[Nego] Digests

NEGO - Quevedo Camille Umali CHAPTER 2: TRANSFER GREAT ASIAN SALES CENTER CORPORATION V CA 381 SCRA 557; CARPIO; April 25, 2002 FACTS -Great Asian is engaged in the business of buying and selling household appliances. In March 1981, the board of directors of Great Asian approved a resolution authorizing its Treasurer and GM, Arsenio Lim Piat, Jr. to secure a loan from Bancasia in an amount not to exceed P1M and also authorized Arsenio to sign all papers, documents or promissory notes necessary to secure the loan. In Feb. 1982, the board of directors of Great Asian approved a 2nd resolution authorizing Great Asian to secure a discounting line with Bancasia in an amount not exceeding P2M and also designated Arsenio as the authorized signatory to sign all instruments, documents and checks necessary to secure the discounting line. -In March 1981 and 1982, Tan Chong Lin signed 2 Surety Agreements in favor of Bancasia to guarantee, solidarily, the debts of Great Asian to Bancasia. Great Asian, through Arsenio, signed 4 Deeds of Assignment of Receivables, assigning to Bancasia 15 postdated checks issued by various customers in payment for appliances and other merchandise. Arsenio endorsed all the 15 checks by signing his name at the back of the checks. Eight of the dishonored checks bore the endorsement of Arsenio below the stamped name of “Great Asian Sales Center”, while the rest of the dishonored checks just bore the signature of Arsenio. The drawee banks dishonored the fifteen checks on maturity when deposited for collection by Bancasia, with any of the following as reason for the dishonor: “account closed”, “payment stopped”, “account under garnishment”, and “insufficiency of funds”. After the drawee bank dishonored the checks, Bancasia sent letters to Tan Chong Lin, notifying him of the dishonor and demanding payment from him. Neither Great Asian nor Tan Chong Lin paid Bancasia the dishonored 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 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. ISSUES 1. WON Arsenio had authority to execute the Deeds of Assignment and thus bind Great Asian 2. WON Great Asian is liable to Bancasia under the Deeds of Assignment for breach of contract pursuant to the civil code, independent of the negotiable instruments law 3. WON Tan Chong Lin is liable to 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 requires stockholders’ approval for certain specific acts. In the ordinary course of business, a corporation can borrow funds or dispose of assets of the corporation only on authority 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 of directors of Great Asian adopted 2 board resolutions on different dates. (text of resolutions shown in case) As plain as daylight, the 2 board resolutions clearly authorized Great Asian to secure a loan or discounting line from Bancasia. The 2 board resolutions also categorically designated Arsenio as the authorized signatory to sign and deliver all the implementing documents, including checks, for Great Asian. There is no iota of doubt whatsoever about the purpose of the 2 board resolutions, and 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 Assignment and to endorse the fifteen postdated checks. Arsenio signed the Deeds of Assignment 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 Assignment. The Deeds of Assignment uniformly provided for one vital 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 to pay the checks is a suspensive condition, the happening of which gives rise to Bancasia’s right to demand payment from Great Asian. This conditional obligation of Great Asian arises from its written contracts with Bancasia as embodied in the Deeds of Assignment. -By express provision in the Deeds of Assignment, Great Asian unconditionally obligated itself to pay Bancasia the full value of the dishonored checks. In short, Great Asian sold the postdated checks on with

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NEGO - Quevedo Camille Umali recourse basis against 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 Asian and Bancasia agreed on this specific with recourse stipulation, despite the fact that the receivables were negotiable instruments with the endorsement of Arsenio. The contracting parties had the right to adopt the stipulation which is separate and distinct from the warranties of an endorser under the Negotiable Instruments Law. -The explicit with recourse stipulation against Great Asian effectively enlarges, by agreement of the parties, the liability of Great Asian beyond that of a mere endorser of a negotiable instrument. Thus, whether or not Bancasia gives notice of dishonor to Great Asian, the latter remains liable to Bancasia because of the with recourse stipulation which is independent of the warranties of an endorser under the Negotiable Instruments Law. -There is nothing in the Negotiable Instruments Law or in the Financing Company Act, that prohibits Great Asian and Bancasia parties from adopting the with recourse stipulation uniformly found in the Deeds of Assignment. Instead of being negotiated, a negotiable instrument may be assigned. Assignment of a negotiable instrument is actually the principal mode of conveying accounts receivable under the Financing Company Act. Since in discounting of receivables 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 true with checks because collecting banks will not accept checks unless endorsed by the payee. The purpose of the endorsement is merely to facilitate collection of the proceeds of the checks. -The purpose of the endorsement is not to make the assignee finance company a holder in due course because policy considerations militate against according finance companies the rights of a holder in due course. Otherwise, consumers who purchase appliances on installment, giving their promissory notes or checks to the seller, will have no defense against the finance company should the appliances

later turn out to be defective. Thus, the endorsement does not operate to make the finance company a holder in due course. For its own protection, therefore, the finance company usually requires 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 against Great Asian under the Negotiable Instruments Law. Had it so proceeded, the Negotiable Instruments Law would have governed Bancasia’s cause of action. Bancasia, however, did not choose this route. Instead, Bancasia decided to sue Great Asian for breach of contract under the Civil Code, a right that Bancasia had under the express with recourse 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 bag. Great Asian, after paying Bancasia, is subrogated back as creditor of the receivables. Great Asian can then proceed against the drawers who issued the checks. Even if Bancasia failed to give timely notice of dishonor, still there would be no prejudice whatever to Great Asian. 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 the check, or if the drawer has countermanded payment. In the instant case, all the checks were dishonored for any of the following reasons: “account closed”, “account under garnishment”, insufficiency of funds”, or “payment stopped”. In the first three instances, the drawers had no right to expect or require the bank to honor the checks, and in the last instance, the drawers had countermanded payment. 3. YES -Tan Chong Lin, by signing the Surety Agreements, explicitly and unconditionally bound himself to pay Bancasia, solidarily with Great Asian, if the drawers of the checks fail to pay on due date. The 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.

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NEGO - Quevedo A Camille Umali CHAPTER III: HOLDER IN DUE COURSE [Cases cited in Campos] YANG V. COURT OF APPEALS 409 SCRA 159 FACTS: Yang and Chandimari entered into an agreement that the latter would issue to the former a manager’s check in exchange for two checks that Yang has payable to the order of David. The difference in amount would be the profit of the two of them. It was further agreed upon that Yang would secure a dollar draft, which Chandimari would exchange with another dollar draft to be secured from a Hong Kong bank. At the agreed time of rendezvous, it was reported by Yang’s messenger that Chandimari didn't show up and the drafts and checks were allegedly stolen. This wasn't true however. Chandimari was able to get hold of the drafts and checks. He was even able to deliver to David the two checks and was able to get money in return. Consequently, Yang asked for the stoppage of payment of the checks she believe to be lost, relying on the report of her messenger. The stoppage order was eventually lifted by the banks and the drafts and checks were able to be encashed. Yang then filed an action for injunction and damages against the banks, Chandimari and David. The trial court and CA held in favor of David as a holder in due course. HELD: Every holder of a negotiable instrument is presumed to be a holder in due course. This is specially true if one is a holder because he is the payee or indorsee of the instrument. In the case at bar, it is evident that David was the payee of the checks. The

prima facie presumption of him being a holder in due course is in his favor. Nonetheless, this presumption is disputable. On whether he took the check under the conditions set forth in Section 52 must be proven. Petitioner relies on two arguments on why David isn’t a holder in due course—first, because he took the checks without valuable consideration; and second, he failed to inquire on Chandimari’s title to the checks given to him. The law gives rise to the presumption of valuable consideration. Petitioner has the burden of debunking such presumption, which it failed to do so. Her allegation that David received the checks without consideration is unsupported and devoid of any evidence. Furthermore, petitioner wasn't able to show any circumstance which should have placed David in inquiry as to why and wherefore of the possession of the checks by Chandimari. David wasn't a privy to the transactions between Yang and Chandimari. Instead, Chandimari and David had the agreement between themselves of the delivery of the checks. David even inquired with the banks on the genuineness of the checks in issue. At that time, he wasn't aware of any request for the stoppage of payment. Under these circumstances, David had no obligation to ascertain from Chandimari what the nature of the latter’s title to the checks was, if any, or the nature of his possession.

ATRIUM MANAGEMENT CORPORATION VS. COURT OF APPEALS Facts: Hi-Cement Corporation through its corporate signatories, Lourdes M. de Leon, treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to Atrium Management Corporation for valuable consideration. Upon presentment for payment, the drawee bank dishonored all four checks for the common reason "payment stopped". On 3 January 1983, Atrium Management Corporation filed with the Regional Trial Court, Manila an action for collection of the proceeds of four postdated checks in the total amount of P2 million, after its demand for payment of the value of the checks was denied. After due proceedings, on 20 July 1989, the trial court rendered a decision ordering Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay Atrium jointly and severally, the amount of P2 million corresponding to the value of the four checks, plus interest and attorney's fees. On appeal to the Court

of Appeals, on 17 March 1993, the Court of Appeals promulgated its decision modifying the decision of the trial court, absolving Hi-Cement Corporation from liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas constituted ultra vires acts; and (3) The subject checks were not issued for valuable consideration. Hence, Atrium filed the petition. Issue [1]: Whether the issuance of the checks was an ultra vires act. Held [1]: The record reveals that Hi-Cement Corporation issued the four (4) checks to extend financial assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost of hydro oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for counterpart checks from E.T. Henry if the checks were in payment for

NEGO - Quevedo 2 Camille Umali hydro oil delivered by E.T. Henry to Hi-Cement? HiCement, however, maintains that the checks were not issued for consideration and that Lourdes and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry, who admittedly was in need of financial assistance. There was no sufficient evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the corporation and is authorized to sign checks for the corporation. At the time of the issuance of the checks, there were sufficient funds in the bank to cover payment of the amount of P2 million pesos. Thus, the act of issuing the checks was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law" The term "ultra vires" is "distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. Issue [2]: Whether Lourdes M. de Leon and Antonio de las Alas were personally liable for the checks issued as corporate officers and authorized signatories of the check.

Held [2]: Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: (1) He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; (2) He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) He agrees to hold himself personally and solidarily liable with the corporation; or (4) He is made, by a specific provision of law, to personally answer for his corporate action." Herein, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of HiCement were authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the checks were strictly endorsed for deposit only to the payee's account and not to be further negotiated. What is more, the confirmation letter contained a clause that was not true, that is, "that the checks issued to E.T. Henry were in payment of Hydro oil bought by HiCement from E.T. Henry". Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor.

BATAAN CIGAR AND CIGARETTE FACTORY VS. CA Facts: Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on 13 July 1978 issued crossed checks post dated sometime in March 1979 in the total amount of P820,000. Relying on the supplier's representation that he would complete delivery within 3 months from 5 December 1978, BCCFI agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance with their earlier agreement. Again, BCCFI issued postdated crossed checks in the total amount of P1,100,000, payable sometime in September 1979. During these times, George King was simultaneously dealing with State Investment House Inc. (SIHI). On 19 July 1978, he sold at a discount check TCBT 551826 bearing an amount of P164,000.00, post dated 31 March 1979, drawn by BCCFI, naming George King as payee to SIHI. On 19 December and 26, 1978, he again sold to SIHI checks TCBT 608967 & 608968, both in the amount of P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by BCCFI in favor of George King. In as much as George King failed to deliver the bales of tobacco leaf as agreed despite its demand, BCCFI issued on 30 March 1979, a stop payment order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also ordered on checks TCBT

608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to deliver the tobacco leaves. Efforts of SIHI to collect from BCCFI having failed, it instituted the present case with the Regional Trial Court, naming only BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a holder in due course. It further said that the non-inclusion of King Tim Pua George as party defendant is immaterial in this case, since he, as payee, is not an indispensable party. Raised in the Court of Appeals, the appellate court affirmed the decision of the trial court. Hence, the present petition for review. The Supreme Court granted the petition, finding that the court a quo erred in the application of law; and thus reversed the decision of the Regional Trial Court as affirmed by the Court of Appeals’ with cost against SIHI. 1.

Section 52 NIL; Holder in Due Course Section 52 of the The Negotiable Instruments Law states what constitutes 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 became the holder of it before it was overdue, and without notice that it had been previously

NEGO - Quevedo 3 Camille Umali 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." 2.

Section 59 NIL Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims, acquired the title as holder in due course.

3.

SIHI vs. IAC on all fours The facts in thepresent case are on all fours to the case of State Investment House, Inc. (the very respondent in this case) v. Intermediate Appellate Court wherein the Court made a discourse on the effects of crossing of checks.

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Check defined; Kinds A check is defined by law as a bill of exchange drawn on a bank payable on demand. There are a variety of checks, the more popular of which are the memorandum check, cashier's check, traveler'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.

5.

Crossed check A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words "and company" are written or nothing is written at all between the parallel lines. It may be issued so that presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although Article 541 of the Code of Commerce refers to such instruments.

6. General viewpoint and English setting on crossed check: Negotiability of a check not affected According to commentators, the negotiability of a check is not affected by its being 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 Negotiable Instrument Law originated. 7. Philippine setting: Effects of a crossed check In the Philippine business setting, beset with bouncing checks, forging of checks, and so forth that banks have become quite guarded in encashing checks, particularly those which name a specific payee. Unless one is a valued client, a bank will not even accept second indorsements on checks. In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (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, he is not a holder in due course. 8. Crossed check should put holder on inquiry to ascertain indorser’s title or nature of possession; Effects of failure, Section 52 (c) NIL Crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser's title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, and as such the consensus of authority is to the effect that the holder of the check is not a holder in due course. In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King; because the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks. 9. SIHI can collect from immediate indorser, George King It does not mean, however, that SIHI 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 nonnegotiable. Hence, SIHI can collect from the immediate indorser, in this case, George King.

NEGO - Quevedo 4 Camille Umali BPI V ALFRED BEARWIN & CO. (1928) ~ricky~ NATURE Appeal by Anselmo Diaz against the CFI of Iloilo’s order for him to satisfy 2 promissory notes he issued in favor of Alfred Berwin & Co. FACTS  -The Bank of the Philippine Islands (BPI) filed a collection suit against Alfred Berwin & Co (ABC). Diaz, ABC’s debtor, was given notice, when the preliminary attachment was ordered, not to deliver the payment of his debt to ABC. The CFI of Iloilo rendered judgment in favor of BPI.  -To effect the execution of the judgment, BPI prayed that Diaz be summoned to testify concerning the credit of ABC against him. Diaz acknowledged his indebtedness in the sum of P20,000, the balance of credit for a greater amount. The P20,000 was evidenced by two promissory notes he issued in favor of ABC.  -It does not appear, however, from the record whether such promissory notes are still in the hands of ABC. It was not known whether ABC is still the

holder in due course of the promissory notes or whether it had already been alienated. ISSUE WON Diaz may be compelled to pay Alfred Berwin & Co., or the sheriff as a credit in favor of said corporation. HELD: NO. Reasoning Diaz cannot be compelled to pay the amount of the said promissory notes to any person save the holder of such documents in due course, for said person is the one entitled to receive it. To compel Diaz to pay ABC would be to expose him to the situation in which, having paid the amount of the promissory notes without settling the same, a holder in due course may appear and within all reason demand its full payment. - The fact that he was given notice when the preliminary attachment was ordered does not change the situation because the debt was secured by negotiable instruments. Notwithstanding such notice, it was beyond Diaz’s power to prevent ABC from negotiating the promissory notes. Disposition Order revoked.

ELGIN NAT’L BANK V GOECKE (1920) ~joey~ FACTS  -Elgin National Brewing Company executed two demand notes, one for $3K (Note A) and the other for $2500 (Note B), each payable to the maker’s order and indorsed in blank ink by it & by 5 accommodation indorsers, including Frank A. Goecke, the company manager. The accommodation indorsers signed on representation that the proceeds were to be used to pay for supplies for the brewery.  -Both notes were diverted by Goecke from their intended purpose. Note A was indorsed to Elgin National Bank as collateral security for a note (Note C) earlier executed by Goecke as maker, the last renewal of which was made on Nov. 22, 1912 for 6 months. Note B was indorsed to the same bank as payment for 5 other notes earlier executed by the brewing company as maker and purchased by the bank. The bank did not know of the diversion of the two demand notes from their intended purpose.  -Brewing company defaulted. Bank sued all 5 accommodation indorsers.  -TC ruled in favor of the bank. Appellate court affirmed. ISSUE WON the accommodation indorsers are liable to the bank notwithstanding the diversion of the proceeds of the notes HELD: YES

Ratio An indorsee of a negotiable note who has taken it, before its maturity, as collateral security for a preexisting debt and without any express agreement, is deemed a holder for a valuable consideration, and that he holds it free from latent defenses on the part of the maker. Reasoning -The accommodation indorsers are liable to the bank on the notes, although the bank at the time of taking the instruments knew that they were only accommodation parties, if the bank is a holder for value, as the notes were indorsed to it before maturity and without notice for their restricted use and purpose. -As for Note B, it is clear that the bank is a holder for value. The consideration paid by the bank for this note was the cancellation and surrender by it of the 5 other notes executed by the brewing company. -Note A was not delivered to the bank and accepted by it as security until Dec. 10, 1912. There is no proof in the record that at the time Note C was renewed on Nov. 22 there was an agreement that Note A was to be put up as collateral and in part consideration for the extension of Note C. Thus, it is argued by the accommodation parties that mere delivery of Note A, without agreement for further extension of time or other agreement for Note C, does not make the bank a bona fide holder for value. This contention is without merit. See ratio Dispositive Judgment affirmed.

NEGO - Quevedo B Camille Umali MERCHANTS’ NAT’L BANK OF ST. PAUL V STA. MARIA SUGAR CO. (1914) ~chriscaps~ FACTS  -Sta. Maria gave netotiable note payable to order of American Hoist & Derrick Co (payee).  -Payee deposited the note in Merchants’ Natl Bank, w/c gave depositor credit representing the principal & accrued interest ($2,427.36).  -After this, there were subsequent deposits and withdrawals. The smallest balance during this period was $6,294.04.  -Discounting bank had no knowledge of claimed defense of maker until receipt of its letter.  -The Bank sued the maker. Maker (Sta. Maria) claimed that the Bank is not a holder for value and not a holder in due course.

HELD: YES  -Until 1 month after plaintiff had discounted the instrument, it had no knowledge or suspicion of any infirmity.  -Mere discounting of the note and placing the amount of said discount to the credit of the holder would not then have constituted a transfer for value because the bank would have parted with nothing, there would have been a mere bookkeeping entry. But if the sum had subsequently been checked out, then value would have passed.  -We should agree with opinion of Justice Brewer: The first debits are to be charged against the first credits. It follows therefore, that the bank was a bona fide holder for value.

ISSUE: WON the Bank is a holder in due course NAT’L BANK OF COMMERCE V MORGAN (1921) ~edel~ FACTS  -Nat’l Hay Company (NHC) deposited with NBC a draft and a bill of lading.  -Said items were received by the NBC and were then credited to the account of NHC.  -Eventually, the draft with the bill of lading attached was forwarded by NBC to the First National Bank of Birmingham (FNBB) for collection and remittance to NBC and the amount of the draft was paid by the drawee to FNBB.  -Prior to remittance (of the proceeds of the draft) by the FNBB to NBC, Morgan (a creditor of the NHC) instituted attachment proceedings against NHC and service was sought to be perfected by the process of garnishment directed to FNBB.  -FNBB, in response to the garnishment, admitted that it held in its possession the proceeds of the draft but said that NBC had the right to claim said fund. NBC then laid claim to the fund.  -Morgan won at the circuit court. Hence, this appeal by NBC. ISSUE WON NBC received the draft as a mere collecting agent or as purchaser/ WON NBC is a holder for value HELD  -NBC was a mere collector. TF, NBC was not a holder for value. FNBB was ordered to pay the proceeds of the draft to Morgan.  -(*Campos’ note: The ruling in this case represents the minority view that as long as the balance in the depositor’s account equals or exceeds the amount of the instrument deposited, the instrument cannot be considered withdrawn for the purpose of treating the bank as holder for value (as per sec.26 NIL.))

Reasoning In this case, NBC insists that it was a purchaser for value and that NHC’s account had never been overdrawn and it had balance to its credit in excess of the draft, continuously from the day the said draft was received until the day of the garnishment.  -The Court, however, denied their contention and held that the case of Fredonia v. Tommei was not in conflict with their holding. In said case, White’s account had been fully checked out and that the proceeds of the note had been fully exhausted, just as in the case at bar, if the proof showed that the NHC had checked out its entire balance at any time between the deposit of the draft and the notice of garnishment. But as had been held, the NHC here had a standing balance to its credit with the NBC throughout this period in excess of the draft.  -Furthermore, the Court thinks that their position is more just and equitable in view of the fact that a bank has the right to apply all unchecked deposits against the debt due it by the depositor. And they added that this holding cannot be of serious detriment to banks while a contrary view might result in furnishing a weapon to the negotiator of notes and bills against their creditors or persons having a right or equity in or against the instruments negotiated.  -All the other cases cited by NBC (ie. FOX v. Bank of Kansas, Dreilling v. First National Bank etc) were held to be contrary to the Court’s decision and to NBC’s contention as well.  (*Basically, NBC cannot be considered as a holder in due course (as per Sec.52(3)) or as a purchaser for value in this case since NBC credited the amount of the draft to the deposit account of NHC and NBC failed to show that the amount credited was absorbed by existing debts or subsequently checked out. Here, NHC had a balance on deposit in excess of the amount of the draft continuously from the negotiation till the garnishment. TF, NBC didn’t show that they have given value for the instrument ergo NBC not a holder/purchaser for value.)

NEGO - Quevedo A Camille Umali UNAKA NAT’L BANK V BUTLER (1904) HELD FACTS YES. To constitute notice of an infirmity in an instrument, or -Harris drew a check for $15.25 on the Unaka National Bank defect of the title of the person negotiating the same, the payable to the order of Butler and delivered the check to person to whom it is negotiated must have had actual the payee for value. The payee indorsed the check in knowledge of the infirmity or defect, or knowledge of blank and negotiated it to Davis who on the next day such facts that his action in taking the instrument lost it on the highway, At the request of the indorsee, amounted to bad faith. The purchaser of a negotiable Davis, the drawer ordered payment stopped by notice to instrument owes no duty to the former holders to the drawee bank. The stop order was overlooked and actively inquire into the title of the party in possession, the check was paid by the drawee to Ward & Fryberg, and that circumstances of suspicion and gross merchants who, within a week after the check’s negligence are not of themselves bad faith, but only issuance to the payee, had taken the check in payment evidence tending to establish it. of goods sold to “a customer who was unknown to them -There is no doubt, upon this record, that Ward & Fryberg but who was supposed by them to be the owner.” The purchased this check for value, in due course of trade, original payee, Butler, for the use of his indorsee Davis, and without actual knowledge of the infirmity of the title the loser of the check, sued the drawee bank. of the holder. It is equally clear that there was no bad faith in the transaction. The result is, they acquired a ISSUE perfect title to the check by their purchase, and had the WON Ward & Fryberg purchased the check for value, in due right to collect it; and at the same time, in consequence of course of trade, and without actual knowledge of the of the same facts, Davis lost his title, and is not entitle to infirmity in the title of the holder recover its proceeds from the bank. Disposition Judgment of the circuit court is reversed, and the suit dismissed. DE OCAMPO V GATCHALIAN (1961) FACTS -Anita Gatchalian was looking for a car to buy. Her friend Emil Fajardo brought Manuel Gonzales to her house because Manuel had a car to show her. Manuel said he was duly authorized by Ocampo Clinic to sell the car. Anita liked the car. Anita told Manuel to bring the car together with the registration the next day, so that Anita's husband can inspect it also. Manuel said that the owner would most likely not allow him to bring the registration unless there's a showing that the party interested in the purchase of the car is ready and willing to pay for it. So Anita issued a check for P600 in Ocampo's name. -The next day, Manuel didn't come. Instead, he went to Ocampo Clinic and paid for her wife's outstanding balance of P441.75 with the clinic. He was given P158.25 cash as sukli. Meanwhile, when Manuel didn't come, Anita got suspicious and gave the bank a stop payment order on the check. Ocampo was not aware of the arrangement between Manuel and Anita at the time Manuel gave it to him as payment for wife's bills. -Ocampo went after Anita. Ocampo won. Anita appealed. She contends that the check is not a negotiable instrument and that Ocampo is not a holder in due course. ISSUES 1. WON original payee of the check can become a holder in due course 2. WON there was valid negotiation of the check (basically, WON Ocampo had NO NOTICE of defect of holder's title) 3. WON Ocampo is a holder in due course HELD 1. YES. Sec 191 of NIL defines HOLDER as the payee or indorsee of a bill or note, who is in possession of

it, or the bearer thereof. While Sec 52 defines a HDC as a HOLDER who has taken the instrument under the 4 conditions. Therefore, a payee can be a HDC. 2. YES. The check payable to Ocampo was entrusted to Manuel. The latter then was the agent of Anita. When the agent (Manuel) of drawer (anita) negotiated the check with the intention of getting its value from Ocampo, negotitation took place through no fault of Ocampo, unless it can be shown that Ocampo should be considered as having notice of the defect in the possession of holder Manuel. 3. NO. Ocampo can't be a HDC because although he had no notice of defect in title, he must also have taken the instrument in good faith. These facts should have put him on guard and inquired into the title of Manuel: a. Anita had no obligation or liability to Ocampo Clinic; b. the amount on the check didn't correspond exactly to Manuel's utang; and c. the check had two parallel lines in the upper left hand corner, which in practice means that the check was for deposit only and cant be converted into cash. -It would've been easy for Ocampo to inquire because he knew Anita's husband. His failure to do so is gross neglect in not finding out the nature of the title and possession of Manuel, which amounts to legal absence of good faith. He therefore cannot be considered a holder in good faith. Sec 52 requires the holder to be in good faith to be considered a HDC. Therefore, Ocampo cannot be a HDC. -The presumption in Sec 59 that every holder is a HDC cannot apply in this case because there were suspicious circumstances that should have put the person in to inquiry as to the title of the holder who negotiated the instrument to him. The test is of the reasonable prudent man and good faith.

NEGO - Quevedo A Camille Umali CHIANG YIA MIN vs. COURT OF APPEALS Facts: US$100,000.00 was sent by Hang Lung Bank Ltd. Of Hong Kong on February 7, 1979 through the Pacific Banking Corporation to RCBC. The remittance was for petitioner’s own account and was intended to qualify him as a foreign investor under Philippine laws. It was sent by petitioner himself prior to his arrival in the Philippines. When petitioner checked on his money sometime in mid1985, he found out that the dollar deposit was transferred to the Shaw Boulevard branch of respondent bank and converted to a peso account, which had a balance of only P1,362.10 as of October 29, 1979. A letter of respondent bank dated August 9, 1985 stated that petitioner’s Current Account was opened on February 8, 1979, with an initial deposit of P729,752.20; a total of P728,390.00 was withdrawn by way of five checks apparently issued by petitioner in favor of Papercon (Phils.), Inc., and a business venture of Tom Pek. Thus, the balance of the account was reduced to P1,362.10 as of October 29, 1979 and no transactions were made on the account since. In the same letter, the bank stated that it was no longer able to locate the microfilm copies of the issued checks, specimen signature cards, and other records related to the questioned account, since the account had been inactive for more than five years. Petitioner: he did not cause the transfer of his money to the Shaw Boulevard branch of RCBC, as his instructions in the telegraphic transfer were for the money to be remitted to the RCBC head office in Makati, nor its conversion to pesos and the subsequent withdrawals. Nor did he authorize anyone to perform these acts. Bank: should it be made liable to petitioner, said thirdparty defendants as payees and beneficiaries of the issued checks should be held solidarily liable with it Papercon: did not deny receiving the checks worth P712,700.00 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: withdrawals were not made by petitioner nor authorized by him, and held respondent bank liable CA:

the opening of the current account and the withdrawals therefrom were authorized by petitioner; accordingly, it reversed the decision of the RTC and absolved private respondents of liability

Current Account, knowing these to be unauthorized by petitioner, and with the purpose of defrauding him. Held: No. There is thus no evidence to demonstrate that bank and Papercon and Tom Pek colluded to defraud petitioner of his money. What the evidence in fact establishes is that the opening of the account and the withdrawals were authorized by petitioner, and that the signatures appearing on the questioned checks were petitioner’s Ratio: 1. petitioner originally sued upon an allegation of negligence on the part of respondent bank’s officers and employees in allowing the said withdrawals 2. Under either theory of fraud or negligence, it is incumbent upon petitioner to show that the withdrawals were not authorized by him. If he is unable to do so, his allegations of fraud or negligence are unsubstantiated and the presumption that he authorized the said withdrawals will apply. 3. Petitioner's allegation was countered by the testimony of Catalino Reyes, the accountant of Pioneer Business Forms (a business venture of Tom Pek). He testified that he and his fellow employees were advised by Tom Pek to "personally help (Chiang Yia Min) in all his personal accounts. He also said that the opening of the account was done in haste, since petitioner was in a hurry to have the proceeds of the remittance credited to his checking account. Because Reyes was well-known to the officers and employees of RCBC-Shaw Boulevard, he was allowed to bring out of the bank the application form, depositor’s card, and other forms which required petitioner’s signature as depositor. He then filled out the forms, and brought them to petitioner for signing. He witnessed petitioner sign the forms. Then he brought the signed forms, 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. This is supported by documentary evidence. 4. As established by the records, 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 that on two separate instances, petitioner asked him to prepare two of the five checks questioned in this case, specifically, the check for P700,000.00 and payable to Papercon, and the check for P12,700.00, 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. 5.

Issue: WON petitioner has proved, by a preponderance of the evidence, that bank connived with Papercon and Tom Pek in allowing the withdrawals from

Confronted with such direct and positive evidence that he authorized the opening of the account and signed the questioned checks, it is curious that petitioner did not take the witness stand to refute

NEGO - Quevedo B Camille Umali Reyes’s testimony. He did present as his rebuttal witness a teller of Metrobank (in which he also maintained a checking account) who testified that she had assisted petitioner in some withdrawals with Metrobank and in these instances it was petitioner himself, unassisted, who filled out his checks. Thus, petitioner attempted to show that he prepared his own checks as a matter of practice. However, we note that the Metrobank teller testified to checks issued on December 1989, or long after the herein questioned checks were issued. It would neither be fair nor accurate to compare the practice of petitioner in issuing checks in 1979, when admittedly he was still unfamiliar with the English language, with the manner by which he prepared his checks ten years later. 6.

7.

The best witness to counter the testimony of Catalino Reyes would be petitioner himself, simply because, based on the statements of Reyes, the only persons present when petitioner allegedly instructed Reyes to open the account and signed the checks were Reyes, petitioner himself, and Tom Pek. (Tom Pek died during the course of the proceedings.) Besides, if indeed Catalino Reyes lied in saying that petitioner instructed the opening of the account and issued the checks, we cannot imagine a more natural reaction of petitioner than wanting to set the record right. Moreover, petitioner’s signatures on the questioned check amounts to prima facie evidence that he issued those checks. By denying that he issued the said checks it is he who puts into question the genuineness and authenticity of the signatures appearing thereon, and it is he who has the burden of proving that those signatures were forgeries. No shared of evidence was presented by petitioner to show that the signatures were not his. All that this petition relies on insofar as concerning the authenticity of the signatures is the finding of the trial court judge that there was a discrepancy between the signatures on the bank form and petitioner’s passport. The Court, however, believes that since what is at issue here is whether petitioner issued the questioned checks the essential comparison should be between the signatures appearing on the checks and the specimen signatures on the depositor’s card. The record is replete with documents bearing petitioner’s signature, among them, his residence certificate, alien certificate of registration, investor’s passport, tourist’s passport, and the application forms for an RCBC current account. From our examination of these records we find no significant disparity between the signatures on the checks and those on the abovesaid documents, and will not risk a finding of forgery where the same had not been clearly alleged nor proved. Forgery, as any other mechanism of fraud, must be proven clearly and convincingly, and the burden of proof lies on the party alleging forgery.

ON NEGLIGENCE OF BANK Petitioner: capitalizes on the following purported irregularities surrounding the opening of the account: 1. the alleged depositor never appeared at the bank; 2. the person who transacted for the alleged depositor was not shown to have been authorized for that purpose; 3. the application form and other documents required to open the account were brought out of the bank premises; 4. the application form, when submitted, was not properly accomplished, but was left blank on most of the required details. SC: The arguments are unmeritorious for failure to show that such irregularities attending the opening of the account resulted in the unauthorized withdrawal of petitioner’s money. The evidence stands unrebutted that petitioner instructed the opening of the said account and signed the pertinent application forms. Quite contrary to petitioner’s insinuations of fraud or negligence, the evidence indicates that the reason why respondent bank relaxed its rules in handling petitioner’s application was because, in addition to having been referred by a well-known client, petitioner was in a hurry to have the remittance credited to his account. OTHER FINDINGS: 1. There is no truth to petitioner’s contention that he could not have authorized the opening of Current Account because he was not yet in the country at the time. The fact is, by February 7, 1979, his 7-day visa had already expired and he was plainly an overstaying tourist, working against time to secure an investor’s visa to legitimize his stay in the Philippines, which explains the haste by which he ordered the withdrawal of the money and the opening of the account in RCBC. 2. It also strains credulity that an investor like petitioner would allow a substantial amount of money to lie insipid and unproductive in a bank account for six years before he bothered to check on it. The complaint was filed with the RTC only on June 29, 1987, or almost two years after his supposed discovery of the loss of his money. 3. Petitioner’s claim that he felt no need to check on the US$100,000.00 because he still had cash at hand was contradicted by his own testimony that in 1983 and 1984 he could not put up the money to fund a letter of credit, lost a major client in the process, and was put out of business. 4. Petitioner wrote the Shaw Boulevard branch of respondent bank to inquire about the status of his current account is fundamentally inconsistent with his position that he had no knowledge of the opening of the account in that branch. 5. As for Papercon and Tom Pek, upon the finding that the checks issued to them were in order, and there being indication that respondent bank colluded in paying the checks to them for any unlawful cause, or was otherwise deceived or misled into doing the same, the presumption lies that they were holders for value and in good faith.

NEGO - Quevedo A Camille Umali STATE INVESTMENT HOUSE V IAC, SPS. CHUA (1989) ~chrislao~ FACTS  -New Sikatuna Wood Industries (New Sikatuna, for brevity) entered into a contract of loan with Chua. Chua's wife issued three postdated crossed checks (valued at almost 300K) payable to New Sikatuna. This loan was subject to the condition "if and when the deposits were made to back up the checks".  -New Sikatuna sold 11 checks including the said 3 checks at a discount to State Investment House. State Investment tried to deposit said checks but the same were dishonored by reason of "insufficient funds", "stop payment" and "account closed", respectively.  -State House Investment filed an action for collection against Spouses Chua. RTC ruled against the spouses. IAC REVERSED. Hence, this petition. ISSUE WON State Investment House is a holder in due course and therefore not subject to the defense of the drawer (Spouses Chua) against the payee (New Sikatuna) due to absence of consideration HELD NO. IAC correctly relied on the HELD in Ocampo v. Gatchalian as regards the effects of crossing a

check: the check may not be encashed but only deposited in the bank; the check may be negotiated only once—to one who has an account with a bank; and the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise he is not a holder in due course. -State Investment House's failure to inquire from the holder, New Sikatuna, the purpose for which the 3 checks were crossed, despite the warning of the crossing, prevents State Investment from being considered in good faith and thus it is NOT a holder in due course. -Since it is not a holder in due course, it is subject to personal defenses, such as lack of consideration between Spouses Chua and New Sikatuna. Under the facts, the checks were postdated and issued only as a loan to New Sikatuna, is and when deposits were made to back up the checks. No such deposits were made, hence no loan was ever made. The 3 checks were without consideration. -although State Investment is not a holder in due course, it doesn't mean that it could not recover on the checks. The only disadvantage is that it is subject to defenses as if the instruments were non-negotiable.

CONSOLIDATED PLYWOOD INDUSTRIES, INC V IFC LEASING AND ACCEPTANCE CORP (1987) ~apple~ NATURE Petition for review on certiorari of a decision of the IAC FACTS -Consolidated, a corporation engaged in the logging business, needed 2 units of tractors for its projects. -Atlantic Gulf & Pacific Company of Manila knew of the need and thus offered 2 used tractors to petitioner through its sister company and marketing arm, Industrial Products Marketing (the "sellerassignor"). -Petitioner inspected the tractors while sellerassignor assured petitioner-corporation that the "used" Allis Crawler Tractors which were being offered were fit for the job, and gave the corresponding warranty of ninety (90) days performance of the machines and availability of parts. -With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitionercorporation through petitioners Wee and Vergara, president and vice-president, respectively, agreed to purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (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 chattel mortgage with promissory note was executed. Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the seller-assignor, by means of a deed of assignment, assigned its rights and interest in the chattel mortgage in favor of the respondent (IFC Leasing). -Barely fourteen (14) days had elapsed after 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. The seller-assignor sent to the jobsite its mechanics to conduct the necessary repairs, but the tractors did not come out to be what they should be after the repairs were undertaken because the units were no longer serviceable. -Since the tractors were no longer serviceable, 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 seller-assignor and petitionercorporation which offered to bear one-half (1/2) of the reconditioning cost. -No response was received by the petitionercorporation and despite several follow-up calls, the seller-assignor did nothing with regard to the request.

NEGO - Quevedo B Camille Umali -IFC filed a complaint against Consolidated for the amount of the PN. -TC and IAC granted the complaint. ISSUE WON the respondent is a holder in due course HELD: No. (first of all, the instrument here was determined as not being a negotiable instrument because of the lack of the words of negotiability... nevertheless, the court discussed why the respondent cannot be considered a holder in the course had the instrument been negotiable) -A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the Disclosure of Loan/Credit 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 petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assigneefinancing 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. -The respondent knew that when the tractors turned out to be defective, it would be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners. -Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its action in taking the

instrument amounted to bad faith, is not a holder in due course, and therefore, subject to all defenses which the petitioners may raise against the sellerassignor. -We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the buyer. -As against the argument that such a rule would seriously affect "a certain mode of transacting business adopted 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 Public-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 to protect his interests against unscrupulous and insolvent dealers... If this opinion imposes great burdens on finance companies it is a potent argument in favor of a rule which will afford public protection to the general buying public against unscrupulous dealers in personal property... (Mutual Finance Co. v. Martin) -The respondent, a financing company which actively participated in the sale on installment of the subject two Allis Crawler tractors, cannot be regarded as a holder in due course of said note. It follows that the respondent's rights under the promissory note involved in this case are subject to all defenses that the petitioners have against the seller-assignor, Industrial Products 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 negotiable instrument is subject to the same defenses as if it were nonnegotiable. ... " Disposition Petition granted

SALAS V CA, FILINVEST FINANCE AND LEASING CORP (1990) ~RACH~ NATURE Petition for review on certiorari FACTS -Petitioner Juanita Salas bought a motor vehicle from the Violago Motor Sales Corporation (VMS) for P58,138.20 as evidenced by a promissory note. This note was subsequently endorsed to the respondent Filinvest Finance & Leasing Corporation which financed the purchase. -Salas defaulted in her installments allegedly due to a discrepancy in the engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice, certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle figured in an accident. -Filinvest then filed a case for a sum of money against Salas. RTC ruled in favor of Filinvest and ordered Salas to pay the plaintiff the sum of P28,414.40 with interest

thereon at the rate of 14% from Oct 2, 1980 until the said sum is fully paid. -Both parties appealed to the CA. Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle to petitioner, the latter prayed for a reversal so that she may be absolved from the contract. -CA merely modified ordering the defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from Oct 2, 1980 until full payment. * Petitioner’s Arguments -In the light of the provision of the law on sales by description which she alleges is applicable, no contract ever existed between her and VMS and therefore none had been assigned in favor of private respondent. -It is not necessary to implead VMS as a party to the case because VMS was earlier sued by her for "breach of contract with damages" before RTC Olongapo City. Such court originally ordered Salas to pay the remaining balance of the motor vehicle installments; this was later

NEGO - Quevedo B Camille Umali reversed by the same court ordering VMS instead to return to Salas the sum of P17,855.70. Such decision is still pending consideration in the CA. *Respondent’s Comment -Issues and allegations are a mere rehash of those presented and already passed upon by the CA; judgment in the "breach of contract" suit cannot be invoked as an authority as it is still pending in CA. -Petitioner's liability on the promissory note, the due execution and genuineness of which she never denied under oath is, under the foregoing factual milieu, as inevitable as it is clearly established. ISSUE 1. WON the promissory note is a negotiable instrument (which will bar completely all the available defenses of Salas against Filinvest) 2. WON Filinvest is a holder in due course HELD 1. YES Ratio 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". Under Sec 8 of the Negotiable Instruments Law, there are only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument and the bill or note is to be paid to the person 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 non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument, but will merely "step into the shoes" of the person designated in the instrument and will thus be open to all defenses available against the latter. Reasoning Requisites under the law have been complied with: [a] it is in writing and signed by the maker Juanita Salas;

[b] it contains an unconditional promise to pay the amount of P58,138.20; [c] it is payable at a fixed or determinable future time which is "P1,614.95 monthly for 36 months due and payable on the 21 st day of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated with certainty. -It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest Finance and Leasing Corporation and it is an indorsement of the entire instrument. **This is not a simple case of assignment of credit as petitioner would have it appear, where the assignee merely steps into the shoes of, is open to all defenses available against and can enforce payment only to the same extent as, the assignor-vendor. 2. YES Reasoning Filinvest had taken the instrument under the ff conditions: [a] it is complete and regular upon its face; [b] it became the holder thereof before it was overdue, and without notice that it had previously been dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to Filinvest, the latter had no notice of any infirmity in the instrument or defect in the title of VMS Corporation. -Filinvest also holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof. This being so, Salas cannot set up against respondent the defense of nullity of the contract of sale between her and VMS. - Even assuming that there was deception made upon Salas, this issue cannot be resolved since VMS was never impleaded as a party. SC: “We can only extend our sympathies to Salas in this unfortunate incident.” Disposition Assailed decision is hereby AFFIRMED.

COMMERCIAL CREDIT CORP V ORANGE COUNTY MACHINE WORKS (1950) ~cha~ NATURE Appeal from judgment FACTS -Orange County Machine Works (OCMW) was in the market for a Ferracute press. Ermac Company (Ermac) offered to sell to OCMW a Ferracute press for $5k (which Ermac would buy from a supplier). Commercial Credit Corp. (CCC) was asked to finance the transaction, and CCC agreed to do so after an assignment of the contract of sale between OCMW and Ermac was made in favor of CCC. -before the assignment, Ermac obtained similar financing from CCC and CCC had some blank forms supplied to Ermac. One of these forms entitled “Industrial Conditional Sales Contract” is the agreement

between Ermac (to sell the press) and OCMW (to buy the press). -the said contract stated the ff. (re: deferred payments): “the balance shown to be due hereunder (evidenced by my note of even date to your order) is payable in 12 equal consecutive installments of $355.09 each, the first installment payable one month from date hereof. Said note is a negotiable instrument separate and apart from this contract, even though at the time of execution it may be temporarily attached hereto by perforation or otherwise.” -Latter part of the contract (in a detachable portion): “This contract may be assigned and/or said note may be negotiated without notice to me and when assigned and/or negotiated shall be free from any defense, counterclaim or cross complaint by me.”

NEGO - Quevedo B Camille Umali …a dotted or perforated line could be detached from it. At the time the president of OCMW signed the contract and note, he raised a question regarding the said portion below the line but was told that it was just “part of the document”. -OCMW paid $1,512.50 to Ermac. Ermac assigned the contract and endorsed the note to CCC. CCC gave Ermac a check for $4,261 in return. At the time the contract was delivered to CCC, the note had not been detached. Ermac deposited the check to its bank and sent the said check to the supplier of the Ferracute press that would be sold to OCMW. However, when the check was presented by the supplier, it was dishonored. The supplier did not deliver the Ferracute press. Ermac did not pay CCC. -CCC filed complaint vs. OCMW and Ermac for the $4,261 it paid for the assignment. Ermac did not pay. OCMW demands $1,512.50 from Ermac and declaratory relief from CCC. -TC: for CCC against Ermac, for OCMW against CCC (So CCC had no claims against OCMW). CCC not a holder in due course because (1) it knew at the time it paid Ermac for the assignment that Ermac did not own the press it sells, and (2) knew that the press was not delivered to OCMW. -Arguments of CCC: (1) the note is negotiable in form, status not changed because of original physical attachment to, nor later detachment from, the sales contract; does not lose status because it was given in connection with a conditional sales contract; (2) the character of an otherwise negotiable note is not destroyed by reason of simultaneous assignment of a conditional sales contract to the endorsee of the note; (3) the note is a separate and distinct instrument negotiable in form; OCMW is estopped from asserting failure of consideration because it knew the purpose and legal effect of the note. -Arguments of OCMW: (1) CCC did not acquire the instrument in good faith and for value and had notice of infirmities in the instrument and the defect in the

title of Ermac; (2) the conditional sales contract and the attached note must be construed as constituting a single document. The sales contract is assignable but not negotiable, so subject to defenses…(3) CCC was an original party to the original transaction so it took title subject to all equities or defenses existing in its favor against Ermac. ISSUE WON CCC is a holder in due course (and so can recover from CCC – the maker) HELD: NO. Ratio. When a finance company actively participates in a transaction of this type from its inception, counseling and aiding the future vendor-payee, it cannot be regarded as a holder in due course of the note given in the transaction and the defense of failure of consideration may properly be maintained. Reasoning. CCC supplied Ermac with the forms and was twice consulted by telephone as to the impeding deal. It knew all of the details of the transaction. Indeed, financing was applied for because Ermac did not have the money to buy the machinery which OCMW desired to obtain. Throughout the entire transaction, CCC dealt chiefly with Ermac, the future payee, rather than with OCMW, the future maker. CCC advanced money to Ermac with the understanding that the agreement and the note would be assigned or endorsed to it immediately. In a very real sense, the finance company was a moving force in the transaction from its very inception and acted as a party to it. Moreover, Commercial Credit knew the financial status of Ermac. -OCMW never obtained the press for which it bargained and, as against CCC, there is no more obligation upon it to pay the note than there is to pay the installments specified in the contract. Disposition. Judgment affirmed.

HAM V MERITT (1912) ~monch~ FACTS -Eva Merritt executed a note for $300 to Southern Hospital Assn. The latter assigned it before maturity to Asa Brunson, who later sold it to E.C. Ham for $100. -Ham sued Merritt to recover from the note. Merritt claims it was obtained from her thru fraud. Ham claims that he had no notice of such fraud and was therefore a holder in due course. ISSUE WON Ham was a holder in due course HELD: YES

Ratio A large discount does not, by itself, constitute notice of fraud. Reasoning -The court said that while it can be seen that from Merritt’s testimony that the note was obtained from her fraudulently, there was no evidence to show that Ham had notice of such. -The fact that the note was sold to Ham for only $100 does not constitute as notice of fraud. Such fact, standing alone, does not deprive him of protection from the law. However, the court also notes that such large discount could be of great weight if was supported by some other evidence. Disposition Judgment reversed

NEGO - Quevedo B Camille Umali PENNOYER V DUBOIS STATE BANK (1926) ~kiyo~ FACTS -The Wyoming Live Stock Loan Company sold shares of its capital stock by fraud to Pennoyer, paid for by the latter’s two notes payable to the order of the seller, dated June 21, 1920 and payable 6 months later. On July 22, the payee negotiated them to Dubois which paid with its own notes, certificate of deposit (COD), payable to Wyoming 9 months from date. On Dec. 31, Wyoming negotiated the COD to the First National Bank of Cody (FNBC), as collateral security for a loan. After execution and issuance, the maker learned of the fraud, and refused to pay upon maturity. Dubois had no notice of the defense of fraud at the time of issuance, but did at the time it discharged the COD by payment. Dubois sued Pennoyer. Pennoyer claimed Dubois was not a holder in due course; hence the latter’s personal defense of fraud was available. HELD -Pennoyer cites Sec. 54 arguing that the Dubois was a holder in due course as it had notice of fraud before

it paid anything on the COD. Dubois is unaffected by the statute if, when it acquired the notes, “it paid the full amount thereof”. When Dubois gave the COD for the notes , it took the notes for “value”; if it was under an obligation to pay the COD when due, its right to protection as a holder in due course was the same as if it had paid in money. It may be argued that upon notice of fraud, Dubois may have protected itself by enjoining transfer or impounding the COD. The Court believes that since Pennoyer put the notes into circulation and contended they were procured by fraud, bringing proceedings for such a purpose was his duty. To avoid the effects of Sec. 54, Dubois was required to prove that the COD had been negotiated and that it had paid or had become liable to pay someone other than the payee. Dubois’ evidence was sufficient to establish that the FNBC, to whom the COD was paid, was the indorsee and holder which is a prima facie showing that it is a holder in due course.

FOSTER V AGUSTANNA COLL. & THEOLOGICAL SEMINARY OF ROCK ISLAND, ILL. (1932) ~athe~ FACTS -Hopkins executed and delivered to Aurelius-Swanson (payee) their negotiable instrument secured by mortgage. Swanson assigned the note and mortgage to Foster not by indorsement but by assignment in a separate instrument duly recorded. Foster redelivered the note and mortgage to Swanson as custodian. Swanson subsequently assigned the note and mortgage to Augustanna. Augustanna had no actual knowledge that the note and mortgage had therefore been assigned to Foster. Swanson became bankrupt. Foster sued Augustanna.

HELD -Doctrine of constructive notice does not apply to Foster. Augustanna had no actual knowledge of the assignment to Foster. Augustanna was a purchaser of the note not the mortgage. It is well-settled rule that where a mortgage given to secure a negotiable PN, the note imparts its negotiable character to the mortgagee, and both are bought within the purview of the statutes, and the mortgage is a mere incident to the note, and an indorsement of the note automatically assigns the mortgage, and the attempted assignment of the mortgage without the transfer of the debt it secures is a nullity. -The doctrine of constructive notice is applicable only to person who is dealing with the land itself, which is not the case here.

NEGO - Quevedo B Camille Umali MILES CITY BANK V ASKIN (1947) ~giulia~ FACTS -George Askin paid his losses in a game of black jack to JW Clark by 2 checks, one for $150 and another for $1,000. Each were signed by Askin as drawer, payable to Clark's order and drawn on the Bank of Baker, Montana. Askin signed his own name and inserted the numerals in lead pencil, and Clark filled the remaining blanks. -Later, Askin was sued on one of the checks (the date was changed), but at the time it was negotiated, it called for $5,000. The court found that a casual examination of the check disclosed that it had been changed after having been written. The words and figures showing the amount are written with a different pencil than the balance of the writing. There were obvious signs of erasure of the words and figures originally occupying such spaces. -The jury found for the plaintiff. Defendant appealed. HELD -The ultimate question of WON plaintiff was a holder in due course must be determined by the just, such determination to be based upon its findings as to whether, (1) the clerk was, in fact materially altered subsequent to its execution and delivery, and (2) if so, was such alteration so manifest and visible as to reasonable impart notice to plaintiff of an irregularity in the check.

-Alterations and erasures of written instruments were presumed to have been made at or prior to the time of their execution. However, when an alteration or erasure appears suspicious on its face, it demands explanation. -The ruling of the TC evidence a presumption by the court that plaintiff was a holder in due course. It should have been considered that Clark was not a depositor in plaintiff bank and had no account there; that the check was written in pencil; that the teller who cashed the check was not acquainted with the defendant or his signature and he was ignorant of the nature of Clark's business, associations, background or financial responsibility; the insistence of Clark in obtaining the cash immediately; and the apparent alterations of the check. -TC erred in refusing evidence offered to prove that in cashing the check as it did plaintiff bank departed from the usual course of business adopted and usually adhered to by the plaintiff. -For these reasons, Court held that the evidence was insufficient to sustain the verdict and judgment, which are contrary to law, and a new trial must be had to present the decisive issues. Dispositive The judgment is reversed, and the cause remanded for new trial

BRONSON V STETSON (1930) ~ajang~ FACTS -Bronson’s agent, Mears, effected the exchange of Bronson’s land in Flint with a farm. Mears, fraudulently represented that there was an $800 mortgage on the land, which he said, Bronson should assume. So Bronson made a note made of even date for $800 payable in three years and secured by a mortgage. The name of the payee and the mortgagee were left blank. It was agreed that Mears was authorized to fill the blanks with the name of Union Trust Savings Bank. -Mears received the papers, and turned them over to defendant Mrs. Stetson. Instead of writing the name of the bank as payee, Mears wrote Mrs. Stetson’s name. Mrs. Stetson asked him if he had a right to do so, and he said he had coz he was a notary public. So Mrs. Stetson paid Mears $800. There is no question that the papers were fraudulently obtained by Mears and that Mrs. Stetson knew that the name on the note was just written by Mears at the time she paid him the money. ISSUE

WON Mrs. Stetson is a holder in due course free from all equities and defenses that could be set up against her and could thus collect from Bronson. HELD NO. At first glance, it can be said that Mrs. Stetson is a holder in due course. Mears was given parol authority to fill in the blank. He exceeded his authority in writing the name of the Mrs. Stetson. Mears had apparent authority and Mrs. Stetson was ignorant of the limitation. -It has been held that the one who entrusts an incomplete instrument to another is bound by anyone who relies in good faith on the genuineness of the instrument although the person entrusted with completing and delivering the instrument exceeded his authority. -However, the court turns with reluctance from this. Harrington Nat. Nank v. Beslin ruled that, “in order however that any such instrument may be enforced, it must be filled up strictly in accordance with the authority given and within reasonable time.” Thus, Mrs. Stetson cannot be held to be a holder in due course. TC reversed.

NEGO - Quevedo B Camille Umali BLISS V CALIFORNIA CO-OP PRODUCERS (1947) ~glaisa~ FACTS -The Court ordered the case to be retried upon the issue of -The California Co-op Producers was organized to process notice of non-payment of first installment at the time of and ship agricultural products through the use of the transfer and that judgment be made according to the shipping terminal facilities. Growers of agricultural views expressed. products were to be solicited to use the facilities of the corporation in the marketing of their products. Marketing TRAYNOR, dissent: contracts were entered into by the cooperative with -It is unnecessary to remand the case since the finding and many producers. evidence show that Bliss took the notes without notice -Agricultural producers executed non-bearing negotiable that the first installment had not been paid. notes, payable to the co-operative, in ten annual -A holder cannot be a holder in due course as to installments installments, with no acceleration clause. The cothat were overdue when he acquired the note, but that operative agreed to furnish facilities. he can be a holder in due course as to future -Shidler, Winchester and Galbreath each executed one of installments, which are not overdue unless their maturity the notes. The three makers defaulted in the payment of dates have been accelerated. the first installment. -The mere fact that one or more installments of an -Later, while the note is still unpaid, the co-operative installment note are unpaid when the note is negotiated negotiated the notes to Bliss to secure payment of the does not convey knowledge to the transferee of a co-operative’s note, held by Bliss. defense against the note; nor does it reveal such -The co-operative, by reason of insolvency and bankruptcy, knowledge of circumstances that it can be said that the was unable to continue to perform its obligation in its holder of the note shut his eyes to the facts and in bad contracts with the producers, including the makers of faith sought to avoid the knowledge of a defense. the three notes. -A notice of default in the payment of an installment of -The co-operative defaulted in payment to Bliss. Bliss sued principal disconnected from other facts does not prevent the makers on their notes. the transferee from being a holder in due course. -The inquiry may reveal that default is fully explained by ISSUE: WON Bliss was a holder in due course. circumstances and it constitutes no warning that the HELD maker has defense with regard to installments to mature -The transferee of an installment note is not a holder in due in the future. Thus, it may appear that prompt payment course as to any part of the note when the transfer has has been waived and that the delay with regard to one been made after the maturity of one or more but less or more past due installments does not exceed the than all of the installments. delay in the payment of other installments that have -On the issue of WON Bliss had notice of the co-operative’s been paid in the past. failure to pay the first installment, the findings are -The rule set forth in the majority opinion that a purchaser of unsatisfactory. an installment note who has knowledge that a past due -On the issue of the co-operative’s defense of failure of installment was unpaid when he acquired the note “is consideration (its failure to perform its obligations under put on inquiry and there may be some defenses against the contracts), Court said that it is a good defense to an it and… cannot be a holder in due course” cannot be action on an instrument by one not a holder in due reconciled with the provisions of the Uniform Negotiable course Instruments Act. BARBOUR V FINKE (1924) ~tito romy~ NATURE: Petition for Certiorari FACTS -In January 11, 1915, Finke issued a negotiable note for $3,000 payable on or before ten years from the date of the note. The stated interest rate was six percent per annum payable annually on January 11 of each year. The note was likewise secured by a real estate mortgage. -In March, 1918, the note was endorsed and the mortgage was assigned to Barbour. At the time of the endorsement, a notation on the note stated that interest thereon was up to October 1, 1917. Barbour at some point filed an action for the foreclosure of the mortgage. The lower court ruled for Barbour. But Finke alleged that Barbour is not a holder in due course based on the fact that the non-payment of interest amounted to a dishonor of the note and that Barbour had notice of this as the same is clearly indicated on the note via the notation. Such being the case, Barbour is subject to any defense Finke might have against the original.

ISSUE: WON Barbour was a holder in due course of both the note and mortgage HELD: YES Ratio The mere fact that interest due is unpaid, the principal not being due, does not render the note dishonored. It is also a settled rule of the jurisdiction that a mortgage is merely an accident to the note which it secures. Hence the transfer of the debt secured by the mortgage carries with it the security. As Barbour is a holder in due course of the note, she is also a holder in due course of the mortgage. -The court just stated that this conclusion is in accord with the great weight of authority and is in accord with the spirit and intent of the NIL (there was no discussion on how the conclusion is in accord with the spirit…) Dispositive Judgment affirmed.

NEGO - Quevedo A Camille Umali LE DUE V FIRST NAT’L BANK OF KASSON (1883) ~owen~ FACTS -Payee of a draft indorsed it to Edison, against whom the drawer, the defendant bank, had an offset. Edison indorsed the draft to Jordan on March 8, 1882 – 4 months and 23 days after the draft became due. ISSUE WON the draft is overdue and dishonored HELD YES Ratio Indorsers subsequent to Edison took it subject to the same offset to which it was subject in his hands. Reasoning -The term “overdue” in a demand bill of exchange (as in this case) is applied when a bill has come into the hands of

the indorser so long after its issue as to charge him with notice of dishonor, and thus subject it in his hands to the defenses which the drawer had against it in the hands of the assignor. -General rule is that a bill, note or check, payable on demand, must be presented for payment within reasonable time, having in view ordinary business usages and the purposes which paper of that class is intended to subserve. But, without any explanation of the reason, this draft which is outstanding nearly 5 months after its date, the trial court is fully justified in holding it overdue and dishonored when Jordan took it, so as to charge it in his hands, or the hands of those who hold under him, with any defense or set-off which the drawer had against it in the hands of Edison.

IDAHO STATE BANK V HOOPER SUGAR CO (1929) ~maia~ FACTS Hooper Sugar made a note payable to Wright for $30,000 (note details: issued on Sept. 5, 1919, payable in 6 mos.). Wright then indorsed the note in blank on Sept. 2, 1920 (1 year after). On the same date, he renewed a personal note that was held by National City Bank of Salt Lake (NCBSL), also for $30,000. Wright also forwarded the note made by Hooper to NCBSL but allegedly for a different purpose -However, the cashier of NCBSL altered the renewal note (1) by erasing the name of his bank as payee and inserting that of a bank in Pocatello, Idaho, (2) by changing the interest rate from 6% to 7% p.a., and (3) by adding a recital that the note (issued by Hooper) was deposited as collateral security for the renewal note. He then transferred the note to the Pocatello Bank for $30,000. In Oct. 11, 1920, the Pocatello Bank sold the 2 notes to Idaho State Bank (plaintiff). -Idaho State Bank (ISB) now claims as holder of the note (made by Hooper) from Hooper and Wright, the same note being the collateral to the renewal note. ISSUE 1. WON Idaho State Bank may claim on the renewal note made by Wright 2. WON Idaho State Bank may claim on the note made by Hooper from Wright as an indorser HELD 1. NO, but this does not mean that Wright is freed from the principal obligation which gave rise to the renewal note. On alterations on the renewal note made by Wright Ratio When a mere inspection of the instrument shows that it has been altered, a purchaser is not a holder in due course because such note is not regular on its face Reasoning – ISB is not a holder in due course of the altered renewal note. It follows then that such note was avoided in the hands of ISB

Obiter: it is further alleged by Wright (as a defendant) that not only is IBS precluded from recovery on the altered renewal note, but that such alteration absolved him ultimately of the principal obligation for which the renewal note was given -the court rejected this contention and said that although the alteration was indeed material and intentionally made, there is no finding that Wright’s renewal note was altered with fraudulent intention. While a material alteration of a note is a defense to an action on the instrument itself, in order that such an alteration may be a bar to recovery on the original debt, it must appear that the alteration was made with fraudulent intent. Thus, Wright remains liable on the original obligation to ISB independent of the altered renewal note. 2. YES Ratio When Wright indorsed the note and delivered it to NCBSL after its maturity date, such note as to Wright became a demand note. As a demand note it did not become overdue as to Wright until a reasonable length of time after it was indorsed by him. Reasoning Next in issue is the liability of Wright as an indorser of the note made by Hooper. Wright posits that the note was overdue at the time it reached the hands of IBS, thus IBS may not be considered as a holder in due course to such note. On the other hand, IBS insists that the note was not overdue when received by it, relying on the provision “ where an instrument is issued, accepted, or indorsed when it is overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand.” -the interpretation of the above-quoted provision can only mean one thing: see the ratio above. -citing the Harvard Law Review: “the instrument takes a new lease of life with respect to an indorser after maturity, and his equitable defenses are not let in until a reasonable time after he indorses, although the

NEGO - Quevedo B Camille Umali paper is apparently overdue. … A contract after maturity has a special maturity of its own, i.e. a reasonable time after execution, and bona fide purchasers within that time will be protected from all equities of the party who signed, even equitable defenses.” -in this case, when Wright indorsed the note after its maturity, he gave the note a second maturity date as to

him, namely, a reasonable time, after the transfer. ISB became such holder within that reasonable time, and as regards Wright, IBS received the note free from any equities of Wright founded upon the mere fact that the note appeared to be overdue. Disposition Wright is liable to IBS, must honor the note (since he indorsed it after the maturity, thus effectively made the note “on demand” as between him and IBS).

DUNN V O’KEEFEE (1816) ~dahlia~ FACTS J and T Dunn drew a bill of exchange on Ricketts, Thorne, George & Co. dated June 19, 1813 and due July 19,1913 for £1000 payable to the order of J. Sinclair and issued to the payee for value. On June 20, 1813, the payee presented the bill to the drawee for acceptance but the bill was then dishonored by non-acceptance . No notice of dishonor by nonacceptance was given to the drawer. Subsequently and on July 13,1913, the payee negotiated the bill to the plaintiff Mary O'Keefe, who had no knowledge of the prior dishonor by non-acceptance . The drawee again dishonored the bill. The indorsee immediately gave notice of dishonor to the drawer. The indorsee sued the drawer. There was judgment for the plaintiff. ISSUE

WON the drawer is liable to the indorsee(who had no knowledge of the prior dishonor) given that the payee did not give the drawer a notice of dishonor. HELD When party holding a bill of exchange receives notice of its dishonor, he is bound to communicate this to the drawer. But a bill of exchange is NOT a void security in the hands of an innocent indorsee who has no knowledge that the bill has ever been dishonored because a former holder has omitted to give notice to the drawer that the bill has ever been refused acceptance.The drawer is liable to the innocent indorsee. He issued it in an imperfect state and cannot justly complain of the neglect of any indorsee who takes the bill in his state, having no knowledge of any circumstance to vitiate it, and looking merely at the names upon it.

TRIPHONOFF V SWEENEY (1913) ~bry_sj~ FACTS -J.W. Sweeney Construction Company drew its check on the US National Bank of Portland Oregon for USD 2,294.74 payable to the order of DAN MALCHEFF. The check was drawn and delivered on or about March 25, 1911 but was POSTDATED APRIL 15, 1911. -Malcheff negotiated it to TRIPHONOFF before April 15, 1911 who took it for value and in good faith. J.W. SWEENEY CONSTRUCTION (the drawer) stopped payment for the check on the ground that Malcheff (the named payee), an employee of the drawer, obtained the check by means of false and forged estimates of work done by him for the drawer. The check was DISHONORED UPON PRESENTMENT about APRIL 17, 1911. -Triphonoff (INDORSER) sued the drawer J.W. SWEENEY. The latter argued that Triphonoff should have been put on notice of the infirmity in the instrument or defect in the tile of MALCHEFF by the fact that the check was POSTDATED. Counsel for Sweeney goes as far as arguing that a postdated check is not a negotiable instrument if taken before the date on which demand can be made for payment but is simply an assignment of rights of the payee and opens the check to all equities and defenses.

ISSUE 1. Whether or not the check in this case is NOT a negotiable instrument. 2. Whether or not postdating of the check amounts to a notice of the infirmity on the instrument as to disqualify the holder from becoming a HIDC HELD 1. NO. The check is a negotiable instrument. It is full and complete on its face as it satisfies the requirements of the law for an instrument to be negotiable. It is worthy to note that the law does not require an instrument to be dated. It is settled that the instrument is not rendered invalid by its antedating or postdating provided that it is not done for an illegal or fraudulent purpose. 2. NO. The plaintiff indorsee was not as a matter of law put into inquiry by reason of the check’s being negotiated prior to day of its date. The law itself does not proscribe postdating of the check. It is noteworthy that the drawing of a postdated check is an everyday occurrence in the commercial world and the uniform understanding of the parties is that, when a check is postdated, it is payable on the day it purports to be drawn even though it be negotiated beforehand.

NEGO - Quevedo B Camille Umali HOWARD NAT’L BANK V WILSON (1923) ~mel~ NATURE Action by Howard National Bank against Graham Wilson and another. FACTS -Elliot was acting president of the bank and had general oversight and management of its affairs. He was also interested in a lumber business conducted as the W. E. Elliot Lumber Company and acted as its treasurer. -He had 2 check accounts with the plaintiff bank, one his personal account and the other an account as Treasurer of the lumber company. He also had an account as treasurer of the lumber company with the Waterbury Savings Bank. -From July 6, 1919, to sept 18, 1919, his personal account with the plaintiff was overdrawn in increasing amounts until the overdraft amounted to $14,594.14. an arrangement was entered into by which the plaintiff made a loan to the lumber company which was deposited in its account with the plaintiff, and Elliot transferred $14,750 from this to his personal account, leaving a balance to his credit of $155.86. -On sept 15, Elliot had drawn a check on his personal account for $10,000 which had not been returned to the bank when this adjustment was made. To cover this check when returned, he drew a check to himself on the Waterbury Bank for a like amount, which he deposited in his personal account. This overdrew the lumber company’s account at the Waterbury Bank about $8,700. There was no evidence that anyone other than Elliot knew of this situation at the time the note in question was given. -On the day the note was given, the defendant called at the plaintiff ank on business which was transacted with Elliot in the director’s room. In the course of the interview Elliot procured the defendant to sign a note for his (Elliot’s) accommodation. No question is made but that they were false and fraudlent. The note was executed and Elliot took it out into the bank and directed the assistant cashier to make a cashier’s check in favor of the defendant for the amount of the note. Elliot returned with the check which the defendant indorsed in blank and delivered to Elliott. The latter deposited the check to the credit of the lumber company in the Waterbury Bank on Sept 20. The movement of these checks was so

timed that want of funds did not appear on the books of either bank. Elliot paid the interest on the note indorsed January 1, 1920. he died in the latter part of January 1920, when for the first time, so far as appeared, it was discovered that he was insolvent. -Defendant insists that the plaintiff, being the payee of the note, is not a holder in due course as a matter of law. ISSUE 1. WON plaintiff (being the payee) is a holder in due course 2. WON plaintiff took the check in good faith HELD: 1. YES -That a payee is capable of being a holder in due course at common law has been held almost without dissent. This view is confirmed by the definition of “negotiation” found in Sec 30 of the act, which provides that an instrument is negotiated when it is transferred from person to another in such a manner as to constitute the transferee the holder thereof. As said, the remaining sentence of the section, “if payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery” was not intended to include all the ways in which an instrument might be negotiated, nor to restrict the comprehensive terms of the preceding sentence. 2. YES -Evidence was uncontradicted that Elliot had authority and was accustomed to approve and direct loans as this loan was approved and directed, and that the defendant was a regular customer of the bank. Assuming that the evidence had the tendency claimed for it, we are at loss to see how, in the circumstances, it can be thought that the cashier had any reason to suspect fraud in the inception of the note or any wrongdoing in the transaction. The note was taken in usual course, for full value and without circumstances calling for or warranting inquiry respecting the occasion for giving it. This being so, it cannot be conceived how a reasonable man could think that the note was taken otherwise than in good faith.

NEGO - Quevedo B Camille Umali BPI VS. COURT OF APPEALS Facts: Marasigan, who is a lawyer by profession, was a complimentary member of BECC from February 1988 to February 1989 and was issued Credit Card No. 100-012-5534 with a credit limit of P3,000.00 and with a monthly billing every 27th of the month (Exh. N), subject to the terms and conditions stipulated in the contract (Exh. 1-b). His membership was renewed for another year and the credit limit was increased to P5,000.00. Oftentimes he exceeded his credit limits but this was never taken against him by the defendant and even his mode of paying his monthly bills in check was tolerated. Their contractual relations went on smoothly until his statement of account for October 1989 amounting to P8,987.84 was not paid in due time. On November 28, 2989, defendant served plaintiff a letter by ordinary mail informing him of the temporary suspension of the privileges of his credit card and the inclusion of his account number in their Caution List. He was also told to refrain from further use of his credit card to avoid any inconvenience/embarrassment and that unless he settles his outstanding account with the defendant within 5 days from receipt of the letter, his membership will be permanently cancelled. There is no showing that the plaintiff received this letter before December 8, 1989. Confidential that he had settled his account with the issuance of the postdated check, plaintiff invited some guests on December 8, 1989 and entertained them at Café Adriatico. When he presented his credit card to Café Adriatico for the bill amounting to P735.32, said card was dishonored. One of his guests, Mary Ellen Ringler, paid the bill by using her own credit card a Unibankard. Marasigan filed a case for damages against the bank. RTC ruled for Marasigan’s damage claim but ordered him to pay his obligations. Issues: 1. WON there was indeed an agreement or arrangement entered into between the parties wherein the Bank required Marasigan to issue a postdated check in the amount of P15K as payment of his overdue accounts, with the condition that his credit card will not be suspended? 2. Was the issuance of the check effective payment? 3. Was the bank in bad faith in cancelling Marasigan’s card?

Held: 1. No. We agree with the findings of the respondent court, that there was an arrangement between the parties, wherein the petitioner required the private respondent to issue a check worth P15,000.00 as payment for the latter’s billings. However we find that the private respondent was not able to comply with this obligation. Clearly the purpose of the arrangement between the parties on November 22, 1989, was for the immediate payment of the private respondent’s outstanding account, in order that his credit card would not be suspended. 2. No. Settled is the doctrine that a check is only a substitute for money and not money, the delivery of such an instrument does not, by itself operate as payment. This is especially true in the case of a postdated check. Thus, the issuance by the private respondent of the postdated check was not effective payment. It did not comply with his obligation under the arrangement with Miss Lorenzo. Petitioner corporation was therefore justified in suspending his credit card. 3. No. Good faith is presumed and the burden of proving bad faith is on the party alleging it. This private respondent failed to do. In fact, the action of the petitioner belies the existence of bad faith. As early as 28 October 1989, petitioner could have suspended private respondent’s card outright. Instead, petitioner allowed private respondent to use his card for several weeks. Petitioner had even notified private respondent of the impending suspension of his credit card and made special accommodations for him for setting his outstanding account. As such, petitioner cannot be said to have capriciously and arbitrarily canceled the private respondent’s credit card. It was petitioner’s failure to settle his obligation which caused the suspension of his credit card and subsequent dishonor at Café Adriatico. He can not now pass the blame to the petitioner for not notifying him of the suspension of his card. As quoted earlier, the application contained the stipulation that the petitioner could automatically suspend a card whose billing has not been paid for more than thirty days. Nowhere is it stated in the terms and conditions of the application that there is a need of notice before suspension may be affected as private respondent claims.

NEGO - Quevedo B Camille Umali PIERCE V CARLTON (1922) ~eva~ NATURE From a Judgment for Defendants, Plaintiff Appeals FACTS -the action is to recover the balance due on 3 promissory notes, executed by MJ Carlton and others payable to Crawford & Ceas, dated Feb.11,1913 and payable June 1 of 1914,1915 and 1916, with an aggregate amount $2100. -on the afternoon of Feb. 11, the notes having been indorsed in blank by the payees, Pierce bought said notes for $1800, and without notice or knowledge of any infirmity affecting the validity of said notes -in Feb.1913 plaintiff sold and delivered said notes to his brother, Thos.B.Pierce, for $2100; said Pierce being also a purchaser for value without notice -June 1915, plaintiff bought the notes back from his brother for $2100 and indorsed to plaintiff without recourse (he didn’t want his brother to be involved in the controversy on the notes) -Defendants: there was allegation with evidence tending to show that said notes were procured by false and fraudulent representations on the part of the payees, and that plaintiff, not only had full notice and knowledge of the fraud at the time he first acquired said notes, but that he had actually aided and abetted the payees in the fraudulent conduct and representations by which the note was procured. -judgment was rendered for the defendants ISSUE WON the court erred in the refusal to nonsuit for want of any evidence to show participation in the alleged fraud on part of plaintiff. HELD: NO. -The principle that one who acquires title from a holder in due course may recover, though he himself may have had notice of the infirmity when he acquired the instrument from such holder, was recognized before the enactment of this statute (Sec.3040 Negotiable Instruments ). -“But this rule is subject to the single exception that, if the note were invalid as between the maker and the

payee, the payee could not himself, by purchase from a bona fide holder, become successor to his rights, it not being essential to such bona fide holder’s protection to extend the principle so far” (Calvert’s Daniel 6th ed. Sec.805). And this exception is approved by the general current of authority. -The exception, we think, extends to the agent who acts for such a payee in reacquisition of the instrument, or to one who aids and abets the payee in the fraud by which the instrument is procured. -There are also decisions which seem to hold that the exception referred to properly applies to one who, not being a party or participant in the fraud, has purchased such a note from the payee with knowledge or notice thereof, and reacquires the same from a bona fide holder. -There is doubt if our statute permits an interpretation which would apply to the facts presented in these last cases. The more natural meaning of the language used would apply the exception to the payee or other taking part in the fraud or illegality which rendered the instrument invalid. -On the facts of the present record we are not called on to make definite decision on this question for the reason that his honor, in submitting the second issue, that as to present plaintiff’s ownership in good faith of the notes, instructed the jury that if present plaintiff held the notes by indorsement for value from a bona fide holder, he was entitled to their verdict on the issue, unless defendants has satisfied them by the greater weight of the evidence that plaintiff was a “participant in the fraudulent conduct which the note were secured.” -It is recognized principle in this jurisdiction that a verdict may be given significance and correctly interpreted by reference to the pleadings, the facts in evidence, and the charge of the court. And the plaintiff having received the full benefit of the position, the refusal of the court to submit the question in the precise terms of the issue as tendered is not erroneous. Dispositive The facts in evidence are fully sufficient to require that the issues be submitted to the jury, and that plaintiff’s motion to nonsuit was properly overruled.

NEGO - Quevedo B Camille Umali LILL V GLEASON (1914) ~jat~ FACTS -Nelson Gleason (maker) executed and delivered a negotiable P/N due on Sept.1, 1908, to Peerless Machinery Co. (payee) for the purchase of stocks in the said company. The note was accompanied by a written contract permitting Gleason to return the stock and receive back his note duly canceled provided he gives the company prior notice of his intentions. Gleason gave notice to Peerless but the note was not returned. -Why? Because Peerless had indorsed the P/N in blank before maturity (making the originally order instrument into a bearer instrument) and left it with Andale State Bank (bank) as security for money to be advanced to it by the bank but the bank refused to make any advancement on the note until it was indorsed by Michael Lill. So Lill went to the bank and wrote his name on the back of the note. The bank then cashed the note. When the note matured Gleason refused to pay. Upon the bank’s demand, Lill paid the note and received it without indorsement from the bank. -Lill then filed an action against Gleason in the district court, which ruled in favor of the latter and held that Lill was not a holder in due course. Lill appeals. ISSUE 1. WON Lill is a holder in due course 2. WON the note was discharged by Lill’s payment HELD 1. YES. Sec. 58 NIL: xxx But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the

instrument, has all the rights of such former holder in respect of all parties prior the latter. -The order note, having been indorsed by the payee (Peerless) in blank, became payable to bearer and negotiable by delivery (Sec. 34 NIL). Thus, when the note was delivered to the bank, the bank became the holder thereof in due course. And when the bank delivered the note to Lill, Lill became the bearer and holder (Sec.191 NIL). Having derived his title from the bank, which was a holder in due course, and not having been a party to any fraud or illegality affecting the instrument, Lill became possessed of all the rights of the bank against the maker (Sec.58 NIL). 2. NO. The general rule is that payment by a party other than the principal debtor does not discharge parties prior to the one making the payment, and the payment, instead of extinguishing the instrument, operates as a transfer of it to the party paying. *What is Lill’s status as a party to the note and what are his rights as such? Lill became a party to the note for the accommodation of the payee (Peerless), and his original status insofar as liability was concerned, was that of an indorser, since he did not indicate an intention to be bound in some other capacity. As an indorser, he thus became secondarily liable to all parties subsequent to the payee, in this instance to the bank. The contract of an indorser for the accommodation of the payee is wholly independent of that of the maker, and such indorser, upon making payment, succeeds to the title and rights of the holder as against the maker. Disposition Judgment of district court REVERSED.

NEGO - Quevedo B Camille Umali FOSSUM V FERNANDEZ HERMANOS (1923) ~kooky~ FACTS -Charles A. Fossum was the resident agent in Manila of the American Iron Products Company, Inc., engaged in business in New York City, while Fernandez Hermanos is a general commercial partnership engaged in business in the Philippines -on Feb 10, 1920, Fossum, acting as agent of AIPCI, procured an order from Fernandez Hermanos, to deliver a tail shaft, to be installed on the ship Romulus. It was stipulated that the tail shaft would be in accordance with the specifications contained in a blueprint given to Fossum on or about Dec 18, 1919; and it was further understood that the shaft should be shipped from New York in March or April 1920. -The manufacture and shipment of the shaft was delayed considerably; it arrived in Jan 1921. Meanwhile AIPCI had drawn a time draft for $2250, at 60 days, upon Fernandez Hermanos, for the price of the shaft, and payable to Philippine National Bank (PNB). It was presented to Fernandez Hermanos, and was accepted by it on Dec 15, 1920, according to its tenor. -The shaft was found not to be in conformity with the specifications and was incapable of use for its intended purpose. Upon discovering this, Fernandez Hermanos refused to pay the draft, and it remained for a time dishonored in PNB Manila. Later the bank indorsed the draft in blank, without consideration, and delivered it to, Fossum, who then instituted this action against Fernandez Hermanos. -The TC held, and it is evident, that the consideration for the draft and for its acceptance by Fernandez Hermanos has completely failed; and no action whatever can be maintained on the instrument by AIPCI, or by any other person against whom the defense of failure of consideration is available. ISSUE: WON Fossum is a holder in due course, such that an action can be maintained on the instrument HELD: NO -Fossum is far from being a holder in due course. He was himself a party to the contract which supplied the consideration for the draft, albeit acting in a representative capacity. Also, he procured the instrument to be indorsed by the bank and delivered to himself without the payment of value, after it was overdue, and with full notice that, as between the original parties, the consideration had completely failed. Under these circumstances, recovery on the draft is out of the question. -He calls attention, however, to the familiar rule that a person who is not himself a holder in due course may yet recover against the person primarily liable where it appears that such holder derives his title through a holder in due course. -there is not a line of proof tending to show that the bank itself was ever a holder in due course. It was incumbent

on Fossum to show that the bank was a holder in due course, and can have no assistance from the presumption expressed in sec 59 of NIL, to the effect that every holder is deemed prima facie to be a holder in due course. This presumption arises only in favor of a person who is a holder in the sense defined in sec 191 of NIL, that is, a payee or indorsee who is in possession of the draft, or the bearer thereof. Under this definition, in order to be a holder, one must be in possession of the note or the bearer thereof. (Night & Day Bank vs. Rosenbaum) If this action had been instituted by the bank itself, the presumption that the bank was a holder in due course would have arisen from the tenor of the draft and the fact that it was in the bank's possession; but when the instrument passed out of the possession of the bank and into the possession of Fossum, no presumption arises as to the character in which the bank held the paper. The bank's relation to the instrument became past history when it delivered the document to Fossum; and it was incumbent upon him to show that the bank had in fact acquired the instrument for value and under such conditions as would constitute it a holder in due course. -Moreover, Fossum personally made the contract which constituted the consideration for the draft. He was therefore a party in fact, if not in law, to the transaction giving origin to the instrument; and it is difficult to see how he could strip himself of the character to agent with respect to the origin of the contract and maintain this action in his own name where his principal could not. An agent who actually makes a contract, and who has notice of all equities emanating therefrom, can stand on no better footing than his principal with respect to commercial paper growing out of the transaction. To place him on any higher plane would be incompatible with the fundamental conception underlying the relation of principal and agent. -if the original payee of a note unenforceable for lack of consideration repurchases the instrument after transferring it to a holder in due course, the paper again becomes subject in the payee's hands to the same defenses to which it would have been subject if the paper had never passed through the hands of a holder in due course. The same is true where the instrument is retransferred to an agent of the payee. Disposition Decision affirmed MALCOLM, J., dissenting: -Sec 58 of NIL provides: ". . . A holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter." Under the provisions of this section, Fossum is in exactly the same situation as PNB would be. He is entitled to all the rights that pertain to PNB as holder in due course. -The absence or failure of consideration is not a defense against a holder in due course, although it is a defense against a holder not in due course.

NEGO - Quevedo B Camille Umali ASIA BANKING CORP V TEN SEN GUAN Y SOBRINOS (1923) ~aida~ FACTS -Asia Banking is a foreign corporation licensed to engage in banking in Manila. Defendant is a duly registered partnership indebted to Asia Banking in the sum of $10,475.51 for and on account of New York draft which was drawn by Snow’s Ltd. Asia Banking had demanded for payment from Ten Sen Guan but the latter refused to do so. -February 25, 1920 – Defendants ordered from Snow’s Ltd. 10 cases of mercerize batiste to be shipped from New York freight prepaid to Manila. -When the merchandise arrived in Manila, a draft drawn by Snow’s Ltd. against the defendants for the amount alleged was presented for acceptance to the defendants. This was done through Asia Banking, an agent of Snow’s Ltd. Snow’s Ltd. had negotiated the draft with Asia Banking’s counterpart in New York. -The delivery of the bill of lading and other documents was refused by Asia Banking until Ten Sen Guan accepted the draft. -Ten Sen Guan accepted the draft and received delivery of the bill of lading and made entry of the goods at customs. -When the cases were opened, they were found to contain burlap and not the batiste ordered by Ten Sen Guan. So Ten Sen Guan declined to receive the goods and left them at customs. They then returned the bill of lading to Asia Banking and demanded that their acceptance of the draft be cancelled. - The lower court found for the defendant. ISSUE WON Ten Sen Guan is liable for the amount due

HELD NO, because Asia Banking is not a holder in due course. -The evidence presented to prove that Asia Banking was a holder of the draft for value is not convincing. To give an authentic account of the transaction, it should have been established by competent evidence how Asia Banking acquired the draft. Asia Banking only presented a local employee of the bank who testified as to the alleged meaning of certain entries made in the bank records. -The trial court also found that the acceptance of the draft by the defendants was conditional. It was also found that the plaintiff released and discharged the defendants from liability upon the draft because of fraud. Disposition Judgment affirmed. STREET [concur] -It was fraud on the part of Snow’s Ltd. to negotiate the draft in question to the New York branch of Asia Banking. -This fraud having been set up in the defendant’s answer and established by proof, it became incumbent upon the plaintiff to prove that it occupies the position of bona fide purchaser of the draft for value and without notice. This requirement is not met by the presumption which the law raises in favor of the holder of a negotiable instrument arising from the mere possession of the instrument. The plaintiff must go further and prove that it is such a purchaser. -The reason for this is that the guilty maker or holder of an instrument vitiated by fraud of illegality will naturally seek to put it in the hands of some other person in order to cut off the defense to which the instrument is subject.

VAN SYCKEL V EGG HARBOR COAL & LUMBER CO. (1932) ~lora~ FACTS -The plaintiff, Van Syckel purchased 3 promissory notes differing only in the amount from one Joseph Ginsberg. -The form and indorsement of the notes were precise with the following: “$2500 Egg Harbor City, N. J., December 5, 1929. Four months after date We Promise To Pay The Order of Max Orocofsky at the Egg Harbor Commercial Bank, Egg Harbor City, N.J., $2500 And 00 Cts Dollar With Defalcation for Value Received. Egg Harbor Coal & Lumber Co. Arthur Mueller (Signed) Pres. Kate Mueller (Signed) Pres. No. 37220 Due Date Apr. 5.” - Reverse side: “ Max Orocofsky by J.G., pr. Att’y. (Signed) Without recourse

C.S. Van Syckel, Att’y. (Signed)” -Plaintiff claims that the notes were not paid and that the amounts therein stated were due and owing. -The maker’s signature was admitted however, the case is barren of any proof of the genuineness of the signature of the payee. -The lower court ruled in favor of the plaintiff: proofs showed that the plaintiff was holder of the instrument and that under Section 59 of the NIL, the duty was cast upon the defendant to show a defect as follows: “every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under who he claims acquired the title as a holder in due course; but the last mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title." -Defendant appealed.

NEGO - Quevedo B Camille Umali ISSUES 1. WON the defendant has the burden of proof of showing defect in the instrument. 2. WON plaintiff is a holder in due course. HELD 1. NO. -At common law, one who sues upon a written contract is obliged, in the absence of admission, to prove the sigNATUREof the defendants before the instrument can be received in evidence. Similarly, the plaintiff, when not name in the contract, has always been required to show the right on which he stands. -The notes were not payable to bearer, but were order notes, and title did not pass until indorsed by the payee. The proof of the sigNATUREof the payee was a necessary part of the plaintiff’s case, unless the fundamental rule of the common law has been changed by the NIL. -There are no statutes changing the law of evidence in this respect. The NIL was intended as a codification of the common law rules relating to negotiable instruments, and is, for the most part, declaratory of the common law. -Sec 55 of NIL: “the title of a person who negotiated an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.” -Sec. 59 should be read in the light of Section 55 and the intervening Sections and should be taken to mean that proof having been offered of the genuineness of the maker’s and payee’s signatures, the holder is deemed to be a holder in due course, and the duty of

proceeding to offer some proof of fraud or defect specified, in procuring essential signatures, is cast upon the party alleging it, and, until such proof is offered, there is no duty upon the holder to prove that he or some person under whom he claims acquired the title as holder in due course. -The Court does not think that it was intended that the presumption should arise under Section 59, without proof that the essential names on the front and back of an order instrument were signatures of the named persons. 2. NO. The court and the jury had no evidence before them that the signature upon the back of the note was the signature of the payee, or that the agent purporting to sign the same was authorized so to do. It seems that such proof would be necessary, in view of Sections 16, 19 and 33 of NIL before a presumption would arise of a valid and intentional delivery. -Since note obligation do not arise save by the signature of the maker, it would seem equally to follow that the signature of the payee by way of indorsement is the foundation of the rights of holder in due course, subsequent to the payee. Upon the proof of the genuineness of the necessary signatures the holder’s rights arise as specified in Article 4 of the act, but in the absence of such proof there was nothing to indicate that the instruments in suit had been negotiated, or that the person possessed of the physical paper had title thereto, or the right to the proceeds thereof. -A note payable to order is negotiated by the indorsement of the holder completed by delivery. -In this case, the holder, prior to the indorsement was Max Orocofsky. His signature was sufficient indorsement. There was however, no proof of authority of the person purporting to act as agent to affix the signature. Disposition Judgment Reversed.

BEACON TRUST CO. V RYDER (1931) ~marge~ FACTS -Promissory note for $20k dated March 18, 1929, payable to Morris Rudnick six months after date, was purportedly made by Robert L. Ryder. The same was indorsed in blank by Charles W. Ryder “waiving demand, notice and protest” and subsequently indorsed in blank also by Morris Rudnick and “E.S. Company, Inc. Morris Rudnick, Treas.” Before its maturity, said promissory note was delivered by Rudnick to plaintiff Beacon Trust Co. for discounting. -On its due date, PN was protested for nonpayment. Ryders were notified. -Ryders denied their signatures on the PN and allege that there was no consideration and no delivery. They also allege that there was fraudulent transfer and insist that plaintiff prove that it is a HIDC. ISSUE WON plaintiff may be compelled to prove it is a HIDC HELD NO.

GenRule: The holder of a negotiable instrument is deemed prima facie to be a HIDC. No further burden rests upon him to prove that he or some other person under whom he claims acquired the title as HIDC. XCPT if it is shown that the title of some person who has negotiated the instrument was defective (i.e., negotiation was “in breach of faith”). -The burden of establishing that the payee’s title was defective was on the Ryders. Failing to sustain this burden [their testimonial evidence did not convince the court], they cannot insist that Beacon Trust Co. prove its prima facie case that it is a HIDC. -Plaintiff Beacon Trust Co.’s right to charge the account of the payee was not necessarily inconsistent with it being a HIDC. -Indifference on the part of the plaintiff as to the outcome of the action would not tend to show that it was not a HIDC. Such indifference might result from a consciousness that there was a good indorser.

NEGO - Quevedo B Camille Umali FARMERS’ STATE BANK V KOFFLER (1930) ~anton~ NATURE Action to recover on a check which payment was stopped by the drawer. FACTS -September 15, 1928: Koffler (defendant) drew a check on the Farmer’s and merchant’s bank if New England in which he had an account, payable to the order of Kenneth Davis. -The consideration was $250, and the check was intended for that amount. The sum payable was written in figures “$250.00,” but in the body it was th expressed in “Two Hundred and 50/100 Dollars” ($200.50). -Davis indorsed the check, and then the check was “lost or stolen.” -October 1: the check was presented to the plaintiff bank, which cashed it in the usual course of business. The bank was acquainted neither with Davis nor the bearer who presented the check. -Davis and Koffler learned that the plaintiff had cashed the check. Koffler notified the drawee bank (Farmer’s and Merchants’) not to pay the same. -The check was transmitted by plaintiff Farmers’ State Bank in the usual course for collection and remittance, but the Farmer’s and Merchants’ refused to pay the same pursuant to Koffler’s notification. -In meantime, after Koffler learned that the Farmers State Bank cashed the check, he gave Davis another one in lieu of the original. Defendant’s Claim -The instrument was complete and regular upon its face and had never previously been dishonored. -Farmers’ State Bank became the holder of it for value and before it was overdue. -The bearer of the check for whom the check was cashed had a defective title within Sec. 55 of the Negotiable Instruments Law (NIL). -The title of the bearer who negotiated the instrument was defective, pursuant to Sec. 59 of the NIL. ISSUE 1. WON the bearer was a holder in due course. 2. WON Farmers’ State Bank had the burden to prove it took the instrument in good faith. HELD 1. YES -Koffler disregarded the last sentence of Sec. 59 of the NIL.

Sec. 59.—Every holder is deemed prima facie to be holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some other person under whom he claims acquired the title as a holder in due course. But the last mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. -Here there is no defect n the title so far as the maker is concerned. The action is not brought against Davis to charge him as indorsee. It is brought against the defendant as maker. Koffler became bound to on the instrument at the time he delivered it to Davis. Davis indorsed the instrument (at the time he delivered) and made it payable to bearer. -Koffler has no defense against Davis. Koffler is interposing a defense which might have been available to Davis only. -The check was in all aspects regular except for the discrepancy between the figures indicating the sum payable and its statement in writing. There was nothing about it to challenge the attention of the plaintiff when it was cashed except this discrepancy. -Plaintiff naturally assumed that the bearer was Davis. When the check was presented, the bearer turned to the desk for that purpose and made the indorsement. -There was nothing suspicious which would charge the bank with notice of a defect in title or show lack of good faith. -As to the amount, the one in words controls in instances of discrepancy, unless the words are ambiguous. 2. NO -Sec. 59 considered as a whole does not have the effect of shifting to the plaintiff the burden of proving that he is the holder in due course of the note on which he sues merely by a showing on the part of the defendant that the title to the instrument was defective as against some intermediate indorsee. -The fraud in putting a note in circulation which will operate as a defense or charge the burden of proof must be a fraud against the defendant. -It is where the fraud is done as to the defendant or maker, and not where it is done as to the payee or some intermediate holder or party to the paper. Disposition Amount is reduced to accord with the sum payable. Judgment is affirmed against Koffler.

NEGO - Quevedo 4 Camille Umali COMMERCIAL BANK OF LA FAYETTE & TRUST CO. V BARRY (1934) ~jonas~ NATURE Appeal from judgment of lower court FACTS -J.C. Barry, Trustee, executed demand notes payable to the order of the Bank of Lafayette & Trust Company, of which he was president. These notes were issued in transactions whereby the bank purchased its own stock from stockholders who wished to dispose of them. The understanding was that Barry would not be personally liable on the notes but that the notes would be paid out of the proceeds of the resale and from dividends. -The Bank of Lafayette & Trust Company sold all its assets, including the Barry note for $8,711 being sued on, to the plaintiff, the Commercial Bank of Lafayette & Trust Company. The note was not indorsed by the payee bank to the plaintiff bank. -Plaintiff contends that it acquired the note for valuable consideration before maturity, & hence is a holder against whom prior equities will not avail. Thus, the bank objected to the offer of any evidence by the defendant in support of his defense.

ISSUE WON plaintiff bank is a holder in due course HELD NO Ratio There having been no negotiation of the note sued on, because it was never indorsed by the payee; it is immaterial whether plaintiff acquired the note prior to its maturity. It follows that plaintiff cannot be regarded as a holder in due course, & the instrument sued on is subject to the same defenses as if it were non-negotiable. The defense of want of consideration is therefore available. Reasoning At common law, under the law merchant, & independently of the Negotiable Instruments Law, a transferee of a note payable to order could not & did not obtain a legal title thereto, except by endorsement of the payee, and a holder without such endorsement took it ‘subject to all the equities vested in prior parties.’ Disposition Judgment appealed from is affirmed.

NEGO - Quevedo Camille Umali CHAPTER 4: DEFENSES AND EQUITIES MURRAY V THOMPSON 136 Tenn. 118, 188 S.W. 378, LRA, 1817B 1172 (1916) ~ice~ FACTS SUBJECT: Bil of Exchange-Check MAKERS: Brick company PAYEE: Murray SUBSEQUENT INDORSEMENTS: Father of Murray sold to Thompson. -Murray received a note from a brick company in satisfaction to his claim for damages worth $1,750 because of personal injuries. It was payable on June 1, 1915 because he was still a minor. On October 16, 1914, W.A. Murray, his father, with the consent of the minor, sold the note to Thompson. He indorsed the name of his son without apprising Thompson that he himself was not the payee. The proceeds were deposited to the account of Murray. It was invested in a saloon business and was lost. There was no actual fraud on the part of Murray in the transaction with Thompson. -Murray wanted to disaffirm and recover. ISSUE WON an infant’s indorsement is void or voidable HELD: Voidable. Ratio Sec. 22. Effect of indorsement by infant or corporation.-The indorsement or assignment of

the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. -The statement that the infant “passes property therein” entails that the contract of indorsement is not void and that his indorsee has the right to enforce payment from all parties prior to the infant indorser. The incapacity of the minor cannot be availed of by the prior parties. -It was not intended to provide that the indorsee should become the owner of the instrument by title indefeasible as against the infant, or to make the act of indorsement an irrevocable one. The law would not want to deprive the infant of the right to reinvest in himself the title to the instrument against a holder who had knowledge of the indorser’s infancy. -The common-law rule is that the purchaser and indorsee of such a note is not a bona-fide holder as against an infant indorser, and that the latter may disaffirm and recover the note from the possession of the former, who takes with constructive notice of the incapacity. This means that the infant could disaffirm and recover Disposition: Court of Civil Appeals reversed while the chancellor is affirmed.

2

NEGO - Quevedo Camille Umali RODRIGUEZ V MARTINEZ 5 Phil 67 (1906) ~rean~ FACTS SUBJECT: promissory note dated Oct. 17, 1902, for 4,000 Mexican pesos Signed by Martinez, payable to one Montalvo. -Montalvo, for value received, sold and transferred the said PN to Rodriguez before maturity. Rodriguez received the same w/o notice of any conditions existing against the note. Rodriguez, before having the note, went to Martinez and asked him in respect thereto, and was informed by him that the note was good and that he would pay the same at a discount; and that the note was delivered by Martinez to said Montalvo in payment of the gambling debt which Martinez owed Montalvo. This note was presented to the court as evidence of that debt without the stamp required by law, and no stamp had ever been attached thereto. After the trial Rodriguez offered to put the necessary stamp on the note, and tendered such stamp. ISSUE WON defendant Martinez is liable to pay Rodriguez on the instrument. HELD: YES -SC did not discuss whether the game at which this debt was incurred is a prohibited game or not. In view of the fact that the judgment of the court below contains no finding as to the name or nature of the game, SC applied A1277 of CC: the consideration of the contract must be presumed to be lawful and valid until the contrary is proved; and without considering as we have said these questions which we do not think necessary to discuss for the purposes of this decision, yet there are other grounds upon which this case can be decided. -From the facts set out in the judgment of the court below, plaintiff Rodriguez acquired the ownership of the note in question by virtue of its indorsement, he having paid the value thereof to its former holder. He did so without being aware

of the fact that the note had an unlawful origin, since he was not given notice, as the court found, of any conditions existing against the note. Furthermore, he accepted it in good faith, believing the note was valid and absolutely good, and that defendant Martinez would not repudiate it for the reason that Martinez, had assured him before the purchase of the note that the same was good and that he would it at a discount. Without such assurance from Martinez we can hardly believe that Rodriguez would have bought the note. It is thus inferred from the fact that he, Rodriguez, inquired from the defendant about the nature of the note before accepting its indorsement. -These facts sufficiently show that Rodriguez bought the note upon the statement of Martinez that the same had no legal defect and that he was thereby induced to buy the same by the personal act of Martinez. In view of this, Martinez can not be relieved from the obligation of paying Rodriguez the amount of the note alleged to have been executed for an unlawful consideration. If such unlawful consideration did in fact exist, Martinez deliberately and maliciously concealed it from Rodriguez. Therefore, to hold otherwise would be equivalent to permitting Martinez to go against his own acts to the prejudice of Rodriguez. Such a holding would be contrary to the most rudimentary principles of justice and law. Par. 1, Sec. 333 of Code of Civil Procedure, applicable to this case, provides as follows: "Whenever a party has, by his own declaration, act, or omission intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he can not, in any litigation arising out of such declaration, act, or omission, be permitted to falsity it." Disposition Judgment of lower court is reversed. Defendant Martinez is ordered to pay to the plaintiff Rodriguez the sum of 4,000 pesos, Mexican currency, or its equivalent in Phil. currency, with legal interest at 6 % p.a.

3

NEGO - Quevedo Camille Umali GLUCKMAN V DARLING (1914) 85 N.J.L. 457, 89 Atl. 1016 (1914) ~yella~ FACTS SUBJECT: Promisory note MAKER: Charles Flynn PAYEE: Balene & Max INDORSEE: H.L. Darling HOLDER FOR VALUE: Isaac Gluckman -Balene & Max were about to sell to Charles Flynn some real estate and were to take in part payment therefore notes made by Flynn and indorsed by defendant. When Balene & Max requested the defendant to be present at the transfer and questioned him about the notes, he attended and examined them and said, “Everything is all right.” The notes were then accepted on account of the purchase price of the property, and the one in suit subsequently passed by indorsement, for a valuable consideration, to the plaintiff.

-Defendant at the trial denied his signature as indorser, insisiting that it was a forgery. Court denied defendant’s motion for nonsuit ISSUE WON defendant is stopped from alleging forgery HELD: YES -It is true that silence and acquiescence alone does not estop a defendant in a suit upon an alleged forged instrument from proving the forgery, where the plaintiff had not been prejudiced or damaged thereby. But where the holder of a note has been willfully misled as to the genuineness of an indorsement thereon by one who purports to be the indorser and sustains damage or is prejudiced thereby, the alleged indorser will be stopped from denying the validity of the signature. Disposition Judgment affirmed.

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NEGO - Quevedo Camille Umali STRADER V HALEY 216 Minn. 315, 12 N.W. (2d) 608 (1943) ~javi~ FACTS -Haley and his wife lived with plaintiff Strader. Between July 11, 1936 and June 14, 1941, 69 checks were negotiated by Haley. Strader claimed that Haley forged her name as drawer for 2 checks and as indorser in a total of 57 checks. Checks varied amounts. Park Recreation Parlor, Luz, Easlinger, Liberty State Bank were those who cashed the checks. -Plaintiff claimed she never made such indorsements or signed as drawer. -Plaintiff brought separate actions against Haley, parties who were alleged to have cashed checks for Haley and Liberty State Bank. -Defense claimed that the checks were indorsed by plaintiff herself, that she delivered them to Haley with instructions to cash them, to purchase supplies, and return the change to her. -TC said that there was no finding that plaintiff authorized Haley to sign her name on any check. TC also said that plaintiff received from Haley all the proceeds of the checks with knowledge that such proceeds came from the checks. TC found that plaintiff had ratified Haley’s actions and conduct in cashing the checks. Plaintiff appealed ISSUE WON plaintiff is liable for Haley’s acts by ratification HELD: YES *Court first determined WON “precluded” in sec.23 of the NIL includes ratification (in this case receiving proceeds of the checks) -“precluded” includes ratification. NIL is based largely on the English Bills of Exchange Act. The English law contains a proviso “that nothing in this section shall affect the ratification of an unauthorized signature not amounting to a forgery.” This proviso was not included in the NIL but a footnote was added that a forged signature may be ratified. The dropping of such proviso did not indicate any intention of changing the meaning adopted from the English law. Established rule was that an unauthorized

signature not amounting to forgery could be so ratified. -SC concluded that the framers of the NIL intended that under the act, the same as under the prior law, a party may be “precluded” by ratification. *case had a discussion on WON “precluded” was equivalent to “estoppel” as some authors conclude. However the Court said that although “precluded” denotes the consequence of an estoppel, it is not equivalent and its meaning should not be so limited because 1)it is not the intention of the framers; 2) it is opposed to the prior law which NIL adopted. *Court then determined WON a forgery may be ratified -By a forgery is meant an unauthorized signature on an instyument or a material alteration thereof in violation of a criminal statute. Rule is that an unauthorized signature on a note, check or other instrument under circumstances not constituting the crime of forgery may be ratified. -in the instant case, there was no forgery committed as an essential element, the intent to fraud, was not proven. *WON plaintiff ratified acts of Haley: YES -where the principal accepts and retains the benefits of an unauthorized act of an agent with full knowledge of all the facts, he thereby ratifies the act. -in the instant case, the evidence sustains the finding that plaintiff received the proceeds of the checks in cash and with full knowledge of all the facts. This was proven by: proceeds of the check were definitely identified and traced; corroboration of Haley’s wife; the fact that Strader did not complain to her attorneys that she did not receive any checks, which was her usual routine. -Court concluded that plaintiff ratified all the unauthorized signatures in these cases; that by reason of such ratification she is precluded from setting up the fact that her signatures were unauthorized in the actions against Haley. Disposition affirmed

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NEGO - Quevedo Camille Umali SAN CARLOS MINING CO, LTD. V BPI, CHINABANK CORP (1933) [place citation here] ~brian b~ FACTS -Plaintiff corporation is organized under Hawaiian law and is authorized to engage business in the Phils. (Manila) -The business in the Phils. was handled by Alfred Cooper, its agent (under GPA) w/ authority of substitution. The principal employee in the Manila office is Joseph Wilson who also has a GPA but w/out substitution. Before Cooper left in 1926, he gave a GPA to Newland Baldwin and at the same time revoked Wilson’s GPA relative to dealing with BPI, a bank where plaintiff has an account. -After a year, Wilson, conspiring w/ Alfredo Dolores, a messenger-clerk in Plaintiff’s Manila office, sent a cablegram to the company in Hawaii requesting a telegraphic transfer of $100K to China Banking Corp. (CBC), where plaintiff also has an account. -After receipt of the money, CBC sent an exchange contract to plaintiff offering P201K (current rate). On this contract was forged the name of Baldwin. It also contained a request for a certified check from CBC upon receipt of the money. -A manager’s check on CBC for P201K payable to plaintiff was receipted for by Dolores. W/c check was deposited to BPI by the following indorsement: “For deposit only with BPI, to credit account of (plaintiff). “By (Sgd.) NEWLAND BALDWIN For Agent” This endorsement was spurious. -BPI credited plaintiff’s account for P201K and passed the cashier’s check through the clearing house, where it was paid by CBC. -The same day, BPI received a letter, purporting to be signed by Baldwin, directing that P200K in bills of various denominations be packed for shipment and delivery the next day. The next day, Dolores witnessed the counting and packing of the money then he gave a check, purporting to be signed by Baldwin, for P200K. He was also charged P1 for the service wherein he also came up w/ another check for P1, again purporting to be signed by Baldwin. (This practice of withdrawing money for shipment was frequent for plaintiff but never so large an amount and under the sole supervision of Dolores.)

-Dolores then delivered the money, in plaintiff’s office, to Wilson where he received his P10K share. Shortly thereafter, the crime was discovered, and upon BPI refusing to credit plaintiff with the amount of the 2 forged checks (P200K+P1), plaintiff sued BPI and CBC. -TC absolved both defendants. ISSUES 1. WON CBC is liable 2. WON BPI is liable HELD *SC, first and foremost, declared that the falsity of Baldwin’s signatures is beyond reasonable doubt. 1. NO. A bank that cashes a check must know to whom it pays. In connection with the cahier’s check, this duty was therefore upon BPI, and CBC was not bound to inspect and verify all endorsements of the check, even if some of them were also depositors in that bank. It had a right to rely upon BPI’s endorsement when it gave the latter bank credit for its own cahier’s check 2. YES. It is an elementary principle both of banking and the NIL that a bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged. -The bank in the case at bar was neither a gratuitous bailee (as contended by BPI) nor an intermeddler bank (as contended by plaintiff). Their relation is that of depositor and banker, creditor and debtor. -The bank paid out its money because it relied upon the genuineness of the purported signatures of Baldwin. These, they never questioned at the time its employees should have used care. In fact, even today the bank represents that it has a belief that they are genuine signatures. -The signatures to the checks being forged, under Sec. 23, NIL, they are not a charge against plaintiff nor are the checks of any value to the defendant. The proximate cause of the loss is BPI’s negligence. Disposition Judgment modified –affirmed as to CBC, reversed as to BPI.

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NEGO - Quevedo Camille Umali PHIL. NAT’L BANK V QUIMPO G.R. No. L-53194; Gancayco; March 14, 1988 ~mini~ FACTS -Francisco S. Gozon II, a depositor of the Caloocan Branch of PNB, went to the bank accompanied by his friend Ernesto Santos whom he left in the car while he transacted business in the bank. -Santos took a check from Gozon’s checkbook, filled it up for the amount of P5T, forged the signature of Gozon, and encashed it in the bank on the same day. Upon receipt of the statement of account from the bank, Gozon asked that the amount of P5T be returned to his account as his signature on the check was forged but the bank refused. -Santos was apprehended by the police and he admitted that he stole the check of Gozon. Gozon filed the complaint for recovery of the amount of P5T against the bank in the CFI Rizal. -CFI ruled in favor of Gozon. Bank then filed petition for review on certiorari before SC. ISSUES 1. WON PNB was negligent in encashing the forged check without carefully examining the signature therein 2. WON Gozon is precluded from setting up the defense of forgery or want of authority (since it is his own negligent act of leaving the checkbook in Santos’ hands that is the proximate cause of the loss) The Lawphil Project -Arellano Law Foundation

HELD 1. YES Ratio A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily change the amount so paid to the account of the depositor whose name was forged. This rule is absolutely necessary to the circulation of drafts and checks, and is based upon the presumed negligence of the drawee in failing to meet its obligation to know the signature of its correspondent. If the paper comes to the drawee in the regular course of business, and he, having the opportunity ascertaining its character, pronounces it to be valid and pays it, it is not only a question of payment under mistake, but payment in neglect of duty which the commercial law places upon him, and the result of his negligence must rest upon him. 2. NO -The act of Gozon in leaving his checkbook in the car while he went out for a short while can not be considered negligence sufficient to excuse the defendant bank from its own negligence. Gozon could not have been expected to know that Santos would remove a check from his checkbook. Defendant had trust in his classmate and friend. He had no reason to suspect that the latter would breach that trust. Disposition Petition is DISMISSED for lack of merit.

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NEGO - Quevedo Camille Umali PRICE V NEAL 3 Burr. 1354 (1762) ~ricky~ FACTS -A bill for 40 pounds (L40) was purportedly drawn by Benjamin Sutton (drawer) against John Price (drawee) in favor of Rogers Ruding (payee). It appeared from the bill that it was indorsed to Anthony Topham, then Hammon and Laroche and finally, for a valuable consideration, to Watson and Son whose representative, Edward Neal, received it. Neal gave notice to Price. On the day it was due, Price sent his servant to Neal to pay the L40 and take up the bill. -A second bill for L40 was again purportedly drawn by Sutton (drawer) against Price (drawee) in favor of Ruding (payee). It appeared from this bill that it was indorsed by Ruding to Watson and Son. This second bill was accepted by Price upon presentment by writing on it: “Accepted John Price.” The bill being accepted, it was indorsed by Neal for a valuable consideration and left at Price’s bankers for payment. It was paid upon Price’s order. -Unfortunately for Price, both these bills were actually fakes. They were done by a certain Lee who was later hanged for the crime of forgery. -Wanting to recover the amount he paid, Price sued Neal. It was proven that Neal acted innocently and bona fide, without any suspicion of the forgeries and that he paid the whole value of those bills. But the jury found a verdict for Price.

HELD: NO. Ratio Price cannot recover the money paid from Neal because the latter received it upon a bill of exchange indorsed to him for a fair and valuable consideration, which he had bona fide paid, without the least privity or suspicion of any forgery. Reasoning Here was no fraud: no wrong. It was incumbent upon Price (drawee) to be satisfied “that the bill drawn upon him was the drawer’s hand,” before ha accepted or paid it. It was not Neal’s duty to do so. Notice was given upon Price of a bill drawn upon him; and he sends his servant to pay and take it up. The other bill he actually accepts. -It was a considerable time after payment before Price found they were forged and the forger was already to be hanged. He made no objection at the time he paid them. Whatever neglect there was, it was on his side. -Neal had no reason to doubt the second bill after Price, without any scruple or hesitation, paid the first. Neal also paid the whole value bona fide. It is a misfortune which happened without Neal’s fault or neglect. Even if there was no neglect on the part of Price, there is no reason to throw off the loss from one innocent man to another innocent man. Disposition Postea1 delivered to defendant.

ISSUE WON Price may recover from Neal the money he paid on the two bills.

Black’s Law Dictionary: “In the common-law practice, a formal statement, indorsed on the nisi prius record, which gives an account of the proceedings at the trial of the action.” The term “nisi prius” means the court in which “the cause was tried to a jury, as distinguished from the appellate court.” [So it appears that in common-law practice, the victor will be entitled to a formal statement of the proceedings. Probably so he could use it to prove his acquittal or for execution of his claim.] 1

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NEGO - Quevedo Camille Umali

FIRST NAT’L BANK OF PORTLAND V U.S. NAT’L BANK OF PORTLAND 100 Ore. 264, 196 Pac 547, 14 ALR 470 (1921) ~joey~ FACTS SUBJECT: 18 forged checks DRAWER: Willamette Iron & Steel Works DRAWEE: First National Bank of Portland PAYEES: Rose and Shea, separately INDORSEES: various merchants  United States National Bank of Portland -Rose and Shea confederated to obtain 18 blank checks bearing the lithographed signature of Ball, president of Steel Works, and forge therein the signature of Insley, secretary-treasurer. -The checks were negotiated by the two to various merchants, all of whom deposited the checks in their accounts in the United States National Bank. -Defendant bank collected from drawee/plaintiff bank. -Forgery was discovered and drawee was immediately notified. -Plaintiff bank wants to recover from defendant bank on the theory that (1) the latter was negligent in not detecting the forgery (apparently, drawer also had a checking account in defendant bank, so they should have been aware of the required signatures), and (2) even if not negligent, the indorsement of the checks and presentment for payment, followed by actual payment, oblige the defendant to refund.

ISSUE WON defendant bank is liable to plaintiff bank HELD: NO -GEN RULE: Where a holder for value in due course presents to the drawee a bill of exchange to which the name of the drawer has been forged, and the drawee pays the instrument, the holder and drawee alike ignorant that the signature of the ostensibly drawer was forged, and it is subsequently discovered that the signature of the drawer was forged, the drawee cannot recover payment made to the holder. -EXCEPTIONS: This defense is not available to a holder who (1) is guilty of bad faith, or (2) has been negligent. -Was the defendant negligent? NO. There was nothing upon the face of any of the checks to excite suspicion, and it is not claimed that any of the 18 merchants knew or had any reason to suspect the checks were forgeries. -The fact that the defendant had in its files the genuine signature of a drawer might, if there are other circumstances tending to show negligence be considered in determining whether the defendant was negligent; but it cannot be said that the failure to compare the signatures was, as a matter of law, negligence on the part of the defendant. Disposition Judgment affirmed.

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NEGO - Quevedo Camille Umali PHIL. NAT’L BANK V NAT’L CITY BANK OF NY and MOTOR SERVICE CO., INC. 63 PHIL 711; RECTO; 1936 ~chriscaps~ FACTS -Unknown person negotiated w/ Motor Svc the checks in payment for tires purchased fr Motor Svc, purporting to have been issued by Pangasinan Transport Co. against PNB and in favor of Int’l Auto Repair Shop. -Said checks were indorsed by unknown person at the back, Motor Svc believing that the signatures of Klar (Manager and Treasurer of Pangasinan Transport) were genuine. -Checks were indorsed for deposit by Motor Svc at the National City Bank of New York and Motor Svc was credited w/ the amounts. -Checks were cleared and PNB credited the National City Bank of New York for the amounts, believing that the signatures of the drawer were genuine, that the payee is an existing entity and the indorsements are regular. -PNB found out that the purported signatures of Klar were forged. It demanded from Motor Svc the reimbursement of amounts for w/c it credited the National City Bank and for w/c the National City Bank credited Motor Svc. -Motor Servic refused to reimburse. Pangasinan Transport refused to have proceeds deducted from their deposit. ISSUE WON PNB has right to recover from National City Bank HELD: YES -Acceptance is unnecessary in so far as bills of exchange payable on demand are concerned (e.g., checks).

-A check being payable immediately and on demand, bank can fulfill its duty to depositor only by paying the amount demanded. The holder has no right to demand from bank anything but payment, and the bank cannot do anything but pay. -There is however, nothing w/c prohibits presentation of checks for acceptance before they are paid. Where a check is certified by the bank on w/c it is drawn, certification is equivalent to an acceptance. The bank accepts if it chooses. -The purpose of certification is to import strength to the paper by obtaining acknowledgment from the certifying bank that the drawer has sufficient funds. -In this case, there was payment but no acceptance nor certification. -To entitle the holder of forged check to retain the money obtained, he must be able to show that the whole responsibility of determining validity of the signature was upon drawee. -The drawee of a check who is deceived by forgery of drawer’s signature may recover payment, unless his mistake has placed an innocent holder of paper in a worse position than he could have been in if the discovery of the forgery had been made on presentation. -The appellant in purchasing the papers from unknown person w/o making inquiry, acted negligently and contributed to the appellee’s constructive negligence in failing to detect the forgery.

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NEGO - Quevedo Camille Umali REPUBLIC V EQUITABLE BANKING CORP and REPUBLIC OF THE PHIL V. BPI 10 SCRA 8; Concepcion; Jan 30, 1964 ~’del~ FACTS [BPI case] -Jacinto Carranza asked the Corporacion de los Padres Dominicos to cash 24 treasury warrants from which encashment his wife expected to earn a sort of commission. -The Corporacion accommodated Carranza’s request since the latter was a trusted former employee but subject to certain conditions: a) that the warrants be deposited with BPI; b) that the actual payment of the value of the warrants would be made only after the same had been duly accepted and cleared by the Treasurer and the proceeds thereof duly credited to the BPI account of the Corporacion. -Said conditions were met and deposited with BPI who accepted the warrants “subject to collection only” and with each of them (warrants) bearing the indorsement of the respective payee and that of the Corporacion. -BPI presented the warrants for payment to the drawee (the Government) through the Clearing Office and upon clearing, was paid by the Treasurer. -BPI then credited the proceeds to the Corporacion’s account, which was then withdrawn by the Corporacion. -The Treasurer returned 3 of the warrants to the Central Bank on the ground that those were forged and then demanded that the value of said warrants be charged against BPI’s account with the Clearing Office and credited back to the demand deposit of the Treasury. -Eventually, all warrants were returned by the Treasury to the Central Bank for the same reason and with the same demand. -Central Bank then referred the matter to BPI for appropriate action but the latter opposed the return of the warrants or to have their value charged against its account and requested, instead, to the CB to return said warrants to the Treasurer. [Equitable Case] -4 warrants were deposited with Equitable by its depositors Robert Wong, Lu Chiu Kau and Chung Ching . -Equitable cleared said warrants through the Clearing Office and then collected the corresponding amounts from the Treasurer, and thereafter, credited those to the accounts of the depositors. -The Treasurer notified Equitable that said warrants were defective and demanded reimbursement of said amounts, which the latter refused.

[Consolidation] -By agreement of the parties, said cases were jointly heard. (Kasi,BPI filed a complaint against the Corporacion; Equitable filed a similar complaint for whatever reimbursements it and BPI may be sentenced to give the Gov’t.) ISSUE WON said banks are liable HELD: No. The Treasury was the negligent one here since there was a “24 –hour clearing rule,” wherein items that should be returned for whatever reason should be done so within 24 hours. This it failed to do in these two cases. (Note: there is no mention of the NIL here because the 28 warrants were not negotiable; Campos posed the question that had the said warrants been negotiable, would the Court’s ruling be different?) -Negligence in clearing: The Auditor of the Treasury, whose signature was forged, exceeded his authority to approve since each of the warrants involved were for over 5k pesos. The irregularity of the warrants was apparent on the face thereof from the Treasury’s viewpoint yet the banks were not informed of any of the irregularity in them until after said warrants were cleared and honored. Only then did the Treasury give notice of the forgeries. -As was stated, all 28 warrants were cleared and paid by the Treasury, this, then, induced the banks to credit the amounts to the respective depositors. TF, the loss of amounts was imputable to the acts and omissions of the Treasury so the banks should not and cannot be penalized. -Treasury should bear the loss, citing PNB v Nat’l City Bank of NY, “Where a loss, which must be borne by one of two parties alike, innocent of forgery, can be traced to the neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded.” -“Generally, where a drawee bank otherwise would have a right of recovery against a collecting or indorsing bank for its payment of a forged check, its action will be barred if it is guilty of an unreasonable delay in discovering the forgery and in giving notice thereof.” (C.J.S. 769-770) -First State Bank & Trust v. First Nat’l Bank: (restated lang ‘to ha!) Where a defendant bank, on presentation to it of a forged check drawn on another bank, paid part of amount to presenter, drawee having had the check cleared through the clearing house, with no notice of forgery given, said bank cannot be held liable for amount so paid. Disposition Decision appealed from is Affirmed.

11

NEGO - Quevedo Camille Umali FIRST NAT’L BANK OF PORTLAND V NOBLE (1946) 179 Ore. 26, 168 P. (2d) 354 (1946) ~jaja~ FACTS SUBJECT: check drawn as a refund of the payment made by John and Lilian Noble for the property purchased and subsequently reconveyed to T.D. Lee through the drawer DRAWER: Kelleck, a broker DRAWEE: First National Bank of Portland Oregon PAYEE: Lilian S. Noble SUBSEQUENT INDORSEMENTS: Mrs. Noble indorsed the check in blank and deposited it in the United States National Bank of Portland. The deposit, on the same day, was entered as credits in the Noble’s savings account and checking account. -The US National Bank, on Sept21, placed its clearing house indorsement, as of Sept22, on the check. The check reached the drawee, the First National Bank of Portland on Sept22. The account of the drawer, Kelleck, then had but $200 to his credit. On discovery of this fact a teller in the First National Bank placed a small symbol on the check which indicated that the check was to be rejected for want of sufficient funds. The check was then returned through the clearing house to the forwarding bank, the US National, at 11 am, Sept23, with the advice that it was being dishonored for insufficient funds in the drawer’s account. The credit to the US National Bank was canceled by the First National. The US National, by letter dated Sept23, informed Mrs. Noble of the dishonor of the Kelleck check and that it had been charged back to the Noble’s account. -Sept24, shortly before 3pm, US National Bank by messenger presented the check over the counter of the First National. The teller in the First National, to whom the check was presented the second time, mistook the rejection symbol which on Sept22, had been placed on the check by another teller of the First National, for a symbol authorizing payment. Acting on this mistaken assumption he prepared a cashier’s check dated Sept24, payable to order of the United States National in the amount of the Kelleck check, had the same duly signed by an assistant cashier of the drawee and delivered the same to the messenger from the United States National. The United States National credited the First National’s cashier’s check to the account of the Nobles. The First National’s cashier’s check was marked paid through the clearing house at 8:45 a.m., Sept25, to the United States National though the courts finds that the cashier’s check was received by the First National on Sept24 and marked paid on that date though the clearing house transaction took place on the next morning. -Sept25, the First National Bank discovered its mistake and before 12 o’clock the First National

retendered the Kelleck check as a dishonored item but the United States National refused to receive it and to return the proceeds of the cashier’s check. The First National Bank brought an action of assumpsit for money had and received against Lilian Noble and John Noble and the United States National Bank to recover the amount of the cashier’s check, i.e., $10, 573.50. The US National Bank filed its bill of interpleader and tendered the money into court. The plaintiff recovered judgment in the trial court against the Nobles. The Nobles appealed. -The court concluded that the asserted right of plaintiff to restitution must be considered exactly as if the Kelleck check and had been paid over the counter in cash. ISSUE WON the trial court erred in discharging the US National from liability HELD: NO -Rule 33 of the Restatement on Restitution must control the decision of this case. It is as follows: -The payee is entitled to retain the money which he has received as a bona fide purchaser. The typical cases are those where an employee of a bank pays the holder of a check in the mistaken belief that the drawer has sufficient funds on deposit to meet it or in forgetfulness of the fact that the drawer has directed that payment should not be made. -The forgery cases are said to rest, in part at least, upon the maxim that where the equities are equal the legal title must prevail. That maxim appears applicable where a drawee bank pays a check so skillfully forged as to defy detection. The holder and the drawee are equally without fault, and the holder has the money. -The position of the defendants in the case at bar is in this respect stronger than that of the one who has received payment of a forged check. Here the equities are not equal. The representative of the plaintiff was clearly negligent. He acted in reliance on a symbol which he had never before seen the meaning of which he had no reason to know. A moment’s inquiry would have informed him fully concerning the meaning of the symbol and the state of Kelleck’s account. But no inquiry was made. -The defendants Noble are not chargeable with any neglect or inequitable conduct. Neither they nor their collecting agent knew or were entitled to know the state of the Kelleck account, and the fact that the Kellect check was NSF on Sept22 did not render it unconscionable to present it again on Sept24, Freeport Bank of Freeport.

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NEGO - Quevedo Camille Umali Disposition The decree in favor of the First National Bank is reversed. It is ordered that the defendants Noble recover the sum $10,573.50 paid into the registry of the court xxx The decree is affirmed as to the United States National Bank.

The defendants Noble may have their costs and disbursements from the plaintiff First National Bank.

LIBERTY TRUST CO V HAGGERTY (1921) [place citation here] ~ina~ FACTS -Haggerty, a manloloko, had a checking account with Liberty Trust Co. He induced a bookkeeper of the bank to manipulate the bank's books to make it appear that he had credit in the bank so that the checks he drew on the bank would be honored. They were successful for about 5 months, when a bank official accidentally discovered the falsification. Haggerty and bookkeeper succeeded in obtaining overdrafts of about $53k of the bank's funds. -Haggerty was arrested. He was also declared bankrupt and a trusty was appointed. His total realized assets was $9500 and the claims filed with the trustee totaled more than $150k. -Mayhew was one of the claimants. He loaned Haggerty some money with 20-40% interest. Haggerty paid him with checks drawn on Liberty. The bank paid a total of $19k to Mayhew during the time the books were being magicked. Mayhew was not aware of the fact that Haggerty's account was being falsified. -Liberty wants to recover the money it paid to Mayhew. ISSUES WON Liberty can recover what it paid Mayhew HELD: NO. Mayhew was a bona fide holder for value. As such, he did not have a right to exact payment from Liberty

because there was no contract between them. Liberty, on the other hand, had the right to determine WON to pay him. When the bank decided to pay, it was bound to know the state of its account with Haggerty. Having exercised its option to pay or not to pay by honoring the checks, Liberty can't recover the money back from the payee. This is under the general rule that payment of a check by a bank upon which it is drawn, under the mistaken belief that the maker of the check has sufficient funds to his credit to pay the check, is a finality, and the bank can't recover from the payee of the check the amount so paid. -The reasons for this rule are: 1. there's no privity between the payee and the bank; 2. the bank always has the means of knowing the state of the depositor's account by an examination of its books, and therefore the payment is not a mistake within the meaning of the general rule which permits the recovery of money paid under a mistake of fact; and 3. to permit the bank to repudiate the payment would destroy the certainty that must pertain to commercial transactions and give way to uncertainty, delay and annoyance. -It's a rule that a person receiving stolen money innocently in due course of business, in payment of a pre-existing debt, is a holder for value as against the former owner.

13

NEGO - Quevedo Camille Umali GREAT EASTERN LIFE INS. V HSBC (1922) 43 Phil 678 (1922); Johns ~chrislao~ FACTS -Great Eastern, an insurance company, drew a check for 2k on HSBC payable to the order of Melicor. -Maasim fraudulently obtained possession of said check and forged Melicor's signature, as an endorser. He then endorsed and presented it to PNB where the amount was placed to his credit. -After paying Maasim, PNB endorsed the check to HSBC. HSBC paid PNB and then charged the check to the account of Great Eastern. -HSBC, as expected in the ordinary course of business, sent Great Eastern a bank statement which showed that the check was charged to its account. Great Eastern did not object. -4 months later, Great Eastern found out that Melicor never got paid. Great Eastern then made a demand on HSBC that Great Eastern should be given credit for the forged check but HSBC refused. -Great Eastern sued HSBC to recover the 2k (so it could pay Melicor). HSBC, on the other hand, prays that should judgment be rendered against it, it should have like judgment against PNB. ISSUES WON Great Eastern can recover HELD

YES. This is not a case where the plaintiff's own signature was forged to one of its checks. In such a case, the plaintiff would have known the forgery and would therefore have the duty to promptly notify the bank. Failure to do so would release the bank. -Here, the forgery was that of Melicor, the payee. Therefore, when Great Eastern, the drawer, received its bank statement, it had the right to assume that Melicor had personally endorsed the check because otherwise, HSBC would not have paid it. -HSBC had no legal right to pay it out to anyone except Great Eastern or its order. Great Eastern ordered HSBC to pay the 2k to Melicor but the money was paid to Maasim. HSBC has no defense to this action. -PNB cashed the check upon a forged signature. PNB had no license or authority to pay the money to Maasim. It was its legal duty to know that Melicor's endorsement was genuine before cashing the check. Its remedy is against Maasim. -Great Eastern can recover from HSBC. HSBC can recover from PNB. As for PNB, it should go after Maasim.

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NEGO - Quevedo Camille Umali JAI-ALAI CORP. OF THE PHIL. V BPI (1975) 66 SCRA 29; CASTRO; August 6, 1975 ~apple~ FACTS -10 checks with a total face value of P8,030.58 were deposited by Jai-Alai Corporation in its current account with BPI -All the checks (all payable to Inter-Island Gas or order) were acquired by the Jai-Alai Corporation from one Antonio J. Ramirez, a sales agent of the Inter-Island Gas and a regular bettor at jai-alai games -Upon deposit to BPI, the checks were temporarily credited to Jai-Alai Corporation's account with the condition that “any credit allowed...is provisional only, until such time as the proceeds thereof, in current funds or solvent credits, shall have been actually received by the Bank, and the latter reserves to itself the right to charge back the item to the account of its depositor, at any time before that event, regardless of whether or not the item itself can be returned...” -After Ramirez had resigned from the Inter-Island Gas and after the checks had been submitted to interbank clearing, Inter-Island Gas discovered that all the indorsements made on the checks purportedly by its cashiers, as well as the rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.," were forgeries. -Inter-Island Gas advised Jai-Alai Corp, BPI, the drawers and the drawee-banks of the said checks about the forgeries -Drawers of the checks demanded reimbursement to their respective accounts from the drawee-banks -Drawee-banks demanded from BPI, as collecting bank, the return of the amounts they had paid on account thereof -BPI, for its part, debited Jai-Alai Corp's current account -On October 8, 1959, Jai-Alai Corp drew against its current account with BPI a check for P135,000 payable to the order of the Mariano Olondriz y Cia in payment of certain shares of stock. -The check was dishonored by BPI as its records showed that the current account of the petitioner, after netting out the value of the checks P8,030.58 with the forged indorsements, had a balance of only P128,257.65. -Jai-Alai Corp filed a complaint with CFI, which was dismissed; CA affirmed dismissal ISSUE WON BPI had the right to debit the petitioner's current account in the amount corresponding to the total value of the checks with the forged indorsements HELD: YES. The respondent acted within legal bounds when it debited the petitioner's account. -When the petitioner deposited the checks with the respondent, the nature of the relationship created at that stage was one of agency--the bank was to

collect from the drawees of the checks the corresponding proceeds. It is true that the respondent had already collected the proceeds of the checks when it debited the petitioner's account, so that following the rule in Gullas vs. Philippine National Bank, it might be argued that the relationship between the parties had become that of creditor and debtor as to preclude the respondent from using the petitioner's funds to make payments not authorized by the latter. -Section 23 of the Negotiable Instruments Law provides: "When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority." -BPI, as a collecting bank which indorsed the checks to the drawee-banks for clearing, should be liable to the latter for reimbursement, for, as found by the court a quo and by the appellate court, the indorsements on the checks had been forged -In legal contemplation, therefore, the payments made by the drawee-banks to the BPI, on account of the said checks, were ineffective; and, such being the case, the relationship of creditor and debtor between the petitioner and the respondent had not been validly effected, the checks not having been properly and legitimately converted into cash. -Having received the checks merely for collection and deposit, BPI cannot he expected to know or ascertain the genuineness of all prior indorsements on the said checks. Indeed, JaiAlai, having indorsed the checks to BPI in accordance with the rules and practices of commercial banks, is deemed to have given the warranty prescribed in Section 66 of the Negotiable Instruments Law that every single one of those checks "is genuine and in all respects what it purports to be." -Also, Jai-Alai was grossly recreant in accepting the checks in question from Ramirez. It could not have escaped it's attention that the payee of all the checks was a corporation — the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere individual who was admittedly a habitue at its jai-alai games without making any inquiry as to his authority to exchange checks belonging to the payee-corporation. -It must be noted further that three of the checks in question are crossed checks, which may only be deposited, but not encashed; yet, the petitioner negligently accepted them for cash.

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NEGO - Quevedo Camille Umali -Under Section 67 of the Negotiable Instruments Law, warranty should not be held liable for the "Where a person places his indorsement on an resulting loss. instrument negotiable by delivery he incurs all the -Also, under article 2154 of the New Civil Code "If liability of an indorser," and under Section 66 of something is received when there is no right to the same statute a general indorser warrants that demand it and it was unduly delivered through the instrument "is genuine and in all respects mistake, the obligation to return it arises." There what it purports to be." Considering that the was, therefore, in contemplation of law, no valid petitioner indorsed the said checks when it payment of money made by the drawee-banks to deposited them with the respondent, the the respondent on account of the questioned petitioner as an indorser guaranteed the checks. genuineness of all prior indorsements thereon. The respondent which relied upon the petitioner's REPUBLIC BANK VS. CA, 1991 Facts: San Miguel Corporation issued a dividend check for P240 in favor of J. Roberto Delgado, a stockholder. Delgado altered the amount of the check to P9,240. The check was indorsed and deposited by Delgado with Republic Bank. Republic Bank endorsed the check to First National City Bank (FNCB), the drawee bank, by stamping on the back of the check “all prior and / guaranteed.”

or

lack

of

indorsements

Relying on the endorsement, FNCB paid the amount to Republic Bank. Later on, San Miguel informed FNCB of the material alteration of the amount. FNCB recredited the amount to San Miguel‟s account, and demanded refund from Republic Bank. Republic Bank refused. Hence, the present action.

Issue: Who shall bear the loss resulting from the altered check. Held: When an indorsement is forged, the collecting bank or last indorser, as a generalrule, bears the loss. But the unqualified indorsement of the collecting bank on the checkshould be read together with the 24-hour regulation on clearing house operation. Thus,when the drawee bank fails to return a forged or altered check to the collecting bank withinthe 24-hour clearing period (as provided by Section 4c of Central Bank Circular 9, asamended), the collecting bank is absolved from liability. The drawee bank, FNCB, shouldbear the loss for the payment of the altered check for its failure to detect and warn RepublicBank of the fraudulent character of the check within the 24-hour clearing house rule.

16

NEGO - Quevedo Camille Umali ASSOCIATED BANK VS. COURT OF APPEALS [GR 107382, 31 JANUARY 1996]; ALSO PHILIPPINE NATIONAL BANK VS. COURT OF APPEALS [GR 107612] Second Division, Romero (J): 3 concur Facts: The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the Sangguniang Bayan. A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. The allotment checks for said government hospital are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac." The checks are released by the Office of the Provincial Treasurer and received for the hospital by its administrative officer and cashier. In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor. It was then discovered that the hospital did not receive several allotment checks drawn by the Province. On 19 February 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting as collecting bank. It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until his retirement on 28 February 1978, collected the checks from the office of the Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the checks and had official receipts. Pangilinan sought to encash the first check with Associated Bank. However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check in his personal savings account with the same bank. Pangilinan was able to withdraw the money when the check was cleared and paid by the drawee bank, PNB. After forging the signature of Dr. Adena

Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for the second check, in the amount of P5,000.00 and dated 20 April 1978, as well as for 28 other checks of various amounts and on various dates. The last check negotiated by Pangilinan was for P8,000.00 and dated 10 February 1981. All the checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed Associated Bank." Jesus David, the manager of Associated Bank, alleged that Pangilinan made it appear that the checks were paid to him for certain projects with the hospital. He did not find as irregular the fact that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given Pangilinan preferential treatment on this account. On 26 February 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various amounts debited from the current account of the Province. In turn, the PNB manager demanded reimbursement from the Associated Bank on 15 May 1981. As both banks resisted payment, the Province brought suit against PNB which, in turn, impleaded Associated Bank as third party defendant. The latter then filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. After trial on the merits, the lower court rendered its decision on 21 March 1988, on the basic complaint, in favor of the Province and against PNB, ordering the latter to pay to the former, the sum of P203,300.00 with legal interest thereon from 20 March 1981 until fully paid; on the thirdparty complaint, in favor of PNB and against Associated Bank ordering the latter to reimburse to the former the amount of P203,300.00 with legal interests thereon from 20 March 1981 until fully paid; on the fourth-party complaint, the same was ordered dismissed for lack of cause of action as against Adena Canlas and lack of jurisdiction over the person of Fausto Pangilinan as against the latter. The court also dismissed the counterclaims on the complaint, thirdparty complaint and fourth-party complaint, for lack of merit. PNB and Associated Bank appealed to the Court of Appeals. The appellate court affirmed the trial court's decision in toto on 30 September 1992. Hence the

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NEGO - Quevedo Camille Umali consolidated petitions which seek a reversal of the appellate court's decision. Issue: Whether PNB was at fault and should solely bear the loss because it cleared and paid the forged checks. Held: The present case concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were order instruments. Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged signature of the drawer. Where the instrument is payable to order at the time of the forgery, such as the checks in the case, the signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting." He cannot interpose the defense that signatures prior to him are forged. A collecting bank where a check is deposited andwhich indorses the check upon presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks' client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank. The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the payee. The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness of any indorsement. The drawee bank's duty is but to verify the genuineness of the drawer's signature and not of the indorsement because the drawer is its client. Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check.

The bank knows him, his address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the indorsement. Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery, thereby depriving said presentor of the right to recover from the forger, the former is deemed negligent and can no longer recover from the presentor. Herein, PNB, the drawee bank, cannot debitthe current account of the Province of Tarlac because it paid checks which bore forged indorsements.However, if the Province of Tarlac as drawer was negligent to the point of substantially contributing to the loss, then the drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac were negligent, the loss should be properly apportioned between them. The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable. If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to bear the loss. The Court finds that the Province of Tarlac was equally negligent and should, therefore, share the burden of loss from the checksbearing a forged indorsement. The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retired from government service, was no longer connected with the hospital. With the exception of the first check (dated 17 January 1978), all the checks were issued and released afterPangilinan's retirement on 28 February 1978. After nearly three years, the Treasurer's office was still releasing the checks to the retired cashier. In addition, some of the aid allotment checks were released to Pangilinan andthe others to Elizabeth Juco, the new cashier. The fact that there were now two persons collecting the checks for the hospital is an unmistakable sign of an irregularity which should have alerted employees in the Treasurer's office of the fraud being committed. There is also evidence indicating that the provincialemployees were aware of Pangilinan's retirement and consequent dissociation from the

18

NEGO - Quevedo Camille Umali hospital. Hence, due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (FaustoPangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a periodclose to three years and in not properly ascertaining why the retired hospital cashier was collecting checks forthe payee hospital in addition to the hospital's real cashier, the Province contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for 50% thereof.

In effect, the Province of Tarlac can only recover 50% of P203,300.00 from PNB. The collecting bank, Associated Bank, shall be liable to PNB for 50% of P203,300.00. It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payee's indorsement.

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NEGO - Quevedo Camille Umali CANAL BANK V BANK OF ALBANY Supreme Court of New York; 1 Hill 287 (1841) ~rach~ FACTS -This is a case to recover money paid on a draft. The ground on which the plaintiffs sought to recover back the money was that the endorsement purporting to be that of Bentley was a forgery, which fact was proved by Bentley and others on the trial. -The draft was drawn on the plaintiffs (Canal Bank) by the Montgomery County Bank, payable to the order of E. Bentley. It purported to have been endorsed successively by Bentley, then by one Budd, afterward by the Bank of New-York, and lastly by the defendants (Bank of Albany), to whom the plaintiffs paid it. -Two months after payment, plaintiffs asked the defendants to have the money refunded, notifying them at the same time of the forgery. -Upon plaintiff’s objections, the circuit judge overruled the defendant’s offer to prove the ff: (1) That the defendants received the draft from the Bank of New York to collect, as agents for the latter, and that as such they received the money and paid it over to their principals, before notice of the forgery; (2) That a uniform custom of the banks of this state is to receive and collect drafts in the manner this was done, without disclosing their agency. ISSUE WON the defendants were bound to return the money received HELD: YES

Ratio Though the defendants were innocent of any intended wrong, they had obtained money of the plaintiffs on an instrument to which they had no title, and were therefore bound to refund; though notice of the forgery was not given till more than two months after they had received the money, they already received it and transmitted it to their principal. -Where a bank collects a draft without disclosing to the drawee that it is merely collecting as agent, and it is afterwards discovered that the indorsement was a forgery, it is liable as principal in an action, by the drawee. -Where a draft had been fraudulently indorsed with the name of an agent, who is also payee, and put in circulation, bona fide, by the principal of the pretended agent, without disclosing an agency, the indorsee of the principal, discovering the forgery two months after might recover the money advanced to the principal. -If one accepts a draft in the hands of a bona fide holder, he will not be allowed afterward to dispute the genuineness of the drawer's signature, though he may that of the endorsers; and payment operates, in this respect, the same as an acceptance. -To a note or bill payable to order, none but the payee can assert any title without the indorsement of such payee; not even a bona fide holder. Disposition New trial denied.

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NEGO - Quevedo Camille Umali REPUBLIC BANK V EBRADA L-40796; 65 SCRA 680; July 31, 1975 ~cha~ FACTS such cases the recovery is permitted because SUBJECT: A forged check although the drawee was in a way negligent in DRAWER: Bureau of Treasury (treasury) failing to detect the forgery, yet if the encasher of DRAWEE: Republic Bank (RB) the check had performed his duty, the forgery PAYEE: Martin Lorenzo, who was already dead 11 would in all probability, have been detected and years before the check was executed the fraud defeated. INDORSEE: Ramon Lorenzo, Delia Dominguez, then Ratio for allowing recovery: Every one with even the lastly Mauricia Ebrada least experience in business knows that no -Treasury issued check in favor of Martin Lorenzo. The business man would accept a check in exchange check was subsequently indorsed to Ebrada for for money or goods unless he is satisfied that the encashment, and so after, she delivered the check is genuine. He accepts it only because he proceeds to Dominguez, and Dominguez delivered has proof that it is genuine, or because he has the latter to a certain Justinia Tinio. When sufficient confidence in the honesty and financial Treasury found out that the check was forged, responsibility of the person who vouches for it. If they demanded RB to refund the check proceeds. he is deceived he has suffered a loss of his cash RB demanded refund from Ebrada. TC ruled for or goods through his own mistake. His own RB. credulity or recklessness, or misplaced confidence was the sole cause of the loss. Why should he be ISSUE: WON Ebrada, the last indorser, was liable to permitted to shift the loss due to his own fault in pay the check on its face although she did not assuming the risk, upon the drawee, simply benefit from it because of the accidental circumstance that the drawee afterwards failed to detect the forgery HELD: YES. Ebrada liable to RB, RB liable to Treasury when the check was presented? Ratio. Where a check is drawn payable to the order of Reasoning.Since Ebrada was the last indorser of the one person and is presented to a bank by another check, she was supposed to have warranted that and purports upon its face to have been duly she has good title to said check. She was dutyindorsed by the payee of the check, it is the duty bound to ascertain whether the check in question of the bank to know that the check was duly was genuine before presenting it to plaintiff Bank indorsed by the original payee, and where the for payment. Her failure to do so makes her liable Bank pays the amount of the check to a third for the loss and the plaintiff Bank may recover person, who has forged the signature of the from her the money she received for the check. As payee, the loss falls upon the bank who cashed reasoned out above, had she performed the duty the check, and its only remedy is against the of ascertaining the genuineness of the check, in all person to whom it paid the money. probability the forgery would have been detected Re: effect of forged instrument: Where the signature on and the fraud defeated. a negotiable instrument if forged, the negotiation -As regards RB, the plaintiff Bank should suffer the of the check is without force or effect (from Section loss when it paid the amount of the check in question 23 of the Negotiable Instruments Law (Act 2031)). to defendant-appellant, but it has the remedy to It is only the negotiation based on the forged or recover from the latter the amount it paid to her. unauthorized signature which is inoperative (Beam -as regards the argument that Ebrada did not benefit vs. Farrel). from the check, although the defendant-appellant Re: drawee’s recovery when he paid based on a to whom the plaintiff Bank paid the check was not forged instrument: the drawee of a check can proven to be the author of the supposed forgery, recover from the holder the money paid to him on yet as last indorser of the check, she has a forged instrument. It is not supposed to be its warranted that she has good title to it even if in duty to ascertain whether the signatures of the fact she did not have it because the payee of the payee or indorsers are genuine or not. This is check was already dead 11 years before the because the indorser is supposed to warrant to the check was issued. The fact that immediately after drawee that the signatures of the payee and receiving the cash proceeds of the check in previous indorsers are genuine, warranty not question in the amount of P1,246.08 from the extending only to holders in due course. One who plaintiff Bank, defendant-appellant immediately purchases a check or draft is bound to satisfy turned over said amount to Adelaida Dominguez himself that the paper is genuine and that by (Third-Party defendant and the Fourth-Party indorsing it or presenting it for payment or putting plaintiff) who in turn handed the amount to Justina it into circulation before presentation he impliedly Tinio on the same date would not exempt her from asserts that he has performed his duty and the liability because by doing so, she acted as an drawee who has paid the forged check, without accommodation party in the check for which she is actual negligence on his part, may recover the also liable under Section 29 of the Negotiable money paid from such negligent purchasers. In Instruments Law.

21

NEGO - Quevedo Camille Umali

BANCO DE ORO V EQUITABLE BANK CORP 157 SCRA 188; Gancayco; January 20, 1988 ~jojo~ FACTS -Sometime in 1983, EBC thru its Visa Card Department, drew 6 crossed Manager's checks amounting to P45,982.23 and payable to certain member establishments of Visa Card. Subsequently, the Checks were deposited with the BDO to the credit of its depositor, a certain Aida Trencio. -Following normal procedures, and after stamping at the back of the checks the usual endorsements: 'All prior and/or lack of endorsement guaranteed', BDO sent the checks for clearing through the PCHC. Accordingly, EBC paid the checks; its clearing account was debited for the value of the checks and defendant's clearing account was credited for the same amount. -Thereafter, EBC discovered that the endorsements appearing at the back of the checks and purporting to be that of the payees were forged and/or unauthorized or otherwise belong to persons other than the payees. -EBC presented the checks directly to BDO for the purpose of claiming reimbursement from the latter. However, BDO refused to accept such direct presentation and to reimburse the EBC for the value of the Checks. ISSUE WON BDO was negligent and thus responsible for any undue payment HELD: YES -In presenting the Checks for clearing and for payment, BDO made an express guarantee on the validity of 'all prior endorsements'. Thus, stamped at the bank of the checks are the defendant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR

LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, EDC would not have paid on the checks. -No amount of legal jargon can reverse the clear meaning of BDO's warranty. As the warranty has proven to be false and inaccurate, the BDO is liable for any damage arising out of the falsity of its representation. -The principle of estoppel effectively prevents BDO from denying liability for any damages sustained by EBC which, relying upon an action or declaration of the BDO, paid on the checks. The same principle of estoppel effectively prevents the BDO from denying the existence of the checks. -Whether the checks have been issued for valuable considerations or not is of no serious moment to this case. These checks have been made the subject of contracts of endorsement wherein BDO made expressed warranties to induce payment by the drawer of the Checks; and the defendant cannot now refuse liability for breach of warranty as a consequence of such forged endorsements. BDO has falsely warranted in favor of EBC the validity of all endorsements and the genuineness of the checks in all respects what they purport to be. -The damage that will result if judgment is not rendered for EBC is irreparable. The collecting bank has privity with the depositor who is the principal culprit in this case. BDO knows the depositor; her address and her history, Depositor is BDO's client. It has taken a risk on its depositor when it allowed her to collect on the crossed-checks. -Having accepted the crossed checks from persons other than the payees, BDO is guilty of negligence; the risk of wrongful payment has to be assumed by BDO.

22

NEGO - Quevedo Camille Umali

BPI V CA, CHINA BANKING CORP L-102383; 216 SCRA 51; November 26, 1992 ~kiyo~ FACTS SUBJECT: 2 checks for the pretermination of a money market placement DRAWER/DRAWEE: BPI PAYEE: Eligia Fernando, impersonated by Susan Lopez INDORSMENT: China Banking Corp., collecting bank of the BPI checks -Lopez impersonated Fernando, preterminated the latter’s money market placement evidenced by a promissory note (P2,462,243.19) from and through BPI, who issued her 2 checks. She later opened an account at CBC and endorsed the checks there; CBC stamped them with guaranty of prior endorsements and/or lack of endorsement; BPI cleared them. Lopez withdrew nearly the whole amount. The real Fernando came on the maturity date of the placement for rollover and claimed forgery of endorsements. ISSUE WON in the event that the payee’s signature is forged, BPI may claim reimbursement from CBC

HELD: NO -Under Sec. 23, the general rule is that forged signatures are wholly inoperative and payments through such are ineffectual; the exception is where the party relying on the forgery is precluded from setting up the forgery or want of authority. The court recognizes negligence of the party invoking forgery as an exception; hence general rule does not apply here. BPI claims the clearing guaranty makes CBC wholly liable for forged checks. Records show both BPI (not calling Fernando to confirm pretermination; not verifying Fernando’s signatures; not asking for the promissory note upon pickup of checks) and CBC (opening account for Lopez with only Fernando’s tax account number as ID, not questioning Lopez’ huge deposit and withdrawals) were negligent in the selection/supervision of their employees and thus both liable. Disposition BPI is liable 60%, CBC is liable 40%

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NEGO - Quevedo Camille Umali GEMPESAW V CA, PBCOM 218 SCRA 682; Campos, Jr.; Feb 9, 1993 ~athe~ FACTS -Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores in Caloocan City. Petitioner maintains a checking account with the Caloocan City Branch of the respondent drawee Bank (PBC). To facilitate payment of debts to her suppliers, petitioner draws checks against her checking account with PBC as drawee. Her customary practice of issuing checks in payment of her suppliers was as follows: The checks were prepared and filled up as to all material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper prepared the checks, the completed checks were submitted to the petitioner for her signature, together with the corresponding invoice receipts which indicate the correct obligations due and payable to her suppliers. Petitioner signed each and every check without bothering to verify the accuracy of the checks against the corresponding invoices because she reposed full and implicit trust and confidence on her bookkeeper. The issuance and delivery of the checks to the payees named therein were left to the bookkeeper. -In the course of her business operations covering a period of two years, petitioner issued, following her usual practice stated above, a total of eighty-two (82) checks in favor of several suppliers. -It appears that instead of issuing the checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon, who, without authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. It was established that the signatures of the payees as first indorsers were forged. The record fails to show the identity of the party who made the forged signatures. The checks were then indorsed for the second time with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as earlier noted. The second indorsements were all genuine signatures of the alleged holders. -The total amount of P1,208,606.89, represented by eighty-two (82) checks, were credited and paid out by respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against petitioner's checking account , Caloocan branch. -It was only after the lapse of more than two (2) years that petitioner found out about the fraudulent manipulations of her bookkeeper (payees did not receive nor see the subject checks). Because of this, the petitioner demanded from the drawee Bank to credit her account with the money value of the 82 checks for having been wrongfully charged against her account. The Bank refused. PROCEDURE

RTC Caloocan – Complaint for recovery of the money value of the 82 checks: dismissed CA – Appeal: affirmed the decision of the RTC on two grounds, namely (1) that the plaintiff’s (petitioner herein) gross negligence in issuing the checks was the proximate cause of the loss and (2) assuming that the bank was also negligent, the loss must nevertheless be borne by the party whose negligence was the proximate cause of the loss. SC- Petition under Rule 45 ISSUES (issues relevant to the topic) 1. WON the CA erred in ruling that the negligence of the drawer is the proximate cause of the resulting injury to the drawee bank 2. WON the drawer is precluded from setting up the forgery or want of authority as a defense WON the respondent drawee Bank should not have honored the checks because they were crossed checks. (other issues) 3. WON banking rules prohibit the drawee bank from having checks with more than one indorsement. 4. WON the drawee Bank may be held liable for damages under any law aside from NIL HELD 1. NO. The petitioner’s negligence was the proximate cause of her loss. Reasoning One thing is clear from the records -that the petitioner failed to examine her records with reasonable diligence whether before she signed the checks or after receiving her bank statements. Had the petitioner examined her records more carefully, particularly the invoice receipts, cancelled checks, check book stubs, and had she compared the sums written as amounts payable in the eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed these discrepancies, she should not have signed those checks, and should have conducted an inquiry as to the reason for the irregular entries. Likewise, had petitioner been more vigilant in going over her current account by taking careful note of the daily reports made by respondent drawee Bank on her issued checks, or at least made random scrutiny of her cancelled checks returned by respondent drawee Bank at the close of each month, she could have easily discovered the fraud being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee Bank. The respondent drawee Bank then could have taken immediate steps to prevent further commission of such fraud. 2. YES. As a general rule, forgery is a defense. However, the plaintiff falls under the exception.

24

NEGO - Quevedo Camille Umali -The applicable law is Section 23 of the NIL which provides: "When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority." -General Rule: Forgery is a real or absolute defense by the party whose signature is forged. A party whose signature to an instrument was forged was never a party and never gave his consent to the contract which gave rise to the instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. -This section covers both the forged signature of the maker of a promissory note/drawer of a check and forged indorsement, i.e., the forged signature of the payee or indorsee of a note or check. -Example: If a person's signature is forged as a maker of a promissory note, he cannot be made to pay because he never made the promise to pay. Or where a person's signature as a drawer of a check is forged, the drawee bank cannot charge the amount thereof against the drawer's account because he never gave the bank the order to pay. -Exception: Where the drawer is guilty of such negligence which causes the bank to honor such a check or checks. -Example: If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by mere examination of his cancelled check. This accounts for the rule that although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of his own signature, he has no similar duty as to forged indorsements. A different situation arises where the indorsement was forged by an employee or agent of the drawer, or done with the active participation of the latter. Most of the cases involving forgery by an agent or employee deal with the payee's indorsement. The drawer and the payee oftentimes have business relations of long standing. The continued occurrence of business transactions of the same nature provides the opportunity for the agent/employee to commit the fraud after having developed familiarity with the signatures of the parties. Reasoning In the case at bar, the agent was the one who perpetrated the series of forgeries. Had the petitioner been more prudent under the circumstances, she could have discovered the fraud earlier. 3. NO. Ratio Issuing a crossed check imposes no legal obligation on the drawee not to honor such a check. It is more of a warning to the holder that the check cannot be presented to the drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank which in turn must present it for

payment against the drawee bank in the course of normal banking transactions between banks. The crossed check cannot be presented for payment but it can only be deposited and the drawee bank may only pay to another bank in the payee's or indorser's account. 4. NO. Ratio The banking rule banning acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by some bank officials does not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the further negotiation of an instrument is a restrictive indorsement which prohibits the further negotiation thereof (Sec. 36, NIL). In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at the back of the instrument, so that any subsequent party may be forewarned that it ceases to be negotiable. However, the restrictive indorsee acquires the right to receive payment and bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee where the form of the indorsement does not authorize him to do so. -Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee, he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit for damages at the instance of the drawer for wrongful dishonor of the bill or check. 5. YES. Article 1170 of the New Civil Code provides -Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable for damages." Reasoning There is no question that there is a contractual relation between petitioner as depositor (obligee) and the respondent drawee bank as the obligor. In the performance of its obligation, the drawee bank is bound by its internal banking rules and regulations which form part of any contract it enters into with any of its depositors. When it violated its internal rules that second endorsements are not to be accepted without the approval of its branch managers and it did accept the same upon the mere approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it were not actually guilty of fraud or negligence. We hold that banking business is so impressed with public interest where the trust and confidence of the

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NEGO - Quevedo Camille Umali public in general is of paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence. Its liability as obligor is not merely vicarious but primary wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no moment.

Disposition: REMANDED to the trial court for the reception of evidence to determine the exact amount of loss suffered by the petitioner (which one half must be paid by respondent drawee bank to herein petitioner50/50 ratio based on Article 1172).

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NEGO - Quevedo Camille Umali PHILIPPINE COMMERCIAL INTERNATIONAL BANK (PICB; FORMERLY INSULAR BANK OF ASIA AND AMERICA) VS. COURT OF APPEALS [GR 121413, 29 JANUARY 2001]; ALSO FORD PHILIPPINES VS. COURT OF APPEALS [GR 121479], AND FORD PHILIPPINES V.S CITIBANK N.A. [GR 128604] Second Division: Quisumbing (J): 4 concur Facts: [GRs 121413 and 121479] On 19 October 1977, Ford Philippines drew and issued its Citibank Check SN-04867 -- a crossed check in that, on its face were two parallel lines and written in between said lines was the phrase "Payee's Account Only" -- in the amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of Ford's percentage or manufacturer's sales taxes for the third quarter of 1977. The aforesaid check was deposited with the Insular Bank of Asia and America (IBAA) and was subsequently cleared at the Central Bank. Upon presentment with Citibank N.A., the proceeds of the check was paid to IBAA as collecting or depository bank. The proceeds of the same Citibank check of Ford was never paid to or received by the payee thereof, the Commissioner of Internal Revenue. The amount of P4,746,114.41 was debited in Ford's account with Citibank and the check was returned to Ford. Upon verification, Ford discovered that its Citibank Check SN-04867 in the amount of P4,746,114.41 was not paid to the Commissioner of Internal Revenue. In separate letters dated 26 October 1979, addressed to Citibank and IBAA, Ford notified the latter that in case it will be re-assessed by the BIR for the payment of the taxes covered by the said checks, then Ford shall hold Citibank and IBAA liable for reimbursement of the face value of the same. IBAA and Citibank denied liability and refused to pay. In a letter dated 28 February 1980 by the Acting Commissioner of Internal Revenue addressed to Ford officially informing the latter, among others, that its check in the amount of P4,746,114.41 was not paid to the government or its authorized agentand instead encashed by unauthorized persons, hence, Ford has to pay the said amount within 15 days from receipt of the letter. Upon advice of Ford's lawyers, Ford, on 11 March 1982, paid to the BIR the amount of P4,746,114.41, representing payment of its percentage tax for the third quarter of 1977. Said second payment of Ford in the amount of P4,746,114.41 was duly received by the BIR. As a consequence of Citibank's refusal to reimburse Ford of the payment it had made for the second time to the BIR of its percentage taxes, Ford filed on 20 January 1983 its original complaint before the court. On 24 December 1985, IBAA was merged with the Philippine Commercial International Bank (PCIB) with the latter as the surviving entity.

It was learned during an investigation by the National Bureau of Investigation (NBI) that Citibank Check SN04867 was recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold back the check because there was an error in the computation of the tax due to BIR. With Rivera's instruction, PCIB replaced the check with two of its own Manager's Checks (MCs). Alleged members of a syndicate later deposited the two MCs with the Pacific Banking Corporation (PBC). Ford, with leave of court, filed a third party complaint before the trial court impleading PBC and Rivera, as third party defendants. But the court dismissed the complaint against PBC for lack of cause of action. The court likewise dismissed the third-party complaint against Rivera because he could not be served with summons as the NBI declared him as a "fugitive from justice". On 15 June 1989, the trial court rendered its decision, ordering Citibank and IBAA/PCIB to solidarily pay Ford the amount of P4,746,114.41 representing the face value of Ford's Citibank Check SN-04867, with interest thereon at the legal rate starting 20 January 1983, the date when the original complaint was filed until the amount is fully paid, plus costs; ordering IBAA/PCIB to reimburse Citibank for whatever amount the latter has paid or may pay to Ford; with costs against Citibank and IBAA. Not satisfied with the said decision, Citibank and PCIB, elevated their respective petitions for review on certiorari to the Court of Appeals. On 27 March 1995, the appellate court issued its judgment affirming the trial court's decision with modifications; dismissing the complaint in Civil Case 49287 insofar as Citibank was concerned; ordering IBAA/PCIB to pay Ford the amount of P4,746,114.41 representing the face value of Ford's Citibank Check SN-04867, with interest thereon at the legal rate starting 20 January 1983. the date when the original complaint was filed until the amount is fully paid; with costs against IBAA/PCIB. PCIB moved to reconsider the decision of the Court of Appeals, while Ford filed a "Motion for Partial Reconsideration." Both motions were denied for lack of merit. Separately, PCIBank and Ford filed before the Supre,e Court, petitions for review by certiorari under Rule 45. [GR 128604] Ford drew Citibank Check SN-10597 on 19 July 1978 in the amount of P5,851,706.37 representing the percentage tax due for the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt 28645385 was issued for the said purpose. On 20 April 1979, Forddrew another

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NEGO - Quevedo Camille Umali Citibank Check SN-16508 in the amount of P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt A-1697160 was issued for the said purpose. Both checks were "crossed checks" and contain two diagonal lines on its upper left corner between which were written the words "payable to thepayee's account only." The checks never reached the payee, CIR. Thus, in a letter dated 28 February 1980, theBIR, Region 4-B, demanded for the said tax payments the corresponding periods above-mentioned. As far asthe BIR is concerned, the said two BIR Revenue Tax Receipts were considered "fake and spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR anew, while an action was filed against Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers SN-10597 and 16508. On 9 December 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank Citibank liable for the value of the two checks while absolving PCIB from any liability. Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence, the petition for review. [1] GRs 121413 and 121479 Issue [a]: Whether the forgery committed by the drawer-payor’s confidential employees precludes Ford from recovering the amount of its checks. Held [a]: NO. Although the employees of Ford initiated the transactions attributable to an organized syndicate, their actions were not the proximate cause of encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could not be characterized as the proximate cause of the injury to the parties. The Board of Directors of Ford did not confirm the request of Godofredo Rivera to recall Citibank Check SN- 04867. Rivera's instruction to replace the said check with PCIB's Manager's Check was not in the ordinary course of business which could have prompted PCIB to validate the same. As to the preparation of Citibank Checks SN-10597 and 16508, it was established that these checks were made payable to the CIR. Both were crossed checks. These checks were apparently turned around by Ford's employees, who were acting on their own personal capacity. Given these circumstances, the mere fact that the forgery was committed by a drawer payor's confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the

drawer-payor, in the absence of some circumstance raising estoppel against the drawer. This rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees who hold them in their possession. Issue [b]: Whether the collecting bank (PCIB) was negligent in preparing two manager’s check to replace Citibank Check SN-04867, on orders of persons besides the CIR. Held [b]: YES. Citibank Check SN-04867 was deposited at PCIB through its Ermita Branch. It was coursed through the ordinary banking transaction, sent to Central Clearing with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed," and was presented to Citibank for payment. Thereafter PCIB, instead of remitting the proceeds to the CIR, prepared two of its Manager's checks and enabled the syndicate to encash the same. On record, PCIB failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIB employees to verify whether his letter requesting for the replacement of the Citibank Check SN-04867 was duly authorized, showed lack of care and prudence required in the circumstances. Furthermore, it was admitted that PCIB is authorized to collect the payment of taxpayers inbehalf of the BIR. As an agent of BIR, PCIB is duty bound to consult its principal regarding the unwarranted instructions given by the payor or its agent. As agent of the BIR, IBAA/PCIB should receive instructions only from its principal BIR and not from any other person especially so when that person is not known to IBAA/PCIB. It is very imprudent on the part of IBAA/PCIB to just rely on the alleged telephone call of one (Rivera) and in his signature to the authenticity of such signature considering that the Ford is not a client of IBAA/PCIB. [2] GR 128604 Issue [a]: Whether PCIB is liable for fraud (embezzlement) committed by PCIB employees while the checks were in transit for clearing. Held [a]: YES. Even if PCIB had no official act in the ordinary course of business that would attribute to it the case of the embezzlement of Citibank Check Numbers SN-10597 and 16508, because PCIB did not actually receive nor hold the two Ford checks at all; that the switching operation (involving the checks whilein transit for "clearing") were the clandestine or hidden actuations performed by the members of the syndicate in their own personal, covert and private capacity and done without the knowledge of PCIB; as a general rule, however, a banking corporation is liable for the

28

NEGO - Quevedo Camille Umali wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment. It may be liable for the tortuous acts of its officers even as regards that species of tort of which malice is an essential element. Herein, although a situation exist where the PCIB appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had participated; a bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or agents were enabled to perpetrate in the apparent course of their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the fraudulent acts or representations of an officer or agent acting within the course and apparent scope of his employment or authority. And if an officer or employee of a bank, in his official capacity, receives money to satisfy an evidence of indebtedness lodged with his bank for collection, the bank is liable for his misappropriation of such sum. Moreover, Section 5 of Central Bank Circular 580, Series of 1977 provides that any theft affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIB. Issue [b]: Whether Citibank can raise the defenses that it has no knowledge of any infirmity in the issuance of the checks in question amd that the endorsement of the Payee or lack thereof was guaranteed by IBAA/PCIB and thus, it has the obligation to honor and pay the same; among others.

Held [b]: NO. Citibank as drawee bank was likewise negligent in the performance of its duties. Citibank failed to establish that its payment of Ford's checks were made in due course and legally in order. As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank ChecksNumbers SN 10597 and 16508, because of the contractual relationship existing between the two. Citibank, as the drawee bank breached its contractual obligation with Ford and such degree of culpability contributed tothe damage caused to the latter. Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the proceeds thereof to the collecting bank of the BIR. The clearing stamps at the back of Citibank Check SN 10597 and 16508 do not bear any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly examined, the switching of the worthless checks to Citibank Checks 10597 and 16508 would have been discovered in time. For this reason, Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its designated payee. The fact that the drawee bank did not discover the irregularity seasonably constitutes negligence in carrying out the bank's duty to its depositors. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.

29

NEGO - Quevedo Camille Umali TRADERS ROYAL BANK V. RPN 390 SCRA 608 FACTS: RPN, IBC and BBC were all assessed for tax by the BIR. To pay the assessed taxes, they bought manager’s checks from petitioner bank. None of these checks were paid to the BIR. They were found to have been deposited in the account of a third person in Security Bank. As the taxes remained unpaid, the BIR issued a levy, distraint and garnishment against the three networks. An action was filed wherein it was decided that the networks should be reimbursed for the amounts of the checks by petitioner bank and the latter in turn, must be reimbursed by Security Bank. In the appellate court, it was held that Traders Bank should be the only bank liable.

HELD: Petitioner ought to have known that where a check is drawn payable to the order of one person and is presented for payment by another and purports upon its face to have been duly indorsed by the payee of the check, it is the primary duty of the petitioner to know that the check was duly indorsed by the original payee, and it pays the amount of the check to the third person, who has forged the signature of the payee, the loss falls upon the petitioner who cashed the check. Its only remedy is against the person to whom it paid the money. It should be further noted that one of the checks was a crossed check. The crossing of the check should have put petitioner on guard; it was dutybound to ascertain the indorser’s title to the check or the nature of his possession.

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NEGO - Quevedo Camille Umali TOLMAN V AMERICAN NAT’L BANK 48 Atl 480, 52 LRA 877 (1901) ~giulia~ FACTS Tolman sues to recover money paid out by the defendant on his account, upon his check, under a forged indorsement. Potter, representing himself as Haskell, went to the plaintiff to get a loan of money, giving the residence and occupation of Haskell as his own. The plaintiff made an inquiry on Haskell and founding that the residence and occupation correct thereby agreed to nake the loan. Potter, under the name of Haskell, gave the note to the plaintiff, and the plaintiff gave him a check on the defendant payable to the order of Haskell, delivering it to Potter, supposing him to be Haskell. Potter indorsed Haskell's name on the back of the check, and gave it to AB Homes, who collected it from the bank. When the note given to the plaintiff became due, fraud was discovered. He thereupon notified the ank, and demanded the return of the amount paid on the check to the credit of his account. ISSUE WON the bank is liable for the payment which it made on the check, Held Ratio

Yes. When a bank receives money to be checked out by a depositor, it is to be paid only as the depositor shall order. The bank assumes this duty in receiving the deposit. If the bank pays money out on a forged signature, the depositor being free from balme or negligence, it must bear the loss. Reasoning In this case the money was intended to Haaskell, because his was the only name suggested. He had been looked up and found to be responsible. It is a perversion of words to say that it was intended for Potter simply because he had fraudulently impersonated Haskell, and led the plaintiff to believe the he was Haskell. The plaintiff did not intend Potter to have the money. When Potter fraudulently indorsed Haskell's name on the check, it was a typical case of forgery. When a signature is forged or made out without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give discharge therefor, or to enforce payment thereof, against a party thereto, can be acquired through or under such signature, unless a party against whom it is sought to enforce such right is precluded from setting up forgery or want of authority

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NEGO - Quevedo Camille Umali SNYDER V CORN EXCHANGE NAT’L BANK 70 Atl. 876 (1908) ~ajang~ FACTS -Action was filed by Snyder, individually and trading as Harrison, Snyder & Son against Corn Exchange National Bank. Snyder wants to recover the amount of the checks which were wrongfully paid by the bank. -George Snyder is a broker, trading and doing business under the name of Harrison, Snyder & Son. He is a depositor at the Corn Exchange National Bank. He had in his employ a clerk named Edwin Greenfield, an attorney, who was authorized to draw checks in his name against his deposit in the said bank. Greenfield drew 4 checks payable to the order of Charles Niemann with a total amount of $ 18, 387.50. These checks were paid by the bank and charged to the account of Snyder. -The checks were said to have been indorsed by Neimann, but these indorsements were forgeries and were never authorized by him or Snyder. They were said to have been indorsed in blank to R.M. Miner & Co., a copartnership purporting to caryy on a stock and grain brokerage business but is actually conducting a gambling establishment popularly known as a “bucket shop.” -The 4 checks were deposited by R.M. Miner to Real Estate Title Insurance & Trust Company of Philadelphia. The trust company then indorsed 3 of the 4 checks to guarantee previous indorsements to certain banks in Philadelphia for collection. The 4th check was also indorsed by the trust company but without guaranteeing the previous indorsements. -Corn Exchagne Bank, relying upon the guaranty by the trust company, paid each of the checks to the trust company through its collecting agents. -Based on the averments that, the indorsements purporting to be those of Charles Niemann were forgeries; that the trust company collected the proceeds of the checks without actual knowledge of the character of the business of R.M. Miner; that Corn Exchange Nat’l Bank had constructive notice of the business of the firm; and that the

said checks were not given in due course of the business. -Snyder wants to recover from the bank the amounts drawn from its account. ISSUE WON Snyder may recover HELD: NO. -The bank said that Neimann was not a real, bona fide payee, but was in legal contemplation, a fictitious person—and such fact was known to Greenfield when he drew the checks, in his capacity as Snyder’s attorney/agent. Neimann may have been an existing person, but nevertheless, he was a fictitious name within the meaning of the act of assembly as Greenfield only intended to use this name and never intended for him to receive the checks or have any right to them. -A check is payable to bearer when it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable. -The intent of the drawer in inserting the name of the payee is the sole test of whether the payee is a fictitious person. -In such case, there could be no recovery. -When the checks were delivered to R.M. Miner, they were shown as payable to bearer and nothing therefore need be said in the contention of Snyder as to the liability of the trust company to the bank upon the guaranty of the indorsements on the checks. -The checks drawn by Greenfield are made as if drawn by Snyder himself. And when Snyder lodged with Greenfield with this power, it is as if he said to the bank that any check drawn by Greendield should be paid by it as if it was made and issued by him. The court said that if this is not enough to protect the bank from liability for mispayments from his account, it is not easy to conceive what else would be.

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NEGO - Quevedo Camille Umali CLEARFIELD TRUST CO V UNITED STATES 318 US 363, 63 S.S. Ct. 573 (1943) ~glaisa~ FACTS -A check was drawn on the Treasurer of the US through the Federal Reserve Bank of Philadelphia to the order of Clair Barner in the amount of $24.20. -It was dated aat Harrisburg, Pennsylvania and was drawn for the services rendered by Barner to the Works Progress Administration. -The check was placed at the mail addressed to Barner but he did not receive the check. -Some unknown person obtained it and presented it to JC Penney Co. store representing that he was the payee and endorsed the check in the name of Barner and transferred it to JC Penney Co. in exchange for cash and merchandise. -JC Penney Co. endorsed the check to Clearfiled Trust Co. which accepted it as an agent and endorsed it as follows: “Pay to the order of Federal Reserve Bank, Prior endorsements guaranteed” -Clearfield collected check from the US and paid the full amount to JC Penney. -Neither Clearfield nor JC Penney had any knowledge or suspicion of forgery -US filed a case against Clearfield based on the express guaranty of prior endorsements made by Clearfield. -District Court held that the rights of the parties were to be determined by the law of Pennsylvania and since the US unreasonably delayed in giving notice to the forgery to Clearfield, it was barred from recovery. Circuit CA reversed.

ISSUE WON US is barred from recovery HELD: NO -He who presents a check for payment warrants that he has title to it and the right to receive payment. If he has acquired the check through forged endorsement, the warranty is breached at the time the check is cashed. The drawee’s right to recover accrues when the payment is made. There is no other barrier to the maintenance of cause of action. The theory of the drawee’s responsibility where the drawer’s signature is forged is inapplicable here. The drawee, whether it be the US or another, is not chargeable with the knowledge of the signature of the payee. -Prompt notice of discovery of forgery was not a condition precedent to suit. If it shown that the drawee on learning of the forgery did not give prompt notice of it and that damages resulted, recovery by the drawee is barred. -But we do not think that he who accepts a forged signature of a payee deserves a preferential treatment. It is his neglect or error in accepting the forger’s signature which occasions the loss. He should be allowed to shift that loss to the drawee only upon clear showing that the drawee’s delay in notifying him of the forgery caused him damage. No such damage has been shown by Clearfield.

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NEGO - Quevedo Camille Umali DETROIT PISTON RING CO. V WAYNE COUNTY & HOME SAVINGS BANK 252 Mich. 163, 233 N.W. 185 (1930) ~tito_romy~ FACTS -Helen Culbert was a trusted payroll clerk of Detroit Piston. She prepared the biweekly payroll and the checks corresponding therewith. She would then have these signed by the officer of the Company who would sign the same without question. Unbeknown to the Company, Culbert was also preparing checks to the order of nonexisting persons or former employees which she subsequently indorsed in the names of the payees and negotiate them to other banks or stores. The drawee bank would then pay the same and debit Detroit for the corresponding amount. -The cancelled checks were then returned to the company on the first of each month. the bookkeeper would then compare the balance on the bank statement with Detroit’s own book. She would then sign a receipt containing the stipulation “if no error is reported in ten days the account will be considered correct. -Because of the increased cost due to the activities of Culbert, the Company employed auditors to ascertain the reason for said increased costs. However, the auditors (it should have employed Ricky if they really wanted to get to the bottom of the problem) failed to discover the cause. -As it turned out, the fraud could have been easily discovered if someone just compared the payroll sheet with the time cards punched by employees in the time clock. -The company finally discovered the defalcation amounting to $28,066.66. The Company sued Wayne County & Home Savings alleging negligence in paying the questioned checks and claiming reimbursement of the above amount

plus interests thereon. -The lower court found for Detroit. Hence the appeal. ISSUE WON Detroit was negligent in the issuance of the checks and thus estopped from asserting claims against the Bank HELD: YES Ratio The estoppel of the depositor, on the ground of negligence, to recover for an unauthorized payment, is based on the failure of the depositor to act as a prudent businessman in issuing his checks. Reasoning At the beginning of the period during which the fraudulent checks were issued, the only negligence on the part of the Company consisted in the failure of its officers to make a thorough check of the payroll. Each time the checks were issued, the officers signing them would compare the checks with the payroll, but at no time was a complete investigation made, i.e., a comparison of the checks with the time cards, nor was an audit of the payroll ever made. It is perfectly clear that a complete investigation would have disclosed the fraud at once. -A depositor may not sit idly by after knowledge has come to him that his funds seem to be disappearing or that there may be a leak in his business, and refrain taking steps that a careful and prudent businessman would take in such circumstances, & w/c if taken would result in stopping the issuances of fraudulent checks. Disposition Judgment reversed.

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NEGO - Quevedo Camille Umali MONTINOLA V PHIL. NAT’L BANK 88 PHIL 178; Montemayor; February 26, 1951 FACTS -Ramos is disbursing officer of USAFFE. As such, he went to the Province of Lanao to procure a cash advance in the amount of P800K for the use of USAFFE. Encarnacion, Provincial Treasurer of Lanao did not have that amount in cash. So, he gave Ramos P300K in emergency notes and a check for P500K. Ramos went to the office of Laya, the Provincial Treasurer of Misamis Oriental and ex officio agent of PNB branch in Misamis Oriental, to encash the check for P500K which he had received from Encarnacion. Ramos worked under him as assistant agent in the bank branch and Ramos got the job as disbursing officer from the recommendation of Laya. Note that the currency being used in Misamis Oriental and Lanao which had not yet been occupied by the Japanese invading forces, was the emergency currency. Laya did not have enough cash to cover the check so he gave Ramos P400K in emergency notes and a check for P100,000 drawn on PNB. According to Laya, he had previously deposited P500,000 emergency notes in PNB Cebu and he expected to have the check issued by him cashed in Cebu against said deposit. Ramos had no opportunity to cash the check because in the evening of the same day the check was issued to him, the Japanese forces entered the capital of Misamis Oriental, and the USAFFE forces surrendered. Ramos was made a prisoner of war until 1943. In 1945, Ramos allegedly indorsed this check (P100K) to Montinola. -However, Montinola alleges that in 1944, Ramos, needing money to buy foodstuffs and medicine, offered to sell him the check. Montinola, with his agents and Ramos, went to see President Carmona of PNB Manila to check the genuineness of said check; after examining it President Carmona told him that it was negotiable but that he should not let the Japanese catch him with it because possession of the same would indicate that he was still waiting for the return of the Americans to the Philippines. He and Ramos finally agreed to the sale of the check for P850,000 Japanese military notes, payable in installments; that of this amount, P450,000 was paid to Ramos in Japanese military notes in five installments, and the balance of P400,000 was paid in kind, (4 bottles of sulphatiasole, each bottle containing 1,000 tablets, and each tablet valued at P100). Upon payment of the full price, Ramos duly indorsed the check which now appears on the back of the document:

-"The words, 'pay to the order of ' -in rubber stamp and in violet color are placed about one inch from the top. This is followed by the words 'Enrique P. Montinola' in typewriting which is approximately 5/8 of an inch below the stamped words 'pay to the order of'. Below 'Enrique P. Montinola', in typewriting are the words and figures also in typewriting, '517 Isabel Street' and about 1/8 of an inch therefrom, the edges of the check appear to have been burned, but there are words stamped apparently in rubber stamp which, according to Montinola, are a facsimile of the signature of Ramos. There is a signature which apparently reads 'M. V. Ramos' also in green ink but made in handwriting." -M. V. Ramos is handprinted in green ink, under the signature. According to Montinola, he asked Ramos to handprint it because Ramos' signature was not clear. Ramos in his turn told the court that the agreement between himself and Montinola regarding the transfer of the check was that he was selling only P30,000 of the check and for this reason, at the back of the document he wrote in longhand the following: "Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the Philippine National Bank to the credit of M. V. Ramos." -Ramos further said that in exchange for this assignment of P30,000 Montinola would pay him P90,000 in Japanese military notes but that Montinola gave him only two checks of P20,000 and P25,000, leaving a balance unpaid of P45,000. In this he was corroborated by Atty. Ramos Jr -The indorsement or writing described by M. V. Ramos which had been written by him at the back of the check does not now appear at the back of said check. What appears thereon is the indorsement testified to by Montinola and described by the trial court as reproduced above. Before going into a discussion of the merits of the version given by Ramos and Montinola as to the indorsement or writing at the back of the check, it is well to give a further description of it as we shall do later. -Montinola filed a complaint in the CFI Manila against PNB and the Provincial Treasurer of Misamis Oriental to collect the sum of P100K the amount of a check issued on 1942 by the Provincial Treasurer of Misamis Oriental to Ramos and supposedly indorsed to Montinola. I. When Montinola filed his complaint in 1947 he stated therein that the check had been lost, and so in lieu thereof he filed a supposed photostatic copy. However, at the trial, he

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NEGO - Quevedo Camille Umali presented the check itself and had its face marked and the back thereof. But the check is badly mutilated, blotted, torn and partly burned, and its condition can best be appreciated by seeing it. In explanation of the mutilation of the check Montinola told the court that several months after indorsing and delivering the check to him, Ramos demanded the return of the check to him, threatening Montinola with bodily harm, even death by himself or his guerrilla forces if he did not return said check, and that in order to justify the non-delivery of the document and to discourage Ramos from getting it back, he (Montinola) had to resort to the mutilation of the document. II. Laya stated that he issued the check only his capacity as Provincial Treasurer, and that the words in parenthesis "Agent, Phil. National Bank" now appearing under his signature did not appear on the check when he issued the same. The words 'Agent, Phil. National Bank' which now appear on the check were not typewritten below his signature when he signed the said check and delivered the same to Ramos. According to Laya, when he issued checks in his capacity as agent of PNB Misamis Oriental the said check must be countersigned by the cashier of the said agency -not by the provincial auditor. Montinola on the other hand said that when he received the check it already bore the words 'Agent, Phil. National Bank' below the signature of Laya and the printed words 'Provincial Treasurer'. -TC: dismissed the complaint. Montinola appealed directly to this Court because the amount exceeds P50,000 ISSUES 1. WON the photostatic copy of the check is acceptable given its mutilated condition 2. WON the words, 'Agent, Phil, National Bank' were added after Laya had issued the check TF issued in the capacity as agent of PNB 3. WON Ramos added or placed those words "in his capacity as Provincial Treasurer of Misamis Oriental" (obviously, not as agent of the Bank) below the signature of Laya before transferring the check to Montinola 4. WON there was valid negotiation (P30,000 only indorsed) HELD 1. NO -a comparison between the photostatic copy and the original check reveals discrepancies between the two. The condition of the check as it was produced is such that it was partially burned, partially blotted, badly mutilated, discolored and pasted with cellophane. What is worse is that Montinola's

excuse as to how it was lost, that it was mixed up with household effects is not plausible, considering the fact that it involves his life savings, and that before the alleged loss, he took extreme pains and precautions to save the check from the possible ravages of the war, had it photographed, registered said check with the General Auditing Office and he knew that Ramos, since liberation, was not after the possession of that check. 2. NO -If he issued the check as agent of the PNB, then the bank is not only drawee but also a drawer of the check, and Montinola evidently is trying to hold PNB liable in that capacity of drawer, because as drawee alone, inasmuch as the bank has not yet accepted or certified the check, it may yet avoid payment. -What renders more probable the testimony of Laya and Ramos the money for which the check was issued was expressly for the use of USAFFE of which Ramos was then disbursing officer. And upon delivery of P400K in emergency notes and the P100K check to Ramos, Laya credited his depository accounts as provincial treasurer with the corresponding credit entry. In the normal course of events the check could not have been issued by the bank, and this is borne by the fact that the signature of Laya was countersigned by the provincial auditor, not the bank cashier. -said check was issued by the provincial treasurer of Lanao to Ramos who requisitioned the said funds in his capacity as disbursing officer of the USAFFE. The check is not, in business parlance, 'certified check' or 'cashier's check.' 3. NO -Naturally, Ramos must have known the procedure followed as to the issuance of checks, namely, that when a check is issued by the Provincial Treasurer, it is countersigned by the Provincial Auditor as was done on the check. And that if the Provincial Treasurer issues a check as agent of the PNB, the check is countersigned not by the Provincial Auditor who has nothing to do with the bank, but by the bank cashier, which was not done in this case. It is not likely, therefore, that Ramos had made the insertion of the words "Agent, Phil. National Bank" after he received the check, because he should have realized that following the practice already described, the check having been issued by Laya as Provincial Treasurer, and not as agent of the bank, and since the check bears the countersignature not of the Bank cashier but of the Provincial Auditor, the addition of the words "Agent, Phil. National Bank" could not change the status and responsibility of the bank. It is therefore more logical to believe and to find that the

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NEGO - Quevedo Camille Umali addition of those words was made after the only of the amount payable does not operate check had been transferred by Ramos to as a negotiation of the instrument." Montinola Montinola. may therefore not be regarded as an 4. NO indorsee. At most he may be regarded as a -The check was not legally negotiated within the mere assignee of the P30,000 sold to him by meaning of the Negotiable Instruments Law. Ramos, in which case, as such assignee, he Section 32 of the same law provides that "the is subject to all defenses available to the indorsement must be an indorsement of the drawer Provincial Treasurer of Misamis entire instrument. An indorsement which Oriental and against Ramos. purports to transfer to the indorsee a part 4) He should have known that a check for such a only of the amount payable, . . . (as in this large amount of P100K could not have been case) does not operate as a negotiation of the issued to Ramos in his private capacity but instrument." Montinola may therefore not be rather in his capacity as disbursing officer of regarded as an indorsee. At most he may be the USAFFE, and that at the time that Ramos regarded as a mere assignee of the P30,000 sold a part of the check to him, Ramos was sold to him by Ramos, in which case, as such no longer connected with the USAFFE but assignee, he is subject to all defenses already a civilian who needed the money only available to the drawer Provincial Treasurer of for himself and his family. Misamis Oriental and against Ramos. 5) Ramos had he retained the check may not now IN SUMMARY collect its value because it had been issued to -Montinola’s complaint cannot prosper because him as disbursing officer. As observed by the 1) Check long overdue by about 2 1/2 years. It trial court, the check was issued to M. V. may therefore be considered even then, a Ramos not as a person but M. V. Ramos as stale check. the disbursing officer of the USAFFE. 2) The insertion of the words "Agent, Phil. Therefore, he had no right to indorse it National Bank" which converts the bank from personally to plaintiff. It was negotiated in a mere drawee to a drawer and therefore breach of trust, hence he transferred nothing changes its liability, constitutes a material to the plaintiff. alteration of the instrument without the 6) It is absolutely necessary for the court to consent of the parties liable thereon, and so examine the original in order to see the actual discharges the instrument. (Section 124 of the alterations supposedly made thereon, and Negotiable Instruments Law). that should this Court grant the prayer 3) The check was not legally negotiated within the contained in the bank's brief that the check be meaning of the Negotiable Instruments Law. later referred to the city fiscal for appropriate Section 32 of the same law provides that "the action, said check may no longer be available indorsement must be an indorsement of the if the appellant is allowed to withdraw said entire instrument. An indorsement which document. purports to transfer to the indorsee a part BANK OF COMMERCE OF SULPHUR V WEBSTER 70 Okla. 73, 172 942 (1918) ~maia~ FACTS SUBJECT: a note of guaranty (this is the negotiable instrument in question) was executed by Webster and Molacek as guarantors, guaranteeing to the Bank of Commerce of Sulphur the payment of two notes issued by Crafton ($1,450 and $204) MAKERS: of the 2 notes  Crafton; Note of Guarantee (guaranteeing the notes) Webster and Molacek PAYEE: Security State Bank INDORSEE: Bank of Commerce of Sulphur (current holder) -The note of guarantee was executed when the notes (to be guaranteed) were transferred from Security State Bank to Bank of Commerce. When Bank of Commerce sued for the fulfillment against the guarantors, the guarantors interposed the defense that they were relieved of liability since the note issued by Crafton had been materially altered. The alteration consists of having the wife

of maker Crafton (Lizzie Crafton) sign the note at the instance of the Bank of Commerce after execution and delivery of the guaranty. (note: it seems that in effect, Lizzie became a co-maker to the note) -Trial court held that the signing of Lizzie at the instance of the Bank of Commerce, without knowledge and consent of the guarantors, was an alteration that defeated the guaranty ISSUE WON the signing of the notes by Lizzie Crafton after the execution and delivery of the contract of guaranty without the consent and knowledge of the guarantors released and discharged the guarantors from the contract of guaranty HELD: YES -the adding of an additional party to a negotiable instrument subsequent to its execution and

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NEGO - Quevedo Camille Umali delivery discharges the original parties when such change is made without their knowledge or consent -the reason why the addition of a name to a note as a joint maker, after its issuance, materially alters it, is because it changes the number of parties and their relative rights, the rate of contribution, and the character and description of the instrument -“a guarantor is exonerated, except as far as he may be indemnified by the principal, if by any act of the creditor, without the consent of the guarantor, the original obligation of the principal

is altered in any respect, or the remedies or rights of the creditor against the principal in respect thereto, in any way impaired or suspended. “ -the addition of the name of Lizzie to the note, payment of which the guarantors guaranteed, changed the identity of the said note and its effect and operation, and such alteration being made without the consent and knowledge of the guarantors, the guarantors are discharged from their liability on the guaranty, Disposition Judgment affirmed.

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NEGO - Quevedo Camille Umali FOUTCH V ALEXANDRIA BANK & TRUST CO 177 Tenn 348; (1941) ~da~ FACTS W.L. Foutch purchased a cow from B.W. Foutch for $18 for which he gave a check to B.W. Foutch, payable to his order. This check was wholly written by the payee (because it was W.L.'s practice to have the checks filled filled out by the parties to whim the check was made). In the check in issue: there was a space between the dollar sign and the amount in numbers and the amount in words was written midway of the line provided for it and in the lower left corner “for cow” and when presented it already bore $418, four hundred eighteen dollars and “for cow and note”. All the figures and writings in the check were in the same writing except for the signature when it was presented to the bank.The bank paid to B.W. Foutch the sum $418 called for by the check, and charged it to the account of the drawer. Issue: WON the the bank is liable for the overdraft (or should W.L. Foutch bear the loss) Held: The bank is not liable because it was the plaintiff 's negligence which approximately caused the loss and the bank is not guilty of any negligence that contributed to the loss.

There is a distinction between bank checks and negotiable instruments of the note and bill class. One who purchases a note, or like negotiable instrument, is under no manner of compulsion and acts purely at his option or election, under which circumstances it is not inappropriate to apply, by analogy the caveat emptor rule; whereas, the Bank is under a direct and peculiarly delicate obligation,which requires prompt discharge, usually with little opportunity for investigation to pay the check of its depositor ,upon presentation, or subject itself to the risk f damages. Furthermore the depositor on the other hand,owes to his bank the duty to exercise care in drawing checks in order to avoid possible loss. The drawer of this check in this case authorized the payee to fill out the check,not only in pencil,which made the added words and figures raising the check particularly easy to insert and well high impossible to detect,there being no such variation as frequently appears when different ink is used, but the payee having been authorized to fill out the check in his handwriting,with the words and figures placed as herein before shown, no possibility of detection of the check having been thus raised was left open to the Bank.

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NEGO - Quevedo Camille Umali SAVINGS BANK OF RICHMOND V NAT’L BANK OF GOLDSBORO 39 A.L.R. 1374 (1925) ~bry_sj~ FACTS -A.C. Norwood (DRAWER), President of the National Bank of Goldsboro issued a certain draft dated March 29, 1918 for the sum of $6, drawn against the FIRST NATIONAL BANK OF NEW YORK (the DRAWEE) payable to the order of N.L. Massie. -The said draft was thereafter unlawfully and without the knowledge or consent of A.C. Norwood or the Goldsboro Bank, fraudulently forged and altered in material respects. The date was changed from March 29, 1918 to June 21, 1918, and the amount thereof from $6 to $8,470. -Massie sold the altered draft to the SAVINGS BANK OF RICHMOND, with whom he had been transacting with for two years. Trusting Massie’s moral and financial strength, the SAVINGS BANK OF RICHMOND purchased the draft for $8,470 giving him in exchange a cashier’s check for the same amount. When the Savings Bank attempted to collect it, only then did it find out that the draft was forged. -In this suit, the Savings Bank insists that the National Bank of Goldsboro (THE DRAWER) should be liable on the theory that it was negligent or amiss in its duty to ensure that the draft is safe from every reasonable chance of alteration. Ordinary paper was used and that there was no protectograph or other safety device to prevent alteration. Daniel, a commentator on the negotiable instruments law is cited as authority for the liability of the drawer of a bill or the maker of a note who by careless execution of the instrument left room for any alteration, insertion or erasure, which would prejudice the bona fide holder’s rights. -The Goldsboro Bank counters that with a completed draft, losses arising from its subsequent alteration and forgery do not fall upon it but rather upon those who have chosen to accept the same as changed. Assuming that the argument of Savings Bank to be valid, it will not be liable because it is not the proximate cause of the loss. ISSUES

1. WON Savings Bank can recover from point of view of tort or negligence. 2. WON Bank can recover from the draft as a contract btwn the parties. 3. WON Savings Bank can recover from the negotiable instrument. HELD 1. NO. The issuing of the note could in no sense be considered as proximate cause of the loss. Where a negotiable note was delivered in completed form, the possibility that it might be altered by the willful fraud or forgery of another was too remote to afford basis of an action either in tort or in contract. 2. NO. The note in its forged and altered state is not a contract of the maker of the instrument. Thus, a suit based on contract can neither prosper. 3. YES, but only as to the original face value of the draft. Section 3106 of the Negotiable Instruments Law of North Carolina provides: “Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided except as against the party who has himself made, authorized or assented to the alteration and subsequent indorsers. But when the instrument has been materially altered and is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to the original tenor.” BSJ Comment: In other words, HIDC enjoys status as such only to the extent of the original amount as written by drawer or maker in a proper case. The Court seems to consider it as a fair rule that nobody should be liable for more than what s/he originally bargained for. Impliedly, it seems to say that the HIDC albeit protected by the law still has some duty to conduct reasonable inquiry especially when transactions involve huge sums of money. Certainly 8,000 dollars is a huge amount in the 1920s. The Court’s ruling here could be justified under the common law rule: as between two innocent persons, the one whose acts occasioned the loss shall suffer the consequences. Here, Savings Bank’s own negligence is the proximate cause of the loss.]

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NEGO - Quevedo Camille Umali CRITTEN V CHEMICAL NAT’L BANK (1902) NY Court of Appeals; 171 NY 219; 63 N.E. 969, 57 LRA 529 ~mel~ FACTS -Plaintiff kept a large and active account with the defendant. The Plaintiffs employed a clerk named Davis. It was the duty of Davis to fill up the checks which it might be necessary for the plaintiffs to give in the course of business, top make corresponding entries in the stubs of the check book, and present the checks so prepared to Mr. Critten, one of the plaintiffs, for signaturem together with the bills in payment of which they were drawn. After signing a check Critten would place it and the bill in an envelope addressed to the proper party, seal the envelope and put it in the mailing drawer. -in 24 separate instances, Davis abstracted one of the envelopes from the mailing drawer, opened it, obliterated by acids the name of the payee and the account specified in the checks, then made the check payable to cash and raised its amount, in the majority of cases, by the sum of $100. he would draw the money on the checks so altered from the defendant bank, pay the bill for which the check was drawn in cash, and appropriate the excess. On one occasion David did not collect the altered check from the defendant, but deposited it to his own credit in another bank. When a check was presented to Critten for signature the number of dollars for which it was drawn would be cut in the check by a punching instrument. When Davis altered a check he would punch a new figure in front of those already appearing in the check. This work has been entrusted to another person in Davis’ absence, hence the forgeries were discovered and Davis was arrested and punished. Hence this action to recover the amount of these forged checks, over and above the sums for which they were originally drawn ISSUES 1. WON plaintiff is guilty of negligence 2. WON by negligence in its discharge or by the failure to discover and notify the bank, the depositor (plaintiff) is estopped from asserting that they are forgeries 3. WON defendant bank can claim relief from plaintiff’s negligence HELD 1. YES In this case, Davis falsified the additions or total sat the foor of the pages in the check book. But with a few exceptions he did not alter the amounts expressed in the stubs. In no case did he change in the stubs the name of the payee of the check. It is clear therefore that at all times a comparison of the returned checks with the stubs in the checkbooks would have exposed the alterations made in the checks. Of course the

knowledge of the forgeries that davis possessed from the fact that he himself was the forger, was in no respect to be attributed to the plaintiffs. the Court sees no reason why they were not chargeable with such information as a comparison of the checks with the check book would have imparted to an innocent party previously unaware of the forgeries. As regards the failure to discover the forgeries after the return of the checks and the balancing of the account in the passbook. As held in Weisser’s adm’rs vs Denison, “the rule is settled that the depositor owes his bank the duty of a reasonable verification of the returned checks.” . If the depositor has by his negligence in failing to detect forgeries in his checks and give notice thereof caused loss to his bank, either by enabling the forger to repeat his fraud or by depriving the bank of an opportunity to obtain restitution, he should be responsible for the damage caused by his default but beyond this his liability should not extend. Moreover, the court sees no reason why the bank should be entitled to anything more than indemnity for the loss the depositor’s negligence has caused it *The Court also made a finding that the ordinary rule of principal and agent or master and servant that the principal or master is liable for the fault of his servant or agent in the master’s business apply in this case. 2. NO .While the Court hold that this duty rests upon the depositor, it does not accept the doctrine asserted in some of the cases that, by negligence in its discharge or by the failure to discover and notify the bank, the depositor either adopts the checks as genuine and ratifies their payment or estops himself from asserting that they are forgeries. In the present case, a check altered by Davis from the sum of $22 to $622 was paid by the defendant to the Colonial Bank in which Davis had deposited it. Against the bank the defendant has ample recourse. If it were to be held that the plaintiffs are estopped from denying the genuineness of that check as against the defendant, the latter could have no claim against the Colonial Bank, nor is it clear that the plaintiffs would have any direct right of action against that Bank. The Colonial bank took the check solely on the responsibility of Davis. To it the plaintiffs owed no duty. A rule which might operate to relieve the bank from the liability it assumed when it collected an altered check, merely because the plaintiffs failed in their duty, not ti it, but to a third party should not be upheld. Nor would it operate justly in a case in which the bank had paid a single forgery unless by the depositor’s default and delay the bank had lost its opportunity to secure restitution.

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NEGO - Quevedo Camille Umali 3. NO. It was held that the defendant was also guilty of negligence in paying the check. The sixth in sequence of these forgeries was a check with the name of the payee erased and “cash” written in the place thereof. The teller of the defendant who paid the check and was a witness on its behalf testified that the check showed on its face that the word “cash” had been written in the place for the payee’s name over an erasure; that it was in such mutilated condition when it was presented to him that, before paying it he required Davis to indorse upon the check a receipt for its amount. Had Davis been required to obtain the indorsement or guaranty of the plaintiffs as to its correctness, the forgeries of Davis would have been exposed, and their repetition would not have occurred.The action brought by plaintiffs was brought on contract, not on tort for the

allegation of negligence on the part of the defendant is used only to defeat its claim for relief on account of the plaintiff’s negligence. Disposition The judgment should be reversed, and a new trial granted. DISSENTING OPINION Since plaintiffs entrusted the work to a competent agent and, as established by evidence, took other precautions, there was evidence to support the finding in their favor. The rule which imputes to a principal knowledge acquired by his agent rest upon the presumption that the latter has disclosed all the material facts to the former. This presumption does not extend to a fact which, if disclosed would subject the agent to a prosecution for crime or defeat a scheme in which he was engaged to defraud his employer.

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NEGO - Quevedo Camille Umali MARINE NAT’L BANK V NAT’L CITY BANK (1874) Court of Appeals of NY, 59 NY 67 (1874) ~eva~ FACTS SUBJECT: A check for $25 (but was altered later) DRAWER: Lunt Brothers DRAWEE: Marine National Bank PAYEE: To the order of Henry Smith -Lunt Brothers who were merchants in NY gave a stranger the $25-check in exchange for the same amount. -The next day, a person called upon Derippe & Co (gold brokers in NY) stating that he wished to buy some gold for Lunt Brothers, and asked $3334 gold in currency. A memo, giving the amount as $4079.96 was delivered to him. -The person then altered the $25-check by erasing the date, payee, and amount, and inserting Dec.2,1969, payee Derippe & Co, amount $4079.96, sent the check to Marine for certification, and upon presentation it was duly certified, and thereupon, Derippe without notice, and being ignorant of the alteration and relying upon the certification, gave to the person the sum of $3334 American gold, receiving in payment the certified check. -Derippe indorsed the check and deposited it in National City Bank. Marine Bank paid the check to Nat’l City Bank, but requested repayment of the amount immediately when it discovered the alterations. Nat’l City Bank refused to repay the same. Before the discovery of the alteration, both banks believed the check to be genuine. -Judgment was rendered for Marine Bank on the ground that it did not guarantee the genuineness of the filling out of the check by certifying, and so

it was not estopped from showing the alteration, and was entitled to the repayment. ISSUE WON Marine National Bank is entitled to the repayment. HELD: YES -That an acceptor of a bill of exchange by acceptance only admits the genuineness of the signature of the drawer, and does not admit the genuineness of the indorsements...or any other part of the bill, is elementary and sustained by an unbroken current of authority. The reason is that when the bill is presented for acceptance the acceptor looks to the handwriting of the drawer with which he is presumed to be acquainted...But the acceptor cannot be presumed to have any such knowledge of the other facts upon which the rights of the holder may depend. -The doctrine is applied to cases of bills altered in the body, by the raising of the amount for which they were drawn, and also to those in which the name of the payee has been feloniously changed. -The drawee is presumed to be acquainted with the drawer’s signature, but to require the drawee to know the handwriting of the residue of the bill is unreasonable. It would, in most cases, be requiring an impossibility. Such a rule would be not only arbitrary and rigorous, but unjust. Disposition Judgment affirmed.

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NEGO - Quevedo Camille Umali WELLS FARGO BANK & UNION TRUST CO V BANK OF ITALY SC of California; 214 Cal. 156, 4 P. 2d 781 (1944) ~jat~ FACTS SUBJECT: A check drawn on Wells Fargo Bank by McCormick Co. made payable to order of Albert Meyer Co. was altered. The name of the payee thereon was erased and the name of one “Harry Behling” was substituted. DRAWER: McCormick Steamship Company DRAWEE: Wells Fargo Bank PAYEE: Albert Meyer and Company -Behling, an employee of steamship co., purchased clothes from a store owned by a certain Popkin, and offered the check in question as payment. (It is not known how Behling got hold of the check). The 2 then went to drawee bank to have the check cashed. After presentment, the drawee bank certified the check but suggested that Popkin, being a depositor of defendant bank, should cash it there instead. So defendant bank, after the check was presented to it, paid the amount thereof and transmitted it to drawee bank, which in turn paid the amount of the check to defendant bank. -Drawer did not discover the alteration until the original payee made an inquiry several months after the check had been paid. Drawer notified drawee. Drawee then notified defendants (Bank of Italy and Popkin) demanding repayment of the amount of the check. Drawee filed action to recover the sum. Talo. Sa District Court of Appeals, talo rin. *Note: The alteration was made with such skill that it could not be detected. The person responsible for the alteration is unknown.

ISSUE WON the drawee bank may recover the money it paid HELD: NO -Under Sec. 62, the acceptor, by accepting the instrument, engages to pay “according to the tenor of his acceptance.” -It makes for the usefulness and currency of negotiable paper to construe the words “according to the tenor of his acceptance” as referring to the instrument as it was at the time it came into the hands of the acceptor for acceptance, for he accepts no other instrument other than the one presented to him-the altered form-and it alone he engages to pay. -The presentation of a check to a drawee for payment is not a negotiation. It involves no warranties as the drawee is not a holder in due course. A drawee who has paid the instrument is not a transferee of title as the last holder’s indorsement does not transfer the check but converts it into a voucher. -Banking institutions can readily protect themselves against liability on altered instruments either by qualifying their acceptance or certification or by relying on forgery insurance and special paper, which will make alterations obvious. Disposition Judgment affirmed

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NEGO - Quevedo Camille Umali HSBC V PEOPLE’S BANK AND TRUST CO G.R. No. L-28226; Fernando; Sept 30, 1970 ~kooky~ FACTS: -On Mar 8, 1965, PLDT drew a check on HSBC in favor of the same bank in the sum of P14,608.05. PLDT sent this check to HSBC by mail. -Florentino Changco somehow got hold of the check, and was able to erase the name of HSBC as payee and instead typed his name. Four days before, Changco had opened a current account with PBTC, where he deposited the altered check. -The check was presented by PBTC for clearing, with the following indorsement: "For clearance, clearing office. All prior endorsements and/or lack of endorsements guaranteed. Peoples Bank and Trust Company." -The check was duly cleared by HSBC, and PBTC credited Changco with the amount of the check. Changco began to withdraw from the account then subsequently closed it. -On Apr 12, 1965 it was returned to PLDT, and the alteration in the name of the payee was discovered. On that same date, PBTC was notified of the alteration, and HSBC requested PBTC to refund to it the sum of P14,608.05. PBTC refused. -HSBC relies on the indorsement (above), arguing that since such an indorsement carries with it a concomitant guarantee of genuineness, PBTC is liable to HSBC for alteration. -PBTC relies on the "24 hour" regulation of the Central Bank that requires after a clearing, that all cleared items must be returned not later than 3:00 PM of the following business day. Since HSBC advised PBTC 27 days after clearing, PBTC claims that it is now too late to do so. -CFI dismissed the complaint based on the fact that HSBC allowed 27 days to elapse after clearing before notifying PBTC as to such alteration, the applicable Central Bank regulation providing for a 24-hour period. ISSUE:

WON the Central Bank regulation should be applied, and would thus preclude or allow recovery by HSBC from PBTC HELD: YES, it should apply -The “24-hour” clearing house rule issued by the Central Bank was applied in Republic v. Equitable Banking Corporation. The rule is embodied in sec 4(c) of Circular No. 9 of the Central Bank and reads thus: "Items which should be returned for any reason whatsoever shall be returned directly to the bank, institution or entity from which the item was received. … All items cleared at 11:00 o'clock a.m. shall be returned not later than 2:00 o'clock p.m. on the same day and all items cleared at 3:00 o'clock p.m. shall be returned not later than 8:30 a.m. of the following business day, except for items cleared on Saturday which may be returned not later than 8:30 of the following day." The circular is clear and comprehensive; the facts of the present case fall within it. -Moreover, as mentioned in a case cited by HSBC, "It is a settled rule that a person who presents for payment checks such as are here involved guarantees the genuineness of the check, and the drawee bank need concern itself with nothing but the genuineness of the signature, and the state of the account with it of the drawee." If at all, then, whatever remedy HSBC has would lie not against PBTC but as against the party responsible for changing the name of the payee. Its failure to call the attention of PBTC as to such alteration until after the lapse of 27 days would, in the light of the above Central Bank circular, negate whatever right it might have had against defendant Bank. Disposition Decision affirmed NOTE: As per Campos, this case illustrates the fact that the SC comes to the same conclusion, but on an etirely different basis, as the minority view regarding the effect of drawee’s payment or acceptance of altered check.

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NEGO - Quevedo Camille Umali REPUBLIC BANK V CA, First Nat’l City Bank G.R. No. 42725; April 22, 1991 ~aida rose~ FACTS SUBJECT: Demand for refund by FNCB from Republic Bank due to clearing by the former of an altered check DRAWER: San Miguel Corporation (SMC) DRAWEE: First National City Bank (FNCB) PAYEE: J. Roberto Delgado -SMC drew a divided check worth P240 in favor of Delgado, one of its stockholders. -After the check had been delivered, the check was altered by increasing the amount on its face from P240 to P9,240. This was done fraudulently and without the authority of SMC as drawer. The check was indorsed and deposited on March 14, 1996 by Delgado in his account with Republic Bank. -Republic accepted the check without ascertaining its genuineness and regularity. It endorsed the check to FNCB with a stamp on the back of the check, stating: “all prior and/or lack of indorsement guaranteed.” -March 15, 1966: FNCB, believing that the check was genuine and relying on the guaranty and endorsement of the petitioner bank, paid the amount on the face of the check. -April 19, 1966 -SMC notified FNCB of the material alternation in the check about a month after FNCB had paid Republic Bank. FNCB recredited P9,240 to SMC’s account. -May 19, 1966 – FNCB wrote Republic about the alteration. But at that time, Delgado had already withdrawn the said amount from his Republic Bank account. -FCNB demanded that Republic Bank refund the amount of P9,240 on the basis of the latter’s endorsement and guaranty. Republic refused, saying that 1) there was delay in giving notice of the alteration, 2) it was SMC’s fault in drawing the heck in such a way as to allow the alteration and 3) that FNCB, as drawee, was absolved of any liability to SMC thus FNCB had no right to recourse against Republic Bank. -The trial court ordered Republic Bank to pay P9,240 to PNCB with interest. The CA affirmed the TC ruling. ISSUE WON Republic Bank, as clearing bank, is protected from liability by the 24-hour clearing house rule (in CB Circular 9) HELD: YES -When an endorsement is forged, the collecting bank or last endorsor bears the loss. However the

unqualified endorsement of the collecting bank on the check should be read together with the 24hour regulation on clearing house operation. -When the drawee bank fails to return a forged or altered heck to the collecting bank within the 24hour clearing period, the collecting bank is absolved from liability. Jurisprudential rulings on the matter: -HSBC vs. People’s Bank: A check was drawn by PLDT on HSBC payable to the same bank. It was mailed to the payee but landed in the hands of Changco who erased the payee’s name and replaced it with his own name. He then deposited the check in People’s Bank with the indorsement: “For clearance, clearing office.” This was cleared by the drawee bank HSBC. Changco withdrew the money and when the alteration was discovered, HSBC sought to recover the amount from People’s Bank. HSBC advised People’s Bank of the alteration 27 days after clearing. The Court ruled that the said indorsement must be read with the 24-hour regulation. -Metrobank vs. FNCB (Aha! Gaya nga ng sabi ni Sharon Cuneta, “Di na natuto…”): A check for P50 was drawn by Cunanan and Co. on its account at FNCB and payable to Manila Polo Club was changed to P50,000. It was deposited by Sales in his account in Metrobank. The check was cleared by FNCB which paid P50,000 to Metrobank. The alteration was discovered 9 days later so FNCB sought to recover from Metrobank. The Court upheld the validity of the 24-hour clearing house regulation. The check was not returned to Metrobank in accordance with the given period but was cleared by FNCB. Failure of FNCB to call attention to the alteration of the check negates whatever right it may have had against Metrobank. -Every bank that issues checks for the use of its customers should know WON the drawer’s signature is genuine. It should be able to detect alterations, erasures and other intercalations on the check. It should possess appropriate detecting devices. -Unless the alteration is attributable to the fault or negligence of the drawer, the remedy of the drawee bank that negligently clears a forged/altered check for payment is against the party responsible for the forgery/alteration. Disposition Petition for review granted.

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NEGO - Quevedo Camille Umali C.L.T. CORPORATION V PANAC (District CA, California; 1944) 149 P. (2d) 901 (1944); WARD, J. ~lora~ FACTS -Plaintiff (CLT-holder) brought this action to recover from the defendants (Panacs-maker) the amount of 2 promissory notes, negotiable in form, executed in favor of Home Improvement Company (payee) in payment of certain repairs and renovations to be performed by the payee upon two dwelling houses owned by the defendants. -The notes were indorsed by the payee to the plaintiff which claims to be holder in due course. -Defendants denied that the plaintiff was such a holder and as a separate defense, pleaded fraud on the part of the payee in the procurement of the notes by its agent -William Hart. The defendants were alleged to be illiterate. -Hart was introduced to the defendants by a friend of theirs, Krajer, for whom Home Improvement Company had done repair work similar to that proposed to be done by defendants. -Hart prepared a document which purported to embody the understanding arrived at on the work to be performed and the cost. He asked defendants to sign it. Both demurred, Mrs. Panac stating that she did not read it and wished to see an attorney. Hart assured her that it was not necessary, that the contract has to be signed at once to get the work started. In doing so, he read the items of work entered in his note book, stating that they were in agreement and urged again the defendants to sign. They still objected but their scruples were overcome by Hart’s assurance that all the work shall be done to their satisfaction and that it was necessary to start at once. Martin thereupon affixed his signature to the contract. -Hart then presented to them another paper, divided into 3 parts by perforated lines, one part being an application for credit, the second a form of promissory note and the third a declaration that the work for which the credit was required had been satisfactorily completed. The defendants placed their signatures at the point indicated by Hart upon his assurance that it was part of the contract for the work to be done and without having Hart read it to them. The second note was executed under the same circumstances. -There were present during the proceedings 2 other persons beside Krajer but neither the defendants requested any of them to read aloud the document or to explain the contents thereof. -The defendants testified that they understood from Hart that the work was to be paid for in monthly installments, but had not contemplated giving notes. -The work was never completed notwithstanding vigorous efforts made by the plaintiff and the

defendants to induce Home Improvement Company to do so, with the consequence that when the first installment became due on the notes the defendants refused to pay. -The trial court found that CLT is a holder in due course however, it also held that fraud was perpetuated against the defendants hence, plaintiff takes nothing by its action. -Plaintiffs appealed from the judgment. ISSUES 1. WON plaintiff is a holder in due course. 2. WON defendants are free from negligence. 3. WON the defendants can plead the defense of fraud against the plaintiff. HELD 1. YES. Defendants do not contend that the plaintiff is not a holder in due course. No evidence was introduced that C.L.T. had actual knowledge of a defect in the instruments or any fact that would justify a finding that the plaintiff’s acceptance of the instruments amounted to bad faith on their part. 2. YES. The trial court determined that, notwithstanding the possession of some knowledge of the English language on the part of the defendants, their neglect to call upon others present to read to them the documents, and their failure to insist on their request for time to seek independent legal advice, they are free from negligence. A reading of the record alone might well disapprove this finding, but, bearing in mind that the trial court had an opportunity to view the witnesses, note their demeanor, the Court refrained from stating as a matter of law that there is insufficient evidence to uphold it. 3. NO. Brannan’s Negotiable Instrument: At common law a real defense was held in most jurisdictions to exist in those cases in which a person, without negligence, has signed an instrument, which was, in fact a negotiable instrument, but was deceived as to the character of the instrument and without knowledge of it. In such cases, there is no contract because there was no consenting mind, but the signer may be estopped by negligence to deny knowledge of the character of the instrument which he has signed. If he was not negligent he is not liable. -In Wisconsin, Minnesota and Illinois, the NIL or other legislation expressly makes fraud in the factum a real defense. The Uniform Act does not cover the question in so many words. It is possible however, that such conduct is fraud within Sec. 55 and hence causes merely a defective title, or that it is one of the defenses under Sec. 57. It might also be assimilated to want of delivery,

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NEGO - Quevedo Camille Umali which was made an equitable defense by Sec. 16. Either possibility would change the common law and protect the holder in due course. -In further support of this position it should be noted that the other real defenses are covered by the act and broad interpretation of Sec. 55, especially the last clause “under such circumstances as amount to fraud” certainly includes all kinds of fraud in factum. Since this is so it is hard to believe that the framers overlooked this particular defense. The equities are all in favor of such interpretation, since the defrauded party really caused the situation and should be the one to suffer. -Under the old common law view fraud in Sec. 55 would be limited to fraud in the inducement and defenses in Sec, 57 restricted to defenses which were equitable at common law, while fraud in the factum would continue to be a real defense analogous to forgery under Sec. 23. Such is the result of a number of cases which have arisen since the NIL, most of which do not cite the act, but there is a strong line of well reasoned cases contra. -Freedom from negligence on the part of the makers has never been regarded in California in following the common law rule, or made by statute a defense, real or personal, against a claim of a holder of a negotiable instrument in due course. If the legislature had intended such defense it would undoubtedly have so provided in no uncertain terms, as the courts of this state have not, at any time, recognized such a defense. -It follows that the defendants were not in position to set up as a defense in this case any equities existing between them and the Home Improvement Company even if, as found by the court, they were free from negligence in executing notes. Disposition Judgment Reversed. PETERS (Dissenting) -The type of fraud here involved has been referred to as fraud in esse contractus, fraud in the factum, fraud in the inception or fraud in execution, to distinguish it from fraud in the inducement which is a mere personal defense. At common law the cases were practically unanimous that fraud in the execution was a real defense. -The overwhelming weight of authority is to the effect that the adoption of the NIL in now way changed

the common law rule, and that both before and after the adoption of that uniform statute, fraud in the execution was and remained, a real defense. -The applicable rules under the NIL is stated as: “Although there are some decisions to the contrary, the weight of authority holds that if a person intending to sign an instrument of an entirely different character places his signature to a negotiable instrument not being due to laches or negligence on the part of the signor, the latter is not liable on the instrument, although it has passed into the hands of a bona fide holder for value.” -Mr. Brannan quoted in the majority opinion approves the minority rule. -The many courts and legal writers have not approved the rule that fraud in execution, where the maker is not negligent, is a real defense, by blindly following the common law rule. Cogent and compelling reasons exist for this approval. -It must be remembered that NIL is not an entirely new statute, nor did it purport to repeal the entire law of contracts. It purported to codify the law of merchant and where there was a conflict to adopt what was considered to be the better rule. Where the NIL has no excess provision, or where its meaning is ambiguous, cases decided under the law merchant and fundamental rules of contract should be looked to in arriving at a proper interpretation. -So far as the present problem is concerned, the NIL has no express provision covering the subject. There are provisions, however which tend to show that the drafter of the act intended fraud in the execution to be real defense. -Sec. 57 of NIL, Sec. 3138 of the Civil Coe, provides that the holder in dues course “free from any defect of title of prior parties, and free from defenses available prior parties among themselves.” When a party, without negligence, signs a document by reason of fraud of another and honestly and reasonably believes it to be something else other than a negotiable instrument, the document, when executed is not merely voidable – it is void.” Fraud of this type is not a mere defense nor a mere defect of title such as referred to in Sec. 57. It is a factor which renders the instrument non-existent as a binding obligation. Disposition Judgment Affirmed

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NEGO - Quevedo Camille Umali C.I.T. CORPORATION V PANAC Supreme Court of California 25 Cal. (2d) 547, 154 P. (2d) 710, 160 ALR 1285 (1944) ~marge~ FACTS (as found by the District Court of Appeals) SUBJECT: 2 promissory notes in payment of certain repairs and renovations to be performed by payee upon two dwelling houses owned by makers MAKERS: Sps. Panac, illiterate, unable to read or write the English language PAYEE: Home Improvement Company INDORSEE: C.I.T. Corp, a holder for value in due course -Makers were defrauded by payee in the procurement of the notes. William Hart, agent of the payee, gained their trust and confidence and secured their signatures to the notes by false representations w/c induced them to believe that they were signing a contract to repair the houses and nothing else. They were ignorant of the fact that they were signing notes, and were not negligent in signing the same. ISSUE WON the defense put up by the makers is a real defense, good even against indorsee as a holder in due course HELD: YES

-A negotiable instrument which is void (as when there is in fact no contract or there is fraud in the execution) is not enforceable by a holder in due course in the absence of negligence on the part of the maker. -A person who cannot read is not always negligent in not calling on a third person to read the instrument to him. The question as to his negligence is one for the jury (that is, the courts) to decide. Circumstances showing that makers were not negligent: -Sps. Panac were illiterate -Hart employed high pressure method -Only contract for repair was read, not the notes -Hart insisted an immediate execution -Hart brushed aside Mrs. Panac’s suggestion that legal advice be obtained -Witnesses to the signing were all friends of Hart. Even Krajer, whom makers personally knew couldn’t have objected to such fraud since he was promised commission. In fact, it was his apparent acquiescence in the transaction that served to silent any apprehensions of the makers.

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NEGO - Quevedo Camille Umali COHN V CITY OF TAUNTON 303 Mass. 182, 21 N.E. (2d) 281 (1939) ~anton~ FACTS -Action by Cohn et al., innocent purchasers for value without notice, to prosecute to recover the face amount of overdue coupons on certain bonds of the defendant city payable to bearer which have been stolen from the vault of the city treasurer. -After the bearer bonds had been “delivered to the City Treasurer as agent” in order to have them registered, the Treasurer had completed the issue of fully registered bonds of like amount, but had not destroyed or cancelled the bearer bonds nor placed any notation upon them and had kept them in his vault. -Cohn and company held them, but the City Treasurer refused to pay on the ground that the amount covered by the bonds had been paid already. ISSUE WON Cohn et al. were holders in due course, and thus entitled to the amount HELD: YES Ratio An instrument that has once been issued, returned, discharged, and stolen would seem to stand no differently in the hands of a holder in due course

than an instrument that has been prepared, signed and stolen before being issued. Reasoning The validity of municipal obligations is not affected, in the hands of innocent holders for value, by facts which concern merely the manner of their passing from their maker into currency, and which do not concern the mode of, or the authority for their creation. -It would be unfortunate in many respects if bonds of municipalities passing by delivery in the market should be treated differently in this regard from the negotiable paper of other corporations and individuals. -It is true that the incurring of liability by municipalities is often strictly regulated by statue, and we need not now go far as to say that such statutes could never affect the position of an innocent holder. -The case cited by the defendant was decided before the negotiable instruments law and at a time when the authorities were divided as to the necessity of an authorized delivery of a negotiable instrument. Disposition Judgment for the plaintiffs in the sum of $100 and interest from the date of the writ.

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NEGO - Quevedo Camille Umali SMITH V DOTTERWEICH 200 NY 299, 93 NE 985, 33 LRA (NS) 892; 1911 ~jonas~ FACTS -Dotterweich (MAKER-defendant) executed and delivered to Smith (PAYEE-plaintiff) a promissory note for $3,740 payable in 6 months. When the note became due, it was renewed by 4 notes payable 6 months from that date. The renewal notes were not paid at maturity, & Smith brought action for payment. -Smith introduced evidence to show that the original note was given in payment of premiums on 2 life insurance policies to the defendant by the John Hancock Life Insurance Company through Smith, as its general agent. Dotterweich denied that the notes were given for value received and that Smith was the lawful holder & owner thereof, alleging an oral agreement under which neither the notes nor the insurance policies were to become valid & enforceable obligations unless Smith secured for Dotterweich a certain loan of money. -The trial court granted Smith’s motion to direct a verdict, to which Dotterweich excepted and moved to submit to the jury the question whether there was a condition that the original note & the insurance policies should be returned in case Smith did not procure a loan of $70,000 for Dotterweich within a year. The motion was denied, and Dotterweich took an exception. ISSUE WON the defendant’s testimony creates a question of fact for a jury HELD: YES Ratio If the agreement created a condition precedent (suspensive condition), without the performance of which the notes never became valid obligations, then there is a question of fact. If the agreement created a condition subsequent (resolutory condition), the issue is one of law for the decision of the trial judge. (basically – i think – the issue is whether the oral agreement meant that the notes were never valid, in which case there was never any delivery, or that the notes later became invalid because of the failure of the

condition, in which case there was delivery) Reasoning The oral agreement between the parties testified to by Dotterweich was that the note would be held in Smith’s safe until the loan was procured, otherwise the note would be returned & the insurance policy would be null & void. The loan was never made, therefore there is a failure of the condition which determines the existence of any contract between the parties. In the case of Jamestown Business College Ass’n v Allen, upon which Smith relies to support his contentions, the promissory note was rendered effective by an unconditional delivery. The agreement of the payee to release the maker and cancel the note upon the happening of a future contingency was a condition subsequent which brought the case within the general rule that a contract reduced to writing, and complete in its terms, cannot be contradicted by oral testimony. The oral testimony therein was in direct contradiction of the written contract, as to the existence or validity of which there was no controversy, while in the case at bar the oral testimony tends to show that the writing purporting to be a contract is no contract at all. On the effect of oral testimony on contracts which are wholly or partly reduced to writing – When the oral testimony goes to the question whether there is a written contract or not, it is always competent; but when the effect of the oral testimony is to establish the existence of the written contract which it is designed to contradict or change, then the spoken word must yield to the written compact. On the rule in Benton v Martin, 52 NY 570 – Instruments not under seal may be delivered upon conditions the observance of which is essential to their validity. The annexing of such conditions to the delivery is not an oral contradiction of the written obligation as between the parties to it or others having notice. Disposition Judgment excepted from is reversed and a new trial ordered.

51

NEGO - Quevedo Camille Umali PAVILIS V FARMERS UNION LIVESTOCK COMMISSION 68 S.D. 96, 298, N.W. 732. ~monch~ FACTS -Plaintiff Pavilis filed the action to recover upon an instrument alleged to be a check transferred to plaintiff for value by one C. Hoard who was named as payee therein. Defendant Farmers Union Livestock Commission argues that: (a) plaintiff was not HIDC, and (b) the instrument signed in blank by defendant and having been stolen from his possession prior to delivery had no legal inception or existence as a check. Lower court ruled in favor of plaintiff. Defendant appealed. -It was practice of defendant’s office manager, who was authorized to sign checks, to sign a block of instruments, printed to be used as check at the beginning of the business day and deliver the same to the bookkeeper whose regularly duty was to complete the instruments as checks and deliver the same to customers during the business day. It was also the practice of such office manager to procure the return of such signed instruments not delivered at the close of business day for the purpose of safekeeping and for the purpose of checking or auditing the same. -Around February 1939, one C. Hoard was employed by defendant as a bookkeeper and clerk. Hoard was expressly authorized by defendant in the presence of such other bookkeeper to complete and deliver checks only during business hours and only for amounts due them as shown by such account of sales. Hoard was not entrusted with a key to the defendant’s office although he did have access to a key kept in a desk in the office in order to unlock the padlock on the inside of the gate across the counter between defendant’s office and the hall. On or about Feb 24, 1939, after the close of the defendant’s office, Hoard gained access thereto by unlocking the gate across the counter and climbed over the counter into defendant’s office and then opened the safe in defendant’s office by using the combination which he knew, and w/o defendant’s knowledge, took certain instruments printed for use as checks, blank as to amount, date and payee, which had been signed by defendant’s office manager authorized to sign checks, and, in one of which instruments Hoard w/o defendant’s knowledge or express consent, inserted the date, amount and payee. Then Hoard placed his name upon the back of the instrument and delivered the same to plaintiff for value of $102.85. ISSUE WON the lost check was completed and therefore giving plaintiff Pavilis title to the instrument

HELD: NO -The check in controversy was an incomplete instrument when stolen and cannot be enforced in the absence of conduct on the part of the drawer creating estoppel. -It is urged that defendant is chargeable with negligence and is estopped to deny liability. The cases cited are those in which the party sought to be charged upon a negotiable instrument has entrusted an instrument signed in blank to an agent or some other person who has wrongfully completed and negotiated the instrument; an agency or trust was created by means of which the fraud was committed and the fact that there was no authority for completing the instrument was otherwise wrongfully dealt with was no defense. -In Linick v AJ Nutting Co: blank check signed by plaintiff was stolen by Rycoff and Silbermann, who filled the amount and a fictitious name as payee and presented it to drawee bank. They endorsed the name of the payee and transferred the check to defendant for value who collected the amount of the check from the bank. Court held that the check was an incomplete instrument and that negligent custody of the check was not borne out by the facts. -Court concludes: If as a result of negligence such instrument comes into the hands of a holder in due course, the latter may recover, yet we cannot say under the facts and circumstances of the instant case that defendant was negligent. The loss did not result from completion and negotiation of the check by one entrusted with its possession, and we are not concerned with a breach of duty as between a depositor and drawee. It does not appear that defendant company had reason to mistrust its employee and to anticipate the wrongful taking by him of a check signed in blank, the subsequent completion and negotiation. -The drawer owes the duty to use due care in the execution of checks, but it does not follow as a legal conclusion that signers of checks in blank assume the risk of liability in all cases where such instruments are wrongfully taken, completed and negotiated. To hold that a person is negligent in having in his possession a check signed in blank would require something more than the exercise of ordinary care Disposition Judgment of lower court is reversed.

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NEGO - Quevedo Camille Umali WEINER V PENNSYLVANIA CO. FOR INSURANCE ON LIVES AND GRANTING ANNUITIES 160 Pa. Super. 320, 51 A. 2d 385 (1947) ~ice~ FACTS SUBJECT: Bil of Exchange-Check MAKERS: Weiner PAYEE: Blank Weiner signed her name to a blank check. The check was stolen. The thief placed the amount $250, the date, and a fictitious name as the payee. The bank paid the check to the fictitious payee who properly indorsed it. Weiner sued the bank to recover the amount taken saying that the bank was negligent as it failed to identify the person paid. ISSUE WON the bank is liable HELD

No. The depositor is. -Weiner signed the check in blank thus putting it in the power of an unauthorized person to fill it in and present it for payment. The depositor’s act made the loss possible and caused it, and enabled the thief to commit the fraud. Weiner’s act was a bar and an estoppel. To hold otherwise would require the bank to communicate with the drawer as each check was presented, in order to find out if the delivery was intended. This is too much to be expected; and to place the burden of loss or its chance to the depository if it does not interview the maker, is neither fair nor compatible with public interest. Such would affect the very nature of checks which is convenience. Disposition: Affirmed.

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NEGO - Quevedo Camille Umali LINICK V A.J. NUTTING & CO. New York SC; 125 N.Y.S. 93, 140 App. Div. 265 (1910) ~rean~ FACTS Plaintiff Linick signed his name to a blank check. Thereafter Rycoff and Silberman stole the check, filled in the name of FA Mann as payee and $147.87 as the amount thereof, and presented it to the State Bank, where plaintiff kept his account, and procured it to be certified. Thereafter they indorsed said check with the name of FA Mann and passed it to defendant A.J Nutting and Co. for value, who collected the amount from said bank. Plaintiff, having taken up said check from the bank, now sues defendant as for money had and received for the amount of the check. ISSUE WON defendant obtained any title to the check which as against the plaintiff, was a valid obligation for $147.87. HELD: NO -In the case of a commercial paper, when by voluntary act a party instructs another with such paper with a blank thereon designed to be filled up with a stipulated amount, such party is liable to a bona fide holder, of the instrument. As to the basis of (plaintiff’s) liability, some say that it rests upon an implied authority conferred by the maker upon the person to whom it was delivered to fill in the blanks, and others upon estoppel by reason of negligence. -Not upon implied authority: for such doctrine grows out of principal-agent relationship, and there’s no such relation between a thief and his victims. The rule that the bona fide holder of an incomplete instrument, negotiable but for some lack capable of being supplied, has implied authority to supply the omission, and to hold the maker thereon, only applies when the latter has by his own act, or the act of another, authorized, confided in or invested with apparent authority by him, put the instrument in circulation as a negotiable paper.

-Not upon negligence: since the paper was stolen and the persons guilty of the crime have been convicted. Plaintiff then cannot be charged with negligence giving rise to an estoppel, unless a man is guilty of negligence in writing his name upon a piece of paper which by some possibility may afterwards be stolen from him, which paper comes into the hands of a third person who is an entire stranger to the transaction, with words written over the signature which are sufficient in form to make it a check or note. Actionable negligence involves, first, the existence of a duty; second, the omission to exercise ordinary and reasonable care in connection therewith; and third, injury resulting in consequence thereof. -Sec. 34 (NIL 15) states: Where an incomplete instrument has not been delivered, it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. -The next section in the same act to the effect that “where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed” must be read with Sec 34 (NIL 15), and this provision does not apply in the case of an incomplete instrument completed and negotiated w/o authority. -Court concludes: The delivery of a PN by a maker is necessary to a valid inception of a contract. The possession of such a note by the payee or indorsee is prima facie evidence of delivery. But if it appears that the note has never been actually delivered, and that without any confidence, or negligence, or fault of the maker, but by force and fraud, it was put in circulation, there can be no recovery upon it, even when in the hands of an innocent holder. So, defendant did not obtain any title to the check, and cannot recover upon it. Disposition Judgment appealed from must be reversed, and a new trial ordered.

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NEGO - Quevedo Camille Umali SIMPSON V NAT’L BANK OF ROSEBURG 94 Ore. 147, 185 Pac. 913 (1919) ~yella~ FACTS SUBJECT: Promisory note MAKER: Mrs. M. Josephson PAYEE: (intended to be the banki) INDORSEE: National Bank of Roseburg POSSESSOR: Grace Simpson -When the note was executed the name of the payee was left blank, and was still in that condition when the plaintiff received it. -The plaintiff tells about writing the name of the in blank and avers that the plaintiff is entitled to the indorsement of the defendant herein upon said note and was at all times so entitled to the same ISSUE WON plaintiff has a right against the defendant and the maker of the note HELD: (case was remanded, court merely discussed rules of the law of merchant if instrument is incomplete) -When the maker of the note left a blank for the name of a payee and delivered the instrument in that

condition to another person for value then that person to whom the note was delivered or any subsequent holder could insert his own name, or that of a transferee, as payee. -The plaintiff could not have sued and recovered upon an incomplete instrument. -Grace Simpson could, in the absence of knowledge of special instructions given by the maker, have filled the blank by writing her own name as payee. However, in this case, evidence show that the maker’s intention was that the name of the bank was to be filled in the blank as payee. -A person upon whom authority is conferred to complete the instrument, is not referred to as the holder but as the one in possession. He is only given prima facie authority to fill a blank, and that the person filling the blank must do so strictly in accordance with the authority given. Disposition Cause is remanded to allow plaintiff opportunity to amend her complaint and thus enter a court of equity.

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NEGO - Quevedo Camille Umali DOUGHERTY V SALT 227 N.Y. 200, 125 N.E. 94 (1919) ~javi~ FACTS: -Action by Charles Doughtery, an infant, instituted by Susan Teves, his guardian against Emma Salt an executrix of the last will and testament of Helena Doughtery (aunt of Charles) -plaintiff received from his aunt a promissory note for $3,000 payable at her death or before. Use was made of a pronted form which contains the words “value received” -Salt explained how the note came to be: boy’s aunt visited one day and commented how she loved the boy so much to which Salt commented that her love was all talk. Aunt replied by saying that she would take care of the boy right at that instant. She asked the guardian to make a note for her which she signed. In the note were the words “You have always done for me, and I have signed this note for you. Now, do not lose it. Some day it will be valuable.” (‘You have always done for me…and I have signed this note for

you’….Sabi ko na nga ba Pinoy si Susan Teves eh) ISSUE: WON there was any consideration for the promised payment HELD: no -TC geld that there was no consideration. Appelate Division however reversed. -SC reverses appellate court’s decision -SC geld that the note was the VOLUNTARY AND UNINFORCEABLE promise of an executory gift. (no explanation why) -the eight year old child was not a debtor, nor dealt with as one. The aunt was conferring a bounty. The promise was neither offered nor accepted with any other purpose -the plaintiff, through his own witness, the guardian who explained how the note came to be, has explained the genesis of the promise. There is no showing that consideration was given

56

NEGO - Quevedo Camille Umali WILLIAM BARCO & SON V FORBES (1927) [place citation here] ~brian b~ FACTS -Plaintiffs brought suit upon a note for $227.25 against defendant who issued it for the purchase of fertilizer from plaintiff. -The note, dated Jan 10, 1923, was given in renewal of a former note dated July 1, 1922. -Defendant contended that the fertilizer was bought for use in producing a sweet potato crop in 1922, and that the fertilizer was worthless and had no effect whatever upon the crop. -This fact notwithstanding, TC ruled in favor of plaintiffs. ISSUE WON defendant is liable

HELD: YES. Ratio One who gives a note in renewal of another note, with knowledge at the time of partial failure of the consideration for the original note, or of false representations by the payee, waives such defense and cannot set it up to defeat or to reduce the discovery on the renewal note. (Bank v Howard) Reasoning The time for harvest was in July or August 1922 and the potatoes were dug at that time. It is obvious, therefore, that the defendant knew then that the fertilizer was worthless and that there was a total failure of consideration. Nevertheless, he executed the renewal note. Disposition Judgment affirmed.

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NEGO - Quevedo Camille Umali CHAPTER V: LIABILITY OF PARTIES 1st NATL BANK OF CENTRAL CITY V UTTERBACK 177 Ky. 76, 197 S.W. 534, L.R.A. 1918B, 838 (1917) ~mini~ FACTS SUBJECT: negotiable promissory note PAYEE: Davis Coal Company -(the only fact I could find) The payee in the note was (probably) required to comply w/ one of 2 certain sections of Kentucky law before it was authorized to do business in the state. ISSUE WON the failure of a payee in a negotiable promissory note to comply with sections 199b and 571, Kentucky Statutes (sorry Campos did not reproduce the statutes themselves but I think the content doesn’t matter) without which it could not do business in the state, before the execution of the note, renders it uncollectible in the hands of an owner in due course. HELD: NO -The Negotiable Instruments act (I think. In Kentucky statutes.) says in plain language that the maker

of an instrument, by making it, admits the payee’s capacity to indorse it. -The act does not say, however, that the maker admits the payee’s capacity to make the contract for which the note was executed, and hence he may have the right to urge such defense against the original payee. BUT again, reiterate the point that the act DOES take from the maker the right to deny the capacity of the payee to indorse and negotiate the note free from defenses available against the payee, even though, as between the original parties, the note was void and unenforceable for any reason. -It has been held in both Colorado and North Dakota that a note to a foreign corporation that he has not complied with the local law, without which it would not do business in the state, is valid against the maker in the hands of a holder in due course. Disposition The judgment overruling the demurrer to the amended answer is reversed for proceedings consistent herewith.

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NEGO - Quevedo Camille Umali MORAN V CA, CityTrust Banking Corp. 230 SCRA 799; GR 105836; Regalado; Mar 7, 1994 ~ajang~ FACTS of deposit between the banker and its depositor, the -Spouses George and Librada Moran are the owners of banker agrees to pay checks drawn by the depositor the Wack-Wack Petron. They regularly purchased provided that said depositor has money in the hands bulk fuel and other related products from Petrophil of the bank. Hence, where the bank possesses Corporation on a cash on delivery (COD) basis. funds of a depositor, it is bound to honor his checks Orders were made by telephone and payments were to the extent of the amount of his deposits. The effected by personal checks upon delivery. failure of a bank to pay the check of a merchant or a -The Morans maintained 3 joint accounts (1 current and 2 trader, when the deposit is sufficient, entitles the savings accounts). As a special privilege to the drawer to substantial damages without any proof of Morans, as valued clients, the bank allowed them to actual damages. Conversely, a bank is not liable for maintain a zero balance in their current account. its refusal to pay a check on account of insufficient Transfers from one of the savings account to the funds, notwithstanding the fact that a deposit may be current account could only be made with prior made later in the day. Before a bank depositor may authorization, while transfers from the other savings maintain a suit to recover a specific amount from his account can be made be the bank automatically bank, he must first show that he had on deposit through a Pre-Authorized Transfer agreement or sufficient funds to meet his demand. PAT. -The available balance on 14 December 1983 was used -On 12 December 1983, the Morans, drew a check for by the bank in determining whether or not there was P50,576.00 payable to Petrophil Corporation. The sufficient cash deposited to fund the two checks, next day, the Moran issued another check in the although what was stamped on the dorsal side of the amount of P56,090.00. The totalling to P106,666.00. two checks in question was "DAIF/12-15-83," since Petrophil deposited the two checks to its account 15 December 1983 was the actual date when the with the Pandacan branch of PNB, the collecting checks were processed. When the Morans' checks bank. In turn, PNB presented them for clearing with were dishonored due to insufficiency of funds, the the Philippine Clearing House Corporation in the available balance of Savings Account which was the afternoon of the same day. The records show that on subject of the PAT agreement, was not enough to 14 Dec 1983, Moran’s Current Account had a zero cover either of the two checks. On 14 December balance, while Savings Account covered by the PAT 1983, when PNB, Pandacan branch presented the had an available balance of P26,104.30 and the checks for collection, the available balance for other Savings Account had P43,268.39. Savings Account 1037001372 was only P26,104.30 -The following day, at around 10am, George Moran went while Current Account 37-0006-7 had no available to the bank, as was his regular practice, to balance. It was only on 15 December 1983 at around personally oversee their daily transactions with the 10:00 a.m. that the necessary funds were deposited, bank. He deposited money to the 2 savings account. which unfortunately was too late to prevent the He then withdrew P40k from Savings Account A and dishonor of the checks. deposited the amount to the current account. -The bank was also under no obligation to give notice P66,666 was also transferred from the other Savings before dishonoring checks drawn upon insufficient Account to the current account through the PAT funds. If ever the spouses Moran on previous agreement. occasions were given notices every time a check -Librada (wife) told George that Petrophil refused to was presented for clearing and payment and there deliver their orders on a credit basis because the two were no adequate funds in their accounts, these checks were dishonored due to "insufficiency of were, at most, mere accommodations on the part of funds. Non-delivery of gasoline forced Morans to CityTrust. Legally, the bank had all the right to temporarily stop business operations. In addition, dishonor the checks because there were no Petrophil cancelled their credit accommodation. sufficient funds to speak of in the first place. Furious and upset, George Moran demanded an -A drawer must remember his responsibilities every time explanation from the bank. He was told that Amy he issues a check. He must personally keep track of Belen Ragodo, the customer service officer, had his available balance in the bank and not rely on the committed a "grave error". The Morans filed a bank to notify him of the necessity to fund certain complaint for damages. checks he previously issued.A check, as distinguished from an ordinary bill of exchange, is ISSUE: WON a bank is liable for its refusal to pay a supposed to be drawn against a previous deposit of check on account of insufficient funds but wherein a funds for it is ordinarily intended for immediate deposit may be made later in the day. payment. In the present case, between the time of issuance of the checks on Dec 12 and 13 and HELD: NO. presentment on Dec 14, Morans had, at the very -The relationship between the bank and the depositor is least, 24 hours to replenish their balance in the bank. that of a debtor and creditor. By virtue of the contract

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NEGO - Quevedo Camille Umali

ARANETA V BANK OF AMERICA No. L-25414 July 30, 1971; 40 SCRA 144 ~ricky~ FACTS DRAWER: Leopoldo Araneta. DRAWEE: San Francisco main office of the Bank of America SUBJECT 1: Check for $500 payable to cash. Dishonored and stamped “Account Closed” despite sufficiency of drawer’s deposit balance. Upon inquiry, Bank acknowledged error and sent a letter of apology to payee Harry Gregory of Hongkong and requesting that no adverse reflection be made on drawer. Matter considered closed. However, similar events occurred later. SUBJECT 2: Check for $500 payable to cash drawn against the same bank. Stamped “Account Closed” and returned to clearing bank despite sufficiency of drawer’s deposit balance. SUBSEQUENT INDORSEMENT: To Rufina Saldaña who deposited it to her account with First National City Bank of New York which in turn cleared it through the Federal Reserve Bank. It was actually paid by the drawee to First National City Bank but later claimed it was inadvertently made and requested the amount be credited back. First National in turn wrote Saldaña but before her reply was received, drawee recalled the check from First National and honored it. (Ano ba talaga, kuya?! ) SUBJECT 3: Check for $150 payable to cash drawn against the same bank. Stamped “Account Closed” and returned to clearing bank (Wells Fargo Bank) despite sufficiency of drawer’s deposit balance. -Because of these incidents, Araneta filed suit for the recovery of the ff: (1) Actual damages P30,000; (2) Moral damages P20,000; (3) Temperate damages P50,000; (4) Exemplary damages P10,000; and (5) Attorney’s fees P10,000. TC awarded all items. CA eliminated actual and temperate (for failure to prove an alleged purchase of jewels for profit) and reduced moral damages to P8,000, exemplary to P1,000 and attorney’s fees to P1,000. ISSUES 1. WON the CA erred in eliminating temperate damages. 2. WON the CA erred in not granting moral damages for mental anguish, besmirched reputation, wounded feelings, social humiliation, etc., separate and distinct from the damages recoverable for injury to business reputation. HELD 1. YES.

Ratio The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some material loss to him. Reasoning The Bank cites Art 2224 which provides that “temperate or moderate damages, which are more than nominal but less that compensatory damages may be recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with certainty,” and contends that Araneta failed to show such loss in this case which the CA upheld. The question is WON there is reason to conclude that Araneta did sustain some pecuniary loss although no sufficient proof of the amount has been adduced. -From the nature of some cases, (citing the Code Commission) definite proof of pecuniary loss cannot be offered although the court is convinced that there has been such loss. For instance, injury to one’s commercial credit or to the goodwill of a business firm is often hard to show with certainty in terms of money. The judge should be allowed to calculate moderate damages in such cases, rather than the plaintiff should suffer, without redress from the defendant’s wrongful act. -Araneta is a merchant of long standing and good reputation in the Philippines. His claim for temperate damages is legally justified. Considering, however, the small size of Araneta’s account with the Bank, the amounts of the checks involved & the fact that the Bank tried to rectify the error, although belatedly, an award of P5T by way of temperate damages is sufficient. 2. NO. Reasoning Araneta contends that moral damages should have been granted for the injury to his business standing or commercial credit, separately from his wounded feelings and mental anguish. It is true that under Art 2217, besmirched reputation is a ground upon which moral damages may be claimed but the CA did take this element into consideration in adjudging the sum of P8T in his favor. The CA considered his reputation as an established and well known international trader as well as his wounded feelings and the mental anguish he suffered which caused his blood pressure to rise beyond unusual limits necessitating medical attendance for an extended period. Disposition Judgment of the CA MODIFIED by awarding temperate damages of P5,000 and increasing attorney’s fees to P4,000.

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NEGO - Quevedo Camille Umali WOODY V NATIONAL BANK OF ROCKY MOUNT 194 N.C. 549, 140 S.E. 150 (1927) ~joey~ FACTS SUBJECT: check for $6 DRAWER: Woody DRAWEE: Bank of Rocky Mount PAYEE: E.L. Hollingworth INDORSEE: Kingston Garage -The check was dishonored and marked “No Account” by drawee bank although, at that time, drawer had on deposit $50. Drawer was arrested and tried on the charge of having given a worthless check. He was acquitted. -This action for compensatory and punitive damages alleges that drawee’s act was willful, negligent, wanton and malicious. Demurrer sustained in TC. ISSUE WON drawer may recover compensatory and punitive damages from drawee HELD: YES -Upon the refusal or failure of the bank to pay the check of its depositor, the bank is liable for a breach of its contract. The depositor may recover of the bank the amount of his check, with interest and cost; the action being on contract, the recovery is limited to the amount of the check, with interest from date of demand and refusal,

and, by virtue of the statute, the costs of the action. -Notwithstanding that the relation of the bank to its depositor is that of debtor and creditor, a bank may be held liable in tort to its depositor whose check it has wrongfully refused or failed to pay. -A depositor, whose check has been wrongfully dishonored by the refusal or failure of the bank on which it was drawn to pay the same, may maintain an action against the bank, not only in contract but also in tort, to recover the damages which he has sustained, and that the jury may, when the plaintiff is a merchant or trader, assess not only nominal but also substantial damages; when the plaintiff is not a merchant or trader, he may recover such sum as special damages as the jury shall find, upon the facts, will compensate him for the injury resulting from the wrong done him by the defendant. -Even if such actual loss or injury is not shown, yet more than nominal damages may be given. It can hardly be possible that a customer’s check can be wrongfully refused payment without some impeachment of his credit, which must in fact be an actual injury, though he cannot from the nature of the case furnish independent, distinct proof thereon. Disposition Judgment reversed.

SINGSON V BANK OF THE PHIL. ISLANDS 23 SCRA 1117; Concepcion; June 27, 1968 ~chriscaps~ FACTS -Singson was one of defendants in civil case where judgment was rendered against him and codefendants Lobregat and Villa-Abrille, to pay. Singson and Lobregat appealed, but not VilllaAbrille. Writ of garnishment was served upon BPI in w/c Singson had account, insofar as VillaAbrille’s credit against the bank were concerned. -Clerk of bank, upon reading name of plaintiff and w/o informing himself that garnishment was merely for deposits of Villa-Abrillle and Bona, prepared letter for Bank President’s signature, informing Singson of the garnishment of his deposits. -2 checks issued by Singson in favor of Lega Corp, drawn against said bank, were deposited by

drawee. Believing that Singson had no more control over his deposits, bank dishonored the checks. -Singson commenced present action against bank and its president for damages because of illegal freezing of account. CFI dismissed complaint. ISSUE WON damages may be awarded HELD: YES -Existence of a contract between parties doesn’t bar commission of a tort by one against the other and the consequent recovery of damages therefore.

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NEGO - Quevedo Camille Umali SPEROFF V FIRST-CENTRAL TRUST CO 140 Ohio st. 415, 79 N.E. 2s 119 (1948) ~’del~ FACTS -Vassil Speroff had drawn a check on First-Central Trust Co. (FCTC). -He eventually notified FCTC that said check be not paid. -Now, he sues FCTC to recover the amount of said check. -FCTC admitted to the drawing of the check and to having received the notice not to pay. However, it interposed the defense that Speroff signed a document stating that Speroff agreed to indemnify FCTC against any loss resulting from the nonpayment of said check and that it is expressly understood that it will not be held responsible if it paid the check through inadvertency or oversight. -TC rendered a judgment for FCTC. CA reversed saying that said statement of release was void as it was contrary to public policy and void for want of consideration. Hence, this appeal. ISSUE WON the statement of release signed by Speroff constitutes a valid defense HELD: NO. The Court upheld the CA’s two grounds for avoiding the statement of release. On want of consideration -Under the reciprocal rights and obligations inherent in the relationship existing between a bank and

its depositors, it was the duty of FCTC NOT to pay after it had received the order of Speroff. -Hence, when Speroff was asked to sign a statement or release to the effect that the bank wouldn’t be held responsible if it would pay the check, this was a new element in the relationship. What consideration or benefit was received by Speroff as promisor and what detriment was suffered by FCTC as promise as a result of this statement? NONE so clearly there was no compliance with either of the fundamental requirements as to consideration. On contrary to public policy -It is elementary that a bank is required by law to act in good faith and exercise reasonable care in its relationship with its depositors. -In this case, the obtaining from Speroff of a purported release from liability for inadvertency or oversight as a condition of the order to stop payment of the check was contrary to public policy and did not relieve FCTC from its duty to act in good faith and exercise reasonable care. -The Court distinguished that FCTC’s defense of purported release was a void and invalid defense. However, the FCTC’s defense of exercising good faith and reasonable care (which it interposed in its amended answer) is a valid defense so the Court remanded the case back to the Court of Common Pleas for trial on that issue. Disposition Judgment was modified and cause remanded.

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NEGO - Quevedo Camille Umali CHASE NATL BANK OF CITY OF NY V BATTAT Ny Court of Appeals; 297 N.Y. 185, 78 N.E. 2d, 465 (1948) ~jaja~ FACTS SUBJECT: a check for $25,000 as payment for the purchase of sugar DRAWER: Arbeedee PAYEE: Caracanda Bros. Co & Ltd. DRAWEE: Chase National Bank of City of New York Arbeedee and defendant Caracanda entered into an agreement for the purchase of sugar which provided that Arbeedee and should deliver a check for $25,000 to Caracanda to bind the transaction and that an amount would be returned upon receipt by Caracanda of a letter of credit to obtained by Arbeedee. Arbeedee drew such a check on its account in the plaintiff bank and delivered it to Caracanda. Thereafter Arbeedee requested plaintiff to stop payment on the check. Caracanda presented the check for certification and it was certified by plaintiff through mistake. The following day, Caracanda presented it for payment and plaintiff paid it. When advised of the payment of the check Arbeedee insisted that plaintiff make no debit against it account asserting that Caracanda has no legal right to the money. Plaintiff thereupon demanded payment of the $25,000 from Caracanda. That was refused. The complaint alleges due demand upon both defendants and

nonpayment and prays for judgment in the sum of $25,000 against Arbeedee “and/or” Caracanda. ISSUE WON the complaint fails to state a cause of action against Arbeedee HELD: YES -The complaint failed to allege ratification by Arbeedee after learning of the payment by plaintiff to Caracanda and there are no alternative allegations of fact upon which to rest such a cause of action. Our courts have never permitted a bank in a commercial transaction to such as this, after breaching its depositor's instructions to involve him against his will in litigation with a third party in order that the bank may recoup a potential loss resulting from its own error. The doctrine of subrogation or equitable assignment is not properly applicable under such circumstances. A bank may protect itself by contract with its depositor so as to limit liability on a stop payment order. When that has not been done, the common law liability is absolute in the absence of ratification. Judgment affirmed.

LAWLESS V TEMPLE 254 Mass 395, 150 NE 176 (1926) ~iNa~ FACTS SUBJECT: bill PAYEE: Hazel Lawless DRAWER: Norris J. Temple DRAWEE: Maurice E. Temple -On the instrument appears ME Temple's signature -ME Temple contends that the mere signature of the name of the drawee on the bill cannot fulfill the requirements that the signification of the assent of the drawee must be in writing and must be signed. ISSUE WON the signature of the drawee is sufficient acceptance .

HELD: YES -Acceptance must be in writing because sound policy requires that some substantial and tangible evidence of the contract is more reliable in nature than the statement or recollection of witnesses. The common practice before the NIL was to write the word "accepted" + the signature on the face of the bill. -But based on case law, the signature is both a writing and signing. The name alone is constantly holden to satisfy the requirement. -A drawee may be charged as acceptor although he writes merely his name upon the bill and that anyone taking the bill has the right to fill up a blank acceptance on the same principle that a holder may fill up a blank indorsement

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NEGO - Quevedo Camille Umali KILGORE NATL BANK V MOORE BROS. LUMBER 102 SW 2d 200 (1937) ~chrislao~ FACTS -Waddell transacted with Moore Brothers, a firm engaged in the lumber business. As payment for the lumber he purchased, Waddell drew 2 checks wroth $350 drawn against Kilgore National Bank. -2 checks were deposited by Moore Brothers in Grand Saline Bank for collection. A few days later, Grand Saline notified G.J. Moore that the checks had been returned by Kilgore Bank unpaid. -Because of this, G.J. Moore brought Waddell to Kilgore Bank where Waddell, Moore and the cashier of Kilgore Bank had an ORAL agreement. Waddell instructed Kilgore bank to pay Moore. The cashier promised Moore the payment of said checks once presented again. On the ledger of the bank in connection with Waddell's account, the cashier made the unsigned notation: "Hold for Moore Brothers $350.00" -G.J. Moore ordered Grand Saline to forward the checks to Kilgore again. One of the checks was paid. The other, however, was not. This prompted Moore to file suit against Kilgore Bank to recover amount of the last mentioned unpaid check. -TC and Civil Appeals: in favor of Moore Brothers.

ISSUE WON Kilgore is liable for the other check HELD: NO. Section 132 governs. Campos enumerates the ff requisites: 1)it must be in writing 2)it must be signed by the drawee, and 3) it must not change the implied promise of acceptor to pay only in money. Acceptance is usually made by writing "accepted" and signing immediately below. However, the drawee's signature alone is NOT sufficient -The plain purpose of 132 is to prevent any liability to the holder of a check from arising from the bare oral promise of the drawee bank to pay the check. In the present case, the liability of Kilgore Bank to Moore Brothers depends entirely on the BARE ORAL PROMISE of the drawee bank to pay. As we have said, this should have been in writing (and of course, complying as well with the other two requities). -The notation in the bank's ledger "Hold for Moore Brother, $350.00" adds no force to said promise. This statement (as opposed to the oral promise to pay) does NOT EVEN make any contract, oral or written, to pay.

WISNER V FIRST NATIONAL BANK OF GALLITZIN 220 Pa. 21, 68 Atl. 955 (1908) ~apple~ FACTS SUBJECT: 6 checks DRAWER: Samuel R. Bullock DRAWEE: First National Bank of Gallitzin PAYEE: Charles W. Gallaer, Jr. or order -Subject checks were deposited in various banks and then, forwarded by said banks to drawee bank for payment -5 of the checks were not returned by the drawee bank to the forwarding banks for more than 2 days -Holder of the checks sued the drawee bank for payment on the theory that its failure to return the checks within 24 hrs after receipt thereof constituted acceptance -TC ruled in favor of drawee bank, saying that mere retention of the checks unaccompanied by its refusal to return them, was not acceptance ISSUE WON failure to return the checks to the holder or the collecting bank within 24 hrs amounts to acceptance HELD: YES. -The drawee to whom a bill is delivered for

acceptance is deemed to have accepted it under Section 137 where: 1. he destroys it; 2. where he refuses within 24 hrs after delivery to return the bill accepted or non-accepted to the holder; and 3. where he refuses within such other period as the holder may allow to return the bill accepted or non-accepted to the holder. WON a demand from the holder for the return of the bill, and a refusal on the part of the drawee, are conditions precedent to an acceptance -No prior demand from holder is required because to require so is not to the convenience or interest of the holder -The manifest purpose in requiring prompt return of the bill is in the interest of and for the protection of the holder -If this section had in view the protection of the holder, then it was evidently the intention of the legislature that the non-return of the bill within the specified time, regardless of the cause, will make the drawee an acceptor -The drawee bank, having failed to return the 5 checks to the collecting bank within 24 hrs after delivery, is deemed to have accepted the checks, and is therefore, liable for their amount *After the decision, Pennsylvania amended

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NEGO - Quevedo Camille Umali Section 137, to destroy the effect of the decision. The following proviso was added: "Provided, that the mere retention of such bill by the drawee,

unless its return has been demanded, will not amount to an acceptance..."

URWILLER V PLATTE VALLEY STATE BANK SC Nebraska; 164 Neb. 630, 83 N.W.2d 88 (1957) ~rach~ FACTS SUBJECT: Holder's action against drawee bank, which had returned check on account of insufficiency of funds on deposit in drawer's account. Lower court dismissed such action; holder appealed. DRAWER: Ira McCord who had an account in defendant bank DRAWEE: Defendant Platte Vlley State Bank PAYEE: Plaintiff Norton Urwiller -In payment of his purchase of hogs, McCord issued to Urwiller his check for the sum of $2,491.11. The next day, Urwiller’s wife deposited this to his account in the Ravenna Bank. The bank then forwarded the check for collection in the usual course of business through regular channels: Ravenna Bank -> Bank in Lincoln -> Omaha branch of the Federal Reserve Bank -> Platte Valley State Bank (PVSB). -The check was received in a cash letter during business hours on Saturday, Dec 12, 1953. The check was proofed on the day it was received and posted for action on the following business day, which was Monday. On Mon it was decided not to pay the check, but mark it for 'return,' because the drawer thereof did not have sufficient funds on deposit in his account with appellee. -Actual return was not made to the Federal Reserve Bank until Wed. This delay was caused by the fact that bank examiners came and assumed control of all the records of the bank, including cash items, on Mon

morning. Urwiller was advised by the Ravenna bank late Thurs afternoon, of the fact that payment of the check had been refused although the check was not actually returned to him until Saturday. The check has never been paid. ISSUE WON retention of a check by a drawee bank for more than 24 hours after it is presented to it for payment constitutes an acceptance of the instrument so that the drawee bank is bound to pay it HELD: NO Ratio 'Presentment for payment and presentment for acceptance are two different acts well known to the law of negotiable instruments. The difference between the object and effect of presentation for these respective purposes is very marked. Payment extinguishes the debt and puts an end to the paper evidencing the same, while acceptance has the very opposite effect. It creates a new liability upon the part of the acceptor, and gives new life to the instrument.' -‘In absence of statutory right, holder would be left to his common law rights, for either breach of contract or for tortious breach of duty, by drawee bank which had refused payment on grounds of insufficiency of funds in drawer's account.’ Disposition Trial court was correct in dismissing his petition. We affirm.

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NEGO - Quevedo Camille Umali SUMCAD V PROVINCE OF SAMAR 52 O.G. 18, 7582 (1956) ~cHa~ FACTS SUBJECT: check for P25k, cannot be paid because of insufficient funds DRAWER: Province of Samar DRAWEE: PNB, Cebu Branch PAYEE: Paulino Santos SUBSEQUENT INDORSEMENTS: Paulino Santos indorsed to James McGuire then transferred to Sumcad et.al. -James McGuire presented the check to municipal treasurer of Borongan for payment, the latter did not pay or did not choose to pay. McGuire wrote letters to the Bureau of Posts seeking payment for check. Director of the Bureau of Posts referred to PNB. (Note: McGuire did not present check directly to PNB.) -PNB requested photostatic copies of the check – was received by bank. (Province of Samar by this time still had P84,287.47) -Procedural requirements still asked from McGuire so by the time the check was transferred to Sumcad et al., Province of Samar already withdrew from their PNB account P83,504.07 leaving only P743.43. -Sumcad et al were not able to encash check so they sued Province of Samar and PNB. PNB was held solidarily liable with Province of Samar. Hence, this appeal.

ISSUE

1. WON PNB constructively accepted to assume the obligation 2. WON PNB is solidarily liable HELD 1. YES. -When PNB requested photostatic copies of the check from the Bureau of Posts and McGuire to present check to provincial treasurer and provincial auditor for certification, it voluntarily assumed the obligation of holding so much of the deposit of the province of Samar as would be sufficient to cover the amount of the check, or before allowing the withdrawal that exhausted said deposit, of making the necessary inquiry on the matter. It would be an empty gesture if the appellant did not mean to assume the obligation of paying the check and holding sufficient deposit of the drawer for the purpose. 2. NO. -PNB’s liability is only subsidiary to that of the Province of Samar which is primarily liable thereon. Disposition. Decision affirmed. PADILLA, dissenting: PNB should not be liable at all. When it requested the Bureau of Posts to furnish it with photostatic copies of the check, it only means that the original check was not presented to it for payment! The act of requesting did not create an obligation on the part of PNB.

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NEGO - Quevedo Camille Umali COOLIDGE V PAYSON 2 Wheat 66, 4 L. Ed. 185 (1817) ~jojo~ FACTS DRAWER: Cornhwaite & Cary DRAWEE: Collidge & Co. (defendant) PAYEE: John Randall INDORSEE: Payson & Co. (plaintiff) - Coolidge held proceeds of the cargo of the Hiram claimed by Cornthwaite. Corthwaite executed bonds of indembity an executed srolls and drew on them for $2,700, payable to Randall, and endorsed by him to Payson. Coolidge wrote to Corthwaite stating that, since there is no seal to any of the signatures, it is necessary to ascertain the legality of the scrolls. Coolidge wrote to its friend, William, who was to determine whether the draft was to be honored. William replied, approving the bond. -Cornthwaithe called on William to inquire whether he had satisfied Coolidge respecting the bond. Williams stated the substance of the letter he had written, and read to him a part of it. Payson also called on him to make the same inquiry, to whom he gave the same information and also read the letter he had written.

-2 days later, a bill was drawn by Cornthwaite and paid to Payson in part of the protested bill of $2,700.it was presented to Coolidge, who refused to accept it. ISSUE WON Coolidge is deemed to have accepted the bill, hence liable to Payson HELD: YES -A promise to accept a bill amounts to an acceptance to a person who has taken it on the credit of that promise, although the promise was made before the existence of the bill, and although it is drawn in favor of a person who takes it for a pre-existing debt -Upon a review of several cases, the court holds that a letter written within a reasonable time before or after the bill of exchange, describing it in terms not to be mistaken, and promising to accept it, is if shown to the person who afterwards takes the bill on the credit of the letter, a virtual acceptance binding the person who makes the promise.

REPUBLIC V PHIL. NAT’L BANK L-No. 16106, Dec. 30, 1961; 3 SCRA 851 ~kiyo~ FACTS -RP filed a complaint for escheat of certain unclaimed bank deposit balances against several banks under Act. 3936 which provides that “unclaimed balances” (w/c includes credits or deposits of money, bullion, security and other evidence of indebtedness of any kind + interest) in favor of persons not heard from for 10 years or more, with the increase and proceeds thereof, shall be deposited with the Insular Treasurer to the credit of the Phil. Government. Among these banks was the First National City Bank of New York who argued that some of its credits didn’t fall within the purview of the Act. The court held that cashier’s checks and demand drafts fall under the Act but upon MFR changed its view and excluded drafts, hence this appeal. ISSUE WON demand drafts create a creditor-debtor relationship between drawee and payee, thus falling within the meaning of “credits” in Act. 3969 HELD: NO

-A demand draft is not of the same category as a cashier’s check which should fall under the Act. In banking terminology, the term bank draft is used interchangeably with a bill of exchange. A bill of exchange under the NIL (sec. 127) does not operate as an assignment of funds in the hands of the drawee who is not liable on the instrument until he accepts. In fact, the law requires presentment w/in a reasonable time or else the drawer is discharged from liability. Since it is admitted in this case that the drafts in question were never presented either for acceptance or payment, appellee bank never became a debtor of the payees, hence the drafts never became “credits” under the Act. -Drafts must however be distinguished from cashier’s checks, which is simply a bill of exchange drawn by the bank on itself; it is equivalent to a certified check and its deposit passes to the credit of the holder who then becomes a depositor of that amount. Disposition TC decision modified; telegraphic transfer payment orders should be escheated to RP (see case for telegraphic orders)

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NEGO - Quevedo Camille Umali PAL V CA, Galano, del Rosario, Tan G.R. No. 24188; Jan 30, 1990; Gutierrez, Jr. ~athe~ FACTS -Amelia Tan commenced a complaint for damages. The CFI of Manila rendered judgment in favor of Tan and against PAL. PAL appealed and the amount of damages was lowered to a total of P30, 000.00. The judgment became final and executory there being no further appeal taken. -Tan filed a motion for the issuance of a writ of execution of the judgment. Judge Galano issued its order of execution and it was duly referred to Deputy Sheriff Emilio Z. Reyes. -Four months later, Tan moved for the issuance of an alias writ of execution stating that the judgment remained unsatisfied. -PAL filed an opposition stating that it had already fully paid its obligation to Tan through the deputy sheriff Reyes as evidenced by cash vouchers properly signed and receipted by Sheriff Reyes (PAL issued a check amounting to P30,000.00 in the name of Sherriff Reyes and not in the name of Tan). However, Sherriff Reyes encashed the check but failed to surrender the amount to Tan. He, instead, absconded. -Judge Galano granted Tan’s Motion for Alias Writ of Execution and directed Special Sheriff del Rosario to levy on execution. Consequently, Del Rosario served a notice of garnishment on the depository bank of PAL. Because of this, PAL filed this instant petition ISSUES 1. WON an alias writ of execution be issued without a prior return of the original writ by the implementing officer 2. WON payment of judgment to the implementing officer as directed in the writ of execution constitutes satisfaction of judgment HELD 1. YES. Ratio Technicality cannot be countenanced to defeat the execution of a judgment for execution is the fruit and end of the suit and is very aptly called the life of the law. A judgment cannot be rendered nugatory by the unreasonable application of a strict rule of procedure. Vested rights were never intended to rest on the requirement of a return, the office of which is merely to inform the court and the parties, of any and all actions taken under the writ of execution. Where such information can be established in some other manner, the absence of an executing officer's return will not preclude a judgment from being treated as discharged or being executed through an alias writ of execution as the case may be. 2. General Rule (under ordinary circumstances): YES

Article 1240, NCC. "Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it." Exception (under peculiar circumstances like in this case): NO a. Unless authorized to do so by law or by consent of the obligee, a public officer has no authority to accept anything other than money in payment of an obligation under a judgment being executed. Strictly speaking, the acceptance by the sheriff of the petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the judgment debt. Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code) A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3). b. It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal contemplation. The reasoning is logical but is it valid and proper? Logic has its limits in decision making. We should not follow rulings to their logical extremes if in doing so we arrive at unjust or absurd results. c. PAL was negligent. Making the checks payable to the judgment creditor would have prevented the encashment or the taking of undue advantage by the sheriff, or any person into whose hands the checks may have fallen, whether wrongfully or in behalf of the creditor. The issuance of the checks in the name of the sheriff clearly made possible the misappropriation of the funds that were withdrawn. Disposition Petition dismissed. NARVASA, Dissenting Opinion -A sheriff is authorized to receive payments on account of the judgment debt tendered by "a person indebted to the judgment debtor," and his "receipt shall be a sufficient discharge for the amount so paid or directed to be credited by the judgment creditor on the execution" (sec. 41, Rule 39). -The sheriff is an adjunct of the court; a court functionary whose competence involves both discretion and personal liability. Being an officer of the court and acting within the scope of his

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NEGO - Quevedo Camille Umali authorized functions, the sheriff's receipt of the checks in payment of the judgment execution, may be deemed, in legal contemplation, as received by the court itself. -If payment had been in cash, no question about its validity or of the authority and duty of the sheriff to accept it in settlement of PAL's judgment obligation would even have arisen. Simply because it was made by checks issued in the sheriff's name does not warrant reaching any different conclusion. FELICIANO, Dissenting Opinion -The risk of the sheriff faithfully performing his duty as a public officer is most appropriately borne NOT by the judgment debtor/creditor, nor upon those members of the general public who are compelled to deal with him, but by the STATE itself. The judgment creditor, in circumstances like those of the instant case, could be allowed to execute upon the absconding sheriff’s bond.

PADILLA, Dissenting Opinion -He has underscored the obligation of the sheriff, imposed upon him by the nature of his office and the law, to turn over such legal tender, checks and proceeds of execution sales to the judgment creditor. The failure of a sheriff to effect such turnover and his conversion of the funds (or goods) held by him to his own uses, do not have the effect of frustrating payment by and consequent discharge of the judgment debtor. -If the plaintiff fails to receive it, his only remedy is against the officer. -When PAL delivered the checks to the Sheriff, the latter was accompanied by the counsel of Tan. Prudence dictates that the counsel of Tan should have insisted on their immediate encashment by the Sheriff with the drawee bank in order to promptly get hold of the amount belonging to his client.

FORTUNADO V CA, Campano, Bautista, Register of Deeds, and National Steel Corporation GR 78556; 196 SCRA 269; Cruz; April 21, 1991 ~giulia~ FACTS -In a civil case, the RTC rendered judgment ordering Angel Bautista to pay damages to Alfero Fortunado. Pursuant to said judgment, the Sheriff levied upon 2 parcels of land registered in the name of Bautista, but 1 of the said parcels of land was already sold to the National Steel Corporation (NSC). The properties were sold to the petitioner as the only bidder in a public auction. -NSC then gave notice to the sheriff of its intention to redeem the property it owned. The sheriff suggested as the 2 lots were sold together that both of them should be redeemed. NSC filed with the TC an urgent motion to redeem, which was opposed by the petitioners on the ground that the movant did not have the personality to intervene. -As the motion remained unresolved, the NSC issued to the sheriff a PNB check for the properties.Bautista sent the sheriff a letter bearing NSC's conformity in which he availed himself of SC's check to redeem the properties. His letter contained the ff reservation: This redemption is made solely for the purpose of effecting the execution and delivery to me of the necessary certificate of redemption and the same shall not be taen to mean my accknowledgment of the validity of the said writ of execution and sale, both of which I shall continue to contest, nor shall this be taken to mean as a waiverr on my part of the legal reights and remedies available to me under the circumstances. -Sheriff issued the certificate of redemption in favor of NSC and Bautista. Bautista later on wrote to the

sheriff that he would no longer effect the redemption because there was nothing to redeem, the auction sale being null and void. -Bautista, in an Urgent Motion, prayed that the sum covered by the PNB check be delivered to and kept by the clerk of court until such time as all incidents relative to the validity of the auction sale were finally resolved. Sheriff notified the petitioners' counsel of the deposit of the PN check. Counsel told the check that he was rejecting the check as it was not legal tender. -Respondent court held that NSC's redemption was absolute and unconditional in view of its refusal to join Bautista in contesting the validity of the sale. However, the validity of the redemption was dependent on the validity of the certificate of sale, which still has to be resolved by the TC. Motion for partial reconsideration by petitioner was denied. ISSUE WON there was valid redemption. HELD: YES. Although the private respondents in the case did not file a redemption case against the petitioners, NSC filed an urgent motion for redemption within the redemption period. In the US, it has been held and recognized that a payment by check or draft or bank bill or currency which is not legal tender is effective if the officer accepts such payment. If in good faith, the redemptioner pays, and the officer receives before the expiration of the time of redemption,

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NEGO - Quevedo Camille Umali an ordinary banker's check, the payment is compel redemption but it is not in itself a payment regarded as sufficient. that relieves the redemption bt is not in itself a The Court does not, by this decision, sanction the use payment that relieves the redemtioner from his of check for the payment of obligations over the liiability t pay the redemption price. While the objection of the creditor. It is just that a check private respondents have properly exercised their may be used for the exercise of the right of right of redemption, they remain liable for the redemption, the same being a right and not an payment of the redemption price. obligation. The tender of a check is sufficient to MESINA V IAC [Gonong, Go and Uy] L-70145; Nov. 13, 1986; 145 sCRA 499; Paras ~ajang~ FACTS -Jose Go purchased from Associated Bank a cashier’s check worth P800,000. Accidentally, he left the check on top of the desk of the bank manager when he left the bank. The bank manager entrusted the check for safekeeping to bank official, Albert Uy, who then had a visitor, Alexander Lim. Uy had to answer a telephone call, then he went t the men’s room. When he returned to the desk, his visitor Lim was already gone and so was the check. When Jose Go returned to the bank, the check was nowhere to be found. -Uy advised Go to accomplish a sop payment order. Go also executed an affidavit of loss. Uy also went to the police station to report the loss, pointing to Alexander Lim as the one who could shed light on it. -Associated Bank received the lost check 2 days after for clearing, coming from Prudential bank. The check was immediately dishonored by Associated Bank and returned to Prudential with the words, “Stop Payment.” The check was again returned to Associated Bank and for the 2nd time, it was dishonored. -Several days later, Associated Bank received a letter from Atty. Lorenzo Navarro demanding payment for the check and threatened to sue. He refuses to reveal who his client is. Unsure with what to do with the matter, Associated Bank filed for an Interpleader. The client turned out to be one named Mesina. He said the check was paid to him by Alexander Lim in a certain transaction but refused to elucidate further. Mesina filed a complaint for damages. -TC rendered a decision on the interpleader ordering Associated Bank to replace Jose Go’s check or pay its cash equivalent. Mesina’s complaint on the other hand was dismissed. The issue in that case is who between Mesina and Go are entitled for the payment of the check. Since this issue

had been resolved in the other case, it has become moot and academic. ISSUE: WON the lower court’s ruling in the interpleader case should be set aside. HELD: NO. Mesina invokes theories on causes and effects of a cashier’s checks such as 1) it cannot be countermanded in the hands of a holder in due course and 2) a cashier’s check is a bill of exchange drawn by the bank against itself. But these are general principles which cannot be aptly applied to the case at bar without considering other things. -Mesina failed to substantiate that he is a holder in due course. He refused to say how and why the check was passed to him. He therefore had notice of the defect of his title over the check from the start. -Next, the check was bought by Jose Go from the bank for purposes of transferring his bank from Associated Bank to a nearby bank, thinking that carrying a check would be safer than carrying cash; it was not issued in payment of an obligation. The check was Jose Go’s property when it was misplaced or stolen. Bank was therefore liable to no one else but Jose Go. -When the payment was stopped, it was not the bank who did it but Jose Go. The bank could not be the drawer and drawee for clearly, Jose Go owns the money it represents and he is therefore the drawer and drawee in the same manner as if he has a current account and he issued a check against it. No one outside Jose Go can be termed a holder in due course because Go had not indorsed it in due course. NOTE: Clear implication from the case is that if Mesina had been a holder in due course, the court would have granted recovery.

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NEGO - Quevedo Camille Umali INT’L CORPORATE BANK V GUECO 351 SCRA 516; Kapunan; Feb 1, 2001 FACTS -Spouses Gueco obtained a loan from International Corporate Bank (now Union Bank of the Philippines) to purchase a car – a Nissan Sentra 1600 4DR, 1989 Model. In consideration, the Spouses executed promissory notes which were payable in monthly installments and chattel mortgage over the car to serve as security for the notes. The Spouses defaulted in payment of installments. The Bank filed a civil action for “Sum of Money with Prayer for a Writ of Replevin” before MTC Pasay City. Dr. Francis Gueco was served summons and was fetched by the sheriff and representative of the bank for a meeting in the bank premises. Desi Tomas, the Bank’s Assistant Vice President demanded payment of the amount of P184,000.00 which represents the unpaid balance for the car loan. After some negotiations and computation, the amount was lowered to P154,000.00, However, as a result of the non-payment of the reduced amount, the car was detained inside the bank’s compound. Dr. Gueco went to the bank and talked with its Administrative Support, Auto Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted in the further reduction of the outstanding loan to P150,000.00. Dr. Gueco delivered a manager’s check in the amount of P150,000.00 but the car was not released because of his refusal to sign the Joint Motion to Dismiss. It is their contention that Dr. Gueco need not sign the motion for joint dismissal considering that they had not yet filed their Answer. However, the Bank insisted that the joint motion to dismiss is standard operating procedure in their bank to effect a compromise and to preclude future filing of claims, counterclaims or suits for damages. After several demand letters and meetings with bank representatives, the Spouses initiated a civil action for damages before MTC Quezon City. -MTC QC: dismissed the complaint for lack of merit. -RTC QC: MTC decision reversed and held that there was a meeting of the minds between the parties as to the reduction of the amount of indebtedness and the release of the car but said agreement did not include the signing of the joint motion to dismiss as a condition sine qua non for the effectivity of the compromise. Also, the Bank is ordered to return the car to the Spouses; the Bank may deposit the Manager’s check – the proceeds of which have long been under the control of the issuing bank in favor of the Bank since its issuance, whereas the funds have long been paid by the Spouses to secure said Manager’s Check, over which the Spouses have no control. Moreover, the Bank is ordered to pay the Spouses the P50,000.00 as moral damages;

P25,000.00 as exemplary damages, and P25,000.00 as attorney’s fees, and to pay the cost of suit. -CA: Petition for review on certiorari is hereby DENIED and the RTC Decision is AFFIRMED in toto as CA essentially relied on the finality of the findings of facts by the lower court and on the latter's finding of the existence of fraud which constitutes the basis for the award of damages. ISSUES 1. WON there was no agreement with respect to the execution of the joint motion to dismiss as a condition for the compromise agreement 2. WON granting moral and exemplary damages and attorney’s fees in favor of Sps Gueco is proper 3. WON the Bank must return the subject car to the Sps. Gueco, without making any provision for the issuance of the new manager’s/cashier’s check by the Spouses in favor of the Bank in lieu of the original cashier’s check that already became stale HELD 1. YES -In support of its claim, The Bank presented the testimony of Mr. Jefferson Rivera who related that Dr. Gueco was aware that the signing of the draft of the Joint Motion to Dismiss was one of the conditions set by the bank for the acceptance of the reduced amount of indebtedness and the release of the car. The Spouses, however, maintained that no such condition was ever discussed during said meeting. If it is true that the signing of the joint motion was a condition sine qua non for the reduction of the Spouses’ obligation, it is only reasonable and logical to assume that the joint motion should have been shown to Dr. Gueco in the said meeting. Why Dr. Gueco was not given a copy of the joint motion on the day of the meeting, for his family or legal counsel to see to be brought signed, together with the P150,000.00 in manager’s check form to be submitted on the following day? -It is more logical to conclude that only an oral compromise agreement, whereby the original claim of the bank of P184,985.09 was reduced to P150,000.00 and that upon payment of which, plaintiff was informed that the subject motor vehicle would be released to him’ happened during that said meeting. 2. NO -Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the voluntary execution of a wrongful act, or a willful omission, knowing and intending the effects which naturally and necessarily arise from such act or omission;

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NEGO - Quevedo Camille Umali the fraud referred to in Article 1170 of the Civil Code is the deliberate and intentional evasion of the normal fulfillment of obligation. We fail to see how the act of the bank in requiring the Spouses to sign the joint motion to dismiss could constitute as fraud. True, the Bank may have been remiss in informing Dr. Gueco that the signing of a joint motion to dismiss is a standard operating procedure of the bank. However, this can not in anyway have prejudiced Dr. Gueco. It should, likewise, be noted that in cases of breach of contract, moral damages may only be awarded when the breach was attended by fraud or bad faith. The law presumes good faith. 3. NO -The Bank would make us hold that petitioner should return the car or its value and that the latter, because of its own negligence, should suffer the loss occasioned by the fact that the check had become stale. It is their position that delivery of the manager’s check produced the effect of payment and, thus, the Bank was negligent in opting not to deposit or use said check. Rudimentary sense of justice and fair play would not countenance the Spouses’ position. -A stale check is one which has not been presented for payment within a reasonable time after its issue. It is valueless and, therefore, should not be paid. Under the negotiable instruments law, an instrument not payable on demand must be presented for payment on the day it falls due. When the instrument is payable on demand, presentment must be made within a reasonable time after its issue. In the case of a bill of exchange, presentment is sufficient if made within a reasonable time after the last negotiation thereof. -A check must be presented for payment within a reasonable time after its issue, and in determining what is a “reasonable time,” regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case. The test is whether the payee employed such diligence as a prudent man exercises in his own affairs. This is because the nature and theory behind the use of a check points to its immediate use and payability. In a case, a check payable on demand which was long overdue by about two and a half (2-1/2) years was considered a stale check. Failure of a payee to encash a check for more than ten (10) years undoubtedly resulted in the check becoming stale. Thus, even a delay of one (1) week[27] or two (2) days, under the

specific circumstances of the cited cases constituted unreasonable time as a matter of law. -In the case at bar, however, the check involved is not an ordinary bill of exchange but a manager’s check. A manager’s check is one drawn by the bank’s manager upon the bank itself. It is similar to a cashier’s check both as to effect and use. A cashier’s check is a check of the bank’s cashier on his own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself, and accepted in advance by the act of its issuance. It is really the bank’s own check and may be treated as a promissory note with the bank as a maker. The check becomes the primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. The mere issuance of it is considered an acceptance thereof. If treated as promissory note, the drawer would be the maker and in which case the holder need not prove presentment for payment or present the bill to the drawee for acceptance. -Even assuming that presentment is needed, failure to present for payment within a reasonable time will result to the discharge of the drawer only to the extent of the loss caused by the delay. Failure to present on time, thus, does not totally wipe out all liability. In fact, the legal situation amounts to an acknowledgment of liability in the sum stated in the check. In this case, the Spouses have not alleged, much less shown that they or the bank which issued the manager’s check has suffered damage or loss caused by the delay or nonpresentment. Definitely, the original obligation to pay certainly has not been erased. -It has been held that, if the check had become stale, it becomes imperative that the circumstances that caused its non-presentment be determined. In the case at bar, there is no doubt that the bank held on the check and refused to encash the same because of the controversy surrounding the signing of the joint motion to dismiss. We see no bad faith or negligence in this position taken by the Bank. Disposition Petition for review is given due course. CA decision affirming RTC decision is SET ASIDE. Spouses Gueco is ordered to pay the original obligation amounting to P150,000.00 to the Bank upon surrender or cancellation of the manager’s check in the latter’s possession, afterwhich, the Bank is to return the subject motor vehicle in good working condition.

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NEGO - Quevedo Camille Umali NEW PACIFIC TIMBER & SUPPLY CO V SENERIS L-41764, Dec. 19, 1980; 101 SCRA 686 ~glaisa~ FACTS SUBJECT: Equitable Bank Cashier’s Check for P50k dated Jan. 3, 1975 DRAWER: New Pacific Timber -New Pacific failed to comply with his judgment obligation. Judge issued writ of execution for P63,130 to which the Sheriff levied upon personal properties and set the auction sale on Jan. 15. Prior to the scheduled sale, New Timber deposited with the Clerk of Court the P50,000 check and P13,130 in cash. -Seneris refused to accept check and cash. Sheriff proceeded with the auction sale. ISSUE WON Seneris can validly refuse acceptance of the payment of the judgment obligation made by New

Timber, consisting of the Cashier’s Check and cash. HELD: NO -A Cashier’s Check is deemed as cash. Moreover, since the check had been certified by the drawee bank, by the certification, the funds represented by the checks are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation. The certification is equivalent to acceptance. -The object of certifying a check as regards both parties is to enable holder to use it, as money. When the holder procures the check to be certified, the check operates as an assignment of a part of the funds to the creditors.

WACHTEL V ROSEN 248 NY 386, 164 NE 326 ~RPR~ FACTS Plaintiff received from Arthur Wachtel a check drawn on National Park Bank which plaintiff presented to said bank for certification. The bank refused to certify the check. ISSUE WON the refusal of the drawee bank to certify the check is equivalent to a dishonor of the check such that holder may sue the drawer as if the check was presented for payment and payment had been refused HELD: NO -The general rule is that a check is of right presentable only for payment, and that the bank

is under no obligation to certify, although it may do so. -When a bank certifies a check at the request of the holder, a new obligation is created. Under Section 324, the drawer and all the endorsers are discharged from liability if the check is accepted or certified. The acceptance of a bill of exchange, on the other hand, does not discharge the liability. The certification differs in effect from mere acceptance of bills other than checks, in that it is not an added obligation but a substitute obligation. Certification of the check by the bank is equivalent to payment. The bank in this case may not be prepared to substitute itself with the drawer. Disposition Judgment affirmed.

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NEGO - Quevedo Camille Umali ROMAN CATHOLIC BISHOP OF MALOLOS, INC V IAC [Robes-Francisco Realty and Dev’t Corp] G.R. No. 72110; Sarmiento; Nov 16, 1990 ~owen~ FACTS -July 7, 1971 > the subject contract over the land, a 20,655 sq.m. in Bulacan, issued and registered in the name of the Roman Catholic Bishop of Malolos which it sold to the Robes-Francisco Realty and Dev’t for P123,930.00). in question was executed stipulating for a downpayment of P23,930.00 and the balance of P100,000.00 plus 12% interest per annum to be paid within four (4) years from execution of the contract, that is, on or before July 7, 1975. The contract likewise provides for cancellation, forfeiture of previous payments, and reconveyance of the land in question in case Robes-Francisco Realty and Development would fail to complete payment within the said period. -March 12, 1973 > Robes-Francisco addressed a letter to Father Vasquez, parish priest of San Jose Del Monte, Bulacan, requesting to be furnished with a copy of the subject contract and the supporting documents. -July 17, 1975 > admittedly after the expiration of the stipulated period for payment, Robes-Francisco wrote Roman Catholic a formal request that her company be allowed to pay the principal amount of P100,000.00 in three (3) equal installments of six (6) months each with the first installment and the accrued interest of P24,000.00 to be paid immediately upon approval of the said request. -July 29, 1975 > Roman Catholic formally denied the said request of Robes-Francisco, but granted the latter a grace period of five (5) days from the receipt of the denial to pay the total balance of P124,000.00, otherwise, the provisions of the contract regarding cancellation, forfeiture, and reconveyance would be implemented. -August 4, 1975 > Robes-Francisco wrote Roman Catholic requesting an extension of 30 days from said date to fully settle its account. -August 7, 1975 > Roman Catholic denied the request for an extension of the grace period. -August 22, 1975 > Robes-Francisco protested alleged refusal of the latter to accept tender of payment purportedly made by the former on August 5, 1975, the last day of the grace period and demanded the execution of a deed of absolute sale over the land in question and after which it would pay its account in full, otherwise, judicial action would be resorted to. -August 27, 1975 > Roman Catholic refused to execute the deed of absolute sale due to its failure to pay its full obligation. Moreover, Roman Catholic denied that Robes-Francisco had made any tender of payment whatsoever within the grace period. In view of this alleged breach of contract, Roman Catholic cancelled the contract

and considered all previous payments forfeited and the land as ipso facto reconveyed. -TC: Failure of Robes-Francisco to present in court the certified personal check allegedly tendered as payment or, at least, its xerox copy, or even bank records thereof is fatal. And Robes-Francisco was found to have insufficient funds to fulfill the entire obligation considering that its president, Atty. Francisco, only had a savings account deposit of P64,840.00, and although the latter had a money-market placement of P300,000.00, the same was to mature only after the expiration of the 5-day grace period. TC declares the subject contract cancelled and RobesFrancisco’s downpayment of P23,930.00 forfeited in favor of Roman Catholic, and hereby dismisses the complaint -IAC: reversed TC decision as Robes-Francisco has a total available sum of P364,840.00 and their disposal on or before August 4, 1975 to answer for the obligation of the Roman Catholic. It was not correct for the trial court to conclude that Robes-Francisco had only about P64,840.00 in savings deposit on or before August 5, 1975, a sum not enough to pay the outstanding account of P124,000.00. ISSUES 1. WON finding that Robes-Francisco had sufficient available funds on or before the grace period for the payment of its obligation is proof that it did tender of payment for its said obligation within said period 2. WON there is legal obligation on the part of Roman Catholic to execute a deed of absolute sale in favor of the Robes-Francisco before the latter has actually paid the complete consideration of the sale where the contract between and executed by the parties stipulates 3. WON an offer of a check is a valid tender of payment of an obligation under a contract which stipulates that the consideration of the sale is in Philippine Currency HELD 1. NO -A finding that Robes-Francisco had sufficient available funds on or before the grace period for the payment of its obligation does not constitute proof of tender of payment by the latter for its obligation within the said period. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the obligee for the former's obligation and demanding that the latter accept the same. Thus, tender of payment cannot be presumed by a mere inference from surrounding

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NEGO - Quevedo Camille Umali circumstances. At most, sufficiency of available funds is only affirmative of the capacity or ability of the obligor to fulfill his part of the bargain. But whether or not the obligor avails himself of such funds to settle his outstanding account remains to be proven by independent and credible evidence. Tender of payment presupposes not only that the obligor is able, ready, and willing, but more so, in the act of performing his obligation. Ab posse ad actu non vale illatio. "A proof that an act could have been done is no proof that it was actually done." 2. NO -Although admittedly the documents for the deed of absolute sale had not been prepared, the subject contract clearly provides that the full payment by the private respondent is an a priori condition for the execution of the said documents by Roman Catholic. “That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall cause the execution of a Deed of Absolute Sale in favor of the VENDEE.” -What Robes-Francisco should have done if it was indeed desirous of complying with its obligations would have been to pay Roman Catholic within the grace period and obtain a receipt of such payment duly issued by the latter. Thereafter, or, allowing a reasonable time, Robes-Francisco could have demanded from Roman Catholic the execution of the necessary documents. In case

Roman Catholic refused, Robes-Francisco could have had always resorted to judicial action for the legit enforcement of its right. 3. NO -A certified personal check is not legal tender nor the currency stipulated, and therefore, cannot constitute valid tender of payment. The first paragraph of Art. 1249CC provides that "the payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. -PAL v. CA > Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. -Hence, where the tender of payment by RobesFrancisco was not valid for failure to comply with the requisite payment in legal tender or currency stipulated within the grace period and as such, was validly refused receipt by Roman Catholic, the subsequent consignation did not operate to discharge the former from its obligation to the latter. Disposition Petition for review on certiorari granted. IAC decision set aside and annulled. RTC decision reinstated.

BULLIET V ALLEGHENY TRUST CO 284 Pa. 561, 131 Atl. 471 (1925) ~maia~ FACTS SUBJECT: a check for $5000 DRAWER: Mitchell, as buyer of an oil property DRAWEE: Allegheny Trust Co PAYEE: Bulliet, as seller of the the oil property -the memorandum of agreement of the parties provided that the 5000 would be given in escrow in evidence of good faith that Mitchell would pay the remainder of the purchase price. In the event of Mitchell’s failure to pay, the 5000 would be forfeited in favor of Buillet. Mitchell made sure with Allegheny that it had enough funds. Buillet then sent a telegram to Allegheny inquiring whether it would honor Mitchell’s check, and the bank replied through wire that it would. -Mitchell did not pay the purchase price. Buillet then claimed from Allegheny, but the latter refused to pay because Mitchell had given a “stop payment order.” Allegheny also insisted that, putting itself in the position of Mitchell, there was no transfer of title as to the property being conveyed as there was failure of consideration, thus it should not be liable to pay since Mitchell itself would not be liable to pay. (in effect, Allegheny invoked the defense available to Mitchell)

ISSUE WON Allegheny is liable for the amount under the circumstances HELD: YES -the reply of Allegheny that it would honor the check amounted to certification of the bank, thus making it liable -the effect of the bank’s certifying a check at the request of the holder is to create a new obligation on the part of the bank to that holder, the amount of the check passes to the credit of the holder, who is thereafter a depositor to that amount -the obligation of the acceptor is to pay the instrument according to the tenor of his acceptance. It has been said that an acceptor admits everything essential to the validity of the bill, and on this ground he cannot, for example, even set up the defense of want of consideration between the parties. -the acceptor cannot defend on the ground of want of consideration between the drawer and the payee Disposition Judgment affirmed (Allegheny liable to pay Buillet)

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NEGO - Quevedo Camille Umali

SUTTER V SECURITY TRUST CO 96 N.J. Eq. 644 A. 435, 35 A.L.R. 938 (1924) ~da~ FACTS SUBJECT: Checks DRAWER: Mr. Sutter DRAWEE: Security Trust Co. PAYEE: Mrs. Sutter INDORSEE: Mr. Mack -Mr. Sutter drew a check in favor of his wife on March 25 1922 in the amount of $1000 for which he procured the certification of drawee Security Trust Co. The check was delivered to his wife in consideration of a certain agreement between them concerning their separation. The wife violated said agreement after the delivery of the check to her. -On March 27, 1922 Mr. Sutter requested that payment be stopped upon the check because of Mrs. Sutter’s violation of their agreement. Mrs Sutter on the same day went to her brother Mr. Mack and indorsed the check to him and he deposited it in his bank in Philadelphia. -March 30, through the Federal Reserve Bank of Philadelphia, the check was presented to Security Trust Co for payment which was refused on ground of “payment stopped”. Respondent told Mr. Sutter that the check was in the hands of an innocent third person for value and that unless he indemnified respondent the check would be paid. He refused to indemnify respondent, thus respondent paid the check upon subsequent presentment. Mr. Sutter demanded the payment to him of his alleged balance of $1034.41 w/c includes the $1000 drawn w/c was refused except as to balance of $34.

ISSUE WON Security Trust Co. was justified in paying the indorsee Mr. Mack the $1000 value of the check HELD: YES. -The Bank was justified and legally called upon to make payment to Mrs. Sutter upon presentation and demand as against the notice of the maker of the check to stop payment, its obligation under the facts was likewise to make the payment to the indorsee holder Mr. Mack Reasoning: A check may be certified by the bank at the request of the payee or the holder, when the check is certified at the request of the drawer or maker before it reaches the hands f the payee therein named. When such a certification is made and there is delivery to the payee, under the circumstances and conditions making him a bona fide holder for value, without notice of defects therein then the instrument is beyond recall by the maker as against the payee. He may only do so (recall) if the payee is not a bona fide holder for value but has obtained the check by fraud perpetrated by him upon the maker. -In this case since Mr. Mack is not a holder in due course, it is necessary to inquire whether the bank by reason of its certification would have been justified in making payment to Mrs. Sutter the payee upon proper presentation of the check by her notwithstanding the service of notice to stop payment by her husband the maker and the disclosure by him to the bank of the conditions upon which the check was obtained by Mrs. Sutters. There is nothing in the case that indicate that Mrs Sutter procured the check by any fraud perpetrated by her to her husband.

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NEGO - Quevedo Camille Umali PNB V PICORNELL Romualdez; 46 Phil. 716 (1922) ~bry_sj~ FACTS SUBJECT: Bill Of Exchange DRAWER: Bartolome Picornell DRAWEE: Firm Of Hyndman, Tavera And Ventura PAYEE: PNB -Bartolome Picornell, following instruction Hyndman, Tavera & Ventura, bought in Cebu 1,735 bales of tobacco. Picornell obtained from the branch of the National Bank in Cebu the sum of P39,529,83, the value of the tobacco, together with his commission of 1 real per quintal, having, in turn, drawn a bill of exchange. This instrument was delivered to the branch of the Philippine National Bank (PNB) in Cebu, together with the invoice and bill of lading of the tobacco, which was shipped in the boat Don Ildefonso, on 27 February 1920, consigned to Hyndman, Tavera & Ventura at Manila. -On 3 March 1920, PNB presented the bill to Hyndman, Tavera & Ventura, who accepted it. The tobacco having arrived at Manila, the firm of Tambunting, owner of the ship Don Ildefonso, that brought the shipment, requested Hyndman, Tavera & Ventura to send for the goods, which was done by the company without the knowledge of PNB which retained and always had in its possession the invoice and bill of lading of the tobacco, until it presented them as evidence at the trial -Hyndman, Tavera & Ventura proceeded to the examination of the tobacco, which was deposited in their warehouses, and wrote and cabled to Picornell, notifying him that of the tobacco received, there was a certain portion which was of no use and was damaged. Through these communications, therefore, Picornell learned that Hyndman, Tavera & Ventura had in their possession the tobacco. -In view of the question raised by the said company as to the quality of the aforesaid tobacco, more correspondence was exchanged between the company and Picornell. Picornell requested PNB to extend the time for payment of the bill for P39,529,83 against Messrs. Hyndman, Tavera & Ventura of Manila for 30 days. PNB granted the request of Picornell; wherefore Hyndman, Tavera & Ventura reaccepted the bill in the terms: "Accepted for thirty days. Due May 2d, 1920. Hyndman, Tavera & Ventura, by (Sgd.) J. Pardo de Tavera, member of the firm." 2 May 1920, arrived and the bill was not paid. -On the 4th of the same month, Hyndman, Tavera & Ventura sent a letter to PNB informing the latter that it absolutely refuse to pay draft 2 for P39,529.83, referring to 1,871,235 quintals of Leaf Tobacco Barili, owing to noncompliance of the contract by the drawer. PNB protested the

bill, took possession of the tobacco, and had it appraised on the 12th of the same month, its value having been fixed at P28,790.72. The bank brought the action for the recovery of the value of the bill of exchange, and about September 1921, sold the tobacco, obtaining from the sale P6,708. -In a decision rendered January 9, 1922, and amended by an order of February 18th next, the Court of First Instance of Manila sentenced the defendants to pay solidarily to the plaintiff bank the sum of P28, 790.72 with interest at the rte of 9 per centum per annum from May 3, 1921, and costs; and the defendant Bartolome Picornell, to pay said plaintiff the sum of P10,739.11 with interest at 9 per centum per annum, all as aforesaid, deducting the sum of P6, 708.82 from such amounts to be paid by the defendants. -This total sum which the defendants are required to pay represents the value of a bill of exchange drawn by Bartolome Picornell in favor of the National Bank, plaintiff, against the firm of Hyndman, Tavera & Ventura, now dissolved, its only successor being the defendant Joaquin Pardo de Tavera. The sum of P6,708.82, which the trial court ordered deducted from the value of the bill of exchange, is the proceeds received by the bank from the sale of a part of a certain quantity of tobacco shipped by Picornell at Cebu to the Hyndman, Tavera & Ventura company at Manila, the price of which, together with his commission, was received by him from the branch of the plaintiff bank in Cebu, and in consideration whereof he drew the bill in favor of the central office of said bank in Manila and against the said Hyndman, Tavera & Ventura company, the consignee of the tobacco. -Joaquin Pardo de Tavera alleged that the bill in question was without consideration and that judgment should not have been rendered against him. The appellant Picornell contended that it should have been taken into account that he merely acted as an agent of Hyndman, Tavera & Ventura in all these transactions; that the tobacco was not of inferior quality, as alleged by the said company; that the condition "D/P" attached to the transaction was not modified; that he had the right to complain because the bank consented to the said company taking possession of the tobacco before the payment of the bill; that the bank held the tobacco as a deposit; that the bank was not authorized to sell the tobacco, said sale not being allowed either by law or by the circumstances; that he should not have been ordered to pay the value of the bill without proof that he was notified of its dishonor, as required by section 89 of the Negotiable Instruments Law. ISSUES

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NEGO - Quevedo Camille Umali 1. WON the bank is subject to the defense of partial want of consideration. 2. WON Picornell is not liable on the instrument on the theory that he is merely a commissioned agent. HELD 1. NO. -The question whether or not the tobacco was worth the value of the bill, does not concern the plaintiff bank. Such partial want of consideration, if it was, does not exist with respect to the bank which paid to Picornell the full value of said bill of exchange. The bank was a holder in due course, and was such for value full and complete. The Hyndman, Tavera & Ventura company cannot escape liability in view of section 28 of the Negotiable Instruments Law. “The drawee by acceptance becomes liable to the payee or his indorsee, and also to the drawer himself. But the drawer and acceptor are the immediate parties to the consideration, and if the acceptance be without consideration, the drawer cannot recover of the acceptor. The payee holds a different relation; he is a stranger to the transaction between the drawer and the acceptor, and is, therefore, in a legal sense a remote party. In a suit by him against the acceptor, the question as to the consideration between the drawer and the acceptor cannot be inquired into. The payee or holder gives value to the drawer, and if he is ignorant of the equities between the drawer and the acceptor, he is in the position of a bona fide indorsee. Hence, it is no defense to a suit against the acceptor of a draft which has been discounted, and upon which money has been advanced by the plaintiff, that the draft was accepted for the accommodation of the drawer. . . ." 2. NO.

-As to Bartolome Picornell, he warranted, as drawer of the bill, that it would be accepted upon proper presentment and paid in due course, and as it was not paid, he became liable to the payment of its value to the holder thereof, which is the plaintiff bank. (Sec. 61, Negotiable Instruments Law.) -The fact that Picornell was a commission agent of Hyndman, Tavera & Ventura, in the purchase of the tobacco, does not necessarily make him an agent of the company in its obligations arising from the drawing of the bill by him. His acts in negotiating the bill constitute a different contract from that made by his having purchased the tobacco on behalf of Hyndman, Tavera & Ventura. Furthermore, he cannot exempt himself from responsibility by the fact of his having been a mere agent of this company, BECAUSE NOTHING TO THIS EFFECT WAS INDICATED OR ADDED TO HIS SIGNATURE ON SIGNING THE BILL. (Sec. 20, Negotiable Instruments Law.) -Concerning the notice to Picornell of the dishonor of the bill, it appears from Exhibit C, which is the protest for the non-payment thereof, that a copy of such protest was sent by mail in good season addressed to Bartolome Picornell, the presumption, now conclusive, that the latter received it (secs. 105, 106, Negotiable Instruments Law), not having been rebutted, or at least, contradicted. Upon the non-payment of the bill by the drawee-acceptor, the bank had the right of recourse, which it exercised, against the drawer. (Sec. 84, Negotiable Instruments Law.) -The drawee, the Hyndman, Tavera & Ventura company, or its successors, J. Pardo de Tavera, accepted the bill and is primarily liable for the value of the negotiable instrument, while the drawer, Bartolome Picornell, is secondarily liable. However, no question has been raised about this aspect of the responsibility of the defendants.

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NEGO - Quevedo Camille Umali BANCO ATLANTICO V AUDITOR GENERAL G.R. No. L-33549; Fernandez; Jan 31,1978 ~mel~ FACTS SUBJECT: Philippine Embassy check dated Oct 31, 1968 for US$10,109.10 DRAWER: Luis M. Gonzales, its ambassador and by said Virginia Boncan as Finance Officer DRAWEE: Philippine National Bank branch in New York, U.S.A PAYEE: Azucena Pace INDORSEE: Banco Atlantico, a commercial Bank doing business in Madrid -Virginia Boncan, then the Finance Officer of the Philippine Embassy in Madrid, Spain, negotiated with Banco Atlantico a Philippine Embassy check signed by Luis M. Gonzales, its ambassador and by said Virginia Boncan as Finance Officer, dated October 31, 1968 in the sum of US$10,109.10 payable to Azucena Pace and drawn against the PNB branch in New York, U.S.A. -The check was endorsed by Azucena Pace and Virginia Bonca. The petitioner, without clearing the check with the drawn bank in New York, U.S.A., paid the full amount of US$10,109.10 to Virginia Boncan; that on November 2, 1968, Virginia Boncan negotiated by endorsement with the petitioner another embassy check signed by Luis M. Gonzales as ambassador and by her as finance officer in the sum of US$35,000.75 dated November 2, 1968 payable to Virginia Boncan and drawn against the Philippine National Bank branch in New York, U.S.A.; that the petitioner paid the full amount of the check to Virginia Boncan without clearing said check with the drawn bank, that on November 5, 1968, Virginia Boncan negotiated by endorsement with petitioner another embassy check signed by Ambassador Luis M. Gonzales and by Finance Officer Virginia Boncan in the sum of US$90,000.00 dated November 5, 1968 payable to Virginia Boncan and drawn against the Philippine National Bank in New York, U.S.A.; that the petitioner paid the full amount of the aforementioned check of US$90,000.00 to Virginia Boncan without clearing said check with the drawn bank; -Upon presentment for acceptance and payment of the aforementioned checks by Banco Atlantico through its collecting bank in New York, U.S.A. to the drawn bank, the Philippine National Bank branch in U.S.A., said drawee bank dishonored the checks by non-acceptance allegedly on the ground that the drawer had ordered payments to be stopped; that upon receipt of the notice of the dishonor, the collecting bank of the petitioner in New York, U.S.A. sent individual notices of protest with respect to the checks in question to the Philippine Embassy in Madrid, Spain and to Virginia Boncan as endorser payee that Virginia Boncan and the Philippine Embassy in Madrid,

Spain refused to pay the petitioner the amounts of the aforementioned checks. -Petitioner Banco Atlantico filed corresponding money claim with the Auditor General. AUDITOR GENERAL: denied the claim of the petitioner for the amounts of the three checks in question, stating that the Embassy never maintained any checking account with Banco Atlantico at any time in the past. Only the individual staff members of the Embassy, including Miss Virginia Boncan, in their personal and private capacities, maintained accounts with said bank. It also stated that while the aforementioned checks of the Embassy may have appeared valid, payment to Miss Boncan in her capacity as endorser and payee of the checks without clearing them first with the drawee bank is definitely not in accordance with normal or ordinary banking practice, especially so in this case where the drawee bank was a foreign bank, and the amounts involved were quite large. The normal procedure would have been for the Banco Atlantico to clear the three cheeks concerned with the drawee bank before paying Miss Boncan. The lower court have gathered enough proof that Miss Boncan had very special relations with the employees and chiefs of the claimant bank's foreign department. This personal relationship that existed between Miss Boncan and said employees and officers was one thing and ordinary banking transactions were something else. Because of this special relationship, the bank took a risk and sacrificed normal banking procedures by cashing the aforementioned checks without prior clearance from the drawee bank. -Further proof of the special relationship between claimant bank and Miss Boncan was the leniency of the bank towards her when it accepted for deposit to Miss Boncan's dollar account an Embassy check for US$75.00 payable to Mr. Antonio P. Villamor without his indorsement. Such leniency on the part of the bank could even lead to the suspicion that there was collusion between the bank and Miss Boncan A photocopy of this check is enclose for ease of reference. In the particular case of the check for US$90,000.00 we can demonstrate that claimant bank likewise has no ewe at all. Section 61 of the Negotiable instruments Law can only be availed of by holders in due course and Banco Atlantico cannot be considered as one ISSUE WON the Philippine Embassy in Madrid is liable, as drawer of the 3 checks in question HELD: NO Ratio: It is apparent that the said three (3) checks were fraudulently altered by Virginia Boncan as to their amounts and, therefore, wholly inoperative. No right of payment thereof against

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NEGO - Quevedo Camille Umali any party thereto could have been acquired by the petitioner. Reasoning: The petitioner paid the amounts of the three (3) checks in question to Virginia Boncan without previously clearing the said checks with the drawee bank, Philippine National Bank, New York. This is contrary to normal or ordinary banking practice specially so where the drawee bank is a foreign bank and the amounts involved were large. The drawer of the aforementioned checks was not even a client of the petitioner. There is a showing that Virginia Boncan enjoyed special treatment from the employees and chiefs of the petitioner's foreign department. It was probably because of this special relationship that the petitioner, in of the elementary principle that should attend banking transactions, cashed the three (3) checks in question without prior clearances from the drawee bank. -SEC. 52. What constitutes a holder in due course A holder in due course is a holder who has taken the instrument under the following conditions: a. That it is complete and regular on its face; b. That he became the holder of it before it was overdue, and without notice that it has 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 infirmity in the instrument or defect in the title of the person negotiating it. -All four conditions enumerated under this section must concur before a holder can be considered as a holder in due course. The absence or failure to

comply with any of the conditions set forth under this section will make one's title to the instrument defective. -The check for US$90,000.00 was a demand note. When Miss Boncan the payee of this check, negotiated the same by depositing it in her account, at the game time informing the bank in writing (copy of her letter is enclosed for ease of reference) that it be not presented for collection until a later date, Banco Atlantico through its agent teller or cashier should have been put on guard that there was something wrong with the check. The fact that the amount involved was quite big and it was the payee herself who made the request that the same not be presented for collection until a fixed date in the future was proof of a glaring infirmity or defect in the instrument. It loudly proclaims, "Take me at your risk." The interest of the payee was the immediate punishment of the check of which she was the beneficiary and not the deferment of the presentment for collection of the same to the drawee bank. This being the case, Banco Atlantico was not a holder in due course as defined by Sec. 52 of NIL, because it was obvious that it had knowledge of the infirmity or defect of the cheek. The fact that the check was honored by claimant bank was proof not only of their gross negligence but a further manifestation of the special treatment they were according Miss Boncan. Disposition Decision of Auditor General denying claim of petitioner for payment of the three checks is affirmed

McCORNACK V CENTARL STATE BANK 211 N.W. 542, 53 A.L.R. 1297 ~eva~ FACTS DRAWER: Peter McCornack DRAWEE: Central State Bank PAYEE: C.R. Kutsman (fictitious person) -(July 1920) Halverson gained the confidence of McCornack and represented to him that he had a client who wished to borrow money to be secured by mortgage on land, and so McCornack consented to make the loan. Halverson delivered to McCornack a note purporting to be signed by CR Kutsman and secured by a mortgage. McCornack signed a check for $1,005.50 which he gave to Halverson. Halverson indorsed the name Kutsman and his own name on the check and deposited it in his account. The check was paid on presentation to Central State Bank and the amount charged to the account of McCornack. -(1924) It was discovered that the note and the mortgage were forged instruments and no Kutsman in fact existed. Halverson, by like

fraudulent means, obtained other checks from McCornack. McCornack sued to recover, as for a conversion, the amount paid by the bank and charged against its (McCornack) account. Court decided in favor of McCornack. Bank now appeals. -Defenses of drawee bank: 1. check paid to person to whom McCornack intended payment to be made 2. the bank was not guilty of negligence 3. McCornack was negligent in making the check in that he failed to ascertain that the payee was a fictitious person 4. that by accepting without objection the statement of their bank account with the check in question cancelled and charged against it, there was account stated, and the plaintiffs were thereby estopped to claim that the check was improperly paid 5. by failing to notify the bank within 6 months after receiving such statement of the alleged

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NEGO - Quevedo Camille Umali irregularity in the payment of the check, the claim was barred by the statute of limitations 6. McCornacks were guilty of negligence in not sooner notifying the bank of the alleged error in the payment of the check, for the reason that they knew, or should have known, that Halverson was receiving the proceeds of checks turned over to him under similar circumstances, and so received the proceeds of the check in question, thereby causing loss to the bank. ISSUE WON Central State Bank (drawee) is liable. HELD: YES. a. A check payable to the order of a fictitious person with the knowledge of the drawer is payable to bearer. But where the fact that it is payable to a fictitious person is unknown to the drawer, that bank upon which it is drawn, or paying it, is in no different position than where it pays a check payable to a real party upon a forged instrument. McCornack did not know that the payee was fictitious; the check was not, therefore, payable to bearer, and the bank cannot escape liability on that ground. b. Where an impostor represents himself to be another, whether the person whom he so impersonates be a real or fictitious person, and procures a check payable to the order of such person, the bank is protected in paying the check to the impostor, because it made payment to the person to whom the drawer intended it should be made, no matter what name he assumed. But where one represents himself to be the agent of a ficititious person and fraudulently procures the delivery to himself of a check payable to the order of such fictitious person as payee, and secures the payment of the check to himself by indorsing the name of the fictitious payee upon it, in the absence of estoppel or negligence on the part of the drawer, the loss must be borne by the drawee and not by the drawer. c. The bank in paying the check was bound to know at its own risk that the indorsements by which the holder of the check claimed title were genuine. Its liability for payment not in accordance with the direction of the drawer did not depend upon negligence, but upon a violation of its implied contract with its depositor. The question WON the bank was negligent is immaterial upon the

naked and primary question of its liability for having paid a check upon a forged indorsement. Here, the check was paid by the bank without inquiry as to the indorsement of Kutsman. d. McCornack was not negligent. There is no showing that anything had come to his knowledge respecting Halverson to put him upon inquiry as to his honesty. Moreover, McCornack’s failure to ascertain that the payee of his check was a fictitious person did not induce or contribute to the payment of the check by the bank. The drawer of the check, who, through failure to discover the fraud that is being practiced upon him, makes a check payable to the order of a fictitious payee in ignorance of that fact, stands in the same position with reference to the bank upon which it is drawn as where his check is payable to the order of a real person. His negligence in so drawing the check is immaterial unless directly and proximately affects the conduct of the bank in paying the check. e. On Sec.9521 of Code 1924 (Sec.61 of NIL): This provision would seem to be, not for the benefit of the drawee, nor designed to relieve the drawee of the duty to pay out the drawer’s money in accordance with his order, but for the protection of holders of the paper in case the drawee refuses to pay. It provides, not only that the drawer admits the existence of the payee and his capacity to indorse, but that he engages that upon dishonor and the necessary proceedings thereon he will pay the amount to the holder or any subsequent indorser who may be compelled to pay it. There is here no engagement to pay the amount to a drawee who has honored the check. -When the payee is a fictitious person and this is unknown to the drawer the statute does not have the effect to bind the drawer by an indorsement of the name of the payee by one to whom he did not intend payment to be made. -If the drawee demanded a genuine indorsement, as it was its duty to do before honoring the check, since there could be no such thing in the case of a fictitious payee, the check would not have been honored. In such case, an innocent holder, upon taking proper steps, would have been protected by Sec.9521. The purpose of that section was to protect the innocent holder of dishonored papernot the drawee who paid it in violation of duty.

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NEGO - Quevedo Camille Umali LOZANO V MARTINEZ 146 SCRA 323; Yap; Dec. 18, 1986 ~jat~ FACTS -Petitions arose from cases prosecuted under Batas Pambansa Blg.22 (BP 22) or the Bouncing Checks Law. Defendants in these cases moved to quash the informations filed against them on ground that BP 22 is unconstitutional. -Arguments against the constitutionality of BP 22: 1. it offends the constitutional provision on nonimprisonment for debt 2. it impairs freedom of contract 3. it contravenes the equal protection clause 4. it is an undue delegation of legislative and executive powers 5. during its passage, the interim Batasan violated the constitutional provision prohibiting amendments rd to a bill on 3 reading BACKGROUND ON BP 22: BP 22 punishes a. Anyone who makes/draws & issues any check on account or for value, knowing at the time of issue that he does not have sufficient funds in or credit with the drawee bank for the payment of said check, in full, upon presentment, which check is subsequently dishonored by the drawee bank for insufficiency of funds/credit or would have been dishonored for the same reason had not the drawer, w/o any valid reason, ordered the bank to stop payment. b. Anyone who has sufficient funds in or credit with bank when he makes/draws & issues a check but fails to keep sufficient funds or maintain a credit to cover full amount if presented w/in 90 days from date appearing on check resulting to the bank dishonoring the check. Penalty: imprisonment of not less than 30 days nor more than 1 yr or a fine of not less than the amt of the check nor more than double said amount, but it should not exceed P200k or both fine & imprisonment at court’s discretion. Essential element: knowledge of the insufficiency of funds. Prima facie presumption of knowledge: when check is refused by bank due to insufficient funds/credit when presented within 90 days from date of the check. Presumption will not arise if within 5 days from receipt of notice of dishonor, the maker/drawer makes arrangements for payment of check by bank/pays the holder the amount of the check. Prima facie proof of dishonor: introduction as evidence of unpaid and dishonored check with drawee bank’s refusal to pay stamped/written thereon or attached thereto, giving the reason thereof. Purpose of the statute: stop/curb practice of issuing worthless checks due to the injury it causes to the public interests. History of provisions covering bouncing checks: a. Penal Code of Spain Art. 335 penalized act of defrauding another by falsely pretending to possess

any power, influence, qualification, property, credit, agency or business or by means of similar deceit. b. 1926, Phil Legislature amended PC Art. 335 penalizing anyone who: 1) issues a check in payment of a debt or for other valuable consideration knowing at the time of its issuance that he does not have sufficient funds in the bank to cover its amount; 2) maliciously signs check differently from his authentic signature as registered at the bank in order that the latter would dishonor it; 3) issues a postdated check & at the date set for its payment doesn’t have sufficient deposit to cover the same. c. RPC Art. 315, Par. 2(d) punishes anyone who postdates a check or issues a check in payment of an obligation knowing that at the time he had no/insufficient funds in the bank without informing the payee of such circumstances. However, this provision did not cover checks issued to pay pre-existing obligations since the deceit that causes the defrauding must be prior to or simultaneous with the commission of the fraud. In this case, payee already parted with his money/property before the check was issued thus he’s not defrauded by means of a prior or simultaneous deceit. Drawer on the other hand did not derive any material benefit in return for check’s issuance. d. Aiming to cover checks issued to pay pre-existing obligations, RA 4885 amended Art. 315 2(d) by removing the requirement of drawer’s knowledge of insufficiency of funds and by giving the drawer 3 days from receipt of notice of dishonor to deposit the amount necessary to cover the check. Failure to do so would be a prima facie evidence of deceit. But SC ruled in People vs. Sabio that the amended provision still did not cover pre-existing obligations. e. BP 22 was enacted to cover checks issued to pay pre-existing debts, which statistically constituted the greater bulk of dishonored checks. ISSUE WON BP 22 is constitutional HELD: YES. BP 22 is clear and broad enough to cover all kinds of checks whether present or postdated, or whether issued in payment of a pre-existing obligation or given in mutual or simultaneous exchange for something of value. WON it violates the constitutional prohibition on nonimprisonment for debt -NO. Those who assail the statute claim that the felony is consummated only upon the dishonor/non-payment of check. That it is really a bad debt law rather than a bad check law. It punishes the non-payment of the check & not the act of issuing it. It is a veiled device to coerce

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NEGO - Quevedo Camille Umali payment of a debt under the threat of penal sanction. -BP 22 punishes making & issuing a worthless check and not the non-payment of an obligation. It does not intend to coerce a debtor to pay his debt. It’s punished because of its deleterious effects on the public interest. It punishes the act not as an offense against property, but an offense against public order. -Although the legislature cannot penalize a person for non-payment of a debt ex-contractu, it can proscribe certain acts deemed pernicious & inimical to public welfare. It is within the police power of the state (making & issuing of worthless checks is a public nuisance to be abated by the imposition of penal sanctions). Court cannot question its wisdom. It’s sufficient that there be a reasonable nexus between the means & end. A check is a convenient substitute for currency in commercial & financial transactions due to the assurance that it will be paid upon presentation. Central Bank reports show that 1/3 of the entire money supply of the country consists of peso demand deposits (funds against w/c commercial papers like checks are drawn). Considering these facts and that there are approximately 50-80 million pesos worth of bouncing checks per day, we can see that the State has a legitimate purpose in protecting checks. Any practice tending to destroy the confidence in checks should be deterred since it would injure trade & commerce, banking system, the nation’s economy & eventually the welfare of the society & the public interest. It would be mistaken charity of judgment to place this felony alongside a felony committed by an honest man unable to pay his debts. WON BP 22 impairs freedom of contract. -NO. The Constitution only protects the freedom to enter into LAWFUL contracts & not those which

contravene public policy. Besides, a check is not a contract. It’s a commercial instrument used as a substitute for money forming part of the banking system & thus not entirely free from state’s regulatory power. WON BP 22 denies equal protection of the laws or is discriminatory since it penalizes the drawer of the check but not the payee. -NO. It would be absurd to punish the person swindled. No sense in talking about swindled’s indispensable participation in the commission of the crime. Classification per se is valid as long as it is not unreasonable/arbitrary. WON BP 22 constitutes undue/improper delegation of legislative/executive powers since completion of act is dependent on the will of the payee. -NO. What cannot be delegated is the power to legislate, or the power to make laws, which means, as applied to the present case, the power to define the offense sought to be punished and to prescribe the penalty. The power to define the crime and prescribe the penalty therefore has not been in any manner delegated to the payee. Nor is the power to enforce the statute delegated to the offended party. WON BP 22 violates Art. VII Sec. 9(2) of the 1973 Consti w/c prohibits the introduction of the rd amendments to a bill during the 3 reading. -NO. Although there was confusion among Batasan Members regarding this matter, a Special Committee investigated the matter & found that there were actually no amendments introduced during the 3rd reading. Amendment in question was made during the 2nd reading.

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NEGO - Quevedo Camille Umali PEOPLE V NITAFAN G.R. No. 75954; Oct 22, 1992; 215 SCRA 79 ~kooky~ FACTS SUBJECT: memorandum check dated Feb 9, 1985 DRAWER: K.T. Lim alias Mariano Lim DRAWEE: Philipppine Trust Company PAYEE: Fatima Cortez Sasaki -K.T. Lim was charged with violation of BP 22. for the check he issued to Sasaki for P143,000 which was dishonored by drawee for insufficiency of funds. Despite notice of dishonor, Lim did not pay within 5 days. -Failing in his argument that BP 22 is unconstitutional, Lim now argues that the memorandum check he issued is in the nature of a PN, hence, outside the purview of the statute. ISSUE WON a memorandum check is within the coverage of BP 22 HELD: YES -A memorandum check is in the form of an ordinary check, with the word "memorandum", "memo" or "mem" written across its face, signifying that the maker or drawer engages to pay the bona fide holder absolutely, without any condition concerning its presentment. Such a check is an evidence of debt against the drawer, and although may not be intended to be presented, has the same effect as an ordinary check, and if passed to the third person, will be valid

in his hands like any other check. It is still drawn on a bank and should be distinguished from PN. In the business community a PN has less impact and persuadability than a check. -a memorandum check comes within Sec 185 NIL which defines a check as "a bill of exchange drawn on a bank payable on demand." It must therefore fall within the ambit of BP 22 which does not distinguish but merely provides that "[a]ny person who makes or draws and issues any check …” -A memorandum check, upon presentment, is generally accepted by the bank. It does not matter for whatever purpose it was issued, for the mere act of issuing a worthless check is malum prohibitum. -a memorandum check may carry with it the understanding that it is not to be presented at the bank but will be redeemed by the maker when the loan falls due. However, with BP 22, this may no longer prevail to exempt it from penal sanction imposed by the law. To require that the agreement surrounding the issuance of check be first looked into and thereafter exempt such issuance from the punitive provision of BP 22 on the basis of such agreement or understanding would frustrate the very purpose for which the law was enacted --to stem the proliferation of unfunded checks. Disposition Petition granted. RTC ordered to proceed.

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NEGO - Quevedo Camille Umali WONG V COURT OF APPEALS, People 351 SCRA 100; Quisumbing; Feb 2, 2001 ~maia~ FACTS -Wong was an agent of Limtong Press. Inc. (LPI), a manufacturer of calendars. LPI would print sample calendars, then give them to agents to present to customers. The agents would get the purchase orders of customers and forward them to LPI. After printing the calendars, LPI would ship the calendars directly to the customers. Thereafter, the agents would come around to collect the payments. Wong, however, had a history of unremitted collections, thus his customers were required to issue postdated checks before LPI would accept their purchase orders. -In December 1985, Wong issued 6 postdated checks totaling P18,025.00. These checks were initially intended to guarantee the calendar orders of customers who failed to issue post-dated checks. However, LPI refused to accept the checks as guarantees. Instead, the parties agreed to apply the checks to the payment of Wong’s unremitted collections for 1984 amounting to P18,077.07. LPI waived the P52.07 difference. -Before the maturity of the checks, Wong told LPI not to deposit the checks and promised to replace them within 30 days. However, Wong reneged on his promise. On June 5, 1986, LPI deposited the checks with RCBC. The checks were returned for the reason “account closed.” -LPI through counsel notified Wong of the dishonor. Wong failed to make arrangements for payment within 5 banking days. Thus, Wong was charged with violation of BP 22 (bouncing checks law) -According to Wong, he issued the checks not as payment for any obligation, but to guarantee the orders of his customers. Although these customers had already paid their respective orders, Wong claimed LPI did not return the said checks to him. -RTC: guilty. CA: guilty ISSUE WON Wong should be convicted considering that the checks were issued as guaranty and the accounts that said checks supposedly guaranteed have already been paid by the customers HELD: YES -Wong contends that LPI is not a "holder for value" considering that the checks were deposited by LPI after the customers already paid their orders. Instead of depositing the checks, LPI should have returned the checks to him. -the lowers courts found that although initially intended to be used as guarantee for the purchase orders of customers, the checks were eventually used to settle the remaining obligations of Wong with LPI. Besides, in Llamado v. Court of Appeals, it was held that “[t]o determine the reason for which checks are issued, or the terms and conditions for their issuance,

will greatly erode the faith the public reposes in the stability and commercial value of checks as currency substitutes, and bring about havoc in trade and in banking communities. So what the law punishes is the issuance of a bouncing check and not the purpose for which it was issued nor the terms and conditions relating to its issuance. The mere act of issuing a worthless check is malum prohibitum.” -2 ways of violating BP 22: (1) by making or drawing and issuing a check to apply on account or for value knowing at the time of issue that the check is not sufficiently funded; and (2) by having sufficient funds in or credit with the drawee bank at the time of issue but failing to keep sufficient funds therein or credit with said bank to cover the full amount of the check when presented to the drawee bank within a period of ninety (90) days. -The elements of BP 22 under the first situation are: (1) The making, drawing and issuance of any check to apply for account or for value; (2) The knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its presentment; and (3) The subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment. -Wong contends that the 1st element does not exist because the checks were not issued to apply for account or for value since the checks were issued as guarantee and the obligations they were supposed to guarantee were already paid. This argument has no legal basis, for what BP 22 punishes is the issuance of a bouncing check and not the purpose for which it was issued nor the terms and conditions relating to its issuance. -As to the 2nd element, BP 22 creates a presumption juris tantum that the 2nd element prima facie exists when the 1st and 3rd elements of the offense are present. Thus, the drawer’s knowledge is presumed from the dishonor. Wong avers that since LPI deposited the checks 157 days after the Dec 30, 1985 maturity date, the presumption of knowledge of lack of 2 funds under Sec2 of BP 22 should not apply to him -However, an essential element of the offense is “knowledge” on the part of the drawer of the insufficiency of his funds in or credit with the bank. Since this involves a state of mind difficult Evidence of knowledge of insufficient funds. -The making, drawing and issuance of a check payment of which is refused by the drawee because of insufficient funds in or credit with such bank, when presented within ninety (90) days from the date of the check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit unless such maker or drawer pays the holder thereof the amount due thereon, or makes arrangements for payment in full by the drawee of such check within five (5) banking days after receiving notice that such check has not been paid by the drawee. 2

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NEGO - Quevedo Camille Umali to establish, the statute itself creates a prima facie presumption Nowhere in said provision does the law require a maker to maintain funds in his bank account for only 90 days. Rather, the clear import of the law is to establish a prima facie presumption of knowledge of such insufficiency of funds under the ff conditions: (1) presentment within 90 days from date of the check, and (2) dishonor of check and failure of maker to make arrangements for payment in full within 5 days after notice -That the check must be deposited within 90 days is simply one of the conditions for the prima facie presumption of knowledge of lack of funds to arise. It is not an element of the offense nor does it discharge Wong from his duty to maintain sufficient funds in the account -Under Section 186 of NIL: “a check must be presented for payment within a reasonable time after its issue or the drawer will be discharged

from liability thereon to the extent of the loss caused by the delay.” By current banking practice, a check becomes stale after more than 6 months or 180 days. LPI deposited the checks 157 days after the date of the check. Hence said checks are not stale. Only the presumption of knowledge of insufficiency of funds was lost, but such knowledge could still be proven by direct or circumstantial evidence. Here, LPI did not deposit the checks because of the reassurance of Wong that he would issue new checks. Upon his failure to do so, LPI was constrained to deposit the said checks. After the checks were dishonored, Wong was duly notified of such fact but failed to make arrangements for full payment within 5 banking days thereof. There is sufficient evidence that Wong had knowledge of the insufficiency of his funds in or credit with the drawee bank at the time of issuance of the checks.

LIM V PEOPLE G.R. No. 143231; Davide; Oct 26, 2001 ~da~ FACTS SUBJECT: Checks DRAWER: ALBERTO LIM DRAWEE: Metrobank PAYEE: ROBERT LU -Sometime in May 1992, ALBERTO issued to private complainant Robert Lu for purpose of rediscounting, sixty-four (64) Metrobank checks, including the 12 checks subject of the informations filed in these cases. Upon respective dates of maturity, each of the 12 checks were deposited by ROBERT at the Roosevelt Branch of the United Coconut Planters Bank, which were all dishonored by the drawee bank for the reason "Account Closed." -ROBERT informed ALBERTO of the dishonor and demanded payment but despite receipt of notice of such dishonor ALBERTO failed pay.ROBERT thru his lawyer sent a demand letter dated 29 December 1992 to ALBERTO. ALBERTO received the demand letter on 9 January 1993. For failure to settle his account within the seven days grace period provided in the demand letter, ALBERTO caused the filing of the 12 informations subject of the instant case. -ALBERTO alleged that sometime in 1989, Sarangani Commercial, Inc. (hereafter Sarangani Inc.) issued to ROBERT seven checks as payment for its obligation to the latter in the amount of P1,600,000. -ALBERTO affixed his signature , as guarantor. When the said seven checks bounced, ALBERTO issued more than three hundred checks,

including the twelve checks which were the subject of the present case, as replacements. -that ROBERT had already received the total amount of P4,021,000 from the proceeds of the replacements checks, which amount is more than the total obligation of Sarangani, Inc. which was accommodated by him. -It is the contention of ALBERTO that with the full payment of the accommodated obligation, the twelve checks subject of the present case have no valuable consideration. -Trial court rendered a decision finding ALBERTO guilty of violation of B.P. Blg. 22 in each of the twelve cases. ALBERTO filed a motion for reconsideration which was denied, Court of Appeals affirmed in toto the decision of the trial court. ISSUE WON ALBERTO is not guilty of violating BP22 (as the subject checks lack valuable consideration) HELD: NO. -Upon issuance of the said checks, it is presumed, in the absence of evidence to the contrary, that the same was issued for valuable consideration. -BP Blg. 22 punishes the issuance of a bouncing check. It is not the non-payment of an obligation which the law punishes, but the act of making and issuing a check that is dishonored upon presentment for payment. The purpose for which it was issued and the terms and conditions relating to its issuance are immaterial. What is primordial is that such issued checks were

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NEGO - Quevedo Camille Umali worthless and the fact of its worthlessness is known to appellant at the time of their issuance, a required element under B.P. Blg. 22. This is because the mere act of issuing a worthless check is malum prohibitum -The law enumerates the elements of B.P. Blg. 22 to be (1) the making, drawing and issuance of any check to apply for account or for value; (2) the knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of the check in full upon its presentment; and (3) the subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment. -The issuance of the twelve checks and its subsequent dishonor were admitted by ALBERTO. His defense rests solely on the payment of the obligation by Sarangani, Inc. including its interests, which was allegedly accommodated by him. ALBERTO insists that as a guarantor, he merely issued the twelve checks to replace the bad checks that were previously issued by Sarangani, Inc., and considering that the total amount of the checks encashed by ROBERT have exceeded the amount of the bad checks including the interest, then the twelve checks already lack valuable consideration. -The seven(7) checks issued by Sarangani, Inc. were all dated and dishonored in September 1989. The twelve (12) checks including the other fifty-two (52) checks were all dated November 1992, hence the same cannot be a replacement of the bad checks which were dishonored as far back as three years ago.Even the corresponding amount of the checks negates said conclusion. The total amount of the seven (7) checks,

representing the obligations of Sarangani, Inc., is only P1,600,000, while the sum total of the twelve (12) checks and the remaining fifty-two checks is P7,455,000. If we add the P7,455,000 to the value of the more than three hundred checks, which ALBERTO alleged to have been issued also in payment of the said obligation then the total amount of all the replacement checks will be P111,476,000. -Moreover, records show that the twelve(12) checks and the other fifty-two (52) checks were issued sometime May 1992 and all postdated 1992, whereas the 330 checks which were submitted to prove the fact of payment were all encashed before the issuance of the said checks. Thus, if full payment was made as early as July 22, 1991, the date of the last check of the 330 checks, why would ALBERTO issue the twelve (12) checks and the fifty-two (52) checks, if not for a consideration other than to answer for an obligation which was already paid. Hence, the 330 checks submitted by the defense did not prove that the twelve checks were not issued for valuable consideration. On the contrary, it supported the version of the prosecution that the checks were issued for rediscounting and not as replacements for the bad checks of Sarangani, Inc., as claimed by ALBERTO. -Further, if indeed it were true as claimed by ALBERTO that the indebtedness covered by the checks sued upon has been paid, the petitioner should have redeemed or taken the checks back in the ordinary course of business. But the same checks remained in the possession of the complainant who asked for the satisfaction of the obligations involved when said checks became due, without the petitioner heeding the demand for him to redeem his checks which bounced.

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NEGO - Quevedo Camille Umali MERIZ V PEOPLE Vitug; 368 SCRA 524 (2001) ~bry_sj~ FACTS SUBJECT: 4 checks DRAWER/ISSUER: Celia Meriz DRAWEE: Pilipinas Bank PAYEE: Amelia SANTOS -Petitioner MERIZ was engaged in the business of manufacturing garments for export using the name and style of "Hi-Marc Needlecraft." During the course of her business undertakings, she obtained a number of loans from Amelia Santos (Santos) and Summit Financing Corporation. Sometime in 1988, petitioner issued in favor of Santos four Pilipinas Bank Checks in the aggregate amount of P188,400.00. Santos deposited the checks with her bank. The checks, however, were later returned, with the notation "Insufficient Funds" stamped on the dorsal portion of each check, by the depositary bank. -Santos, through her counsel, sent a telegram to petitioner, warning her that criminal action will be instituted unless the obligation was paid in cash. MERIZ however was not able to do so due to difficulties encountered in her business. Santos filed a complaint against Meriz, which resulted in the filing of several informations charging her with violation of the Bouncing Checks Law. Trial ensured and Meriz was convicted. -Petitioner Meriz in the instant appeal, would have it that there was an absolute lack of consideration for the subject checks which were issued only as a condition for the grant of loan in her favor and that the requisite element of notice was not complied with. ISSUE WON absolute lack of consideration for the issuance of checks is a valid defense in a prosecution for violation of BP 22 HELD: NO. Ratio The cause or reason for the issuance of the check is inconsequential in determining criminal culpability under BP 22 -The essential elements of the offense penalized under BP 22 are (1) making, drawing & issuance of any check to apply to account or for value; (2) the knowledge of the maker, drawer or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its presentment; and (3) subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer,

without any valid cause, ordered the bank to stop payment." -The Court has since said that a "check issued as an evidence of debt, although not intended for encashment, has the same effect like any other check" and must thus be held to be "within the contemplation of BP 22." Once a check is presented for payment, the drawee bank gives it the usual course whether issued in payment of an obligation or just as a guaranty of an obligation. BP 22 does not appear to concern itself with what might actually be envisioned by the parties, its primordial intention being to instead ensure the stability and commercial value of checks as being virtual substitutes for currency. It is a policy that can easily be eroded if one has yet to determine the reason for which checks are issued, or the terms and conditions for their issuance, before an appropriate application of the legislative enactment can be made. The gravamen of the offense under BP 22 is the act of making or issuing a worthless check or a check that is dishonored upon presentment for payment. The act effectively declares the offense to be one of malum prohibitum. The only valid query then is whether the law has been breached, i.e., by the mere act of issuing a bad check, without so much regard as to the criminal intent of the issuer. -The element of "knowledge" involves a state of mind that obviously would be difficult to establish; hence, the statute itself creates a prima facie presumption of knowledge on the insufficiency of funds or credit coincidental with the attendance of the two other elements. -The prima facie presumption that the drawer has knowledge of the insufficiency of funds or credit at the time of the issuance, or on the presentment for payment, of the check might be rebutted by payment of the value of the check either by the drawer or by the drawee bank within five banking days from notice of the dishonor given to the drawer. The payment could thus be a complete defense that would lie regardless of the strength of the evidence offered by the prosecution. It must be presupposed then that the issuer receives a notice of dishonor and that, within five days from receipt thereof, he would have failed to pay the amount of the check or to make arrangement for its payment. NOTE: Court deleted prison sentence, imposed a fine of P94,200 against Meriz

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NEGO - Quevedo Camille Umali LAGMAN V PEOPLE 371 SCRA 679; Kapunan; Dec 7, 2001 ~kitik~ FACTS persuasive. As held in the case of Que v. People of -This is a petition for review of the CA decision of CA the Philippines, B.P. Blg. 22 “applies even in cases which affirmed the RTC decision finding accusedwhere dishonored checks are issued merely in the petitioner guilty of six counts of violation of BP 22. form of a deposit or guarantee and does not make -Accused Gloria Elena Lagman, purchased from the any distinction as to whether the checks within its private complainant Delia Almarines, various pieces contemplation are issued in payment of an obligation of jewelry worth P700,250.00 from October, 1985 to or merely to guarantee the said obligation.” December, 1985. As guarantee for the payment of -The records of the case belie accused-petitioner’s the jewelries, the accused issued to the private allegation that the checks were merely issued as complainant several checks. First, she issued twenty guarantees. Evidence shows that the six checks nine (29) postdated checks in the total sum of subject of the present appeal were issued by herein P591,916.00. All the checks bounced either for accused-petitioner to private respondent in the sala insufficiency of funds or for the reason that the of Judge Domingo Garcia of the Pasig RTC, Branch account of the accused-drawer had been closed. As 157 in settlement of the 29 cases pending before the replacement for said checks she issued eight said court which arose from the issuance of 29 checks. Of the eight (8) checks, only two became bounced checks. When these six replacement good, more particularly, the April 22, 1991 check and checks also bounced, they became the subject of six the May 2, 1991 check. The other six (6) other criminal cases which were filed before Judge checks were dishonored. The reason for the Trampe. Later on, these six cases were consolidated dishonor of the checks, is: “IF” or insufficiency of with the 29 cases before Judge Garcia. During trial, funds. counsels for herein accused-petitioner and private -Despite demand, the accused failed to make good or respondent were in agreement that these six checks pay for the value of the six (6) checks which had were issued in settlement of some of the pending 29 been dishonored. Accused-petitioner was charged cases. with thirty-five counts for violation of B.P. 22. She -Based on the records, therefore, the six checks were was found guilty for issuing six of the last set of issued in partial settlement of the 29 B.P. Blg. 22 checks issued. cases pending before Judge Garcia. We find nothing -Accused-petitioner claims that the six checks subject of in the records that would show that these six checks the present cases were issued as mere guarantees were issued as mere guarantees. Accused-petitioner in replacement of several bounced checks she had herself acknowledged that these eight (8) postdated previously issued, and private complainant was checks “were issued as replacements of the sufficiently warned that these checks were not to be previous checks” which bounced upon presentment. deposited or encashed. Relying on the case of There is, thus, overwhelming evidence contradicting Magno vs. Court of Appeals, accused-petitioner accused-petitioner’s posture that the six checks maintains that she cannot be held liable because subject of this appeal were mere guarantees. she expressly and repeatedly informed private -The case of Magno v. Court of Appeals relied upon by complainant that she would not be able to maintain accused-petitioner, does not find application to the sufficient funds in or credit with the drawee banks for present case. In Magno, we held that there was no the payment of the checks due to financial violation of the bouncing checks law because there constraints. was evidence that complainant was told by the drawer that he did not have sufficient funds in the ISSUE bank. The drawer, from the very beginning, never hid WON the fact that the subject checks were not intended the fact that he did not have funds with which to put as payments but as mere guarantees of petitioner’s up the warranty deposit and openly intimidated the obligations exempt her from liability same to complainant. Although the ruling in Magno was reiterated in the case of Idos v. Court of HELD: NO Appeals, again, we note that in Idos, petitioner -The act sought to be prevented by BP 22, or the repeatedly notified the complainant of the Bouncing Check’s Law, is the act of making and insufficency of funds. In both cases, the complainant issuing a check with the knowledge that at the time was duly notified by the drawer of the insufficiency of of issue, the drawer does not have sufficient funds in funds. It also serves to emphasize that in Idos, or credit with the bank for payment and the check petitioner’s acquittal was not based on complainant’s was subsequently dishonored upon presentment. knowledge that petitioner did not have sufficient What the law punishes is the issuance of a worthless funds in the bank but on some other grounds. check and not the purpose for which such check was -In the case under consideration, accused-petitioner issued nor the terms or conditions relating to its failed to adduce any evidence to substantiate her issuance. Accused-petitioner’s contention that the claim that private respondent knew that she had checks were merely issued to guarantee payment of difficulty maintaining sufficient funds in or credit with her obligation to private complainant is not the bank.

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NEGO - Quevedo Camille Umali ADOLPH RAMISH, INC. V WOODRUFF 2 Cal. (2d) 190, 28 P. (2d) 360; 1934 ~aida rose~ FACTS SUBJECT: Question on proper indorsement of P/N to Adolph Ramish MAKER: Woodruff PAYEE: Craig INDORSEE: Adolph Ramish, Inc. -Adolph Ramish held the promissory note of Craig for $13,000. Said note matured on Feb 1932. Craig and Woodruff exchanged their own negotiable notes (each for $10,000) dated February 19 and due in 90 days. -Craig indorsed the note from Woodruff but it was uncertain as to whether or not it was for collateral security for Craig’s indebtedness to Adolph Ramish and was thus treated as an issue in the case. -Adolph Ramish sued Woodruff. Woodruff admitted the note’s execution but denied title of Adolph Ramish, saying that the note was delivered for inspection and investigation only. He also alleged that note served as collateral security for the $6,820 balance of the note and that Adolph Ramish was not a holder in due course because it did not take the note by negotiation under proper indorsement and thus was subject to the available defenses. -According to Woodruff, the indorsement by Craig did not amount to a commercial indorsement but was merely a guaranty which does not operate as a transfer cutting off the defenses of the maker. ISSUE

WON the note had been indorsed in accordance with the law (as an ordinary commercial endorsement) HELD: YES -There are two views with regard to this matter: Minority view: A guaranty placed on a bill or note does not constitute a commercial negotiation. The guaranty is considered a separate contract. Majority view: These are the better reasoned arguments and are in accordance with the policy of free circulation of commercial paper as a substitute for money. -A person placing his signature in the instrument, aside from doing so as maker, drawer or acceptor is deemed to be an indorser unless there is a clear indication through the words of being bound in another capacity. -The tendency of the law is to resolve all doubtful cases towards holding the same to be a commercial indorsement in due course. -Commercial instruments take the place of money and requiring every assignee to inquire into circumstances bearing upon the original execution, along with taking cognizance of all the equities between the original parties, would destroy their commercial value. -The evidence is conflicting with regard to Woodruff’s argument that the note was delivered for inspection and investigation purposes, along with an allegation that there was no meeting of the minds and that there was no authorization to deliver the note as collateral security. Disposition Judgment reversed.

WACHIOVA BANK & TRUST CO V CRAFTON 181 N.C. 404, 107 S.E. 316 (1921) ~lora~ FACTS SUBJECT: promissory note MAKER: J.M. Carver PAYEE/INDORSER: J.W. Crafton INDORSEE/HDC: Wachovia Bank and Trust Co. -The defendant, the indorser, denied liability, alleging that the P/N was for an amount won in a gambling transaction hence, void. -Lower court ruled in favor of defendant. Plaintiff appealed. ISSUE WON the indorsee, a HDC can recover from a P/N which was for an amount won in a gambling transaction hence, void. HELD: YES. -Statutes applicable render this and all notes and contracts in like cases void and no action thereon

can be sustained. The principle however, is allowed to prevail only where the action is on the note to enforce its obligations, and does not affect or extend to suits by an innocent indorsee for value and HDC against the indorser on his contract of indorsement. -The contract of indorsement is a substantive contract, separable and independent of the instrument on which it appears, and where it has been made without ratification, and for value, it guarantees to a HDC, among other things that the instrument, at the time of the indorsement, is a valid and subsisting obligation. -The law which renders these contracts void was enacted for the suppression of gambling but it would tend rather to encourage the vice if a successful gambler could procure the value of such a note on his indorsement. Disposition Judgment Reversed.

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NEGO - Quevedo Camille Umali

HOROWITZ V WOLLOWITZ 59 Misc. 520, 110 NY Supp. 972 (1908) ~marge~ FACTS SUBJECT: promissory note prepared by Barnet Cohen on 18 Dec 1906: worded as follows: “Six months and five days date I promise to pay the order of myself five hundred dollars at 16-1/2 Carmine St. Value received.” -Said note was delivered to Jacob Jormack. -At the time of making said note, and prior to its delivery to Horowitz, Louis Wollowitz indorsed it w/ intent to charge himself as first indorser. Thereafter and before maturity, Jormack indorsed the note to Horowitz for value. -Horowitz presented the note for payment. Unpaid, he filed suit in court. -Defendants [C, J, and W] set up the defense that the note was tainted with usury in its inception, and was therefore null and void. ISSUE WON an indorser may raise the defense that note is void for usury HELD: NO.

-It is not necessary to pass upon the question of the availability to the maker of the defense of usury as against HIDCs, because defendants herein were sued in their capacity, not as makers, but as indorsers of the note in question. -Sec116, US law (Sec 66, NIL): Every indorser who indorses w/o qualification warrants to all subsequent holders in due course: xxx (b) that the instrument is, at the time of his indorsement, valid and subsisting.” -Under the language of the statute, as applied by the decisions in Packard v Windholz and Lennon v Grauer, it must be held that in indorsing the note the defendant warranted its validity, and he cannot be heard now to assert that it is void for usury, any more than for forgery or any other cause. -It is an established rule that the obligation of an indorser is a new and independent contract, separate and distinct from that evidenced by the note. Disposition Judgment reversed. New trial ordered.

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NEGO - Quevedo Camille Umali INGALLS V MARSTON 121 Me. 182, 116 Atl. 216 (1922) ~anton~ FACTS PROMISSORS: Herbert L. Marston, Almeda E. Marston INDORSERS: Howard W. Smith and Walter H. Foss, but they signed at the note’s inception, hence the issue whether they are mere indorsers or copromissors. PAYEE: Ingalls -Herbert L. and Almeda E. Marston signed the note on its face. -Howard W. Smith and Walter H. Foss placed their signatures on the back of the note at its inception, and before the delivery to the payee, Ingalls (plaintiff). -The first instalment was not demanded of the makers, Herbert and Almeda (at maturity), and notice of dishonor was not given o Smith and Foss. Plaintiff’s Claim: All four were original promissors, and therefore liable. Defendants’ Comment: Smith and Foss were merely indorsers, and therefore free from liability because of want of demand and notice. ISSUE WON Smith and Foss became original promissors when they signed the instrument on its back. HELD: NO Ratio Nature of liability must be expressly stated in instances where the instrument was signed other than on its face. Reasoning -Before the enactment of the NIL, the law was firmly settled in states by judicial decisions, that one who signed his name on the back of a note at its inception was a joint or joint and several makers with who signed on the face, so far as necessity for demand and notice of non-payment was

concerned. The passage of the NIL abrogated this rule of commercial law. -Sec. 63, NIL: A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be an indorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity. -Smith and Foss placed their signatures, not on the face (as makers), but on the back—meaning “other than makers”—and they did not indicate by any words, appropriate or otherwise, any intention to be bound in some other capacity. -However Ingalls seeks to differentiate between regular and irregular indorsers. According to him, regular endorsers are entitled to have demand made to the maker first, with due notice of dishonour given to him (indorser). Such right is not available to irregular indorsers. This interpretation however would revert the law back to the time before the NIL was enacted. -Sec. 64, NIL: Where a person not otherwise a party to an instrument, place thereon his signature in blank before delivery he is liable as an indorser, in accordance with the following rules: (1) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties.” In the present case the note was made payable to the order of a third person, and therefore this section applies, and these irregular indorsers were made liable to the payee Ingalls and to all other subsequent parties. But their liability is that of “indorsers” as the section unequivocally provides. These necessarily imply the inherent elements of demand and notice of dishonor. Disposition Smith and Foss are not liable as makers, but only as indorsers, which requires prior demand and due notice.

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NEGO - Quevedo Camille Umali WEST RUSTLAND TRUST CO V HOUSTON 104 Vt. 104, 158 Atl. 69, 80 ALR 664 (1932) ~jonas~ FACTS -The note in suit is a promissory note, signed by defendant Buck, an employee of the Buck Lumber Company, as MAKER then INDORSED by defendant Houston. This note is a renewal of another note, also signed by Buck as maker & indorsed by Houston, which was delivered to plaintiff bank as collateral security for the indebtedness of the Buck Lumber Company to it. -Buck testified that before the note was signed, he had a talk with F.L. Jones, treasurer of the plaintiff bank. Jones told him that the bank examiner was expected to visit the bank very soon, & that he wanted a new note, to be held by the bank as collateral, as he thought that the indebtedness of the Buck Lumber Company to the bank was larger than the bank examiner would like. Jones explained that he was afraid not to have some extra collateral to show the examiner, & that the note would be held only until the examiner had examined the books & then returned to either of the defendants. Houston testified that he spoke with Buck about signing the note in suit, & he was told the purpose of the note, after which he signed it. -NOTE: the bank examiner is sent by the commissioner of banking & insurance to oversee & inspect banks in order to protect the public interest. -The receiver of the plaintiff bank (it appears the bank was subsequently placed in receivership) brought an action to recover from the defendants, as makers. The trial was by jury, and at the close of the evidence, a verdict was directed for plaintiff. The defendants excepted to the direction of the verdict & to the judgment thereon. ISSUE/S 1. WON defendants are bound on the note 2. WON the liability of the defendants is primary & absolute

HELD 1. YES Ratio If the note was given to plaintiff bank merely as a semblance of collateral security, the result was to effect a scheme to deceive the bank examiner. If so, it was an illegal transaction, and it is against public policy to permit defendants to rely upon it as a defense. In such circumstances, the defendants are bound as the face of the note discloses. Reasoning Transactions with banks are affected with an unusual public interest. It is of public importance that all dealings with banks be conducted with integrity & honesty. 2. YES Ratio Under the Uniform Act, one who takes a negotiable note as collateral to secure a preexisting debt takes for value, even though no independent consideration is given. An accommodation party cannot claim the benefit of being treated as a surety as against a holder for value, but is liable as if he were financially interested in the transaction. It follows that the liability of the defendants on the note is primary & absolute and that there was no error in the direction of a verdict against them. Reasoning Under the Negotiable Instruments Act, the previous rule to the effect that, if a holder for value knew a party had signed for accommodation only he must be treated as a surety, has been abolished. An accommodation party is now primarily & absolutely liable on the instrument to a holder for value. Sec. 25 provides that “xxx an antecedent or preexisting debt constitutes value xxx” Sec. 27 provides that “xxx where the holder has a lien on the instrument, xxx he is deemed a holder for value to the extent of his lien xxx”. Disposition Judgment affirmed.

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NEGO - Quevedo Camille Umali GOODMAN V GAUL 244 Mass 528, 138 NE 910 (1923) ~monch~ FACTS SUBJECT: Promissory note MAKER: Bennie Bean PAYEE: D. Goodman INDORSERS: Goodman, Gaull -Bean signed the not and handed it to Goodman. The latter then saw Gaull at his place of business and asked him if he will indorse a note for Bennie Bean. Gaull agreed and signed the note. -Goodman instituted the action to recover from Gaull as indorser the amount in the promissory note. ISSUE WON Gaull is liable HELD: NO Ratio An accommodation party is liable to all subsequent parties except to the party whom he accommodated. Reasoning

-The circumstances will show if Gaull was indeed an accommodation party. It appears Bean did not ask for the defendant’s indorsement, or authorized the plaintiff to obtain it, or that defendant’s signature was agreed upon to be affixed for the instrument to become complete. -It is clear from the record that defendant signed in accommodation of the plaintiff. The party for whose accommodation a not is given cannot enforce it against the accommodator. It is a mere gratuity. -The plaintiff asks to be allowed to amend and to proceed on the indorsement as a written guaranty. But the contract itseld fails to show any conract of guaranty. His signature being on the note, he is presumed to be a indorser, unless by some words he indicates his intention to be bound by another capacity. Such is lacking in the case.

CLARK V SELLNER 42 Phil. 384 (1921) ~ice~ FACTS SUBJECT: Promissory Note MAKER: Sellner and two others PAYEE: Clark -Sellner and two others signed a note in favor of Clark. The note reads: “Php.12,000 Manila, July 1, 1914 “Six months after date, for value received….xxx (Sgd.) W.H. Clarke, “John Maye. “By W.H. Clarke, his attorney. (Internal Revenue Stamp) “Geo C. Sellner.” -The note matured but was not paid. Defendant argued that he did not receive or the whole of the amount of the debt; also, that the instrument was not presented to him for payment; finally that he is an accommodation party thus failure to negotiate means lack of liability. ISSUES 1. WON he is liable. 2. WON presentment is necessary. 3. WON he is merely an accommodation party. HELD 1. YES. It is not dependent on whether or not he has received any or part of his debt. So long as he is one of the joint and several debtors which he is, makes him liable. 2. NO. There is no requirement for presentment. 3. NO. By putting his signature to the note, he lent his name not to the creditor, but to those who signed

with him placing himself with respect to the creditor in the same position and with the same liability as the said signers. It should be noted that the phrase “witout receiving value therefor,” as used in Sec. 29 of the aforesaid Act, means “without receiving payment for lending out his name.” If, as in the case, a sume of money was received by virtue of the note, it is immaterial, so far as the creditor is concerned, whether one of the signers has, or has not, received anything for the use of his name. In reality the legal situation of the defendant in this case may properly be regarded as that of a joint surety, rather than that of an accommodation party. The defendant as a joint surety, may, upon the maturity of the note, pay the debt, demand the collateral security and dispose of it to his benefit; but there is no proof whatsoever that this was done. As to the plaintiff, he is the “holder for value” under the phrase of said Sec. 29 for he had paid the money to the signers at the time the note was executed and delivered to him. Who is the “holder” is defined in section 191 of the said law thus: “Holder” means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.” And as such holder, he has the right to demand payment of the debt from the signer of the note, even though he knows that sai signer is merely an accommodation party (Sec. 29 above cited), assuming the subject to be such, which as has been stated, is not the case. Disposition: Judgment reversed.

94

NEGO - Quevedo Camille Umali

MAULINI V SERRANO 28 Phil. 640; Moreland; Dec 16, 1914 ~rean~ FACTS -The action was brought by plaintiff Maulini upon the contract of indorsement alleged to have been made in his favor by defendant Serrano upon a PN. A PN was issued by Padern, Moreno and Gimenez in favor of Serrano for P3K due on Sept. 5 1912. The note was indorsed on the back as follows: "Pay to the order of Don Fernando Maulini, value received. Manila, June 5, 1912. (Sgd.) A. G. Serrano." -CFI: (1) By verbal agreement between the indorser Serrano and the indorsee Maulini, the indorser, in making the indorsement, was acting as agent for the indorsee, as a mere vehicle for the transference of naked title, and that his indorsement was wholly without consideration. (2) It was immaterial whether there was a consideration for the transfer or not, as the indorser, under the evidence offered, was an accommodation indorser. So Maulini appealed. ISSUES 1 WON CFI erred in ruling that the indorsement was without consideration, 2 WON CFI erred in holding that Serrano was an accommodation indorser. HELD 1 YES -It seems that Serrano was a broker doing business in Manila and that part of his business consisted in looking up and ascertaining persons who had money to loan as well as those who desired to borrow money and, acting as a mediary, negotiate a loan between the two. According to his custom in transactions of this kind, and the arrangement made in this particular case, Serrano obtained compensation for his services of the borrower, the lender paying nothing. Sometimes this was a certain % of the sum loaned; at other times it was a part of the interest which the borrower was to pay, the latter paying 1% per mo.for use of the money, the lender taking 1% and the broker 1/2%. According to the method usually followed in these transactions, and the procedure in this particular case, the broker Serrano delivered the money personally to the borrower, took the note in his own name and immediately transferred it by indorsement to the lender. In this case, this was done at the special request of the indorsee Maulini and simply as a favor to him, Maulini stating to Serrano that he did not wish his name to appear on the books of the borrowing company as a lender of money and that he desired that the broker take the note in his own name, immediately transferring to him title thereto by indorsement. This was done, the note being at once transferred to the lender. -There never was a moment when Serrano was the real owner of the note. It was always the note of the

indorsee Maulini, he having furnished the money which was the consideration for the note directly to the maker and being the only person who had the slightest interest therein, Serrano, the broker, acting solely as an agent, a vehicle by which the naked title to the note passed from the borrower to the lender. The only payment that the broker received was for his services in negotiating the loan. He was paid absolutely nothing for becoming responsible as an indorser on the paper, nor did the indorsee lose, pay or forego anything, or alter his position thereby. 2. YES. Defendant Serrano was not an accommodation indorser. Ratio Where an indorsement is made as a favor to the indorsee, who requests it, not to secure payment, but to relieve himself from a distasteful situation, and where the only consideration for such indorsement passes from the indorser to the indorsee, the situation does not present one creating an accommodation indorsement, nor one where there is a consideration sufficient to sustain an action on the indorsement. Reasoning -Sec. 29 of NIL defines an accommodation party as "one who has signed the instrument as maker, drawer, acceptor, or indorser, w/o receiving value, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew the same to be only an accommodation party." -CFI misunderstood this definition. The accommodation to which reference is made in Sec29 is not one to the person who takes the note i.e., the payee or indorsee, but one to the maker or indorser of the note. It is true that in this case it was an accommodation to the plaintiff, in a popular sense, to have the defendant indorse the note; but it was not the accommodation described in the law, but, rather, a mere favor to him and one which in no way bound Serrano. In cases of accommodation indorsement, the indorser makes the indorsement for the accommodation of the maker. Such an indorsement is generally for the purpose of better securing the payment of the note – i.e., he lends his name to the maker, not to the holder. -In other words: An accommodation note is one to which the accommodation party has put his name, without consideration, for the purpose of accommodating some other party who is to use it and is expected to pay it. The credit given to the accommodation party is sufficient consideration to bind the accommodation maker. Disposition Judgment reversed and complaint dismissed.

95

NEGO - Quevedo Camille Umali

PHIL. NAT’L BANK V MAZA Malcolm; 48 Phil. 207 (1925) ~mel~ FACTS SUBJECT: five promissory notes of ten thousand pesos each MAKER: Ramon Maza and Francisco Mecenas PAYEE: PNB -The notes were not taken up by Maza and Mecenas at maturity. To recover the amounts on the face of the notes with interest, action was begun by PNB against Maza and Mecenas in CFI Iloilo. -Defendants’ defense was that a.) the notes were went in blank to them by Enrique Echaus with the request that they sign them so that he, Echaus might negotiate them with PNB in case of need; b.) defendants have not negotiated the notes with the bank, nor have they received the value thereof, or delivered them to the bank in payment of any pre-existing debt c.) it was Echaus who negotiated the notes with the bank and who is accordingly the real party in interest and the party liable for the payment of the notes. -Trial judge rendered judgment in favor of plaintiff and against defendants jointly and severally ISSUE WON The defendants are liable to pay the amount on the promissory note (considering that they are accommodation parties)

HELD: YES. Their liability on the instruments is primary and unconditional. Echaus is merely secondarily liable. -The most plausible and reasonable stand for the defendant sis that they are accommodation parties. But as accommodation parties, the defendants having signed the instruments without receiving value therefore and for the purpose of lending their names to some other person, are still liable on the instruments. The law now is that the accommodation party can claim no benefit as such, but he is liable according to the face of his undertaking the same as if he were himself financially interested in the transaction. -Even if defendants never received the value of the notes, even assuming that it is fundamental that an instrument given without consideration does not create any obligation in favor of the payee, however, to fasten liability upon an accommodation maker, it is not necessary that any consideration should move to him. The consideration which supports the promise of the accommodation maker is that parted with by the person taking the note and received by the person accommodated. *When accommodation parties make payment to the holder of the notes, they have a right to sue the accommodated party for reimbursement, since the relation between them in effect is that principal and sureties, the accommodation parties being the sureties. Disposition Judgment affirmed

96

NEGO - Quevedo Camille Umali ACUÑA V VELOSO 50 Phil 241; Street; 1927 ~javi~ FACTS -Xavier is an agent working in Manila of Veloso. Veloso has certain properties in Manila but is based in Cebu. Xavier on his own, is in the practice of trading real estate as far as his credit allowed. Xavier wanted to purchase a property in Legarda for which he lacked P25000 for partial purchase. He asked assistance from Veloso. They approached Gonzalez and Gonzalez agreed to lend the money on two conditions: 1)Xavier and Veloso execute a joint and several note in the amount lent by Gonzalez; 2) that Xavier (only) purchases ½ interest which Gonzalez had in a mortgage credit on a property in Pangasinan. -Acuna sued Veloso and Xavier for the amount in the note and interests. TC gave judgment jointly and severally against the defendants. TC having found that Veloso was a mere accommodation maker as regards Xavier, gave judgment over in favor of Veloso against Xavier for whatever the former should pay upon the judgment, and lastly ordered that Veloso be subrogated to the rights of the plaintiff Acuna in a mortgage given by Xavier to secure the debt. -after execution of note, it was found that the Legarda property was already encumbered with a mortgage to another bank. Thus to secure himself further, Gonzalez asked Xavier to execute a second mortgage to him upon the Legarda property. The encumbrance on the Legarda property was now 25000 plus 22,070 (1/2 interest in the Pangasinan property) *Acuna is a transferee of the note executed by Xavier and Veloso. But he is said to be a holder only and not a holder in due course for although he purchased the note for value, he purchased the note 2 years after it fell due. (the court discussed the case by putting Gonzalez in the shoes of Acuna.

ISSUE WON Veloso is jointly and severably liable with Xavier HELD: YES -In this case the accommodating party and the accommodated party unite in making a joint and several note to a person who advances the face value of the note to one of its makers at the very time of its creation. The consideration for the note, as regards both makers, was the money which the payee advanced to Xavier; and it cannot be said that the note was lacking in consideration as to Veloso because he himself received non of this money. Value was given for the note, and this was enough. In equity as between Veloso and Xavier, the former is entitled to all the rights of surety, and Xavier is the real debtor; but as to the creditor, both Veloso and Xavier are mere joint and several makers. *however the Court noted that the second mortgage was already under foreclosure. Thus it held that if the amount received for the foreclosure of such property is enough to cover the indebtedness of Xavier and Veloso, Gonzales would thus be fully paid and that would end the matter. *issue of Veloso’s subrogation (Veloso on appeal raised the issue of his right to be subrogated to the rights of Gonzalez in case amount after foreclosure of Legarda property was not enough) -“ Veloso's right of subrogation in case enough is not realized to pay off the whole, must be understood to extend to such proportion of the proceeds of the contemplated foreclosure sale of the mortgaged property on Legarda Street as the amount of the note, and interest, bears to the entire secured indebtedness.” *if hindi nyo maintindihan and feeling nyo kulang sa details, feel free to approach me. Mejo magulo talaga yung case and may stuff na hindi nilagay si Campos.

97

NEGO - Quevedo Camille Umali ANG TIONG V TING L-26767, February 22, 1968; 22 SCRA 713 ~brian b~ FACTS SUBJECT: PBCom check for P4k, payable to “cash or bearer” DRAWER: Lorenzo Ting INDORSER: Felipe Ang (indorsement in blank) BEARER: Ang Tiong, presented check to drawee bank. When the check was dishonored, he made written demands to Lorenzo and Felipe. Unheeded, he filed collection suit in Manila MTC. -MTC ruled in his favor. CFI affirmed. Case was elevated to CA, but the latter certified the same to SC since it involves pure questions of law. ISSUE WON Felipe is liable HELD: YES -A check is a negotiable instrument governed by NIL (Secs. 1 and 185).

TF, appellant’s reliance on Art. 2071, CC is irrelevant -A person placing his signature upon an instrument otherwise than as a maker, drawer or acceptor is a general indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity (Sec. 63, NIL) -Even assuming that appellant is just an accommodation party, he is still liable to HDC even if the latter, at the time of taking the instrument, knew him to be only an accommodation party (Sec. 29) -Again assuming that Art. 2071, CC applies (being an accommodation indorser, he may obtain security from the maker to protect himself against the danger of insolvency of the latter,) said remedy is between accommodation indorser and accommodated party only and cannot diminish nor defeat the rights of a holder for value. Disposition Judgment affirmed.

SADAYA V SEVILLA L-17845, April 27, 1967; 19 SCRA 924 ~mini~ FACTS SUBJECT: promissory note for P15k, with ineterest at 6% per annum, payable on demand MAKERS: Sevilla, Varona and Sadaya, jointly and severally PAYEE: BPI INDORSEE: C.I.T. Corp, a holder for value in due course -Sevilla and Sadaya signed as co-makers as a favor to Varona. The proceeds of the note, P15k, was received by Varona alone. As of June 15, 1950, the outstanding balance was at P4,850. No payment was made after that date. -The bank collected the balance plus interest from Sadaya. Varona didn’t reimburse him. -Sevilla died. Sadaya filed a creditor’s claim against his estate for the sum Sadaya paid on the note. The administrator resisted the claim saying that the deceased Sevilla did not receive any amount as consideration for the promissory note, and that he signed it only as surety for Varona. ISSUE WON Sadaya can demand reimbursement for the amount he paid on the note from his coaccomodation maker, Sevilla HELD: NO -The court goes to the Civil Code for this case, because nothing extant in the Negotiable

Instruments Law defines the right of one accommodation maker to seek reimbursement from another. -Sevilla and Sadaya are, in themselves, coguarantors of Varona, so their case is covered by Art. 2073: “When there are two or more guarantors of the same debt, the one among them who has paid may demand of each of the others the share which is proportionally owing from him. If any of the guarantors should be insolvent, the share shall be borne by the others, including the payer, in the same proportion. The provisions of this article shall not be applicable unless the payment has been made in virtue of a judicial demand or unless the principal debtor is insolvent.” -Based on that provision, a joint and several accommodation maker who pays on a promissory note may directly demand reimbursement from his co-accommodation maker without first directing his action against the principal debtor provided that (a) he made the payment by virtue of a judicial demand or (b) the principal debtor is insolvent. -In this case, Sadaya’s payment to the bank was made voluntarily and w/out any judicial demand, and there is no evidence showing Varona is insolvent. Disposition CA judgment affirmed.

98

NEGO - Quevedo Camille Umali PRUDENCIO V CA L-34339 July 1, 1986; 143 SCRA 7 ~ricky~ FACTS SUBJECT: Promissory note (PN) for P10,000 payable to PNB secured by a real estate mortgage on the property of the Prudencios. Concepcion & Tamayo Construction Company (Company) had a pending contract with the Bureau of Public Works for the construction of the municipal building of Puerto Princesa, Palawan. As the Company needed funds for the construction, Toribio, a relative of the Prudencios and the attorney-in-fact of the Company, prevailed upon the Prudencios to mortgage their property to secure the loan of P10,000 being negotiated with PNB. They were finally persuaded as Toribio also signed on the day of the signing of the PN a Deed of Assignment (DA) assigning all payments from the Bureau to the Company in favor of PNB. MAKER: Jose Toribio as attorney-in-fact of the Company and the Spouses Prudencio as accommodation parties. PAYEE: PNB -Unknown to the Prudencios and contrary to the DA, the Bureau, with the approval of PNB, made 3 payments totaling P11,234.40 directly to the Company for labor and materials. Another payment for P5,000 was, however, denied by PNB as the loan was already overdue. The Company abandoned the work and subsequently, its life as a partnership expired. The Bureau rescinded the contract and assumed the work. The Prudencios wrote PNB requesting the cancellation of the mortgage since the conditions of the contract were changed without their knowledge when PNB allowed payment to the Company instead of on account of the loan. PNB refused. The trial court ruled for PNB and ordered the Prudencios to pay jointly and severally with the owners of the Company, Concepcion and Tamayo. The CA affirmed. ISSUES 1. WON the CA erred in holding the Prudencios as solidary co-debtors instead of sureties. 2. WON the CA erred in not holding that the Prudencios were released from their obligation when PNB, without their knowledge and consent, changed the tenor and condition of the assignment of payments made by the principal debtor and released to such principal debtor payments from the Bureau which were more than enough to wipe out the indebtedness to the PNB.

HELD 1. NO. Ratio In lending his name to the accommodated party, the accommodation party is in effect a surety. However, unlike a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value such that even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as a holder for value is concerned, he is a solidary co-debtor. 2. YES. Ratio Between the immediate parties to a negotiable instrument – the parties between whom there is privity – the consideration may be inquired into; and as to them the only superiority of a bill or note over other unsealed evidence of debt is that it prima facie imports a consideration. Reasoning Although as a general rule, a payee may be considered a holder in due course, in this case, such a rule cannot apply to PNB. Not only was PNB an immediate party or in privy to the PN, that is, it had dealt directly with the Prudencios knowing fully well that the latter only signed as accommodation makers but more important, it was the DA executed by the Company in favor of PNB which principally moved the Prudencios to sign the PN also in favor of PNB. Under the terms of the DA, it is clear that there are no further conditions which could possibly alter the agreement without the consent of the Prudencios. Yet, PNB approved the Bureau’s release of 3 payments directly to the Company in violation of the DA and without notice to the Prudencios who stood to lose their property once the PN falls due without it having been paid because PNB, in effect, waived payment of the first three releases. PNB cannot be regarded as having acted in good faith which is also one of the requisites of a holder in due course. Thus, the Prudencios can validly set up their personal defense of release from the real estate mortgage against PNB. Disposition Petition is GRANTED. Decision of the CA reversed.

99

NEGO - Quevedo Camille Umali AUSTIN, NICHOLS & CO V GROSS 98 Conn. 782, 120 Atl. 596 (1923) ~joey~ FACTS SUBJECT: check in payment for goods by State Street Grocery DRAWER: (?) State Street Grocery/ Gross, principal stockholder DRAWEE: Pallotti, Andretta & Co., Bankers PAYEE: Austin, Nichols & Co. Inc. -The check had the following tenor: “Pay to the order of Austin, Nichols & Co., Inc., $334 86/100, three hundred thirty-four 86/100 dollars. M. Gross.” “State Street Grocery Co. Inc.” -The check was duly presented for payment and has not been paid. At this time, plaintiff had no account with Gross personally. -Plaintiff sued Gross, not State Street Grocery. -Parol evidence, offered by Gross for the purpose of showing that the check sued on was the check of the State Street Grocery Co., was excluded. Judgment against Gross. ISSUE WON parol evidence is admissible to prove that the signature “M. Gross” was not an individual signature but was the signature of State Street Grocery Co. Inc. HELD: YES -The decision must be based upon the terms of Sec. 20 of the Negotiable Instruments Law. This section covers at least five classes of cases. The instant case falls under the fifth class: “Where the negotiable instrument contains words indicating that

one has signed for or on behalf of a principal, or in a representative capacity, he is not liable if he was duly authorized.” -Whether defendant Gross was authorized to sign or not, and whether the check contains words indicating that he signed for and in behalf of a principal or in a representative capacity, might be proved by evidence outside the check for the purpose of carrying out the intention of the parties and establishing just what the contract was, not to vary it, but to ascertain it. -We do not understand how the fact of authorization could be proved in any case where it was not established by the instrument except by extraneous evidence. The body of the check does not contain any reference to the State Street Grocery as the drawer of the check. But this section of the statute does not say that the words indicating the relation in which Gross signed the check must appear in the body of the check. -If words appear on any part of the check indicating that Gross signed in behalf of the State Street Grocery, that will be sufficient, whether the words appear at the head of the check or on its margin. All that is necessary between the original parties is that these words should be such as to reasonably apprise or put on notice the payee that it was or might be the check of the company, and not of Gross. By such proof the true contract is revealed, and the intention of the parties effected. Disposition A new trial is in order.

NEW GEORGIA NATL BANK OF ALBANY V J&G LIPPMANN 249 NY 307, 164 NE 108, 80 ALR 1344 (1927) ~chriscaps~ FACTS Plaintiff is owner thru indorsement of promissory note signed J&G Lippmann, LJ Lippmann, Pres. It asks for judgment in the alternative against corporation (maker of note) or against the president personally if he acted w/o authority. ISSUE WON the president should be personally liable HELD: YES -At common law, remedy against agent signing a note w/o authority was not upon note itself, but for breach of implied warranty. -The proviso that the agent or representative shall not be liable on instrument if he was authorized to sign, carries w/ it a fair implication that he shall be liable if not authorized. -Held in a case: a note bearing name of corp in margin, signed by pres and treas in own names w/ addition

of official titles, and discounted by a bank w/o notice dehors the instrument, was in law the individual promise. -The statute doesn’t distinguish between cases where he has indicated his intention unmistakably and where he has done so more obscurely. Liability is imposed upon agent, not in the aid of his intention, for the hypothesis intention to the contrary has been adequately revealed. Liability exists as a duty imposed by law. -If agent signing w/o authority isn’t liable, there might be a failure of justice when note wrongfully issued was in the hands of later holders. No doubt a remedy in tort is available to such holder if agent had misrepresented his authority as to be guilty of fraud. -In proportion as the agent was relieved of liability if he acted w/ authority, there was need to charge him w/ liability if authority was lacking.

100

NEGO - Quevedo Camille Umali PRATT V HOPPER 12 Cal App.(2d) 291, 55 P. 2d 517 (1936) ~’del~ FACTS -Mabel Pratt conveyed a tract of land to Mitchell Mayer. -Mayer then executed a deed of trust to the California Trust Co.(CTC) as trustee and Pratt as beneficiary therein. -Mayer also executed a deed of the property to Hopper and Payne. -Trimble carried on the negotiations for the purchase of the property for the parties. -The trust from Mayer to the CTC secured the payment of a note representing a portion of the purchase price. -Said note was signed by Mayer in his individual capacity and not designating himself as an agent. Neither did he disclose in the note the names of any of the other interested parties in the transaction. -Pratt sued Mayer, Hopper, Payne and Trimble to recover a deficiency on the note. ISSUE WON Mayer is liable on the instrument as agent HELD: NO. -All the exhibits show that Mayer signed in his individual capacity and not as agent for other defendants. The exhibits don’t show either that a trade-name was used or that the parties thereto were partners.

-An undisclosed principal has been held liable except in cases of negotiable instruments and specialties, but the law seems well settled that in the case of negotiable instruments an undisclosed principal could not be charged at any time. -In the case of negotiable instruments, this restriction arises, not by reason of the status of the parties, but by reason of the character of the instrument. When a negotiable instrument is executed by an agent without sufficiently indicating on its face who the principal is, parol evidence cannot be introduced to charge the principal, although the agent executed the instrument as an agent. -This exception to the rule is based upon the reason that each party who takes a negotiable instrument makes his contract with the parties who appear on its face to be bound for its payment; and in suits upon negotiable instruments no evidence to charge any principal thereto unless his name in some way is disclosed on the instrument itself. -The instrument in question here was a negotiable instrument (even if it was secured by a deed of trust as it is negotiable in form). To go beyond the face of the instrument is to nullify Sec. 3099 of the US CC. Disposition Judgment affirmed.

101

NEGO - Quevedo Camille Umali INSULAR DRUG CO V PHIL. NAT’L BANK Malcolm; G.R. No. L-38816 58 Phil. 684 (1933) ~jaja~ FACTS discovery of anomalies, Foerster committed suicide. But -The Insular Drug Co., Inc., is a Philippine corporation there is no evidence showing that the bank knew that with offices in the City of Manila. U.E. Foerster was Foerster was misappropriating the funds of his principal. formerly a salesman of drug company for the The Insular Drug Company claims that it never received Islands of Panay and Negros. Foerster also acted the face value of 132 checks here in the question as a collector for the company. He was instructed to covering a total of P18,285.92. take the checks which came to his hands for the drug company to the Iloilo branch of the Chartered ISSUE Bank of India, Australia and China and deposit the WON the bank is responsible to the drug company for amounts to the credit of the drug company. Instead, the amounts represented by the checks Foerster deposited checks, including those of Juan Llorente, Dolores Salcedo, Estanislao Salcedo, and HELD: YES a fourth party, with the Iloilo branch of the Philippine -The bank could tell by the checks themselves that the National Bank. The checks were in that bank money belonged to the Insular Drug Co., Inc., and placed in the personal account of Foerster. Some of not to Foerster or his wife or his clerk. When the the checks were drawn against the Bank of bank credited those checks to the personal account Philippine National Bank. After the indorsement on of Foerster and permitted Foerster and his wife to the checks was written "Received payment prior make withdrawals without there being made indorsement guaranteed by Philippine National authority from the drug company to do so, the bank bank, Iloilo Branch, Angel Padilla, Manager." The made itself responsible to the drug company for the indorsement on the checks took various forms. In amounts represented by the checks. The bank this connection it should be explained that Carmen could relieve itself from responsibility by pleading E. de Foerster was his stenographer. As a and proving that after the money was withdrawn consequence of the indorsements on checks the from the bank it passed to the drug company which amounts therein stated were subsequently thus suffered no loss, but the bank has not done so. withdrawn by U. E., Foerster and Carmen E. de The bank will have to stand the loss occasioned by Foerster. the negligence of its agents. -Eventually the Manila office of the drug company Disposition Judgment affirmed. investigated the transactions of Foerster. Upon the PBCOM V ARUEGO L-25736, Jan 31, 1981; 102 SCRA 530 ~iNa~ NATURE ISSUES Appeal from an order of trial court denying motion to set 1. WON Aruego is a mere representative aside order of default. (Remember requirements to 2. WON Aruego is a primarily liable set aside default order: failure to answer was due to 3. WON the documents are bills of exchange FAME and that defendant has meritorious defense.) HELD The SC found that failure was due to E; but 1. NO defendant (Aruego) does not have a meritorious -Sec. 20 of NIL says that an agent who does not defense. disclose his principal is not exempt from liability. FACTS Aruego did not disclose that he was signing as a -Involves 22 transactions between Bank and Aruego for representative of PEFC. For failure to disclose his the printing of defendant's periodical. Defendant principal, Aruego is personally liable. had a credit accommodation with Bank. The 2. YES printers would collect the cost of printing from Bank. -Accomodation party = one who signs instrument as The total amount demanded was P35k. maker, drawer, indorser, without receiving value for -The instruments were signed: "Jose Aruego (Acceptor) the purpose of lending his name = surety; therefore, (Sgd.) Jose Aruego" primarily liable. Aruego's defenses: -The defendant who is a lawyer should not have signed 1. he signed in his capacity as President of Philippine as an acceptor/drawee. In doing so, he became Education Foundation (PEFC), publisher of the primarily and personally liable for the drafts. periodical 3. YES 2. he's not a principal obligor, but only an -As long as a commercial paper conforms with the accommodation party definition of a bill of exchange, that paper is 3. the documents are not legally bills of exchange but considered a bill of exchange. The nature of only instruments evidencing indebtedness because acceptance is important only in the determination of payments were made before acceptance the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not.

102

NEGO - Quevedo Camille Umali COLUMBIAN BANKING CO V BOWEN 134 Wis. 218, 114 N.W. 451 (1908) ~chrislao~ FACTS -Farmer's Merchant Bank (drawer) sold $400 draft drawn on National Bank of North America (drawee) payable to Bowen (payee). -Bowen indorsed and forwarded by mail the draft to Trabert, a traveler. The endorsement was made on June 16, 1903. -Trabert indorsed the draft to Columbian Banking Co. Columbian presented the draft to drawee bank for payment. This was refused. Columbian demanded payment from Bowen. ISSUE WON Bowen (as an indorser, hence, secondarily liable) was released from liability on the draft because of period intervening between his indorsement and the presentation to drawee for payment. HELD: NO. Bowen was NOT released from liability. -The only time to be considered here is the time intervening between the last negotiation and the presentment (meaning between time when Trabert negotiated it to Columbia and the time when Columbia presented the said draft to drawee bank for payment, NOT the time when Bowen let go of the draft) -Bowen unqualifiedly indorsed the draft and put it in circulation by sending it to Trabert at a distant

part of the country and probably knowing that Trabert was travelling to San Francisco where he would negotiate the paper. At any rate, the important thing is that after Trabert negotiated the draft, said draft was immediately presented for payment. *Note that this case involves a draft which is a bill of exchange. In the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. As to what constitutes reasonable time is a question of fact. In the case at bar, the court is satisfied that the draft was presented for payment within a reasonable time. Campos Notes: Under Sec. 71 (on demand nego instruments), the liability of the drawer and indorsers (emphasis by me), of a demand bill can be preserved indefinitely, provided presentment is made WITHIN A REASONABLE TIME FOR LAST NEGOTATION. But take note, under Sec. 53, where an instrument payable on demand is negotiated in an unreasonable length of time after issue, the holder is NOT a HDC. THUS (as a way of reconciling the two), although a reasonable time may not have elapsed between the last negotiation and presentment for payment of a demand bill (and so the secondary parties remain liable), the holder who takes the instrument after the lapse of a reasonable time from issue, will be subject to personal defenses.

FICK V JONES 185 Wash. 365, 55 P. 2d 334 (1936) ~apple~ FACTS SUBJECT: Check DRAWER: J.W. Jones DRAWEE: People's Bank and Trust Company PAYEE: E.P. Fick -Fick brought an action on the check against Jones -Judgment was rendered in Fick's favor [*it was neither alleged nor proven that the check was ever presented to the drawee for payment: the TC found it had not been presented to drawee but to drawer in 1933 (check dated 1929), who refused to pay it] -Jones appealed on the ground that an action on a check cannot be had against the drawer without allegation and proof of presentment and demand on the drawee ISSUE WON an action on a check can be had against the drawer without presentment and demand on the drawee

HELD: NO. -Fick cited a number of cases to support his contention that failure to present a check to the drawee does not release the drawer unless he sustains loss or injury in consequence of such failure -However, these cases go only to the extent of holding that the debt, which the check was designed to pay, is charged only to the extent that the drawer has sustained loss by the failure or negligent delay of the payee to present the check to the drawee for payment -Issue of loss or injury to drawer arises only when he claims the debt is discharged by reason of negligence of payee in presenting the check for payment--this is not the case -Such cases do not encroach upon the rule that presentment, demand and notice of dishonor are essential prerequisites to an action against the drawer on a check Disposition Judgment reversed, case remanded, with direction to dismiss.

103

NEGO - Quevedo Camille Umali

GORDON V LEVINE Morton; 194 Mass. 418, 80 NE 505; (1907) ~rach~ FACTS HELD: NO SUBJECT: Check dated December 30, 1905, Saturday -Where the drawer, the drawee and the payee of a DRAWER: Max Levine, defendant check are all in the same city or town, the check should DRAWEE: Provident Securities & Banking Company be presented for payment before the close of banking PAYEE: Samuel Gordon, plaintiff hours on the day after its delivery, and its circulation -Gordon’s version: Levine asked him not to present the from hand to hand by indorsement does not extend the check for a couple of days; still, he presented it on time for its presentment. If it is presented and paid Monday morning and was told there were no funds. afterwards the drawer suffers no harm. But if not Gordon then passed the check to one Saievitz in presented within the time thus fixed, and there is a loss payment of a bill. On Tues, Saievitz indorsed it to one it falls not on him but on the holder. Rootstein who deposited it on Thurs, in the Faneuil Hall -The general rule is that a check must be presented for National Bank, Boston, for collection. On Friday, that payment within a reasonable time after it is issued. bank's messenger then went to the bank on which the If it is not so presented and the drawer sustains a check was drawn, the Provident Securities & Banking loss by reason of the failure of the drawee, he will Company, and found its doors closed. Hence, with this be discharged from liability to the extent of such non-payment, Levine should still be liable. loss, continuing liable otherwise. This results from -Levine’s version: When the check was drawn, he had the nature of the instrument which though defined sufficient funds on deposit at the bank to meet it, and in the negotiable instruments act as 'a bill of continued to maintain such account. The check should exchange drawn on a bank payable on demand' is have been presented for payment within a reasonable intended for immediate use and not to circulate as a time -the check in suit should have been presented promissory note, and it consequently would be before the close of banking hours on Mon, Jan 1. unjust to subject the drawer to the loss if any -The court refused to instruct the jury that the transfer to resulting from failure to present it for payment within successive holders would not extend the time, or that a a reasonable time. presentment on Friday was not within a reasonable -'In determining what is a 'reasonable time' or an time. Defendant seeks exceptions from this ruling. 'unreasonable time' regard is to be had to the nature of the instrument, the usage of trade or business, if any, with respect to such instruments and the facts of the ISSUE particular case.' WON there was proper diligence in presentment Disposition Exceptions sustained. MORRISON V McCARTNEY 30 Mo. 183 ~cHa~ FACTS before suit, brought, and within a reasonable time, SUBJECT: check delivered and transferred on demand, protest, and notice were duly given Oct.2, 1957 but was presented only on January 1958 HELD: YES DRAWER: McCartney -The drawer is treated as in some sort of principal DRAWEE: E.W. Clark & Brothers (C&B) debtor, and he is not discharged by any laches of PAYEE: Bohn & Co. the holder in not making due presentment thereof, SUBSEQUENT INDORSEMENTS: Bohn & Co. to or in not giving him notice of the dishonor, unless Morrison he has suffered some loss or injury thereby, and -Check was not presented Oct.3 because C&B was then only pro tanto. closed or stopped payment. On Oct.6, McCartney -The drawer is the principal debtor. The check is the who previously commenced suits by attachment acknowledgement of a certain sum due. It is an compromised the suits, settled with the C&B then absolute appropriation of so much money in the withdrew his deposits with C&B. Morrison only hands of his banker to the holder if the check, and presented check January 1958, payment refused, there it ought to remain till called for; and unless the duly protested, notice given to McCartney. drawer actually suffers by the delay, as by the intermediate failure of his banker, he has no reason ISSUE to complain of delay not unreasonably protracted. If WON Morrison was entitled to recover, notwithstanding the holder does so unreasonably delay, he their failure to present the check on the day after it assumes the risk of the drawee’s failure, and he was endorsed to them, upon showing that the may, under circumstances, be deemed to have drawer sustained no injury by the delay, and that made the check his own to the discharge of the drawer.

104

NEGO - Quevedo Camille Umali

PHIL. NAT’L BANK V SEETO Labrador; 91 Phil. 756 (1952) ~jojo~ FACTS On March 13, 1948, Benito Seeto called at the Surigao Branch of PNB, and presented a check in the amount of P5,000, payable to cash or bearer, and drawn by one Gan Yek Kiao against the Cebu branch of the Philippine Bank of Communications (PBC). After consultation with the employees of the branch, Seeto made a general and unqualified indorsement of the check, and PNB's agency accepted it and paid Seeto the amount of P5,000 therefor. The check was mailed to PNB's Cebu branch on March 20, 1948, and was presented to PBC for payment on April 9, 1948, but the check was dishonored for "insufficient funds." So the check was returned to PNB's Surigao agency, and upon receipt thereof by it on April 14, 1948, said branch sent two letters to Seeto demanding immediate refund of the value of the check, to Seeto answered asking that PNB's contemplated suit be deferred while he was making inquiries about the reasons for the dishonor of the check. Thereafter, Seeto refused to make the refund demanded, claiming that at the time of the negotiation of the check the drawer had sufficient funds in the drawee bank PBC, and that had PNB's Surigao agency not delayed to forward the check until the drawer's funds were exhausted, the same would have been paid. ISSUE WON indorsee Seetois demanded by PNB

liable

for

the

refund

HELD:NO. -Section 84 of the Negotiable Instrument Law is applicable, but its application is subject to the condition imposed by Section 186, to the effect that the check must be presented for payment within a reasonable time after its issue. SEC. 84. Liability of person secondarily liable, when instrument dishonored. Subject to the provisions of this Act, when the instrument is dishonored by nonpayment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. SEC. 186. Within what time a check must be presented. A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay.

-The silence of Sec. 186 as to the indorser is due to the fact that his discharge is already expressly covered by the provision of Section 84, the indorser being a person secondarily liable on the instrument. The reason for the difference between the liability of the indorser and that of the drawer in case of dishonor is that the drawer is not probably or necessarily prejudiced thereby, while an indorser is, actually or by legal presumption. -There is no authority sustaining the proposition that an indorser of a check is not discharged from liability for an unreasonable delay in presentation for payment. This is contrary to the essential nature and character of negotiable instruments their negotiability. They are supposed to be passed on with promptness in the ordinary course of business transactions; not to be retained or kept for such time as the holder may want, otherwise the smooth flow of commercial transactions would be hindered. -It is not claimed by PNB that the conclusion of the CA that there was unreasonable delay in the presentation of the check for payment at the drawee bank is erroneous. The fact, admitted by the witnesses for the petitioner, that checks of the drawer issued subsequent to March 13, 1948, drawn against the same bank and cashed at the same Surigao agency, were not dishonored positively shows that the drawer had enough funds when he issued the check in question, and that had it not been for the unreasonable delay in its presentation for payment, the petitioner herein would have been able to receive payment therefor. The check is dated March 10 and was cashed by the petitioner's agency on March 13, 1948. It was not mailed until seven days thereafter, or ten days after issue. No excuse was given for this delay. Assuming that it took one week, or say ten days, or until March 30, for the check to reach Cebu, neither can there be any excuse for not presenting it for payment at the drawee bank until -- The supposed assurances of refund in case of dishonor of the check are precisely the ordinary obligations of an indorser, and these obligations are, under the law, considered discharged by an unreasonable delay in the presentation of the check for payment.

105

NEGO - Quevedo Camille Umali CRYSTAL V CA [Ocang, de Gracia] L-No. 35767, June 18, 1976; 71 SCRA 443 ~kiyo~ FACTS -The SC affirmed a CA decision, holding that Raymundo Crystal’s redemption of the 4 parcels of land in question acquired by Pelagia Ocang, et al, was invalid as the check which Crystal used in paying the redemption price of P11,200 had been either dishonored or had become stale hence, the value of the check was never realized. Crystal filed and MFR. ISSUE WON the conflicting circumstances of the check being dishonored and becoming stale affect the validity of the redemption sale HELD

-For a check to be dishonored upon presentment and to be stale for not being presented at all in time are incompatible developments that have variant legal consequences. If indeed the questioned check was dishonored, the redemption was null and void. If it had only become stale, it becomes imperative that the circumstances that caused its non-presentment be determined, for if it was not due to the fault of the drawer, it would be unfair to deprive him of the rights he had acquired as redemptioner. In this case, there is a strong showing that the check was not dishonored, although it became stale, and that Pelagia Ocang had actually been paid the full value thereof. Disposition SC decision is reconsidered and the case remanded to the TC.

CHAN WAN V TAN KIM Bengzon; 50 O.G. 1554 (1960) ~athe~ FACTS -Tan Kim drew 11 checks payable to “cash or bearer” upon the Equitable Banking Corp payable to Pinong and Muy for some shoes the former had promised (8 of these checks bear two parallel lines between which these words are written: non-negotiable-China Banking Corporation). -The checks were deposited with the CBC and the latter presented to the drawee for collection. However, as the drawee had no funds they were unpaid and returned. -The checks reached the hands of Chan Wan. He presented them to the drawee bank (EBC) but they were all dishonored on the ground that the plaintiff (a) failed to prove he was a holder in due course, and (b) the checks been crossed checks should not have been presented to the drawee

for “payment”, but should have been deposited instead with the bank mentioned in the crossing. HELD -Chan Wan is indeed not a holder in due course since he knew that the checks had already been dishonored. However, it does not follow that simply because he was not a HDC, he could not recover on the checks. His only disadvantage is that the negotiable instrument is subject to defenses as if it were non-negotiable. But since lower court did not mention what defenses Tan Kin prove, the case was remanded to the trial court for determination of whether any defense existed between the original parties.

106

NEGO - Quevedo Camille Umali ASSOCIATED BANK, Cruz V CA, Reyes 208 SCRA 465; Cruz; May 27, 1992 ~giulia~ FACTS Reyes in engaged in the business of RTW garments under the firm name 'Melissa's RTW.' The companies she deals with issue in payment crossed checks payable to Melissa's RTW. When Reyes went to the companies to collect on what she thought were still unpaid accounts, she was informed of the issuance of the crossed checks. Further inquiry revealed that the said checks had been deposited with the Associated Bank (bank) and subsequently paid to Sayson. According too the branch manager, Cruz, Sayson had not been authorized by the private respondent to deposit and encash the said checks. Reyes sued the petitioners to which RTC rendered a decision requiring the petitioners to pay the respondehnt the total value of the checks. Petitioners appealed saying that the the respondent had no cause of action and should have proceeded against the companies instead. CA affirmed the judgment of the RTC. ISSUE WON Reyes had cause of action against the petitioners HELD: YES. There being no evidence that the crossed checks were acutally received by the respondent, she would have a right of action against the drawer companies, which in turn could sue the petitioner as a collecting bank. In a similar situationn, to simplify the proceedings, tha payee of the illegally encashed checks could be allowed to recover directly from the bank responsible for such encashment regardless of whether or not the checks were actually delivered to the payee.

Crossing a check is special where the name of a bank or a business institution is written between 2 parallel lines, which means that the drawee should pay only with the intervention of that company. This means that the drawee should not encash the check but merely accept it for deposit. In State Investment House v IAC the court held that the effects of crossing a check are: (1) that the check may not be encashed but only deposited in the bank; and (2) that the check may be negotiated only once – to one who has account with a bank and; (3) that the act of crossing the chec serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he ahs received the check pursuant to that purpose. Under Sec 72,NIL, presentment of payment, to be sufficient, must be made by the holder or by some person authorized to receive payment on his behalf. Who the holder or authorized person is depends on the instruction stated on the face of the check. The possession of a check on a forged or unauthorized indorsement is wrongful, and when the money is collected on the check, the bank can be held for moneys had and received. The bank was negligent. The petitioners also argued that the respondent's husband was the one who indorsed the check. Assuming that he did, the bank would still be liable because the husband was not authorized to make the indorsements. There is no substantial difference between an actual forging of a name to a check as an endorsement by a person not authorized to make the signature and the affixing of a name to a check as an indorsement by a peson not authorized to indorse it.

107

NEGO - Quevedo Camille Umali GULLAS V PHIL. NAT’L BANK Malcolm; 62 Phil 519 (1935) ~ajang~ FACTS -Atty. Gullas has a current account with PNB. The treasurer of the U.S. for the United Veterans Bureau issued a treasury warrant worth $361 payable to the order of Sabectoria Bacos. Atty. Gullas and Pedro Lopez signed as indorsers of this check. Thereupon, it was cashed by PNB. However, the treasury warrant was dishonored by the Insular Treasury, so PNB sent notices by mail to Gullas which could not be delivered to him at that time because he was in Manila. In the letter, the bank said that in view of the fact that the treasury warrant was dishonored, the bank has applied the outstanding balances of his current accounts (worth P509) to the part payment of the check. -When Atty. Gullas went back to Cebu, he received the notice of dishonor and immediately paid the unpaid balance of the treasury warrant. -However, Atty. Gullas was inconvenieced because of this. Check including one for his insurance was not paid because of lack of funds. Also, periodicals in the vicinity gave prominence to this news, to great mortification of Gullas. ISSUES: 1. WON PNB had right to apply a deposit to debt of the depositor to the bank 2. WON award for damages should be given to Atty. Gullas

HELD 1. YES. -As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of the depositor. In Louisiana however, the rule is denied and it is held that a bank has no such right without an order from or special assent of the depositor. The basis of this doctrine is the theory of confidential contracts arising from irregular deposits e.g. the deposit of money with a banker. The court decided to adopt the general rule as more in harmony with modern banking practice. From this premise that PNB had the right, the next question is whether the bank properly enforced such right. The bank mailed the notice of dishonor, but made use of the money standing in hi saccount without waiting for any action by Gullas. Thus, Gullas didn’t have any notice of the set off when he issued the other checks. It must be noted that Gullas was merely an indorser of the treasury warrant. As to an indorser, the situation is different, notice should actually have been given to him in order that he might protect his interest. 2. YES. -Atty. Gullas should be awarded nominal damages, P250, because of the premature action of the bank against Gullas, he had no means of protection.

STATE BANK OF EAST MOLINE V STANDAERT 335 Ill. App. 519, 82 N.E. 2d 393 ~glaisa~ FACTS SUBJECT: a promissory note MAKERS: Alfons and Lena Standaert INDORSEES: Alois and Anna de Vos -Alfons and Lena made and delivered the PN to Alois and Anna. The note recited it was secured by real estate mortgage. -Alois and Anna sold the note and the mortgage to the plaintiff bank. Note was not paid. Bank sued the makers and the indorsees. -During trial, bank offered the testimony of its tellerbookkeeper who said that it was unswerving custom of the bank to send to the parties, 10 days prior to its maturity date. -Anna maintains she did not receive any notice that the note was dishonored. ISSUE

WON the plaintiff bank gave the indorser notice of dishonor as required under the Negotiable Instruments Law HELD: NO -To charge an indorser with the payment of the note, the plaintiff must establish that the notice of dishonor was addressed and was actually made which may be proven by direct or circumstantial evidence. -In the case, other that the description of the general custom of the bank of notifying indorser, the only evidence tending to prove, even circumstantially, that the notice of dishonor was prepared and mailed to the defendant was the inference from the teller-bookkeeper’s self-serving declaration that she always did her duty and never failed to send out notice of dishonor.

108

NEGO - Quevedo Camille Umali ARTERBURN V WAKEFIELD 309 Ky. 212, 217 S.W. 2nd 203 (1949) ~RPR~ FACTS -Arterburn drew a check for $1,000 payable to JH and HA Wakefield and delivered the same for value. The check was dishonored on presentment. The payee sued. As defense, the maker alleged that since the petition did not aver that notice [of the non-payment of the check when presented at the bank] was given to him, no cause of action was stated. Arterburn argued that a check is a bill of exchange and hence a notice must be given the drawer; otherwise, maker is discharged. In support of this contention the defendant cited two provisions of the law as follows: “356.185. Check defined. A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this chapter applicable to a bill of exchange payable on demand apply to a check. “356.089. Notice of dishonor. Except as otherwise provided in this chapter, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged.” ISSUE WON in an action on a check the petition must aver that the maker of the check was given notice that it was dishonored HELD: NO -The two sections quoted by the defendant, when taken independent of the other provisions, would seem to imply that a failure to give notice of dishonor of a check discharges the maker. However, several provisions of the NIL stand in

pari material and must be construed as to give each a field of operation. While Article 356.185 makes a check a bill of exchange, it does not so unqualifiedly but only “except as herein otherwise provided”. On the other hand, Article 356.186 seem to create a distinction between a check and a bill of exchange in that the maker of the check is released upon the delay of the payee in presenting a check payment but only to the extent of the loss caused by the delay. -Even assuming that he is entitled to notice, the following provision of Article 356.114 would apply: “356.114. When notice to drawer not required. Notice of dishonor is not required to be given to the drawer in either of the following cases: (1) Where the drawer and the drawee are the same person; (2) Where the drawee is a fictitious person or a person not having capacity to contract; (3) Where the drawer is the person to whom the instrument is presented for payment; (4) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (5) Where the drawer has countermanded payment” -Banks would normally not pay or dishonor a check due to insufficiency of funds in the account of the maker or to a stop payment order by the maker. In which case, if the dishonor or non-payment of the check is due to the stop payment order, then it is covered by the fifth condition of Article 356.114. If on the other hand, non-payment is due to lack of funds, he has no right to expect or require the bank to pay his check. This situation is covered by the fourth condition of Article 356.114. Disposition Judgment affirmed.

109

NEGO - Quevedo Camille Umali SIMON V PEOPLE’S BANK & TRUST CO 116 N.J.L. 390, 184 Atl. 793 (1936) ~owen~ FACTS DRAWER: Robert H. Simon PAYEE/INDORSER: Frucht INDORSEE/HDC: Ruth Simon DRAWEE BANK (payable at): People’s Bank & Trust Company of PASSAIC COLLECTING BANK: Hamilton Trust Company of PATERSON The note, which was sent to the Federal Reserve Bank, was presented to PASSAIC for payment but it was dishonored. The notice of dishonor was mailed, addressed to each party liable thereon, in the care of PATERSON. These notices were received by PATERSON the next day. Thereupon, the notices were mailed to Ruth Simon, who failed to collect against the Robert H. Simon and Frucht, brought an action against PASSAIC, its cashier, and PATERSON for negligence District Court: in favor of PASSAIC et al Supreme Court on appeal: reserved judgment ISSUE WON PASSAIC, its cashier, and PATERSON are liable as agents because they did not give sufficient notice HELD: NO Ratio The holder of a note taking it to a bank for collection is familiar with the financial responsibility of the maker and indorsers, and can easily disclose the addresses of those to be charged and request that they be notified in event of default. In the absence of specific instructions, the bank need do no more than promptly report the fact to its principal, and the principal may then notify those to be charged.

PASSAIC as a mere agent of PATERSON for effecting collection (sub-agent) 1. bound to make legal demand on promisor of payment 2. and upon non-payment, to give due notice of the dishonor to PATERSON >>to hold PASSAIC to a greater duty would be most unreasonable because it had not discounted the paper and presumable knew nothing of the indorsers or their residences. If Ruth Simon desired PASSAIC to notify the indorsers, she could have given SPECIFIC INSTRUCTIONS (Phipps v Milbury Bank) PATERSON as mere AGENT for Ruth Simon for collection >>knew nothing of their indorsers or their residences >>duty as agent fully performed when it gave TIMELY NOTICE if the dishonor of the note so she could notify the prior parties. It does not matter that a notice placed in the mail is not received -Section 94 NIL: Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal; if he gives notice to his principal, he must do so within the same time as if he were the holder, and the principal upon receipt of such notice has himself the same time for giving the notice as if the agent has been an independent holder. -Mailing of notices to the principal is sufficient to relieve the agent. Any other rule would cast too great an obligation upon banks. Disposition Judgment is reversed.

110

NEGO - Quevedo Camille Umali PEOPLE’S NATL BANK OF YPSILANTI V DICKS 258 Mich. 441; 242 NW 825 (1932) ~maia~ FACTS SUBJECT: promissory note MAKER: Ives HOLDER: People’s National Bank (substituted by Deake et al. as plaintiffs) INDORSER: Dicks -People’s National Bank sued Dicks and Ives for the promissory note. The note was signed on its face by Ives and Dicks. Opposite the signatures and directly opposite Dicks’ name was stamped the word “indorsed.” -Above the signatures of the parties, there was no guaranty of payment, no waiver of demand or notice of non-payment or protest, and no waiver of extension. Such waiver was on the face of another part of the note (the back of the instrument). -there was no presentment of the note for payment to Ives, no demand of payment made to him, no dishonor by Ives, no notice of dishonor to Dicks, no protest on the note. Thus, if Dicks was a joint maker of the note he is liable. If he is an indorser and is bound by the waiver printed on the note, he is likewise liable. If he is a mere indorser, not bound by the warranty or guaranty printed on the note, he is not liable. ISSUE WON Dicks was liable HELD: NO -when the waiver is embodied in the instrument itself it is binding upon all parties; but when it is written

above the signature of an indorser, it binds him only. “Embodied in the instrument” means embodied in the original contract, not in detached words on the back of the instrument. -in the construction of negotiable instruments, the NIL provides that where the signature is so placed upon the instrument that it is not clear in what capacity the person making it intended to sign, he is deemed an indorser. -further, Sec. 109 provides that notice of dishonor may be waived, either before the time of giving notice has arrived, or after the omission to give notice, and the waiver may be express or implied. -the NIL has intended to make a distinction between waivers appearing on the body of the instrument itself, and those appearing at the back thereof above the signature of the indorser. An indorser is not bound in all events by a waiver that is not embodied in the body of the instrument, but placed at the back thereof. -prior to NIL, there was no such distinction. The effect of a waiver appearing at the back of an instrument has the same effect as that of one appearing at the back thereof, i.e. binds all indorsers. Now, there is a distinction. -here, Dicks was an indorser, thus he is not bound by the printed guaranty of payment or waiver of the note. Nothing indicates that Dicks signed, accepted, or approved of the printing upon the instrument. No presentment, demand, or notice of dishonor was given defendant, thus he is not bound by the same.

111

NEGO - Quevedo Camille Umali STATE INVESTMENT HOUSE V CA G.R. No. 101163; Bellosillo: Jan 11, 1993 ~da~ FACTS: SUBJECT: 2 Post dated checks DRAWER: Nora Moulic DRAWEE: PAYEE: Corazon Victoriano Indorsee: SIHI -Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each who thereafter negotiated the checks to State Investment House. Inc. (STATE).MOULIC failed to sell the pieces of jewelry, so she returned them to Victoriano before maturity of the checks. The checks could no longer be retrieved since they had already been negotiated. Before their maturity dates, MOULIC withdrew her funds from the drawee bank. -The checks were dishonored for insufficiency of funds. On 20 December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that it be paid in cash instead, although MOULIC avers that no such notice was given her. ISSUE WON MOULIC is liable for the value of the checks even if STATE failed to give her notice of dishonor HELD: YES.

-The fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is not absolute; there are exceptions under -Sec. 114 of NIL: When notice need not be given to drawer. Notice of dishonor is not required to be given to the drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment: (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer had countermanded payment. -Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she returned the jewelry. She simply withdrew her funds from her drawee bank and transferred them to another to protect herself. After withdrawing her funds, she could not have expected her checks to be honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it.

ELLENBOGEN V STATE BANK 197 N.Y. Supp. 278 (1922) ~bry_sj~ FACTS SUBJECT: draft DRAWER: State Bank DRAWEE: Polish National Loan Bank PAYEE: Meyer Ellenbogen’s agent -Ellenbogen sued to recover $1650 on a draft drawn by defendant to the order of her agent for the equivalent of Polish money of that sum. Ellenbogen alleged that the check was duly presented to the Polish National Bank but said bank refused payment for the reason that the defendant had no money on deposit in the bank with which to pay the check. -The trial court dismissed the complaint because it was not pleaded that the draft was protested citing section 260 of the Negotiable Instruments Law, which provides that a foreign bill of exchange, appearing on its face to be such, which is dishonored for nonpayment, must be duly protested for nonpayment, and that if it is not

so protested the drawers and indorsers are discharged. ISSUE WON the lower court erred in holding that protest is a condition precedent to recovery against the drawer HELD: NO. -Section 185 of the NIL provides that notice of dishonor is not required to be given to the drawer, if the drawer has no right to expect or require that the drawee or acceptor will honor the instrument and under Section 267 (which is only required in the case of foreign bills of exchange) is dispensed with by any circumstances which would dispense with the notice of dishonor. Further, under Section 139, presentment for payment is not required, in order to charge the drawer, where he has no right to expect or

112

NEGO - Quevedo Camille Umali require that the drawee or acceptor will pay the instrument.

-It follows that neither presentment nor dishonor was necessary in light of the facts pleaded by the plaintiff and therefore, protest was not required.

TAN LEONCO V GO INQUI Johnson; 8 Phil. 531 (Sept 13, 1907) ~mel~ FACTS SUBJECT: bill of exchange worth P800 DRAWER: Go Inqui, as representative of the plaintiff’s mercantile co, "J.C.," DRAWEE: Lim Uyco, of Manila. PAYEE: Tan Leonco -In the year 1897 the plaintiff left the Philippine for China, and prior to his departure turned over to Tan Tonguan, for his management, the plantations of abaca (hemp) which the plaintiff then possessed in this province. While the plaintiff was in China, Tan Tonguan worked the abaca and obtained 800 pesos worth of fiber, which he caused to be stored, by direction of the defendants, in a warehouse in Buhang, and after storing the draft or check in question, handing it to the plaintiff, who in the mean time had returned from China. The plaintiff then, desiring to leave again for China, presented the draft for payment in Manila, but as the defendants had suspended the payment of the same, the plaintiff was unable to collect the amount thereof. When the said abaca was stored by Tan Tonguan in Buhang it became the property of the defendants (although it did not go through their hands), and on the face of the draft they acknowledge having received the amount of said draft. Therefore, it is evident that the defendants can not alleged now that they had not received the amount of the said draft. -In the years 1896 and 1897 the plaintiff entered into an agreement with the then head of the firm, of J.C., wherein it was agreed that the plaintiff could transfer the shop at San Isidro to the Chinaman Tan Tonguan, and the shop of Buhang tot he Chinaman Lim Joco and Tim Bico; and by reason by such transfers it was agreed between them that the said Chinamen to whom the two should had been transferred would become liable for the debt of the plaintiff directly in connection with the said two shops, one being for the sum of about 600 pesos and the under these conditions, the plaintiff can not now be held to the liable for the 2,390 odd pesos claimed by the defendants in their counterclaim; they must look for payment of this sum to the Chinamen in whose favor the two shops were transferred. -When the draft in question was presented by the plaintiff in Manila for payment, having failed to collect the amount,. he did not cause the protest to be drawn up in the manner provided by the Code of Commerce. Whether this draft or check is considered as a bill of exchange, it is my opinion that said draft or check should the plaintiff

should therefore be relieved from the formalities of the protest for want of payment of the same, as provided for with regard to bills of exchange. The lower court indicated a sentence in the cause against the defendant and in favor of the plaintiff for the sum of 800 pesos, Mexican currency, or its value in the Conant, at the rate of P1.30, with interest 6 per cent from 3d day of march, 1901, and costs, including the fees of the arbitrators appointed at its request of the respective the counterclaim presented by the defendant. ISSUE 1. WON defendant received the hemp so as to constitute consideration for the bill of exchange. 2. WON the plaintiff has a right to recover upon said bill of exchange without the same having been duly protested. HELD 1. YES -It is not disputed that the warehouse in which the hemp was deposited was the warehouse of the defendant. The hemp became the property of the defendant upon the delivery thereof in the warehouse of the defendant (arts. 1462 and 1463, Civil Code), and was property of the defendant at the time a complete delivery of the said abaca to the defendant, and the loss occuring thereafter,. without any fault of the plaintiff, was loss of the defendant . We that the delivery of the hemp as above stated was duly made to the defendant and constituted a valuable consideration for the said bill of exchange or check. 2. YES -It was alleged that he said bill of exchange, after being presented to the drawee in Manila, was not protested and that there is some question of the right of the p[plaintiff to recover upon said bill of exchange without the same having been duly protested. The action was not brought upon the bill of exchange; the bill of exchange was used only as evidence of the indebtedness. We believe, however, that inasmuch as the defendant had himself ordered the drawee not to pay the said bill of exchange, that protest and notice of nonpayment under these conditions was unnecessary in order to render the drawer, or defendant in this case, liable. Disposition: The judgment of the lower court is affirmed

113

NEGO - Quevedo Camille Umali BISHOP V DEXTER 2 Conn. 419 (1817) ~eva~ FACTS Maker: Wittlesey Payee/First Indorser: Dexter Indorsees: Converse, then indorsed to Judd, indorsed finally to Bishop -Dexter indorsed a negotiable note to Converse after it was due -after indorsement by Dexter, no demand was ever made of Whittlesey and no notice ever given to Dexter. -Bishop claims he has a right to recover of Dexter on his indorsement, the note never having been paid by Whittlesey ISSUES 1. WON Dexter is liable. 2. WON when a note is indorsed by the payee after due, a subsequent indorsee without knowledge that the first indorsement was made after the note was due, has a right to presume that a proper demand had been made and notice given when it fell due. HELD 1. NO. The indorsement of a bill or note after due is equivalent to drawing a new bill payable at sight; and demand must be made by the indorsee of the drawer of the bill, or maker of the note, and notice given to the indorser, as in cases of bills payable at sight. It appears that no demand was ever made of Whittlesey, by any of the indorsees

of the note, and no notice ever given to the defendant for non-payment; of course, he became discharged of any liability on his indorsement. 2. NO. To hold that the indorsee has a right to presume is not only repugnant to the principle that the indorsement after due is equivalent to drawing a new bill, and must be proceeded with as such; but would lead to the practice of the grossest fraud, for the first indorsee might neglect to make demand, and give notice, by which the liability of his indorser would be discharged, and then, by a subsequent indorsement, he might create a new right in his indorsee to recover against the first indorser, after the note had been lost by his negligence. -That the note had been put in suit would not excuse demand and notice. **With respect to the necessity of demand on the maker by the indorsee, the reasonable notice to the indorser, there can exist no serious question. A bill may be negotiated after it has become due. The indorsement of it afterwards is equivalent to the act of drawing a bill payable at sight. The indorser is a new drawer, and has the right to insist, that the same steps should be resorted to for the collection of it, as he had been the drawer of the bill originally. By drawing, he incurs the same legal obligation.

114

NEGO - Quevedo Camille Umali BINGHAMPTON PHARMACY V FIRST NATL BANK 131 Tenn. 711, 176 S.W. 1038, 2 A.L.R. 1377 (1915) ~jat~ FACTS -Binghampton Pharmacy and Kilpatrick brothers W.A. Kilpatrick and L.H. Kilpatrick (makers) executed a note payable to the order of “ourselves,” due on Dec.29, 1912 and PAYABLE AT the Chickasaw Bank and Trust. The note was indorsed in blank and discounted at said Chickasaw Bank, which later rediscounted the same note at First Natl. Bank before it became due. -First Natl. Bank did not present the note for payment at Chickasaw Bank on Dec.29 and instead presented the note on Jan.1, 1913. -Because Chickasaw Bank failed to pay, First Natl. Bank demanded payment from the makers who declined, their defense being that they are discharged from liability on the note because of the omission of the First Natl. Bank to present it for payment at the Chickasaw Bank, where the note was made payable, when it fell due. -First Natl. Bank instituted action against the makers in the lower court, which decided in its favor. The makers then filed this certiorari, invoking chapter 94 of the Tennessee Act (Sec.87 NIL) as their defense. They argue that Sec.87 puts upon the holder of a note payable at a bank the same duties as those upon the holder of an ordinary check. ISSUES WON Sec. 87 should be interpreted to mean that a note made payable at a bank requires presentment for payment in order to charge the

maker, failure of which discharges the maker from liability HELD: NO. Sec.87 should be interpreted in light of the other provisions of the NIL. -Although Sec.87 authorizes a bank, at which an instrument is made payable, to pay the same for the account of the principal debtor, its language must not be so expanded to mean that it converts the maker into a drawer. -The duty of the holder of a note toward the maker cannot be assimilated to the duty of a holder of a check toward the drawer: (1) The maker is primarily liable, while the drawer is only liable after dishonor. (2) Sec.70 excuses presentment of the instrument as to the maker of a note, but the same does not apply to the drawer of a check or bill of exchange (3) Sec.186 places an absolute duty upon the holder of a check to present the instrument for payment at the place where it is payable, within a reasonable time otherwise the drawer is discharged from liability. No such duty rests upon the holder of a note with respect to presentment because the maker of a note, by the terms of the instrument, is absolutely required to pay. His obligation as the maker is not a conditional promise to pay only at a special place, but is a promise to pay generally, even though a place of payment is named. Disposition Petition for certiorari denied.

115

NEGO - Quevedo Camille Umali CHAPTER VI: DISCHARGE FOX V KROEGER 119 Tex. 511, 35 S.W. (2d) 679 (1931) ~kooky~ FACTS: SUBJECT: promissory note for $769.03, payable 12 mos. from June 28, 1921 MAKERS: Mrs. C.M. Fox as principal and J.H. Kroeger as surety PAYEE: Levi State Bank & Trust Company -Mrs. Fox as principal and Kroeger as surety executed the above note. Mrs. Fox died before its maturity. At maturity, on agreement with the payee, Kroeger executed and delivered his own note of the same amount to the payee. The payee bank then assigned the principal note to Kroeger. More than two years later Kroeger sued BJ Fox, executor of Mrs. Fox’s estate. ISSUE: WON the payment of Kroeger as surety discharged the obligation HELD: NO -Under the Texas statute (Sec 119 and 121 taken together), the payment by the principal debtor or by the party accommodated discharges the

instrument, but payment by a party secondarily liable, other than the principal debtor or party accommodated, does not extinguish or discharge the debt. By sec 121, the party accommodated is excluded from those secondarily liable, payment by whom does not discharge the instrument. The statute requires payment by the principal debtor to discharge a negotiable promissory note, and that the payment thereof by the surety does not discharge the obligation. Disposition Affirmed. NOTE: the other issue in the case is regarding the right of the surety to collect from the principal what he has paid the creditor. Court held: where the surety pays the debt of the principal, he has his election to either pursue his legal remedies and bring an action on an assumpsit, or the obligation implied by law in his favor for reimbursement by the principal; or he can prosecute an action on the very debt itself, and in either event he stands in the shoes of the original creditor as to any securities and rights of priority.

116

NEGO - Quevedo Camille Umali EQUITABLE BANKING CORP V IAC G.R. No. L-74451, May 25, 1988, 161 SCRA 518 ~aida rose~ FACTS -In 1975 Casals (who represented himself as general manager of Casville Enterprises, a business engaged in processing and procurement of lumber products) went to Edward J. Nell Co. and told the company’s sales engineer Claustro of his interest in purchasing a Garrett skidder, one of the many merchandise the company was selling. -Casals was referred to Javier, Nell’s EVP, who asked for cash payment for the skidders. Casals said that Casvile had a credit line with Equitable Bank. Javier then agreed to have two units of skidders paid by way of domestic letter of credit instead of cash. Each unit was to cost P485,000. The domestic letter of credit was to be payable in 36 months and was to be opened within 90 days after date of shipment of the skidders. The first installement was to be due 180 days after shipment and interest was pegged at 14% p.a. -Casals requested that one unit be delivered to Cagayan de Oro before April 24, 1976 together with all its accessories. The letter of credit was to be opened on or before June 30, 1976. The skidder was shipped on May 3. -June 15, 1976 – Casals handed Nell Co. a check amounting to P300,000 postdated August 4, 1976 followed by another check with the same date. Nell Co. considered the checks as partial payment for the skidder or as reimbursement for the marginal deposit due from Casals. -Casals informed Nell Co. that its application for a letter of credit had been approved by Equitable but informed the company that a sum of P400,000 was needed to stand as collateral in favor of Equitable. The amount include P100,000 to clear the title of the Estrada property which was to act as security for the trust receipts issued by the bank. To facilitate the transaction, Nell Co. issued a check for the said amount in favor of Equitable even if the marginal deposit was supposed to be produced by Casville. -Casals wrote Equitable to apply for two letters of credit (an on sight letter of credit for P485,000, a 36-month letter of credit for P606,000 and cash marginal deposit of P300,000) to cover its purchase of the skidders. The skidders were to be mortgaged as security. The bank responded favorably, stipulating a required 30% cash margin deposit, a real estate collateral and chattel mortgage of the equipment. -Casville sent three postdated checks to Nell Co. attached to a letter informing the latter of the bank requirements. The cash margin deposit was to amount to P327,300 and adding the P100,000 needed for the Estrada property, the

total amount due to Equitable was P427,300. The postdated checks from Casville were intended to cover the checks issued by Nell Co. to Equitable. The postdated checks amounted to P427,300. -Nell Co. issued a check worth P427,300 payable to Equitable Bank. The check was made payable to the “order of Equitable Banking Corp. A/C of Casville Enterprises.” The check was sent to Equitable through Casals. Casals deposited the check in Equitable Bank and the teller accepted it as deposit in Casals checking account. Casals then withdrew the amount deposited. -Upon presentation for encashment, Nell Co. discovered that the three checks amounting to P427,300 were all dishonored for having been drawn against a closed account. Nell Co. checked the status of the letter of credit and was informed by Equitable that no letter of credit had been opened and that the entire amount of P427,300 had been withdrawn. -Casals and Casville recognized their liability towards Nell Co. so they assigned the Garrett skidder to the latter for the amount of P450,000 as partial satisfaction. -In determining the liability of Equitable Bank to Nell Co., the trial court held that Casals, Casville and Equitable Bank were solidarily liable to Nell Co. for the amount of P427,300 erroneously credited by Equitable to Casville’s account. ISSUE WON Equitable is liable to Nell Co. HELD: NO -The check was patently ambiguous. By making the check read “Pay to Equitable Banking Corp., order of A/C of Casville Enterprises,” the payee ceased to be indicated with reasonable certainty. As worded it could be accepted as deposit to the account of the party named after the symbols A/C or payable to the bank as trustee or as agent for Casville Enterprises with the latter being the ultimate beneficiary. The ambiguity was to be construed against Nell Co. who caused the ambiguity. -The check was also initially negotiable and neither was it crossed. The crossing of the check and the stamping of the words “non-negotiable” were made by the bank and not by Nell. It simply meant that the same check would thereafter be no longer negotiated. -Nell’s own acts and omissions were the proximate causes of its own defraudation. Disposition Petition granted.

117

NEGO - Quevedo Camille Umali IN RE HARNAUGH’S ESTATE 320 Pa. 209, 182 Atl. 394 (1936) FACTS -If the holder receives payment through an agent or SUBJECT: P/N in the sum of $7,677.17, due April1, the surrounding circumstances show that money 1919 in discharge of the instrument actually reached MAKER: Decedent his hands he cannot recover merely because he PAYEE: Flora Moore, administrator of Peyton retains possession of the instrument. Harbaugh -In this case, there is no testimony on record to show INDORSEE: Jessie P. Harbaugh agency and therefore appellee, to sustain her -Peyton, claimant and decedent were all children of position, must show that the indorsee received Flora Moore. the money in discharge of the note. -Payment is always an affirmative defense and the ISSUE burden of proving it rests on the party asserting it. WON the maker of a negotiable instrument who It must be shown by preponderance of evidence. makes payment to the payee after the latter, -The auditor and the court below found that the before maturity, has indorsed the note to another, claimant indorsee holder had received payment may be relieved of liability on the note if evidence of the note in question. is received showing that the payee acted as the -April 4, 1919: decedent gave a check to Flora M. indorsee’s agent or that payment was in fact Moore for $13, 249. 40 which included the received by the indorsee. amount due on the note and certain other items payable by decedent to Flora Moore. HELD: YES. -The findings of fact of an auditor will not be disturbed -Payment to the payee of a negotiable instrument unless they are unsupported by the evidence. when title and possession of the instrument has Disposition Decision affirmed. passed to another before maturity will not protect the maker.

118

NEGO - Quevedo Camille Umali JONES’ ADM’RS V COLEMAN 121 Va. 86, 92 S.E. 910 (1917) FACTS mutilated envelope w/ the subject mutilated SUBJECT: negotiable promissory note for $500, (partly burned) paper. allegedly dated 1 Jan 1915, payable at Bank of -There was no attempt to explain or account for the Brunswick, Lawrenceville, Virginia, 365 days after mutilation of the paper. date. Said note waives the benefit of the -TC judge rendered judgment in favor of plaintiff Kate homestead exemption. Coleman. MAKER: Reps Jones, now deceased PAYEE: Kate D. Coleman, Jones’ domestic servant ISSUE for 15-16 yrs WON plaintiff may recover on the basis of the -Kate presented his claim against WR Jones and Jack mutilated note Shell, administrators of [the estate of] Reps Jones. She moved for judgment on the basis of HELD: NO. the notice she filed in court. [motion for judgment -A cancellation made unintentional[ly] or under a on the pleadings? ^_^] mistake, or w/o the authority of the holder is -Jury was waived. Case was submitted to TC judge. inoperative; but where an instrument or any -To sustain the motion, Kate presented a mutilated signature thereon appears to have been paper, upon which there was neither date nor cancelled, the burden of proof lies on the party signature; both apparently destroyed by burning. who alleges that the cancellation was made The paper originally was a printed blank form of a unintentionally or under a mistake or without negotiable instrument note, payable at the bank authority. [Sec. 123, NIL] of Lawrenceville. The mutilated remnant shows -It is assumed that the date and the signature were that the figures “500” and “365” as well as the originally upon the paper presented. There was name “Kate D. Coleman” and the words “five no explanation why the same have been hundred” had been inserted in ink. Evidence destroyed by burning. The presumption is that showed that these words and figures were written the burning was intentional and done for the by Reps Jones himself. purpose of cancelling the instrument. This -Kate’s brother Beverly (an ignorant man) gave a presumption can only be overcome by evidence vague and unsatisfactory testimony re: existence showing that such burning was done of the subject note. He testified that sometime in “unintentionally, or under a mistake, or without 1914 he saw in Kate’s room in a sewing machine authority.” Plaintiff failed to sustain this burden. drawer a note for $500 with Reps Jones name on Disposition Judgment reversed. Kate’s motion it, and that after Jones’ death, Kate showed him a dismissed.

119

NEGO - Quevedo Camille Umali MANCHESTER V PARSONS 75 W. Va. 93, 84 S.E. 885 (1915) FACTS -Sec. 119 of the NIL describes how a note may be SUBJECT: promissory note executed on Sept. 33, discharged. Subsection 4 reads “by any other act 1910, for $800. which will discharge a simple contract for the MAKER: L.W. Parsons payment of money.” PAYEE: Burton & Co. indorsed to Manchester -This provision must be interpreted with reference to -L.W. Parsons executed his negotiable note on Sept. the general purpose of the NIL. Reading Sec. 4, it 33, 1910, for $800 payable to the order of Burton is apparent that it was never the legislative intent & Co., 18 months from date, and delivered the to make a radical change in the general law as same to the payee for value. would be brought by the literal interpretation -The note was negotiated to Manchester (plaintiff), for argued by Parsons. The legislature did not value about Nov. 1, 1910. contemplate making so vital a change in the law, -June 3, 1911: Parsons sold and delivered to the as to permit equities between the original parties payee some Percheron Colts for $1,675, with the to a negotiable instrument to defeat the title of an understanding between the parties that this innocent holder for value in due course. transaction was to pay the note, and the balance -The acts which will discharge a simple contract for was to be paid for the execution and delivery by payment of money, in order to effect a discharge Burton & Co. of their note payable to Parsons. of negotiable paper, must be necessarily limited -Manchester is suing Parsons for payment. Parsons to such acts as relate to and affect the holder of put up the defense of payment. the paper demanding payment of it. It does not include a holder in due course. ISSUE:WON there was discharge (payment) of the -It would injuriously affect the value of commercial instrument. paper, by putting it on a plane with simple contracts for the payment of money. HELD: NO. -The elements constituting what a holder in due -Negotiable paper in the hands of a holder in due course is, and the rights of an HDC must be course is not discharged by payment made to his considered in construing Sec. 119. The rights of transferor, either before or after the transfer. a bona fide assignee of such a note, in due -The uncontradicted testimony of L.A. Burton (the course, are not affected by the equities of the surviving partner of Lee Whorton) is that it had maker. been indorsed to Manchester, for value, on -Payment by Parsons to Burton & Co. before the note November 1, 1910, and therefore the payment to became due, whether before or after they had the original holders did not discharge it. The negotiated it, could not defeat collection by an delivery of the Colts was on June 3, 1911, almost innocent bystander for holder for value who a year after the indorsement of the note to acquired it in due course. Manchester. Disposition Judgment is affirmed. SCHWARTZMAN V POST 94 App. Div. 474, 84 NYS 922, 87 NYS 872 (1903) FACTS Ratio Subdivision 5 of Section 200 of the Negotiable -Defendant Post executed a note for $5,000 payable Instruments Law provides that a negotiable to his own order on demand, indorsed by him, his instrument is discharged “when the principal father and by defendant Postawalsky. The note debtor becomes the holder of the instrument at or was delivered to plaintiff Schwartzman in after maturity in his own right”. payment of his interest in a partnership of which Reasoning Post was the maker of the note, & he & Postawalsky were members. primarily liable thereon. It was surrendered to -Subequently, Post paid $2,750, & a 3rd party paid him, & he became the “holder” thereof without $500. The payment was made on the condition fraud or mistake, in “his own right”. that the note for $5,000 be surrendered to him. DEFINITIONS: -Schwartzman sued Post for the balance due on the Holder – Sec. 2: “Holder means the payee or indorsee note, but as Post had possession of the same, he of a bill or note who is in possession of it, or the did not allege that he was the holder thereof. At bearer thereof.” the conclusion of the case, defendant moved to Person Primarily Liable on Instrument – Sec. 3: “The dismiss the complaint on the ground that the person ‘primarily’ liable on an instrument is the surrender of the note to defendant constituted a person who, by the terms of the instrument, is discharge thereof. absolutely required to pay the same.” In his own right – merely excludes such a case as that ISSUE of a maker acquiring the instrument in purely a WON the instrument has been discharged representative capacity. HELD: YES Disposition Judgment reversed.

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NEGO - Quevedo Camille Umali McGLYNN V GRANSTROM 168 Min 164, 210 NW 892 (1926) ~monch~ FACTS SUBJECT: Promissory note MAKER: not named PAYEE: McGlynn INDORSERS: Granstrom -The action was brought by payee McGlynn against indorser Granstorm for recovery of the note. McGlynn denied liability and said that the payee was a party to an oral contract between the maker and third parties which discharged the maker from liability. And according to Sec 120 of the NIL, if the maker is discharged, so is the indorser. -McGlynn relies on Sec 122 of the NIL, saying that such renunciation must be made in writing and thus the contract did not have an effect of releasing the maker from its obligation. There was also no delivery of the note to the maker. -The lower court ruled in favor of the indorser. ISSUE WON the oral contract released the maker (and thus the indorser too) HELD: YES -The requirement of writing in Sec 122 pertains only to renunciation. It does no apply to Sec 119 and 120 which talks about discharge. Reasoning -Sec 122, which speaks of renunciation, should be distinguished from Sec 119 and 120, which speaks of discharge. Since renunciation and discharge are separated, it suggests that one is different from the other. Under S122, renunciation should be in writing. In S119 and

120, no requirement exists. If there was an intention to apply the requirement of writing to S199 and 120, why the need to change the terminology between the two? -Examining the instances in S119 and S120, it would be radical and impractical to require writing in the discharge of the instrument. -History: French law - obligation by a bill of exchange could be voluntarily remitted by the holder without consideration. The principle was approved by Foster v Dawber and it was held there that it applies to bills and notes. It was adopted by the English Bills of Exchange Act, where the written requirement was added. In that form and meaning it came to our uniform statute. That meaning cannot be expanded without impringing upon the intended effect of other provisions of the statute, particularly S119 and S120. So, we are constrained to hold that the renunciation, which under S120 must be in writing, is one accomplished by the unilateral act of the holder. Ordinarily, but not always, it will be without consideration. -Gorin v Wiley: S122 does not apply to novation which discharged the makers of a note. -Hall v Wichita: S122 inapplicable to an oral novation. S122 intended to deal only “with the formal and express release of common law” while Sec 119 was intended “to continue in effect other recognized methods of discharging obligations of this character” -In these cases, it can be seen that the requirement in S122 was intended to apply only to renunciation and not extend to discharge in S199 and S120.

121

NEGO - Quevedo Camille Umali McCORMICK V SHEA 99 NY Supp. 467 (1906) ~ice~ FACTS SUBJECT: Promissory Note MAKER: Thomas Shea PAYEE: John McCormick INDORSER: Annie Shea -Before maturity Annie Shea as indorser was cancelled through the representative of the attorney of Shea in the presence of McCormick. Defendant claims that the cancellation was part of their claims against each other while plaintiff claims that the cancellation was not authorized and that there was no consideration for such cancellation. Also, plaintiff claims that even if he did agree, the effect would only be to release the indorser as a person secondarily liable.

ISSUE Who bears the burden of proving the cancellation without authority? HELD -A cancellation made unintentionally or under a mistake or without the authority of the holder is inoperative; but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority. -The burden of proof was with the plaintiff Disposition: Judgment affirmed.

ROBERTS V CHAPPELL 63 Ohio Apple 397, 26 NE 2d 930 ~rean~ FACTS SUBJECT: Promissory note MAKER: George Daily, Audrey Daily, Lewis Daily PAYEE/INDORSER: Chappell HOLDER: Roberts -George Daily, Audrey Daily, Lewis Daily executed a note for S237 payable to the order of Chappell. The latter indorsed it to Roberts. Upon presentment, the note was dishonored. Roberts sued Chappell -Defense of Chappell: No claim against the estate of Lewis Daily (now dead) was filed by Roberts. The estate has now been administered and closed. Roberts should have presented the note to the administrator. Since he failed to do so, Chappell should be discharged. -Chappell bases his claim on S8225 of the General Code which says that a person secondarily liable on the instrument is discharged by the discharge of a prior party.

ISSUE WON Chappell was discharged HELD: NO -The discharge of a prior party referred to is a discharge by an act of the holder and not a discharge accomplished by operation of law. Reasoning - Romero case: discharge in the NIL contemplates some affirmative act by the holder and does not contemplate passive conduct. This interpretation is in accord with the Ohio law relating to suretyship. Under such law, mere failure to claim of a creditor against the estate does not discharge the surety. The rule relating to sureties becomes important since the rights and duties of sureties correspond to that of indorsers. -The words “discharge by a prior party must be given its common and accepted meaning. Prior to the enactment of the law, such meaning refers to a discharge by an act of the holder and not a discharge accomplished by operation of law.

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NEGO - Quevedo Camille Umali CORLEY V FRENCH 154 Tenn. 672, 294 S.W. 513 (1927) ~eva~ FACTS SUBJECT: Note for $2,500 MAKER: Volunteer Mfg. Co. PAYEE-HOLDER: Corley INDORSERS: French Nichol, et al. -Note contained a waiver of presentment and notice, and was made payable at the American National Bank. The note was not presented at this bank on the day of maturity nor thereafter. The maker had funds on deposit in this bank at the date of maturity of the note sufficient to pay it. The maker was later adjudged bankrupt. -Corley sued French and other indorsers. -Defense: discharge by constructive tender of payment and by laches in failing to collect from the maker. -Nichol was held liable. The other indorsers were discharged in bankruptcy. ISSUE WON French is liable on the note as indorser. HELD: YES. -While the effect of the waiver was to make the indorser liable without the necessity of presentment, French did not become technically or strictly “primarily” liable (CA found French liable saying that he became primarily liable). French continued to be secondarily liable, but without the right to interpose the defense based upon want of presentment, notice and protest. His obligation by virtue of the waiver became absolute and unconditional with respect to defenses so grounded. -Every indorser who has waived presentment is liable to the holder without reference to presentment. No steps need be taken by the holder upon maturity to charge the waiving indorser, who engages that it shall be paid according to its tenor, without presentment, and whether proceedings on dishonor be taken or not. -The Negotiable Instrument Act provides that “when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder.” So, without presentment, the holder has his right of recourse upon dishonor that is failure to pay, against those primarily liable, and against those secondarily liable who have waived presentment,

or those as to whom, not having so waived, the prescribed steps have been taken. (ON THE TOPIC) -Defense insists that he is “secondarily liable” only, despite his waiver, in the meaning of this term as used in Sec.120, by which it is provided that one so liable only is discharged “by a valid tender of payment made by a prior topic”, and that constructive tender by the maker “primarily liable” took place under the provision of Sec.70 which states that: “If the instrument is, by its terms, payable at a special place and he (the person primarily liable) is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part.” -This section is without direct application to a party to the instrument who has voluntarily waived presentment of payment. However, in the instant case, while under Sec70, presentment was not necessary to charge the maker, if it appears that the maker had been both able and willing (as does not appear) to pay the note at the bank named therein at maturity, a constructive tender would have accrued as to him, and such tender might have constituted such “a valid tender of payment made by the prior party” as would have operated to discharge the indorser. -BUT while there is evidence that the maker had funds in the bank at the maturity of the note (to show “ability”, there is no evidence of “willingness” on the part of the maker to have such application made of its funds of deposit, and these element must concur to be equivalent to a tender of payment upon his part. -Sec.87 provides: “Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon.” Under this section, it is both the right and the duty of the bank to pay the note from the funds of the maker on deposit with it, which discharged the indorser. In the present case, the bank has the right to so apply its depositor’s fund only when the bank is the place of payment and the payee and holder of the instrument as well. Thus, no tender was made by or on behalf of the maker primarily liable on the instrument which operated to discharge the indorser. Dispositive CA affirmed.

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NEGO - Quevedo Camille Umali MAGLIONE V PENTA 266 Mass. 413, 165 N.E. 424 (1929) ~javi~ FACTS SUBJECT: a note secured by mortgage MAKER/MORTGAGOR: unnamed PAYEE /INDORSER/DEFENDANT/: PENTA INDORSEE/HOLDER/PLAINTIFF:MAGLIONE -Penta is a payee of a note secured by mortgage. Penta indorsed the note and assigned the mortgage to Maglione. A subsequent foreclosure (on the mortgage) was instituted by Maglione. But he dropped the foreclosure suit (mortgagor paid $300). -Some months later, Penta inquired of Maglione whether the note and mortgage have been paid. Maglione said that he had a satisfactory arrangement with the maker-mortgagor. -Maker defaulted so Maglione sued indorser Penta -Jury found that Maglione had entered into a valid and binding agreement with maker to extend deadline of note

ISSUE WON Penta being secondarily liable for the note, is discharged from liability in lieu of Maglione’s agreement with maker-mortgagor HELD: YES -If the plaintiff made a valid and binding agreement with the makers of the note extending the time of payment without the knowledge and consent of the surety, the surety is thereby discharged. -As an indorser, Penta was secondarily liable. But the jury found that there was a valid and binding agreement between Maglione and the makers thereby discharging Penta from his liability.

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NEGO - Quevedo Camille Umali CHAPTER VII: OTHER FORMS OF COMMERCIAL PAPER LEE, MICO METALS CORP v. CA and PBC 375 SCRA 579; De Leon, Jr; Feb 1, 2002 FACTS (hereinafter referred to as petitioners-sureties), -A petition for review of the decision of the CA executed another surety agreement in favor of ordering defendants-appellees jointly and PBCom on July 28, 1980, whereby they jointly severally to pay plaintiff PBCom a certain sum and severally guaranteed the prompt payment on arising from ordinary loans, letters of credit and due dates or at maturity of overdrafts, promissory trust receipt transactions granted by the plaintiff notes, discounts, drafts, letters of credit, bills of plus legal interest until fully paid. exchange, trust receipts and all other obligations -On March 2, 1979, Charles Lee, as President of of any kind and nature for which MICO may be MICO wrote private respondent Philippine Bank held accountable by PBCom. of Communications (PBCom) requesting for a -On two occasions, MICO filed with PBCom an grant of a discounting loan/credit line in the sum application for a domestic letter of credit. The of Three Million Pesos (P3,000,000.00) for the corresponding irrevocable letters of credit was purpose of carrying out MICO’s line of business approved. Thereafter, the domestic letters of as well as to maintain its volume of business.On credit was negotiated and accepted by MICO as the same day, Charles Lee requested for another evidenced by the corresponding bank draft discounting loan/credit line of Three Million Pesos issued for the purpose. After the suppliers of the (P3,000,000.00) from PBCom for the purpose of merchandise was paid, trust receipts upon opening letters of credit and trust receipts. MICO’s own initiative, was executed in favor of -On March 26, 1979, MICO availed of the first loan of PBCom. One Million Pesos (P1,000,000.00) from PBCom. On three occasions MICO applied for authority to Upon maturity of the loan, MICO caused the open a foreign letter of credit in favor of various same to be renewed, the last renewal of which corporations and thus, the corresponding letter of was made on May 21, 1982 under a promissory credits was then issued by PBCom with cables note. Two more loans to complete the three sent to the beneficiaries advising that said million were availed by MICO under the same beneficiaries may draw funds from the account of terms. PBCom in its correspondent bank’s New York -As security for the loans, MICO through its ViceOffice. As in past transactions, MICO executed in President and General Manager, Mariano Sio, favor of PBCom a corresponding trust receipt. In executed on May 16, 1979 a Deed of Real Estate all the transactions involving foreign letters of Mortgage over its properties situated in Pasig, credit, PBCom turned over to MICO the Metro Manila. necessary documents such as the bills of lading -On March 26, 1979 Charles Lee, Chua Siok Suy, and commercial invoices to enable the latter to Mariano Sio, Alfonso Yap and Richard Velasco, withdraw the goods from the port of Manila. in their personal capacities executed a Surety -Upon maturity of all credit availments obtained by Agreement in favor of PBCom whereby the MICO from PBCom, the latter made a demand petitioners jointly and severally, guaranteed the for payment. For failure of petitioner MICO to pay prompt payment on due dates or at maturity of the obligations incurred despite repeated overdrafts, promissory notes, discounts, drafts, demands, private respondent PBCom letters of credit, bills of exchange, trust receipts, extrajudicially foreclosed MICO’s real estate and other obligations of every kind and nature, mortgage. Aside from the unpaid balance of Five for which MICO may be held accountable by Million Four Hundred Forty-One Thousand Six PBCom. Hundred Sixty-Three Pesos and Ninety Centavos -On July 14, 1980, petitioner Charles Lee, in his (P5,441,663.90), MICO likewise had another capacity as president of MICO, wrote PBCom standing obligation in the sum of Four Hundred and applied for an additional loan in the sum of Sixty-One Thousand Six Hundred Pesos and Six Four Million Pesos (P4,000,000.00). The loan Centavos (P461,600.06) representing its trust was intended for the expansion and receipts liabilities to private respondent. PBCom modernization of the company’s machineries. then demanded the settlement of the aforesaid Upon approval of the said application for loan, obligations from herein petitioners-sureties who, MICO availed of the additional loan of Four however, refused to acknowledge their Million Pesos (P4,000,000.00) as evidenced by a obligations to PBCom under the surety promissory note. agreements. Hence, PBCom filed a complaint -As per agreement, the proceeds of all the loan with prayer for writ of preliminary attachment availments were credited to MICO’s current before the Regional Trial Court of Manila. checking account with PBCom. To induce the -Petitioners (MICO and herein petitioners-sureties) PBCom to increase the credit line of MICO, denied all the allegations of the complaint filed by Charles Lee, Chua Siok Suy, Mariano Sio, respondent PBCom, and alleged that: a) MICO Alfonso Yap, Richard Velasco and Alfonso Co was not granted the alleged loans and neither did

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NEGO - Quevedo Camille Umali it receive the proceeds of the aforesaid loans and since no loan was ever released to or received by MICO, the corresponding real estate mortgage and the surety agreements signed concededly by the petitioners-sureties are null and void. -The trial court gave credence to the testimonies of herein petitioners and dismissed the complaint filed by PBCom. In ruling for herein petitioners, the trial court said that PBCom failed to adequately prove that the proceeds of the loans were ever delivered to MICO. Hence, inasmuch as no consideration ever passed from PBCom to MICO, all the documents involved therein, such as the promissory notes, real estate mortgage including the surety agreements were all void or nonexistent for lack of cause or consideration. The trial court said that the lack of proof as regards the existence of the merchandise covered by the letters of credit bolstered the claim of herein petitioners that no purchases of the goods were really made and that the letters of credit transactions were simply resorted to by the PBCom and Chua Siok Suy to accommodate the latter in his financial requirements. -CA reversed -Petitioners contend that there was no proof that the proceeds of the loans or the goods under the trust receipts were ever delivered to and received by MICO. ISSUE: WON the proceeds of the loans and letters of credit transactions were ever delivered to MICO HELD: YES -In civil cases, the party having the burden of proof must establish his case by preponderance of evidence. During the trial of an action, the party who has the burden of proof upon an issue may be aided in establishing his claim or defense by the operation of a presumption, or, expressed differently, by the probative value which the law attaches to a specific state of facts. A presumption may operate against his adversary who has not introduced proof to rebut the presumption. The effect of a legal presumption upon a burden of proof is to create the necessity of presenting evidence to meet the legal presumption or the prima facie case created thereby, and which if no proof to the contrary is presented and offered, will prevail. The burden of proof remains where it is, but by the presumption the one who has that burden is relieved for the time being from introducing evidence in support of his averment, because the presumption stands in the place of evidence unless rebutted. Under Section 3, Rule 131 of the Rules of Court the following presumptions, among others, are satisfactory if uncontradicted: a) That there was a sufficient consideration for a contract and b) That a negotiable instrument was given or indorsed for

sufficient consideration. As observed by the Court of Appeals, a similar presumption is found in Section 24 of the Negotiable Instruments Law which provides that every negotiable instrument is deemed prima facie to have been issued for valuable consideration and every person whose signature appears thereon to have become a party for value. Negotiable instruments which are meant to be substitutes for money, must conform to the following requisites to be considered as such a) it must be in writing; b) it must be signed by the maker or drawer; c) it must contain an unconditional promise or order to pay a sum certain in money; d) it must be payable on demand or at a fixed or determinable future time; e) it must be payable to order or bearer; and f) where it is a bill of exchange, the drawee must be named or otherwise indicated with reasonable certainty. Negotiable instruments include promissory notes, bills of exchange and checks. Letters of credit and trust receipts are, however, not negotiable instruments. But drafts issued in connection with letters of credit are negotiable instruments. -Private respondent PBCom presented the following documentary evidence to prove petitioners’ credit availments and liabilities: Promissory Notes, Irrevocable letter of credits, drafts, trust receipts. -The above-cited documents presented have not merely created a prima facie case but have actually proved the solidary obligation of MICO and the petitioners, as sureties of MICO, in favor of respondent PBCom. While the presumption found under the Negotiable Instruments Law may not necessarily be applicable to trust receipts and letters of credit, the presumption that the drafts drawn in connection with the letters of credit have sufficient consideration. Under Section 3(r), Rule 131 of the Rules of Court there is also a presumption that sufficient consideration was given in a contract. Hence, petitioners should have presented credible evidence to rebut that presumption as well as the evidence presented by private respondent PBCom. The letters of credit show that the pertinent materials/merchandise have been received by MICO. The drafts signed by the beneficiary/suppliers in connection with the corresponding letters of credit proved that said suppliers were paid by PBCom for the account of MICO. On the other hand, aside from their bare denials petitioners did not present sufficient and competent evidence to rebut the evidence of private respondent PBCom. Petitioner MICO did not proffer a single piece of evidence, apart from its bare denials, to support its allegation that the loan transactions, real estate mortgage, letters of credit and trust receipts were issued allegedly without any consideration.

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NEGO - Quevedo Camille Umali MERCER COUNTY V HACKETT US Supreme Court; 1 Wall. 83; 1863 ~brian b~ FACTS SUBJECT: Bonds issued for stock in Pittsburgh and Erie (Railroad) Company [PEC] payable in 20 years MAKERS: County of Mercer, Commonwealth of Pennsylvania PAYEE: PEC or bearer BEARER: Hackett -Legislature of Pennsylvania authorized Mercer’s commissioners to subscribe to stock of PEC, where the railroad if built would pass through their county and benefit it. The act, however, had a restriction wherein the bonds to be issued shall in no case be sold, assigned, or transferred by the PEC at less than par value. -Rightly or wrongly – w/ or w/o authority – the bonds to the extent of several thousand of dollars were issued. The instruments were elegantly engraved, with such external indications as were calculated to arrest the eye, and through it to inspire confidence. It was signed by the Mercer commissioners, attested by their clerk, and authenticated by the county seal conspicuously put. It was announced as issued for stock in the PEC. The pertinent obligatory part, read: “… the County of Mercer (Pennsylvania) is indebted to (PEC) in the full and just sum of ($1k), which sum said county agrees to pay, (20yrs after date), to (PEC) or bearer, annually… upon delivery of the coupons severally hereto annexed … the faith, credit and property of the County of Mercer are hereby solemnly pledged, under the authority of an act of Assembly of this Commonwealth…” -A number of bonds were obtained, bona fide and for value paid, by Hackett. And the coupons, being due and unpaid, Hackett sued the county of Mercer. -Circuit Court pointed out the “faith, credit and property…” part and declared that the

instruments were on their face complete and perfect; exhibiting no defect in form of substance. ISSUE WON evidence of fraud practiced by the railroad company to whom these bonds were delivered, and by whom they were paid to bona fide holders for value, or the fact that they were negotiated at less than their par value, be received to defeat the recovery of Hackett HELD: NO -The species of bonds is a modern invention, intended to pass by manual delivery, and to have qualities of negotiable paper; and their value depends mainly upon this character. Being issued by States and corporations they are necessarily under seal. But there is nothing immoral or contrary to good policy in making them negotiable, if the necessities of commerce require that they should be so. A mere technical dogma of the courts cannot prohibit the commercial world from inventing or using any species of security not known in the last century. When a corporation covenants by these means and obtains funds for the accomplishment of the useful enterprises of the day, it cannot be allowed to evade payment by parading some obsolete judicial decision that a bond, for some technical reason, cannot be made payable to bearer. -The epidemic insanity of the people, the folly of county ofiicers, the knavery of railroad “speculators” are pleas which might have just weight in an application to restrain the issue or negotiation of these bonds, but cannot prevail to authorize their repudiation, after they have been negotiated and have come into the possession of bona fide holders Disposition Judgment affirmed.

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NEGO - Quevedo Camille Umali MANKER V AMERICAN SAVINGS & TRUST CO Washington SC, 131 Wash. 430, 230 Pac. 406 (1924) ~mini~ FACTS SUBJECT: 2 local improvement bonds which were stolen from the appellant’s safety deposit box. The bonds provide that: the holders shall have no claim against the city, except from the special assessment made for the improvement for which bond was issued the city of seattle promises to pay… or bearer… out of the fund established by ordinance No. 36562 of said city ( local improvement fund district No. 3032)… and not otherwise the holders or owners of this bond shall look only to said fund for the payment of either the principal or interest in this bond HOLDER: respondent bank (American Savings) -The bonds were stolen and came into the possession of the respondent bank, which purchased it in due course of business. The respondent City of Seattle has the funds ready to pay the bonds. ISSUE (Who is entitled to the payment on the bonds, appellant or respondent bank?) WON these bonds are negotiable instruments

HELD: NO, they are not negotiable instruments. Therefore the appellant is entitled to payment on the bonds. -Negotiable instruments must contain an unconditional promise or order to pay a sum certain in money. An order or promise to pay only out of a particular fund is not unconditional. Therefore, these bonds, which provide for the particular fund out of which the bonds are to be paid, are not negotiable. -Respondent bank argues that these bonds should be held negotiable as a matter of public policy, because large sums of money are now invested in securities of that sort, and to hold them as nonnegotiable would be to destroy their market value, and few persons would assume the risk incident to purchasing these bonds, if they are not negotiable. The court cannot decide these questions upon a matter of public policy, however. Where the law is as plain as it is here, the decision must be governed by the law. Disposition The appellant will be entitled to the amount held by the city of Seattle for the exctinction of his bonds.

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NEGO - Quevedo Camille Umali ENOCH V BRANDON New York CA; 249 N.Y. 263, 164 N.E. 45; 1928 ~ricky~ FACTS SUBJECT: series of bonds for $7,500,000 payable on Nov1, 1941 to bearer, or, if registered, to the registered holder. They are all equally secured by and entitled to the benefits and subject to the provisions of a trust mortgage and redeemable at 105% and interest at certain dates. The bonds may become due in advance of maturity in case of default under the mortgage. The bonds contain a provision allowing it to be registered in the usual way, and, except where registered, “they are to be treated as negotiable, and all persons are invited by the company to act accordingly.” MAKER/ISSUER: The Manitoba Power Company. It was obliged to create a sinking fund to provide for its purchase and redemption. CONTROVERSY: It appears from the disposition of the case that some of these Manitoba bonds were purchased in due course from a thief; hence, the title of the purchaser was put in issue. The lower court (called the Trial Term) held that the bonds were negotiable hence the purchaser in due course may retain them but the Appellate Division reversed. ISSUE WON the bonds are negotiable instruments, hence, a purchaser in due course from a thief may retain them. HELD: YES. Ratio The NIL deals with the form of the instrument – with what a mere inspection of its face should disclose. Reference to the paper itself said to be negotiable determines its character. Reasoning If in the bond or note anything appears requiring reference to another document to determine whether in fact the unconditional promise to pay a fixed sum at a future date is modified or subject to some contingency, then the promise is no longer unconditional. The rule itself is not a difficult one. The trouble lies in its

application to particular facts. There is no infallible test as to whether there is a modification of the promise. Because of differences in the words used, or in the arrangement of paragraphs, sentences, or clauses, each instrument must be interpreted by itself. The instrument must be considered as a whole and when the meaning is doubtful, the construction most favorable to the bondholder must be adopted. -The bonds in this case, speaking of possible redemption, of acceleration of payment, of a sinking fund, and notice, it continues: “All as provided” in the trust mortgage, “to which reference is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds with respect thereto, the manner in which notice may be given to such holders, and the terms and conditions under which said bonds are issued and secured.” -There is no modification of the promise to pay made in explicit terms. The provisions all have to do with the trust mortgage. They refer to the rights conferred by it upon the bondholders and limit and explain those rights. They are speaking solely of security. It would never occur to a purchaser, scanning the bonds, that because of something contained in the mortgage he might be unable to collect the amount due him. It only means that the bonds are to be issued not only upon the general credit of the corporation but upon the faith of some collateral mortgage. -The acceleration clause in case of the default, the privilege given the obligor to redeem before maturity at certain dates, the obligation to create a sinking fund or the fact that the bonds are payable to bearer, or, if registered, to the registered holder does not affect the bonds’ negotiability. Disposition Decision of the Appellate Division reversed and that of the Trial Term affirmed.

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NEGO - Quevedo Camille Umali ARANETA V PHIL. NAT’L BANK 95 Phil. 160 (1954) FACTS ISSUE -PNB granted Araneta’s application for a commercial WON Araneta should be liable for the value of the letter of credit in favor of Allied National draft under the devauated exhange rate Corporation for $7,440. -A draft for $4,013.13 was negotiated by PNB’s HELD: NO correspondent bank in London, Barclay’s Bank -Araneta’s application for a commercial letter of credit, Ltd., against Araneta’s credit. PNB paid Barclay’s as granted by PNB, is the contract between the the amount of the draft. parties. -By the time the draft matured, the British pound was -Although the plaintiff’s application provides for devaluated from the rate of $4.0325 to $2.80124. payment at maturity of the draft, this refers -On the first business day after the maturity of the merely to the time when the plaintiff was bound to draft, PNB sent Araneta a bill of P33,727.92 and pay, and not to the rate of exchange at which the on the same date Araneta forwarded to PNB a draft was drawn and presented or negotiated. check for P23,194.37 in full payment of its -The application provides that the plaintiff promised indebtedness. and agreed to pay at maturity in Philippine -The check was returned without acknowledgment. currency, the equivalent of any “amount that Araneta re-transmitted the check. PNB issued a might be drawn or paid upon the faith” of the receipt stating that it was received as partial plaintiff’s credit and that the plaintiff agreed to payment and that there was still a P10,533.55 “reimburse” the defendant bank in said manner. balance. -It is admitted that the PNB actually paid for the draft -PNB debited Araneta’s overdraft with the amount of in question was P33,727.92. Moreover, the tern the balance. Hence, Araneta filed present “reimburse” requires the return of something complaint. paid. -CFI dismissed complaint Disposition Appealed judgment is affirmed. NATL RICE & CORN CORP V PAN-PHIL SHIPPING (CA) 51 O.G. No. 11, 5564; Sanchez FACTS to weight, quality and moisture content of the -The parties entered into contract of purchase and rice. sale, where Pan-Phil agreed to sell & deliver to -PNB charged Naric P12,907.77 for the opening of NARIC 850 metric tons of Ecuadorian Fortuna the LC; PNB debited Naric’s account. Canilla rice at US $12.51, per 100 pounds net -Pan-Phil failed to ship the rice. shipped weight final, CIF Manila. ISSUE: WON Pan-Phil is liable -Goods were shipped in good condition fr Ecuador. HELD: YES -Contract calls for bond of P20K by Pan-Phil in favor -Naric complied w/ its obligations. Pan-Phil says nonof Naric. In accordance w/ this, Pan-Phil, as shipment was due to causes beyond its control – principal, and RF Navarro w/ Julian Salgado that the rice wasn’t shipped bec Nicholas Graver (deceased), as sureties, executed a bond. & Sons relinquished its interest in the LC upon Appellants obligated themselves, jointly and alleged ground that its terms didn’t conform w/ severally, to answer for faithful performance by conditions of the contract. But one thing is Pan-Phil of its obligations. certain. The LC is in accord with the contract. -The contract also provides that Naric agrees to open Mere refusal of beneficiary to use LC can’t be by cable an irrevocable letter of credit (LC) force majeur w/in meaning of the law. Pan-Phil’s against full shipping docs w/ certificate of quality liability to reimburse Naric for bank expenses is issued by representative of Naric, in favor of inescapable. Nicholas Graver & Sons (agent of Pan-Phil), of -Pan-Phil claims the LC was subsequently cancelled. California and/or assignee, for $2,579,155.42, But the LC, being irrevocable and in favor of a payable in New York negotiation of drafts to specified party, can’t be changed by Naric or the expire not later than Jan 31, 1947. bank w/o consent of the beneficiary and Pan-Phil. -Accdg to contract, in case of non-shipment by Nov -It’s a banking practice for bank to collect commission 30, 1948, except force majeure beyond control of & charges for its svcs in opening of LC Pan-Phil, Pan-Phil shall pay/reimburse Naric for irrespective of WON beneficiary uses the LC. bank commission and miscellaneous banking First, because svcs were actually rendered by charges in connection w/ contract. bank in negotiation of LC w/ the bank’s -Naric applied to PNB for opening of LC. addressee at San Francisco and second, -PNB, on same date of contract, arranged w/ and because the minute the said bank cabled the LC transmitted by cable to Anglo-California Nat’l to its correspondent at San Francisco, the former Bank irrevocable LC No. 25865, payable on sight became exposed to liability thereon until it was against complete shipping docs w/ certificate as cancelled.

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NEGO - Quevedo Camille Umali BPI V DE RENY FABRIC INDUSTRIES 35 SCRA 256; Castro; Sept 16, 1970 ~’del~ FACTS -On 4 different occasions in 1961, De Reny through Aurora Carcereny (aka Aurora Gonzales), president and Aurora Tuyo, secretary of the corporation, applied to the BPI for 4 irrevocable commercial letters of credit (L/C) to cover the purchase of goods such as dyestuffs from their supplier J. B. Distributing Co. -All the applications of the corporation were approved and the corresponding commercial L/C agreements were executed pursuant to banking procedures. -Under the agreements, the aforementioned officers bound themselves personally as joint and solidary debtors with the corporation. -As per bank regulations then in force, De Reny delivered to BPI peso marginal deposits as each L/C was opened. -BPI then issued irrevocable commercial L/Cs addressed to its correspondent banks in the US with uniform instructions for them to notify the beneficiary thereof, JB Distributing Co, that they have been authorized to negotiate the latter’s sight drafts up to the amounts mentioned therein, if accompanied upon presentation, by full set of negotiable clean “on board” ocean bills of lading, covering the merchandise appearing on the L/Cs (ie dyestuffs). -Consequently, the corresponding banks debited the account of BPI w/ them up to the full value of the drafts presented by the JB Dist. Co. plus commission thereon, and thereafter, endorsed and forwarded all documents to BPI. -As each of the shipments arrived, De Reny made partial payments to BPI however, further payments were discontinued subsequently as a result of the chemical test wherein it was found that the goods that arrived in Manila were not dyestuffs but were colored chalks. -De Reny refused to take possession of the goods so BPI caused them to be deposited w/ a bonded warehouse and sued De Reny. -The lower court ordered the defendants to pay BPI w/ interest.

ISSUE WON it was the duty of the correspondent banks of BPI to take the necessary precaution to ensure that the goods shipped under the covering L/C conformed w/ the item appearing therein TF having failed to do so, no claim for recoupment could be had against the defendants HELD: NO, defendants are liable for recoupment. -Under the terms and conditions of their commercial L/C agreement with BPI, the defendants agreed that BPI shall not be responsible for the “existence, character, quality, quantity, conditions, packing, value or delivery of the property purporting to be represented by documents; for any difference in character, quality, quantity, condition, or value of the property from that expressed in documents,” or for “partial or incomplete shipment, or failure or omission to ship any or all the property referred to in the Credit,” as well as “for any deviation from instructions, delay, default, or fraud by the shipper or anyone else in connection with the property the shippers or vendors and ourselves(purchasers) or any of us.” -Having agreed to these terms, the defendants have to comply w/ their covenant. -But even w/o said stipulation, they are still liable because banks, in providing financing in int’l business transactions such as those entered into by the defendants, do NOT deal with the property to be exported or shipped to the importer but deal only with documents (as per Art 10 of the Uniform Customs and Practices for Commercial Documentary Credits Fixed for the 13th Congress of Int’l Chamber of Commerce) -Having proved that there exists a custom in int’l banking and financing circles negating any duty on the part of a bank to verify whether what has been described in the L/Cs or drafts or shipping docs actually tallies with what was loaded in the ship, the defendants are bound by said established usage. Disposition Judgment affirmed.

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NEGO - Quevedo Camille Umali SANTAMARIA V HSBC Bautista-Angelo; 89 Phil. 780 (1951) ~jaja~ FACTS -Santamaria bought 10,000 shares of the Batangas Minerals through the offices of Woo, Uy-Tioco & Naftaly, a stock brokerage firm and paid therefore the sum of P8,014.20 as shown by receipt Exh. “B.” The buyer received Stock Certificate No. 517, Exh. “E,” issued in the name of Woo UyTioco & Naftaly and indorsed in blank by this firm. On March 9, 1937, Mrs. Santamaria placed an order for the purchase of 10,000 shares of the Crown Mines Inc. with R.J. Campos & Co. a brokerage firm and delivered Certificate No. 517 to the latter as security therefor with the understanding that said certificate would be returned to her upon payment of the 10,000 Crown Mines, Inc. shares. Exh. “D” is the receipt of the certificates in question signed by one Mr. Coscolluela, manager of the R.J. Campos & Co., Inc. According to certificate, Exh. “E,” R.J. Campos & Co., Inc. bought for Mrs. Josefa T. Santamaria 10,000 shares of the Crown Mines, Inc. at .225 a share, or the total amount of P2,250.00. -At the time of the delivery of Stock Certificate No. 517 to R.J. Campos & Co., Inc. this certificate was in the same condition as that when Mrs. Santamaria received it from Woo, Uy-Tioco & Naftaly, with the sole difference that her name was later written in lead pencil on the upper right hand corner thereof. -Two days later, on March 11, Mrs. Santamaria went to R.J. Campos & Co., Inc. to pay for her order of 10,000 Crown Mines shares and to get back Certificate No. 517. Coscolluela then informed her that R.J. Campos & Co., Inc. was no longer allowed to transact business due to the prohibition order from the Securities and Exchange Commission. She was also informed that her stock certificate was in the possession of the Hongkong & Shanghai Banking Corporation (HSBC). Certificate No. 517 came into the possession of the HSBC because R.J. Campos & Co., Inc. had opened an overdraft account with this bank and to this effect it had executed on April 16, 1936 a document of hypothecation, Exh. “I,” by the term of which pledged to the said bank all the stocks, shares, and securities which I/We may hereafter come into their possession on my/our account and whether originally deposited for sale custody or for any other purpose whatever or which may hereafter be deposited by me/us in lieu of or in addition to the Stocks, Shares and Securities now deposited for any other purposes whatsoever. -On March 11, 1937, as shown by Exh. “G,” Certificate No. 517, already indorsed by R.J. Campos & Co., Inc. to the HSBC, was sent by the latter to the office of the Batangas Minerals,

Inc. with the request that the same be cancelled and a new certificate be issued in the name of R.W. Taplin as trustee and nominee of the banking corporation. Taplin was an officer of this institution in charge of the securities belonging to or claimed by the bank. As per this request the Batangas Minerals, Inc. on March 12, 1937, issued Certificate No. 715 in lieu of Certificate No. 517, in the name of Taplin as trustee and nominee of the HSBC. -Mrs. Santamaria said she made the claim to the bank for her certificate, though she did not remember the exact date, but it was most likely on the following day of that when she went to Coscolluela for the purpose of paying her order for 10,000 shares of the Crown Mines, Inc. or else on March 13, 1937. In her interview with Taplin, the bank’s representatives, she informed him that the certificate belonged to her and she demanded that it be returned to her. Taplin then replied that the bank did not know anything about the transaction had between her and and R.J. Campos & Co., Inc. and that he could not do anything until the case of the bank with Campos shall have been terminated. This declaration was not contradicted by the adverse party. -In Civil Case No. 51224, R.J. Campos & Co., Inc. was declared insolvent, and on July 12, 1937, the HSBC asked permission in the insolvency courts to sell the R.J. Campos & Co., Inc. securities listed in its motion by virtue of the document of hypothecation, court granted this motion. -On June 13, 1938, the 10,000 shares of Batangas Minerals, Inc. represented by Certificate No. 715 were sold to the same bank by the Sheriff for P300.00 at the foreclosure sale authorized by said order. R.J. Campos, the president of R.J. Campos & Co., Inc. was prosecuted for estafa and found guilty of this crime and was sentenced by the Manila Court of First Instance in Criminal Case No. 54428, to an imprisonment and to indemnify the offended party, Mrs. Josefa Santamaria, in the amountof P8,041.20 representing the value of the 10,000 shares of Batangas Minerals, Inc. (Exhs. “I” and “J”). The offended party and RW Taplin were among the witnesses for the prosecution in this criminal case No. 54428. -When Mrs. Santamaria failed in her efforts to force the civil judgment rendered in her favor in the criminal case because the accused became insolvent, she filed her complaint in this case on October 11, 1940. At the trial both parties agreed that the 10,000 Batangas Minerals shares formerly represented by Certificate No. 517 and thereafter by Certificate No. 715, have no actual market value. Defendants-appellants contend in the first place that the trial court erred in finding

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NEGO - Quevedo Camille Umali that the plaintiff-appellee was not chargeable with negligence in the transaction which gave rise to this case. ISSUE WON defendant bank was obligated to inquire who the real owner of the shares represented by the certificate of stock was HELD: NO. -The certificate of stock in question was issued in the name of the brokerage firm—Woo, Uy-Tioco & Naftaly and that said indorsement was guaranteed by R.J. Campos & Co., Inc., which in turn indorsed it in blank. This certificate is what is known as street certificate. Upon its face, the holder was entitled to demand its transfer into his name from the issuing corporation. The Bank was not obligated to look beyond the certificate to ascertain the ownership of the stock at the time it received the same from R.J. Campos & Co., Inc. for it was given to the Bank pursuant to their letter of hypothecation. Even if said certificate had been in the name of the plaintiff but indorsed

in blank, the Bank would still have been justified in believing that R.J. Campos & Co. Inc. had the title thereto for the reason that it is a well-known practice that a certificate of stock, indorsed in blank, is deemed quasi negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor. -A mere claim of ownership does not establish the fact of ownership. The right of the plaintiff in such a case would be against the transferor. The fact that on the right margin of said certificate the name of the plaintiff appeared written, granting it to be true, cannot be considered sufficient reason to indicate that its owner was the plaintiff considering that said certificate was indorsed in blank by R.J. Campos & Co., Inc. and was transferred in due course by the latter to the Bank under their letter of hypothecation. Said indicium could at best give the impression that the plaintiff was the original holder of the certificate. Disposition Decision modified in the sense of ordering the defendant to deliver to the plaintiff certificate of stock No. 715

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NEGO - Quevedo Camille Umali DELOS SANTOS V McGRATH 96 Phil 577 (1955) FACTS the same. The shares were registered, and are -Plaintiff is claiming ownership of 1.6 M shares of still, in the name of Madrigal. It was not disputed stock of Lepanto Consolidated Mining Co., Inc. that he was a mere trustee. It was proven that covered by several stock certificates issued in Mitsui never sold or otherwise disposed of the favor of Vicente Madrigal, who is the registered shares. owner in the books of Lepanto and whose -According to the Corporation Law, a share of stock indorsement in blank appears on the back of said may be transferred by endorsement of the certificates. The certificates except one, covering corresponding stock certificate, coupled with its 55k shares, are in plaintiff's possession. delivery. However, the transfer shall not be valid, -Santos claims he bought the shares from different except as between the parties, until it is entered persons (Campos and Hess) in 1942. Ownership and noted upon the books of the corporation. of said shares was vested in the Alien Property Therefore, the alleged sale by Campos and Hess Custodian of the US by virtue of an order in 1945. is not valid except as between them and plaintiff. The Administrator denied plaintiff's claim on the It doesn't bind Madrigal of Mitsui. ground that the stocks were bought by Madrigal 2. NO in trust for and for the benefit of Mistui Busaan -Although a stock certificate is sometimes regarded Kaisha (a Japanese corp); that Mitsui kept the as quasi-negotiable, in the sense that it may be certificates in its office in Manila until liberation; transferred by endorsement, coupled with and that the certificates were never sold or delivery, the instrument is non-negotiable, otherwise disposed of so that they were probably because the holder thereof takes it without stolen during the war. prejudice to such rights or defenses as the -Plaintiff couldn't produce as witnesses the persons registered owner may have under the law, except from whom he bought the stocks because they if the circumstances properly call for application died in the war. of estoppel. -Even if the owner of the certificate has endorsed it in ISSUES blank, and it is stolen from him, no title is 1. WON plaintiff had purchased the shares of stock acquired by an innocent purchaser for value. 2. WON stock certificates are negotiable instruments -The title of the true owner of a lost or stolen certificate may be asserted against any one HELD subsequently obtaining possession although the 1. NO. holder may be a bona fide purchaser. -Even if Campos and Hess did sell the shares, the result, insofar as plaintiff is concerned, would be CAPCO V MACASAET L-9088; 189 SCRA 561; Sept 13, 1990 FACTS -TC in favor of Capco. CA reversed. -Capco was a stockholder, director & executive VP of ISSUE: WON CA erred. Monte Oro Mineral, a local mining company. HELD: NO. CA did not err. -He owned shares of capital stock of Monte Oro. It's -Certificates of stocks are considered "quasi-negotiable" total value was over 565K. instruments. When the owner/shareholder of these -Capco INDORSED and delivered his 2 stock certificates signs the printed form of sale certificates (02 and 26) to Macasaet, President of /assignment at the back of every stock certificate Monte Oro. Macasaet received it with an without filling in the blanks provided for the name of ACKNOWLEDGMENT RECEIPT wherein he the transferee and name of atty-in-fact, the said acknowledged that he received said certificates in owner/stockholder, in effect, confers on another all trust and for safekeeping only to be delivered to the indicia of ownership of said certificates. Capco ON DEMAND. -In the case at bar, Capco signed the printed form at the -Capco demanded the return of his certificates. back of both certificates without filling in the blanks. Macasaet replaced cert 26 with his own. As for the Capco's acts of indorsement and delivery conferred other certificate, it was returned later than cert26. on Macasaet the right to hold them as though they Note that both certificates were not returned on were his own. Because of this, there was nothing demand. irregular about Macasaet delivering the certificates -Capco filed a complaint saying that because of the to Feliciano for a consideration in connection with delay, he lost over 300K. the contemplated business tie-up. -Macasaet said that there was delay because Feliciano, -This is the way to look at the case, notwithstanding the the person to whom he entrusted the certificates, Acknowledgment Receipt. failed to return the same.

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NEGO - Quevedo Camille Umali ROMAN V ASIA BANKING CORP Ostrand; 46 Phil. 705 (1922) FACTS -The question of whether or not the receipt issued in -Umberto de Poli purchased 2,777 bales of tobacco favor of Asia Banking Corporation is negotiable is from Felisa Roman not entirely free from doubt because the receipt is -Of the P78,815.69 total value, de Poli paid P15,000 in not perfect. It recited that the merchandise is cash. He executed 4 notes of P15,953.92 each for deposited in the warehouse, "por orden" instead of the balance "a la orden" or sujeto ala orden" of the depositor -On November 18, 1920, de Poli, for value received, and it contains no other direct statement showing issued a negotiable receipt (quedan) covering 576 whether the goods received are to be delivered to bales of tobacco, to the Asia Banking Corporation the bearer, to a specified person, or his order. -De Poli became insolvent and insolvency proceedings -The SC held that it must be considered a negotiable were filed -In said proceeding, the CFI declared receipt. the vendor's lien claimed by Felisa Roman on the -A warehouse receipt, like any other document, must 576 bales of tobacco superior to that claimed by be interpreted according to its evident intent -It is Asia Banking Corporation quite obvious that the deposit evidenced by the -Hence, this appeal receipt was intended to be made subject to the ISSUE WON Felisa Roman's right over the 576 bales order of the depositor and therefore, negotiable. of tobacco is superior to that of Asia Banking -The instrument must be construed to mean that de Corporation Poli was the person authorized to endorse and HELD: NO. deliver the receipt; any other interpretation would -Sec 49 of Act No. 2138 provides: Where a negotiable mean that no one had such power and the clause, receipt has been issued for goods, no seller's lien as well as the entire receipt, would be rendered or right of stoppage in transitu shall defeat the nugatory rights of any purchaser for value in good faith to -Also, the receipt was not marked "non-negotiable." whom such receipt has been negotiated, whether Modern statutes have enlarged the negotiability of such negotiation be prior or subsequent to the warehouse receipts, making such receipts notification to the warehouseman who issued such negotiable unless marked "non-negotiable." receipt of the seller's claim to a lien or right of -Sec 7 of our Warehouse Receipts Act says: "A nonstoppage in transitu. Nor shall the warehouseman negotiable receipt shall plainly place upon it's face be obliged to deliver or be justified in delivering the by the warehouseman issuing it 'non-negotiable,' goods to an unpaid seller unless the receipt is first or 'not negotiable.' In case of the warehouseman's surrendered for cancellation. failure to do so, a holder of the receipt who -There can be no doubt that if the quedan or the purchased it for value supposing it to be warehouse receipt in question is negotiable, the negotiable may, at his option, treat such receipt as vendor's lien of Felisa Roman cannot prevail over imposing upon the warehouseman the same the rights of Asia Banking Corporation as the liabilities he would have incurred had the receipt indorsee of the receipt. been negotiable."

135

NEGO - Quevedo Camille Umali JOHN S. HALE & CO V BELEY COTTON CO Tennessee SC; 154 Tenn 689, 200 SW 994 (1927) ~rach~ FACTS -Hale Co. sold to the Beley Cotton Co. 222 bales of cotton represented by warehouse receipts and bills of lading. These documents of title were delivered by Hale to the Beley Cotton upon receipt of checks of that company, aggregating $33,738.83, drawn on Union and Planters’ Bank. All these checks were dishonored. -In exchange for warehouse receipts thus acquired by Beley Cotton, issued by a Memphis warehouse, the Beley Co. procured clearance certificates. Beley Cotton then attached these clearance certificates, the remaining warehouse receipts, and the bills of lading to drafts drawn by it on customers and deposited these drafts to the credit of its account in defendant bank. Beley’s credit with the bank had been exhausted by other checks, so that, the checks for Hale were returned unpaid. ISSUE: WON the bank acquired the title to the goods (being an innocent purchaser for value from Beley Cotton of the said documents of title) HELD: NO. Transferee of order bills of lading, not indorsed by person to whom goods were deliverable, took no better title than transferor. Transferee of "order" warehouse receipts, not indorsed by person to whose order goods were deliverable, acquired no greater title than transferor. Re: FIRST LOT represented by warehouse receiptsBeley Cotton did not undertake to negotiate these receipts to the bank, but, exchanged said receipts with the Memphis warehouse, which

issued them for clearance certificates of that warehouse, and pinned the clearance certificates to the draft made on account of this lot of cotton and deposited with the bank. The clearance certificates recited on their face that they were not negotiable. Under these circumstances, the bank acquired no better title to this lot of cotton than the Beley Cotton Company possessed. The Beley Cotton Company, however, could not pass a title which it did not have, except by an instrument to which the law gave negotiability, and the clearance certificates were expressly nonnegotiable. Re: SECOND LOT represented by warehouse receipts-The bank got no better title to the cotton represented by these warehouse receipts than was possessed by the Beley Cotton. Beley acquired no title by reason of the fact that its checks given for the cotton were dishonored. Since the receipts we are considering had not been indorsed by the person to whose order the goods were deliverable, they could not be indorsed and negotiated by anyone else. Although Beley Cotton did indorse the receipts, such indorsement by it was not effective for purposes of negotiation. Re: THIRD LOT represented by bills of lading-The bills of lading in controversy had not been indorsed by Manget Bros., the persons to whom the carrier had undertaken to deliver the goods, when they came into the hands of the bank. They were not in such shape that they might be negotiated by delivery. They were not in negotiable form at all. Disposition No error in CA decision; certiorari denied.

SOUTHERN PAC. CO V BANK OF AMERICA District Court of Illinois; 23 Fed. 939; 1928 ~cHa~ FACTS Subject: crab meat from Japan, bill of lading, warehouse receipts Shipper (presumably also the consignor): Ono & Co., sold and assigned the bill of lading and sight draft for $37k to Pacific National Bank (PNB) Vendee: definitely not PNB. unnamed Carrier: Southern Pacific Railway Company -how Bank of America (BA) obtained the warehouse receipts: the vendee fraudulently made SouthPac’s agents to deliver to them the crab meat without the production of the bill of lading (in violation of the condition that the crab meat should not be delivered until the bill should be surrendered). Vendee deposited goods in a public warehouse, taking warehouse receipts. BA

loaned the vendee $34k, and the negotiable warehouse receipt is the security for the loan. BA not aware that vendee fraudulently acquired the goods. -how SouthPac had title over goods: PNB found out that the vendee fraudulently obtained the goods, demanded from SouthPac to pay for it. SouthPac took the assignment of the bill of lading and draft for $37k. *so SouthPac now wants to recover the goods from BA, instituted replevin suit -claims of SouthPac: (1) Ono & Co’s title never passed to BA; (2)SouthPac had superior title over BA who obtained title from a fraudulent vendee -claims of BA: SouthPac ESTOPPED: (1) SouthPac’s agents wrongfully delivered the goods, made

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NEGO - Quevedo Camille Umali possible the negotiation of the warehouse receipts (2) SouthPac knew at the time when it obtained the title from PNB that its agent wrongfully delivered the goods to the vendee and that the vendee assigned the warehouse receipts to BA for value ISSUE WON SouthPac could acquire the goods from BA HELD: NO. For BA. -It would be contrary to the established law to allow Southern Pac, who has purchased his title with full knowledge of the facts, to prevail against a bona fide purchaser, for its act (through its agent) made possible the procurement of the negotiable warehouse receipts and the sale thereof by the vendee Ratio. No owner of merchandise may be deprived of title thereto, except by his consent, or by the existence of such facts as will create an estoppel against him to assert his title. A thief can convey no title to a bona fide purchaser, nor can a trespasser, or other tortuous taker of merchandise, convey a good title thereto.

However, one who secures title to property by fraudulent misrepresentations may convey good title to a bona fide purchaser. The vendor is there stopped to assert its rights. -The purchaser whom the act protects is he who is entitled to assume that the carrier has not delivered the goods and will not thereafter deliver them except to a person who holds the bill of lading. Reasoning. Here, by its fraudulent representations, the vendee persuaded the delivering carrier to surrender the goods. That delivery was a conscious, voluntary delivery, induced by fraud, true it is, but none the less a delivery consciously and voluntarily made, a delivery within the apparent scope of the plaintiff’s agent’s authority. The goods were not stolen; they were not received by the vendee as a result of a trespass, but consent to delivery was fraudulently procured. It follows that the purchaser from the vendee stands in the position of the purchaser from any fraudulent vendee, whose rights by virtue of the doctrine of estoppel are well recognized as being superior to those of the vendor or parties in privity with him.

W.S. BROWN MERCANTILE CO V YIELDING BROS. DEPT STORE SC of Alabama (1917) FACTS -Franklin, a tenant farmer, gave a chattel mortgage on his cotton crop to Yielding Bros., which was recorded in the office of the probate judge of the county where said cotton was grown and stored. Subsequently, Franklin stored the cotton in the Warrant Warehouse Co. and took a negotiable receipt. Said receipt was sold by Franklin for the full cash value of the cotton to W.S. Brown, which had no actual knowledge of the prior chattel mortgage. The chattel mortgagee (Yielding Bros.) sued the purchaser of the warehouse receipt (W.S. Brown) for $ 1,050, the value of the cotton. -Under the provisions of Sec. 3373, Code 1907, the recording of the mortgage operated as a notice of the contents thereof. ISSUE WON the Warehouse Receipts Act, providing for the negotiability of such warehouse receipts, is repealed by Code 1907 HELD: NO. -Yielding Bros., as chattel mortgagee, is entitled to the value of the cotton.

Sec. 41, Warehouse Receipt Act A person to whom a negotiable receipt has been duly negotiated acquires thereby – (a) Such title to the goods as the person negotiating the receipt to him had or had ability to convey to a purchaser in good faith for value, and also such title to the goods as the depositor or person whose order the good were to be delivered by the terms of the receipt had or had ability to convey to a purchaser in good faith for value, and (2) the direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt as fully as if the warehouseman had contracted directly with him. -The phrase “ or had ability to convey to a purchaser in good faith for value” means provided such person was such purchaser in good faith for value. If the purchaser had actual notice, no one would contend that he was a purchaser in good faith. Registration laws were enacted for the purpose of giving notice, and the mortgage herein, having been duly recorded gave the purchaser a constructive notice so as to prevent him from being a purchaser in good faith.

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NEGO - Quevedo Camille Umali DUNAGAN V GRIFFIN CA of Texas, 151 S.W. 2d 250 (1941) FACTS -Dunagan employed Whitehead to haul beer from Houston to Big Springs, Texas, and gave him a check payable to Gulf Brewing Co. as payment upon receipt of the goods. Whitehead hauled the beer to Fort Worth for storage in defendant Storage Company’s warehouse and received a warehouse receipt in his own name. Defendants refused to deliver to plaintiff. Company alleged it was told Griffin was the owner and holder of the receipt; Griffin was interpleaded, filed intervention stating he loaned money to Whitehead and took the receipt as security in good faith and for value ($730). Judgment in favor of Griffin.

ISSUE WON Griffin acquired rights to the beer HELD: NO -Article 5616 of the Uniform Warehouse Receipts Act provides that an indorsee of a negotiable receipt acquires such title as the indorser or depositor had (or the latter’s ability to convey to a purchaser in good faith and for value). -Griffin, despite his good faith, could acquire no better title than Whitehead, who was in possession of the beer only by virtue of his contract to transport it. Griffin only received such title as Whitehead could have conveyed to a purchaser of the goods in good faith and for value.

LUHRS V VALLEY RANCH CO., INC SC of Arizona; 27 Ariz. 306. P. 1014 FACTS ISSUE -Franklin, the person in-charge of the ranch of Luhrs WON Section 25 of the WRA includes an action of sold to Harrison four bales of cotton. Harrison, in replevin turn, delivered it to Valley Ranch for ginning and storage, and held defendant’s negotiable HELD: YES. warehouse receipts therefor. The whole purpose of the section is to protect the -Luhrs instituted and action in replevin to recover warehouseman who comes into possession of possession of the bales but the defendant the property from being liable to two parties. refused by virtue of the Uniform Warehouse Moreover, under all the evidence, Franklin was “a Receipts Act (Section 25 ), providing that it could person whose act…would bind the owner.” not be compelled to surrender the seized Harrison was a purchaser in good faith. He had property until the receipts were either no reason to doubt the authority of Franklin to sell surrendered or impounded by the court . Luhrs, the cotton as the latter was running the ranch and on the other hand, argues that Section 25 of the selling the products for three or four years. WRA does not cover an action of replevin by the real owner of the goods.

138

NEGO - Quevedo Camille Umali

139

SIY CONG BIENG & CO V HSBC 55 Phil. 598 (1932) FACTS -Ranft called at the office of the plaintiff to purchase hemp (abaca)and he was offered the bales of hemp as described in the quedans. Together with the covering invoice, the quedans were sent to Ranft, without having paid for the hemp, but the plaintiff's understanding was that the payment would be made against the same quedans, and it appears that in previous transactions of the same kind, quedans were paid on or 2 days after their delivery.On the date the quedans were delivered to the defendant, Ranft died, and when the plaintiff's found that such was the case, it immediately demanded the return of the quedans, or the payment of value, but was told that the quedans haed been sent to the defendant soon as they were received by Ranft. -Shortly after, the plaintiff files a claim for the said sum in the intestate proceedings of the estate of the deceased. In the mean time, demand had been made by the plaintiff on the defendant bank for the return of the quedans or their value, which was refused by the bank on the ground that it was the holder of the quedans in due course. There upon, the plaintiff filed its first complaint against the defendant, wherein it alleged that it had sold the quedans to the deceased for cash, but that the deceased had not fulfilled the conditions of the sale. Lter on, plaintiff filed an amended complaint wherein they changed the word 'sold' to 'attempted to sell'. -TC rendered in favor of the plaintiff on the ground that the defendant bank could not have acted in good faith for the reason that according to the statement of his own witness, the quedans were delivered to the bank in order to secure the debts of Ranftfor the payment of their value and from which it might be deducted that the said bank knew that the value fo the said quedans had not been paid when it was endorsed to them.

ISSUE WON the defendant bank is a holder in due course HELD: YES. -TC decision is not tenable. First, the quedans were in negotiable in form. Second, that they were pledged by Ranft to the defendant bank to secure the payment of debt t bank. Third, that such of the quedans were issued in the name of the plaintiff were duly endorsed in blank by the plaintiff and Ranft. Fourth, that the 2 remaining quedans which were issued directly in the name of Ranft were also duly endorsed in blank to him. When the quedans were negotiated, Ranft was indebted to HSBC, which indebtedness was partly covered by quedans. Since the quedans were negotiable in form and duly endorsed in blank by the plaintiff and Ranft, it follows that on the delivery to the bank they were no longer the property of the indorser unless he liquidated his debt with the bank. -Nothing in the record would compel the bank to investigate the indorser. The bank had perfect right to act. -The warehouse receipt represents the goods, but the entrusting of the receipt is more than the mere delivery of the goods; it is a representation that the one to whom the possession of the receipt has been so entrusted has the title to the foods. The importance of Sec 47 and Sec 41 is that if the owner of the goods permits another to have the possession or custody of negotiable warehouse receipts running to the order of the latter, or to bearer, it is a representation of title upon which bone fide purchasers for value are entitled to reply, despite breaches of trust or violations of the agreement on the part of the apparent owner.