Caltex vs.

Court of Appeals,
G.R. No. 97753, August 10, 1992
REGALADO, J p:

Facts: Defendant bank, Security Bank and Trust Company (SBTC) issued 280 certificates of
time deposit (CTDs) in favour of Angel dela Cruz who then used the CTDs to guarantee his
purchases of fuel products and delivered them to plaintiff Caltex. Sometime in March 1982,
Angel dela Cruz informed the bank that he lost all the CTDs and he was advised to submit a
notarized affidavit of loss. Upon receipt of the said affidavit, issued 280 replacement CTDs
which he assigned and transferred to defendant bank in consideration of the loan that was
granted to him. Angel dela Cruz executed a notarized Deed of Assignment of Time Deposit
which stated that he surrendered to defendant bank full control of the CTDs from and after the
date of assignment and authorized said bank to pre-terminate, set-off and apply the said time
deposits to the payment of whatever amount or amounts may be due on the loan upon its
maturity.

On the CTDs issued the word ‘bearer’ appears boldly and after the word BEARER stamped on
the space provided supposedly for the name of the depositor, the words ‘has deposited’ a
certain amount follows. The document further provides that the amount deposited shall be
‘repayable to said the depositor’ on the period indicated

Issue:
1. WN the CTDs are negotiable instruments
2. WN the petitioner can rightfully recover on the CTDs

Ruling:
1. Yes. The CTDs in question undoubtedly meet the requirements of the law for negotiability.
Section 1 of Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
"(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty."

The parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr.
Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court
that the depositor referred to in the CTDs is no other than Mr. Angel de la Cruz.

The documents provide that the amounts deposited shall be repayable to the depositor. And
who, according to the document, is the depositor? It is the "bearer." The documents do not
say that the depositor is Angel de la Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or,
for that matter, whosoever may be the bearer at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only,
instead of having the word "BEARER" stamped on the space provided for the name of the
depositor in each CTD.
2. NO. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred
from one person to another in such a manner as to constitute the transferee the holder thereof,
and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the
bearer thereof,

In the present case, however, there was no negotiation in the sense of a transfer of the legal
title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of
the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the
purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was
not disclosed) could at the most constitute petitioner only as a holder for value by reason of his
lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition of such security,
in the event of non-payment of the principal obligation, must be contractually provided for.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de
la Cruz.

Consolidated Plywood Industries, Inc. vs. IFC Leasing

G.R. No. 72593. April 30, 1987
GUTIERREZ, JR., J p:

Facts: Consolidated Plywood Industries Inc. (CPII) is a corporation engaged in the logging business.
It had for its program of logging activities for the year 1978 the opening of additional roads, and
simultaneous logging operations along the route of said roads, in its logging concession area at
Baganga, Manay, and Caraga, Davao Oriental.

For this purpose, it needed 2 additional units of tractors. Cognizant of CPII’s need and purpose,
Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (IPM), a corporation dealing in tractors and other heavy equipment business,
offered to sell to CPII 2 “Used” Allis Crawler Tractors, 1 an HD-21-B and the other an HD-16-B. After
conducting said inspection, IPM assured CPII that the “Used” Allis Crawler Tractors which were
being offered were fit for the job, and gave the corresponding warranty of 90 days performance of
the machines and availability of parts. With said assurance and warranty, and relying on the IPM’s
skill and judgment, CPII through Henry Wee and Rodolfo T. Vergara, president and vice-president,
respectively, agreed to purchase on installment said 2 units of “Used” Allis Crawler Tractors. It also
paid the down payment of P210,000.00. On 5 April 1978, IPM issued the sales invoice for the 2 units
of tractors. At the same time, the deed of sale with chattel mortgage with promissory note was
executed.

Barely 14 days had elapsed after their delivery when one of the tractors broke down and after
another 9 days, the other tractor likewise broke down. IPM sent to the jobsite its mechanics to
conduct the necessary repairs, but the tractors did not come out to be what they should be after the
repairs were undertaken because the units were no longer serviceable. Because of the breaking
down of the tractors, the road building and simultaneous logging operations of CPII were delayed
and Vergara advised IPM that the payments of the installments as listed in the promissory note
would likewise be delayed until IPM completely fulfills its obligation under its warranty.
Since the tractors were no longer serviceable, on 7 April 1979, 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
IFC Leasing and the excess, if any, to be divided between IPM and CPII which offered to bear 1/2 of
the reconditioning cost. No response to this letter was received by CPII and despite several follow-
up calls, IPM did nothing with regard to the request, until the complaint in the case was filed by IFC
Leasing against CPII, Wee, and Vergara. The complaint was filed by IFC Leasing against CPII, et al.
for the recovery of the principal sum of P1,093,789.71, accrued interest of P151,618.86 as of 15
August 1979, accruing interest there after at the rate of 12% per annum, attorney’s fees of
P249,081.71 and costs of suit.

CPII, et al. filed their amended answer praying for the dismissal of the complaint. In a decision dated
20 April 1981, the trial court rendered judgment, ordering CPII, et al. to pay jointly and severally in
their official and personal capacities

On 17 July 1985, the Intermediate Appellate Court issued the decision affirming in toto the decision
of the trial court.

Issue: WN the promissory notes are negotiable instruments

Ruling: No. The pertinent portion of the note provides that “”FOR VALUE RECEIVED, I/we jointly
and severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of
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.” Considering that
paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note “must be
payable to order or bearer,” it cannot be denied that the promissory note in question is not a
negotiable instrument.

The instrument in order to be considered negotiable must contain the so called “words of
negotiability” — i.e., must be payable to “order” or “bearer.” These words serve as an expression of
consent that the instrument may be transferred. This consent is indispensable since a maker
assumes greater risk under a negotiable instrument than under a non- negotiable one. Without the
words “or order” or “to the order of,” the instrument is payable only to the person designated therein
and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of
being a holder of a negotiable instrument, but will merely “step into the shoes” of the person
designated in the instrument and will thus be open to all defenses available against the latter.

Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that
IFC Leasing can never be a holder in due course but remains a mere assignee of the note in
question. Thus, CPII may raise against IFC Leasing all defenses available to it as against IPM. This
being so, there was no need for CPII to implead IPM when it was sued by IFC Leasing because
CPII’s defenses apply to both or either of them.

Traders Royal Bank vs. Court of Appeals,

G.R. No. 93397, March 3, 1997
TORRES, JR., J p:
Class Notes:

February 10, 2023

Sec. 1 and Sec. 52 – Memorize by heart

Negotiable Instrument - Functions as substitute for money, but is not a legal tender.
- can be paid to your obligations or indebtedness
- Evidence of indebtedness in case the maker disputes there is no loan transaction

Example:

I promise to pay Ms. A or bearer PHP10,000 on February 14, 2023.

Signed Ms. B

Ms. A – holder
Ms. B – maker

If Ms. B denies her obligation, Ms. A can show the promissory note as an evidence of the obligation
of Ms. B

Negotiable Instruments can be rejected by the creditor because it is not a legal tender and cannot
effect payment.

3 Kinds of Negotiable Instrument

1. Promissory Note – Sec. 184 of NIL: is an unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time,
a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is
not complete until indorsed by him.(Sec. 184)

Has two parties:

1. Y – maker
2. X – payee; the promissory note is in favor of X
This is a bearer note. Bearer is entitled to the payment of 10,000 on the maturity date of March 1,
2023
NI can be transferred by mere delivery

If payable to order:
NI can be transferred by delivery and indorsement

2. Bill of Exchange – an unconditional order in writing addressed by one person to another, signed
by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed
or determinable future time a sum certain in money to order or to bearer. (Sec. 126)

Has 3 parties:

1. Y – drawer; gives the unconditional order

2. X – payee;
3. Z – drawee; Y is directing Z to pay X at the time of maturity

Drawee is primary liable if the Bill of Exchange is accepted by it. On the contrary, without
acceptance, the drawee cannot be liable.

3. Checks - a bill of exchange drawn on a bank payable on demand. Except as herein otherwise
provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a
check. (Sec. 185)

In a check, the drawee is always a bank. Its main difference is that ordinary bill of exchange a
juridical person or ordinary person is the drawee.

Cashier’s/Manager’s Check – manager of the bank issues a check against the bank; becomes a
promissory note holds itself primary liable to the instrument. It is good as cash.
Mere issuance is considered as acceptance, therefore is considered as cash. But is still not a legal
tender, you cannot compel X to accept such payment under the BSP Circular.
Here,
Drawer – cashier/manager
Drawee – Bank

Negotiation v. Assignment
Negotiation is the transfer of an instrument from one person to another so as to constitute the
transferee the holder thereof. (Sec. 30, NIL) The transferee, if he is a HIDC may acquire better rights
than his transferor.

Assignment – transfer of the title to the instrument, with the assignee generally taking only such title as
his assignor has, subject to all defenses available against the assignor. The transferee does not become a
holder and can have no better right than his transferor; he merely steps into the shoes of the assignor.

Example:
X wants to buy the car of Y. They agreed to a purchase price of 500,000 with a down payment paid
by X of 200,000. X issued a promissory note for 300,000 to Y. Y transferred that note to Z. The
maturity of the amount was on Feb. 15. Come Feb 15, Z is claiming payment from X.

But during that time X found the car to be defective which he bought from Y.

Can X set-up a defense of failure of consideration (a personal defense)? For him not to pay the
remaining balance?
Answer: Qualify if the instrument is a negotiable instrument. Check the requisites of NI. Absent one
requisite, it cannot be considered negotiable.

In this case, if it is not a negotiable instrument, the transferee of the instrument is considered a mere
assignee. Since Z is a mere assignee, he acquires the rights of Y. whatever can be invoked against
Y, can also be invoked against Z. The transferee merely steps into the shoes of the transferor. (WN
the Z, the transferee, knows the defect or not)

If Z knows that the car is defective:

If it is a negotiable instrument, Z is now therefore, not a holder in due course. And the defense by of
the failure of consideration can be set-up by X against Z.

If Z does not know the defect:

If it is a negotiable instrument, Z is now HIDC, and is free from personal defenses set-up by X. He is
in good faith.

Consolidated Plywood Industries, Inc. vs. IFC Leasing

Even conceding for purposes of discussion that the promissory note in question is a negotiable
instrument, the respondent cannot be a holder in due course for a more significant reason. Because IPM
and IFC has actual knowledge. The respondent 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 petitioners.

Requisites of Negotiable Instruments

1. It must be in Writing and signed by the maker or drawer;
2. Must contain an Unconditional promise or order to pay a sum certain in money;
3. Must be payable on demand, or at a fixed or determinable future time;
4. Must be payable to Order or to bearer; and
5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty. (Sec.1, NIL)

Exceptions for the Signature Requisite:

1. One who signs in a trade or assumed name will be liable to the same extent as if he had signed in his
own name. (Sec 18)
2. The principal is bound by the signature of his duly authorized agent (Sec 19)
3 Forgery (Sec 23)
4. Acceptance by the acceptor in a separate paper (Sec 134)
5. Written promise by a person to accept the bill before it is drawn. (Sec 135)

March 3, 2023
Does not affect negotiability – Section 5
1. authorizes the sale of collateral securities in case the instrument be not paid at maturity
Sale of collateral securities will rise upon the instrument is not paid upon its maturity.
Y – Maker
“I promise to pay X or the bearer 500 on or before march 15, 2023. If the instrument is not paid upon
maturity, I also authorized the rise of the mortgage of the car to the payee.”

The collateral security does not affect the negotiability of the instrument

Confession of judgment – is a written acknowledgement by the debtor the amount to be paid if not
paid upon maturity. Void but does not affect negotiability.

Stages in the life of a negotiable instrument

1. Preparation – make sure that the requisites under Sec. 1 is met.

Bills of Exchange, drawer
Promissory note, maker signs

2. Issue – first delivery of the instrument to the payee; there must be a transfer of physical
possession and an intention on the part of drawer to transfer the title to the instrument – to the
holder.

3. Negotiation – Sec. 30; transfer from one person to another so as to constitute the transferee a
holder; if it is an order then endorsement

UMALI (drawer) -> Embile (Holder 1) = Issuance

Embile (endorser) -> Soriano (Holder 2) = Negotiation order instrument – endorse and deliver
 “Pay to Soriano or Order + Signed Embile
Soriano (endorser) -> Escabusa (Holder 3) =
 Upon Maturity, Soriano refuse to accept, Escabusa can go after Umali.
 Holder in Due Course – check under sec. 52; rights – sec. 57; personal defenses cannot
be put up against HIDC. HIDC can enforce the instrument to all parties primarily and
secondarily liable to the instrument.
 If HIDC failure of consideration, a personal defense, cannot be put up against escabusa
Escabusa -> Rongcales (drawee)

4. Presentment for Acceptance – presentment for acceptance to the drawee; if not done, the holder
cannot go after the secondary persons liable. (Sec. 143, 144); drawee has 24 hours to accept the BIE
 Drawee accepts the BIE; drawee becomes acceptor, is now primarily liable
 Drawee refuses the BIE;
 Even if accepted, the drawee fails to signify his acceptance = dishonored (Sec. 150)
Once dishonor, undertake dishonor proceedings – go after primarily liable (Umali) or the ones
secondarily liable (indorsers)

5. Presentment of Payment – the instrument is shown to the maker or drawee / acceptor for him to pay
(Sec. 70)
 Payable upon demand – presentment within a reasonable time after its issue or after
the last negotiation of the instrument; present to the one primarily liable
 Payable upon date of maturity
Rongcales (now primarily liable) accepted BIE from Escabusa – upon maturity, Rongcales refused the
payment of the BIE; hence, BIE dishonor for nonpayment -> then escabusa can go after secondarily liable
(Umali) as long as escabusa serves notices of dishonor to the endorsers/drawer.

5. Discharge – once Umali pays escabusa the amount, it releases all the persons liable from the
obligation

Payable on Demand – Sec. 7

Chu executed promissory note to pay x or order 100,000 on or before March 15, 2023. X endorsed
the instrument to Y on March 12, 2023. Y endorsed the instrument to Z on March 16, 2023. Z
endorsed to A.

Y, Z, A – payable on demand
Chu – March 15, 2023

Payable on determinable time – Sec. 4

A promise to pay B or order the sum of 500,000 on or before the 15 days after the death of his cat –
still determinable since the word “on” the date of the death.

Can a payee be the drawer to the instrument? Of the BOE.

Pay to the order of Y 20,000.

Signed Y

Drawee and the payee is the same person.