NEGO Digests Ch1-3

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Law 108: Negotiable Instruments

CH. I: REQUISITES OF NEGOTIABILITY  REQUIS ASTRO ELECTRONICS CORP. v. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION 411 SCRA 462; AUSTRIA-MARTINEZ; Sept. 23, 2003 ~lora~ FACTS -Astro was granted several loans by the Philippine Trust Company Company amounting amounting to P3,000, P3,000,000 000.00 .00 with interest interest and secured by three promissory notes. -In each promissory promissory notes, notes, petitione petitionerr Roxas signed twice, twice, as Presid President ent of Astro Astro and in his personal personal capacity. Roxas also signed a Continuing Surety ship Agreement in favor of Philtrust Bank, as President of  Astro and as surety. -Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of 70% of Astro’s loan, subj subjec ectt to the the cond condit itio ion n that that upon upon paym paymen entt by Phil Philgu guan anra rant nte ee of said said amou amount nt,, it shal shalll be proportion proportionally ally subrogated subrogated to the rights of Philtrust Philtrust against Astro. -As a result of Astro’s failure to pay its loan obligations, despit despite e demand demands, s, Philgu Philguara arante ntee e paid paid 70% 70% of the guar guaran ante teed ed loan loan to Phil Philtr trus ust. t. Subs Subseq eque uent ntly ly,, Philguarantee filed against Astro and Roxas a complaint for sum of money with the RTC of Makati. -In his Answer, Answer, Roxas disclaims disclaims any liability liability on the instruments, alleging that he merely signed the same in blank and the phrases “in his personal capacity” and “in his official official capacity” capacity” were were fraudulent fraudulently ly inserted inserted without his knowledge. -The RTC rendered its decision in favor of Philguarantee observ observing ing that if Roxas Roxas really really intended intended to sign sign the instrument instruments s merely merely in his capacity as President President of  Astro, then he should have signed only once in the promissory note. -CA affirmed the RTC decision agreeing with the trial court that Roxas failed to explain satisfactorily why he had to sign twice in the contract and therefore therefore the presumption that private transactions have been fair and regular must be sustained. ISSUE WON Roxas Roxas should should be jointl jointly y and severa severally lly liable liable (solidary) with Astro for the sum awarded by the RTC. HELD  YES. Astro’s Astro’s loan with Philtrust Philtrust Bank is secured secured by three promissory promissory notes. These promissory promissory notes are valid valid and binding binding against against Astro Astro and Roxas. Roxas. As it appears appears on the notes, Roxas Roxas signed signed twice: first, first, as

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president of Astro and second, in his personal capacity. In signing his name aside from being the President of  Asro, Roxas became a co-maker co-maker of the promissory promissory notes and cannot escape any liability arising from it. -Under the Negotiable Instruments Law, persons who write their names on the face of promissory notes are makers, promising that they will pay to the order of the payee or any holder according to its tenor. Thus, even without the phrase “personal capacity,” Roxas will still be primarily liable as a joint and several debtor under the notes considering that his intention to be liable as such such is manife manifeste sted d by the fact that he affixed affixed his signature on each of the promissory notes twice which necessari necessarily ly would imply imply that he is undertaki undertaking ng the obliga obligatio tion n in two two differ different ent capaci capacitie ties, s, offici official al and personal. -Unnotice -Unnoticed d by both the trial court and the Court of  Appeals, a closer examination of the signatures affixed by Roxas on the promissory notes, readily reveals that portio portions ns of his signat signature ures s covere covered d portio portions ns of the typewritten words “personal capacity” indicating with certainty certainty that the typewritten typewritten words were already existing at the time Roxas affixed his signatures thus demolishing his claim that the typewritten words were   just inserted after he signed signed the promissory notes. If  what he claims is true, then portions of the typewritten words would have covered portions of his signatures, and not vice versa. -As to the third promissory note, the copy submitted is not clear so that this Court could not discern the same observations on the notes. - The 3 promissory promissory notes notes uniformly uniformly provide: provide: “FOR VALUE RECEIVED, I/We jointly, severally and solidarily, promise to pay to PHILTRUST BANK or order...” -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. Also, the phrase “joint “joint and sever several” al” binds binds the makers makers jointl jointly y and indivi individua dually lly to the payee payee so that that all may be sued together for its enforcement, or the creditor may select one or more as the object of the suit. Having signed under such terms, Roxas assumed the solidary liability of a debtor debtor and Philtrust Philtrust Bank may choose choose to enforce enforce the notes against him alone or jointly with Astro. Roxas’ claim that the phrases “in his personal capacity” and “in his official capacity” were inserted on the notes without his knowledge was correctly disregarded by the RTC and the Court Court of Appeals. Appeals. It is not disputed disputed that Roxas does not deny that he signed the notes twice. Roxas failed failed to prove the truth of such allegations allegations.. Bare allegations, when unsubstantiated by evidence, documentary or otherwise, are not equivalent to proof  under our Rules of Court. -Roxas -Roxas is a busine businessm ssman an who is presum presumed ed to take take

Prof. Rogelio V. Quevedo

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ordinary ordinary care of his concerns. concerns. Clearly, Clearly, he knew knew the nature of the transactions and documents involved as he not only executed these notes on two different dates but he also also execut executed, ed, and again, again, signed signed twice, twice, a “continuing Surety ship Agreement” notarized on July 31, 1981, wherein he guaranteed, jointly and severally with Astro the repayment repayment of P3,000, P3,000,000. 000.00 00 due to Philtrust. Such continuing suretyship agreement agreement even even re-enforced his solidary liability Philtrust because as a surety, surety, he bound himself himself jointly jointly and severally severally with Astro’s obligation. -Philguaran -Philguarantee tee has all the right to proceed proceed against petitioner, it is subrogated to the rights of Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the value of 70% of the loan obligation. -Subrogation is the transf transfer er of all the rights rights of the creditor to a third person, who substitutes him in all his rights. rights. It may either either be legal or conventional. conventional. Legal Legal subr subrog ogat atio ion n is that that whic which h take takes s plac place e with withou outt agreement but by operation of law because of certain acts. Instances of legal subrogation are those provided in Article Article 1302 1302 of the Civil Civil Code. Code. Conven Conventio tional nal subrogation subrogation,, on the other hand, is that which takes place by agreement of the parties. -Roxas’ acquiescence is not necessary for subrogation to take place because the instant case is one of the legal subrogation that occurs by operation of law, and withou withoutt need need of the debtor debtor’s ’s knowle knowledge dge.. Furthe Further, r, Philguarantee, as guarantor, became the transferee of  all the rights of Philtrust as against Roxas and Astro because because the “guarantor “guarantor who pays is subrogated subrogated by virtue thereof to all the rights which the creditor had against the debtor.” Disposition Deci Decisi sion on of the the Cour Courtt of Appe Appeal als s AFFIRMED in toto.

REHABILITATION FINANCE CORPORATION v. COURT OF APPEALS [Madrid and Anduiza] 94 Phil. 984; CONCEPCION; May 14, 1954 ~marge~ FACTS -Jesus de Anduiza & Quinatana Cano borrowed money from the Agricultural and Industrial Bank (now RFC), as evidenced evidenced by a promissory promissory note dated October 31, 1941. In said note, they promised to pay the AIB, or order, on or before October 31, 1951, the the sum sum of  P13,800.00, with interest at the rate of 6% p.a.. Said

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Law 108: Negotiable Instruments

note also recited that payments were to be made in ten equal annual installments in accordance with the given schedule of amortizations. -Mortgagors Anduiza and Cano failed to pay the yearly amortizati amortizations ons that fell due on October October 31, 1942 and 1943. Learning of this, Estelito Madrid (who temporarily lived lived in the house house of Anduiz Anduiza) a) offere offered d to pay and actually paid on October 30, 1944 the full amount of  said indebtedness to AIB/RFC. -July 30, 1948: 1948: Madrid Madrid institute instituted d the present action asking the court to (a) declare as paid the P16,425.17 Anduiza owed the AIB/RFC; (b) order AIB/RFC to cancel the mortgage and release the properties; (c) condemn Anduiza to pay Madrid the P16,425 P16,425.17 .17 with legal interest, etc. -In answe answer, r, AIB/ AIB/RFC RFC praye prayed d that that the compla complaint int be dism dismis isse sed. d. The The bank bank argu argued ed that that in as much much as Madrid Madrid’s ’s payme payment nt was unauth unauthori orized zed by Anduiz Anduiza, a, Madrid’s deposit in the sum of P16,425.17 P16,425.17 was null and void in accordance accordance with EO No. 49, series series of 1945. 1945. Anduiza, on the other hand, alleged that when Madrid paid paid his his debt debt,, the the same same was was not not yet yet due due and and demandable; hence, he may not be compelled to pay the latter. -RTC -RTC dismis dismissed sed the compla complaint int.. On appeal appeal,, the CA reversed and directed AIB/RFC to cancel the mortgage and Anduiza to pay Madrid the P16,425.17. Hence this appeal by certiorari.  AIB/RFC’s Arguments: that payments by Madrid were made against the express will of Anduiza and over the object objection ion of the Bank, hence hence not valid; valid; that that the obli obliga gati tion on in que questio stion n was was not not full fully y due due and and demandable at the time of the payments ISSUE (related to NEGO) WON the debtors were entitled to pay the obligation prior to Oct. 15, 1951 HELD: YES -At the outset, it should be noted that the makers of the promissory promissory note quoted above promised promised to pay the obligation evidenced thereby "on or before October 31, 1951." Although the full amount of said obligation was not demandable prior to October 31, 1951, in view of  the provision of the note relative to the payment in ten (10) annual installments, it is clear, therefore, that the makers or debtors were entitled to make a complete settleme settlement nt of the obligation obligation at any time before said date.  Another Issue: WON payment by third person [Madrid] was valid 

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  YES. YES. Madrid Madrid was entitl entitled ed to pay the obligati obligation on of  Anduiza irrespective of the latter's will or that of the Bank, and even over the objection of either or both. -Article 1158 of the Civil Code of Spain, which was in force in the Phils. at the time of the payments under consideration and of the institution of the present case provid provides: es: "Payment "Payment may be made made by any person person,, whether he has an interest in the performance of the obligation or not, and whether the payment is known and approved by the debtor or whether he is unaware of it. One who makes a payment for the account of  another may recover from the debtor the amount of the payment, unless it was made against his express will. In the latter case he can recover from the debtor only in so far as the payment has been beneficial to him." [The [The decisi decision on also also cited cited commen comments ts from from Manre Manresa, sa, Mucius Scaevola and Sanchez Roman - all in Spanish! I will not attempt to translate them. They do not deal with the NEGO topic under consideration. ^_^] -Payme -Payments nts in questi question on were were not made made agains againstt the objection objection either either of Anduiza or of the Bank! Anduiza impliedly, but clearly, acquiesced in the validity of the payme payment nt when when he joine joined d Madrid Madrid in appea appealin ling g the decision decision of CFI Manila. Also, AIB/RFC AIB/RFC issued receipts acknow acknowle ledgi dging ng paymen paymentt w/out w/out qualif qualifica icatio tion n and demanded a signed statement of Anduiza sanctioning said payments merely as a condition precedent, not to its acceptance, which had already been made, but to the executi execution on of the deed of cancel cancellat lation ion of the mortgage constituted in favor of said institution. -This condition was null and void, for the creditor Bank had no other right than to exact payment. After such payment, the obligation in question, as regards said creditor, creditor, and the latter’s latter’s status and rights rights as such creditor, become automatically extinguished. Hence: (1) The good or bad faith of the payor payor is immaterial. immaterial.   The exercise exercise of a right, vested by law without without any qualif qualifica icatio tion, n, can hardly hardly be legal legally ly consid considere ered d as tainted with bad faith. (2) The Bank cannot cannot invoke invoke the provision provision that the payor "may only recover from the debtor insolar as the payme payment nt has been been benefi beneficia ciall to him," him," when when made made against his express will. This is a defense that may be availed of by the debtor, not by the Bank, for it affects solely the rights of the former. Disposition: CA affirmed.

METROPOLITAN BANK & TRUST COMPANY V CA (GOLDEN SAVINGS & LOAN ASSOC., INC.) 194 SCRA 169; CRUZ; February 28, 1991 ~anton~

Prof. Rogelio V. Quevedo

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FACTS -Metropol -Metropolitan itan Bank and Trust Co. (Metrobank) (Metrobank) is a comme commerci rcial al bank, bank, while while Golden Golden Saving Savings s and Loan Loan Asso Associ ciat atio ion n (Gol (Golde den n Savi Saving ngs) s) was was at that that time time operating in Calapan, Mindoro. -Jan. 1979: 1979: Eduardo Eduardo Gomez Gomez opened opened an account account with Golden Golden Savings Savings and deposite deposited d over over a period period of 2 months 38 treasury warrants totaling P1.755M. All were drawn by the Philippine Philippine Fish Marketin Marketing g Authority Authority and signed signed by its Gener General al Manage Manager. r. Six were were direct directly ly payable to Gomez while the others appeared to have been indorsed by their respective payees, with Gomez as second indorser. -On various dates between June 25 and July 16, 1979, all the warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Saving Savings s Accoun Accountt in the Metroban Metrobank k branch branch in Calapan. Calapan. They were sent for clearing clearing by the branch office office to the princi principal pal office office of Metro Metroban bank, k, which which forwarded them to the Bureau of Treasury for special clearing. -More than two weeks after the deposits, Castillo went to the Calapan branch several times to ask whether the warrants warrants had been cleared. cleared. She was told to wait, wait, and Gomez was not allowed to withdraw from his account. -Exasperated over Castillo’s repeated inquiries and also as an acco accomm mmod odat atio ion n for for a “val “value ued d clie client nt,” ,” the the petiti petitione onerr says says it finall finally y decide decided d to allow allow Golden Golden Savings to withdraw from the proceeds of the warrants. -Wit -Withd hdra rawa wals ls were were made made thre three e time times, s, tota totali ling ng P968,000.00. -In turn, Golden savings subsequently allowed Gomez to make withdrawal withdrawals s from his own account, totaling totaling P1.168M from the proceeds of the apparently cleared warrants. -Jul. 21, 1979: Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau on Jul. 19, 1979, 1979, and demanded demanded Golden Golden Savings Savings to refund refund the amount amount previo previousl usly y withd withdraw rawn. n. Golden Golden Savings Savings refused, refused, forcing Metrobank Metrobank to sue (after trial trial court ruled in favor of Golden Savings). ISSUE(S) 1.WON Metrobank Metrobank should be allowed to charge charge back any amount erroneously credited. 2. WON CA erred in holding that the treasury warrants invo involv lve ed in this this case case are are not not nego negoti tiab able le instruments. HELD 1.NO -Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity of the warrants through its own services. The proceeds of the

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Law 108: Negotiable Instruments

warrants warrants were withheld withheld from Gomez until until Metrobank Metrobank allowed Golden Savings itself to withdraw them from its own deposit. It was only when Metrobank gave the gosignal that Gomez was finally allowed to withdraw. -Metroban -Metrobank k exhibite exhibited d extraordin extraordinary ary carelessne carelessness ss for allo allowi wing ng thre three e with withdr draw awal als s with withou outt wait waitin ing g for for clearance. clearance. It was indeed negligent negligent in giving giving Golden Golden Savings the impression that the treasury warrants had been cleared cleared and that, consequen consequently, tly, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it. -Without -Without such assurance, assurance, Golden Savings would not have allowed the withdrawa withdrawals; ls; with such assurance, assurance, there there was no reason reason not to allow allow the withdraw withdrawal. al. Golden Savings might even have incurred liability for its refusal refusal to return return the money that to all appearances appearances belong belonged ed to the deposi depositor tor,, who could could theref therefore ore withdraw it any time. -The -The argume argument nt that that Golden Golden Saving Savings s should should have have exercise exercised d more care in checking checking the circumstan circumstances ces does not hold water. It was Gomez who was entrusting the warrants, warrants, not Golden Savings that was extending extending him a loan. There was no question of Gomez’s identity or of the genuineness of his signature. 2.NO. Clearl Clearly y stampe stamped d on the face of the treasur treasury y warran warrants ts is the word word “non-n “non-nego egotia tiable ble;” ;” it is indicated indicated that they are payable payable from a particular particular fund, Fund 501. Reasoning SECTION SECTION 1.—Form of negotiable negotiable instrumen instruments.— ts.—An instru instrume ment nt to be negoti negotiabl able e must must confor conform m to the following requirements: xxx (b) Must contain an unconditional promise or order to  pay a sum of money. SECTION SECTION 2.—When promise promise is unconditio unconditional.— nal.—An unqualifie unqualified d order or promise promise to pay is unconditio unconditional nal within the meaning of this Act though coupled with— (a) An indica indicatio tion n of a partic particula ularr fund fund out of which which reimbursement is to be made or a particular account to be debited with the amount; or xxx But an order or promise to pay out of a particular fund  is not unconditional. -The -The indica indicatio tion n of Fund Fund 501 501 as the source source of the payment to be made on the treasury warrants makes the order or promise to pay “not unconditional” and the warrants themselves non-negotiable. There should be no question that the exception on Sec 3 of the NIL is applicable in the case. -Metro -Metroban bank k cannot cannot conten contend d that that by indors indorsing ing the warrants in general, Golden Savings assumed that they were “genuine and in all respects what they purport to

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be,” in accordance with Sec. 66 of the NIL. This law is not applicable to non-negotiable treasury warrants. -Golden Savings never represented that the warrants were negotiable but signed them only for the purpose of depositing them for clearance. DISPOSITION:   The challenged challenged decision decision is affirmed. affirmed.   The amount Gomez withdrew must be charged not to Golden Savings but to Metrobank, which must bear the consequences of its own negligence. But the balance of  P586,589.00 should be debited to Golden Savings, as obviou obviously sly Gomez Gomez can no longer longer be permit permitted ted to withdraw this amount from his deposit because of the dishonor of the warrants.

GARCIA V LLAMAS 417 SCRA 292 ; Panganiban; December 8, 2003 ~jonas~ FACTS -A complaint for sum of money and damages was filed in the RTC by herein herein respondent respondent Dionisio Llamas Llamas against herein Petitioner Petitioner Romeo Garcia and Eduardo de  Jesus, alleging (1) that petitioner and de Jesus borrowed P400k from respondent & executed a promissory note wherein they bound themselves jointly and severally; and (2) that that the loan has long long been been overdu overdue e and, despite despite repeated repeated demands, petitioner petitioner and de Jesus Jesus have have failed failed and refuse refused d to pay it. Annex Annexed ed to the complaint complaint were the promissory promissory note and a demand demand letter letter by responden respondentt addressed addressed to petitione petitionerr and de  Jesus. - Petitione Petitionerr Garcia, Garcia, in his Answer, Answer, averred averred that he assumed no liability under the promissory note because he signed it merely as an accommodation party for de   Jesus; and, alternatively, that he is relieved from any liability arising from the note as the loan had been paid by de Jesus Jesus by means means of a check; check; and that, in any event, event, the issuance of the check and respondent's respondent's acceptance acceptance thereof novated novated the note. note. Responde Respondent’s nt’s reply reply to Petitione Petitioner's r's answer asserted that the loan remained unpaid because the check issued by de Jesus bounced. Annexed to the reply were the face of the check and the reverse side thereof. - During During the pre-tria pre-triall confer conferenc ence e de Jesus Jesus and his lawyer lawyer did not appear appear nor file file any pre-tr pre-trial ial brief. brief. Neither Neither did Petitione Petitionerr Garcia Garcia file a pre-trial pre-trial brief, and his counsel even manifested that he would no longer present present evidence evidence.. The trial court gave respondent respondent permission to present his evidence ex parte against de  Jesus; and, as regards Petitioner Garcia, the trial court directed respondent to file a motion for judgment on the pleading pleadings, s, and for Petit Petition ioner er Garcia Garcia to file file his comment or opposition thereto.

Prof. Rogelio V. Quevedo

[3]

- On July 7, 1998, the RTC disposed of the case by rendering judgment on the pleadings against petitioner and De Jesus, Jesus, orderi ordering ng them them to pay, pay, jointl jointly y and severa severally lly,, the respon responden dentt the princi principal pal amount amount of  P400k plus 5% interest thereon per month until the same shall have been fully paid, less the amount of  P120k representing interests already paid by de Jesus; & P100k P100k as attorney's attorney's fees plus appearance fee of  P2,000.00 for each day of court appearance, and the costs of the suit. - The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De Jesus as his Answer raised genuinely contentious issues and he was still required to present his evidence ex parte. As to petitioner, the CA treated his case as a summary  judgment, because his Answer had failed to raise even a single genuine issue regarding any material fact. The appellate appellate court ruled that no novation novation - express express or implied - had taken place when respondent accepted the check from De Jesus. Jesus. According According to the CA, the check was issued precisely to pay for the loan that was covered by the promissory note jointly and severally undertaken by petitioner and De Jesus. Respondent's acceptance of the check did not serve to make De Jesus the sole debtor because, first, the obligation incurred by him and petiti petitione onerr was was joint joint and several; several; and, second second,, the check - which which had been intend intended ed to exti exting ngui uish sh the the obli obliga gati tion on - boun bounce ced d upon upon its its presentment. ISSUE WON the note was negotiable HELD NO. Petitioner Petitioner avers that as a mere accommodati accommodation on party, he was released released as obligor obligor when respondent respondent agree agreed d to extend extend the term of the obligati obligation. on. This This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads: PROMISSORY NOTE P400,000.00 RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of  FOUR FOUR HUND HUNDRE RED D THOU THOUSA SAND ND PESO PESOS, S, Phil Philip ippi pine ne Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at the rate of 5% per month or fraction thereof. It is understood understood that our liability liability under this loan is  jointly and severally [sic]. Done at Quezon City, Metro Manila this 23rd day of  December, 1996. -By its terms, the note was made payable to a specific person rather than to bearer or to order - a requisite for negoti negotiabi abilit lity y under under Act 2031 2031,, the Negot Negotiab iable le Instruments Law (NIL). Petitioner cannot avail himself of 

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Law 108: Negotiable Instruments

the NIL's provisions on the liabilities and defenses of an accommodation party. A non-negotiable note is merely a simple contract in writing and is evidence of such intangible intangible rights rights as may have been created by the assent assent of the parties. parties. The promis promissor sory y note note is thus thus covered by the general provisions of the Civil Code, not by the NIL. Even granting that the NIL was applicable, petitione petitionerr would be liable liable for the promissory promissory note. Under Art. 29 of Act 2031, an accommodation party is liable for the instrument to a holder for value even if  the latter knew the former to be only an accomm accommoda odatio tion n party. party. The relat relation ion betwe between en an accommodation party and the party accommodated is, in effect, one of principal and surety. It is a settled rule that a surety is bound equally and absolutely with the princi principal pal and is deemed deemed an origin original al promis promisor or and debtor from the beginning. -The liability is immediate and direct. Disposition Petit Petition ion denie denied. d. Assai Assaile led d decisi decision on affirmed.

GSIS V CA (RACHO) 170 SCRA 530; REGALADO; February 23, 1989 ~monch~ NATURE Petition to review the judgment of the CA FACTS -Mr. -Mr. and Mrs. Racho, Racho, together together with Mr. and Mrs. Mrs. Lagasca, executed 2 deeds of mortgage (11.5K and 3k). A parcel of land co-owned by the mortgagor spouses was given as security. A few years later, the Lagascas executed an instrument denominated “Assumption of  Mortga Mortgage” ge”,, thus thus assumi assuming ng sole sole respon responsib sibili ility ty of  obligation to the GSIS. -The Lagascas failed to pay the amortizations. The land was extrajudicially foreclosed. -2 years later, the Rachos filed a complaint against the Lagascas Lagascas and GSIS, GSIS, praying praying that the foreclosur foreclosure e be declar declared ed void. void. They They allege alleged d that that they they signed signed the mortgage contracts not as sureties or guarantors of the Lagascas but they merely gave their common property to the latter who were to solely benefit from the loans. -RTC dismissed the case. The CA reversed, saying that the the Rach Rachos os were were an acco accomm mmod odat atio ion n part party. y. The The mortgage was therefore void as the GSIS failed to give personal notice (notice given was thru publication) to them as to the delinquency of the amortizations and as to the subsequent subsequent foreclosure. foreclosure. Thus, the foreclosu foreclosure re was declared void. ISSUE/S

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1. WON WON the the prom promis isso sory ry note note was was a nego negoti tiab able le instrument 2. WON the property of the Rachos was liable under the mortgage contracts 3. WON there was a proper notice of the foreclosure HELD 1. NO Ratio A negotiable negotiable instrument instrument must be payable to order or to bearer Reasoning Both Both partie parties s relied relied on Sec. Sec. 29 of the Negotiable instruments law, which defined the meaning of an accomm accommoda odatio tion n party. party. Said provis provision ion is not applicable since the promissory note is not a negotiable instrument. It not was directly payable to a specified party, GSIS. 3. YES Ratio Article 2085 of the Civil code says third persons who are not parties parties may secure secure an obliga obligatio tion n by mortgaging their own property. Reasoning So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca Lagasca spouses spouses would not invalidate invalidate the mortgage mortgage with with respe respect ct to Racho’ Racho’s s share share in the property property.. In consenting thereto, their share in the property would secure the performance of the principal obligation. 3. YES Ratio Act 3135 does not require personal notice to the mortgagor. Notice thru publication is sufficient Disposition Judgment reversed.

CONSOLIDATED PLYWOOD INDUSTRIES, INC. (Wee and Vergara) V. IFC LEASING AND ACCEPTANCE CORP 149 SCRA 449; GUTIERREZ ; April 30, 1987 ~ice~ NATURE Petition for Certiorari FACTS -Consolidated (petitioner) is a corporation engaged in the logging business, it needed 2 units of tractors for its projects. projects. Atlantic Gulf & Pacific Pacific Company Company of Manila Manila knew of the need and thus offered 2 used tractors to petitione petitionerr through through its sister sister company company and marketing marketing arm, arm, Indust Industria riall Produc Products ts Marke Marketin ting g (the (the "selle "sellerrassignor"). assignor"). Petitione Petitionerr inspected inspected the tractors tractors while while seller-assignor assured petitioner-corporation that the "Used" Allis Crawler Tractors which were being offered were were fit for the job, and gave the correspo correspondi nding ng warran warranty ty of ninet ninety y (90) (90) days days perfor performan mance ce of the

Prof. Rogelio V. Quevedo

[4]

machines and availability of parts. With said assurance and warranty, and relying on the seller-assignor's skill and and judg judgme ment nt,, peti petiti tion oner er-c -cor orpo pora rati tion on thro throug ugh h petiti petitione oners rs Wee Wee and Verga Vergara, ra, presid president ent and vicevicepresid president ent,, respe respecti ctive vely, ly, agree agreed d to purcha purchase se on installment said two (2) units of "Used" Allis Crawler   Tra Tract ctor ors. s. It also also paid paid the the down down paym paymen entt of Two Two Hundred Ten Thousand Pesos (P210,000.00). (P210,000.00). -Seller-assignor issued the sales invoice for the two (2) units of tractors. At the same time, the deed of sale with with chatte chattell mortga mortgage ge with with promis promissor sory y note note was executed. executed. Simultaneous Simultaneously ly with the execution execution of the deed of sale with chattel chattel mortgage mortgage with promissory promissory note, note, the sellerseller-ass assign ignor, or, by means means of a deed deed of  assignment assignment,, assigned assigned its rights rights and interest interest in the chatte chattell mortga mortgage ge in favor favor of the respo responde ndent nt (IFC (IFC Leasing). -Barely -Barely fourteen fourteen (14) days had elapsed after their their delivery when one of the tractors broke down and after another nine (9) days, the other tractor likewise broke down. -Vergara informed seller-assignor and asked for prompt action action.. The seller seller-as -assig signor nor sent sent to the jobsit jobsite e its mechanics to conduct the necessary repairs, but the tractors did not come out to be what they should be after the repairs repairs were undertake undertaken n because because the units were no longer serviceable. -Vergara advised the seller-assignor that the payments of the installme installments nts as listed listed in the promissory promissory note would likewise likewise be delayed delayed until the seller-as seller-assigno signorr completel completely y fulfills fulfills its obligatio obligation n under under its warranty. warranty. Since the tractors tractors were no longer longer serviceab serviceable, le, Wee asked the seller-assignor to pull out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to the respondent and the excess, if any, to be divided between the sellerassignor assignor and petitione petitioner-corp r-corporati oration on which offered offered to bear one-half (1/2) of the reconditioning cost. -No -No resp respon onse se was was rece receiv ived ed by the the peti petiti tion oner er-corporation corporation and despite despite several several follow-up follow-up calls, the seller-assignor did nothing with regard to the request, until the complaint in this case was filed by the IFC. -TC and IAC granted the complaint. ISSUE 1. [not important in our discussion] re: warranty – held there is warranty and it could be rescinded if  breached) 2. WON the promissory note in question is a negotiable instrument HELD No, it is not a negotiable instrument. -The pertinent portion of the note is as follows:

[5]

Law 108: Negotiable Instruments

"FOR "FOR VALUE VALUE RECEIV RECEIVED, ED, I/ I/we we jointl jointly y and sever severall ally y prom promis ise e to pay pay to the the INDU INDUST STRI RIAL AL PROD PRODUC UCTS TS MARKETING, the sum of ONE MILLION NINETY THREE   THOUSAND THOUSAND SEVEN HUNDRED HUNDRED EIGHTY EIGHTY NINE NINE PESOS & 71/100 only (P1,093,789.71), (P1,093,789.71), Philippine Currency, the said said princi principal pal sum, to be payabl payable e in 24 monthly monthly installme installments nts starting July 15, 1978 and every every 15th of  the month thereafter until fully paid. ... ." -"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 maker assum assumes es greate greaterr risk risk under under a negoti negotiabl able e instrument than under a non-negotiable one. . . . . xxx xxx xxx "When instrument is payable to order. "SEC. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order . . . xxx xxx xxx "These are the only two ways by which an instrument may be made payable to order. There must always be a specified specified person named in the instrument. instrument. It means that that the bill bill or note note is to be paid paid to the the pers person on designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words 'or order' or 'to the order of,' the instrument is payable only to the person designated therein and is therefore therefore non-negot non-negotiable iable.. Any subsequent subsequent purchaser 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 -Therefore,, considerin considering g that the subject subject promissory promissory note is not a negotiable instrument, it follows that the respondent can never be a holder in due course but remains a mere assignee of the note in question. Thus, the petitioner petitioner may raise against against the respondent respondent all defenses available to it as against the seller-assignor, Industrial Products Marketing. -This being so, there was no need for the petitioner to implead the seller-assignor when it was sued by the respondent-assignee because the petitioner's defenses apply to both or either of them. -The records also show that respondent IFC knew that they were mere assignees. -A mere perusal perusal of the Deed Deed of Sale Sale with with Chatte Chattell Mort Mortga gage ge with with Prom Promis isso sory ry Note Note,, the the Deed Deed of  Assi Assign gnme ment nt and and the the Disc Disclo losu sure re of Loan Loan/C /Cre redi ditt  Transaction shows that said documents evidencing the sale on installment of the tractors were all executed on the same day by and among the buyer, which is herein

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petitione petitionerr Consolidat Consolidated ed Plywood Plywood Industrie Industries, s, Inc.; the seller seller-as -assig signor nor which which is the Indust Industria riall Produc Products ts Marketing; and the assignee-financing company, which is the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-assignor'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. defective. The responden respondentt 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. Even Even assum assuming ing for the sake sake of argume argument nt that that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts facts so that that its action action in taking taking the instrume instrument nt amounted to bad faith, is not a holder in due course. As such, the responden respondentt is subject subject to all defenses defenses which the petitioners may raise against the seller-assignor. -Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact, which would justify its act of taking the promissory note as not amounting to bad faith. -Sections 52 and 56 of the Negotiable Instruments Law provide that: "SEC. 52. 52. WHAT CONSTI CONSTITUTES TUTES A HOLDER HOLDER IN DUE DUE COURSE. A holder holder in due course is a holder who who has taken the instrument under the following conditions. xxx xxx xxx "(c ) That he took it in in good faith and for value; "(d) That at the time it was negotiated negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the p erson negotiating it. xxx xxx xxx "SEC. 56. 56. WHAT WHAT CONSTITUTES CONSTITUTES NOTICE NOTICE OF DEFECT. 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 actu actual al know knowle ledg dge e of the the infi infirm rmit ity y or defe defect ct,, or knowledge of such facts that his action in taking the instrument amounts to bad faith." -We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the buyer, to wit: "In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times, in pursuance of a previous arrangement with the seller, a finance company pays the full price and the note is indorsed indorsed to it, subrogating subrogating it to the right to collect the price from the buyer, with interest. With the increa increasin sing g freque frequency ncy of instal installme lment nt buying buying in this this country, it is most probable that the tendency of the courts in the United States to protect the buyer against the finance company will find judicial approval approval here. here. Where Where the goods sold turn out to be defective defective,, the

Prof. Rogelio V. Quevedo

[5]

financ finance e compan company y will will be subje subject ct to the defense defense of  failur failure e of consid consider erati ation on and cannot cannot recove recoverr the purch purchas ase e pric price e from from the the buye buyer. r. As agai agains nstt the the argument argument that such a rule would seriously seriously affect 'a cert certai ain n mode mode of tran transa sact ctin ing g busi busine ness ss adop adopte ted d throughout the State,' a court in one case stated: "'It may be that our holding here will require some changes in business methods and will impose a greater burden on the finance companies. We think the buyer ---- Mr. & Mrs. General General Public ---- should should have some protection somewhere along the line. We believe the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better position position to protect protect his interests interests against unscrupulo unscrupulous us and insolvent dealers . . . . "'If "'If this this opinio opinion n impose imposes s great great burden burdens s on financ finance e companies it is a potent argument in favor of a rule which will afford public protection to the general buying public public agains againstt unscru unscrupul pulous ous deale dealers rs in person personal al property..' (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953])" Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third Edition, p. 128).' " -In like manner, manner, therefore therefore,, even assuming assuming that the subject promissory note is negotiable, the respondent, a financing company which actively participated in the sale on installme installment nt of the subject two Allis Allis Crawler Crawler tractors, cannot be regarded as a holder in due course of said note. It follows follows that the respondent's respondent's rights under the promissory promissory note involved involved in this case are subject to all defenses that the petitioners have against the seller-a seller-assign ssignor, or, Industrial Industrial Products Products Marketing Marketing For Section 58 of the Negotiable Instruments Law provides that "in the hands of any holder other than a holder in due course, a negotiabl negotiable e instrume instrument nt is subject to the same defenses as if it were non-negotiable. non-negotiable. . . . ." -Prescinding from the foregoing and setting aside other periph periphera erall issues issues,, we find find that that both both the trial and respon responden dentt appel appellat late e court court erred erred in holdin holding g the promissory note in question to be negotiable. Such a ruling ruling does not only violate violate the law and applicable applicable  jurisprudence, but would result in unjust enrichment on the part of both the seller-as seller-assigno signorr and responde respondent nt assignee at the expense of the petitioner-corporation which rightfully rescinded an inequitable contract. We note, however, that since the seller-assignor has not been impleaded herein, there is no obstacle for the respondent respondent to file a civil suit and litigate litigate its claims agains againstt the seller seller-as -assig signor nor in the rather rather unlike unlikely ly possibility that it so desires. Disposition Annulled and set aside.

ANG TEK LIAN V CA

[6]

Law 108: Negotiable Instruments 87 PHIL 383; BENGZON; September 25, 1950 ~rean~

NATURE Petition for review on certiorari FACTS -Ang Tek Lian, knowing he had no funds therefor, drew on Saturday, Nov. 16, 1946, a check upon the China Banking Corporation for the sum of P4,000, payable to the order of "cash". He delivered it to Lee Hua Hong in exchange for money which the latter handed in the act. On Nov. 18, 1946, the next business day, the check was presented by Lee Hua Hong to the drawee bank for payment, payment, but it was dishonored dishonored for insufficie insufficiency ncy of  funds, the balance of the deposit of Ang Tek Lian on both dates being P335 only. -For having issued a rubber check, Ang Tek Lian was convicted of estafa in the CFI of Manila. CA affirmed the verdict. Hence, this petition with SC. -Ang Tek Lian argues that as the check had been made payable payable to "cash" and had not been endorsed endorsed by Ang  Tek Lian, he is not guilty of the offense charged. Based on the proposition that "by uniform practice of all banks in the Philippi Philippines nes a check check so drawn drawn is invari invariabl ably y dishonored," the following line of reasoning is advanced in support of the argument: "When the offended party accepted the check from defendant, he did so with full know knowle ledg dge e that that it woul would d be dish dishon onor ored ed upon upon presentme presentment. nt. In that sense, defendant defendant could not be said said to have have acte acted d frau fraudu dule lent ntly ly beca becaus use e the the complainant, in so accepting the check as it was drawn, must be considered, by every rational consideration, to have done so fully aware of the risk he was running thereby." ISSUE WON Ang Tek Lian is not guilty of estafa since the check had been made payable to “cash” and had not been endorsed by him. HELD 1. NO. Ang Tek is guilty of estafa. Ratio Under the Negotiable Instruments Law (sec. 9 [d]), a check drawn payable to the order of "cash" is a check payable to bearer, and the bank may pay it to the person person presen presentin ting g it for paymen paymentt withou withoutt the drawer's indorsement. Reasoning SC is not aware of the uniformity of such practice, as the defendant points out. Instances have undoubtedl undoubtedly y occurred occurred wherein wherein the Bank required the indorseme indorsement nt of the drawer before honoring honoring a check payable to "cash." But cases there are too, where no

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such requirement had been made. It depends upon the circumstances of each transaction. - Where Where a check check is made made payabl payable e to the order of  “cash”, “cash”, the word “cash” does not purport to be the name of any person', person', and hence the instrume instrument nt is payable to bearer. The drawee bank need not obtain any indorsement of the check, but may pay it to the person presenting it without any indorsement. In other words, the bank, to which the check is presented for payment, need not have the holder identified, and is not negligent in failing to do so. -Anyway, it is significant, and conclusive, that the form of the check in question was totally unconnected with its its dish dishon onor or.. CA decl declar ared ed that that it was was retu return rned ed unsatisfied because the drawer had insufficient funds not because the drawer's indorsement was lacking. Disposition Decision is AFFIRMED, with costs.

Prof. Rogelio V. Quevedo

[6]

[7]

Law 108: Negotiable Instruments

CHAPTER II: TRANSFER GREAT ASIAN SALES CENTER CORPORATION V CA (BANCASIA FINANCE AND INVESTMENT CORP) 381 SCRA 557; CARPIO; April 25, 2002 ~jojo~ FACTS -Great Asian is engaged in the business of buying and selling household appliances. In March 1981, the board of direct directors ors of Great Great Asian Asian approv approved ed a resolu resolutio tion n authorizing its Treasurer and GM, Arsenio Lim Piat, Jr. to secure secure a loan loan from from Bancas Bancasia ia in an amount amount not to exceed exceed P1M and also authorized authorized Arsenio Arsenio to sign all papers, documents or promissory notes necessary to secure the loan. In Feb. 1982, 1982, the board of directors of  Great Asian approved a 2 nd resolution authorizing Great Asian to secure a discounting line with Bancasia in an amount amount not excee exceedin ding g P2M P2M and also also design designate ated d Arse Arseni nio o as the the auth author oriz ized ed sign signat ator ory y to sign sign all all instru instrume ments nts,, docume documents nts and checks checks necess necessary ary to secure the discounting line. -In March 1981 1981 and 1982, 1982, Tan Chong Lin signed signed 2 Surety Agreements in favor of Bancasia to guarantee, solidarily, the debts debts of Great Asian Asian to Bancasia. Great Asian, through Arsenio, signed 4 Deeds of Assignment of Receivabl Receivables, es, assigning to Bancasia Bancasia 15 postdated postdated checks checks issued issued by various various customers customers in payment for appliances and other merchandise. Arsenio endorsed all the 15 checks by signing his name at the back of the checks checks.. Eight Eight of the dishon dishonore ored d checks checks bore bore the endorsement of Arsenio below the stamped name of  “Grea “Greatt Asian Asian Sales Sales Cente Center”, r”, while while the rest of the dishonored checks just bore the signature of Arsenio.   The drawee banks dishonored dishonored the fifteen checks on maturity maturity when deposited deposited for collection collection by Bancasia, Bancasia, with any of the following as reason for the dishonor: “account closed”, “payment stopped”, “account under garnishment”, and “insufficiency “insufficiency of funds”. After the drawee drawee bank dishonored dishonored the checks, checks, Bancasia Bancasia sent letters to Tan Chong Lin, notifying him of the dishonor and demanding payment from him. Neither Great Asian nor Tan Chong Chong Lin paid paid Bancas Bancasia ia the dishon dishonore ored d checks. -In June 1982, Bancasia filed a complaint for collection of a sum of money against Great Asian and Tan Chong Lin. Great Asian raised the alleged alleged lack of authority of  Arsenio to sign the Deeds of Assignment as well as the absence of consideration and consent of all the parties to the Surety Agreements signed by Tan Chong Lin.

First Semester

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ISSUES 1. WON Arsenio had authority authority to execute the Deeds Deeds of  Assignment and thus bind Great Asian 2. WON Great Great Asian is liable liable to Bancasia under under the Deeds of Assignment for breach of contract pursuant to the the civi civill code code,, inde indepe pend nden entt of the the nego negoti tiab able le instruments law 3. WON Tan Chong Lin Lin is liable to Great Great Asian under the surety agreements. HELD 1. YES -The Corporation Code of the Philippines vests in the board of directors the exercise of the corporate powers of the corporation, save in those instances where the Code Code requir requires es stockh stockhold olders ers’’ approv approval al for certai certain n specific specific acts. In the ordinary ordinary course of business, business, a corporation can borrow funds or dispose of assets of  the corporat corporation ion only on author authority ity of the board of  directors. The board of directors normally designates one or more corporate officers to sign loan documents or deeds of assignment for the corporation. -To secure a credit accommodation from Bancasia, the board board of direct directors ors of Great Great Asian Asian adopte adopted d 2 board board resolutio resolutions ns on different different dates. (text (text of resolutio resolutions ns shown shown in case) case) As plain plain as daylig daylight, ht, the 2 board board resolutions clearly authorized Great Asian to secure a loan or discounting discounting line from Bancasia Bancasia.. The 2 board resolutions also categorically designated Arsenio as the author authorize ized d signat signatory ory to sign sign and delive deliverr all the implementing documents, including checks, for Great Asian. There is no iota of doubt whatsoever about the purpos purpose e of the 2 board board resolu resolutio tions, ns, and about about the authority of Arsenio to act and sign for Great Asian. Arsenio had all the proper and necessary authority from the board of directors of Great Asian to sign the Deeds of Assignme Assignment nt and to endorse endorse the fifteen fifteen postdated postdated checks. checks. Arsenio Arsenio signed the Deeds Deeds of Assignme Assignment nt as agent and authorized signatory of Great Asian under an authority expressly granted by its board of directors.  The signature of Arsenio on the Deeds of Assignment is effectively also the signature of the board of directors of Great Asian, binding on the board of directors and on Great Asian itself. 2. YES -Bancasia’s complaint against Great Asian is founded on the latter’s breach of contract under the Deeds of  Assignme Assignment. nt. The Deeds Deeds of Assignme Assignment nt uniformly uniformly provided for one vital suspensive suspensive condition: in case the drawers fail to pay the checks on maturity, Great Asian obligated itself to pay Bancasia the full face value of  the dishonored checks, including penalty and attorney’s fees. The failure of the drawers drawers to pay the checks is is a

Prof. Rogelio V. Quevedo

[7]

suspensive condition, the happening of which gives rise to Bancasia’s Bancasia’s right to demand demand payment payment from Great Great Asian. This conditional obligation of Great Great Asian arises from its written contracts with Bancasia as embodied in the Deeds of Assignment. -By express provision provision in the Deeds of Assignme Assignment, nt, Great Great Asian Asian unconditio unconditionally nally obligated obligated itself itself to pay Bancasia Bancasia the full value of the dishonor dishonored ed checks. checks. In short, short, Great Great Asian Asian sold the postdated postdated checks on with recourse basis against itself. itself. This is an obligation that Great Asian is bound to faithfully comply because it has the force of law as between Great Asian and Bancasia, as provided in Art 1159 of the Civil Code. Great Great Asian and Bancasia agreed on this specific specific with recourse recourse stipulation, despite the fact that the receivables were negoti negotiabl able e instru instrumen ments ts with with the endors endorseme ement nt of  Arsenio. The contracting parties had had the right to adopt the stipulation which is is separate and distinct distinct from the warran warrantie ties s of an endors endorser er under under the Negot Negotiab iable le Instruments Law. -The explicit with recourse recourse stipulati stipulation on against against Great Great Asian effectively enlarges, by agreement of the parties, the liabilit liability y of Great Great Asian beyond beyond that that of a mere mere endorser of a negotiable instrument. instrument. Thus, whether or not Bancasia gives notice of dishonor dishonor to Great Great Asian, Asian, the latter remains liable liable to Bancasia because of the with recourse stipulation which is independent of the warran warrantie ties s of an endors endorser er under under the Negot Negotiab iable le Instruments Law. -There is nothing in the Negotiable Instruments Law or in the Financing Financing Company Company Act, that prohibits prohibits Great Asian and Bancasia Bancasia parties from adopting adopting the with recourse recourse stipulation stipulation uniformly uniformly found in the Deeds of  Assignment. Instead of being negotiated, negotiated, a negotiable inst instru rume ment nt may may be assi assign gned ed.. Assi Assign gnme ment nt of a negotiable instrument is actually the principal mode of  conveying conveying accounts accounts receivabl receivable e under under the Financing Financing Company Act. Since in discounting of receivables the the assignee is subrogated as creditor of the receivable, the endorsement of the negotiable instrument becomes necessary to enable the assignee to collect from the drawer. This is particularly particularly true with checks checks because collecting banks will not accept checks unless endorsed by the payee. payee. The purpose purpose of the endorseme endorsement nt is merely to facilitate collection of the proceeds of the checks. -The purpose of the endorsement is not to make the assignee finance finance company company a holder holder in due course course because because policy policy considera consideration tions s militate militate against according finance companies the rights of a holder in due course. Otherwise, consumers who purchase appliances on installment, giving their promissor promissory y notes notes or checks to the seller, will will have have no defe defens nse e agai agains nstt the the fina financ nce e

[8]

Law 108: Negotiable Instruments

company should the appliances later turn out to be defective. defective. Thus, the endorse endorsement ment does not  operate to make the finance company a holder in due course. course. For its own protectio protection, n, therefore, therefore, the the fina financ nce e comp compan any y usua usuall lly y requ requir ires es the the assignor, in a separate and distinct contract, to  pay the finance company in the event of dishonor  of the notes or checks. -As endorsee of Great Asian, Bancasia had the option to proceed proceed against against Great Great Asian Asian under under the Negotiable Negotiable Instruments Law. Had it so proceeded, the the Negotiable Instrumen Instruments ts Law would have governed governed Bancasia’ Bancasia’s s cause of action. Bancasia, however, did not choose this route. Instead, Bancasia decided decided to sue Great Asian for breach of contract under the Civil Code, a right that Banc Bancas asia ia had had un unde derr the the expr expres ess s with with reco recour urse se stipulation in the Deeds of Assignment.  The exercise by Bancasia of its option to sue for breach of contract under the Civil Code will not leave Great Asian holding an empty empty bag. Great Asian, after after paying Bancas Bancasia, ia, is subrog subrogate ated d back back as credit creditor or of the receivables. Great Asian can then proceed proceed against the drawers who issued the checks. checks. Even if Bancasia failed to give timely notice of dishonor, still there would be no prejud prejudice ice whatev whatever er to Great Great Asian. Asian. Under Under the Negotiable Instruments Law, notice of dishonor is not  required if the drawer has no right to expect or require the bank to honor honor the check check,, or if the drawer drawer has countermanded payment. In the instant case, all the checks checks were were dishon dishonore ored d for any of the follow following ing reas reason ons: s: “acc “accou ount nt clos close ed”, d”, “acc “accou ount nt unde underr garnishme garnishment”, nt”, insufficie insufficiency ncy of funds”, funds”, or “payment “payment stopped”. In the first three three instances, the drawers had no right to expect or require the bank to honor the checks checks,, and in the last instan instance, ce, the drawe drawers rs had countermanded payment. 3. YES -Tan Chong Lin, by signing signing the Surety Agreements, Agreements, explicitl explicitly y and unconditi unconditionall onally y bound himself to pay Bancasia, solidarily with Great Asian, if the drawers of  the checks checks fail to pay on due date. date. The condition condition on which Tan Chong Lin’s obligation hinged had happened. As surety, Tan Chong Lin automatically became liable for the entire obligation to the same extent as Great Asian.

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[8]

[9]

Law 108: Negotiable Instruments

CHAPTER III: HOLDER IN DUE COURSE  YANG V COURT OF APPEALS [PCIB, FEBTC, Equitable Bank, Chandiramani, Chandiramani, David] 409 SCRA 159; QUISUMBING; Aug 15, 2003 ~yella~ FACTS -Yang and Chandirama Chandiramani ni entered entered into an agreemen agreementt whereby the latter was to give Yang a PCIB manager’s check in the amount of P4.2M in exchange for two of    Yang’ Yang’s s manage manager’s r’s checks checks each each in the amount amount of  P2.087M, both payable to the order of Fernando David.   Yang and Chandiramani agreed that the difference of  P26k P26k in the exchange exchange would would be their profit profit to be divided equally between them. -Yang and Chandiramani also further agreed that the former would secure from FEBTC a dollar draft in the amount amount of US$200k US$200k payable payable to PCIB FCDU Account Account which Chandiramani would exchange for another dollar draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong Kong. -Yang gave the checks and dollar drafts to her business associate Albert Liong to be delivered to Chandiramani by Liong’s Liong’s messenge messengerr Danilo Danilo Rodrigo. Rodrigo. Chandiraman Chandiramanii allegedly allegedly did not appear appear at the meeting meeting place and Ranigo lost the checks and dollar drafts. -Yang requested FEBTC and Equitable to stop payment on the instruments she believed to be lost. However, the the chec checks ks and and draf drafts ts were were not not lost lost beca becaus use e Chandiramani was able to get hold of them and deliver them to Fernando David in exchange of US$360k. -FEB -FEBTC TC and and Equi Equita tabl ble e stop stoppe ped d paym paymen entt on the the instrument instruments. s. However However upon representa representation tion of PCIB, FEBTC subsequently lifted the stop payment order on the dollar draft, TF enabling the holder to receive the amount of US$200k. -Yang lodged a Complaint for injunction and damages agains againstt Equita Equitable ble,, Chandi Chandiram ramani ani,, and David, David, with with prayer for a TRO, with the RTC. It was subsequently amended to include a prayer for Equitable to return to  Yang the amount of P2.087 million with interest -Yang filed a separate case for injunction vs. FEBTC, PCIB, PCIB, Chandirama Chandiramani ni and David David with the RTC. It was later later amended amended to include include a prayer prayer that defendants defendants therein return to Yang the amount of P2.087million P2.087million with interest. -David moved for dismissal, it was denied. Cases were consolidated. - RT RT C r en end er er ed ed ju dg dg me men t i n f av av o orr o f Da vi vid rationcinat rationcinating ing thus: The evide evidence nce thus thus shows shows that  that  defendant David was a holder in due course for the

First Semester

AY 2008-09

reason reason that the cashier’ cashier’s s checks checks were complete complete on their their face when they were negotiated negotiated to him. They  were not yet overdue overdue when he became became the holder  holder  thereof and he had no notice that the said checks were  previously dishonored… -Yang’s MR denied. On appeal, CA affirmed RTC. ISSUE WON respondent Fernando David was a holder in due course HELD: YES. -Every -Every holder holder of a negotiable negotiable instrument instrument is deemed deemed prima prima facie facie a holder holder in due course course.. Howeve However, r, this this presumption arises only in favor of a person who is the payee or indorsee of a bill or note who is in possession of it or the the bear bearer er ther thereo eof. f. What What is vita vitall to the the resol resoluti ution on of the issue is the concurren concurrence ce of all requisites in Section 52 of the Negotiable Instruments Law. -What constitutes a holder in due course xxx 1. That it is complete and regular upon its face 2. That he became became the holder holder of it before before it was overdue, overdue, and without such notice notice that it has been  previously dishonored, is such was a fact  3. That he took it in good faith and for value 4. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect of  the title of the person negotiating it  -Petitioner’s challenge to David’s status as a holder in due course hinges on the allegation that the last two requisites in Section 52 are missing -Section 24 of the Negotiable Instruments Law creates a presum presumpti ption on that that every every party party to an instru instrumen mentt acquired the same for a consideration of for value. The law creates creates a presumpti presumption on in favor of David. David. Also, factual factual findings findings of the lower court showed that David gave Chandiramani Chandiramani US$360,0 US$360,000 00 in exchange exchange of the said instruments. Absent any proof from petitioner to the contrary, the presumption imposed the law is to be upheld. -Petit -Petition ioner er fails fails to point point any circum circumsta stance nces s which which should have put David on inquiry as to the why and wher wheref efor ore e of the the poss posses essi sion on of the the chec checks ks by Chandiramani. David was not privy to the transaction betwe between en petiti petitione onerr and Chandi Chandiram ramani ani.. Inste Instead, ad, Chandirama Chandiramani ni and David David had a separate separate dealing in which it was precisely Chandiramani’s duty to deliver the checks to David as payee. Court cannot hold David as guilty of gross neglect amounting to legal absence of  good good fait faith, h, abse absent nt any any show showin ing g that that ther there e was was something amiss about Chandiramani’s acquisition or possession of the checks.

Prof. Rogelio V. Quevedo

[9]

ATRIUM MANAGEMENT CORPORATION V CA [E.T. Henry & Co., de Leon, de Leon, HiCement Corp] 353 SCRA 23; PARDO; February 28, 2001 ~javi~ FACTS -Hi-Ceme -Hi-Cement nt Corporatio Corporation n (HCC) (through its corporate corporate signatories de Leon and de las Alas) issued checks in favor of E.T. Henry and Co. Inc (ETH), as payee. ETH in turn turn endo endors rsed ed the the chec checks ks to peti petiti tion oner er Atri Atrium um Management Management Corp for valuable valuable considerat consideration. ion. Upon presentment for payment, the drawee bank dishonored all four checks checks for the reason reason “payment “payment stopped”. stopped”. Atrium Atrium instit institute uted d this this action action after after its demand demand for payment of the value of the checks was denied. -RTC rendered a decision ordering de Leon, ETC and HCC to pay Atrium, jointly and severally, P2 million, ++. -CA modified the decision, absolving HCC from liability and dismissing the complaint against it, in part because the subje subject ct checks checks were were not issued issued for valuab valuable le consideration. ISSUE WON Atrium was a holder in due course and for value HELD: NO Reasoning The Negotiable Instruments Law, Section 52 defines a holder in due course, thus: "A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he becam became e the holder holder of it before before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." -Here, the checks were crossed checks and specifically indorsed for deposit to payee's account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payee's account, meaning E.T. E.T. Henr Henry. y. Clea Clearl rly, y, then then,, Atri Atrium um coul could d not not be considered a holder in due course. -However, it does not follow as a legal proposition that simply simply because because petitioner petitioner Atrium was not a holder holder in due course course for having having taken taken the instrume instruments nts in question with notice that the same was for deposit only to the the acco account unt of paye payee e E.T. E.T. Henr Henry y that that it was was alto altoge geth ther er prec preclu lude ded d from from reco recove veri ring ng on the the instrument. The Negotiable Instruments Law does not

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Law 108: Negotiable Instruments

provide that a holder not in due course can not recover on the instrument. -The disadvantage [of Atrium] in not being a holder in due course is that the negotiable instrument is subject to defenses defenses as if it were non-negoti non-negotiable. able. One such defense is absence or failure of consideration. Dispositive decision of CA is affirmed

BATAAN CIGAR AND CIGARETTE FACTORY, INC. V CA [State Investment House, Inc.] 230 SCRA 643; NOCON; March 3. 1994 ~brian b~ FACTS -Petitio -Petitioner, ner, a corp. involved involved in the manufacturing manufacturing of  cigarettes, engaged one of its suppliers, King Tim Pua George George (herein (herein after, George George King), King), to deliver deliver 2,000 2,000 bales of tobacco leaf starting Oct 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated sometime sometime in March 1979 in the totaling totaling P820K. -Relying -Relying on the King's represen representatio tation n that he would comple complete te delive delivery ry w/in w/in 3 mos. mos. from from Dec Dec 5, 1978, 1978, petitione petitionerr agreed agreed to purchase purchase add’l. 2,500 2,500 bales of  tobacco leaves, despite the supplier's failure to deliver in accordance accordance with their their earlier earlier agreement agreement.. Again Again petitioner issued post dated crossed checks in the total amount of P1.1M payable sometime in Sep 1979. -During these times, King was simultaneously dealing with SIHI. On July 19, 1978, he sold at a discount check   TCBT 551826 (P164K), (P164K), post dated dated March 31, 1979, 1979, drawn by petitioner, w/ King as payee to SIHI. On Dec 19 and 26, 1978, he again sold to respondent checks  TCBT Nos. 608967 & 608968, (both P100K) post dated Sep 15 & 30, 1979 respectively, drawn by petitioner in favor of King. -King -King faile failed d to delive deliverr the bales of tobacc tobacco o leaf leaf as agreed despite petitioner's demand. BCCFI issued on March 30, 1979, a stop payment order on all checks payable to George King, including check TCBT 551826, and subsequently, subsequently, on checks checks TCBT Nos. 608967 & 608968 on Sep 14 & 28, 1979, respectively. -Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI as party defendant. TC pronounced SIHI as having a valid claim being a holder in due course. ISSUE WON SIHI, SIHI, a secon second d indors indorser, er, a holder holder of crosse crossed d checks, is a holder in due course HELD: NO.

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-Crossing of checks should put the holder on inquiry and upon him devolve devolves s the duty to ascert ascertain ain the indors indorser' er's s title title to the check check or the nature nature of his posses possessio sion. n. Failin Failing g in this this respec respect, t, the holder holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiabl Negotiable e Instrumen Instruments ts Law, an d a s su ch ch t he he consensus of authority is to the effect that the holder of  the check is not a holder in due course. Reasoning A check is defined defined by law as a bill bill of  exchange drawn on a bank payable on demand. There are a variety of checks, the more popular of which are the memorandu memorandum m check, check, cashier's cashier's check, check, traveler' traveler's s check and crossed check. 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 crosse crossed d specia specially lly when the name 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 written or nothing is written written at all between between the parallel 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 mention "crossed "crossed checks," although Article 541 541 of the the Code Code of Comm Commer erce ce refe refers rs to such such instruments. -According -According to commentato commentators, rs, the negotiability negotiability of a check is not affected affected by its being crossed, crossed, whether specially or generally. It may legally be negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank mentioned between the parallel lines. This is specially true in England where the NIL originated. -In the Philippine business setting, however, we used to be beset with bouncing checks, forging of checks, and so forth forth that that banks banks have have become become quite guarded guarded in encashing encashing checks, particularly particularly those which 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,   jurisprud jurisprudence ence has pronounced pronounced that crossi crossing ng of a check should have the following effects: (a) the check may not  be encashed but only deposited in the bank; (b) the check may be negotiated only once -to one who has an account with a bank; (c) 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, otherwise, he is not a holder holder in due course. -The facts in the present case are on all fours to the case of  State Investment House, Inc. v. IAC. In that that case, New Sikatuna Wood Industries, Inc. (NSWI) also

Prof. Rogelio V. Quevedo

[10]

sold at a discount to SIHI 3 post dated crossed checks, issued by Anita Peña Chua naming as payee NSWI. The court said: “The 3 checks had been crossed generally and issued payable to NSWI w/c could only mean that the drawer had intended the same for deposit only by the rightful person, i.e. the payee named therein. therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentme presentment, nt, and the liability liability did not attach attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of  recourse recourse is available available to petitione petitionerr (SIHI) (SIHI) against against the drawer of the subject checks, private respondent wife (Anita), (Anita), considering considering that petitioner petitioner is not the proper proper party authorized to make presentment of the checks in question. xxx xxx xxx “That the subject checks had been issued subject to the condit condition ion that that privat private e respon responden dents ts (Anit (Anita a and her husband) on due date would make the back up deposit for said checks but w/c condition apparently was not made, thus resulting in the non-consummation of the loan intended to be granted by private respondents to NSWI, NSWI, constitute constitutes s a good defense against petitione petitionerr who is not a holder in due course.” -In the presen presentt case, case, BCCFI' BCCFI's s defen defense se in stoppi stopping ng payment is as good to SIHI as it is to George King. Becaus Because, e, really really,, the checks checks were were issued issued with with the intention that George King would supply BCCFI with the bale bales s of toba tobacc cco o leaf leaf.. Ther There e bein being g fail failur ure e of  consid considera eratio tion, n, SIHI SIHI is not a holder holder in due course. course. Consequent Consequently, ly, BCCFI cannot be obliged to pay the checks. -The -The fore forego goin ing g does does not not mean mean,, howe howeve ver, r, that 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. Disposition Petition granted. RTC decision as affirmed by CA reversed.

CHIANG YA MIN V CA [RCBC, Papercon, Tom Pek] 355 SCRA 608; GONZAGA-REYES; March 28, 2001 ~mini~ FACTS -Petitioner: in 1979, $100,000 was sent by Hang Lung Bank of Hong Kong to RCBC; the remittance was for petitioner petitioner’s ’s own account and was intended intended to qualify qualify him as a foreign investor under Philippine laws; he sent it himself prior to his arrival in the Philippines. He said when he checked on it in 1985, he found that the dollar deposit deposit was transferre transferred d to the Shaw Blvd branch of 

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Law 108: Negotiable Instruments

RCBC and converted to a peso account, which had a balance of only P1,362.10 as of October, 1979. A letter from RCBC in 1985 said that the account was opened with an initial deposit of P729,752.20, and a total of  P728,390 P728,390 was withdrawn by way of 5 checks apparently issued by petitioner in favor of Papercon and Tom Pek.  Thus, the balance of P1,362.10. -Petitioner insists he did not cause the transfer of his money to the Shaw Blvd branch, nor its conversion to pesos and the subsequent subsequent withdrawals, withdrawals, nor did he authorize anyone to perform these acts. -RCBC, -RCBC, after after petitione petitionerr adduced adduced his evidence evidence,, filed filed a third-party complaint against Papercon and Tom Pek, admitting that plaintiff conclusively appeared to have deposited the sum of US$100k with the bank and said foreign currency deposit was converted, adopting the prevailing rate of interest at the time, to P730k and deposited deposited to plaintiff’ plaintiff’s s Current Current Account Account No. 12-200 12-2009 9 which he opened with Shaw Boulevard branch, after which plaintiff issued Check No. 492327 to third-party defend defendant ant Paperc Papercon. on. for the amount amount of P700k P700k and Check NO. 492328 to third-party defendant Tom Pek for the amount of P12,700 P12,700.00 .00.. Responde Respondent nt bank thus contended that should it be made liable to petitioner, said third-party defendants as payees and beneficiaries of the issued checks should be held solidarily liable with it. -Tom Pek and Papercon Papercon did not deny receiving receiving the checks worth P712.7k but argued that unless proven otherwise, the said checks should be presumed to have been issued in their favor for a sufficient and valuable consideration. -TC held RCBC liable for the $100k, saying that the with withdr draw awal als s were were not not made made by peti petiti tion oner er nor nor authorized by him. The court also concluded that the withdrawa withdrawals ls couldn’t couldn’t have been possible possible without without the collusion of officers and employees of RCBC. It held RCBC solely culpable and exonerated the other private respondents. After MR, the decision was amended to hold Papercon and Tom Pek solidarily liable with RCBC. -CA reversed the decision, finding that the opening of  the account and the withdrawals were authorized by petitioner. Defendant and third-party defendants were absolved of any liability. -Petit -Petition ioner er is now seeki seeking ng the reversal reversal of the CA decisi decision, on, mainta maintaini ining ng that that the withdr withdrawa awals ls on his account were unauthorized by him and that respondent bank connived with third persons to defraud him. ISSUE WON petiti petitione onerr has proved proved that that respon responden dentt bank bank connived connived with private respondents respondents and third party defend defendant ants s Paperc Papercon on and Tom Pek Pek in allowi allowing ng the withdrawals, knowing them to be unauthorized by the

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petitioner, and with the purpose of defrauding him. HELD NO. NO. Ther There e is no evid eviden ence ce to demo demons nstr trat ate e that that responden respondentt bank RCBC and Papercon Papercon and Tom Pek colluded to defraud petitioner of his money. What the evidence establishes is that the opening of the account and the withdrawals were authorized by petitioner, and the the sign signat atur ures es appe appear arin ing g on the the chec checks ks were were petitioners. -Under -Under either either theory theory of fraud fraud or neglig negligenc ence, e, it is incu incumb mbe ent upon upon peti petiti tion oner er to show show that that the the withdrawals were not authorized by him. If he is unable to do so, his allegations allegations of fraud or negligence negligence are unsu unsubs bsta tant ntia iate ted d and and the the pres presum umpt ptio ion n that that he authorized the said withdrawals will apply. -Petition -Petitioner’s er’s allegation allegation that he did not authorize the opening of the current account and the issuance of the checks was countered by private respondents through the testimony testimony of Catalino Reyes, the accountant accountant of  Pioneer Business Forms, Inc. (another business venture of Tom Pek) to the effect that the opening of Current Acco Accoun untt No. No. 12-2 12-200 009 9 and and the the issu issuan ance ce of the the questioned questioned checks were all upon the instruction instructions s of  petitioner. Reyes stated that he first met petitioner in   Jan Janua uary ry or Febr Februa uary ry 1979 1979 when when the the latt latter er was was introd introduce uced d to him by Tom Pek. Pek. He and his fellow fellow employee employees s were advised advised by Tom Pek to "personally "personally help (Chiang Yia Min) in all his personal accounts." accounts." Reyes was charged with working on the incorporation of Philippine Color Scanning, a new business venture where where petiti petitione onerr will will be the GM. He also also assist assisted ed petitioner when the latter applied for a change of visa from tourist to special non-immigrant. Reyes testified that on the first week week of February February 1979, petitioner petitioner asked him to pick up the US$100k which he caused to be remi remitt tted ed in comp compli lian ance ce with with the the capi capita tall requireme requirements nts for foreign foreign investors investors at Pacific Pacific Banking Banking Corporation. Bringing with him the letter of advise from the bank, bank, Reyes Reyes did as he was told and the bank released to him a cashier’s check representing the peso equivale equivalent nt of the US$100k. US$100k. Reyes Reyes then showed the check to petitioner and upon the latter’s instructions, he went to the Shaw Boulevard branch of respondent bank to open a checking account in petitioner’s name, using the proceeds of the check as initial deposit. -Reyes describes the opening of the current account as having been done in haste, since petitioner was in a hurry to have the proceeds of the remittance credited to his checking account. Because Because Reyes Reyes was wellknown known to the officers and employee employees s of RCBC-Shaw RCBC-Shaw Boulevard, he was allowed to bring out of the bank the applicatio application n form, depositor’s depositor’s card, and other other forms forms which required petitioner’s signature as depositor. He

Prof. Rogelio V. Quevedo

[11]

then then fill filled ed out out the the form forms, s, and and brou brought ght them them to petitioner for signing. He witnessed petitioner sign the form forms. s. Then Then he brou brough ghtt the the sign signed ed form forms, s, and and petitioner’s passport, back to the bank, which approved the opening of the current account upon a comparison of the signatures on the forms and the passport. -The -The docume documenta ntary ry eviden evidence ce accura accuratel tely y suppor supports ts Reyes’ Reyes’s s statem statement ents. s. Pacifi Pacific c Bankin Banking g Corpor Corporati ation on confirmed confirmed receipt of the US$100k US$100k from Hang Lung Bank, Ltd. by telegraphic transfer on Feb 7, 1979. It had inst instru ruct ctio ions ns to tran transm smit it the the mone money y "to "to Riza Rizall Commercial Banking Corporation, Head Office, for (the) account of Chiang Yia Min"; however, the records also show that on Feb 8, 1979 Pacific Banking Corporation released released the money money to petitione petitionerr by way of Cashier’s Cashier’s Chec Check k No. No. DD 2449 244955 55,, repr repres esen enti ting ng the the peso peso equivalen equivalentt of the US$100k, US$100k, which check was in turn presented before the Board of Special Inquiry of the Bure Bureau au of Immi Immigr grat atio ion n as proo prooff of peti petiti tion oner er’s ’s compliance with the requirements for change of status from tourist tourist to special special non-immig non-immigrant, rant, i.e. , foreign foreign invest investor. or. On the same day, day, Feb Feb 8, 1979 1979,, Curren Currentt Account No. 12-2009, in the name of Chiang Yia Min, was opened in RCBC-Shaw RCBC-Shaw Boulevard Boulevard with an initial initial deposit deposit of P729,75 P729,752.20 2.20,, "represen "representing ting proceeds proceeds of  inward inward remitt remittanc ance e recei received ved from from Pacifi Pacific c Bankin Banking g Corporation." -There were five issued checks: two made payable to Papercon, and three made payable to cash (these three checks were all negotiated to Tom Pek). Catalino Reyes testified testified that on two separate separate instances, instances, petitione petitionerr asked him to prepare two of the five checks questioned in this case, specifically, the check for P700k dated Feb 19, 1979 and payable to Papercon, and the check for P12,700.00, dated Feb 23, 1979 and payable to cash. He witnessed petitioner study the information typed on the checks, sign the checks, and hand them over to  Tom Pek. The microfilm copies of these checks were submitted in evidence. They all bear the signature of  petitioner. No shred of evidence was presented to show that the signatures were not petitioner’s. -Upon finding that the checks issued to Papercon and  Tom Pek were in order, there being no indication that respondent bank colluded in paying the checks to them for any unlawful cause, or was otherwise deceive or misled into doing the same, the presumption lies that they were holders for value and in good faith. Dispositive decision of CA is affirmed

BANK OF THE PHIL. ISLANDS V CA [Eastern Plywood Corp. and Lim] 232 SCRA 302; DAVIDE; May 10, 1994 ~sarah~

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Law 108: Negotiable Instruments

FACTS -Easte -Eastern rn Plywoo Plywood d Corpor Corporati ation on and Benign Benigno o D. Lim [officer and stockholder] held at least one joint bank account ("and/or" account) with the Commercial Bank and Trust Co. (CBTC), (CBTC), the predecesso predecessor-inr-in-inte interest rest of  petitioner BPI. -March 1975, a joint checking account ("and" account) with with Lim in the amount amount of P120 P120k k was opened opened by Marian Mariano o Velasc Velasco o with with funds funds withd withdraw rawn n from from the account of Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint account of  Velasco and Lim. The money therein was placed in the money market. -Velasco died on 7 April 1977. At the time of his death, the outsta outstandi nding ng balanc balance e of the account account stood stood at P662,522.87. P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as Pres and GM of Eastern, ½ of this amount was provisionally released and transferred to one of the bank accounts of  Eastern with CBTC. -18 August 1978: Eastern obtained a loan of P73k from CBTC as "Additional Working Capital," evidenced by the "Disclosur "Disclosure e Statement Statement on Loan/Credi Loan/Creditt Transactio Transaction" n" (Disclosu (Disclosure re Statement Statement)) signed signed by CBTC through its branch branch manage manager, r, Cefer Ceferino ino Jimene Jimenez, z, and Easte Eastern, rn, through Lim, as its Pres-GM. The loan was payable on demand with interest at 14% per annum. -For -For this this loan, loan, Eastern Eastern issued issued on the same same day a negoti negotiabl able e promis promissor sory y note note for P73k P73k payabl payable e on demand to the order of CBTC with interest at 14% per annum. The note was signed by Lim both in his own capacity and as Pres-GM of Eastern. No reference to any security for the loan appears on the note. In the Disclosure Statement, the box with the printed word "UNSEC "UNSECURE URED" D" was marke marked d with with "X". "X". ------- meani meaning ng unsecured, while the line with the words "this loan is wholly/partly secured by" is followed by the typewritten words "Hold-Out on 1:1 on C/A No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance of P331,261.44. P331,261.44. -In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also dated 18 August 1978, wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current Account No. 2310-011-42 2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged interests therein as these may appear as a result of final and definitive  judicial action or a settlement between and among the cont contes esti ting ng part partie ies s ther theret eto. o."" Para Paragr grap aph h 02 of the the Agreement provides as follows: “Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their their alleged alleged interests interests in the Account Account Balance shall have have been been esta establ blis ishe hed d with with fina finali lity ty,, ampl ample e and and

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sufficient sufficient power as shall be necessary necessary to retain said Account Account Balance and enable enable Comtrust Comtrust to apply the Account Balance for the purpose of liquidating the Loan in respect respect of principal principal and/or accrued accrued interest interest." ." And paragraph paragraph 05 thereof thereof reads: reads: “The acceptance acceptance of this holdout shall not impair the right of Comtrust to declare the loan payable on demand at any time, nor shall the existence hereof and the non-resolution of the dispute betw betwee een n the the cont conten endi ding ng part partie ies s in resp respec ectt of  entitlement to the Account Balance, preclude Comtrust from instituting an action for recovery against Eastply and/or Mr. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. Lim shall default in payment of all obligations and liabilities thereunder." -In the meantime, a case for the settlement of Velasco's estate was filed with RTC Pasig. In said case, the whole balance balance of P331,26 P331,261.4 1.44 4 in the said joint account of  Velasco and Lim was being claimed as part of Velasco's estate. -9 Sept 1986, the intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit unde underr the the join jointt acco accoun untt of Lim Lim and and Vela Velasc sco o and and authorized the heirs to divide among themselves the amount withdrawn. -2 Dec 1987: BPI filed with the RTC Manila a complaint against Lim and Eastern demanding payment of the promissory note for P73k. Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of  the balance in the disputed account subject subject of the Holdout Holdout Agreemen Agreementt and the interest interests s thereon thereon after after deducting the amount due on the promissory note. -After -After due proceedings, proceedings, RTC Manila Manila dismissed dismissed the compla complaint int and denie denied d the counte countercl rclaim aim to avoid avoid disturbing the resolution of the intestate court. -Both -Both partie parties s appea appealed led to CA, which render rendered ed a decision affirming the RTC decision. It, however, failed to rule on the defendants' partial appeal from the TC's denial of their counterclaim. Upon MR, CA promulgated an Amen Amende ded d Deci Decisi sion on wher wherei ein n it rule ruled d that that the the settlement of Velasco's estate had nothing to do with the claim claim of the defenda defendants nts for the return return of the balance of their account with CBTC/BPI as they were not privy to that case, and that the defendants defendants,, as deposi depositor tors s of CBTC/ CBTC/BP BPI, I, are the latter latter's 's credit creditors ors;; hence, CBTC/BPI should have protected the defendants' intere interest st in the estat estate e procee proceedin dings gs when when the said said accoun accountt was claime claimed d by Velas Velasco' co's s estat estate. e. It then then orde ordere red d BPI BPI "to "to pay pay defe defend ndan ants ts the the amou amount nt of  P331,261.44 P331,261.44 representing the outstanding balance in the bank account of defendants." -22 April 1992: BPI failed the instant petition. ISSUES

Prof. Rogelio V. Quevedo

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1. WON BPI can demand demand payment of the loan of P73k P73k despite the existence of the Holdout Agreement 2. WON BPI is still liable to the private respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco. HELD 1. YES. -The collection suit of BPI is based on the promissory note for P73k. On its face, the note is an unconditional promis promise e to pay the said said amount amount;; it is a negoti negotiabl able e instrument instrument.. BUT BPI was not a holder in due course because the note was not indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid transfer to make BPI a holder in due course. It acquired the note from CBTC by the contract of merg merger er or sale sale betw betwee een n the the two two bank banks. s. BPI, BPI, theref therefore ore,, took took the note note subjec subjectt to the Holdou Holdoutt Agreement. -Holdout Agreement, par. 02: CBTC/BPI had every right to demand that Eastern Eastern and Lim settle their liability liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint acco accoun untt to the the paym paymen entt of the the note note.. What What the the agreement conferred on CBTC was a power, not a duty. Generall Generally, y, a bank is under no duty or obligation obligation to make make the applicat application ion.. To apply apply the deposit deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to exercise. -Als -Also, o, par. par. 05 stat states es that that notw notwit iths hsta tand ndin ing g the the agreement, CBTC was not in any way precluded from demanding payment from Eastern and from instituting an action action to recove recoverr payme payment nt of the loan. What it provides is an alternative, not an exclusive, method of  enforcing enforcing its claim on the note. When it demanded demanded payment of the debt directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposi depositt subjec subjectt of the Holdout Holdout Agree Agreeme ment nt to the payment of the promissory note for P73k. Its suit for the enforcement of the note was then in order.

2. YES. -The counterclaim of Eastern and Lim for the return of  the P331,261.44 P331,261.44 was equivalent to a demand that they be allowed to withdraw their bank deposit. [Recall: Art. 1980, NCC: bank deposits governed by the provisions re: simple loan; Serran Serrano o vs. Central Central Bank Bank of the Philippines: bank deposits are in the nature of irregular deposits; relationship between a depositor and a bank is one of creditor and debtor; bank deposit is payable on demand of depositor.] -The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As the real creditor of the bank, Eastern

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Law 108: Negotiable Instruments

has the right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of  Velasco to withdraw the whole balance of the account.   The petitioner should not have allowed such withdrawal. Order of the intestate court merely authorized the heirs of Velasco to withdraw account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. -Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of  the creditor, or through error induced by fraud of a third person. Disposition Petition partly granted. CA decision re: dismissal of petitioner's complaint reversed and set aside; Award on counterclaim sustained subject to a modification of the interest.

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AY 2008-09

Prof. Rogelio V. Quevedo

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