeded by Feati
because of the absence of the certification of Christiansen. Villaluz filed a
petition for mandamus and specific performance against Christiansen and
the Feati Bank.
The trial court and the Ca rule din favor of Villaluz. Hence this petition.
ISSUE:
1. Whether or not a correspondent bank is to be held liable under the
letter of credit despite the non-compliance of the beneficiary with
the terms thereof
2. Whether or not FEATI is a notifying of confirming bank
HELD:
1. It is a settled rule that the documents tendered by the beneficiary
must strictly conform to the terms of the letter of credit. The
tender must include all the documents required by the letter.
a. A correspondent bank bears the risk of non-reimbursement
if it decides to pay the beneficiary despite the non-
compliance with the terms of the letter of credit
b. The rule is recognized in the United States and has been
adopted by the Philippines
2. The letter of credit also incorporates the Uniform Customs and
Practice for Documentary Credit (UCP) as such the said rules are
applicable in the relations between the parties. Also, even if there
was no incorporation in the letter of credit, Art. 2 of the Code of
Commerce states that in the absence of any particular provision in
the Code of Commerce, commercial transactions shall be governed
by the customs and usages generally observed. Hence, the
applicability of the UCP particularly articles 3, 7 and 8.
3. The mentioned provisions state that the bank may only negotiate,
accept or pay, if the documents tendered to it are on their face in
accordance with the terms and conditions of the documentary
credit. The absence of any document required justifies the refusal
by the correspondent bank to negotiate, accept or pay the
beneficiary. It is not its obligation to look beyond the documents. It
merely has to rely on the completeness of the documents tendered
by the beneficiary.
4. FEATI is merely a notifying bank. The credit is irrevocable but not
confirmed and FEATI is not bound to pay without presenting the
documents required by the letter of credit.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
a. Irrevocable credit – means that the issuing bank may not
without the consent of the beneficiary and the applicant
revoke his undertaking under the letter of credit
b. Confirmed Credit – obligation assumed by the
correspondent bank. Correspondent bank gives an absolute
assurance to the beneficiary that it will undertake the
issuing bank’s obligation as its own according to the terms
and conditions of the credit.
5. And even if FEATI be considered as a negotiating or a confirming
bank, it cannot be forced to pay the amount under the letter
because there was a failure on the part of Villaluz to comply with
the terms of the letter of credit.
KENG HUA PAPER PRODUCTS V. CA
286 SCRA 257
Letters of Credit
FACTS:
Keng Hua Paper Products bought 50 tons waste paper from Ho Kee
Waste Paper in Hong Kong as manifested by a letter of credit issued by
Equitable Bank. Partial shipment was allowed and that the remaining
balance of the shipment was only 10 more tons.
Sea Land Service received at its Hong Kong terminal a sealed container
with the waste paper for shipment to Keng Hua Paper Products. The
shipment was discharged at the port in Manila. Notices were then sent
to Keng Hua but the latter failed to discharge the shipment and the
waste paper remained inside the container of Sea Land Service for 481
days. During the 481 days, demurrage charges accrued. Sea Land
Service is now asking for payment for the demurrage from Keng Hua.
Keng Hua on the other hand alleges that it only agreed for the
shipment of the remaining balance of 10 tons of waste paper and that
what Sea Land Service was asking Keng Hua to accept was 20 tons of
waste paper and that Keng Hua informed Sea Land that the shipment
was wrong. Keng Hua also argued that Sea Land should collect
payment of the demurrage from Ho Kee Waste Paper, since the later
was the one that hired Sea Land.
ISSUE:
1. Whether or not Keng Hua accepted the Bill of Lading and is therefore
liable for the payment of the demurrage charges.
HELD:
1. Keng Hua is liable for payment of the demurrage
P 42 of 51
2D Negotiable Instruments – Atty. Mercado
 2. Bill of lading has two functions:
a. Receipt for the goods shipped Judgment of the trial court and the CA are affirmed with only the payment
b. Contract by which three parties, namely the shipper, the of interest modified. Keng Hua is liable for payment of the demurrage
carrier and the consignee undertake specific charges.
responsibilities and assume the stipulated obligations
c. The acceptance of the bill of lading by the shipper and the
consignee, with ful knowledge of its contents, gives rise to
the presumption that the same was a perfected and
binding contract
3. Both lower courts held that the bill of lading was a valid and
perfected contract between Ho Kee and Keng Hua and Sea Land
and that Keng Hua and Sea Land are liable to pay the demurrage
charges as provided for in the contract of carriage in the bill of
lading.
4. The SC agrees that Keng Hua accepted the bill of lading and failed
to object or dissent from any term or stipulation in said bill of
lading. It was only after six months that it sent a letter to Sea Land
that it is refusing to accept the shipment. Also the letter only
stated that it is refusing to pick up the cargo because of the non-
compliance of the shipper with the terms and conditions of the
letter of credit which state that the shipment should only be for 10
tons, it was not an actual rejection of the bill of lading. Hence it is
liable to pay for the demurrage charges.

Bill of Lading separate from other letter credit arrangements

Three distinct and independent contracts in a letter of credit:

1. the contract of sale between the buyer and the seller
2. the contract of the buyer with the issuing bank
3. letter of credit proper in which the bank promises to pay the seller
pursuant to the terms and conditions stated therein.

A transaction for the purchase of goods may also require apart from the
letter of credit a contract of transportation. The contract of transportation
or carriage is stated in the bill of lading. It must be treated independently
of the contract of sale and the contract for the issuance of the letter of
credit. A discrepancy in the amount of goods in the invoice, in the contract
of sale and in the letter of credit will not affect the and enforceability of
the contract of carriage in the bill of lading.

The banks cannot be expected to look beyond the documents presented to

it pursuant to a letter of credit. The carrier also cannot be expected to go
beyond the representation of the shipper in the bill of lading and verify the
accuracy vis-à-vis the commercial invoice and the letter of credit.

Discrepancy between the amount of goods indicated in the invoice and the
amount in the bill of lading cannot negate Keng Hua’s liability arising from
the contract of carriage. Keng Hua’s remedy for overshipment lies against
Ho Kee and not Sea Land.
P 43 of 51
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim 2D Negotiable Instruments – Atty. Mercado
INSULAR BANK V. IAC
167 SCRA 450
Letters of Credit
FACTS:
Respondent spouses obtained 2 loans from from Philam Insurance total
amount of P6000,000 to finance construction of their residential house at
Mandaue. The loans were to be liquidated in equal amortizations over a
period of 5 years from March 1972 to March 1982
To secure payment, Philam Life required that amortizations be guaranteed
by an irrevocable standby letter of credit of a commercial bank. Thus, the
mendozas contracted with pet. Insular bank (IBAA) for the issuance of 2
irrevocable standby letters of Credit (L/C). 1 st was for 500k 2 nd was for
100k. the 2 L/Cs, were in turn, secured by an REM on the houses of the
respondent spouses
Mendozas executed a promissory note in favor of IBAA
Both Notes authorized IBAA to sell their properties or securities to be
applied as payments on their obligations
Mendozas failed to pay Philamlife due on September 1979, Philamlife again
informed IBAA that it eas declaring the entire balance outstanding on both
loans, including damages, “immediately due and payable. Philamlife
wanted to recover P274k while IBAA said they should pay only the
remaining obligation under the LCs for 30k only
REM secured was extrajudicially foreclosed in favor of IBAA
ISSUE:
1. Whether or not IBAA has liability to Phlam under the LCs and
whether it is direct and primary and cannot be reduced by direct
payments made by Mendozas to Philam
RULING:
IBAA has primary obligation under the LCs. The intention of the parties
must prevail. The LCs secure the payment of any obligation of the
Mendozas to Philam life including all interest, etc provided it does not
exceed 600k. While they are a security arrangement, they cant be
converted to a contract of guaranty for it would be ultra vires. They are an
absolute undertaking for the money advanced. They are separate and
independent contracts. Payments by mendozas to philam are due to their
own prestation under the loan agreement
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
Omission by Philam to draw the required drafts on the standby LCs can be
explained by the fact that it was the Mendozas who prepared, predated
and pre-accepted them
TRANSFIELD V. LUZON
443 SCRA 307
Letters of Credit
FACTS:
Transfield and Luzon LHC entered into a turnkey contract. Trans, undertook
to construct on a turnkey basis , a 70 megawatt hydro-electric power
station at the Bakun River in the provinces of Benguet. Trans was given
sole responsibility for the design
Contract provides that 1)target date of completion is june 2000 or such
later date as maybe agreed upon 2) Trans can ask for extensions of time
for example due to force majeure or delay by LHC. To secure the
performans of petitioner’s obligation, it opened in favor of LHC 2 letters of
credit on the local branch of ANZ bank and with Security bank corporation.
In the course of the project, LHC sought many extensions. The banks sent
letters to pet. That they will pay if and when LHC calls on them. LHC
asserted that the additional extension would not be warranted and that
pet. Is declared in default and asked that payment of 75k usd to be paid for
each day of delay from june 28m 2000
Pet sought injunction against respondent LHC and the banks from paying
on or in any manner disposing of the securities in favor of LHC
LHC argues that the Securities are independent of the main contract
between them as shown of the face of the letters of credit.
ISSUE:
1. Whether or not the “independent principle of LCs” apply as well as
the “fraud exception rule” and if it can be invoked by LHC
RULING:
Yes it applies.
Where the credit is irrevocable as in this case, there is a definite
undertaking by the issuing bank to pay the beneficiary provided that the
stipulated docs are presented. To say that the independence principle may
only be invoked by the banks and not the beneficiary would make the
principle nugatory. If, as argued by pet that there should be a compromise
between LHC and Pet first would concert the LC into a guarantee.
P 44 of 51
2D Negotiable Instruments – Atty. Mercado

SUBISSUE:
Whether trans can file for injunction against respondents
No. it failed to show the clear and unmistakable right to restrain LHC’s call
on the securities which would justify the injunction. There was an express
stipulation in favor of LHC to call upon the securities
VINTOLA v. INSULAR BANK
159 SCRA 140
Trust Receipts
FACTS:
Spouses Tirzo Vintola and Loreta Dy Vintola are the proprietors of Dax Kin
International (Dax), a company engaged in the manufacture of raw
seashells into finished products.
On August 20, 1975, the Vintolas applied for and were granted, a
commercial letter of credit with the Insular Bank of Asia and America
(IBAA), Cebu City. The letter of credit authorized the bank to negotiate for
their account, drafts drawn in favor of one of their suppliers, Efren Alani, on
Dax in the amount of P35, 000 to represent a shipment of a variety of puka
and olive shells. The Vintolas promised and agreed to pay the bank at
maturity said amount. To secure the release of the raw seashells, on the
same day, the Vintolas executed in favor of IBAA a trust receipt agreement,
which was to mature on October 19, 1975.
Three months after IBAA demanded the payment of the P35, 000. the
Vintoals offered to return the raw seashells to IBAA instead because they
were not able to dispose them. IBAA refused to accept the shells. IBAA
instituted the present action against the spouses for their failure to pay
their obligation for the crime of estafa.
ISSUE:
Whether the Vintolas still owed IBAA even though the goods held in trust
were not sold---YES!
HELD:
Vintolas are still liable under the Letter of Credit arrangement!
A letter of credit-trust receipt arrangement is endowed with its own distinct
features and characteristics. Under the set-up, a bank extends a loan
covered by the Letter of Credit, with the trust receipt as a security for the
loan. The transaction involves a loan feature represented by the letter of
credit, and a security feature, which is in the covering trust receipt.
A trust receipt is a security agreement, pursuant to which a bank acquired
a “security interest” in the goods. It secures an indebtedness, and there
can be no such thing as security interest that secures no obligation. It is
intended to aid in financing importers and retain dealers who do not have
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
sufficient finds and resources to finance the importation or purchase of
merchandise and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased.
The goods purchased by Vintolas through IBAA financing remains their own
property and they hold it at their own risk. The trust receipt arrangement
did not convert the IBAA into an investor; the latter remained a lender and
the creditor.
Since IBAA is not the factual owner of the goods, the Vintolas cannot
justifiably claim that because they have surrendered the goods to IBAA,
and subsequently deposited them in custody of the court, they are
absolutely relieved of any liability under the Letter of Credit.
PRUDENTIAL BANK vs. IAC
216 SCRA 257
Trust Receipts
FACTS:
Philippine Rayon Mills (Rayon) entered into a contract with Nissho Co. of
Japan for the importation of textile machineries under a five0year deferred
payment plan. To effect payment, Philippine Rayon applied for a
commercial letter of credit with the Prudential Bank in favor of Nissho.
Drafts were drawn by Nissho, which were all paid by Prudential through its
correspondent bank in Japan, Bank of Tokyo. Two of the drafts were
accepted by defendant through its president, Anacleto Chi.
Upon arrival of the machines, prudential indorsed the shipping documents
to defendants. To enable Rayon to take delivery of the machineries, it
executed a trust receipt, which was signed by Anacleto in his capacity as
president of the company. At the back of the trust receipt is a printed form
to be accomplished by two sureties who were to be jointly and severally
liable to Prudential Bank.
In 1969, Rayon ceased business operation, five years later, the trust
receipt remained unpaid. Thus, Prudential filed the present suit impleading
Rayon and Anacleto. Both claim that the action has prescribed.
ISSUES:
Whether Anacleto Chi is solidarily liable under the trust receipt--NO
Whether Rayon is liable on the basis of the trust receipt--YES
HELD:
On the issue of acceptance, Rayon contends that acceptance is necessary
in signifying the drawee’s assent to the order of the drawer. The court held
that acceptance is not necessary. A different conclusion would violate the
principle upon which commercial letters of credit are founded because in
such a case, Prudential would be placed at the mercy of Rayon.
P 45 of 51
2D Negotiable Instruments – Atty. Mercado
The signature of Chi in the dorsal portion of the trust receipt does not bind
him solidarily with Rayon. At most, Chi is merely a guarantor.
The person signing the trust receipt for the corporation is not solidarily
liable with the entrustee-corporation for the civil liability arising from the
criminal offense (in this case, violation of section 13 of PD 115 – failure of
an entrustee to turn over the proceeds of the sale of goods). He may,
however, be personally liable if he bound himself to pay the debt of the
corporation under a separate contract of surety or guaranty.
Furthermore, any doubt as to the true intent of the solidary guarantee
clause should be resolved against Prudential. The trust receipt together
with the questioned solidary guaranty clause is on a form drafted and
prepared solely by Prudential. Chi’s participation therein is limited to the
affixing of his signature thereon. It is, therefore a contract of adhesion, as
such it must be strictly construed against the party responsible for its
preparation.
Chi’s responsibility is limited to the principal obligation in the trust receipt
plus all the accessories thereof including judicial costs; with respect to the
latter, he shall only be liable for those costs incurred after being judicially
required to pay. The attorney’s fees to be paid by Chi cannot be the same
as that to be paid by Rayon since it is only the trust receipt that is covered
by the guaranty and not the full extent of the latter’s liability.
SUMCAD V. PROVINCE OF SAMAR
100 PHIL 72
Sec. 132
FACTS:
May 1942, while the province of Samar was still occupied by the Japanese
military forces, a check was issued by said province to Paulino Santos (then
the postmaster of Borongan) for the sum of P25,000, drawn against the
Philippine National Bank (PNB), Cebu. The payee negotiated the check with
James McGuire, an American citizen and resident of Borongan. After the
liberation in 1946, McGuire presented the check to the municipal treasurer
of Borongan for payment, but the latter (who merely noted it) was not able
or did not choose to pay the same.
McGuire wrote letter to the Bureau of Posts seeking payment, these letters
were referred by the Director of the Bureau to the PNB.
On April 25, 1950, PNB requested the Bureau to furnish it with photostatic
copies of the check which were duly received by the bank on May 12. As of
this date, the province of Samar still had a deposit of P84, 287.47 in the
PNB. On May 14, PNB request McGuire to present the check to the
provincial treasurer and the provincial auditor for the certification. On Aug
22, McGuire again requested the Buresau of Posts to expedite compliance
with the requirement of the PNB so as to permit the encashment of the
check. Before the check could be certified, the province of Samar on Sept
4, 1951 withdrew the amount of P83, 504.07 leaving a balance of P743.43.
McGuire transferred his rights to the check to the present plaintiffs
(Sumacad). Sumacad filed the present collection case. Trial Court held PNB
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
and province of Samar solidarily liable. Only PNB appealed contending that
it could not pay the check because it was never presented to it with the
necessary certification and that it is the province of Samar, as the drawee,
that is primarily liable.
ISSUES:
Whether PNB is primarily liable—NO! PNB is only susidiarily liable; province
of Samar is primarily liable
Whether there was acceptance by PNB---YES! There was implied
acceptance.
HELD:
An implied acceptance of the check by PNB was created in view of the fact
that upon its own request, it was furnished with the photostatic copies of
the check and it even required McGuire to present the check to the
provincial treasurer and auditor for certification. PNB voluntarily assumed
the obligation of holding so much of the deposit of the province of Samar
as would be sufficient to cover the amount of the check, or before allowing
the withdrawal that exhausted said deposit, of making the necessary
inquiry on the matter. Its actions amounted to implied acceptance.
ALLIED BANK V. CA
494 SCRA 467
Sec. 152
FACTS:
Allied Bank purchased an export bill from GGS. The bill was drawn form a
letter of credit covering men’s Valvoline training suits in transit to West
Germany. The bill was issued by Chekiang First Bank, Hong Kong. In short,
GGS discounted the bill to Allied Bank instead of directly claiming payment
from Chekiang under the letter of credit. Allied Bank paid the peso
equivalent of the bill amounting to P151,474.52. GGS acknowleged receipt
of the amount in a letter.
Nari Gidwani and Alarcon International represented by Hans-Joachim
Schoeler executed Letters of Guaranty in favor of Allied Bank in case the
bill should be dishonored or retired. The Spouses De Villa and Nari Gadwani
executed a Continuing Gauaranty or Comprehensive Surety, guaranteeing
payment of any credit accommodation that Allied may extend to GGS.
Allied negotiated the bill to Chekiang, but payment was refused because of
some discrepancies in the documents. Allied demanded payment from GGS
and all the respondents based on the letters of guaranty and surety
agreement.
P 46 of 51
2D Negotiable Instruments – Atty. Mercado
The respondents refused presenting different defenses. GGS and Gidwani SC: Decision is modified. Alarcon is subsidiarily liable as gurantor while
admitted to the due excution of the bill but said that they signed the Gidwani and Spouses De Villa are jointly and severally liable with GGS as
letters of guaranty and the surety in blank and that neither covered the sureties for the amount of P151,474.52
subject bill. Spouses De Villa also said that the surety was not meant to
secure the bill, while Alarcon said that its branch here in the Philippines
had no authority to issue letter of guaranty.

It is also argued that Allied did not protest the dishonor of the bill and
because of this GGS is discharged from its liability. The trial court dismissed
the petition of Allied but the CA reversed and ordered GGS to pay Allied.
Allied filed for a motion for reconsideration in order to hold Gidwani,
Alarcon and the Spouses De Villa liable for payment of the obligation.

ISSUE:

Can the respondents be held jointly and severally liable under the Letters
of Guaranty and Surety in the absence of protest on the bill in accordance
with Sec. 152 of the NIL?

RULING:

It is normal for a negotiating bank in a discounting arrangement, such as

Allied, to ask for securities. It is clear in this case that the respondents
undertook and bound themselves as guarantors and surety to pay the full
amount of the bill in case of dishonor or non-payment as evidenced by the
letters of guaranty and surety they executed. Obligations arising from
contracts have the force of law between the parties.

Also, it is immaterial that no protest was made by Allied in order to hold

the respondents liable.
1. The surety itself contained a stipulation waiving the need for notice
of dishonor and protest
2. Sec. 152 of the NIL is applicable only to indorsers and not to
guarantors and sureties. The liability of a gurantor and a surety is
broader than the liability of an indorser. Unless an instrument is
promptly presented for payment at maturity and a due notice of
dishonor is given to the indorser he is discharged from liability on
the bill. However, it is not necessary that notice be given to
gurarantors and sureties unless there is an express stipulation
requiring it.

It cannot also be argued that the contracts were contracts of adhesion

since the respondents fixed their signatures at different times on different
documents. Hence it is presumed that they had knowledge of the terms
and conditions of the letters of guaranty and surety. Laches is also
unavailing, inequity is not present in this case.

P 47 of 51
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim 2D Negotiable Instruments – Atty. Mercado
MORAN V. CA
230 SCRA 799
Sec. 185
FACTS:
The Morans are the owners of the Wack-Wack Petron gast station. They
purchase bulk fuel and other products form Pterophil Corp. on cash on
delivery basis. Orders were made by telephone and payments were
effected by personal checks upon delivery.
They maintained 1 current account and 2 savings account with Citytrust.
As special privilege the bank allowed the Morans to maintain a zero
balance in their current account. Transfers from savings account 1 to the
current account could only be made with the authority of the Morans, but
prior written authorization was given to Citytrust to transfer funds from
savings account 2 to the current account any time its funds are insufficient
to meet the withdrawals. The authorization was in the form of a pre-
authorized transfer agreement (PAT) which was an accommodation mae by
the bank in favor of the Morans.
Dec. 12, 1983 and Dec. 13, 1983: Moran issued 2 checks as payment for
the products they ordered from Petrophil. Check 1 – P50,576 and Check 2 –
56,090
Dec. 14, 1983: Petrophil deposited the checks with PNB Pandacan.
Afterwards the checks were presented for clearing in the afternoon of the
same day. The Morans had zero balance in their current account and only
P26,104.30 in savings account 2 (the one with the PAT) while savings
account 1 only had P43,268.39
Dec. 15, 1983 (10:00 am): Moran deposited in savings account 1: P17,
628.83 and in savings account 2: P41,030. He also transferred by debit
memorandum P40,000 from savings account 1 to the current account and
at the same time P60,000 was transferred from savings account 2 to the
current account through the PAT
Petrophil refused to deliver the products to the Moran because of the
dishonoring of the checks issued for insufficiency of funds. The non-
delivery forged the Morans to temporarily stop their business. Petrophil
also cancelled their credit accommodation forcing them to pay their
purchases in cash.
Moran asked for an explanation from the bank, the bank replied that there
was a grave error that was committed. Diaz, the bank manager, then went
to Moran to get his signature for the manager’s check Moran applied for to
serve as payment for the dishonored checks. Diaz then personally went to
Petrophil to give the check.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
Moran, 6 months after the incident, found out from Petrophil that Citytrust
notifying them that the two checks of Moran were inadvertently dishonored
due to operational error. This prompted Moran to write to Citytrust and ask
for indemnity for the damage caused by the dishonoring of the check.
Citytrust refused and Moran instituted a civil case for damages
ISSUES:
W/N Citytrust is liable to pay damages
W/N the Morans had sufficient funds to cover the checks when the bank
dishonored the checks
RULING: No.
A check is a bill of exchange drawn on a bank payable on demand. It is a
written order, addressed to a bank or persons carrying on the business of
banking, by a party having money in their hands, requesting them to pay
on presentment, to a person named therein or to bearer or order, a named
sum of money.
Fixed savings and current deposits of money in banks and other similar
institutions shall be governed by the provisions concerning simple loan.
The relationship between the bank and the depositor is that of debtor and
creditor. The bank is therefore bound to honor the checks of the depositor
to the extent of the amount of the deposits. The failure of the bank to pay
the check when the deposit is sufficient entitles the depositor to
substantial damages without any proof of actual damages.
Although the checks were processed in Dec. 15, 1983, the available
balance of the Morans on Dec. 14, 1983 was what was used in determining
whether or not there was sufficient cash deposited to fund the two checks.
Dec. 14, 1983 was the date when the checks were by presented by PNB
Pandacan to the clearing house. This is the standard clearing procedure.
Hence, the subsequent deposits and transfers made by the Morans on Dec.
15, 1983, were too late to prevent the dishonor of the checks.
A check as distinguished from an ordinary bill of exchange is supposed to
be drawn against a previous deposit of funds for it is ordinarily intended for
immediate payment. Only the drawer is at fault here since he failed to
keep track of his available balance. The PAT was merely an accommodation
in favor of Moran and legally the bank could still refuse the payment of the
checks since the Morans clearly did not have sufficient funds in their
accounts when the checks were dishonored.
The letter of Citytrust to Petrophil was merely to maintain goodwill and
continued patronage of a client and could not be construed as an
admission of liability
P 48 of 51
2D Negotiable Instruments – Atty. Mercado
FIRESTONE TIRE V. INES CHAVES
18 SCRA 356
Sec. 185
FACTS:
Ines Chaves brought from Firestone several tires and paid using a check
amounting to Php 1,437.50. When the check was presented to Security
Bank, it was returned for insufficiency of funds. Despite repeated
demands, Ines failed to pay thus firestone initiated an action against the
former. The petitioner asked for payment of attorney’s fees which was
granted by the court. It is now the contention of Ines that she is not guilty
of bad faith and in consequence, attorney fees should not be granted.
ISSUES:
W/N there was bad faith on the part of Ines.
RULING:
Ines knew that that there were no funds to back up the check she issued.
This shows bad faith on her part. It would have been a different patter if
Firestone agreed to accept the check, knowing that it was not covered by
adequate funds in the bank in such a case, no finding of bad faith can be
made against the appellant. There was nothing in the record to show that
appellee knew that there were no funds in the bank when it accepted the
check from the appellant. Thus, the order of the lower court that the
appellants’ action was lacking of good faith was affirmed.
PEOPLE V. REYES ET. AL.
454 SCRA 635
Sec. 185 (NO DIGEST)
CRYSTAL V. CA
71 SCRA 443
Sec. 186
FACTS:
The case revolved around Crystal’s redemption of the property acquired by
respondent Ocang, Teodulo, etc. in an execution sale pursuant to a final
judgment of the trial court. According to the facts of the case, after issuing
a check for the redemption of the said land, the petitioner Crystal
immediately regained possession of the four parcels of land in question,
taking the same from Pelagia Ocang.
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
Respondent contended that the petitioner’s redemption was invalid
because the check tendered has been dishonored due to insufficiency of
funds. There was a contention however that the check had merely become
stale.
ISSUES:
RULING:
The Supreme Court remanded the case for further proceedings to
determine whether the check was dishonored or become stale, in order to
determine if there was a valid redemption. If the check has been
dishonored, then there can be no doubt that Crystal’s redemption was null
and void. If the check had become stale, then it becomes imperative that
the circumstance that caused its non-presentment be determined, for if
this was not due to the fault of Crystal, then it would be unfair to deprive
him of the rights he acquired as redemptioner, particularly, it the value of
the check was otherwise been received or realized by the party concerned.
WONG V. CA
351 SCRA 100
Sec. 186
FACTS:
Petitioner Wong was an agent of Limtong Press (LPI), a manufacturer of
calendars. As an agent. Limtong would get purchase orders of customers
and forward them to LPI. LPI would then ship the calendars directly to the
customers. It was then the agents that would collect the payments. Wong
however had a history of unremitted collections which he duly
acknowledged in a confirmation receipt he cosigned with his wife. Thus,
Wong’s customers were required to issue postdated checks before LPI
would accept their purchase orders.
In 1985, Wong issued 6 postdated checks totaling Php 18T+ which were
initially intended to guarantee the calendar orders of customer who failed
to issue postdated checks. However, it was company policy not to accept
checks as guarantees, thus, Wong and LPI just agreed to apply the checks
to the payment of the petitioner’s unremitted collections for 1984 also
amounting to Php 18T+. Before the maturity of the checks, Wong asked
LPI not to deposit the checks and promised to replace them within 30 days.
But since petitioner did not fulfill his promise, LPI deposited the checks with
RCBC. The checks were returned by reason “account closed”. Wong was
charged with 3 counts of violation of BP22.
It was the contention of Wong that the checks were mere guarantees for
the calendar purchases of his customers, thus, there is no consideration
behind the checks issued. Wong also contends that LPI was not a holder
P 49 of 51
2D Negotiable Instruments – Atty. Mercado
for value since the checks were deposited after the customers paid their
orders. The checks should have been returned to him instead.
Wong also contends that since complainant deposited the checks on June
5, 1986 or 157 days after maturity of the checks, the presumption of
knowledge of lack of funds under BP 22 should not apply to him. He
further claims that he should not be expected to keep his bank account
active and funded beyond the 90-day period.
ISSUES:
W/N the elements of BP 22 are present
RULING:
The issue of whether the checks were issued as mere guarantees of
payment for an obligation was already settled by the court. It was enough
to note that LPI does not accept checks as guarantees and that the mere
act of issuing worthless check is malum prohibitum, therefore, Wong
should be liable for the said checks.
There are two ways of violating BP 22,: 1) issuing worthless checks
knowing at the time of issue that the check is not sufficiently funded and
(2) by having sufficient funds in or credit with the draw bank at the time of
the issue but failing to keep sufficient funds with the said bank to cover the
full amount of the check when presented within a period of ninety days.
That the check must be deposited within 90 days is simply a condition
prima facie presumption of knowledge of lack of funds to arise. There are
other conditions such as the dishonor of the check and failure of the maker
to make arrangements for payment in full within 5 banking days after the
notice.
Under section 186, a check must be presented for payment within a
reasonable time after its issue to the drawer will be discharged from
liability thereon to the extent of the loss caused by the delay. By current
banking practice, a check becomes stale after more than 6 months. In this
case, the checks issued were not yet stale, since they were deposited 157
days after the date of the check. Although LPI failed to avail of the prima
facie presumption with the 90 day condition, it can still prove lack of
knowledge through other means.
NAGRAMPA V. PEOPLE
386 SCRA 412
Sec. 186
FACTS:
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim
NAGRAMPA purchased a Yutani Porcelain Backhoe Excavator Equipment
from FEDCOR and pain in cash the downpayment. To cover the balance of
Php 150,000. the manager of Ngarama issued a check postdated 31
August 1989 and another check postdated 30 September 1989. The
checks were drawn against Security Bank and Trust company. Upon
assurance that the check was good, FEDCOR delivered the equipment to
the petitioner. When the checks were presented for payment, they were
dishonored for reason “Account Closed”. FEDCOR demanded payment but
the same was not heeded.
It was the contention of NGARAMPA that they issued the check with an
agreement htat they will replace them with cash if the backhoe would be in
good running condition. Unfortunately, the said Backhoe broke down
several times despite frequent repairs. NGARAMPA said that it demanded
FEDCOR to return the checks but instead of returning them, the latter
deposited the checks. Petitioner further contends that they were not guilty
of Estafa since there was no element of damage on the part of FEDCOR.
ISSUES:
W/N the petitioner is guilty of violation of BP 22 considering that the
checks were presented more than 90 days after the maturity of the check.
RULING:
By current banking practice, a check becomes stale after more than 6
months or 180 days. These checks were presented before 6 months or 180
days. Thus, Nagrampa is guilty of 2 counts of BP 22.
It was also found that the account of NANGARAMPA has been closed 4
years before he issued the check. There was knowledge on his part that
there were no funds to back up the checks he issued.
NGARAMPA’s contention that Administrative Circular No. 12-2000 removed
the penalty of imprisonment for BP 22 violations cannot be given any merit
for such circular merely laid dow3n a reule of preference in the application
of the penalties provided in BP 22. AC12-2000 establishes a rule of
preference in the application of the penal provisions of BP 22 such that
where the circumstance of both the offense and the offender clearly
indicate good faith, imposition of fine is the more appropriate penalty. But
in this case, there clearly was bad faith, thus, fine as penalty is
inappropriate.
TY V. PEOPLE
439 SCRA 220
Sec. 186
FACTS:
P 50 of 51
2D Negotiable Instruments – Atty. Mercado
Vicky Ty issued checks in favor of Manila doctor’s hospital, all of which
bounced. It was the contention of Ty that she was forced to issue said
checks in payment for the hospitalization of her mother and sister. She
further contends that if she did not issue said checks, her mother would
have committed suicide because of the harsh treatment given by the
hospital. She further contends that there is a great need for her to have
her mother discharged since certain facilities were not being given to her
mother thus, forcing her to issue said checks.

ISSUES:
W/N Ty should be held liable for the said checks given her circumstance.

RULING:
Yes. The mere act of issuing worthless checks is malum prohibitum. There
is no compelling reason to reverse the finding of the CA. Ty was not able to
prove uncontrollable fear or greater injury that would have exempted her
since all her allegations were remote, baseless. She is therefore liable to
the said checks and guilty of the offense charged.

P 51 of 51
Aquino, Bautista, Cangco, Concepcion, Enriquez, Go, Hosaka, Laurente, Lim 2D Negotiable Instruments – Atty. Mercado