CHAPTER 2

G. R. No. L-10221, February 28, 1958

INTESTATE OF LUTHER YOUNG AND PACITA YOUNG, SPOUSES. PACIFICA JIMENEZ, PETITIONER
AND APPELLEE, VS. DR. JOSE BUCOY, ADMINISTRATOR AND APPELLANT

Facts:
In this intestate (one who has died without a valid will) of Luther Young and Pacita
Young who died in 1954 and 1952 respectively, Pacifica Jimenez (creditor) presented for
payment four promissory notes signed by Pacita Young (debtor) for different amounts totalling
twenty-one thousand pesos (P21,000).
Executed in the month of August 1944, the first promissory note read as follows:
"Received from Miss Pacifica Jimenez the total amount of P10,000) ten thousand pesos
payable six months after the war, without interest." The other three notes were couched in the
same terms, except as to amounts and dates.
The administrator of the intestate of Pacita manifested willingness to pay provided
adjustment of the sums be made in line with the Ballantyne schedule since the amount was
received during the Japanese Occupation. (It also contained a schedule of values of the said war
notes in terms of Philippine Peso during different periods of the Japanese occupation)
Jimenez objected to the adjustment insisting on full payment in accordance with the
notes.
The trial court held that the notes should be paid in the currency prevailing after the
war.
The appellant administrator also calls attention to the fact that the notes contained no
express promise to pay a specified amount.

Issues: Whether the notes contained express promise to pay a specified amount.

Ruling:
Yes. There can be no serious question that the notes were promises to pay "six months
after the war," the amounts mentioned.
The note "a promise to pay ten thousand pesos six months after the war, without
interest,” and so of the other notes amounted a promise to pay an specified amount.
"An acknowledgment may become a promise by the addition of words by which a
promise of payment is naturally implied, such as, "payable," "payable on a given day,”
"payable on demand," "paid . . .when called for,"…. (10 Corpus Juris Secundum p.
523.)
"To constitute a good promissory note, no precise words of contract are necessary,
provided they amount, in legal effect, to a promise to pay. In other words, if over and above the
mere acknowledgment of the debt there may be collected from the words used, a promise to
pay it, the instrument may be regarded as a promissory note. 1 Daniel, Neg. Inst. 36 et seq.;
Byles, Bills, 10, 11, and cases cited... "Due A. B. $325, payable on demand," or, "I acknowledge
myself to be indebted to A in $109, to be paid on demand, for value received," or, "I. O. U. $85
to be paid on May 5th," are held to be promissory notes, significance being given to words of
payment as indicating a promise to pay. 1 Daniel Neg. Inst. sec. 39, and cases cited. (Cowan vs.
Hallack, (Colo.) 13 Pacific Reporter 700, 703.)

Wherefore, in view of the foregoing consideration, the appealed decision is affirmed,

except as to the attorney's fees which are hereby disapproved. So ordered.
 PHILIPPINE NATIONAL BANK, Petitioner, -versus- ERLANDO T. RODRIGUEZ and NORMA
RODRIGUEZ, Respondents.
G.R. No. 170325, September 26, 2008, THIRD DIVISION, REYES, R.T., J.

In the case under review, the Rodriguez checks were payable to specified payees. It is
unrefuted that the 69 checks were payable to specific persons. Likewise, it is uncontroverted
that the payees were actual, existing, and living persons who were members of PEMSLA that
had a rediscounting arrangement with spouses Rodriguez.

FACTS:
Respondents Spouses Rodriguez maintained bank accounts with petitioner PNB.
They are engaged in the informal lending business of discounting arrangement (A
financing scheme where a postdated check is exchanged for a current check with a discounted
face value) with Philnabank Employees Savings and Loan Association (PEMSLA), an
association/MPCoop of PNB employees. PEMSLA regularly granted loans to its members, and
Spouses would rediscount the a post dated checks issued to members whenever the association
was short of funds. Thus, the spouses would replace the postdated checks with their own checks
issued in the name of the members.
Some PEMSLA officers took out loans in the names of members without their knowledge
or consent and they forged the indorsement of the named payees.
The PEMSLA checks issued for these loans were then given to the spouses for
rediscounting. In return, the spouses issued their personal checks (Rodriguez checks) in the
name of the members and delivered the checks to an officer of PEMSLA.  The PEMSLA checks,
on the other hand, were deposited by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings
account without any indorsement from the named payees. This fraud was through the
facilitation of the treasurer of PEMSLA and a bank teller in the PNB. 
Petitioner PNB eventually found out about these fraudulent acts. Thus, PNB closed the
current account of PEMSLA.  As a result, the PEMSLA checks deposited by the spouses were
returned or dishonored for the reason "Account Closed." 
The corresponding Rodriguez checks, however, were deposited as usual to the PEMSLA
savings account and were duly debited from the Rodriguez account. 
Hence, the spouses sued PEMSLA and PNB for recovery of the value of their checks that
were deposited to the PEMSLA savings account amounting to P2,345,804.00, and damages.
The spouses contended that because PNB credited the checks to the PEMSLA account
even without indorsements, PNB violated its contractual obligation to them as depositors. PNB
paid the wrong payees, hence, it should bear the loss.
PNB argues that when the spouses issued the disputed checks, they did not intend for
the named payees to receive the proceeds. Thus, they are bearer instruments that could be
validly negotiated by mere delivery.  
The trial court ruled that PNB is liable to return the value of the checks.
PNB appealed to the CA on the principal ground that the disputed checks should be
considered as payable to bearer and not to order.
The CA initially reversed the ruling of the trial court, but after motion for
reconsideration, the CA upheld it.

ISSUE: Whether the subject checks are payable to order or to bearer and who bears the loss?

RULING:
NO. The subject checks are presumed order instruments. PNB failed to present sufficient
evidence to defeat the claim of respondents-spouses that the named payees were the intended
recipients of the checks’ proceeds. The bank failed to satisfy a requisite condition of a fictitious-
payee situation – that the maker of the check intended for the payee to have no interest in the
transaction. The fictitious-payee rule does not apply. Thus, the checks are to be deemed payable
to order. Consequently, the drawee bank bears the loss.
For the fictitious-payee rule to be available as a defense, PNB must show that the
makers did not intend for the named payees to be part of the transaction involving the checks.
Lack of knowledge on the part of the payees was not tantamount to a lack of intention on the
part of respondents-spouses that the payees would not receive the checks’ proceeds.
Considering that respondents-spouses were transacting with PEMSLA and not the individual
payees, it is understandable that they relied on the information given by the officers of PEMSLA
that the payees would be receiving the checks.
 As a rule, when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument. A check is "a bill of exchange drawn
on a bank payable on demand." It is either an order or a bearer instrument.
The distinction between bearer and order instruments lies in their manner of
negotiation. Under Section 30 of the NIL, an order instrument requires an indorsement from the
payee or holder before it may be validly negotiated. A bearer instrument, on the other hand,
does not require an indorsement to be validly negotiated. It is negotiable by mere delivery.
A check that is payable to a specified payee is an order instrument. However, under
Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be considered as
a bearer instrument if it is payable to the order of a fictitious or non-existing person, and such
fact is known to the person making it so payable. Thus, checks issued to "Prinsipe Abante" or "Si
Malakas at si Maganda," who are well-known characters in Philippine mythology, are bearer
instruments because the named payees are fictitious and non-existent.
A review of US jurisprudence yields that an actual, existing, and living payee may also be
"fictitious" if the maker of the check did not intend for the payee to in fact receive the proceeds
of the check. If the payee is not the intended recipient of the proceeds of the check, the payee is
considered a "fictitious" payee and the check is a bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer
bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer
instrument that can be negotiated by delivery. Thus, in case of controversy, the drawer of the
check will bear the loss. This rule is justified for otherwise, it will be most convenient for the
maker who desires to escape payment of the check to always deny the validity of the
indorsement. This despite the fact that the fictitious payee was purposely named without any
intention that the payee should receive the proceeds of the check. (purpose of the rule)
However, there is a commercial bad faith exception to the fictitious-payee rule.  A
showing of commercial bad faith on the part of the drawee bank, or any transferee of the check
for that matter, will work to strip it of this defense.  The exception will cause it to bear the loss. 
Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to
the fraudulent scheme. 
The Rodriguez checks were payable to specified payees. It is unrefuted that the 69
checks were payable to specific persons. Likewise, it is uncontroverted that the payees were
actual, existing, and living persons who were members of PEMSLA that had a rediscounting
arrangement with spouses Rodriguez.

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller
or tellers accepted the 69 checks for deposit to the PEMSLA account even without any
indorsement from the named payees.  It bears stressing that order instruments can only be
negotiated with a valid indorsement.
The checks were presented to PNB for deposit by a representative of PEMSLA absent
any type of indorsement, forged or otherwise.  The facts clearly show that the bank did not pay
the checks in strict accordance with the instructions of the drawers, respondents-spouses.
Instead, it paid the values of the checks not to the named payees or their order, but to PEMSLA,
a third party to the transaction between the drawers and the payees.
 CHAPTER 3

EQUITABLE BANKING CORPORATION, Petitioner, -versus- THE HONORABLE INTERMEDIATE

APPELLATE COURT and THE EDWARD J. NELL CO, Respondent
G.R. No. 74451, May 25, 1988

(Ljean’s version)

FACTS
In 1975, Liberato Casals, majority stockholder, P & GM of Casville Enterprises, went to
buy two garrett skidders (bulldozers) from Edward J. Nell Company amounting to P970,000.00.
To pay the bulldozers, Casals agreed to open a letter of credit with the Equitable
Banking Corporation. Pursuant to this, Nell Company shipped one of the bulldozers to Casville.
Meanwile, Casville advised Nell Company that in order for the letter of credit to be opened,
Casville needs to deposit P427,300.00 with Equitable Bank, and that since Casville is a little
short, it requested Nell Company to pay the deposit in the meantime.
Nell Company agreed and so it eventually sent a check in the amount of P427,300.00.
The check read: Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE
ENTERPRISES, INC.
Nell Company sent the check to Casville so that it would be the latter who could send it
to Equitable Bank to cover the deposit in lieu of the letter of credit. Casals received the check,
he went to Equitable Bank, and the teller received the check. The teller, instead of applying the
amount as deposit in lieu of the letter of credit, credited the check to Casville’s account with
Equitable Bank. Casals later withdrew all the P427,300.00 and appropriated it to himself.
'Meanwhile, upon their presentation for encashment, Nell Company discovered that the
three checks (Exhibits "F". "G" and "H") in the total amount of P427.300.00, that were issued by
defendant Casville as collateral were all dishonored for having been drawn against a closed
account.
Casals and Casville showed lack of interest in disputing petitioners claim by not
appearing in most of the hearings, but they also assigned to the garrett skidder which is an
action of clear recognition of their liability.

Hence what is left for the Court to determine, therefore, is only the liability petitioner
bank.

The trial court found Casals, Casville and Equitable Bank liable to Edward J. Nell
Company for the said amount. It was further affirmed by the Appellate Court. The trial court said
that the teller should have exercised more prudence in the handling of said check because it was
not made out in the usual manner. The addition of the words 'A/C OF CASVILLE ENTERPRISES
INC should have placed the teller on guard and he should have clarified the matter with his
superiors.

ISSUE
Whether or not Equitable Bank is liable to cover for the loss.

RULING
NO. The subject check was equivocal and patently ambiguous. Reading on the wordings
of the check, the payee thereon ceased to be indicated with reasonable certainty in
contravention of Section 8 of the Negotiable Instruments Law. As worded, it could be accepted
as deposit to the account of the party named after the symbols “A/C,” or payable to the Bank as
trustee, or as an agent, for Casville Enterprises, Inc., with the latter being the ultimate
beneficiary.
That ambiguity is to be taken contra proferentem that is, construed against Nell
Company who caused the ambiguity and could have also
avoided it by the exercise of a little more care. Thus, Article 1377 of the Civil Code, provides:
Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity.
"xxx As between two innocent persons, one of whom must suffer the consequence of a
breach of trust, the one who made it possible by his act of confidence must bear the loss."
 EQUITABLE BANKING CORP. V. INTERMEDIATE APPELLATE COURT, G.R. NO. 74451

(Dale’s version)

FACTS:

Plaintiff Edward J. Nell Company was a dealer of machineries, equipment and supplies.
Defendant Liberato Casals represented himself as the majority stockholder, president and
general manager of Casville Enterprises. Casals went to plaintiff to buy garrett skidders. When
ask for the manner of payment, Casals informed that they have a credit line with defendant
Equitable Banking Corporation. Then a letter of credit was executed.

On April 21 1976, due to the request of Casville, on May 3, 1976 a delivery from Plaintiff was
made. For that, plaintiff hoped that an irrevocable Domestic Letter of Credit would be opened.
Checks were handed by the defendants but are postdated August 4, 1976.

On August 3, 1976, letter of credit was approved but defendants need 300,000php for collateral
or marginal deposit and 100,000php for clearing of title of Estrada property in favor of Casals as
security for trust receipts issued by the bank for payment of the equipment. To facilitate the
transaction, Plaintiff agreed to advance the 400,000 php. Check was drawn “payable to the
order of Equitable Banking Corporation”.

On August 9, 1976, when Casville applied for two letters of credit amounting to 1,091,000php,
additional terms and conditions were provided by Santos (Vice President) including an increase
in the margin deposit which is 30% or 327,300php and should be made payable 'to the Order of
EQUITABLE BANKING CORPORATION for the account of Casville Enterprises Inc.' Defendant
Casville. Such was informed to the plaintiff through a letter enclosed with three postdated
checks.

On August 16, 1976, plaintiff issued a check for P427,300.00, payable to the 'order of EQUITABLE
BANKING CORPORATION A/C CASVILLE ENTERPRISES, INC.' and drawn against the First National
City Bank. Plaintiff entrusted the delivery of the check and the letter to defendant Casals
because it believed that no one, including defendant Casals, could encash the same as it was
made payable to the defendant bank alone. Besides, defendant Casals was known to the bank as
the one following up the application for the letters of credit.

Casals immediately deposited it with the defendant bank and the bank teller accepted the same
for deposit in defendant Casville's checking account. After depositing said check, defendant
Casville, acting through defendant Casals, then withdrew all the amount deposited.

All three checks were subsequently dishonored or having been drawn against a closed account.
Defendants Casals and Casville hardly disputed their liability to plaintiff. Not only did they show
lack of interest in disputing plaintiff's claim by not appearing in most of the hearings, but they
also assigned to plaintiff the garrett skidder which is an action of clear recognition of their
liability.

Trial Court ruled that Defendant and Defendant Bank pay 427,300 to the plaintiff. The Trial
Court found that the amount of the second check had been erroneously credited to the Casville
account; held the Bank liable for the mistake of its employees. “The addition of said words did
not in any way make Casville Enterprises, Inc. the Payee of the instrument for the words merely
indicated for whose account or in connection with what account the check was issued by the
plaintiff”.

ISSUE/S:

Whether or not Defendant Bank is liable to private respondent Edward J. Nell Co. (NELL,
for short) for the value of the second check issued by NELL, Exhibit "E-1," which was made
payable "to the order of EQUITABLE BANKING CORPORATION A/C OF CASVILLE ENTERPRISES
INC." and which the Bank teller credited to the account of Casville.

RULING:

No. Defendant Bank is not liable to private respondent NELL.

As worded, it could be accepted as deposit to the account of the party named after the symbols
"A/C," or payable to the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the
latter being the ultimate beneficiary. That ambiguity is construed against NELL who caused the
ambiguity and could have also avoided it by the exercise of a little more care.

NELL's own acts and omissions in connection with the drawing, issuance and delivery of the 16
August 1976 check were the proximate cause of its own defraudation.

A. NELL changed the payee in the subject check.

B. NELL entrusted the subject check and its covering letter to Casals who purposely did not
present the subject check to the Executive Vice-President of the Bank
C. NELL was extremely accommodating to Casals. It is, indeed, abnormal for the seller of goods,
the price of which is to be covered by a letter of credit, to advance the marginal deposit for the
same.
D. NELL was erroneously confident that its interests were sufficiently protected. Never had it
suspected that those postdated checks would be dishonored, nor that the subject check would
be utilized by Casals for a purpose other than for opening the letter of credit.

It was NELL's own acts, which put it into the power of Casals and Casville Enterprises to
perpetuate the fraud against it and, consequently, it must bear the loss.
 PHILIPPINE NATIONAL BANK v. CONCEPCION MINING COMPANY, INC., ET AL.
G.R. No. L-16968, EN BANC, July 31, 1962, LABRADOR, J.

(Ljean’s version)

FACTS
The present action was instituted by PNB to recover from the defendants the face of a
promissory note.
I promise to pay to the order of the Philippine National Bank signed by
The defendants alleged that the co-maker the promissory note Don Vicente L. Legarda
died on February 24, 1946 and his estate is in the process of judicial determination in a Special
Proceedings case. On the basis of this allegation it is prayed, as a special defense, that the estate
of said deceased Vicente L. Legarda be included as party-defendant. The court in its decision
ruled that the inclusion of said defendant is unnecessary and immaterial, in accordance with the
provisions of Article 1216 of the Civil Code and section 17 (g) of the Negotiable Instruments Law.

ISSUE
Whether the estate of Legarda should be included in the suit since Legarda is a co-maker
of the promissory note

RULING
SEC. 17. Construction where instrument is ambiguous. — Where the language of the
instrument is ambiguous or there are omissions therein, the following rules of construction
apply:
(g) Where an instrument containing the word “I promise to pay” is signed by two or
more persons, they are deemed to be jointly and severally liable thereon.
And Article 1216 of the Civil Code of the Philippines also provides as follows:
"ART. 1216. The creditor may proceed against any one of the solidary debtors or some
of them simultaneously. The demand made against one of them shall not be an obstacle to
those which may subsequently be directed against the others, so long as the debt has not been
fully collected."

In view of the above quoted provisions, and as the promissory note was executed jointly
and severally by the same parties, namely, Concepcion Mining Company, Inc. and Vicente L.
Legarda and Jose S. Sarte, the payee of the promissory note had the right to hold any one or any
two of the signers of the promissory note responsible for the payment of the amount of the
note.

PHILIPPINE NATIONAL BANK V. CONCEPCION MINING CO., INC., G.R. NO. L-16968

(Dale’s version)

FACTS:

Appeal from a judgment or decision of the Court of First Instance of Manila, sentencing
defendants Concepcion Mining Company and Jose Sarte to pay jointly and severally to the
plaintiff.

Co-maker of the promissory note Don Vicente L. Legarda, died and his estate is in the process of
judicial determination in Special Proceedings. It is prayed, as a special defense, that the estate of
said deceased Vicente L. Legarda be included as party-defendant. The court in its decision ruled
that the inclusion of said defendant is unnecessary and immaterial.

ART. 1216. The creditor may proceed against any one of the solidary debtors or some of them
simultaneously. The demand made against one of them shall not be an obstacle to those which
may subsequently be directed against the others, so long as the debt has not been fully
collected.

ISSUE/S:

Whether or not the inclusion of the estate is necessary.

RULING:
No. The inclusion of said defendant is unnecessary and immaterial, in accordance with the
provisions of Article 1216 of the new Civil Code and section 17(g) of the Negotiable Instruments
Law.

Section 17(g) of the Negotiable Instruments Law provides as follows:

"SEC. 17. Construction where instrument is ambiguous. — Where the language of the instrument
is ambiguous or there are omission therein, the following rules of construction apply:

xxx xxx xxx

"(g) Where an instrument containing the words 'I promise to pay' is signed by two or more
persons, they are deemed to be jointly and severally liable thereon."

ART. 1216. The creditor may proceed against any one of the solidary debtors or some of them
simultaneously. The demand made against one of them shall not be an obstacle to those which
may subsequently be directed against the others, so long as the debt has not been fully
collected.

In view of the above quoted provisions, and as the promissory note was executed jointly and
severally by the same parties, namely, Concepcion Mining Company, Inc. and Vicente L. Legarda
and Jose S. Sarte, the payee of the promissory note had the right to hold any one or any two of
the signers of the promissory note responsible for the payment of the amount of the note. This
judgment of the lower court should be affirmed.
 REPUBLIC PLANTERS BANK V. COURT OF APPEALS, G.R. NO. 93073

DECEMBER 21, 1992, 290-A PHIL 534-547

FACTS:

Defendant Shozo Yamaguchi and private respondent Fermin Canlas were officers of Worldwide
Garment Manufacturing Inc. They were authorized to apply for credit facilities with the
petitioner Republic Planters Bank. Petitioner bank issued nine promissory notes which were
uniformly worded in the following manner:

On the right bottom margin of the promissory notes appeared the signatures of Shozo
Yamaguchi and Fermin Canlas above their printed names with the phrase "and (in) his personal
capacity" typewritten below.

Sometime after the said events, Worldwide Garment Manufacturing, Inc. voted to change its
corporate name to Pinch Manufacturing Corporation.

Petitioner bank filed a complaint for the recovery of sums of money covered among others, by
the nine promissory notes with interest thereon, plus attorney's fees and penalty charges.

Defendants Pinch Manufacturing Corporation and Shozo Yamaguchi did not file an Amended
Answer and failed to appear at the scheduled pretrial conference despite due notice.

Only private respondent Fermin Canlas filed an Amended Answer wherein he denied having
issued the promissory notes in question since according to him, he was not an officer of Pinch
Manufacturing Corporation, but instead of Worldwide Garment Manufacturing, Inc., and that
when he issued said promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the
same were in blank, the typewritten entries not appearing therein prior to the time he affixed
his signature.

The RTC ruled in favor of the plaintiff Republic Planters Bank, ordering defendant Pinch
Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.) and defendants
Shozo Yamaguchi and Fermin Canlas to pay, jointly and severally, the plaintiff bank.

From the above decision only defendant Fermin Canlas appealed to the Court of Appeals. His
contention was that inasmuch as he signed the promissory notes in his capacity as officer of the
defunct Worldwide Garment Manufacturing, Inc., he should not be held personally liable for
such authorized corporate acts that he performed. The CA absolved Fermin from liability.

ISSUE/S:

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

RULING:

Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature. Persons
who write their names on the face of promissory notes are makers and are liable as such. By
signing the notes, the maker promises to pay to the order of the payee or any holder.

An instrument which begins with "I", "We", or "Either of us" promise to pay, when signed by two
or more persons, makes them solidarily liable. The fact that the singular pronoun is used
indicates that the promise is individual as to each other; meaning that each of the co-signers is
deemed to have made an independent singular promise to pay the notes in full.

The phrase "Joint and several" as describing the unconditional promise to pay to the order of
Republic Planters Bank and also provides for the solidarily liability.

The phrase "and (in) his personal capacity" below the signatures of the makers in the notes will
affect the liability of the makers. It is immaterial and will not affect the liability of private
respondent Fermin Canlas as a joint and several debtor of the notes. With or without the
presence of said phrase, private respondent Fermin Canlas is primarily liable as a co maker of
each of the notes and his liability is that of a solidary debtor.
 CHAPTER 4

SESBREÑO V. COURT OF APPEALS, G.R. NO. 89252

(Dale’s version)

FACTS:

Raul made a money market placement in the amount of P300,000.00 with the Philippine
Underwriters Finance Corporation ("Philfinance") with a term of thirty-two (32) days, would
mature on 13 March 1981. Additionally, Philfinance issued the following:

a. Certificate of Confirmation of Sale of one (1) Delta Motors Corporation Promissory Note
("DMC PN") No. 2731
b. Certificate of Securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to
petitioner; and
c. Post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's
investment), with petitioner as payee, Philfinance as drawer

On 13 March 1981, petitioner sought to encash the post-dated checks issued by Philfinance.
However, the checks were dishonored for having been drawn against insufficient funds.
Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas
Bank ("Pilipinas").

Petitioner approached Elizabeth de Villa of private respondent Pilipinas for the physical delivery
of DMC PN No. 2731. It was cognized that the note would mature on 6 April 1981; that it had a
face value of P2,300,833.33, with Philfinance as "payee" and private respondent Delta Motors
Corporation ("Delta") as "maker;" and that on face of the promissory note was stamped "NON-
NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation in respect
thereof, to petitioner.

Delta, however, denied any liability to petitioner on the promissory note, and explained in turn
that it had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN
No. 2730) against Philfinance PN No. 143-A issued in favor of Delta.

Petitioner filed an action for damages against private respondents Delta and Pilipinas. It was
dismissed. CA also dismissed the action.

Philfinance, therefore, is solely and legally obligated to return the investment of plaintiff,
together with its earnings, and to answer all the damages plaintiff has suffered incident thereto.
Unfortunately for plaintiff, Philfinance was not impleaded as one of the defendants in this case
at bar; hence, this Court is without jurisdiction to pronounce judgment against it.

ISSUE/S:

Whether the CA erred in concluding that petitioner cannot recover from private respondent
Delta his assigned portion of DMC PN No. 2731.

RULING:

No. Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that that Note
had been validly transferred, in part, to him by assignment.

Delta avers:

A. DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by

Philfinance as manifested by the word "non-negotiable". It is intended to be offset against
Philfinance PN No. 143-A issued to Delta as payee

B. assignment of DMC PN No. 2731 by Philfinance was without Delta's consent

C. Offsetting

Court

A. DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-
transferrable" or "non-assignable." It contained no stipulation which prohibited Philfinance from
assigning or transferring, in whole or in part, that Note.
 We find nothing in his "Letter of Agreement" which can be reasonably construed as a
prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731,
before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of
Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a
prohibition cannot be invoked against an assignee or transferee of the Note who parted
with valuable consideration in good faith and without notice of such prohibition.

B. Money market transactions in Perez v. Court of Appeals, It involves 'commercial papers'

which are instruments 'evidencing indebtedness of any person or entity . . ., which are issued,
endorsed, sold or transferred or in any manner conveyed to another person or entity, with or
without recourse'. In practice, no notification is given to the borrower or issuer of commercial
paper of the sale or transfer to the investor.

C. The assignment effected by Philfinance in favor of petitioner was a valid one and that
petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof
assigned to him. However, that petitioner notified Delta of the fact of the assignment to him
only on 14 July 1981, 19 that is, after the maturity not only of the money market placement
made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other
words, petitioner notified Delta of his rights as assignee after compensation had taken place by
operation of law because the offsetting instruments had both reached maturity.

Article 1626 of the Civil Code states that: "the debtor who, before having knowledge of
the assignment, pays his creditor shall be released from the obligation."

Because petitioner failed to do so, and because the record is bare of any indication that
Philfinance had itself notified Delta of the assignment to petitioner, the Court is
compelled to uphold the defense of compensation raised by private respondent Delta.
Of course, Philfinance remains liable to petitioner under the terms of the assignment
made by Philfinance to petitioner.

RAUL SESBREÑO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents.

(Jarick’s version)

Facts of the Case:

On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the amount
of P300,000.00 with the Philfinance which would mature on 13 March 1981. On the same day,
Philfinance issued to the petitioner Sesbreno the Certificate of Confirmation of Sale without
recourse of a Delta Motor Corporation Promissory Note (2731), the Certificate of Securities
Delivery Receipt with note that said security was in the custody of Pilipinas Bank , as per
Denominated Custodian Receipt ("DCR") No. 10805, and postdated checks drawn against the
Insular Bank of Asia and America for P304,533.33 payable on 13 March 1981. 

The checks were dishonored for having been drawn against insufficient funds.

Thereafter, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent
Pilipinas Bank ("Pilipinas").

On 2 April 1981, petitioner demanded from Pilipinas Bank the delivery of the Delta’s promissory
note. It was then that the petitioner found out that that it had a face value of P2,300,833.33,
with the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as
"maker;" and on face of the promissory note was stamped "NON NEGOTIABLE."

Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written
instructions but Philfinance did not provide the appropriate instructions; Pilipinas never
released DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner.

Petitioner also demanded from respondent Delta the partial satisfaction of promissory note
explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of
P307,933.33. Delta, however, denied any liability to petitioner on the promissory note, and
explained in turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731
(along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta.

As Sesbreno was unable to collect his investment and interest thereon, he filed an action for
damages against Delta Motors and Pilipinas Bank.

The RTC dismissed the complaint for lack of cause of action and the CA affirmed the same ruling
that the act of Philfinance in accepting the investment of plaintiff and charging it against DMC
PN No. 2731 when its entire face value was already obligated or earmarked for set-off or
compensation is difficult to comprehend and may have been motivated with bad faith.
Philfinance, therefore, is solely and legally obligated to return the investment of plaintiff,
together with its earnings, and to answer all the damages plaintiff has suffered incident thereto.
Unfortunately for plaintiff, Philfinance was not impleaded as one of the defendants in this case
at bar; hence, this Court is without jurisdiction to pronounce judgement against it. (p. 11,
Decision)

Further, the Court of Appeals held that petitioner acquired no rights vis-a-vis  Delta in respect of
the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to
petitioner, to the extent of P304,533.33 as the same is "non-negotiable" as stamped on its face
(Exhibit "6"), negotiation being defined as the transfer of an instrument from one person to
another so as to constitute the transferee the holder of the instrument (Sec. 30, Negotiable
Instruments Law). A person not a holder cannot sue on the instrument in his own name and
cannot demand or receive payment (Section 51, id.)

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had
been validly transferred, in part to him by assignment and that as a result of such transfer, Delta
as debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned
to him by the payee Philfinance.

Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise
transferred by Philfinance as manifested by the word "non-negotiable" stamp
across the face of the Note10 and because maker Delta and payee Philfinance
intended that this Note would be offset against the outstanding obligation of
Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's
consent, if not against its instructions; and

(3) assuming (arguendo only) that the partial assignment in favor of petitioner

was valid, petitioner took the Note subject to the defenses available to Delta, in
particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-
A.11

Issue:

Whether or not non-negotiability of a promissory note prevents its assignment.

Or
Whether or not non-negotiable instruments are transferrable.

Ruling:

The Court noted that a non-negotiable instrument may, obviously, not be negotiated; but it may
be assigned or transferred, absent an express prohibition against assignment or transfer written
in the face of the instrument.

The words "not negotiable," stamped on the face of the bill of lading, did not destroy its
assignability. DMC PN No. 2731, while marked "non-negotiable," was not at the same time
stamped "non-transferable" or "non-assignable." It contained no stipulation which prohibited
Philfinance from assigning or transferring, in whole or in part, that Note.
In this case, Delta adduced the "Letter of Agreement" which it had entered into with Philfinance
but this Court found nothing which can be reasonably construed as a prohibition upon
Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity
thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an
explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an
assignee or transferee of the Note who parted with valuable consideration in good faith and
without notice of such prohibition. It is not disputed that petitioner was such an assignee or
transferee.

Regarding Delta's argument that the partial assignment by Philfinance of DMC PN No. 2731 had
been effected without the consent of Delta, the Court noted that such consent was not
necessary for the validity and enforceability of the assignment in favor of petitioner. 14 Delta's
argument that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731
constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken.

The Court further ruled that relative to Delta's arguments concerning alleged compensation or
offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note
that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9
February 1981, no compensation had as yet taken place and indeed none could have taken
place. On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due.
This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with
Philfinance, where Delta acknowledged that the relevant promissory notes were "to be offsetted
(sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."

The record shows, however, that petitioner notified Delta of the fact of the assignment to him
only on 14 July 1981, 19 that is, after the maturity not only of the money market placement made
by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other
words,  petitioner notified Delta of his rights as assignee after compensation had taken place by
operation of law because the offsetting instruments had both reached maturity. It is a firmly
settled doctrine that the rights of an assignee are not any greater that the rights of the assignor,
since the assignee is merely substituted in the place of the assignor 20 and that the assignee
acquires his rights subject to the equities — i.e., the defenses — which the debtor could have
set up against the original assignor before notice of the assignment was given to the debtor.
Article 1285 of the Civil Code provides that:

Art. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not
consent  thereto, the latter may set up the compensation of debts previous to
the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up

the compensation of all credits prior to the  same and also later ones until he
had knowledge of the assignment. (Emphasis supplied)

It bears some emphasis that petitioner could have notified Delta of the assignment or sale was
effected on 9 February 1981. He could have notified Delta as soon as his money market
placement matured on 13 March 1981 without payment thereof being made by Philfinance; at
that time, compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner
could have notified Delta on 26 March 1981 when petitioner received from Philfinance the
Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in
favor of petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity
date of DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of
any indication that Philfinance had itself notified Delta of the assignment to petitioner, the Court
is compelled to uphold the defense of compensation raised by private respondent Delta. Of
course, Philfinance remains liable to petitioner under the terms of the assignment made by
Philfinance to petitioner.
 CONSOLIDATED PLYWOOD INDUSTRIES V. IFC LEASING AND ACCEPTANCE CORP., G.R. NO.
72593, [APRIL 30, 1987], 233 PHIL 462-480

FACTS:

Petitioner-corporation through petitioners Wee and Vergara, president and vice-president,

respectively, agreed to purchase on installment two Tractors from INDUSTRIAL PRODUCTS
MARKETING (IPM). IPM gave the corresponding warranty of ninety (90) days performance of the
machines and availability of parts.

A deed of sale with chattel mortgage and promissory note was executed. During that same time,
IPM, assigned its rights and interest in the chattel mortgage in favor of IFC LEASING AND
ACCEPTANCE CORPORATION (IFC).

(Promissory note)

"FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100
only (P1,093,789.71), Philippine Currency, the said principal sum, to be
payable in 24 monthly installments starting July 15, 1978 and every
15th of the month thereafter until fully paid. . . . ."

Barely one month had elapsed after their delivery, the tractors broke down. Even after IPM sent
mechanics to conduct repairs, the units were no longer serviceable.

Petitioner Wee asked IPM to pull out the units and have them reconditioned, and thereafter to
offer them for sale. The proceeds were to be given to the IFC and the excess, if any, to be
divided between the IPM and petitioner-corporation which offered to bear one-half (1/2) of the
reconditioning cost.

However, a complaint was filed by IFC against the petitioners for the recovery of the principal
amount with interest as stated in the promissory note executed. Trial court ruled in favour of
IFC.

Petitioners appealed. Appellate Court ruled in favour IFC on considering them a holder in due
course.

IFC Leasing and Acceptance Corporation is engaged in financing and receivable discounting
extending credit facilities to consumers and industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable. The promissory was
discounted or sold to the IFC. That all requisites, of a being a “holder in due course”, are present
in IFC.

ISSUE/S:

Whether or not the promissory note in question is a negotiable instrument so as to bar

completely all the available defenses of the petitioner against IFC.

RULING:

No.

The petitioner was clearly a victim of a warranty not honored by the maker. It is patent then,
that the IPM is liable for its breach of warranty against the petitioner. This liability as a general
rule, extends to the corporation to whom it assigned its rights and interests unless the assignee
is a holder in due. If such is the case, the petitioner's defenses may not prevail against IFC.

However, the instrument is not payable to order or bearer, provided under Section 1 of the NIL.
The subject promissory note is not a negotiable instrument. It then follows that IFC can never be
a holder in due course but only a mere assignee of the note in question. Thus, the petitioner
may raise against the respondent all defenses available to it as against the seller-assignor, IPM.

Secondly, even if the promissory note in question is a negotiable instrument, the IFC cannot be a
holder in due course for a more significant reason, that it had actual knowledge of the fact that
IPM’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. IFC knew that when the tractors turned out
to be defective, it would be subject to the defense of failure of consideration and cannot
recover the purchase price from the petitione rs. IFC’s actual knowledge of the foregoing facts
amounted to bad faith, is not a holder in due course. As such, the IFC is subject to all defenses
which the petitioners may raise against the seller-assignor. (Section 52 of the NIL)

Lastly, even assuming that the subject promissory note is negotiable, IFC, a financing company
which actively participated in the sale on installment of the subject two tractors, cannot be
regarded as a holder in due course of said note. A finance company was a moving force in the
transaction from its very inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be regarded as a holder in
due course of the note given in the transaction. Such constitutes that IFC had actual knowledge
of the infirmity or defect, or knowledge of such facts that his action in taking the instrument
amounts to bad faith regarding the instrument

LEGAL BASIS:

Section 1 of the Negotiable Instruments Law requires that a promissory note "must be payable
to order or bearer," it cannot be denied that the promissory note in question is not a
negotiable instrument.

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

"SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due course is a holder
who has taken the instrument under the following conditions:

xxx xxx xxx

"(c) That he took it in good faith and for value;

"(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

"SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT. — To constitute notice of an infirmity in the
instrument or defect in the title of the person negotiating the same the person to whom it is
negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such
facts that his action in taking the instrument amounts to bad faith."
SAN MIGUEL CORPORATION V. PUZON, JR., G.R. NO. 167567, [SEPTEMBER 22, 2010], 645 PHIL
298-309

FACTS:

Respondent Bartolome V. Puzon, Jr., (Puzon) was a dealer of beer products of petitioner San
Miguel Corporation (SMC) Puzon purchased SMC products on credit. To ensure payment and as
a business practice, SMC required him to issue postdated checks equivalent to the value of the
products purchased on credit before the same were released to him. Said checks were to be
returned to Puzon when the transactions covered by these checks were paid or settled in full.

Puzon issued postdated checks to SMC. One day when he visited SMC, he allegedly immediately
left the office with his accountant, bringing the checks with them.

SMC filed a complaint against Puzon for theft. The City Prosecutor denied stating that SMC and
Puzon have a creditor-debtor relationship. And that the problem lies in the reconciliation of
accounts and the non-payment of beer empties which cannot give rise to a criminal prosecution
for theft. Said decision was affirmed by DOJ upon appeal of SMC.

The CA also agreed with the City Prosecutor that there was not theft. The CA found that the
postdated checks were issued by Puzon merely as a security for the payment of his purchases
and that these were not intended to be encashed. It thus concluded that SMC did not acquire
ownership of the checks as it was duty bound to return the same checks to Puzon after the
transactions covering them were settled.

ISSUE/S:

Whether or not ownership of the subject check was transferred to petitioner in relation to Sec.
12 of the NIL.

RULING:

No. The delivery contemplated in Sec. 12 means that the party delivering did so for the purpose
of giving effect thereto. Otherwise, it cannot be said that there has been delivery of the
negotiable instrument. Once there is delivery, the person to whom the instrument is delivered
gets the title to the instrument completely and irrevocably.

The subject check was given by Puzon was not given as payment, there being no intent to give
effect to the instrument, then ownership of the check was not transferred to SMC.

Moreover, the evidence of SMC also failed to establish that the check was given in payment of
the obligation of Puzon. There was no provisional receipt or official receipt issued for the
amount of the check. What was issued was a receipt for the document, a "POSTDATED CHECK
SLIP”.

Furthermore, the petitioner's demand letter sent to respondent states "As per company policies
on receivables, all issuances are to be covered by post-dated checks. However, you have
deviated from this policy by forcibly taking away the check you have issued to us to cover the
December issuance." Notably, the term "payment" was not used instead the terms "covered"
and "cover" were used. The term "cover" was not meant to be used interchangeably with
"payment."

LEGAL BASIS:

Sec. 12. Antedated and postdated. — The instrument is not invalid for the reason only that it is
antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The
person to whom an instrument so dated is delivered acquires the title thereto as of the date of
delivery.
 MANUEL LIM AND ROSITA LIM, PETITIONERS, VS. COURT OF APPEALS AND PEOPLE OF THE
PHILIPPINES
Facts:
Spouses MANUEL LIM and ROSITA LIM, were charged with estafa on three (3) counts
and seven (7) counts of violation of B.P. Blg. 22, otherwise known as the Bouncing Checks Law
before RTC of Mabalon.
They purchased goods from Linton Commercial Company, Inc. (LINTON), and issued
seven Consolidated Bank and Trust Company (SOLIDBANK) checks simultaneously with the
delivery as payment therefor. When presented to the drawee bank for payment the checks
were dishonored as payment on the checks had been stopped and/or for insufficiency of funds
to cover the amounts.
Manuel Lim admitted having issued the seven (7) checks but denied that his company's
account had insufficient funds to cover the amounts of the checks. Also, he claimed that he
ordered SOLIDBANK to stop payment because the supplies delivered by LINTON were not in
accordance with the specifications in the purchase orders.
The trial court held both accused guilty of estafa and violation of B.P. Blg. 22.
On appeal, Court of Appeals acquitted the spouses of estafa on the ground that the
checks were not made in payment of an obligation contracted at the time of their issuance.
However it affirmed the finding of the trial court that they were guilty of having violated B.P.
Blg. 22.
The spouses claimed that no essential element of violation of B.P. Blg. 22 was
committed within the jurisdiction of the Regional Trial Court of Malabon. They asserted that
considering that the checks were issued at their place of business, received by a collector of
LINTON, and dishonored by the drawee bank, all in Kalookan City, the trial court of Malabon
exceeded its jurisdiction.
Issues:
Whether any of the essential elements of violation of B.P. Blg. 22 was committed within
the jurisdiction of RTC Malabon?
Ruling:
Yes. In determining the proper venue, the following acts material and essential to each
crime and requisite to its consummation must be considered: (a) the seven (7) checks were
issued to LINTON at its place of business in Balut, Navotas; (b) they were delivered to LINTON...
at the same place; (c) they were dishonored in Kalookan City; and, (d) petitioners had
knowledge of the insufficiency of their funds in SOLIDBANK at the time the checks were issued.
Under Sec. 191 of the Negotiable Instruments Law the term "issue" means the first
delivery of the instrument complete in form to a person who takes it as a holder. On the other
hand, the term "holder" refers to the payee or indorsee of a bill or note who is in possession of
it or the bearer thereof.
The place where the bills were written, signed, or dated does not necessarily fix or
determine the place where they were executed. What is of decisive importance is the delivery
thereof.  The delivery of the instrument is the final act essential to its consummation as an
obligation (People v. Yabut).
Although LINTON sent a collector who received the checks from petitioners at their
place of business in Kalookan City, they were actually issued and delivered to LINTON at its place
of business in Balut, Navotas.  The receipt of the checks by the collector of LINTON is not the
issuance and delivery to the payee in contemplation of law. The collector was not the person
who could take the checks as a holder, i.e., as a payee or indorsee thereof, with the intent to
transfer title thereto. Neither could the collector be deemed an agent of LINTON with respect to
the checks because he was a mere employee.
Moreover, that venue or jurisdiction is determined by the allegations in the Information.
The Informations in the cases under consideration allege that the offenses were committed in
the Municipality of Navotas which is controlling and sufficient to vest jurisdiction upon the
Regional Trial Court of Malabon.
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personal capacity as
garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H.
SESBREÑO, respondents.

Facts of the case:

Private respondent Sesbreno filed a complaint for damages against Assistant City Fiscals
Bienvenido Mabanto, Jr., and Rama, Jr., before the RTC. Judgment was rendered ordering the
defendants to pay to Sesbreno the amount of P11,000.00. The decision having become final and
executory, on motion of Sesbreno, the trial court ordered its execution.

As a result of the writ of execution, a notice of garnishment was served on petitioner Loreto D.
de la Victoria as City Fiscal of Mandaue City where defendant Mabanto, Jr., was then detailed.
The notice directed petitioner not to disburse, transfer, release or convey to any other person
except to the deputy sheriff concerned the salary checks or other checks or belonging to
Mabanto, Jr., under penalty of law. 

Petitioner moved to quash the notice of garnishment claiming that he was not in possession of
any money, funds, credit, property or anything of value belonging to Mabanto, Jr., except his
salary and RATA checks, but that said checks were not yet properties of Mabanto, Jr., until
delivered to him. He further claimed that, as such, they were still public funds which could not
be subject to garnishment.

The trial court denied the motion to quash reasoning that the checks of Mabanto, Jr., had
already been released through petitioner by the DOJ. Hence, petitioner as custodian of the
checks was under obligation to hold them for the judgment creditor. Additionally, the trial court
mentioned that those checks were no longer government funds and presumably delivered to
the payee, conformably with the last sentence of Sec. 16 of the Negotiable Instruments Law.

(For reference only, last sentence of Sec 16:

"And where the instrument is no longer in the possession of a party whose signature appears
thereon, a valid and intentional delivery by him is presumed.")

Motion for reconsideration was filed but denied. The trial court explained that it was not the
duty of the garnishee to inquire or judge for himself whether the issuance of the order of
execution, writ of execution and notice of garnishment was justified. His only duty was to turn
over the garnished checks to the trial court which issued the order of execution. 

Issue:

1. Whether a check still in the hands of the maker or its duly authorized representative is owned
by the payee before physical delivery to the latter.

2. Whether the salary check of a government official or employee funded with public funds can
be subject to garnishment.

Ruling:

Garnishment is considered as a species of attachment for reaching credits belonging to the

judgment debtor owing to him from a stranger to the litigation. 

1. A check that is still in the hands of the maker or its duly authorized representative is not
owned by the payee Fiscal Mabanto Jr before physical delivery to the him.

The Court provided that the source of the salary of Mabanto, Jr., being a city fiscal, is public
funds. He receives his compensation in the form of checks from the DOJ through petitioner as
City Fiscal of Mandaue City and head of office. Under Sec. 16 of the Negotiable Instruments Law,
every contract on a negotiable instrument is incomplete and revocable until delivery  of the
instrument for the purpose of giving effect thereto. As ordinarily understood, delivery means
the transfer of the possession of the instrument by the maker or drawer with intent to transfer
title to the payee and recognize him as the holder thereof.
The Supreme Court ruled further that the reliance of the trial court with the last sentence of
Section 16 of the Negotiable Instruments Law that the checks as no longer government funds
and presumed delivered to the payee is untenable. The Supreme Court said that this
presumption is not conclusive because the last portion of the provision says "until the contrary
is proved." However, this phrase was deleted by the trial court for no apparent reason. Proof to
the contrary is its own finding that the checks were in the custody of petitioner. Inasmuch as
said checks had not yet been delivered to Mabanto, Jr., they did not belong to him and still had
the character of public funds.

(For reference: The Supreme Court cited Tiro v.  Hontanosas 

The salary check of a government officer or employee such as a teacher does

not belong to him before it is physically delivered to him. Until that time the
check belongs to the government. Accordingly, before there is actual delivery
of the check, the payee has no power over it; he cannot assign it without the
consent of the Government.)

2. The Supreme Court also ruled that as a necessary consequence of being public fund, the
checks may not be garnished to satisfy the judgment.  The rationale behind this doctrine is
obvious consideration of public policy.

Regarding the denial of the MR of the petitioner by the RTC, the Supreme Court provides that in
the case of Philippine Commercial Industrial Bank v. Court of Appeals,  “it is not incumbent upon
the garnishee to inquire or to judge for itself whether or not the order for the advance
execution of a judgment is valid." But that is invoking only the general rule. There are exceptions
thereto, which were not taken into account by the trial court, e.g., a defect on the face of the
writ or actual knowledge by the garnishee of lack of entitlement on the part of the garnisher. In
this case, it was incumbent upon petitioner to inquire into the validity of the notice of
garnishment as he had actual knowledge of the non-entitlement of private respondent to the
checks in question.
 G.R. No. 85419 March 9, 1993

DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,

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

Facts of the Case:

Plaintiff Development Bank filed a complaint for a sum of money against respondents for the
enforcement of payment of the balance of P1,032,450.02 on a promissory note executed by
respondent Sima Wei and of payment of two checks executed by Sima Wei, payable to
petitioner, and drawn against the China Banking Corporation, to pay the balance due on the
promissory note.

This is based from the loan extended by the petitioner Bank to respondent Sima Wei, who
executed and delivered to the former a promissory note, engaging to pay the petitioner Bank or
order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32%   per annum.
Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. Thereafter,
Sima Wei issued two crossed checks payable to petitioner Bank drawn against China Banking
Corporation, for 500, 000 each check. Allegedly. These checks were issued in full settlement of
the drawer's account evidenced by the promissory note. These two checks were not delivered
to the petitioner-payee or to any of its authorized representatives. For reasons not shown, these
checks came into the possession of respondent Lee Kian Huat, who deposited the checks
without the petitioner-payee's indorsement (forged or otherwise) to the account of respondent
Plastic Corporation at the Producers Bank. Respondent Cheng Uy, Branch Manager of Producers
Bank, relying on the assurance of the President of Plastic Corporation, that the transaction was
legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit and
to credit them to the account of said Plastic Corporation, inspite of the fact that the checks were
crossed and payable to petitioner Bank and bore no indorsement of the latter.

(Crossed checks legal definition for reference:

It means that it could only be deposited and could not be converted into cash.  Thus, the effect
of crossing a check relates to the mode of payment, meaning that the drawer had intended the
check for deposit only by the rightful person, i.e., the payee named therein. (Bank of America,
NT & SA, vs. Associated Citizens Bank, G.R. No. 141001, 141018, May 21, 2009)

A check can be made a crossed check by drawing two transverse parallel lines across the check,
with or without the writing ‘Account payee’ or ‘Not Negotiable’. In a crossed check the lines are
usually drawn on the left-hand top corner of the check. With respect to a crossed check the
proceeds must be accredited only to the account of payee only and no other. If the collecting
banker accredits the proceeds of a crossed check to any other account, s/he will be subjected to
an action for wrongful conversion of funds and will be held guilty of negligence.

Issue:
Whether or not the petitioner Development Bank of Rizal acquired any right or interests on the
checks, so as to give him cause of action against any or all of the defendants, in the alternative
or otherwise.

Answer:

The petitioner Development Bank of Rizal did not acquire any right or interests on the checks,
hence, he has no cause of action against any or all of the defendants, in the alternative or
otherwise. This is because under Section 16 of the Negotiable Instruments Law, which governs
checks, every contract on a negotiable instrument is incomplete and revocable until delivery of
the instrument for the purpose of giving effect thereto.

Ruling:

The Supreme Court have recognized the business custom of using printed checks where blanks
are provided for the date of issuance, the name of the payee, the amount payable and the
drawer's signature. All the drawer has to do when he wishes to issue a check is to properly fill up
the blanks and sign it. However, the mere fact that he has done these does not give rise to any
liability on his part, until and unless the check is delivered to the payee or his representative. A
negotiable instrument, of which a check is, is not only a written evidence of a contract right but
is also a species of property, and the same must be delivered to the payee in order to evidence
its existence as a binding contract. Section 16 of the Negotiable Instruments Law, which governs
checks, provides in part:

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

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

Here, the two (2) China Bank checks, with 500, 000 each were not delivered to the payee, the
petitioner herein. Without the delivery of said checks to petitioner-payee, the former did not
acquire any right or interest therein and cannot therefore assert any cause of action,  founded
on said checks, whether against the drawer Sima Wei or against the Producers Bank or any of
the other respondents.

II

(In case nga damagen na pay)

This does not mean however tha Sima Wei is freed from liability to petitioner Bank under the
loan evidenced by the promissory note agreed to by her because these checks were never
delivered to petitioner Bank. And even granting, without admitting, that there was delivery to
petitioner Bank, the delivery of checks in payment of an obligation does not constitute payment
unless they are cashed or their value is impaired through the fault of the creditor.  None of these
exceptions were alleged by respondent Sima Wei.

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