Last Negotiable - Instruments - Law New

NEGOTIABLE INSTRUMENTS LAW
I.
INTRODUCTION
A.
GOVERNING LAWS ACT No. 2031 effective June 2, 1911 (which

amended some of the provisions of the Rules of the Law Merchant),
the Code of Commerce and the Civil Code.
B.
APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW the

Act applies only to negotiable instruments or those that meet the
requirements under Sec. 1 of Act No. 2031.
provide that an accommodation party is one who has signed an

instrument as maker, drawer, acceptor of indorser without receiving value
therefor, but is held liable on the instrument to a holder for value although
the latter knew him to be only an accommodation party. This approach of
both parties appears to be misdirected and their reliance misplaced. The
promissory note hereinbefore quoted, as well as the mortgage deeds
subject of this case, are clearly not negotiable instruments. These
documents do not comply with the fourth requisite to be considered as
such under Section 1 of Act No. 2031 because they are neither payable to
order nor to bearer. The note is payable to a specified party, the GSIS.
Absent the aforesaid requisite, the provisions of Act No. 2031 would not
apply, governance shall be afforded, instead, by the provisions of the Civil
Code and special laws on mortgages.
KRAUFFMAN VS. PNB (GR No. 16454, Sept. 29, 1921) - Herein plaintiff
was entitled to P98,000 of the Philippine Fiber and Produce Companys
dividend for the year 1917. George B. Wicks, treasurer of the Company,
requested that a telegraphic transfer of $45,000 to the plaintiff in New
York City. Wicks drew and delivered a check for the amount of
P90,355.50, total cost of said transfer, including exchange and cost of
message which was accepted by the officer selling the exchange in
payment of the transfer in question. As evidence of this transaction a
document was made out and delivered to Wicks, which is referred to by
the bank's assistant cashier as its official receipt. On the same day the
Philippine National Bank dispatched to its New York agency a cablegram
for $45,000. However, the bank's representative in New York replied
suggesting the advisability of withholding this money from Kauffman. The
PNB dispatched to its New York agency another message to withhold the
Kauffman payment as suggested. Meanwhile, upon advice of Wicks that
the money has been placed to his credit, Kauffman presented himself at
the office of the Philippine National Bank in New York and demanded the
money. By this time, however, the message from the Philippine National
Bank directing the withholding of payment had been received in New
York, and payment was therefore refused. Thus the present complaint to
recover said sum, with interest and costs. ISSUE: WON Act No. 2031 is
applicable in the above case? HELD: NO. The provisions of the
Negotiable Instruments Law to come into operation, there must be a
document in existence of the character described in section 1 of the Law;
and no rights properly speaking arise in respect to said instrument until it
is delivered. In the case before us there was an order transmitted by the
defendant bank to its New York branch, for the payment of a specified
sum of money to George A. Kauffman. But this order was not made
payable "to order or "to bearer," as required in Section 1(d) of that Act;
and inasmuch as it never left the possession of the bank, or its
representative in New York City, there was no delivery in the sense
intended in Section 16 of the same Law. In this connection it is
unnecessary to point out that the official receipt delivered by the bank to
the purchaser of the telegraphic order, and already set out above, cannot
itself be viewed in the light of a negotiable instrument, although it affords
complete proof of the obligation actually assumed by the bank.
GSIS VS. CA (GR No. L-40824, Feb. 23, 1989) - Private respondents, Mr.
and Mrs. Isabelo R. Racho, together with the Lagasca spouses, executed a
deed of mortgage in favor of petitioner GSIS. Subsequently, another deed
of mortgage was executed in connection with earlier two loans granted. A
parcel of land, co-owned by said mortgagor spouses, was given as
security under the aforesaid two deeds and they also executed a
"promissory note". The Lagasca spouses executed an instrument
denominated "Assumption of Mortgage" under which they obligated
themselves to assume obligation to the GSIS. This undertaking was not
fulfilled. Upon failure of the mortgagors to comply with the conditions of
the mortgage, particularly the payment of the amortizations due, GSIS
extra-judicially foreclosed the mortgage and caused the mortgaged
property to be sold at public auction. Private respondents filed a complaint
against the petitioner and the Lagasca spouses praying that the
extrajudicial foreclosure be declared null and void. In their aforesaid
complaint, they alleged that they signed the mortgage contracts not as
sureties or guarantors for the Lagasca spouses but they merely gave their
common property to the said co-owners who were solely benefited by the
loans from the GSIS. Trial court dismissed the case. CA reversed decision
stating that the respondents are that only of an accommodation party.
ISSUE: WON the NIL is applicable to the promissory note and mortgage
deed? HELD: No. Both parties relied on the provisions of Section 29 of Act
No. 2031, otherwise known as the Negotiable Instruments Law, which
C.
CONCEPT OF NEGOTIABLE INSTRUMENTS

1.
DEFINITION: Negotiable Instruments are written statements

signed by the maker or drawer containing an unconditional promise
or order to pay a sum certain money, payable on demand or at a
fixed or determinable future time, to order or to bearer.
2.
FUNCTIONS OF NEGOTIABLE INSTRUMENTS

a. Substitute for money - although they are not considered
legal tender. One of its distinct characteristics is its negotiability
which allows it to go from hand to hand in the commercial
markets and to take the part of money in commercial
transactions free from all personal defenses available against
the original owner.
b. Media of exchange they thus increase the purchasing
medium in circulation. They are a safe and convenient means of
doing business that eliminate the risk of dealing in cash.
c. Medium of credit transactions they allow men of
undoubted credit (such as those with illiquid properties) to carry
on business enterprise upon their promissory notes, bills of
exchange and checks knowing that other businessmen will treat
these promises as cash.
Checks are primarily used for immediate payment (substitute
for money); while ordinary bill of exchange and the promissory
note are intended for the circulation of credits (credit
instruments)
3.
LEGAL TENDER that amount which the creditor can be compelled

to accept as payment.
Sec. 52,
New
Central
Bank
Act
Sec. 60
Legal Tender Power. All notes and coins issued by the
Bangko Sentral shall be fully guaranteed by the Government

of the Republic of the Philippines and shall be legal tender in
the Philippines for all debts, both public and private:
Provided, however, That, unless otherwise fixed by the
Monetary Board, coins shall be legal tender in amounts not
exceeding Fifty pesos (P50.00) for denominations of Twentyfive centavos and above, and in amounts not exceeding
Twenty pesos (P20.00) for denominations of Ten centavos.
Legal Character. Checks representing demand deposits
do not have legal tender power and their acceptance in the
payment of debts, both public and private, is at the option of
the creditor: Provided, however, That a check which has
been cleared and credited to the account of the creditor shall
be equivalent to a delivery to the creditor of cash in an
amount equal to the amount credited to his account
TIBAJIA VS. CA (GR No. 100290, June 4, 1993) - A writ of attachment

was issued by the trial court in connection to the collection of a sum of
money filed by Eden Tan against the Tibajia spouses. The fund was then
on deposit with the cashier of the Regional Trial Court of Pasig. The
Tibajia spouses thereafter delivered to the Deputy Sheriff the total money
judgment in the form of Cashier's Check worth P262,750.00. However,
Eden Tan, refused to accept the payment made and instead insisted that
the garnished funds deposited with the cashier of the Regional Trial Court
Cesar Nickolai F. Soriano Jr.

Arellano University School of Law 2011-0303
NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) based on the book of Aquino and De Leon and Audio Lecture of Dean Sundiang
of Pasig be withdrawn to satisfy the judgment obligation. Petitioners filed

a motion to lift the writ of execution on the ground that the judgment
debt had already been paid but was denied by the trial court on the
ground that payment in cashier's check is not payment in legal tender.
When the petitioners' motion for reconsideration was denied, the spouses
Tibajia filed herein petition. ISSUE: WON the delivery of the cashier's
check is considered payment in legal tender? HELD: No. 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. (Philippine Airlines, Inc. vs.
Court of Appeals and Roman Catholic Bishop of Malolos, Inc. vs.
Intermediate Appellate Court). The ruling in the two (2) abovementioned
cases decided by the Supreme Court applies the statutory provisions
which lay down the rule that a check is not legal tender and that a creditor
may validly refuse payment by check, whether it be a manager's, cashier's
or personal check.
E.
PROMISSORY NOTE
BILL OF EXCHANGE
Preparation & Signing
Issuance
Negotiation
Presentment for Acceptance
Acceptance
Dishonor by Non-acceptance
Presentment for payment
Dishonor by Non-payment
Notice of Dishonor
Payment
Discharge
F.
PAL VS. CA (GR No. 49188, Jan. 30, 1990) - CFI Manila ruled in favor of
Amelia Tan [under the name and style of Able Printing Press] in a
complaint for damages against petitioner Philippine Airlines. On appeal,
the CA upheld the decision of the CFI with minor modifications as to the
damages to be awarded. The corresponding writ of execution was duly
referred to Deputy Sheriff Emilio Z. Reyes for enforcement with checks in
the name of the latter. Four months later, Amelia Tan moved for the
issuance of an alias writ of execution since the judgment remained
unsatisfied. The petitioner filed an opposition to the motion for the
issuance of an alias writ of execution stating that it had already fully paid
its obligation to plaintiff through the deputy sheriff of the respondent
court, Emilio Z. Reyes, as evidenced by cash vouchers properly signed and
received by said Emilio Z. Reyes. On March 3,1978, the Court of Appeals
denied the issuance of the alias writ for being premature, ordering the
executing sheriff Emilio Z. Reyes to appear with his return and explain the
reason for his failure to surrender the amounts paid to him by petitioner
PAL. However, the order could not be served upon Deputy Sheriff Reyes
because he already absconded or disappeared. ISSUE: WON the payment
rendered through a check made by PAL to the absconding sheriff in his
name operate to satisfy the judgment debt? HELD: Under ordinary
circumstances, payment by the judgment debtor to the sheriff should be
valid payment to extinguish the judgment debt. There are circumstances,
however, which compel a different conclusion such as when the payment
made by the petitioner to the absconding sheriff was not in cash or legal
tender but in checks. The delivery of promissory notes payable to order,
or bills of exchange or other mercantile documents shall produce the
effect of payment only when they have been cashed, or when through the
fault of the creditor they have been impaired. In the meantime, the action
derived from the original obligation shall be held in abeyance. 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 managers 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). PAL created a situation which permitted the said Sheriff to
personally encash said checks and misappropriate the proceeds thereof to
his exclusive personal benefit. For the prejudice that resulted, the
petitioner himself must bear the fault. As between two innocent persons,
one of whom must suffer the consequence of a breach of trust, the one
who made it possible by his act of confidence must bear the loss.
D.
G.
2.
NEGOTIABILITY is that quality or attribute of a bill or note

whereby it may pass from one person to another similar to money,
so as to give the holder in due course the right to collect on the
instrument the sum payable for himself free from any defect in the
title of any of the prior parties or defenses available to them among
themselves.
ACCUMULATION OF SECONDARY CONTRACTS as they are
transferred from one person to another. Once an instrument is
issued, additional parties can become involved.
KINDS OF NEGOTIABLE INSTRUMENTS

1.
PROMISSORY NOTES (Sec. 184, NIL) An unconditional promise

in writing mace by one person to another, signed by the maker,
engaging to pay on demand, or at a fixed or determinable future
time, a sum certain in money to order or to bearer.
a. Parties to a Negotiable Promissory Note are (1) Maker and
(2) Payee;
b. Kinds of Negotiable Promissory Note include certificates of
deposits, bank notes, due bills and bonds.
2.
BILLS OF EXCHANGE (Sec. 126, 185, NIL) An unconditional

order in writing addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay
on demand, or at a fixed or determinable future time, a sum certain
in money to order or bearer.
a. Parties to a Bill of Exchange are (1) Drawer, (2) Payee and
(3) Drawee;
b. Kinds of Bills of Exchange include drafts, trade acceptances
and bankers acceptances.
WHEN BILLS TREATED AS NOTES
Sec. 130
Sec. 17(e)
When bill may be treated as promissory note. - Where

in a bill the drawer and drawee are the same person or where
the drawee is a fictitious person or a person not having
capacity to contract, the holder may treat the instrument at
his option either as a bill of exchange or as a promissory note
Construction where instrument is ambiguous. - Where
the language of the instrument is ambiguous or there are
omissions therein, the following rules of construction apply:
(e) Where the instrument is so ambiguous that there is doubt
whether it is a bill or note, the holder may treat it as either at
his election;
H.
BILLS AND NOTES DISTINGUISHED
PROMISSORY NOTES
2 parties Maker and Payee
Maker cannot be the payee
There is unconditional PROMISE by
the maker
Presentment for payment without
prior acceptance
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

1.
INCIDENTS IN THE LIFE OF NEGOTIABLE INSTRUMENTS
Liability of the maker is primary and

absolute
I.
BILLS OF EXCHANGE
3 parties Drawer, Payee and
Drawee
Drawer and payee may be the same
person
There is unconditional ORDER by the
drawer to the drawee
Some Bills need prior acceptance by
the drawee before presentment for
payment
Liability of the drawer is secondary
and conditional
NEGOTIABLE INSTRUMENTS COMPARE WITH OTHER PAPERS

(Negotiability vs. Assignability)
SESBRENO VS. CA (GR No. 89252, May 24, 1993) - Petitioner Sesbreno
made a money market placement in the amount of P300,000 with the

Philippine Underwriters Finance Corporation (PhilFinance), with a term of

32 days. PhilFinance issued to Sesbreno (1) the Certificate of Confirmation
of Sale of a Delta Motor Corporation Promissory Note, (2) the Certificate of
Securities Delivery Receipt indicating the sale of the note with notation
that said security was in the custody of Pilipinas Bank, and (3) post-dated
checks drawn against the Insular Bank of Asia and America for
P304,533.33 payable on March 13, 1981. The checks were dishonored for
having been drawn against insufficient funds. Pilipinas Bank never
released the note, nor any instrument related thereto, to Sesbreno; but
Sesbreno learned that the Delta Promissory Note maturing on 6 April
1981, has a face value of P2,300,833.33 with PhilFinance as payee and
Delta Motors as maker; and was stamped non-negotiable on its face.
PhilFrance was later on placed under the custody of the Securities and
Exchange Commission. As Sesbreno was unable to collect his investment
and interest thereon, he filed an action for damages against Delta Motors
and Pilipinas Bank. Delta Motors contends that said promissory note was
not intended to be negotiated or otherwise transferred by Philfinance as
manifested by the word "non-negotiable" stamped across the face of the
Note. The trial court and the CA dismissed petitioners complaint and
appeal, respectively, for lack of cause of action. If anything, petitioner has
a cause of action against Philfrance, which, however, was not impleaded.
ISSUE: WON the non-negotiability of a promissory note prevents its
assignment? HELD: No. A negotiable instrument, instead of being
negotiated, may also be assigned or transferred. The legal consequences
of negotiation and assignment of the instrument are different. A nonnegotiable instrument may not be negotiated but may be
assigned or transferred, absent an express prohibition against
assignment or transfer written in the face of the instrument. The
subject promissory note, while marked "non-negotiable," was not at the
same time stamped "non-transferable" or "non-assignable." It contained
no stipulation which prohibited Philfinance from assigning or transferring
such note, in whole or in part.
J.
II. FORM AND INTERPRETATION OF NEGOTIABLE INSTRUMENTS

A.
CALTEX VS. COURT OF APPEALS (GR No. 97753, Aug. 10, 1992) Respondent bank issued 280 certificates of time deposit (CTDs) in favor of
Angel dela Cruz who delivered the same to herein petitioner in connection
with his purchased fuel products. Eventually, dela Cruz executed and
delivered an Affidavit of Loss for the reissuance of the CTDs. Dela Cruz
later on obtained a loan from respondent bank and negotiated the said
CTDs, executing a Deed of Assignment of Time Deposit which stated,
among others, that the bank has full control of the indicated time deposits
from and after date of the assignment and may set-off such and apply the
same to the payment of amount or amounts that may be due on the loan
upon maturity.
Petitioner then went to the Sucat branch for verification of the CTDs
declared lost, alleging that the same were delivered to herein petitioner as
security for purchases made with Caltex Philippines, Inc. and requested
that the CTDs be pre-terminated, which was refused by the respondent
bank due to the failure of petitioner to present requested documents to
prove such allegation. Petitioner then filed a complaint in the RTC, which
was dismissed. On appeal, the CA affirmed the decision of the RTC. Thus,
the present petition. ISSUE: WON the CTDs are considered negotiable?
HELD: Yes. A sample text of the certificates of time deposit is reproduced
below:
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICE P4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of
PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE
P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731
days. after date, upon presentation and surrender of this certificate, with interest
at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
AUTHORIZED SIGNATURES
SOME NON-NEGOTIABLE INSTRUMENTS

1. Document of Title like a certificate of stock, bill of lading and
warehouse receipt (non-negotiable because there is no unconditional
promise or order to pay a certain sum in money);
2. Letter of Credit a letter from a merchant or bank or banker in
one place, addressed to another, in another place or country,
requesting the addressee to pay money or deliver goods to a third
party therein named, the writer of the letter undertaking to provide
him the money for the goods or to repay him. It is a letter requesting
one person to make advances to a third person on the credit of the
writer. (It is in favor of a certain person and not to order)
3. Treasury Warrant - it is a government warrant for the payment of
money such as that issued in favor of a public officer or employee
covering payment or replenishment of cash advances for official
expenditures. (It is payable out of a specific fund or appropriation)
4. Postal Money Order
PHILIPPINE EDUCATION CO. VS. SORIANO (GR No. L-22405, June
30, 1971) - Enrique Montinola sought to purchase from the Manila Post
Office 10 money orders (P200 each), offering to pay for them with a
private check. Montinola was able to leave the building with his check and
the 10 money orders without the knowledge of the teller. Upon discovery,
message was sent to all postmasters and banks involving the unpaid
money orders. One of the money orders was received by the Philippine
Education Co. as part of its sales receipt. It was deposited by the company
with the Bank of America, which cleared it with the Bureau of Post. The
Postmaster, through the Chief of the Money Order Division of the Manila
Post Office informed the bank of the irregular issuance of the money
order. The bank debited the account of the company. The company
moved for reconsideration. ISSUE: WON postal money orders are
negotiable instruments? HELD: No. Philippine postal statutes are
patterned from those of the United States, and the weight of authority in
said country is that Postal money orders are not negotiable instruments
inasmuch as the establishment of a postal money order is an exercise of
governmental power for the publics benefit. Furthermore, some of the
restrictions imposed upon money order by postal laws and regulations are
inconsistent with the character of negotiable instruments. For instance,
postal money orders may be withheld under a variety of circumstances,
and which are restricted to not more than one indorsement
HOW NEGOTIABILITY IS DETERMINED?
Section 1, of Act No. 2031, otherwise known as the Negotiable

Instruments Law, enumerates the requisites for an instrument to become
negotiable. The CTDs in question undoubtedly meet the requirements of
the law for negotiability. The accepted rule is that the negotiability or nonnegotiability of an instrument is determined from the writing, that is, from
the fact of the instrument itself. Contrary to what respondent court held
(that the CTDs are payable to the depositor which is Angel dela Cruz),
the documents provide that the amounts deposited shall be repayable to
the depositor. And who, according to the document is the depositor? It is
the bearer. The documents do not say that the depositor is Angel dela
Cruz and that the amounts deposited are repayable specifically to him.
Rather, the amounts are to be repayable to the bearer of the documents
or, for that matter, whosoever may be the bearer at the time of
presentment.
B.
EFFECT OF ESTOPPEL
BANCO DE ORO SAVINGS VS. EQUITABLE BANKING CORP. (GR No.
74917, Jan. 20, 1988) - Manager's checks (Checks) having an aggregate
amount of P45,982.23 and payable to certain member establishments of
Visa Card. Subsequently, the Checks were deposited with the defendant
(respondent Equitable) to the credit of its depositor (Aida Trencios
account). Following normal procedures, and after stamping at the back of
the Checks the usual endorsements (All prior and/or lack of endorsement
guaranteed), Equitable sent the checks for clearing through the Philippine
Clearing House Corporation (PCHC). Accordingly, BDO 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, BDO
discovered that the endorsements appearing at the back of the Checks,
purporting to be that of the payees, were forged and/or unauthorized or
otherwise belong to persons other than the payees. Pursuant to the PCHC
Clearing Rules and Regulations, it presented the Checks directly to

Equitable for the purpose of claiming reimbursement from the latter.

However, Equitable refused to do so. After an exhaustive investigation and
hearing, the Arbiter rendered a decision in favor of BDO and against
Equitable ordering the PCHC to debit the clearing account of the
defendant (E), and to credit the clearing account of the plaintiff (B) of the
foregoing amount with interest at the rate of 12% per annum from date of
the complaint. The Board of Directors of the PCHC affirmed the decision of
the Arbiter. Hence this petition. ISSUE 1: Were the subject checks nonnegotiable and if not, does it fall under the ambit of the power of the
PCHC? OR Does the PCHC has jurisdiction over the controversy involved in
view of petitioners claim that the subject matter of the case (the Checks)
was not negotiable. HELD: Yes. As provided in the articles of
incorporation of PCHC, its operation extend to "clearing checks and other
clearing items." No doubt transactions on non-negotiable checks are
within the ambit of its jurisdiction. The term check as used in the said
Articles of Incorporation of PCHC can only connote checks in general use
in commercial and business activities. It cannot be conceived to be limited
to negotiable checks only. Checks are used between banks and bankers
and their customers, and are designed to facilitate banking operations. It
is of the essence to be payable on demand, because the contract between
the banker and the customer is that the money is needed on demand.
Further, the participation of the two banks, petitioner and private
respondent, in the clearing operations of PCHC is a manifestation of their
submission to its jurisdiction. ISSUE 2: How does principle of estoppel
apply? HELD: Petitioner is estopped from raising the defense of nonnegotiability of the checks in question. It stamped its guarantee on the
back of the checks and subsequently presented these checks for clearing
and it was on the basis of these endorsements by the petitioner that the
proceeds were credited in its clearing account. The principle of estoppel
effectively prevents the defendant from denying liability for any damages
sustained by the plaintiff which, relying upon an action or declaration of
the defendant, paid on the Checks. The same principle of estoppel
effectively prevents the defendant from denying the existence of the
Checks. The petitioner by its own acts and representation cannot now
deny liability because it assumed the liabilities of an endorser by stamping
its guarantee at the back of the checks. The petitioner having stamped its
guarantee of "all prior endorsements and/or lack of endorsements" (Exh.
A-2 to F-2) is now estopped from claiming that the checks under
consideration are not negotiable instruments. The checks were accepted
for deposit by the petitioner stamping thereon its guarantee, in order that
it can clear the said checks with the respondent bank. By such deliberate
and positive attitude of the petitioner it has for all legal intents and
purposes treated the said cheeks as negotiable instruments and
accordingly assumed the warranty of the endorser when it stamped its
guarantee of prior endorsements at the back of the checks. It led the said
respondent to believe that it was acting as endorser of the checks and on
the strength of this guarantee said respondent cleared the checks in
question and credited the account of the petitioner. Petitioner is now
barred from taking an opposite posture by claiming that the disputed
checks are not negotiable instrument.
PBCOM VS. JOSE ARUEGO (GR No. L-25836-37, Jan. 31, 1981) - Herein
plaintiff instituted against an action against defendant for the recovery of
the total sum of money plus interests and attorneys fees. The complaint
filed by the Philippine Bank of Commerce contains twenty-two (22) causes
of action referring to twenty-two (22) transactions entered into by the said
Bank and Aruego on different dates. The sum sought to be recovered
represents the cost of the printing of "World Current Events," a periodical
published by the defendant. To facilitate the payment of the printing the
defendant obtained a credit accommodation from the plaintiff. Thus, for
every printing of the "World Current Events," the printer collected the cost
of printing by drawing a draft against the plaintiff, said draft being sent
later to the defendant for acceptance. As an added security for the
payment of the amounts advanced to printer, the plaintiff bank also
required defendant Aruego to execute a trust receipt in favor of said bank
wherein said defendant undertook to hold in trust for plaintiff the
periodicals and to sell the same with the promise to turn over to the
plaintiff the proceeds of the sale of said publication to answer for the
payment of all obligations arising from the draft. Defendant filed an
answer interposing for his defense that he signed the drafts in a
representative capacity, that he signed only as accommodation party and
that the drafts signed by him were not really bills of exchange but mere
pieces of evidence of indebtedness because payments were made before

acceptance. ISSUE1: WON the drafts Aruego signed were bills of
exchange? HELD: YES. Under the Negotiable Instruments Law, a bill of
exchange is an unconditional order in writing addressed by one person to
another, signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a
sum certain in money to order or to bearer. As long as a commercial paper
conforms with the definition of a bill of exchange, that paper is considered
a bill of exchange. The nature of acceptance is important only in the
determination of 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. ISSUE2: WON Aruego is personally liable? HELD: YES. Firstly,
Section 20 of the Negotiable Instruments Law provides that "Where the
instrument contains or a person adds to his signature words indicating
that he signs for or on behalf of a principal or in a representative capacity,
he is not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent or as filing a representative
character, without disclosing his principal, does not exempt him from
personal liability." An inspection of the drafts accepted by the defendant
shows that nowhere has he disclosed that he was signing as a
representative of the Philippine Education Foundation Company. He
merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE
ARGUEGO For failure to disclose his principal, Aruego is personally liable
for the drafts he accepted. Secondly, an accommodation party is one
who has signed the instrument as maker, drawer, indorser, without
receiving value therefor and for the purpose of lending his name to some
other person. Such person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking of the instrument
knew him to be only an accommodation party. In lending his name to the
accommodated party, the accommodation party is in effect a surety for
the latter. He lends his name to enable the accommodated party to obtain
credit or to raise money. He receives no part of the consideration for the
instrument but assumes liability to the other parties thereto because he
wants to accommodate another. In the instant case, the defendant signed
as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is
primarily liable. Thus, if the defendant who is a lawyer, he should not
have signed as an acceptor/drawee. In doing so, he became primarily and
personally liable for the drafts.
C.
REQUISITES OF NEGOTIABILITY
Section 1. Form of negotiable instruments. - An instrument to be

negotiable must conform to the following requirements
(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
(a) It must be in writing and signed by the maker or drawer;
Section 191. Definition and meaning of terms.
Written includes printed, and writing includes print.
Signature of the maker or drawer is usually written, preferably with the full
name or at least the surname. However, initials or any mark will be sufficient,
provided that such signature be used as a substitute and the maker or drawer
intends to be bound by it.
Signature is presumed valid, the person denying and to whom the

signature operates must provide evidence of its invalidity.
(b) Must contain an unconditional promise or order to pay a sum

certain in money;
Money is the medium of exchange authorized or adopted by a domestic or
foreign government as part of its currency. In a literal sense, the term means
cash. It includes all legal tender which has been defined in p.1.

1.
Sec. 10
the payment depends upon the adequacy or existence of the fund designated.
It is immaterial, whether the fund has sufficient funds at maturity.
Promise or Order to Pay
METROPOLITAN BANK & TRUST CO. VS. CA (GR No. 88866; Feb. 18,
1991) - Eduardo Gomez opened an account with Golden Savings and
deposited over a period of two months 38 treasury warrants. They were
all drawn by the Philippine Fish Marketing Authority and purportedly
signed by its General Manager and counter-signed by its Auditor. Six of
these were directly payable to Gomez while the others appeared to have
been indorsed by their respective payees, followed by Gomez as second
indorser. On various dates all these warrants were subsequently indorsed
by Gloria Castillo as Cashier of Golden Savings and deposited to its
Savings Account in the Metrobank. They were then sent for clearing by
the branch office to the principal office of Metrobank, which forwarded
them to the Bureau of Treasury for special clearing. After being told to
wait several times, Gloria Castillo and Gomez made subsequent
withdrawals at Metrobank with the impression that the treasury warrants
had been cleared. Metrobank informed Golden Savings that 32 of the
warrants had been dishonored by the Bureau of Treasury and demanded
the refund by Golden Savings of the amount it had previously withdrawn,
to make up the deficit in its account. The demand was rejected. ISSUE:
WON treasury warrants are negotiable instruments? HELD: No. The
treasury warrants in question are not negotiable instruments. Clearly
stamped on their face is the word "non-negotiable." Moreover, it is
indicated that they are payable from a particular fund, to wit, Fund 501.
Sections 1 and 3 of the Negotiable Instruments Law especially
underscored this requirement. The indication of Fund 501 as the
source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional" and the
warrants themselves non-negotiable. Metrobank cannot contend that
by indorsing the warrants in general, Golden Savings assumed that they
were "genuine and in all respects what they purport to be," in accordance
with Section 66 of the Negotiable Instruments Law. The simple reason is
that this law is not applicable to the non-negotiable treasury warrants. The
indorsement was made by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants but merely to deposit them
with Metrobank for clearing.
Terms, when sufficient. - The instrument need not follow the

language of this Act, but any terms are sufficient which clearly
indicate an intention to conform to the requirements hereof.
Clear intention of the parties the substance of the transaction rather than
the form is the criterion of negotiability. Instead of promise the words bind
myself may be used; instead of on demand, the words on call may be used
and instead of bearer, the word holder may be used.
Mere defect in language or grammatical error The words himself

order may be construed as himself or order and thus not render the
instrument non-negotiable.
2.
Promise or Order to Pay Must be Unconditional
Condition Resolutory or Suspensive - In conditional obligations, the
acquisition of rights, as well as the extinguishment or loss of those already

acquired, shall depend upon the happening of the event which constitutes the
condition (Art. 1181, NCC)
Period As opposed to a condition, is when the event is certain to happen or

come.
3.
When is a promise unconditional
Promissory Notes:
It is not essential that the word promise be used. Any words equivalent to a
promise or assumption of responsibility for the payment of the note (like
payable, to be paid, I agree to pay, I guarantee to pay, M obliges
himself to pay, good for, due on demand, etc.) are sufficient to constitute
a promise to pay.
However, bare acknowledgements like IOU, Due P1,000 or for value
received do not constitute promise to pay and are non-negotiable, unless
words constituting a promise to pay is added, like IOU (or Due) P1,000 to be
paid on Jan. 8.
4.
The Basic Test: is whether the holder can determine by calculation or
Bills of Exchange:
computation the amount payable when the instrument is due.
It is not necessary to use the word order. Any other words like Let the
bearer or Drawer obliges the drawee to pay P or order are sufficient.
Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum

certain within the meaning of this Act, although it is to be paid:
An order is a command or imperative direction and, therefore, a mere request,

supplication, or authority (like I request you to pay, or I hope you will pay
or I authorize you to pay) is not sufficient. However, the use of polite words
like please does not convert an order to a request.
Sec. 3
(a) with interest; or

(b) by stated installments; or
(c) by stated installments, with a provision that, upon default in payment of
any installment or of interest, the whole shall become due; or
(d) with exchange, whether at a fixed rate or at the current rate; or
(e) with costs of collection or an attorney's fee, in case payment shall not be
made at maturity.
When promise is unconditional. - An unqualified order or

promise to pay is unconditional within the meaning of this Act
though coupled with:
(a) An indication of a particular fund out of which

reimbursement is to be made or a particular account to be
debited with the amount; or
(b) A statement of the transaction which gives rise to the
instrument.
Sec. 39
Sec. 2(b): STATED instalments must clearly indicate the amount due on each
instalment and the interest, if any. A bill or note indicating payable in two
instalments or in instalments does not fulfil the requirement of the law.
Sec. 2(c): Stated instalments with acceleration clause:

Acceleration clause requires the debtor to pay off the balance sooner than
But an order or promise to pay out of a particular fund is not

unconditional.
Conditional indorsement., - see Part III, Conditional
the due date if some specified event occurs, such as failure to pay an
instalment.
Insecurity clause allows the creditor to demand immediate and full
payment of the loan balance if the creditor has reason to believe that the
debtor is about to default, as when the debtor suddenly loses a significant
source of income.
Extension clause allows additional time for the payment of the loan due.
Indorsement, p. 13.
Sec. 3 (a): does not render the instrument non-negotiable because the
reimbursement is a subsequent act to the payment, which still makes it
absolute. Same is true if there is indication of a particular fund to be debited,
like Pay P or order the sum of P10,000 and charge it to my account, because
here the instrument is payable absolutely, the debit of the account is also a
subsequent act to the payment.
Sec. 3, last paragraph: The instrument is deemed non-negotiable because
Provisions which do not affect certainty of sum
Acceleration at the option of the HOLDER will render the instrument nonnegotiable.
Sec. 2(d): refers to instruments payable in foreign currency. Exchange is the

charge for the expense of providing funds at the place where the instrument is

payable to meet the instrument which is issued at another place. It may be at a

fixed rate or at the current rate. Ex. M promises to pay P or order $1,000 with
exchange at % or at the current rate.
accommodation party when his obligation will arise.

Sec. 4. Determinable future time; what constitutes. - An instrument is
payable at a determinable future time, within the meaning of this Act, which is
expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified therein; or
(c) On or at a fixed period after the occurrence of a specified event which is
certain to happen, though the time of happening be uncertain.
Sec. 2(e): does not affect negotiability because such takes place after
maturity.
Sec. 5
Additional provisions not affecting negotiability. - An

instrument which contains an order or promise to do any act in
addition to the payment of money is not negotiable. But the
negotiable character of an instrument otherwise negotiable is not
affected by a provision which:
Sec. 6
An instrument payable upon a contingency is not negotiable, and the

happening of the event does not cure the defect
(a) authorizes the sale of collateral securities in case the instrument

be not paid at maturity; or
(b) authorizes a confession of judgment if the instrument be not paid
at maturity; or
(c) waives the benefit of any law intended for the advantage or
protection of the obligor; or
(d) gives the holder an election to require something to be done in
lieu of payment of money.
But nothing in this section shall validate any provision or stipulation
otherwise illegal.
Omissions; seal; particular money. - The validity and negotiable
character of an instrument are not affected by the fact that:
Time Instruments
Sec. 4(a): To pay on Aug. 12, 2013;
Sec. 4(b): To pay sixty days after date;
Sec. 4(c): To pay after P dies.
Sec. 4, last paragraph: refers to a condition which may or may not happen. A
negotiable instrument must be payable in all events.
Sec. 7. When payable on demand. - An instrument is payable on

demand:
(a) When it is so expressed to be payable on demand, or at sight, or on
presentation; or
(b) In which no time for payment is expressed.
(e) designates a particular kind of current money in which payment

is to be made.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as

regards the person so issuing, accepting, or indorsing it, payable on demand.
General Rule is that, an additional act, aside from payment of money, is
prohibited. This is based on the fact that while the payment of money may be
indorsed, the additional act would have to be assigned. The following clauses
have been held to render non-negotiable the instrument:
* pay for taxes assessed upon the note or its mortgage security (Hubard vs.
Robert Wallace Co.);
* keep free from encumbrance property on which the value of collateral
pledged for security of the instrument depends (Streckhold vs. National Salt
Co.)
* promise to insure the property pledged as security (First State Savings
Bank vs. Russel)
Demand Instruments are those which are payable on demand, due and
payable immediately after delivery. It is a present debt due at once.
(d) Payable to order or bearer
Sec. 8
When payable to order. - The instrument is payable to order

where it is drawn payable to the order of a specified person or to
him or his order. It may be drawn payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Exceptions are:
Sec. 5(a): I promise to pay P or order the sum of P1,000 secured by a ring I
delivered to him by way of pledge and which he could sell should I fail to pay
him at maturity the additional act is to be performed after non-payment at
maturity. Until maturity, the promise is to pay money only.
Sec. 5(b): I promise to pay P or order P10,000 and I hereby authorize my
Where the instrument is payable to order, the payee must be named

or otherwise indicated therein with reasonable certainty.
When payable to bearer. - The instrument is payable to
bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing
person, and such fact was known to the person making it so
payable; or
(d) When the name of the payee does not purport to be the name of
any person; or
(e) When the only or last indorsement is an indorsement in blank.
attorney-at-law to appear in any court of record after the obligation becomes

due and waive the issuing and service of processes and confess a judgment
against me in favor of the holder and thereupon waive all errors in any such
proceedings and waive all right of appeal confession of judgment is a written
acknowledgment by the defendant of his indebtedness and liability to the
plaintiff. It enables the holder to obtain a judgment without the delay usually
incident to a lawsuit. While not authorized in this jurisdiction, because it
deprives the maker or drawer a day in court, it nevertheless does not affect
negotiability. A confession of judgment given AFTER the action is brought to
save expenses is valid.
Sec. 9
Sec. 5(c): Notice of dishonor waived even waiver of protest, presentment
Payable to Order: when it is payable to the (1) order of a specified person; or
for payment, or demand, would not destroy negotiability.
(2) to him or his order. Consequently, an instrument payable to a specified

person (Pay to P), is not a negotiable order instrument.
Sec. 5(d): or an airconditioner at the option of the holder since the holder
has the choice, the instrument is still negotiable because he can still demand
payment of money. If the option is on the promisor, it would be difficult to
compel him to make payment in money.
Sec. 8(b): An instrument payable to the maker is not complete until indorsed
by him. (Sec. 184)
Sec. 8(c): Being payable to the drawee, he may pay himself at maturity from
the funds of the drawer.
Sec. 8(d): Pay to A and B; for Sec. 8(e), Pay to A or B.
Sec. 8(f): Pay to the order of the Commissioner of Internal Revenue.
(c) Payable on demand or at a fixed or determinable future time
Time must be certain so that the holder will know when he may enforce the
instrument, and the person liable maker, drawee, or acceptor when he may
be required to pay, or the secondary parties drawer, indorser or
Sec. 8, last paragraph: If there is no payee, there is nobody who could give
the order or authority to collect or otherwise indorse and, therefore, there is no

point in considering it negotiable.
easy, and cheap way to settle and secure debts. They are quick remedy
serve to save the court's time. They also save time and money of the
litigants and the government the expenses that a long litigation entails. In
one sense, instruments of this character may be considered as special
agreements, with power to enter up judgments on them, binding the
parties to the result as they themselves viewed it. On the other hand, are
disadvantages to the commercial world which outweigh the considerations
just mentioned. Such warrants of attorney are void as against public
policy, because they enlarge the field for fraud, because under these
instruments the promissor bargains away his right to a day in court, and
because the effect of the instrument is to strike down the right of appeal
accorded by statute. The recognition of such form of obligation would
bring about a complete reorganization of commercial customs and
practices, with reference to short-term obligations. It can readily be seen
that judgment notes, instead of resulting to the advantage of commercial
life in the Philippines, might be the source of abuse and oppression, and
make the courts involuntary parties thereto. If the bank has a meritorious
case, the judgment is ultimately certain in the courts. The Court is of the
opinion thus that warrants of attorney to confess judgment are not
authorized nor contemplated by Philippine law; and that provisions in
notes authorizing attorneys to appear and confess judgments against
makers should not be recognized in this jurisdiction by implication and
should only be considered as valid when given express legislative sanction.
Bearer Instruments produce the following effect: (a) it is payable to bearer;
(b) payment to any person in possession thereof in good faith and without
notice that his title is defective, at or after maturity (Sec. 88) discharges the
instrument (Sec. 119); (c) Delivery alone is enough to effect negotiation (Sec.
30).
Sec. 9(a) and (b) are originally bearer instruments. Those under subsection
(c), (d) and (e) are order instruments on the face converted to bearer
instruments.
Sec. 9(c): A fictitious person is meant to be one who, though named, as
payee, has no right to it because the maker or drawer so intended and it

matters not, whether the name of the payee used by him be that one living or
dead, or one who never existed. (Snyder vs. Com. Exch. Nat. Bank)
Sec. 9(c) and (d): They are treated as bearer instruments because it is
impossible to indorse when it is payable to cash, sundries or a fictitious

person.
ANG TEK LIAN VS. CA (GR No. L-2516; Sept. 25, 1950) - Petitioner Ang
Tek Lian approached Lee Hua and asked him if he could give him
P4,000.00. He said that he is supposed to withdraw from the bank but his
bank was already closed. In exchange, he gave respondent Lee Hua a
check which is payable to the order of cash. When Lee Hua presented
the check for payment the next day, he discovered that it has an
insufficient funds, hence, was dishonored by the bank. In his defense, Ang
Tek Lian argued that he did not indorse the check to Lee Hua when the
latter accepted the check without his indorsement. ISSUE: WON Ang Tek
Lians indorsement of the said check is necessary to hold him liable for the
dishonored check? HELD: No. Under Section 9 of the Negotiable
Instruments Law, a check drawn payable to the order of cash is a
check payable to bearer and the bank may pay it to the person
presenting it for payment without drawers indorsement.
Consequently, the form of the check was totally unconnected with its
dishonor. The check was returned unsatisfied because the drawer had
insufficient funds and not because the drawers indorsement was lacking.
Hence, Ang Tek Lian may be held liable for estafa because under article
315, paragraph d, subsection 2 of the Revised Penal Code, one who issues
a check payable to cash to accomplish deceit and knows that at the time
he had no sufficient deposit with the bank to cover the amount of the
check and without informing the payee of such circumstances is guilty of
estafa.
1.
Sec. 6
(a) it is not dated; or

(b) does not specify the value given, or that any value had
been given therefor; or
(c) does not specify the place where it is drawn or the place
where it is payable; or
(d) bears a seal; or
(e) designates a particular kind of current money in which
payment is to be made.
Sec. 11
Sec. 12
Sec. 130. When bill may be treated as promissory note. - Where in a
bill the drawer and drawee are the same person or where the drawee is a
fictitious person or a person not having capacity to contract, the holder may
treat the instrument at his option either as a bill of exchange or as a
promissory note
OMISSIONS AND
NEGOTIABILITY
PROVISIONS
THAT
DO
NOT
Sec. 13
AFFECT
PNB VS. MANILA OIL REFINING (GR No. L-18103; June 8, 1922) The manager and treasurer of respondent company executed and
delivered to the Philippine National Bank (PNB), a promissory note which
provides a promise to pay petitioner bank the amount of P61,000 and that
in case payment was not made at time of maturity, any lawyer in the
Philippines is authorize to represent the company and confess judgment
for the said sum with interest, cost of suit and attorney's fees of ten% for
collection, a release of all errors and waiver of all rights to inquisition and
appeal, and to the benefit of all laws exempting property, real or personal,
from levy or sale. Indeed, Manila Oil has failed to pay on demand. This
prompted the bank to file a case in court, wherein an attorney associated
with them entered his appearance for the defendant. To this the
defendant objected. ISSUE: WON provisions in notes authorizing
attorneys to appear and confess judgments against makers should not be
recognized in Philippine jurisdiction by implication? HELD: No. Judgments
by confession as appeared at common law were considered an amicable,
Omissions; seal; particular money. - The validity and

negotiable character of an instrument are not affected by the
fact that:
(e) Identity of the drawee
D.
OMISSIONS
Sec. 14
But nothing in this section shall alter or repeal any statute

requiring in certain cases the nature of the consideration to be
stated in the instrument.
Date, presumption as to. - Where the instrument or an
acceptance or any indorsement thereon is dated, such date is
deemed prima facie to be the true date of the making, drawing,
acceptance, or indorsement, as the case may be.
Ante-dated and post-dated. - The instrument is not invalid
for the reason only that it is ante-dated or post-dated, provided
this is not done for an illegal or fraudulent purpose. The person
to whom an instrument so dated is delivered acquires the title
thereto as of the date of delivery.
When date may be inserted. - Where an instrument (1)
expressed to be payable at a fixed period after date is issued

undated, or (2) where the acceptance of an instrument payable
at a fixed period after sight is undated, any holder may insert
therein the true date of issue or acceptance, and the instrument

shall be payable accordingly. The insertion of a wrong date
does not avoid the instrument in the hands of a subsequent
holder in due course; but as to him, the date so inserted is to
be regarded as the true date. (emphasis supplied)
Blanks; when may be filled. - Where the instrument is
wanting in any material particular, the person in
possession thereof has a prima facie authority to complete it by
filling up the blanks therein.
And a signature on a blank paper delivered by the person
making the signature in order that the paper may be converted
into a negotiable instrument operates as a prima facie authority
to fill it up as such for any amount.
In order, however, that any such instrument when completed

may be enforced against any person who became a party

E.
thereto prior to its completion, it must be (1) filled up strictly in

accordance with the authority given and (2) within a reasonable
time.
INTERPRETATION OF INSTRUMENTS
Sec. 17. Construction where instrument is ambiguous. - Where the

language of the instrument is ambiguous or there are omissions therein,
the following rules of construction apply:
But if any such instrument, after completion, is negotiated to a

holder in due course, it is valid and effectual for all purposes
in his hands, and he may enforce it as if it had been filled up
strictly in accordance with the authority given and within a
reasonable time.
of establishing such claim.
(a) Where the sum payable is expressed in words and also in figures and
there is a discrepancy between the two, the sum denoted by the words is
the sum payable; but if the words are ambiguous or uncertain, reference
may be had to the figures to fix the amount;
(b) Where the instrument provides for the payment of interest, without
specifying the date from which interest is to run, the interest runs from
the date of the instrument, and if the instrument is undated, from the
issue thereof;
(c) Where the instrument is not dated, it will be considered to be dated as
of the time it was issued;
(d) Where there is a conflict between the written and printed provisions of
the instrument, the written provisions prevail;
(e) Where the instrument is so ambiguous that there is doubt whether it is
a bill or note, the holder may treat it as either at his election;
(f) Where a signature is so placed upon the instrument that it is not clear
in what capacity the person making the same intended to sign, he is to be
deemed an indorser;
(g) Where an instrument containing the word "I promise to pay" is signed
by two or more persons, they are deemed to be jointly and severally liable
thereon.
Sec. 13: If an undated note payable to P matures on Aug. 29, 2013, 30 days
Sec. 17(d): Reason for this rule is that, the written words are deemed to
(separation and emphasis supplied)

Sec. 17
Sec. 53
Sec. 71
Construction where instrument is ambiguous. see E.

Interpretation of Instruments.
When person not deemed holder in due course. see
HOLDER IN DUE COURSE, p. 16
Presentment where instrument is not payable on
demand and where payable on demand. (1) Where the
instrument is not payable on demand, presentment must be
made on the day it falls due. Where it is payable on demand,
presentment must be made within a reasonable time after its
issue, except that in the case of a bill of exchange, presentment
for payment will be sufficient if made within a reasonable time
after the last negotiation thereof.
Sec. 11: He who claims that some other date is the true date has the burden
express the true intention of the maker or drawer because they are placed
there by himself. Also, because the amount in words are harder to alter
(Sundiang, 2010 audio lecture).
after issuance, but P inserted July 15 to hasten maturity date, P cannot enforce
payment because it is avoided as to him who ante-dated for fraudulent
purposes (Sec. 12). But if it was indorsed to A, a holder in due course, he may
collect on Aug. 14, as if the date inserted was the true date.
Sec. 17(g): Joint and Solidary Obligation
Sec. 14: Material Particular is any particular proper to be inserted in a
REPUBLIC PLANTERS BANK VS. CA (GR No. 93073; Dec. 21, 1992) In 1979, World Garment Manufacturing, through its board authorized
Shozo Yamaguchi (president) and Fermin Canlas (treasurer) to obtain
credit facilities from Republic Planters Bank (RPB). For this, 9 promissory
notes were executed. Each promissory note was uniformly written in the
following manner:
negotiable instrument to make it complete.
Authority to Complete does not carry with it the authority to alter (Sec.
124).
Authority to put any amount there must be showing of intention to

convert it to a negotiable instrument. Otherwise, it cannot be enforced
against the maker, even by a holder in due course (Sec. 15).
___________, after date, for value received, I/we, jointly and severally
promise to pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office in
Manila, Philippines, the sum of ___________ PESOS(.) Philippine Currency
Please credit proceeds of this note to:
Holder NOT in due course of an instrument filled up in excess of the

authority given is treated as a holder of a materially altered instrument (Sec.
124) and therefore cannot collect to parties prior to completion who did not
assent to the alteration. If M issues a note and authorized P, payee, to insert
P1,000, but P inserts P2,000, N, a subsequent holder NOT in due course cannot
enforce it against M. But if N was a holder in due course, he can enforce the
instrument against M upto the stated amount of P2,000 since it is conclusive
that there was authority to fill up the instrument and the same was not done in
excess of authority.
2.
________ Savings Account ______XX Current Account No. 1372-00257-6 of

WORLDWIDE GARMENT MFG. CORP.
Sgd. Shozo Yamaguchi
Sgd. Fermin Canlas
The note became due and no payment was made. RPB eventually sued
Yamaguchi and Canlas. Canlas, in his defense, averred that he should not
be held personally liable for such authorized corporate acts that he
performed inasmuch as he signed the promissory notes in his capacity as
officer of the defunct Worldwide Garment Manufacturing. ISSUE: WON
Canlas should be held liable for the promissory notes? HELD: Yes. The
solidary liability of private respondent Fermin Canlas is made clearer and
certain, without reason for ambiguity, by the presence of the phrase joint
and several as describing the unconditional promise to pay to the order
of Republic Planters Bank. Where an instrument containing the
words I promise to pay is signed by two or more persons, they
are deemed to be jointly and severally liable thereon. Canlas is
solidarily liable on each of the promissory notes bearing his signature for
the following reasons: The promissory notes are negotiable instruments
and must be governed by the Negotiable Instruments Law. Under the
Negotiable lnstruments Law, persons who write their names on the face of
promissory notes are makers and are liable as such. By signing the notes,
the maker promises to pay to the order of the payee or any holder
according to the tenor thereof.
ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABILITY

Sec. 5 (supra, p.6)
a. Confession of Judgment see p.6
a.1 Warrant of attorney to confess judgment, however, are
not authorized nor contemplated by our law because under
these instruments, the promisor bargains away his right to a
day in court. (PNB vs. MANILA OIL REFINING, supra, p.6)
a.2 Cognovit Actionem he has confessed the action
a.3 Relicta Verificationem his pleading being abandoned;
a confession of judgment accompanied by a withdrawal of the
plea.
b. Waiver of Obligor Sec. 109. Waiver of notice. - Notice of
dishonor may be waived either before the time of giving notice has
arrived or after the omission to give due notice, and the waiver may
be expressed or implied.

SPS. EVANGELISTA VS. MERCATER FINANCE CORP. (GR No.

148864; Aug. 21, 2003) - Petitioner spouses filed a complaint against
respondents for the foreclosure of the mortgage on their property and
eventual its eventual sale, claiming, among others, that they executed the
said mortgage on their capacity as officers of Embassy Farms, and not on
their personal capacity, thus, there is no consideration received by them,
making the mortgage voidable. Respondent, on the other hand, claims
that the promissory note for the loan, for which the mortgage was
executed, shows that the spouses signed as co-makers, also with the
succeeding promissory notes. The RTC, upon motion of the respondent,
granted summary judgment and dismissed the complaint. On appeal, the
CA affirmed in toto the decision of the RTC. ISSUE: WON petitioners are
solidarily liable with Embassy Farms for the loan as evidenced by the
promissory note? HELD: Yes. The promissory note reads:
from one person to another;
"Issue" means the first delivery of the instrument, complete in

form, to a person who takes it as a holder
Section 15: Example: M makes a note for P10,000 with the name of the
payee in blank and keeps it in his drawer. P steals the note, names himself as
the payee and indorses the note to A, A to B, B to C, a holder in due course.
NOTE: C, even though a holder in due course, cannot enforce said note against
M by virtue of Sec. 15, but C can go after P, A and B.
Section 16: As regards immediate parties and a remote party other than a
holder in due course, delivery is a rebuttable presumption, as such can either
be conditional or for a special purpose (without intention of transferring title).
For value received, I/We jointly and severally promise to pay to the order of MERCATOR FINANCE
CORPORATION at its office, the principal sum of EIGHT HUNDRED FORTY-FOUR THOUSAND SIX
HUNDRED TWENTY-FIVE PESOS & 78/100 (P 844,625.78), Philippine currency, x x x, in
installments as follows:
September 16, 1982
P154,267.87
As regards a holder in due course, valid delivery, of a complete instrument (as

opposed to an incomplete instrument under Sec. 15), by all parties prior to him
is conclusively presumed (admission of evidence to the contrary is not allowed).
October 16, 1982
P154,267.87
B.
November 16, 1982
P154,267.87
December 16, 1982
P154,267.87
January 16, 1983
P154,267.87
February 16, 1983
P154,267.87
Sec. 30. What constitutes negotiation. - An instrument is negotiated when

it is transferred from one person to another in such manner as to constitute the
transferee the holder thereof. If payable to bearer, it is negotiated by delivery;
if payable to order, it is negotiated by the indorsement of the holder and
completed by delivery. (emphasis supplied)
NEGOTIATION DEFINED
1.
The note was signed by petitioners and Embassy Farms, Inc. with the
signature of Eduardo Evangelista below it. Sec. 17 of the Negotiable
Instruments Law provide: Construction where instrument is ambiguous
Where the language of the instrument is ambiguous or there are
omissions therein, the following rules of construction shall apply: (g)
Where an instrument containing the word I promise to pay is signed by
two or more persons, they are deemed to be jointly and severally liable
thereon. As such, the promissory note itself proves that petitioners
are solidarily liable with Embassy Farms. Moreover, even if
petitioners signed merely as officers, it does not erase the fact
that they subsequently executed a continuing suretyship
agreement which makes them solidarily liable with the principal.
They cannot eventually claim that they did not personably receive any
consideration for the contract.
2.
C.
generally taking only such title or rights as his assignor has, subject to all
defenses available against his assignor. It is the less usual method which may
or may not involve an indorsement in the sense of writing on the back of the
instrument.
Applicable
Law
Type
of
transaction
or
instrument:
Nature of
the
transferee:
Rights
acquired:
ISSUANCE/DELIVERY OF NEGOTIABLE INSTRUMENTS
Sec. 15
Sec. 16
Sec. 191
Incomplete instrument not delivered. - 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.
Delivery; when effectual; when presumed. - Every contract on
a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto.
As between immediate parties and as regards a remote party other
than a holder in due course, the delivery, in order to be effectual,
must be made either by or under the authority of the party making,
drawing, accepting, or indorsing, as the case may be; and, in such
case, the delivery may be shown to have been conditional, or for a
special purpose only, and not for the purpose of transferring the
property in the instrument. But 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. And where the instrument is no longer in the possession
of a party whose signature appears thereon, a valid and intentional
delivery by him is presumed until the contrary is proved.
Definition and meaning of terms. - In this Act, unless the
contract otherwise requires:
"Delivery" means transfer of possession, actual or constructive,
ASSIGNMENT AND NEGOTIATION DISTINGUISHED
Assignment is the transfer of the title to an instrument, with the assignee
III. ISSUE, TRANSFER AND NEGOTIATION

A.
Instruments payable to order: two steps are required for negotiation:

(a) indorsement and (b) delivery.
Instruments payable to bearer: delivery alone without indorsement.
Availability
of personal
defenses
NEGOTIATION
Negotiable Instruments Law
ASSIGNMENT
Civil Code of the Philippines
Negotiable instruments only
Contracts in general
assignable rights
Transferee is a holder who may

be a holder in due course
Transferee
is
a
mere
assignee and can never be a
holder in due course
Transferee cannot acquire
more
rights
than
the
transferor because he merely
steps into the shoes of the
transferor
Transferee is always subject
to personal defenses
The transferee-holder may

acquire more rights than the
transferor if he is a holder in
due course
Transferee-holder may be free
from personal defenses if he is
a holder in due course
or
CASABUENA VS. COURT OF APPEALS (GR No. 115410; Feb. 27, 1998)
- Ciriaco Urdaneta was a grantee of a parcel of land purchased by the City
of Manila and conveyed to its less privileged inhabitants, through its land
reform program. Subsequently, he assigned his rights and interests in 1/2
of the lot to Arsenia Benin covering full payment of his indebtedness in the
amount of P500. A deed of sale with mortgage was executed, with
Urdaneta undertaking to pay the City the amount figured for a period of
forty years in 480 equal installments. Another deed of
assignment involving the whole lot, with assignee Benin agreeing to
shoulder all obligations including the payment of amortization to the City,
in accordance with the contract between it and Urdaneta. As stated in
their verbal agreement, Urdaneta could redeem the property upon

payment of the loan within 3yrs. from the date of assignment; failure to
pay would transfer physical possession of the lot to Benin for a period of
15 years, without actual transfer of title and ownership thereto.
Meanwhile, the administration of the property was assigned to brothers
Candido and Juan Casabuena, to whom Benin had transferred her right,
title and interest for a consideration of P7,500. Notwithstanding this
assignment, Benin constructed a duplex (apartment) on the lot separately
occupied by Jose Abejero and Juan Casabuena, who collected rentals from
the former. After the lot was fully paid for by the Urdanetas, a Release of
Mortgage was executed and period of non-alienation of the land was
extended from 5 to 20 years. Casabuena was Benin's rental collector but
their relationship soured resulting in a litigation involving issue on
ownership, of which the cause was the latters failure to pay rentals. Upon
learning of the litigation between petitioner and Benin, Urdaneta asked
them to vacate the property and surrender to him possession thereof
within 15 days from notice. Petitioner's adamant refusal to comply with
such demand resulted in a complaint for ejectment and recovery of
possession of property filed by Urdaneta against Casabuena and Benin.
Amid the sprouting controversies involving the lot, the Urdaneta spouses
succeeded in having the Court declare them as its true and lawful owners
with the deed of assignment to Benin merely serving as evidence of
Ciriaco's indebtedness to her in view of the prohibition against the sale of
the land imposed by the City government. ISSUE: WON a deed of
assignment can transfer ownership of the property to the assignee?
HELD: At the bottom of this controversy is the undisputed fact that
Ciriaco Urdaneta was indebted to Benin, to secure which debt the spouses
ceded their rights over the land through a deed of assignment. An
assignment of credit is an agreement by virtue of which the
owner of a credit, known as the assignor, by a legal cause,
transfers his credit and its accessory rights to another, known as
the assignee, who acquires the power to enforce it to the same
extent as the assignor could have enforced it against the
debtor. Stated simply, it is the process of transferring the right of
the assignor to the assignee, who would then be allowed to
proceed against the debtor. The assignment involves no transfer
of ownership but merely effects the transfer rights which the
assignor has at the time, to the assignee. Benin having been deemed
subrogated to the rights and obligations of the spouses, she was bound by
exactly the same conditions to which the latter were bound. This being so,
she and the Casabuenas were bound to respect the prohibition against
selling the property within the five-year period imposed by the City
government. The act of assignment could not have operated to efface
liens or restrictions burdening the right assigned, because an assignee
cannot acquire a greater right than that pertaining to the assignor. At
most, an assignee can only acquire rights duplicating those which his
assignor is entitled by law to exercise. In the case at bar, the Casabuenas
merely stepped into Benin's shoes, who was not so much an owner as a
mere assignee of the rights of her debtors. Not having acquired any right
over the land in question, it follows that Benin conveyed nothing to
defendants with respect to the property.
all executed on the same day by and among the parties. Barely 14 days
after delivery, the tractors broke down. Mechanics were sent to do repairs
but the tractors were no longer serviceable. CPII logging operations were
delayed so Vergara advised IPM that the installment payments would
likewise be delayed until it fulfills its obligation under its warranty. IFC
then filed a collection suit against petitioners for the recovery of the
principal sum plus interest, attorney's fees and costs of suit contending
that it was a holder in due course of a negotiable promissory note.
ISSUE: WON IFC is a holder in due course of a negotiable promissory
note so as to bar all defenses of CPII against IPM? HELD: No. The note in
question fails to meet the requirement under Sec. 1(d) of Act No. 2013.
IFC is not and will never be a holder in due course of the promissory note
but is merely an assignee. The note in question is not a negotiable
instrument for lack of the so-called words of negotiability. The sellerassignor IPM is liable for breach of warranty and such liability as a general
rule extends to the corporation (IFC) to whom it assigned its rights and
interests. Even assuming that the note is negotiable, IFC which actively
participated in the sale on installment transaction from its inception cannot
be regarded as a holder in due course. Thus, petitioners may raise against
the respondent all defenses available to it as against the seller-assignor,
IPM.
TRADERS ROYAL BANK VS. COURT OF APPEALS (GR No. 93397;
Mar. 3, 1997) - Assailed in this Petition is the Decision of the Court of
Appeals affirming the nullity of the transfer of Central Bank Certificate of
Indebtedness (CBC), with a face value of P500,000 from Philippine
Underwriters Finance Corporation (Philfinance) - without authorization to
petitioner Traders Royal Bank. ISSUE: WON Central Bank Certificate of
Indebtedness (CBCI) is a negotiable instrument? HELD: No. The
instrument provides for a promise to pay the registered owner Filriters.
Very clearly, the instrument was only payable to Filriters. It lacked the
words of negotiability which should have served as an expression of the
consent that the instrument may be transferred by negotiation. The
language of negotiability which characterizes a negotiable paper as a
credit instrument is its freedom to circulate as a substitute for money.
Hence, freedom of negotiability is the touchstone relating to the protection
of holders in due course, and the freedom of negotiability is the
foundation for the protection, which the law throws around a holder in
due course. This freedom in negotiability is totally absent in a certificate of
indebtedness as it merely acknowledges to pay a sum of money to a
specified person or entity for a period of time. The transfer of the
instrument from Philfinance to TRB was merely an assignment, and is not
governed by the negotiable instruments law. The pertinent question then
iswas the transfer of the CBCI from Filriters to Philfinance and
subsequently
from
Philfinance
to
TRB,
in
accord
with
existing law, so as to entitle TRB to have the CBCI registered in its name
with the Central Bank? Clearly shown in the record is the fact that
Philfinances title over CBCI is defective since it acquired the instrument
from Filriters fictitiously. Although the deed of assignment stated that the
transfer was for value received, there was really no consideration
involved. What happened was Philfinance merely borrowed CBCI from
Filriters, a sister corporation. Thus, for lack of any consideration, the
assignment made is a complete nullity. Furthermore, the transfer wasn't in
conformity with the regulations set by the CB. Giving more credence to
rule that there was no valid transfer or assignment to petitioner.
Art. 348, Code of Commerce. The conveyer shall answer for the
legality of the credit and for the capacity in which he made the transfer;
but he shall not answer for the solvency of the debtor, unless there is an
express agreement requiring him to do so
D.
HOW ARE NEGOTIABLE INSTRUMENTS AND NON-NEGOTIABLE

INSTRUMENTS TRANSFERRED?
SESBRENO VS. COURT OF APPEALS (supra, p.3)
CONSOLIDATED PLYWOOD INDUSTRIES, INC. VS. IFC LEASING
(GR No. 72593; April 30, 1987) - Consolidated Plywood Industries, Inc.
(CPII) needed two tractors for its logging business. Atlantic Gulf & Pacific
Company through its sister company Industrial Products Marketing (IPM)
offered to sell two used" tractors. IPM inspected the job site and assured
that the tractors were fit for the job and gave a 90-day warranty for
machine performance and availability of parts. CPII officers Wee and
Vergara purchased the tractors on installment and paid the down
payment. The deed of sale with chattel mortgage with promissory note
and the deed of assignment, where IPM assigned its rights and interest in
the chattel mortgage in favor of IFC Leasing and Acceptance Corp., were
10
E.
HOW NEGOTIATION TAKES PLACE
Sec. 30
Sec. 40
What constitutes negotiation. (supra, p. 9)

Indorsement of instrument payable to bearer. - Where an
instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person
indorsing specially is liable as indorser to only such holders as make
title through his indorsement.
An instrument payable to bearer is not converted into an instrument
payable to order by being indorsed specially. However, the person who

indorsed specially is liable only to those holders who can trace their title to the
instrument by a series of unbroken indorsements from such special indorser.
originally payable to order: Sec. 40 does not

10 Instruments
instruments originally payable to order which was indorsed in black.

apply to
LIM VS. CA (GR No. 107898; Dec. 19, 1995) - Manuel Lim and Rosita Lim
are the officers of the Rigi Bilt Industries, Inc. (RIGI) which had been
transacting business with Linton Commercial Company, Inc. The Lims
ordered several steel plates and purlins from Linton and were delivered to
the Lims place of business which was in Caloocan. To pay Linton, the
petitioners issued seven checks. When the checks were presented to the
drawee bank (Solidbank), they were dishonored because payment for the
checks had been stopped and/or insufficiency of funds. As a result,
petitioners were found guilty with Estafa and 7 counts of violation of BP
22 by the Malabon RTC. On appeal, the CA reversed the trial courts
decision on Estafa but upheld the decision on violation of BP 22, hence,
this petition. ISSUE: WON the issue was within the jurisdiction of the
Malabon RTC? HELD: The venue of jurisdiction lies either in the RTC
Caloocan or Malabon Trial Court. BP 22 is a continuing crime. A person
charged with a transitory crime may be validly tried in any municipality or
territory where the offense was partly committed. In determining the
proper venue, the ff. must be considered. 1) 7 checks were issued to
Linton in its place of business in Navotas. 2) The checks
were delivered Linton in the same place. 3) The checks were dishonored
in Caloocan 4) The Lims had knowledge of their insufficiency of funds.
Under
Section
191
of
the
Negotiable
Instruments
Law, issue means the first delivery of the instrument complete in its
form to a person who takes it as holder. The term holder on the other
hand refers to the payee or endorsee of a bill or note who is in possession
of it or the bearer thereof. The place where the bills were written,
signed or dated does not necessarily fix or determine the place
where they were executed. It is the delivery that is important. It
is the final act essential to its consummation of an obligation. An
undelivered bill is unoperative. The issuance and delivery of the check
must be to a person who takes it as a holder. In the case at bar, although
Linton sent a collector who received the checks from the petitioners place
of business, the checks were actually issued and delivered to Linton in
Navotas. The collector is not a holder or an agent, he was just an
employee.
LORETO DELA VICTORIA VS. HON. BURGOS (GR No. 111190; June
27, 1995) - Raul Sebreo filed a complaint for damages against Fiscal
Bienvenido Mabanto Jr. of Cebu City. Sebreo won and he was awarded
the payment of damages. Judge Burgos ordered De La Victoria, custodian
of the paychecks of Mabanto, to hold the checks and convey them to
Sebreo instead. De La Victoria assailed the decision as he said that the
paychecks and the amount thereon are not yet the property of Mabanto
because they are not yet delivered to him; that since there is no delivery
of the checks to Mabanto, the checks are still part of the public funds; and
the checks due to the foregoing cannot be the proper subject of
garnishment. ISSUE: WON De La Victoria is correct? HELD: Yes. Under
Section 16 of the Negotiable Instruments Law, every contract on a
negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As ordinarily
understood, delivery means the transfer of the possession of the
instrument by the maker or drawer with intent to transfer title to the
payee and recognize him as the holder thereof.
DEVELOPMENT BANK OF RIZAL VS. SIMA WEI (GR No. 85419; June
9, 1983) - In consideration for a loan extended by petitioner Bank to
respondent Sima Wei, the latter executed and delivered to the former a
promissory note, engaging to pay the petitioner Bank or order the amount
of P1,820,000.00 on or before June 24, 1983 with interest at 32% per
annum. Sima Wei made partial payments on the note, leaving a balance of
P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed
checks payable to petitioner Bank drawn against China Banking
Corporation, bearing respectively the serial numbers 384934, for the
amount of P550,000.00 and 384935, for the amount of P500,000.00. The
said checks were allegedly issued in full settlement of the drawer's
account evidenced by the promissory note. These two checks were not
delivered to the petitioner-payee or to any of its authorized
representatives. For reasons not shown, these checks came into the
possession of respondent Lee Kian Huat, who deposited the checks
without the petitioner-payee's indorsement (forged or otherwise) to the
account of respondent Plastic Corporation, at the Balintawak branch,
Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the
11
11
Balintawak branch of Producers Bank, relying on the assurance of

respondent Samson Tung, President of Plastic Corporation, that the
transaction was legal and regular, instructed the cashier of Producers Bank
to accept the checks for deposit and to credit them to the account of said
Plastic Corporation, inspite of the fact that the checks were crossed and
payable to petitioner Bank and bore no indorsement of the latter. Hence,
petitioner filed the complaint as aforestated. ISSUE: WON petitioner Bank
has a cause of action against any or all of the defendants, in the
alternative or otherwise? HELD: A cause of action is defined as an act or
omission of one party in violation of the legal right or rights of another.
The essential elements are: (1) legal right of the plaintiff; (2) correlative
obligation of the defendant; and (3) an act or omission of the defendant in
violation of said legal right. The normal parties to a check are the drawer,
the payee and the drawee bank. Courts have long recognized the business
custom of using printed checks where blanks are provided for the date of
issuance, the name of the payee, the amount payable and the drawer's
signature. All the drawer has to do when he wishes to issue a check is to
properly fill up the blanks and sign it. However, the mere fact that he has
done these does not give rise to any liability on his part, until and unless
the check is delivered to the payee or his representative. A negotiable
instrument, of which a check is, is not only a written evidence of a
contract right but is also a species of property. Just as a deed to a piece of
land must be delivered in order to convey title to the grantee, so must a
negotiable instrument be delivered to the payee in order to evidence its
existence as a binding contract. Section 16 of the Negotiable Instruments
Law, which governs checks, provides in part: Every contract on a
negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. Thus, the payee of a
negotiable instrument acquires no interest with respect thereto until its
delivery to him. Delivery of an instrument means transfer of possession,
actual or constructive, from one person to another. Without the initial
delivery of the instrument from the drawer to the payee, there can be no
liability on the instrument. Moreover, such delivery must be intended to
give effect to the instrument. The allegations of the petitioner in the
original complaint show that the two (2) China Bank checks, numbered
384934 and 384935, were not delivered to the payee, the petitioner
herein. Without the delivery of said checks to petitioner-payee, the former
did not acquire any right or interest therein and cannot therefore assert
any cause of action, founded on said checks, whether against the drawer
Sima Wei or against the Producers Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent
Sima Wei on the promissory note, and the alternative defendants,
including Sima Wei, on the two checks. On appeal from the orders of
dismissal of the Regional Trial Court, petitioner Bank alleged that its cause
of action was not based on collecting the sum of money evidenced by the
negotiable instruments stated but on quasi-delict a claim for damages
on the ground of fraudulent acts and evident bad faith of the alternative
respondents. This was clearly an attempt by the petitioner Bank to change
not only the theory of its case but the basis of his cause of action. It is
well-settled that a party cannot change his theory on appeal, as this would
in effect deprive the other party of his day in court. Notwithstanding the
above, it does not necessarily follow that the drawer Sima Wei is freed
from liability to petitioner Bank under the loan evidenced by the
promissory note agreed to by her. Her allegation that she has paid the
balance of her loan with the two checks payable to petitioner Bank has no
merit for, as We have earlier explained, these checks were never delivered
to petitioner Bank. And even granting, without admitting, that there was
delivery to petitioner Bank, the delivery of checks in payment of an
obligation does not constitute payment unless they are cashed or their
value is impaired through the fault of the creditor. None of these
exceptions were alleged by respondent Sima Wei. Therefore, unless
respondent Sima Wei proves that she has been relieved from liability on
the promissory note by some other cause, petitioner Bank has a right of
action against her for the balance due thereon. However, insofar as the
other respondents are concerned, petitioner Bank has no privity with
them. Since petitioner Bank never received the checks on which it based
its action against said respondents, it never owned them (the checks) nor
did it acquire any interest therein. Thus, anything which the respondents
may have done with respect to said checks could not have prejudiced
petitioner Bank. It had no right or interest in the checks which could have
been violated by said respondents. Petitioner Bank has therefore no cause
of action against said respondents, in the alternative or otherwise. If at all,

it is Sima Wei, the drawer, who would have a cause of action against her
co-respondents, if the allegations in the complaint are found to be true.
F.
selling only P30,000 of it and for such reason, at the back of the
document he wrote in longhand: 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
INCOMPLETE NEGOTIATION OF ORDER INSTRUMENT
assignment of P30,000, Montinola would pay him P90,000 in Japanese

military notes but that the latter gave him only two checks of P20,000 and
P25,000, leaving a balance unpaid of P45,000. The writing made at the
back of the check was, however, mysteriously obliterated and in its place,
a supposed indorsement appearing on the back of the check was made for
the whole amount of the check. ISSUE: WON the check was legally
negotiated within the meaning of the NIL in view of the fact that the
instrument was indorsed for a lesser amount? HELD: NO. Section 32 of
the NIL provides that "the indorsement must be an indorsement of the
entire instrument. An indorsement which purports to transfer to the
indorsee a part only of the amount payable (as in this case) does not
operate as a negotiation of the instrument." As to what was really written
at the back of the check which Montinola claims to be a full indorsement
of the check, the Court agreed with trial court that the original writing of
Ramos on the back of the check was to the effect that he was assigning
only P30,000 of the value of the document and that he was instructing the
bank to deposit to his credit the balance. Montinola may therefore not be
regarded as an indorsee. At most he may be regarded as a mere assignee
of the P30,000 sold to him by Ramos, in which case, as such assignee, he
is subject to all defenses available to the drawer Provincial Treasurer of
Misamis Oriental and against Ramos.
Sec. 49. Transfer without indorsement; effect of. - Where the holder of
an instrument payable to his order transfers it for value without indorsing it,
the transfer vests in the transferee such title as the transferor had therein,
and the transferee acquires in addition, the right to have the indorsement of
the transferor. But for the purpose of determining whether the transferee is a
holder in due course, the negotiation takes effect as of the time when the
indorsement is actually made.
Equitable Assignment the transfer of an order instrument without

indorsement where the transferee acquires the instrument subject to defenses
and equities available among prior parties.
The transferee acquires the legal title the transferor had and in addition, the
right to have the indorsement of the transferor, without which he cannot be
considered a holder within the definition under Sec. 191 and thus cannot
negotiate it. He also cannot be considered a bearer since the instrument is
not payable to bearer.
G.
WHERE INDORSEMENT SHOULD BE PLACED?
Sec. 31. Indorsement; how made. - The indorsement must be written on

the instrument itself or upon a paper attached thereto. The signature of the
indorser, without additional words, is a sufficient indorsement.
ANG TEK LIAN VS. CA (GR No. L-2516; Sept. 25, 1950) - Knowing he
had no funds therefor, petitioner Ang Tek Lian drew a check upon the
China Banking Corporation for the sum of P4,000, payable to the order of
cash. He delivered it to Lee Hua Hong in exchange for money which the
latter handed in the act. The next business day, the check was presented
by Lee Hua Hong to the drawee bank for payment, but it was dishonored
for insufficiency of funds, the balance of the deposit of Ang Tek Lian on
both dates being P335 only. Petitioner was sued for estafa. In his defense,
however, he argues that as the check had been made payable to cash
and had not been endorsed by Ang Tek Lian, the defendant is not guilty of
the offense charged. ISSUE: WON a check payable to cash needs
indorsement? HELD: NO. Under the Negotiable Instruments Law (sec. 9
[d], a check drawn payable to the order of cash is a check payable to
bearer, and the bank may pay it to the person presenting it for payment
without the drawers indorsement. Where a check is made payable to the
order of cash, the word cash does not purport to be the name of any
person, and hence the instrument is payable to bearer. The drawee bank
need not obtain any indorsement of the check, but may pay it to the
person presenting it without any indorsement.
Indorsement is the writing of the name of the payee on the instrument with
the intent either to transfer the title to the same, or to strengthen the security
of the holder by assuming a contingent liability for its future payment, or both.
Allonge - is a slip of paper sometimes attached to a negotiable instrument for

the purpose of receiving further indorsements when the original paper is filled
with indorsements. Generally, an allonge may not be utilized for indorsement if
there is still sufficient space on the instrument itself.
H.
WHEN PERSON DEEMED INDORSER
Sec. 63. When a person deemed indorser. - A person placing his

signature upon an instrument otherwise than as maker, drawer, or acceptor,
is deemed to be indorser unless he clearly indicates by appropriate words his
intention to be bound in some other capacity
An indorser cannot show by parol evidence (i.e., outside the instrument itself)
Sec. 21. Signature by procuration; effect of. - A signature by

"procuration operates as notice that the agent has but a limited authority to
sign, and the principal is bound only in case the agent in so signing acted
within the actual limits of his authority.
his intention to be bound in some other capacity, as for example, he signed

merely as an agent.
I.
OTHER RULES ON INDORSEMENT

ENRIQUE MONTINOLA VS. PNB (GR No. L-2861 ; Feb. 26, 1951) - In
1942, Mariano Ramos, as disbursing officer of an army division of United
States Armed Forces in the Far East (USAFFE) and based in Misamis
Oriental, procured cash advances in the amount of Php800,000 with the
Provincial Treasurer (PT) of Lanao for the use of USAFFE in Cagayan de
Misamis. PT-Lanao did not have that amount in cash so he gave Ramos
P300,000 in emergency notes and a check for P500,000. Thereafter,
Ramos presented the check to their PT in their province for encashment.
PT-Misamis did not have enough cash to cover the check so he gave
Ramos P400,000 in emergency notes and a check for P100,000 drawn on
the PNB as he had previously deposited P500,000 emergency notes in the
PNB branch in Cebu and thus he expected to have the check issued by
him cashed in Cebu against said deposit. Ramos was unable to encash
said check for he was captured by the Japanese and later made a prisoner
of war. After his release, sometime in 1945, Ramos allegedly indorsed the
check to herein plaintiff-appellant. According to Montinolas version of the
circumstances that roused the present controversy, Ramos, who then was
no longer connected with the USAFFE but already a civilian who needed
the money only for himself and his family, offered to sell the check to him.
But as stated by Ramos, he and Montinola agreed to the sale of said check
and the agreement regarding the transfer of the check was that he was
12
Procuration is the act by which a principal gives power to another to act in his
place as he could himself. It is otherwise understood as agency or proxy.
12
Sec. 32
Indorsement must be of entire instrument. - The indorsement
Sec. 40
Sec. 41
Indorsement of instrument payable to bearer. (supra, p. 10)

Indorsement where payable to two or more persons. -
Sec. 42
Effect of instrument drawn or indorsed to a person as

cashier.- Where an instrument is drawn or indorsed to a person as
"cashier or other fiscal officer of a bank or corporation, it is
must be an indorsement of the entire instrument. An indorsement

which purports to transfer to the indorsee a part only of the
amount payable, or which purports to transfer the instrument to
two or more indorsees severally, does not operate as a negotiation
of the instrument. But where the instrument has been paid in part,
it may be indorsed as to the residue.
Where an instrument is payable to the order of two or more payees

or indorsees who are not partners, all must indorse unless the one
indorsing has authority to indorse for the others.
deemed prima facie to be payable to the bank or corporation of

which he is such officer, and may be negotiated by either the
indorsement of the bank or corporation or the indorsement of the

officer.
Sec. 43
Indorsement where name is misspelled, and so forth. -
Sec. 44
adding, if he thinks fit, his proper signature. (emphasis supplied)

Indorsement in representative capacity. - Where any person
Sec. 45
Sec. 46
Sec. 48
Sec. 49
purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.
Where the name of a payee or indorsee is wrongly designated or

misspelled, he may indorse the instrument as therein described
But when the negotiation is by delivery only, the warranty extends

in favor of no holder other than the immediate transferee.
is under obligation to indorse in a representative capacity, he may

indorse in such terms as to negative personal liability.
Time of indorsement; presumption. - Except where an
indorsement bears date after the maturity of the instrument, every
negotiation is deemed prima facie to have been effected before the
instrument was overdue
Place of indorsement; presumption. - Except where the
contrary appears, every indorsement is presumed prima facie to
have been made at the place where the instrument is dated
Striking out indorsement. - The holder may at any time strike
out any indorsement which is not necessary to his title. The
indorser whose indorsement is struck out, and all indorsers
subsequent to him, are thereby relieved from liability on the
instrument
The provisions of subdivision (c) of this section do not apply to a

person negotiating public or corporation securities other than bills
and notes.
Sec. 38: When the indorser wants to transfer his rights over the instrument
but does not want to assume responsibilities under the secondary contracts, he
may do so by resorting to qualified indorsement, by virtue of which he
disclaims his liability to any holder or any subsequent party who might be
compelled by another.
He is only liable for breach of warranties under Sec. 65.
Transfer without indorsement; effect of. (supra, p.12)
METROPOL (BACOLOD) FINANCING & INVESTMENT CORP. VS.

SAMBOK MOTORS (GR No. L-39641 ; Feb. 28, 1983) - Sambok Motors
Company negotiated and indorsed the note in favor of plaintiff Metropol
Financing & Investment Corporation with the following indorsement: "Pay
to the order of Metropol Bacolod Financing & Investment Corporation
with recourse. Notice of Demand; Dishonor; Protest; and Presentment
are hereby waived. SAMBOK MOTORS CO. (BACOLOD) By: RODOLFO G.
NONILLO Asst. General Manager". The maker, Dr. Villaruel defaulted in
the payment. Plaintiff notified Sambok as indorsee of said note of the fact
that the same has been dishonored and demanded payment. Sambok
failed to pay. Trial court rendered its decision in favor of Plaintiff.
Appellant Sambok argues that by adding the words "with recourse" in the
indorsement of the note, it becomes a qualified indorser; that being a
qualified indorser, it does not warrant that if said note is dishonored by
the maker on presentment, it will pay the amount to the holder. ISSUE:
WON Sambok is a qualified indorser? HELD: Appellant, by indorsing
the note "with recourse'' does not make itself a qualified indorser
but a general indorser who is secondarily liable, because by such
indorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiffappellee can go after said appellant. The effect of such indorsement is
that the note was indorsed without qualification. A person who indorses
without qualification engages that on due presentment, the note shall be
accepted or paid, or both as the case may be, and that if it be dishonored,
he will pay the amount thereof to the holder. Appellant Sambok's intention
of indorsing the note without qualification is made even more apparent by
the fact that the notice of' demand, dishonor, protest and presentment
were all waived. The words added by said appellant do not limit his
liability, but rather confirm his obligations as a general indorser.
Sec. 32: Reason: negotiation requires delivery, and there can be no partial
delivery of one instrument. Also, to avoid multiplicity of suits and a bill or note
divided into different parts divides a single cause of action.
Sec. 41: Does not apply to instruments payable to two or more payees
severally, such as payable to A or B, which may be negotiated by either A or

B. In order to make an indorsement of an instrument payable to two or more
persons effective, all must indorse to effect a negotiation.
Sec. 48: An instrument payable to bearer remains a bearer instrument and the
holder thereof can strike out any special indorsements by virtue of Sec. 48.
An instrument originally payable to order but converted by virtue of a blank

indorsement, the holder thereof can remove all subsequent special
indorsements as he can acquire title only by delivery. But the holder cannot
strike out the indorsements prior to the blank indorsement since it would be
necessary for his acquisition of title.
J.
KINDS OF INDORSEMENT
1. Blank and Special Indorsements
Sec. 33
Sec. 34
Sec. 35
2.
Sec. 38
Sec. 65
Kinds of indorsement. - An indorsement may be either special
or in blank; and it may also be either restrictive or qualified or

conditional.
Special indorsement; indorsement in blank. - A special
indorsement specifies the person to whom, or to whose
order, the instrument is to be payable, and the indorsement
of such indorsee is necessary to the further negotiation of the
instrument. An indorsement in blank specifies no indorsee,
and an instrument so indorsed is payable to bearer, and
may be negotiated by delivery. (emphasis supplied)
3.
Sec. 39. Conditional indorsement. - Where an indorsement is conditional,

the party required to pay the instrument may disregard the condition and
make payment to the indorsee or his transferee whether the condition has
been fulfilled or not. But any person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds thereof, subject to the rights
of the person indorsing conditionally
Blank indorsement; how changed to special indorsement.

- The holder may convert a blank indorsement into a special
indorsement by writing over the signature of the indorser in blank
any contract consistent with the character of the indorsement.
Qualified Indorsements
Qualified
If payment is made prior to the fulfilment of the condition, the holder will hold
the payment subject to the rights of the conditional indorser. Such that, when
the condition did not happen, he is obliged to return the amount he recovered
to the conditional indorser.
indorsement.
- A qualified indorsement
constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser's
signature the words "without recourse" or any words of similar
import. Such an indorsement does not impair the negotiable
character of the instrument.
Warranty where negotiation by delivery and so forth.
Every person negotiating an instrument by delivery or by a
qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it
13
Conditional Indorsement
4.
Sec. 36
13
Restrictive Indorsement
When indorsement restrictive. - An indorsement is restrictive

which either:
(a) Prohibits the further negotiation of the instrument; or

(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of

some other persons.
Sec. 37
drawer.
(c) If he signs for the accommodation of the payee, he is liable to all parties
subsequent to the payee.
But the mere absence of words implying power to negotiate does

not make an indorsement restrictive.
Effect of restrictive indorsement; rights of indorsee. - A
restrictive indorsement confers upon the indorsee the right:
K.
WHEN INDORSEMENT NECESSARY Sec. 8(b) (p.6), Sec. 30 (p.10),

Sec. 184 (p.2)
L.
INDORSEMENT OF ENTIRE INSTRUMENT Sec. 32 (p.40)
M.
INDORSEMENT OF BEARER INSTRUMENT Sec. 40 (p.10)
N.
INDORSEMENT WHEN PAYABLE TO TWO OR MORE PERSONS

Sec. 41 (p.12)
O.
INDORSEMENT IN REPRESENTATIVE CAPACITY Sec. 44 (p.13)
under (b) and (c) may still be further negotiated, but the subsequent indorsees
will also be an agent or trustee.
P.
PRESUMPTION ON TIME, PLACE OF INDORSEMENT Sec. 45 and

46 (p.13)
NATIVIDAD GEMPESAW VS. CA (GR No. 92244; Feb. 9, 1993) Natividad Gempesaw issued checks, prepared by her bookkeeper, a total
of 82 checks in favor of several supplies. Most of the checks for amounts
in excess of actual obligations as shown in their corresponding invoices. It
was only after the lapse of more than 2 years did she discovered the
fraudulent manipulations of her bookkeeper. It was also learned that the
indorsements of the payee were forged, and the checks were brought to
the chief accountant of Philippine Bank of Commerce (the Drawee Bank,
Buendia Branch) who deposited them in the accounts of Alfredo Romero
and Benito Lam. Gempesaw made demand upon the bank to credit the
amount charged due the checks. The bank refused. Hence, the present
action. ISSUE: Who shall bear the loss resulting from the forged
indorsements? HELD: As a rule, a drawee bank who has paid a check on
which an indorsement has been forged cannot charge the drawers
account for the amount of said check. An exception to the rule is where
the drawer is guilty of such negligence which causes the bank to honor
such checks. Gempesaw did not exercise prudence in taking steps that a
careful and prudent businessman would take in circumstances to discover
discrepancies in her account. Her negligence was the proximate cause of
her loss, and under Section 23 of the Negotiable Instruments Law, is
precluded from using forgery as a defense. On the other hand, 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 said checks. The only kind of indorsement
which stops the further negotiation of an instrument is a
restrictive indorsement which prohibits the further negotiation
thereof, pursuant to Section 36 of the Negotiable Instruments
Law. In light of any case not provided for in the Act that is to be
governed by the provisions of existing legislation, pursuant to Section 196
of the Negotiable Instruments Law, the bank may be held liable for
damages in accordance with Article 1170 of the Civil Code. The drawee
bank, in its failure to discover the fraud committed by its employee and in
contravention banking rules in allowing a chief accountant to deposit the
checks bearing second indorsements, was adjudged liable to share the
loss with Gempesaw on a 50:50 ratio.
Q.
CONTINUATION OF NEGOTIABLE CHARACTER
(a) to receive payment of the instrument;

(b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of the
indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first
indorsee under the restrictive indorsement.
Sec. 36(a) is the only type of indorsement that bars further negotiation. Those
5.
6.
Sec. 47. Continuation of negotiable character. - An instrument

negotiable in its origin continues to be negotiable until it has been
restrictively indorsed or discharged by payment or otherwise.
Restrictive indorsement as used in this provision pertains only to Sec. 36(a),

since, as discussed earlier, (b) and (c) thereof do not prevent further
negotiation.
Discharge by payment or otherwise are enumerated under Sec. 119 (p.)

R.
Sec. 50
Sec. 121
S.
Sec. 48
Striking out indorsement. - The holder may at any time strike
out any indorsement which is not necessary to his title. The

indorser whose indorsement is struck out, and all indorsers
subsequent to him, are thereby relieved from liability on the
instrument
Sec. 50
Irregular Indorser
Liability of irregular indorser. - Where a person, not otherwise a party to

an instrument, places thereon his signature in blank before delivery, he is
liable as indorser, in accordance with the following rules:
14
instrument is negotiated back to a prior party, such party may,

subject to the provisions of this Act, reissue and further negotiable
the same. But he is not entitled to enforce payment thereof
against any intervening party to whom he was personally
liable. (emphasis supplied)
Right of party who discharges instrument. - Where the
instrument is paid by a party secondarily liable thereon, it is not
discharged; but the party so paying it is remitted to his former
rights as regard all prior parties, and he may strike out his own
and all subsequent indorsements and against negotiate the
instrument, except:
STRIKING OUT OF INDORSEMENT
Absolute Indorsement
Joint Indorsement
(a) If the instrument is payable to the order of a third person, he is liable to

the payee and to all subsequent parties.
(b) If the instrument is payable to the order of the maker or drawer, or is
payable to bearer, he is liable to all parties subsequent to the maker or
When prior party may negotiate instrument. - Where an
(a) Where it is payable to the order of a third person and has

been paid by the drawer; and
(b) Where it was made or accepted for accommodation and has
been paid by the party accommodated.
Sec. 41. Indorsement where payable to two or more persons. see p.

12
7.
NEGOTIATION BY PRIOR PARTY
When prior party may negotiate instrument. (supra, p.14)
T.
EFFECT OF TRANSFER WITHOUT INDORSEMENT Sec. 49 (p.12)
U.
DIFFERENT COMBINATIONS OF INDORSEMENT
V.
RIGHT OF PRIOR PARTY TO NEGOTIATE Sec. 50 (p.14)
W. CONSIDERATION FOR ISSUANCE AND SUBSEQUENT TRANSFER

Sec. 24
14
Presumption of consideration. - Every negotiable instrument is

deemed prima facie to have been issued for a valuable
consideration; and every person whose signature appears thereon

to have become a party thereto for value.

Value, what constitutes. Value is any consideration sufficient to
support a simple contract. An antecedent or pre-existing debt
constitutes value; and is deemed such whether the instrument is
payable on demand or at a future time.
What constitutes holder for value. - Where value has at any
time been given for the instrument, the holder is deemed a holder
for value in respect to all parties who become such prior to that
time.
When lien on instrument constitutes holder for value.
Where the holder has a lien on the instrument arising either from
contract or by implication of law, he is deemed a holder for value to
the extent of his lien.
Sec. 25
Sec. 26
Sec. 27
Consideration is not presumed when there is transfer without indorsement as

in Sec. 49.
Simple Contract as used in Sec. 25 is that found under the Civil Code. Such
that, a negotiable instrument is issued for a valuable consideration which may

be to give, to do or not to do.
Value Sufficient need not mean that the amount of consideration and the
promise to pay in the instrument are equal, so long as it is not grossly
inadequate.
Sec. 27: If a negotiable instrument was delivered by way of pledge, the
transferee is a holder for value up to the extent of the amount secured. If the
sum certain state in the instrument is P50,000 and the same was pledged for
P30,000, the transferee is a holder for value upto P30,000 only.
Value previously given: If M issued a note to P, then P to A, A to B and B to
C, as a way of gift. C is a holder for value as to A, since value has previously

given by B to A.
X.
WHAT CONSTITUTES VALUE Sec. 24

BIBIANO BANAS VS. CA (GR No. 102967; Feb. 10, 2000) Petitioner
sold to Ayala Investment Corporation (Ayala) a lot for P2,308,770 to be
paid P461,754 upon signing of the contract and the balance covered by a
promissory note to be paid in four equal annual installments. On the same
day, petitioner discounted the promissory note with Ayala. On the year of
sale, petitioner reported the P461,754 as sales proceeds and the balance
as unrealized, and consistently reported in the succeeding years the
installment that fell due. On 1978, Revenue Director of Manila authorized
herein respondents Tuazon and Talon to examine the books and records
of petitioner to which they assessed him for deficiency taxes, arguing that
since the note evidencing the installment nature of the sale was
discounted the same year it was issued, the sale should be treated as a
cash transaction and not installment and accordingly the whole amount of
gain on disposition should have been reported in 1976, the year of sale.
ISSUE: WON the proceeds of the discounted note should have been
reported as taxable income during 1976 and not deferred on installments?
HELD: Yes. As a general rule, the whole profit accruing from a sale of
property is taxable as income in the year the sale is made. But, if not all of
the sale price is received during such year, and a statute provides that
income shall be taxable in the year in which it is received, the profit from
an installment sale is to be apportioned between or among the years in
which the installments are paid and received. However, the proceeds from
the disposition or discounting of receivable, though not considered in
computing for initial payments under Sec. 43 and Sec. 175 of the Tax
Code, it is still taxable in the year it was converted to cash. Non-dealer
sales of property may be reported as income under the installment
method provided that the obligation is still outstanding at the close of the
year. Where an installment obligation is discounted at a bank or
finance company, a taxable disposition results. Clearly, the
indebtedness of the buyer is discharged, while the seller acquires
money for the settlement of his receivables. Logically then, the
income should be reported at the time of the actual gain.
Y.
Z.
EFFECT OF VALUE PREVIOUSLY GIVEN Sec. 26 (p.15)

HOLDER FOR VALUE Sec. 27 (p.15)
15
IV. HOLDERS
A.
WHAT IS A HOLDER?
A Holder means the payee or indorsee of a bill or note who is in possession of

it or the bearer thereof (Sec. 191), who may sue on his own name (Sec. 51).
Sec. 51
Sec. 193
Right of holder to sue; payment. - The holder of a negotiable
instrument may to sue thereon in his own name; and payment to

him in due course discharges the instrument
Reasonable time, what constitutes. - 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.
CHAN WAN VS. TAN KIM (G.R. No. L-15380; September 30, 1960) - Eleven
checks payable to "cash or bearer" and drawn by defendant Tan upon the
Equitable Banking Corporation, were all presented for payment by Chan Wan to
the drawee bank, but they "were all dishonored and returned to him unpaid
due to insufficient funds and/or causes attributable to the drawer." The drawer
in drawing the check engaged that "on due presentment, the check would be
paid, and that if it be dishonored . . . he will pay the amount thereof to the
holder". On the backs of the checks, endorsements which apparently show they
had been deposited with the China Banking Corporation and were, by the
latter, presented to the drawee bank for collection. The court declined to order
payment for two principal reasons: (a) plaintiff failed to prove he was a holder
in due course, and (b) the checks being crossed checks should not have been
deposited instead with the bank mentioned in the crossing. ISSUE: WON a
holder who is not a holder in due course may recover on the checks? HELD:
YES. The Negotiable Instruments Law does not provide that a holder,
who is not a holder in due course, may not in any case, recover on the
instrument. If B purchases an overdue negotiable promissory note signed by
A, he is not a holder in due course; but he may recover from A, if the latter has
no valid excuse for refusing payment. The only disadvantage of holder who is
not a holder in due course is that the negotiable instrument is subject to
defense as if it were non- negotiable.
ATRIUM MANAGEMENT CORPORATION VS. CA (G.R. No. 109491;
February 28, 2001) - Hi-Cement Corp. issued checks in favor of E.T. Henry and
Co. Inc., as payee. The latter, in turn, endorsed the checks to Atrium for
valuable consideration. But upon presentment for payment, the drawee bank
dishonored the checks for the common reason "payment stopped" which
prompted petitioner to institute this action. The trial court rendered a decision
ordering E.T. Henry and Co., Inc. and Hi-Cement to pay petitioner Atrium,
jointly and severally, the amount corresponding to the value of the checks. CA,
however, absolved & ruled, inter alia, that Lourdes de Leon of Hi-Cement was
not authorized to issue the subject checks in favor of E.T. Henry, Inc. ISSUE:
WON petitioner Atrium is a holder in due course? HELD: To emphasize, the
checks were crossed checks and specifically indorsed for deposit to payee's
(E.T. Henry) account only. Atrium was aware of the fact that the checks were
all for deposit only to payee's account. Clearly, then, Atrium could not be
considered a holder in due course. The SC, however, held that it does not
follow as a legal proposition that simply because petitioner Atrium
was not a holder in due course for having taken the instruments in
question with notice that the same was for deposit only to the
account of payee E.T. Henry that it was altogether precluded from
recovering on the instrument. The Negotiable Instruments Law does not
provide that a holder not in due course cannot recover on the instrument. The
disadvantage of Atrium in not being a holder in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable. One
such defense is absence or failure of consideration.
B.
CLASSES OF HOLDER
Sec. 51
Sec. 26
Sec. 52
15 Sec. 57
Rights of holder to sue. (supra)

What constitutes holder for value. - Where value has at any
time been given for the instrument, the holder is deemed a

holder for value in respect to all parties who become such prior
to that time
What constitutes a holder in due course. see C. HOLDER
IN DUE COURSE, p.
Rights of holder in due course. see Rights of A Holder In

2.
Due Course, p. 19.
Overdue an instrument is overdue after the date of maturity fixed therein or
MARCELO MESINA VS. CA (G.R. No. 70145 November 13, 1986) - Jose
Go purchased from Associated Bank a cashier's check for P800,000.00.
Unfortunately, he left said check on the top of the desk of the bank
manager when he left the bank. The bank manager entrusted the check
for safekeeping to a bank official, a certain Albert Uy. While Uy went to
the men's room, the check was stolen by his visitor in the person of
Alexander Lim. Upon discovering that the check was lost, Jose Go
accomplished a "STOP PAYMENT" order. Two days later, Associated Bank
received the lost check for clearing from Prudential Bank.
After
dishonoring the same check twice, Associated Bank received summons
and copy of a complaint for damages of Marcelo Mesina who was in
possession of the lost check and is demanding payment. Petitioner claims
that a cashier's check cannot be countermanded in the hands of a holder
in due course. ISSUE: WON petitioner can collect on the stolen check on
the ground that he is a holder in due course? HELD: No. Petitioner failed
to substantiate his claim that he is a holder in due course and for
consideration or value as shown by the established facts of the case.
Admittedly, petitioner became the holder of the cashier's check as
endorsed by Alexander Lim who stole the check. He refused to say how
and why it was passed to him. He had therefore notice of the defect of his
title over the check from the start. The holder of a cashier's check who is
not a holder in due course cannot enforce such check against the issuing
bank which dishonors the same. A person who became the holder of a
upon happening of an event certain, and a person taking an overdue

instrument must be put on inquiry why the instrument is still in circulation
Dishonor may be by non-acceptance (bills of exchange) under Sec. 149 or by

non-payment (promissory notes and bills of exchange) under Sec. 83. A holder
who has knowledge that the instrument was previously dishonored is not a
holder in due course.
Sec. 4
Sec. 7
Sec. 87
Determinable future time, what constitutes. (supra, p.6)

When payable on demand (supra, p.6)
Rule where instrument payable at bank. - Where the
Sec. 53
Sec. 143
When person not deemed a holder in due course (supra)

When presentment for acceptance must be made. (a) Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to fix the
maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be
presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.
HOLDER IN DUE COURSE
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 upon 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 any infirmity
in the instrument or defect in the title of the person negotiating it.
Sec. 83
Sec. 149
Holder - the first requisite is that he should be a holder as defined under
Sec. 191. If a possessor of a negotiable instrument is not a holder (i.e., he is

neither payee nor indorsee or bearer of a bearer instrument), he can NEVER be
a holder in due course.
Sec. 53
Sec. 57
Sec. 59
1.
When person not deemed holder in due course. see 2.
Sec. 47
Sec. 5
Overdue, b. Rule in case of demand instruments.

Rights of a holder in due course. See Rights of a Holder in
Due Course p. 19
Who is deemed holder in due course. - 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 whom he claims acquired the title
as 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.
a.
b.
Instrument Complete and Regular
particular proper to be inserted in a negotiable instrument without which the

same will not be complete. Examples of material particulars are name of payee,
amount, signature of maker or drawer, or rates of interest, if any.
Continuation of negotiable character (supra, p.14)

Additional provisions not affecting negotiability (p.6)
Rule in case of installment instruments a purchaser of an
installment note after an installment is overdue may be a holder in
due course as to the balance if he has no notice of failure to pay
the first installment. The holder may assume that the regular course
of business has been followed and that each installment was paid
when due. A transferee has no reason to conclude from the mere
fact that a note circulates after the due date of one or more
installments that such installments were not paid (Bliss vs. California
Co-op Producers)
Rule in case of demand instruments
Unreasonable is relative and must be determined in relation to Sec. 193

(p.15)
Regular It is regular upon its face when it does not contain any material
alterations or if there are, they are not apparent or visible on the face of the
instrument.
c.
Overdue interest payments the mere fact that interests on a

note was overdue does not, in the absence of an acceleration clause
on failure to pay interest, affect an indorsee with notice of dishonor
or put him on inquiry.
3.
Notice of Infirmity or Defect
A Holder upon receiving an instrument which is incomplete or irregular
16
In no other case is presentment for acceptance necessary in

order to render any party to the bill liable.
When instrument dishonored by non-payment. - The
instrument is dishonored by non-payment when:
(a) It is duly presented for payment and payment is refused or
cannot be obtained; or
(b) Presentment is excused and the instrument is overdue and
unpaid.
When dishonored by nonacceptance. - A bill is dishonored
by non-acceptance:
(a) When it is duly presented for acceptance and such an
acceptance as is prescribed by this Act is refused or cannot be
obtained; or
(b) When presentment for acceptance is excused and the bill is
not accepted.
Sec. 53. When person not deemed holder in due course. - Where an
instrument payable on demand is negotiated on an unreasonable length of time
after its issue, the holder is not deemed a holder in due course.
Complete - it is complete when it is not wanting of any material particular or
(containing visible and apparent alterations) must be put on inquiry why it is

such. If he fails to do so, he takes the instrument subject to all defenses.
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.
Presentment for acceptance must be made:
cashier's check as endorsed by the person who stole it and who refused to
say how and why it was passed to him is not a holder in due course
C.
Taken Before Overdue and Before Notice of Dishonor
16

check in his possession and why he was using it for the payment of his
own personal account show that holder's title was defective or
suspicious, to say the least. As holder's title was defective or suspicious, it
cannot be stated that the payee acquired the check without knowledge of
said defect in holder's title, and for this reason the presumption that it is a
holder in due course or that it acquired the instrument in good faith does
not exist. And having presented no evidence that it acquired the check in
good faith, it (payee) cannot be considered as a holder in due course. In
other words, under the circumstances of the case, instead of the
presumption that payee was a holder in good faith, the fact is that it
acquired possession of the instrument under circumstances that should
have put it to inquiry as to the title of the holder who negotiated the
check to it. The burden was, therefore, placed upon it to show that
notwithstanding the suspicious circumstances, it acquired the check in
actual good faith. In the case at bar as the payee acquired the
check under circumstances which should have put it to inquiry,
why the holder had the check and used it to pay his own personal
account, the duty devolved upon it, plaintiff-appellee, to prove
that it actually acquired said check in good faith. The stipulation of
facts contains no statement of such good faith, hence, plaintiff payee has
not proved that it acquired the check in good faith and may not be
deemed a holder in due course thereof. It was payee's duty to ascertain
from the holder Manuel Gonzales what the nature of the latter's title to the
check was or the nature of his possession. Having failed in this respect,
we must declare that plaintiff-appellee was guilty of gross neglect in not
finding out the nature of the title and possession of Manuel Gonzales,
amounting to legal absence of good faith, and it may not be considered as
a holder of the check in good faith. To such effect is the consensus of
authority
Infirmity means any irregularity in the instrument. Thus, notice of an

alteration which is apparent is notice of an infirmity in the instrument, as well
as notice of forgery in the maker or drawers signature. Sec. 56 provides what
constitutes notice of defect.
Sec. 54
Sec. 55
Sec. 56
Sec. 57
Notice before full amount is paid. - Where the transferee
receives notice of any infirmity in the instrument or defect in the

title of the person negotiating the same before he has paid the
full amount agreed to be paid therefor, he will be deemed a
holder in due course only to the extent of the amount
therefore paid by him.
When title defective. - The title of a person who negotiates 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.
What constitutes notice of defect. - To constitutes notice of
an infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated
must have had actual knowledge of the infirmity or
defect, or knowledge of such facts that his action in
taking the instrument amounted to bad faith.
Rights of a holder in due course. (supra)
Sec. 54: M makes a note for P100,000 payable to the order of P, P indorsed it
to A, B stole the note, and forged As signature, B then indorsed it to C who

paid P50,000 before knowing that As signature was forged. In this case, C is a
holder in due course upto P50,000 only.
4.
Good Faith
Crossed Checks produce the following effect:

(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; and
(c) The act of crossing the check serves as warning to the holder that the check
has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise, he is not a holder in
due course. (State Investment House Inc. vs. CA; Bataan Cigar and Cigarette
Factory vs. CA)
VICENTE DE OCAMPO & CO. VS. ANITA GATCHALIAN (GR No. L15126 ;Nov. 30, 1961) Facts:
Herein defendants issued a check
amounting to P600 to one Manuel Gonzales, who represented himself as
authorized by the owner of the car, Ocampo Clinic, which will be shown to
the owner as evidence of defendants good faith in the intention to
purchase the said car. Without knowledge of this transaction, plaintiff
received from Gonzales the subject check for the payment of the
hospitalization of his wife. On the failure of Gonzales to appear the day
following, to bring the car and its certificate of registration and to return
the check on the following day as previously agreed upon, defendant
Gatchalian issued a "Stop Payment Order" on the check, with the drawee
bank. The CFI of Manila then ordered defendants to pay the plaintiff the
sum of P600 with legal interest until paid. In this action, defendants seek
to recover the value of the check, contending that plaintiff is not a holder
in due course. ISSUE: WON plaintiff is a holder in due course? HELD:
Under the Negotiable Instruments Law, Section 52 (c) provides that a
holder in due course is one who takes the instrument "in good faith and
for value;" Section 59, "that every holder is deemed prima facie to be a
holder in due course;" and Section 52 (d), that in order that one may be a
holder in due course it is necessary that "at the time the instrument was
negotiated to him "he had no notice of any . . . defect in the title of the
person negotiating it;" and lastly Section 59, that every holder is
deemed prima facie to be a holder in due course. In the case at bar the
rule that a possessor of the instrument is prima facie a holder in due
course does not apply because there was a defect in the title of the holder
(Manuel Gonzales), because the instrument is not payable to him or to
bearer. On the other hand, the stipulation of facts indicated by the
appellants in their brief, like the fact that the drawer had no account with
the payee; that the holder did not show or tell the payee why he had the
17
17
CELY YANG VS. CA (GR No. 138074; Aug. 15, 2003) Cely Yang and
Prem Chandiramani were to exchange dollar drafts and checks with the
difference to be divided equally as their profit. Chandiramani did not
appear at the rendezvous and Ranigo, Yangs representative, allegedly lost
the two cashiers checks and the dollar draft bought by petitioner. Ranigo
reported the alleged loss of the checks and the dollar draft to Liong.
Liong, in turn, informed Yang, and the loss was then reported to the
police. The checks and the dollar draft were not lost because
Chandiramani was able to get hold of said instruments, without delivering
the exchange consideration consisting of the PCIB managers check and
the Hang Seng Bank dollar draft. Yang requested FEBTC and Equitable to
stop payment on the instruments she believed to be lost. Both banks
complied with her request, but upon the representation of PCIB, FEBTC
subsequently lifted the stop payment order on FEBTC Dollar Draft No.
4771. Yang lodged a Complaint for injunction and damages against
Equitable, Chandiramani, and David (payee of the subject checks). The
Court rendered judgment in favor of defendant Fernando David against
the plaintiff Cely Yang and declaring the former entitled to the proceeds of
the two (2) cashiers checks. ISSUE: WON Fernando David is a holder in
due course? HELD: Yes. Petitioner fails to point any circumstance which
should have put David on inquiry as to the why and wherefore of the
possession of the checks by Chandiramani. David was not privy to the
transaction between petitioner and Chandiramani. Instead, Chandiramani
and David had a separate dealing in which it was precisely Chandiramanis
duty to deliver the checks to David as payee. The evidence shows that
Chandiramani performed said task to the letter. Petitioner admits that
David took the step of asking the manager of his bank to verify from
FEBTC and Equitable as to the genuineness of the checks and only
accepted the same after being assured that there was nothing wrong with
said checks. At that time, David was not aware of any "stop payment"
order. Under these circumstances, David thus had no obligation to
ascertain from Chandiramani what the nature of the latters title to the
checks was, if any, or the nature of his possession. Thus, we cannot hold
him guilty of gross neglect amounting to legal absence of good faith,
absent any showing that there was something amiss about Chandiramanis
acquisition or possession of the checks. David did not close his eyes
deliberately to the nature or the particulars of a fraud allegedly committed
by Chandiramani upon the petitioner, absent any knowledge on his part
that the action in taking the instruments amounted to bad faith. Moreover,
the factual circumstances in De Ocampo and in Bataan Cigar are not
present in this case. For here, there is no dispute that the crossed
checks were delivered and duly deposited by David, the payee

named therein, in his bank account. In other words, the purpose

behind the crossing of the checks was satisfied by the payee.
BATAAN CIGAR AND CIGARETTE FACTORY VS. CA (GR No. 93048;
March 3, 1994) - BCCFI issued to King Tim Pua George (George King)
post-dated crossed checks for the delivery tobacco leaves. George King
later on sold at a discount the subject checks to SIHI. In as much as
George King failed to deliver the bales of tobacco leaves as agreed,
despite petitioners demand, BCCFI issued a stop payment order on all
checks payable to George King. Unable to collect, SIHI instituted an action
to recover from herein petitioner and was granted relief by the trial court
and later on upheld by the CA. Hence, the present petition. ISSUE: WON
SIHI, a second indorser, a holder of crossed checks, a holder in due
course? HELD: No. Sec. 52 of the Negotiable Instruments Law (NIL)
states what constitutes a holder in due course, thus:
Sec. 52 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 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.
Jurisprudence has pronounced that crossing 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. It is settled that
crossing the checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorsers 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 NIL. In the present case, BCCFIs defense in
stopping payment is as good to SIHI as it is to George King. Because,
really, the checks were issued with the intention that George King would
supply BCCFI with the bales of tobacco leaf. There being failure of
consideration, SIHI is not a holder in due course. Consequently, BCCFI
cannot be obliged to pay the checks
STELCO MARKETING CORPORATION VS. CA (GR No. 96160; June
17, 1992) Stelco Marketing Corporation is engaged in the distribution
and sale to the public of structural steel bars. On 7 different occasions in
September and October 1980, it sold to RYL Construction, Inc. quantities
of steel bars of various sizes and rolls of G.I. wire. These bars and wire
were delivered at different places at the indication of RYL Construction,
Inc. The aggregate price for the purchases was P126,859.61. Although the
corresponding invoices issued by STELCO stipulated that RYL would pay
"COD" (cash on delivery), the latter made no payments for the
construction materials thus ordered and delivered despite insistent
demands for payment by the former. On April 4, 1981, RYL gave to
Armstrong Industries described by STELCO as its "sister corporation"
and "manufacturing arm" a check drawn against Metrobank in the
amount of P126,129.86, numbered 765380 and dated 4 April 1981. That
check was a company check of another corporation, Steelweld Corporation
of the Philippines, signed by its President, Peter Rafael Limson, and its
Vice-President, Artemio Torres. The check was issued by Limson at the
behest of his friend, Romeo Y. Lim, President of RYL. Romeo Lim had
asked Limson for financial assistance, and the latter had agreed to give
Lim a check only by way of accommodation, "only as guaranty but not to
pay for anything." Why the check was made out in the amount of
P126,129.86 is not explained. The check was actually issued in said
amount of P126,129.86, and as already stated, was given by R.Y. Lim to
Armstrong, Industries, in payment of an obligation. When the latter
deposited the check at its bank, it was dishonored because "drawn against
insufficient funds." When so deposited, the check bore two (2)
indorsements, that of "RYL Construction," followed by that of "Armstrong
18
18
Industries." On account of the dishonor of Metrobank Check 765380, and

on complaint of Armstrong Industries (through a Mr. Young), Rafael
Limson and Artemio Torres were charged in the Regional Trial Court of
Manila with a violation of Batas Pambansa Bilang 22. They were acquitted
in a decision rendered on 28 June 1984 "on the ground that the check in
question was not issued by the drawer 'to apply on account for value,' it
being merely for accommodation purposes." That judgment however
conditioned the acquittal with the pronouncement that "this is not
however to release Steelweld Corporation from its liability under Sec. 29 of
the Negotiable Instruments Law for having issued it for the
accommodation of Romeo Lim." Eleven months later and some 4 years
after issuance of the check in May, 1985, STELCO filed with the
Regional Trial Court of Caloocan City a civil complaint against both RYL
and STEELWELD for the recovery of the value of the steel bars and wire
sold to and delivered to RYL in the amount of P126,129.86, plus 18%
interest from 20 August 1980 and 25% of the total amount sought to be
recovered as and by way of attorney's fees. A preliminary attachment was
issued by the trial court on the basis of the averments of the complaint
but was shortly dissolved upon the filing of a counter-bond by
STEELWELD. RYL could no longer be located and could not be served with
summons. It never appeared. Only STEELWELD filed an answer, under
date of 16 July 1985. Judgment was rendered on 26 June 1986. The
judgment sentenced Steelweld to pay to Stelco the amount of
P126,129.86 with legal rate of interest from 9 May 1985, when the case
was instituted until fully paid, plus another sum equivalent to 25% of the
total amount due as and for attorney's fees. STELCO's motion for
reconsideration was denied by the Appellate Tribunal's resolution dated 13
November 1990. STELCO appealed. ISSUE NO. 1 WON the fourth
condition, i.e. as to notice, for a holder in due course is applicable to an
accommodation party? HELD: "A holder in due course," says the law, "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 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
persons negotiating it." As regards an accommodation party (such as
STEELWELD), the fourth condition, i.e., lack of notice of any infirmity in
the instrument or defect in title of the persons negotiating it, has no
application. This is because Section 29 of the law above quoted preserves
the right of recourse of a "holder for value" against the accommodation
party notwithstanding that "such holder, at the time of taking the
instrument, knew him to be only an accommodation party." ISSUE NO.2:
WON STELCO ever became a holder in due course of Check 765380, a
bearer instrument within the contemplation of the Negotiable Instruments
Law? HELD: NO. It never did. There is no evidence whatever that
STELCO's possession of Check 765380 ever dated back to any time before
the instrument's presentment and dishonor. There is no evidence
whatsoever that the check was ever given to it, or indorsed to it in any
manner or form in payment of an obligation or as security for an
obligation, or for any other purpose before it was presented for payment.
On the contrary, STELCO never became a holder for value and that
"(n)owhere in the check itself does the name of Stelco Marketing appear
as payee, indorsee or depositor thereof." What the record shows is that:
(1) the STEELWELD company check in question was given by its president
to R.Y. Lim; (2) it was given only by way of accommodation, to be "used
as collateral for another obligation;" (3) in breach of the agreement,
however, R.Y. Lim indorsed the check to Armstrong in payment of an
obligation; (4) Armstrong deposited the check to its account, after
indorsing it; (5) the check was dishonored. The record does not show any
intervention or participation by STELCO in any manner or form whatsoever
in these transactions, or any communication of any sort between
STEELWELD and STELCO, or between either of them and Armstrong
Industries, at any time before the dishonor of the check. The record does
show that after the check had been deposited and dishonored, STELCO
came into possession of it in some way, and was able, several years after
the dishonor of the check, to give it in evidence at the trial of the civil case
it had instituted against the drawers of the check (Limson and Torres) and
RYL. Possession of a negotiable instrument after presentment and
dishonor, or payment, is utterly inconsequential; it does not make the
possessor a holder for value within the meaning of the law; it gives rise to
no liability on the part of the maker or drawer and indorsers. It is clear

from the relevant circumstances that STELCO cannot be deemed a holder

of the check for value. It does not meet two of the essential requisites
prescribed by the statute. It did not become "the holder of it before it was
overdue, and without notice that it had been previously dishonored," and
it did not take the check "in good faith and for value." Neither is there any
evidence whatever that Armstrong Industries, to whom R.Y. Lim
negotiated the check, accepted the instrument and attempted to encash it
in behalf, and as agent of STELCO. On the contrary, the indications are
that Armstrong was really the intended payee of the check and was the
party actually injured by its dishonor; it was after all its representative (a
Mr. Young) who instituted the criminal prosecution of the drawers, Limson
and Torres, albeit unsuccessfully.
5.
Sec. 25
Sec. 26
Sec. 27
D.
HOLDER FOR VALUE
Value, what constitutes (supra, p.15)

What constitutes holder for value (supra, p.15)
When lien on instrument constitutes holder for value
(supra, p.15)
PRESUMPTION OF DUE COURSE HOLDING
Sec. 53
Sec. 59
E.
The checks, however, were dishonored by reason of "insufficient funds",

"stop payment" and "account closed", respectively. Petitioner claims that
despite demands on Chua to make good said checks, the latter failed to
pay the same necessitating the former to file an action for collection.
When the CA reversed the trial court ruling favoring State Investment
House, the latter elevated the issue before the SC. ISSUE: WON
petitioner is a holder in due course as to entitle it to proceed against
private respondents Chua for the amount stated in the dishonored checks?
HELD: The Intermediate Appellate Court (now Court of Appeals), correctly
elucidated that the effects of crossing a check are: 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. It results therefore that when State Investment House
rediscounted the check knowing that it was a crossed check he was
knowingly violating the avowed intention of crossing the check.
Furthermore, his failure to inquire from the holder, party defendant New
Sikatuna Wood Industries, Inc., the purpose for which the three checks
were cross despite the warning of the crossing, prevents him from being
considered in good faith and thus he is not a holder in due course. Being
not a holder in due course, plaintiff is subject to personal
defenses, such as lack of consideration between appellants and
New Sikatuna Wood Industries. Note that under the facts the checks
were postdated and issued only as a loan to New Sikatuna Wood
Industries, Inc. if and when deposits were made to back up the checks.
Such deposits were not made, hence no loan was made, hence, the three
checks are without consideration (Sec. 28, Negotiable Instruments Law).
When person not deemed holder in due course (p.16)

Who is deemed a holder in due course (p.16)
RIGHTS OF A HOLDER IN DUE COURSE Sec. 57
Sec. 57. Rights of a holder in due course. A holder in due course (1) holds
the instrument free from any defect of title of prior parties, and free
from defenses available to prior parties among themselves, and (2)
may enforce payment of the instrument for the full amount thereof against
all parties liable thereon (emphasis supplied)
1.
Sec. 58. When subject to original defense. - 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 non-negotiable. 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 to the latter.
SALAS VS. CA (G.R. No. 76788 January 22, 1990) - Juanita Salas
(Petitioner) bought a motor vehicle from the Violago Motor Sales
Corporation (VMS) as evidenced by a promissory note. This note was
subsequently endorsed to Filinvest Finance & Leasing Corporation (private
respondent) which financed the purchase. Petitioner 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. This failure to pay
prompted private respondent to initiate an action for a sum of money
against petitioner before the Regional Trial Court. ISSUE: WON private
respondent is a holder in due course? HELD: YES. The Promissory Note
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. Under the circumstances, there
appears to be no question that Filinvest is a holder in due course, having
taken the instrument under the following 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. Accordingly, respondent
corporation 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, petitioner cannot set
up against respondent the defense of nullity of the contract of
sale between her and VMS.
STATE INVESTMENT HOUSE VS. CA (GR No. ; July 13, 1989) New
Sikatuna Wood Industries, Inc. requested for a loan from Chua. The latter
agreed to grant the same subject to the condition that the former should
wait until December 1980 when he would have the money. In view of this
agreement, private respondent Chua issued three (3) "crossed checks"
payable to New Sikatuna Wood Industries, Inc. all postdated December
22, 1980. Subsequently, New Sikatuna entered into an agreement with
herein petitioner State Investment House, Inc. whereby New Sikatuna
assigned and discounted with petitioner eleven (11) postdated checks
including the aforementioned three (3) postdated checks issued by Chua.
19
When subject to original defense
19
PRUDENCIO VS. CA (GR No.; July 14, 1986) In 1955, Concepcion and
Tamayo Construction Enterprise had a contract with the Bureau of Public
Works. The firm needed fund to push through with the contract so it
convinced spouses Eulalio and Elisa Prudencio to mortgage their parcel of
land with the Philippine National Bank for P10,000.00. Prudencio, without
consideration, agreed and so he mortgaged the land and executed a
promissory note for P10k in favor of PNB. Prudencio also authorized PNB
to issue the P10k check to the construction firm. In December 1955, the
firm executed a Deed of Assignment in favor of PNB which provides that
any payment from the Bureau of Public Works in consideration of work
done (by the firm) so far shall be paid directly to PNB this will also
ensure that the loan gets to be paid off before maturity. Notwithstanding
the provision in the Deed of Assignment, the Bureau of Public Works
asked PNB if it can make the payments instead to the firm because the
firm needs the money to buy construction materials to complete the
project. Notwithstanding the provision of the Deed of Assignment, PNB
agreed. And so the loan matured without PNB actually receiving any
payment from the Bureau of Public Works. Prudencio, upon learning that
no payment was made on the loan, petitioned to have the mortgage
cancelled (to save his property from foreclosure). The trial court ruled
against Prudencio; the Court of Appeals affirmed the trial court. ISSUE:
WON Prudencio should pay the promissory note to PNB? HELD: No. PNB
is not a holder in due course. Prudencio is an accommodation party for he
signed the promissory note as maker but he did not receive value or
consideration therefor. He expected the firm (accommodated party) to pay
the loan this obligation was shifted to the Bureau of Public Works by
way of the Deed of Assignment). As a general rule, an accommodation
party is liable on the instrument to a holder for value/in due course,
notwithstanding such holder at the time of taking the instrument knew
him to be only an accommodation party. The exception is that if the
holder, in this case PNB, is not a holder in due course. The court finds
that PNB is not a holder in due course because it has not acted in
good faith when it waived the supposed payments from the

Bureau of Public Works contrary to the Deed of Assignment. Had

the Deed been followed, the loan would have been paid off at
maturity.
such former holder in respect of all parties prior to the latter.
If a Holder is not a holder in due course, he is subject to personal defenses as

between prior parties. The only exception is an ordinary holder who derived his
title from a holder in due course, this is known in American case law as
Shelter Rule.
STELCO MARKETING CORPORATION VS. CA (supra, p. 18) - STELCO

came into possession of it in some way, and was able, several years after
the dishonor of the check, to give it in evidence at the trial of the civil case
it had instituted against the drawers of the check (Limson and Torres) and
RYL. Possession of a negotiable instrument after presentment and
dishonor, or payment, is utterly inconsequential; it does not make the
possessor a holder for value within the meaning of the law; it gives rise to
no liability on the part of the maker or drawer and indorsers. It is clear
from the relevant circumstances that STELCO cannot be deemed a holder
of the check for value. It does not meet two of the essential requisites
prescribed by the statute. It did not become "the holder of it before it was
overdue, and without notice that it had been previously dishonored," and
it did not take the check "in good faith and for value." Neither is there any
evidence whatever that Armstrong Industries, to whom R.Y. Lim
negotiated the check, accepted the instrument and attempted to encash it
in behalf, and as agent of STELCO. On the contrary, the indications are
that Armstrong was really the intended payee of the check and was the
party actually injured by its dishonor; it was after all its representative (a
Mr. Young) who instituted the criminal prosecution of the drawers, Limson
and Torres, albeit unsuccessfully.
F.
personally or through an agent.
RIGHTS OF HOLDER NOT IN DUE COURSE
Sec. 51
Sec. 58
G.
Sec. 58: does not apply to a holder who repurchased the instrument either
Rights of holder to sue. (supra, p.15)

When subject to original defense (supra, p.19)
ACCOMMODATION PARTIES Sec. 29.
Sec. 29. Liability of accommodation party. - An accommodation party is

one who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, 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
him to be only an accommodation party
H.
PAYEE AS HOLDER IN DUE COURSE

VICENTE DE OCAMPO VS. ANITA GATCHALIAN (supra, p.17) Section 191 defines "holder" as the payee or indorsee of a bill or note,
who is in possession of it, or the bearer thereof. Sec. 52 defines a holder
in due course as "a holder who has taken the instrument under the
conditions enumerated therein. Since "holder", as defined in sec.
191, includes a payee who is in possession the word holder in the
first clause of sec. 52 and in the second subsection may be
replaced by the definition in sec. 191 so as to read "a holder in
due course is a payee or indorsee who is in possession," etc.
(Brannan's on Negotiable Instruments Law, 6th ed., p. 543).
EULALIO PRUDENCIO VS. CA (supra, p. 19) Petitioners contend that
the payee PNB is an immediate party and, therefore, is not a holder in due
course and stands on no better footing than a mere assignee. In those
cases where a payee either acquired the note from another holder or has
not directly dealt with the maker thereof. As was held in Bank of
Commerce and Savings vs. Randell: We conclude, therefore, that a payee
who receives a negotiable promissory note, in good faith, for value, before
maturity, and without any notice of any infirmity, from a holder, not the
maker, to whom it was negotiated as a completed instrument, is a holder
in due course within the purview of Negotiable Instruments Law, so as to
preclude the defense of fraud and failure of consideration between the
maker and the holder to whom the instrument was delivered.
I.
SHELTER RULE
Sec. 58. When subject to original defense. - 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 non-negotiable. 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
20
20
CHARLES FOSSUM VS. FERNANDEZ HERMANOS (GR No. L-19461) Herein petitioner was the resident agent in Manila of the American Iron
Products Company, Inc. (AIPCI), engaged in business in New York City,
while Fernandez Hermanos is a general commercial partnership engaged
in business in the Philippines. Fossum, acting as agent of AIPCI, procured
an order from respondent 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 and that the
shaft should be shipped from New York in March or April 1920. The
manufacture and shipment of the shaft was delayed considerably.
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 for
acceptance, and was accepted by the firm according to its tenor.
Subsequently, 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 trial court
held 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.
J.
B.
PAYMENT BY PARTY SECONDARY LIABLE
Sec. 121
RIGHTS OF HOLDER IN BILLS IN SET
Bills in Set involve one bill although drawn in set. The problem arises when
different parts of the set are negotiated to separate persons who are holders in
due course.
Sec. 178
Sec. 179
Sec. 180
Sec. 181
V.
A.
Sec. 68
Sec. 70
Bills in set constitute one bill. - Where a bill is drawn in a set,
each part of the set being numbered and containing a reference

to the other parts, the whole of the parts constitutes one
bill.
Right of holders where different parts are negotiated. Where two or more parts of a set are negotiated to different
holders in due course, the holder whose title first accrues is,
as between such holders, the true owner of the bill. But
nothing in this section affects the right of a person who, in due
course, accepts or pays the parts first presented to him.
Sec. 89
Liability of holder who indorses two or more parts of a set

to different persons.- Where the holder of a set indorses two or
more parts to different persons he is liable on every such part,

and every indorser subsequent to him is liable on the part he has
himself indorsed, as if such parts were separate bills.
Acceptance of bill drawn in sets. - The acceptance may be
written on any part and it must be written on one part only. If the
drawee accepts more than one part and such accepted parts
negotiated to different holders in due course, he is liable on every
such part as if it were a separate bill.
Sec. 118
Sec. 119
PARTIES WHO ARE LIABLE

PRIMARY AND SECONDARY LIABLE DISTINGUISHED
Active Subject in the negotiable instrument is the holder. He is given the

right to demand the performance of the obligation reflected in the negotiable
instrument, that is, the obligation to pay a sum certain in money.
Passive Subject is the one against whom the holder can enforce the right
presented by the instrument who may be primary or secondarily liable (Sec.
192).
Sec. 61
Sec. 120
Liability of drawer. - The drawer by drawing the instrument
admits the existence of the payee and his then capacity to

indorse; and engages that, on due presentment, the instrument
will be accepted or paid, or both, according to its tenor, and that
if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to
the holder or to any subsequent indorser who may be
compelled to pay it. But the drawer may insert in the
instrument an express stipulation negativing or limiting his own
liability to the holder
Sec. 65
Sec. 66
Sec. 192
Warranty where negotiation by delivery and so forth

(supra, p. 13)
Liability of general indorser. see d. Indorsers, General
Indorser
Persons primarily liable on instrument. - The person
"primarily" liable on an instrument is the person who, by the
Sec. 184
terms of the instrument, is absolutely required to pay the same.

All other parties are "secondarily" liable.
Primary and Secondary Liability, in general:
Instrument
Primary
Promissory Note
Maker
Bill of Exchange
Acceptor
21
Secondary
General Indorsers
Drawer and Indorsers
Sec. 151
Right of party who discharges instrument. - Where the

instrument is paid by a party secondarily liable thereon, it is not
discharged; but the party so paying it is remitted to his former
rights as regard all prior parties, and he may strike out his own
and all subsequent indorsements and again negotiate the
instrument, except:
(a) Where it is payable to the order of a third person and has been
paid by the drawer; and
(b) Where it was made or accepted for accommodation and has
been paid by the party accommodated.
Order in which indorsers are liable. see liability of indorsers
Effect of want of demand on principal debtor. - Presentment
for payment is not necessary in order to charge the person
primarily liable on the instrument; but if the instrument is, by its
terms, payable at a special place, and he is able and willing to pay
it there at maturity, such ability and willingness are equivalent to a
tender of payment upon his part. But except as herein otherwise
provided, presentment for payment is necessary in order to charge
the drawer and indorsers
To whom notice of dishonor must be given. - Except as
herein otherwise provided, 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
When protest need not be made; when must be made. Where any negotiable instrument has been dishonored, it may be
protested for non-acceptance or non-payment, as the case may
be; but protest is not required except in the case of foreign bills of
exchange.
Instrument; how discharged. - A negotiable instrument is
discharged:
(a) By payment in due course by or on behalf of the principal
debtor;
(b) By payment in due course by the party accommodated, where
the instrument is made or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the
payment of money;
(e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
When persons secondarily liable on the instrument are

discharged. - A person secondarily liable on the instrument is
discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party;
(e) By a release of the principal debtor unless the holder's right of
recourse against the party secondarily liable is expressly reserved;
(f) By any agreement binding upon the holder to extend the time
of payment or to postpone the holder's right to enforce the
instrument unless made with the assent of the party secondarily
liable or unless the right of recourse against such party is
expressly reserved.
Promissory note, defined. - A negotiable promissory note
within the meaning of this Act is an unconditional promise in
writing made by one person to another, signed by the maker,
engaging to pay on demand, or at a fixed or determinable future
time, a sum certain in money to order or to bearer. Where a note
is drawn to the maker's own order, it is not complete until
indorsed by him,
Rights of holder where bill not accepted. - When a bill is
dishonored by nonacceptance, an immediate right of recourse
against the drawer and indorsers accrues to the holder and no
presentment for payment is necessary
21

C.
LIABILITY DISTINGUISHED FROM WARRANTIES
making any inquiry as to his authority to exchange checks belonging to

the payee-corporation. In Insular Drug Co. vs. National, the Court made
the pronouncement that: ". . . The right of an agent to indorse commercial
paper is a very responsible power and will not be lightly inferred. A
salesman with authority to collect money belonging to his principal does
not have the implied authority to indorse checks received in payment. Any
person taking checks made payable to a corporation, which can act only
by agents, does so at his peril, and must abide by the consequences if the
agent who indorses the same is without authority." Respondent which
relied upon the petitioner's warranty should not be held liable for the
resulting loss. The depositor of a check as indorser warrants that it is
The primary and secondary liability makes the parties liable to pay the sum
certain in money stated in the instrument. While warranties are affirmations
of fact on the part of the parties that impose no direct obligation to pay in the
absence of breach thereof.
In case of breach of warranties, the person who breached the same may (1)
either be liable; or (2) he may be barred from asserting a particular defense.
Unlike secondary liability which requires a notice of dishonor, an action based
on breach of warranty is not so conditioned, the latter occurring as it does at
the time of the transfer, may be brought at any time.
D.
1.
genuine and in all respects what it purports to be. Having indorsed the
checks to respondent bank, petitioner is deemed to have given the
warranty prescribed in Section 66 of the NIL that every single one of those
checks "is genuine and in all respects what it purports to be."
LIABILITY AND/OR WARRANTIES OF PARTIES

Maker primary and unconditional
c.
Sec. 60. Liability of maker. - The maker of a negotiable instrument, by

making it, engages that he will pay it according to its tenor, and admits the
existence of the payee and his then capacity to indorse
2.
Acceptor it is only from the moment the drawee accepts the bill or
certifies the check that the drawee becomes primarily liable. (see Sec.
127). He becomes liable to the holder by his unconditional acceptance
(Westminster Bank vs. Torres & K. Nassor, Inc., GR No. L-38139; Oct. 27,
1932)
Drawer secondary liability. But the drawer may insert in the instrument
an express stipulation negativing or limiting is own liability to the holder
Sec. 62
(see Sec. 61, p.21)

a.
b.
Relationship with Drawee there is a contractual relation between the

drawer and the drawee. Thus, a drawer may have drawn the bill against
the drawee because the latter is holding an amount in trust for the
drawer, or the drawee may have extended credit to the drawer and
agreed to honor any bill drawn by the drawer against said drawee.
Sec. 127
Relationship with Collecting Bank the privity of contract is between

the holder-depositor and the collecting bank. There is no privity of
contract between the drawer and the collecting bank.
JAI ALAI CORP OF THE PHILS. VS. BPI (GR No. L-29432; Aug. 6,
1975) Petitioner deposited 10 checks in its current account with BPI
which were acquired from Antonio Ramirez, a regular jai-alai bettor and a
sales agent of the Inter-Island Gas. All the checks were payable to InterIsland Gas Service, Inc. or order. After the checks had been submitted to
Inter-bank clearing, Inter-Island Gas discovered that all the indorsements
made on the checks purportedly by its cashiers were forgeries. The
drawers of the checks demanded reimbursement from the drawee-banks,
who in turn demanded from BPI. BPI thus debited the value of the checks
against petitioner's current account and forwarded to the latter the checks
containing the forged indorsements which petitioner refused to accept.
ISSUE: WON BPI had the right to debit from petitioner's current account
the value of the checks with the forged indorsements? HELD: Yes. BPI
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, that is, 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 2 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. It is our view nonetheless that no creditor-debtor
relationship was created between the parties. Since the indorsements
were forgeries, they are inoperative, the payment made by the drawee
banks therefore is inoperative and relationship of a creditor and debtor
was not created. Having indorsed the checks to respondent bank,
petitioner is deemed to have given the warranty prescribed in Section 66
of the NIL that every single one of those checks "is genuine and in all
respects what it purports to be." BPI, being the collecting bank is liable to
the drawee banks when it submitted the checks for clearing. The
petitioner was, moreover, grossly recreant in accepting the checks in
question from Ramirez. It could not have escaped the attention of the
petitioner that the payee of all the checks was a corporation the InterIsland Gas Service, Inc. Yet, the petitioner cashed these checks to a mere
individual who was admittedly a habitue at its jai-alai games without
22
Sec. 143
Sec. 164
Sec. 165
Sec. 189
Liability of acceptor. - The acceptor, by accepting the
instrument, engages that he will pay it according to the tenor

of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
Bill not an assignment of funds in hands of drawee. - A bill
of itself does not operate as an assignment of the funds in the
hands of the drawee available for the payment thereof, and the
drawee is not liable on the bill unless and until he accepts the
same.
When presentment for acceptance must be made. Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to fix the
maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented
for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order
to render any party to the bill liable.
Liability of the acceptor for honor. - The acceptor for honor is
liable to the holder and to all parties to the bill subsequent to the
party for whose honor he has accepted.
Agreement of acceptor for honor. - The acceptor for honor,
by such acceptance, engages that he will, on due presentment,
pay the bill according to the terms of his acceptance provided it
shall not have been paid by the drawee and provided also that is
shall have been duly presented for payment and protested for
non-payment and notice of dishonor given to him.
When check operates as an assignment. - A check of itself
does not operate as an assignment of any part of the funds to the
credit of the drawer with the bank, and the bank is not liable to
the holder unless and until it accepts or certifies the check.
vs. BARTOLOME PICORNELL (GR No. L-18751/L-18915;

September 26, 1922) - Bartolome Picornell executed a bill of exchange
PNB
22
ordering Hyndman, Tavera & Ventura (HTV) to pay PNB for the amount
used to purchase bales of tobacco and Picornells commission. HTV later
on accepted the bill, and re-accepted it after the requested extension.
However, the bill was not paid upon maturity, HTV arguing that the quality
of the bales of tobacco fell short of what was expected. ISSUE: WON HTV
is still liable on the instrument considering that the bales of tobacco
delivered were of poor quality? HELD: Yes. The question of 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

and complete. The HTV company cannot escape liability in view of Sec. 28
of the Negotiable Instruments Law.
Angs signature (indorsement in blank) at the back thereof, the instrument

was received by Ang Tiong who thereafter presented it to the bank for
payment. The drawee bank dishonored it. Ang Tiong made written
demands on both Ting and Ang to make good the amount represented by
the check. These demands unheeded, Ang Tiong then filed a suit for
collection. The trial court adjudged for herein petitioner. Only Felipe Ang
appealed, maintaining that he is only an accommodation party. ISSUE:
WON Felipe Ang is an accommodation party? What is the liability of an
accommodation indorser? HELD: NO. Felipe Ang is a general indorser
(Section 63, NIL), in the absence of any indication by appropriate words
his intention to be bound in some other capacity. Even on the assumption
that Ang is a mere accommodation party as he professes to be, he is
nevertheless by the clear mandate of section 29 of the Negotiable
Instruments Law. That the appellant, again assuming him to be an
accommodation indorser, may obtain security from the maker to protect
himself against the danger of insolvency of the latter, cannot in any
manner affect his liability to the appellee, as the said remedy is a matter
of concern exclusively between accommodation indorser and
accommodated party. So that the fact that the appellant stands only as a
surety in relation to the maker, granting this to be true for the sake of
argument, is immaterial to the claim of the appellee, and does not a whit
diminish nor defeat the rights of the latter who is a holder for value. The
liability of the appellant remains primary and unconditional. To sanction
the appellant's theory is to give unwarranted legal recognition to the
patent absurdity of a situation where an indorser, when sued on an
instrument by a holder in due course and for value, can escape liability on
his indorsement by the convenient expedient of interposing the defense
that he is a mere accommodation indorser.
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 on 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
advance by the plaintiff, that the draft was accepted or the
accommodation of the drawer. . . . (3 R. C. L., pp. 1143, 1144, par,
358.)
Payment Without Acceptance
PNB VS. CA (GR No. L-26001; Oct. 29, 1968) Agusto Lim deposited
GSIS check no. 645915-B with respondent bank Philippine Commercial and
Industrial Bank, who in turn submitted said check to PNB, through Central
Bank, for clearing which the latter paid. Upon demand of GSIS that the
signatures of its officers on the check were forged, PNB re-credited the
account of GSIS. PNB requested reimbursement from PCIB, the latter
refused. Hence, the present action. ISSUE: WON prior acceptance before
payment is required in the case of checks? HELD: No. In general,
"acceptance", in the sense in which this term is used in the Negotiable
Instruments Law is not required for checks, for the same are payable on
demand. Indeed, "acceptance" and "payment" are, within the purview of
said Law, essentially different things, for the former is "a promise to
perform an act," whereas the latter is the "actual performance" thereof.
In the words of the Law, "the acceptance of a bill is the signification by
the drawee of his assent to the order of the drawer," which, in the case of
checks, is the payment, on demand, of a given sum of money. Upon the
other hand, actual payment of the amount of a check implies not only an
assent to said order of the drawer and a recognition of the drawer's
obligation to pay the aforementioned sum, but, also, a compliance with
such obligation. Sec. 62 of the NIL is applicable to a drawee who
pays a bill without having previously accepted it.
d.
PEOPLE VS. MANIEGO (G.R. No. L-30910 February 27, 1987) - Accused
Julia T. Maniego was indicted, together with Rizalino Ubay and Milagros
Pamintuan, for Malversation, by drawing checks. Maniego was acquitted in
the absence of evidence against her but ordered to pay jointly and
severally the amount of P57,434.50 to the government. Maniego sought
reconsideration of the judgment, praying that she be absolved from civil
liability or, at the very least, that her liability be reduced. The Court
declined to negate her civil liability, but did reduce the amount. She
appealed. ISSUE: WON Maniego could properly be held civilly liable after
her acquittal? HELD: Yes. Appellant's contention that as mere indorser,
she may not be made liable on account of the dishonor of the checks
indorsed by her, is untenable. Under the law, the holder or last
indorsee of a negotiable instrument has the right to "enforce
payment of the instrument for the full amount thereof against all
parties liable thereon." Among the "parties liable thereon" is an
indorser of the instrument i.e., "a person placing his signature upon an
instrument otherwise than as maker, drawer, or acceptor ** unless he
clearly indicates by appropriate words his intention to be bound in some
other capacity. Such an indorser "who indorses without qualification,"
inter alia "engages that on due presentment, ** (the instrument) shall be
accepted or paid, or both, as the case may be, according to its tenor, and
that if it be dishonored, and the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it."
Indorsers
Sec. 63
Sec. 68
When a person deemed indorser. supra, p.12

Order in which indorsers are liable. - As respect one another,
indorsers are liable prima facie in the order in which they
indorse; but evidence is admissible to show that, as between or
among themselves, they have agreed otherwise. Joint payees or

joint indorsees who indorse are deemed to indorse jointly and
severally.
Qualified Indorser
General Indorser
Sec. 65. Warranty where negotiation by delivery and so forth.
Sec. 66 Liability of general indorser. - Every indorser who indorses without
Every person negotiating an instrument by delivery or by a qualified

indorsement warrants:
qualification, warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the
next preceding section (sec. 65 warranties of a person negotiating by delivery
or by qualified indorsement); and
(b) That the instrument is, at the time of his indorsement, valid and subsisting;
(a) That the instrument is genuine and in all respects what it purports to
be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity
of the instrument or render it valueless.
And, in addition, he engages that, on due presentment, it shall be accepted or

paid, or both, as the case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent indorser who may
be compelled to pay it.
ANG TIONG vs. LORENZO TING (G.R. No. L-26767, February 22, 1968)
- Lorenzo Ting issued a check payable to cash or bearer. With Felipe
23
But when the negotiation is by delivery only, the warranty extends in favor
of no holder other than the immediate transferee.
23
The provisions of subdivision (c) of this section do not apply to a person

negotiating public or corporation securities other than bills and notes.

that the holder for value is not a holder in due course merely because at
the time he acquired the instrument, he knew that the indorser was only
an accommodation party.
While a general indorser warrants that the instrument is valid and

subsisting at the time of his indorsement, the qualified indorser warrants
that he has no knowledge of any fact which would impair the validity of
the instrument or render it valueless, and the qualified indorser does not
breach his warranty even if the instrument was already impaired at the
time he negotiated it, as long as he has no knowledge of such fact.
Corporations the rule on the liability of an accommodation party does

not apply to corporations.
ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sept. 15,

1989) - The Vice-president of Mover Enterprises, Inc. issued a check
drawn against Traders Royal Bank, payable to petitioner Ernestina
Crisologo-Jose, for the accommodation of his client. Petitioner-payee was
charged with the knowledge that the check was issued at the instance and
for the personal account of the President who merely prevailed upon
respondent vice-president to act as co-signatory in accordance with the
arrangement of the corporation with its depository bank. While it was the
corporation's check which was issued to petitioner for the amount
involved, petitioner actually had no transaction directly with said
corporation. ISSUE: WON private respondent, one of the signatories of
the check issued under the account of Mover Enterprises, Inc., is an
accommodation party under NIL and a debtor of petitioner to the extent
of the amount of said check. HELD: Yes. To be considered an
accommodation party, a person must (1) be a party to the instrument,
signing as maker, drawer, acceptor, or indorser, (2) not receive value
therefor, and (3) sign for the purpose of lending his name for the credit of
some other person. It is not a valid defense that the accommodation party
did not receive any valuable consideration when he executed the
instrument. He is liable to a holder for value as if the contract was not for
accommodation, in whatever capacity such accommodation party signed
the instrument, whether primarily or secondarily. Thus, it has been held
that in lending his name to the accommodated party, the accommodation
party is in effect a surety for the latter. The foregoing notwithstanding,
the liability of an accommodation party to a holder for value, although
such holder does not include nor apply to corporations which are
accommodation parties. This is because the issue or indorsement of
negotiable paper by a corporation without consideration and for
the accommodation of another is ultra vires. One who has taken the
instrument with knowledge of the accommodation nature thereof cannot
recover against a corporation where it is only an accommodation party. By
way of exception, an officer or agent of a corporation shall have the
power to execute or indorse a negotiable paper in the name of the
corporation for the accommodation of a third person only if specifically
authorized to do so. Corollarily, corporate officers, such as the president
and vice-president, have no power to execute for mere accommodation a
negotiable instrument of the corporation for their individual debts or
transactions arising from or in relation to matters in which the corporation
has no legitimate concern. Since such accommodation paper cannot thus
be enforced against the corporation, especially since it is not involved in
any aspect of the corporate business or operations, the signatories thereof
(president and vice-president) shall be personally liable therefor, as well
as the consequences arising from their acts in connection therewith.
A qualified indorser neither warrants payment nor binds himself to pay,

nevertheless, if judgment for the amount of the note is defeated by the
maker on the ground that the indorser, as payee, obtained it by fraud or
without consideration, the holder may recover from the qualified indorser
the consideration paid by him with interest (Cressler vs. Brown).
Order of Liability see Sec. 68 under d. Indorsers
PEOPLE VS. MANIEGO (supra) - Such an indorser "who indorses
without qualification," inter alia "engages that on due presentment, **
(the instrument) shall be accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to
the holder, or to any subsequent indorser who may be compelled to pay
it."
e.
Persons Negotiating by Delivery see Warranties of a Person
Negotiating by mere delivery under Sec. 65 under Qualified Indorsement

p.13. or Qualified Indorser from the preceding section.
Warranties of a person negotiating by delivery are similar to a qualified
indorser, except that the formers warranties extend only in favor of his
immediate transferee.
f.
Other Cases
Irregular Indorser is a person, not otherwise a party to an
instrument, who placed thereon his signature in blank before delivery or a
person who indorses the instrument in an unusual, singular or peculiar
manner. If an instrument payable to A, but at the back has B as the first
indorser, B is an irregular indorser.
Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a

party to an instrument, places thereon his signature in blank before delivery,
he is liable as indorser, in accordance with the following rules:
(a) If the instrument is payable to the order of a third person, he is liable to
the payee and to all subsequent parties.
(b) If the instrument is payable to the order of the maker or drawer, or is
payable to bearer, he is liable to all parties subsequent to the maker or
drawer.
(c) If he signs for the accommodation of the payee, he is liable to all parties
subsequent to the payee.
Indorser of Bearer Instrument Sec. 40, 65 and 67
Sec. 40
Sec. 65
Sec. 67
Indorsement of instrument payable to bearer. supra

under How Negotiation Takes Place, p. 10
Sec. 65. Warranty where negotiation by delivery and so
forth. see under Qualified Indorser from previous section
Liability of indorser where paper negotiable by delivery.
Where a person places his indorsement on an instrument
negotiable by delivery, he incurs all the liability of an indorser.
Conditions precedent to make unqualified indorser liable

Accommodation Party Sec. 29, p. 20.
The accommodation party lends his name to the accommodated party, to
enable the latter to obtain credit or to raise money. He receives no part of
the consideration for the instrument but assumes liability to the other
parties thereto. He is liable to a holder for value as if the contract was not
for accommodation. It is not a valid defense that the accommodation
party did not receive any valuable consideration. Nor is it correct to say
24
24
RN CLARK VS. GEORGE SELLNER (GR No. 16477; Nov. 22, 1921) Herein defendant, together with two other persons, signed a note in favor
of the plaintiff which stipulates that six months after date of the same, the
former shall pay the latter the sum of P12,000 with interest at rate of 10%
per annum from date until paid, payable quarterly. The note matured, but
its amount was not paid. Counsel for the defendant allege that the latter
did not receive in that transaction either the whole or any part of the
amount of the debt; that the instrument was not presented to the
defendant for payment; and that the defendant, being an accommodation
party, is not liable unless the note is negotiated, which was not done, as
shown by the evidence. ISSUE: WON defendant is liable given the
defenses raised by him? HELD: The liability of the defendant, as one of
the signers of the note, is not dependent on whether he has, or has not,
received any part of the amount of the debt. The defendant is really and
expressly one of the joint and several debtors on the note, and as such he
is liable under the provisions of Sec. 70 of NIL. As provided in Sec. 70 of
the said law, as to presentment for payment, such action is not necessary
in order to charge the person primarily liable, as is the defendant. And as
to whether or not the defendant is an accommodation party, it should be
taken into account that 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
"without receiving value therefor," as used in section 29 of the
aforesaid Act, means "without receiving value by virtue of the
instrument" and not, as it apparently is supposed to mean,
"without receiving payment for lending his name." If, as in the
instant case, a sum of money was received by virtue of the note, it is
immaterial, so far as the creditor is concerned, whether one of the singers
has, or has not, received anything in payment of 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 whatever that this was done. As to the
plaintiff, he is the "holder for value," under the phrase of said section 29,
for he had paid the money to the signers at the time the note was
executed and delivered to him.
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.
PNB VS. MAZA (GR No. 24224; Nov. 3, 1925) - PNB is suing Ramon
Maza and Francisco Mecenas on five promissory notes of P10,000 each,
two of which is due 3 months after date, the three were due 4 months
after date. The notes were not taken up by Maza and Mecenas at
maturity. The special defines interposed by the defendants was that the
promissory notes were sent in blank to them by Enrique Echaus with the
request that they sign them so that Echaus might negotiate them with the
PNB in case of need; that the defendants have not negotiated the note
with the bank nor have they received the value thereof, or delivered them
to the bank in payment of any pre-existing debt; and that it was Echaus
who negotiated the note with the bank and who is accordingly the real
party in interest and the party liable for the payment of the notes.
Defendants move for the inclusion of Echaus as defending party, which
was denied. The court rendered a judgment in favor of PNB. ISSUE: WON
Ramon Maza and Francisco Mecenas are liable even if classified as
accommodation parties? HELD: Yes. The most plausible and reasonable
stand for the defendants is that they are accommodation parties. But as
accommodation parties, the defendants having signed the instrument
without receiving value therefor 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. 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. The accommodation parties
may make payment to the holder of the notes and have the right to sue
the party accommodated for reimbursement, since the relation between
them is in effect that of principal and sureties.
FERNANDO MAULINI VS. ANTONIO SERRANO (GR No. 8844; Dec.

16, 1914) The promissory note reads:
3,000. Due 5th of September, 1912.
We jointly and severally agree to pay to the order of Don Antonio G. Serrano on or
before the 5th day of September, 1912, the sum of three thousand pesos (P3,000)
for value received for commercial operations. Notice and protest renounced. If the
sum herein mentioned is not completely paid on the 5th day of September, 1912,
this instrument will draw interest at the rate of 1 per cent per month from the date
when due until the date of its complete payment. The makers hereof agree to pay
the additional sum of P500 as attorney's fees in case of failure to pay the note.
Manila, June 5, 1912.
(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For Jose
Padern, by F. Moreno. Angel Gimenez.
The note was indorsed on the back as follows:
TOWN SAVINGS & LOAN BANK VS. CA (GR No. 106011; June 17,
1993) - Spouses Hipolito applied for and was granted a loan by the bank,
which was secured by a promissory note. For failure to pay their monthly
payments, they were declared in default. The spouses denied having any
liability. They stated that the real party-in-interest is the sister of the
husband, Pilarita Reyes. The spouses, not having received part of the
loan, were mere guarantors of Reyes. As such, they protested against
being dragged into the litigation. The trial court held that they were liable
as accommodation parties to the promissory note. This was reversed by
the Court of Appeals. ISSUE: WON Respondent spouses are liable on the
promissory note which they executed in favor of the petitioner? HELD:
Yes. In lending his name to the accommodated party, the accommodation
party is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no
part of the consideration for the instrument but assumes liability to the
other parties thereto because he wants to accommodate another. In the
case at bar, it is indisputable that the spouses signed the promissory note
to enable Reyes to secure a loan from the bank. She was the actual
beneficiary of the loan and the spouses accommodated her by signing the
note. Unlike in the Maulini case, there was no agreement here, written or
verbal, that in signing the promissory note, the spouses were acting as
agents for the money lender, the Bank. The consideration of the note
signed by the Hipolitos was received by them through Pilarita. They acted
as agents of Pilarita, not the Bank. They signed the promissory note as a
favor to Pilarita, to help her raise the funds that she needed. It was
Pilarita whom they accommodated, not the bank, contrary to the
erroneous finding of the appellate court.
Pay note to the order of Don Fernando Maulini, value received. Manila, June 5, 1912.
(Sgd.) A.G. Serrano.
Maulini's business as a broker 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 the method usually followed, the broker delivered the money
personally to the borrower, took note in his own name and immediately
transferred it by indorsement to the lender. At the special request of the
indorsee and simply as a favor to him, the latter stating to the broker 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 transferred to him title thereto by
indorsement. The trial court held that it was immaterial whether there was
a consideration for the transfer or not, as the indorser, under the evidence
offered, was an accommodation indorser. ISSUE: WON Serrano was an
accommodation indorser? HELD: No. There was never a moment that
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 or 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 the broker received was for
his services in negotiating the loan. He was paid absolutely nothing for
becoming responsible as an indorser to the paper, nor did the indorsee
lose, pay or forego anything, or alter his position thereby. He is also not
an accommodation party under Sec. 29. The accommodation to which
reference is made in Sec. 29, is not one to the person who takes the note
that is, the payee or indorsee, but one to the maker or indorser of the
note. 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. Where, however, an indorsement is made as a favor to the
indorsee, who requests it, not the better to secure payment, but
to relieve himself from a distasteful situation, and where the only
25
Liability of Agent or Broker

Sec. 69
25
Sec. 19
Liability of an agent or broker. - Where a broker or other

agent negotiates an instrument without indorsement, he incurs all
the liabilities prescribed by Section Sixty-five of this Act, unless he
discloses the name of his principal and the fact that he is acting
only as agent
Signature by agent; authority; how shown. - The signature

Sec. 20
Sec. 21
equitable defenses) may be raised only against holders who are not holders in
due course which are brought out of conduct of persons and makes it
inequitable to impose payment.
of any party may be made by a duly authorized agent. No

particular form of appointment is necessary for this purpose; and
the authority of the agent may be established as in other cases of
agency
Liability of person signing as agent, and so forth. - Where
the instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he
was duly authorized; but the mere addition of words describing
him as an agent, or as filling a representative character, without
disclosing his principal, does not exempt him from personal liability
Signature by procuration; effect of. - A signature by
"procuration" operates as notice that the agent has but a limited
authority to sign, and the principal is bound only in case the agent
in so signing acted within the actual limits of his authority
Professor William Britton: In the main, real defenses are those wherein the
facts disclose an absence of one or more of the essential elements of a
contract, or where the admitted contract is vitiated for all purposes for reasons
of public policy. Personal defenses are those wherein the facts present a true
contract but where, for various reasons, such as fraud, duress, mistake, prior
breach of contract by the holder, discharge before maturity, and the like, the
defendant is excused from his obligation to perform.
Defenses distinguished from EQUITIES OF OWNERSHIP: the latter is
raised by persons who may have legal claim over the instrument. They have
different purposes, one is to claim the instrument and the other to resist a
claim for payment. For example, the person from whom a bearer instrument
was stolen may claim the instrument from a holder who is not in due course
because of his equity of ownership. He may also resist the claim of a holder not
in due course by raising the defense of non-delivery.
PBCOM VS. ARUEGO (supra, p.4) - Sec. 20 provides that a person

(who) adds to his signature words indicating that he signs for or on behalf
of a principal or in a representative capacity, he is not liable on the
instrument if he was duly authorized; but the mere addition of words
describing him as an agent, or as filling a representative character,
without disclosing his principal, does not exempt him from personal
liability. An inspection of the drafts accepted by the defendant shows that
nowhere has he disclosed that he was signing as representative of the
Philippine Education Foundation Company. He merely signed as follows:
JOSE ARUEGO (Acceptor) (SGD) JOSE ARUEGO. For failure to disclose
his principal, Aruego is personally liable for the drafts he accepted.
REAL DEFENSES AND PERSONAL DEFENSES

REAL DEFENSE
Minority (available only to the
minor)
Forgery
Non-delivery
of
Incomplete
Instrument
Material Alteration
Signature by Procuration Sec. 21, supra, p. 12.

g.
Person who should sign
Ultra Vires act of Corporation

Fraud in Factum or Esse Contractus
Illegality if declared void for any
purpose
Vicious Force or Violence
A person must sign the negotiable instrument before he can be made

liable under the same instrument. For example, a maker must sign as such
maker before he can be made primarily liable.
Sec. 18. Liability of person signing in trade or assumed name. - No
person is liable on the instrument whose signature does not appear thereon,
except as herein otherwise expressly provided. But one who signs in a trade
or assumed name will be liable to the same extent as if he had signed in his
own name
Want of authority
Prescription
Discharge in Insolvency
By way of EXCEPTION, the following persons who did not sign in their
own names, or persons whose signatures do appear in the instrument
itself, are still liable:
1.
2.
3.
4.
5.
6.
B.
1.
Sec. 137. Liability of drawee returning or destroying bill. - Where a

drawee to whom a bill is delivered for acceptance destroys the same, or
refuses within twenty-four hours after such delivery or within such other
period as the holder may allow, to return the bill accepted or non-accepted
to the holder, he will be deemed to have accepted the same.
Indorsers who sign on a separate piece of paper known as allonge
8.
Persons who negotiate by mere delivery. They are liable for breach of
warranty although they did not sign. (Sec. 65)
(see p. 12);
REAL AND PERSONAL DEFENSE DISTINGUISHED
Real Defenses may be raised against all holders even against a holder in due
course and attaches to the instrument itself. Personal Defenses (also called
26
Conditional delivery of complete

instrument
Fraud in inducement
Filling up blank not within authority
Duress or Intimidation
Filling up blank beyond reasonable
time
Transfer in breach of faith
Mistake
Insertion of wrong date
Ante-dating or Post-dating for illegal
or fraudulent purpose
REAL DEFENSES
MINORITY AND ULTRA VIRES ACTS
a.
Minor the defense of minority is real and may be enforced against all
holders but is only available to the minor himself.
b.
Ultra Vires Acts are acts done beyond the power conferred upon a
corporation by law and such want of authority may be raised as a real
defense but the negotiation of the corporation may pass title to the
instrument.
ATRIUM MANAGEMENT VS. CA (supra, p. 15) ISSUE: WON the
issuance of the checks were ultra vires? HELD: No. 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.
VI. DEFENSES
A.
Illegal Consideration
Non-delivery of Complete Instrument
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
One who signs in a trade or assumed name (Sec. 18);

One who signs through an agent or authorized representative (Sec.
19);
Incapacitated persons who sign through their legal guardians;
Forgers of signatures (Sec. 23);
Persons whose signatures were forged but who are precluded from
setting up the defense of forgery (Sec. 23);
In case of constructive acceptance
7.
PERSONAL DEFENSE
Failure or Absence of Consideration
26
CRISOLOGO-JOSE VS. CA (supra, p.24) - The liability of an

accommodation party to a holder for value, although such holder does not

2.
include nor apply to corporations which are accommodation parties. This is

because the issue or indorsement of negotiable paper by a
corporation without consideration and for the accommodation of
another is ultra vires.
ORDER Where the instrument of the payee is forged in a note

payable to order, the instrument cannot be enforced against the payee
and the maker. But the indorsers after the forgery are liable because
they warrant that they have good title to the instrument.
NON-DELIVERY OF INCOMPLETE INSTRUMENT
Example: M made a note payable to the order of P who indorsed it to A.

F stole the note and indorsed it to C who indorsed it to D, present
holder.
Sec. 15
Incomplete instrument not delivered. - 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.
1.
See under p. 9
2.
3.
FRAUD IN FACTUM (or Fraud in execution or Fraud in esse

contractus)
a.
DEFINITION: It is present when a person is induced to sign an instrument

not knowing its character as a note or a bill. The person signing does not
know that he is signing a negotiable instrument and may be used as a
defense even against a holder in due course.
NOT APPLICABLE: When the person had reasonable opportunity to obtain
knowledge of the character or essential terms of the instrument.
FACTORS FOR REASONABLE OPPORTUNITY: (1) age and sex of the
obligor; (2) intelligence, education and business experience; (3) ability to
read and understand the language used; (4) representations made to him
and his reason to rely on them or to have confidence in the person making
them; (5) the presence or absence of any third person who might read or
explain the instrument to him, or any other information; and (6) apparent
necessity, or lack of it, for acting without delay (Milton Roberts, Fraud as
Defense Against Holder in Due Course)
b.
c.
3.
4.
c.
SALAS VS. CA (supra, p. 19) ISSUE: WON VMS fraud in the conduct
of its business, specifically in the delivery of a defective truck, would
release petitioner-maker from paying First Finance the amount stated in
the note? HELD: No. The note was a negotiable instrument and was
validly negotiated to private respondent who is a holder in due course and
as such holds the instrument free from defenses available to prior parties
among themselves. This being so, petitioner cannot set up against
respondent the defense of nullity of the contract of sale between her and
VMS.
4.
1.
2.
PRUDENCIO VS. CA (supra, p. 19) - The court finds that PNB is not a
holder in due course because it has not acted in good faith when it waived
the supposed payments from the Bureau of Public Works contrary to the
Deed of Assignment. Had the Deed been followed, the loan would have
been paid off at maturity.
3.
FORGERY AND WANT OF AUTHORITY
4.
Sec. 23. Forged signature; effect of. - 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
A forged signature, whether it be that of the drawer, maker, payee or any
other party, is wholly inoperative and no one can gain title to the instrument
through such forged signature against parties prior to the forgery.
b.
Forgery of Indorsers Signature in a promissory note payable to

BEARER the signature of the payee or holder is unnecessary to pass
title to the instrument. Hence, the maker may still be liable to a holder
in due course even if an indorsement was forged after the issuance of
the note since according to Sec. 60 he is to pay the instrument
according to its tenor and considering that the tenor of the
instrument is that he engages to pay any bearer of the instrument.
However, if the holder is not a holder in due course, the person whose
signature is forged may raise the defense of non-delivery of a complete
instrument.
Example: M made a note payable to P or bearer, P delivered the note to
A, who indorsed it specially to B. F stole the note and forged Bs
signature and later on indorsed it to C, who in turn delivered it to H.
Forgery of signatures and the placing of a signature in behalf of another

without authority are real defenses.
a.
27
H can collect from M since the liability remains that he will pay the
bearer of the instrument.
P, A and B cannot be liable since under Sec. 40, they will only be
liable to those who can trace their title to the indorsments,
notwithstanding the fact that Bs signature was forged.
If, however C indorsed it to H, a holder in due course, the latter
may recover from A considering that he can trace his title to A. But
B, whose signature was forged, may raise the defense of forgery
even against a holder in due course.
If H is not a holder in due course, M, A and B may raise the
defense of non-delivery of a complete instrument as a defense.
d.
Forgery of Drawers Signature barring gross negligence on the

part of the drawer where his signature is forged, he is not liable
whether or not the instrument is payable to bearer or order because the
drawer was never a party to the instrument he did not promise to pay
anybody.
e.
Forgery of Indorsers Signature in a bill of exchange payable to

ORDER subsequent holders cannot enforce payment against the
drawee, drawer, payee or the indorser whose signature was forged, or
those parties prior to the forged indorsement. Indorsers AFTER the
forgery are still secondarily liable because of their warranties. See BDO
vs. Equitable Banking Corp
Forgery of Makers Signature the maker is not liable to all

subsequent parties whether the instrument is an order or bearer
instrument. However, indorsers after the forgery are still secondarily
liable to the holder by virtue of their warranty.
Forgery of Indorsers Signature in a promissory note payable to
D, even if he is a holder in due course, cannot recover from parties

prior to the forgery. Thus, he cannot recover from A, P and M.
Because F forged the signature of A, D did not acquire any right
against A, P and M because A did not transfer his right over the
instrument;
D, however, can enforce the instrument against C, who is an
indorser after the forgery and is secondarily liable to subsequent
parties due to their warranties;
Later on, C can recover what he paid from the forger, F, who
becomes principal debtor because of his wrongful act of forging a
signature in the note.
A, whose signature was forged, has a remaining equity of
ownership, hence, his right to recover from either M who is still
primarily liable or P who is secondarily liable in case M dishonors
the note.
27
f.
Forgery of Indorsers Signature in a bill of exchange payable to

BEARER same rule with bearer promissory note.
g.
Situation with a COLLECTING BANK

1. Payee can claim against Collecting Bank a payee whose
signature is forged may directly proceed against the collecting
bank (Westmont Bank vs. Eugene Ong);

2.
3.
Drawer and Collecting Bank the drawer cannot opt to

recover from the collecting bank since there is no privity of
contract between him and the collecting bank (Associated Bank vs.
CA);
Warranty of Collecting Bank
The collecting bank which indorses a check bearing a forged

indorsement and presents it to the drawee bank guarantees
all prior indorsements, including the forged indorsement
itself, and ultimately should be held liable therefor. (Traders
4.
can gain title to the instrument through such forged indorsement.

Such an indorsement prevents any subsequent party from acquiring
any right as against any party whose name appears prior to the
forgery. Such forged indorsement cuts-off the rights of all
subsequent parties as against parties prior to the forgery. As a rule,
a drawee bank who has paid a check on which an indorsement has been
forged cannot charge the drawers account for the amount of said check. An
exception to the rule is where the drawer is guilty of such negligence which
causes the bank to honor such checks. Gempesaw did not exercise prudence
in taking steps that a careful and prudent businessman would take in
circumstances to discover discrepancies in her account. Her negligence was
the proximate cause of her loss, and under Section 23 of the Negotiable
Instruments Law, is precluded from using forgery as a defense.
Royal Bank vs. RPN);
An EXCEPTION is when the issuance of the check itself was

attended with negligence.
Collecting Bank, for having indorsed the checks, is solely
liable when the checks were deposited in an account other
than that of the payees on the strength of forged instruments
REPUBLIC BANK VS. EBRADA (GR No. L-40769; July 31, 1975) - This is a
case of what appeared to be an indorsed check by one Martin Lorenzo who
turned out to be dead since 1952. The forged signature of the deceased
appeared at the dorsal portion of the check indorsed in favor of one Ramon
Lorenzo. From Ramon Lorenzo the same was indorsed to one Delia
Dominguez and then from Dominguez to herein respondent Ebrada.
Subsequently, Ebrada encashed the same in 1963 at herein petitioner
Republic Bank's main office in Escolta. Upon informing petitioner Republic
Bank, however, that the payee's (Lorenzo) indorsement was a forgery, the
Bureau of Treasury requested the Bank to refund them the amount given to
Ebrada. The Bank sued Ebrada upon the latters refusal to return the money
of the forged check. ISSUE: WON Ebrada is liable to return the money paid
to him by Republic Bank subject of a forged check and may the petitioner
recover the proceeds given? HELD: It is clear from the provision of Section
23 of the NIL that where the signature on a negotiable instrument if forged,
the negotiation of the check is without force or effect. But does this mean
that the existence of one forged signature therein will render void all the
other negotiations of the check with respect to the other parties whose
signature are genuine? No. Applying the principle of Beam vs. Farrel, 135
Iowa 670, 113 N.W. 590, it can be safely concluded that it is only the
negotiation predicated on the forged indorsement that should be declared
inoperative. This means that the negotiation of the check in question from
Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the 2nd indorser,
should be declared of no effect, but the negotiation of the aforesaid check
from Ramon R. Lorenzo to Adelaida Dominguez, the 3 rd indorser, and from
Adelaida Dominguez to the defendant-appellant who did not know of the
forgery, should be considered valid and enforceable, barring any claim of
forgery. Being the last indorser, however, Ebrada warrants that she has good
title to the check subject of this action. The petitioner, drawee of the check
can recover from the holder [Ebrada] the money paid to the latter on a
forged instrument. It is not supposed to be its duty to ascertain whether the
signatures of the payee or indorsers are genuine or not. This is because the
indorser is supposed to warrant to the drawee that the signatures of the
payee and previous indorsers are genuine, warranty not extending only to
holders in due course. Ebrada, upon receiving the check in question from
Dominguez, was duty-bound to ascertain whether the check in question was
genuine before presenting it to plaintiff Bank for payment. Indorsers own
credulity or recklessness or misplaced confidence was the sole
cause of the loss. Why should he be permitted to shift the loss due
to his own fault in assuming the risk, upon the drawee, simply
because of the accidental circumstance that the drawee afterwards
failed to detect the forgery when the check was presented for
payment.
(Republic Bank vs. Ebrada; BDO vs. EBC; Traders Royal Bank
vs. RPN);
In other cases, the collecting bank and the drawee bank were
made to share in the liability because of the relative
negligence that they exhibited (BPI vs. CA);
Recourse of Collecting Bank the collecting bank may recover
from its depositor who had not given value for the money paid to
him.
ASSOCIATED BANK VS. CA (GR No. 107382; 107612; Jan. 31, 1996)
The Province of Tarlac maintains a current account with the Philippine
National Bank where the provincial funds are deposited. 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. It was later discovered
that the hospital did not receive several allotment checks drawn by the
Province. After the checks were examined, it was learned that 30 checks
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, collected the questioned
checks from the office of the Provincial Treasurer claiming to be assisting or
helping the hospital on the release of the checks. To encash the checks, he
forged the signature of Dr. Adena Canlas chief of the payee hospital. All the
checks bore the stamp of Associated Bank which reads "All prior
endorsements guaranteed ASSOCIATED BANK." The Provincial Treasurer
sought to recover from PNB various amounts debited from the current
account of the Province. In turn, PNB demanded reimbursement from the
Associated Bank who refused to pay interposing the defense of forgery.
ISSUE: WON Associated Bank (collecting bank) may interpose the real
defense of forgery against PNB (drawee bank) as to bar recovery by the
latter? HELD: NO. Where the instrument is payable to order at the time of
the forgery, such as the checks in this 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 and which indorses the check upon presentment with the drawee
bank, is such an indorser. So even if the indorsement on the check deposited
by the bank's 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 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. 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.
GEMPESAW VS. CA (supra, p. 14) - Under Sec. 23 of the Negotiable
Instruments Law, a forged signature is wholly inoperative, no one
28
Persons precluded from setting up forgery
28
MWSS VS. CA (GR No. L-62943; July 14, 1986) - 23 checks were deposited
by the payees Dizon, Sison and Mendoza in their respective current accounts
with the PCIB and PBC. Thru the Central Bank Clearing, these checks were
presented for payment by PBC and PCIB to the defendant PNB, and were
paid. At the time of their presentation to PNB, these checks bear the
standard indorsement which reads 'all prior indorsement and/or lack of
endorsement guaranteed.' Subsequent investigation however, conducted by
the NBI showed that Raul Dizon, Arturo Sison and Antonio Mendoza were all
fictitious persons. NWSA addressed a letter to PNB requesting the immediate
restoration to its Account No. 6, of the total sum of P3,457,903.00
corresponding to the total amount of these twenty-three (23) checks claimed
by NWSA to be forged and/or spurious checks. ISSUE: WON THE DRAWEE

BANK WAS LIABLE FOR THE LOSS UNDER SECTION 23 OF THE

NEGOTIABLE INSTRUMENTS LAW? HELD: The NBI does not declare or
prove that the signatures appearing on the questioned checks are forgeries.
These reports did not touch on the inherent qualities of the signatures which
are indispensable in the determination of the existence of forgery. There
must be conclusive findings that there is a variance in the inherent
characteristics of the signatures and that they were written by two or more
different persons. Forgery cannot be presumed. It must be
established by clear, positive, and convincing evidence. This was
not done in the present case. Even if the twenty-three (23) checks
in question are considered forgeries, considering the petitioner's
gross negligence, it is barred from setting up the defense of forgery
under Section 23 of the Negotiable Instruments Law. One factor
which facilitates this fraud was the delay in the reconciliation of bank (PNB)
statements with the NAWASA bank accounts. The records likewise show that
the petitioner failed to provide appropriate security measures over its own
records thereby laying confidential records open to unauthorized persons.
We cannot fault the respondent drawee Bank for not having detected the
fraudulent encashment of the checks because the printing of the petitioner's
personalized checks was not done under the supervision and control of the
Bank. Under the circumstances, therefore, the petitioner was in a better
position to detect and prevent the fraudulent encashment of its checks.
exerts due diligence and care in preventing such faulty discharge. Forgeries
often deceive the eye of the most cautious experts; and when a bank has
been so deceived, it is a harsh rule which compels it to suffer although no
one has suffered by its being deceived. The forgery may be so near like the
genuine as to defy detection by the depositor himself, and yet the bank is
liable to the depositor if it pays the check. The Court recognize that Section
23 of the Negotiable Instruments Law bars a party from setting up the
defense of forgery if it is guilty of negligence. Yet, we are unable to conclude
that Samsung Construction was guilty of negligence in this case. The
appellate court failed to explain precisely how the Korean accountant was
negligent or how more care and prudence on his part would have prevented
the forgery. We cannot sustain this "tar and feathering" resorted to without
any basis. When the bank receives the deposit, it impliedly agrees to pay
ONLY UPON THE DEPOSITORS ORDER. When the Bank pays a check, on
which the depositors signature is a forgery, it has failed to comply with its
contract in this respect.
PNB VS. QUIMPO (GR No. L-53194, March 14, 1988) - Private Respondent
Francisco Gozon went to the Caloocan City Branch of PNB with his friend
Ernesto Santos, who he left in the car while he transacted business in the
bank. Santos saw that Gozon left his checkbook, he took a check therefrom,
filled it up for P5,000 and forged the signature of Gozon. Santos was later on
apprehended and admitted that he stole the check and encashed the same
with the bank. Gozon filed an action to recover the amount from the Bank
which the court granted. Hence the petition. ISSUE: WON Gozon who left
his checkbook into hands of Santos was indeed the proximate cause of the
loss and thus precluded from setting up the defense of forgery? HELD: No.
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' (San Carlos Milling Co. vs. Bank of
the P.I). 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. ... There is
nothing inequitable in such a rule. 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. The prime duty of the bank is to ascertain the genuineness of the
signature of the drawer or the depositor on the check being encashed. It is
expected to use reasonable business prudence in accepting and cashing a
check presented to it. Obviously, petitioner was negligent in encashing
said forged check without carefully examining the signature which
shows marked variation from the genuine signature of private
respondent. The act of the plaintiff in leaving his checkbook in the
car cannot be considered negligence sufficient to excuse the
defendant bank from its own negligence. Santos could not have
been expected to know that Santos, a long time classmate and
friend, would remove a check from his checkbook.
METROPOLITAN BANK VS. CA (supra, p.5) - ISSUE: WON Metropolitan

Bank can use forgery of the warrants as defense, hence, making Golden
Savings liable? HELD: No. There was no question of Gomez's identity or of
the genuineness of his signature as checked by Golden Savings. In fact, the
treasury warrants were dishonored allegedly because of the forgery of the
signatures of the drawers, not of Gomez as payee or indorser. Under the
circumstances, it is clear that Golden Savings acted with due care and
diligence and cannot be faulted for the withdrawals it allowed Gomez to
make. By contrast, Metrobank exhibited extraordinary carelessness. Despite
the lack of such clearance, it allowed Golden Savings to withdraw from the
uncleared treasury warrants. The supposed reason for the dishonor, to wit,
the forgery of the signatures of the general manager and the auditor of the
drawer corporation, has not been established. This was the finding of the
lower courts which must not be disturbed. As held in MWSS v. Court of
Appeals, forgery cannot be presumed. It must be established by clear,
positive and convincing evidence. This was not done in the present case.
Hence, petition was denied.
SAMSUNG CONSTRUCTION VS. FAR EAST BANK (GR No. 129015; Aug.
15, 2003) - Petitioner maintained a current account with respondent bank.
The sole signatory to petitioners account was Jong Kyu Lee ("Jong"), its
Project Manager, while the checks remained in the custody of the companys
accountant, Kyu Yong Lee ("Kyu"). A certain Roberto Gonzaga presented for
payment FEBTC Check to the bank. The check, payable to cash and drawn
against Samsung Constructions current account, was in the amount of P999,
500.00. After the bank teller ascertained that there were enough funds to
cover the check and compared the signature as contained in the specimen
signature, the bank teller forwarded the check with two other bank branch
officers, who counterchecked the signature. One of the bank officers noticed
Sempio, the assistant accountant of Samsung Construction, was also in the
bank and when asked, Sempio vouched for the genuineness of Jongs
signature. The following day, Kyu examined the balance of the bank account
and discovered that a check amounting to P999, 500.00 had been encashed.
Aware that he had not prepared such a check for Jongs signature, Kyu
perused the checkbook and found that the last blank check was missing. He
reported the matter to Jong, who then proceeded to the bank. Jong learned
of the encashment of the check, and realized that his signature had been
forged. Samsung Construction filed before the RTC against respondent bank
for violation of Section 23 of the Negotiable Instruments Law who ruled in
favor of Samsung Construction while the CA reversed the RTC Decision and
absolved FEBTC from any liability. The Court of Appeals invoked the ruling
in PNB v. National City Bank of New York that, if a loss, which must be borne
by one or two innocent persons, can be traced to the neglect or fault of
either, such loss would be borne by the negligent party, even if innocent of
intentional fraud. (equity principle). ISSUE:
WON Samsung Construction
was precluded from setting up the defense of forgery under Section 23 of
the Negotiable Instruments Law? HELD: No. On the premise that Jongs
signature was indeed forged, FEBTC is liable for the loss since it authorized
the discharge of the forged check. Such liability attaches even if the bank
29
BANCO DE ORO VS. EQUITABLE BANKING CORPORATION (supra,

p.3) - A commercial bank cannot escape the liability of an endorser of a
check and which may turn out to be a forged endorsement. Whenever any
bank treats the signature at the back of the checks as endorsements and
thus logically guarantees the same as such there can be no doubt said bank
has considered the checks as negotiable. Apropos the matter of forgery in
endorsements, this Court has succinctly emphasized that the collecting
bank or last endorser generally suffers the loss because it has the
duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment to the
drawee is an assertion that the party making the presentment has
done its duty to ascertain the genuineness of the endorsements
(PNB vs. National City Bank) In another case, this court held that if the
drawee-bank discovers that the signature of the payee was forged after it
has paid the amount of the check to the holder thereof, it can recover the
amount paid from the collecting bank.
29
WESTMONT BANK VS. EUGENE ONG (GR No. 132250; Jan. 30, 2002) - It
was undisputed that Respondent Eugene Ong maintained a current account
with petitioner, formerly the Associated Banking Corporation, but now known
as Westmont Bank. Sometime in May 1976, he sold certain shares of stocks

through Island Securities Corporation. To pay Ong, Island Securities

purchased two (2) Pacific Banking Corporation managers checks, both dated
May 4, 1976, issued in the name of Eugene Ong as payee. Before Ong could
get hold of the checks, his friend Paciano Tanlimco got hold of them, forged
Ongs signature and deposited these with petitioner, where Tanlimco was
also a depositor. Even though Ongs specimen signature was on file,
petitioner accepted and credited both checks to the account of Tanlimco,
without verifying the signature indorsements appearing at the back thereof.
Tanlimco then immediately withdrew the money and absconded. ISSUE:
WON Westmont Bank is precluded from setting up the forgery or want of
authority and therefore, should suffer the loss and be made liable to herein
Respondent Ong? HELD: YES. Citing the ruling in Associated Bank vs. Court
of Appeals, the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior
endorsements. The collecting bank is also 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. Hence, it is in a better position to detect
forgery, fraud or irregularity in the indorsement. Further, respondent Ong, at
the time the fraudulent transaction took place, was a depositor of petitioner
bank. Banks are engaged in a business impressed with public interest, and it
is their duty to protect in return their many clients and depositors who
transact business with them. They have the obligation to treat their clients
account meticulously and with the highest degree of care, considering the
fiduciary nature of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a family. Since the
signature of the payee, in the case at bar, was forged to make it
appear that he had made an indorsement in favor of the forger,
such signature should be deemed as inoperative and ineffectual.
Petitioner, as the collecting bank, grossly erred in making payment
by virtue of said forged signature. The payee, herein respondent,
should therefore be allowed to recover from the collecting bank.
The theory of said rule is that the collecting banks possession of such check
is wrongful.
ILLUSORIO VS. CA (GR No. 139130; Nov. 27, 2002) Petitioner was a
depositor in good standing of respondent bank, the Manila Banking
Corporation. As he was then running about 20 corporations, and was going out
of the country a number of times, petitioner entrusted to his secretary,
Katherine E. Eugenio, his credit cards and his checkbook with blank checks. It
was also Eugenio who verified and reconciled the statements of said checking
account. Between the dates September 5, 1980 and January 23, 1981, Eugenio
was able to encash and deposit to her personal account about seventeen (17)
checks drawn against the account of the petitioner at the respondent bank.
Upon learning that Eugenio has been using his credit cards, petitioner fired
Eugenio immediately, and instituted a criminal action against her for estafa thru
falsification. Private respondent also lodged a complaint for estafa thru
falsification of commercial documents against Eugenio on the basis of
petitioners statement that his signatures in the checks were forged. Petitioner
then requested the respondent bank to credit back and restore to its account
the value of the checks which were wrongfully encashed but respondent bank
refused. Hence, petitioner filed the instant case. Petitioner contends that
Manila Bank is liable for damages for its negligence in failing to detect the
discrepant checks. He adds that as a general rule a bank which has obtained
possession of a check upon an unauthorized or forged endorsement of the
payees signature and which collects the amount of the check from the drawee
is liable for the proceeds thereof to the payee. Petitioner further contends that
under Section 23 of the Negotiable Instruments Law a forged check is
inoperative, and that Manila Bank had no authority to pay the forged checks.
ISSUE: WON petitioner may put up the defense of forgery against Manila
bank? HELD: NO. True, it is a rule that when a signature is forged or made
without the authority of the person whose signature it purports to be, the
check is wholly inoperative. No right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party, can be
acquired through or under such signature. However, the rule does provide for
an exception, namely: unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority. In the
instant case, it is the exception that applies. In our view, petitioner is
precluded from setting up the forgery, assuming there is forgery, due
to his own negligence in entrusting to his secretary his credit cards
and checkbook including the verification of his statements of account.
Petitioners reliance on Associated Bank vs. Court of Appeals and Philippine
Bank of Commerce vs. CA to buttress his contention that respondent Manila
30
Bank as the collecting or last endorser generally suffers the loss because it has
the duty to ascertain the genuineness of all prior endorsements is misplaced.
In the cited cases, the fact of forgery was not in issue. In the present case,
the fact of forgery was not established with certainty. In those cited cases, the
collecting banks were held to be negligent for failing to observe precautionary
measures to detect the forgery. In the case before us, both courts below
uniformly found that Manila Banks personnel diligently performed their duties,
having compared the signature in the checks from the specimen signatures on
record and satisfied themselves that it was petitioners.
TRADERS ROYAL BANK VS. RPN (GR No. 138510; Oct. 10, 2002) - The BIR
assessed plaintiffs Radio Philippines Network (RPN), Intercontinental
Broadcasting Corporation (IBC), and Banahaw Broadcasting Corporation (BBC)
of their tax obligations for the taxable years 1978 to 1983. To pay the assessed
taxes, respondent networks purchased from petitioner Traders Royal Bank
(TRB) three managers checks which was turned over through Aida Nuez, TRB
Branch Manager, to Mrs. Lourdes C. Vera, the financial comptroller of
respondents. The 3 managers checks, however, were never delivered nor paid
to the BIR but instead, the checks were presented for payment by unknown
persons to Security Bank, Taytay Branch. Respondents sent letters to both TRB
and Security Bank thereafter demanding that the amounts covered by the
checks be reimbursed or credited to their account. An action was filed where 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. ISSUE: WON Traders Royal Bank should solely bare the
loss for its negligence? HELD: YES. If a bank pays a forged check, it must be
considered as paying out of its funds and cannot charge the amount so paid to
the account of the depositor. Petitioner TRB ought to have known that where
checks 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 petitioner to know that the check was
duly indorsed by the original payee and, where it pays the amount of the check
to a third person who has forged the signature of the payee, the loss falls upon
petitioner who cashed the check. Its only remedy is against the person to
whom it paid the money. A bank is engaged in a business impressed with
public interest and it is its duty to protect its many clients and depositors who
transact business with it. It is under the obligation to treat the accounts of the
depositors and clients with meticulous care, whether such accounts consist only
of a few hundred or millions of pesos. Since TRB did not pay the rightful holder
or other person or entity entitled to receive payment, it has no right to
reimbursement. Petitioner TRB was remiss in its duty and obligation, and must
therefore suffer the consequences of its own negligence and disregard of
established banking rules and procedures. 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 duty-bound to ascertain the indorsers title to the
check or the nature of his possession.
MATERIAL ALTERATION
A material alteration is only a partial real defense because the holder in due
course can enforce it according to its original tenor.
Sec. 124
Sec. 125
30
Alteration of instrument; effect of. - Where a negotiable
instrument is materially altered without the assent of all parties

liable thereon, it is avoided, except as against a party who has
himself made, authorized, or assented to the alteration and
subsequent indorsers.
But when an 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 its original tenor.
What constitutes a material alteration. - Any alteration
which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c)
The
time
or
place
of
payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment
is specified, or any other change or addition which alters the

effect of the instrument in any respect, is a material alteration.

a.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK VS. CA (GR No.

121413; Jan. 29, 2001) - Ford Philippines filed actions to recover from the
drawee bank Citibank and collecting bank PCIB the value of several
checks payable to the Commissioner of Internal Revenue as payment of
percentage or manufacturer's sales taxes. What prompted this action was
the drawing of a check by Ford, which it deposited to PCIB as
payment and was debited from their Citibank account. It was later on
found out that the payment wasnt received by the Commissioner.
Meanwhile, according to the NBI report, one of the checks issued by Ford
was withdrawn from PCIB for alleged mistake in the amount to be paid. This
was replaced with managers check by PCIB, which were allegedly stolen
by a syndicate and deposited in their own account. The trial court
decided in favor of Ford. In this petition, PCIB claims that the action of Ford
had prescribed because of its inability to seek judicial relief seasonably,
considering that the alleged negligent act took place prior to December 19,
1977 but the relief was sought only in 1983, or seven years thereafter.
ISSUE: WON Fords cause of action has prescribed, hence, cannot recover
anymore from PCIB? HELD: The statute of limitations begins to run when
the bank gives the depositor notice of the payment, which is ordinarily when
the check is returned to the alleged drawer as a voucher with a statement of
his account. An action upon a check is ordinarily governed by the statutory
period applicable to instruments in writing. Our laws on the matter provide
that the action upon a written contract must be brought within ten years
from the time the right of action accrues. Hence, the reckoning time for the
prescriptive period begins when the instrument was issued and the
corresponding check was returned by the bank to its depositor. Applying the
same rule, the cause of action for the recovery of the proceeds of Citibank
would normally be a month after December 19, 1977, when Citibank paid the
face value of the check in the amount of P4,746,114.41. Since the original
complaint for the cause of action was filed on January 20, 1984, barely six
years had lapsed. Thus, Ford's cause of action to recover the amount was
seasonably filed within the period provided by law. Hence, PCIB was
declared solely responsible for the loss of the proceeds of Citibank in the
amount P4,746,114.41, which shall be paid together with 6% interest
thereon to Ford from the date when the original complaint was filed until
said amount is fully paid.
Concept
PNB VS. CA (GR No. 107508; April 25, 1996) - A check with serial number
7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00 was issued
by the Ministry of Education and Culture payable to F. Abante Marketing.
This check was drawn against Philippine National Bank (herein petitioner).
F. Abante Marketing, a client of Capitol City Development Bank (Capitol),
deposited the questioned check in its savings account with said bank. In
turn, Capitol deposited the same in its account with the Philippine Bank of
Communications (PBCom) which, in turn, sent the check to petitioner for
clearing. Petitioner cleared the check as good and, thereafter, PBCom
credited Capitols account for the amount stated in the check. However,
petitioner PNB returned the check to PBCom and debited PBComs account
for the amount covered by the check, the reason being that there was a
material alteration of the check number. PBCom, as collecting agent of
Capitol, then proceeded to debit the latters account for the same amount.
On the other hand, Capitol could not, in turn, debit F. Abante Marketings
account since the latter had already withdrawn the amount of the check.
ISSUE: WON AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS A
MATERIAL ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW?
HELD: No. An alteration is said to be material if it alters the effect of the
instrument. It means an unauthorized change in an instrument that purports
to modify in any respect the obligation of a party or an unauthorized addition
of words or numbers or other change to an incomplete instrument relating to
the obligation of a party. In other words, a material alteration is one which
changes the items which are required to be stated under Section 1 of the
Negotiable Instrument Law. The case at the bench is unique in the
sense that what was altered is the serial number of the check in
question, an item which, it can readily be observed, is not an
essential requisite for negotiability under Section 1 of the
Negotiable Instruments Law. The aforementioned alteration did
not change the relations between the parties. The name of the
drawer and the drawee were not altered. The intended payee was
the same. The sum of money due to the payee remained the same.
If the purpose of the serial number is merely to identify the issuing
government office or agency, its alteration in this case had no material effect
whatsoever on the integrity of the check. The identity of the issuing
government office or agency was not changed thereby and the amount of
the check was not charged against the account of another government office
or agency which had no liability under the check.
ENRIQUE MONTINOLA VS. PNB (supra, p. 12) Provincial Treasurer
(PT) of Misamis Oriental Ubaldo Laya issued the check in question as PT and
not as agent of PNB when he signed it as drawer payable to the order of MV
Ramos who later on sold the check to Montinola. On trial, the check was
severely mutilated and beneath Layas signature appears the words Agent,
Phil. National Bank. HELD: The insertion of the words "Agent, Phil. National
Bank" which converts the bank from a mere drawee to a drawer and
therefore changes its liability, constitutes a material alteration of the
instrument without the consent of the parties liable thereon, and so
discharges the instrument.
b.
Alteration that totally prevents recovery in the case of Montinola

vs. PNB above, even if it was negotiated to a holder in due course, such
holder cannot enforce the instrument against the bank as drawer. The
drawee cannot be compelled to pay unless he accepts, and the drawer
cannot be made liable until the instrument is dishonored. As a drawee, he
cannot be made to pay because there was no acceptance, the Bank
cannot also be made to pay as a drawer considering that the change of
liability was due to the alteration. Same rule applies if the alteration is in
the payees name, since the holder in due course cannot enforce it
according to its original tenor, which contains a different payee.
5.
EXTINCTIVE PRESCRIPTION
The prescriptive period for the filing of a claim based no negotiable
instruments is ten years from the time the cause of action accrued (Pay
vs. Vda. De Palanca). With respect to CHECKS, the action of the depositor
against his drawee bank commences to run from the time he is given
notice of payment.
31
31
PAPA VS. AU VALENCIA (GR NO. 105188; Jan. 23, 1998) - Private
respondents filed in the RTC a complaint for specific performance against
petitioner herein, in his capacity as administrator of the Testate Estate of
Angela Butte. The RTC ruled in favor of the PR allowing PR to redeem the
subject property and ordering petitioner to execute a Deed of Sale in favor of
PR Penarroyo covering the property in question and to deliver the peaceful
possession of the said property. Petitioner appealed the aforesaid decision of
the trial court to the Court of Appeals, alleging among others that the sale
was never "consummated" as he did not encash the check (in the amount of
P40,000.00) given by respondents Valencia and Pearroyo in payment of the
full purchase price of the subject lot. He maintained that what said
respondent had actually paid was only the amount of P5,000.00 (in cash) as
earnest money. The Court of Appeals rendered a decision, affirming with
modification the trial court's decision. ISSUE: WON alleged sale of the
subject property had been consummated? HELD: The Court finds no merit in
petitioners arguments. It is an undisputed fact that respondents Valencia
and Pearroyo had given petitioner P5, 000.00 in cash, P40, 000.00 in check,
in payment of the purchase price of the subject lot. Petitioner's assertion that
he never encashed the aforesaid check is not substantiated and is at odds
with his statement in his answer that "he can no longer recall the transaction
which is supposed to have happened 10 years ago." After more than ten
(10) years from the payment in party by cash and in part by check, the
presumption is that the check had been encashed. As already stated, he
even waived the presentation of oral evidence. Granting that petitioner had
never encashed the check, his failure to do so for more than ten (10) years
undoubtedly resulted in the impairment of the check through his
unreasonable and unexplained delay. While it is true that the delivery of a
check produces the effect of payment only when it is cashed, pursuant to
Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced
by the creditor's unreasonable delay in presentment. The acceptance of a
check implies an undertaking of due diligence in presenting it for payment,
and if he from whom it is received sustains loss by want of such diligence, it
will be held to operate as actual payment of the debt or obligation for which
it was given. It has, likewise, been held that if no presentment is made at

all, the drawer cannot be held liable irrespective of loss or injury unless
presentment is otherwise excused. This is in harmony with Article 1249 of
the Civil Code under which payment by way of check or other negotiable
instrument is conditioned on its being cashed, except when through the fault
of the creditor, the instrument is impaired. The payee of a check would be a
creditor under this provision and if its no-payment is caused by his
negligence, payment will be deemed effected and the obligation for which
the check was given as conditional payment will be discharged. Considering
that respondents Valencia and Pearroyo had fulfilled their part of the
contract of sale by delivering the payment of the purchase price, said
respondents, therefore, had the right to compel petitioner to deliver to them
the owner's certificate of title.
C.
PERSONAL DEFENSES
1.
ANTEDATING OR POST-DATING
that under the facts the checks were postdated and issued only as a loan to
New Sikatuna Wood Industries, Inc. if and when deposits were made to back
up the checks. Such deposits were not made, hence no loan was made,
hence, the three checks are without consideration.
5.
SIMPLE FRAUD, DURESS, INTIMIDATION, FORCE OR FEAR,

ILLEGALITY OF CONSIDERATION, BREACH OF FAITH
Sec. 55
Sec. 56
Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the
reason only that it is ante-dated or post-dated, provided this is not done for an
illegal or fraudulent purpose. The person to whom an instrument so dated
is delivered acquires the title thereto as of the date of delivery.
Sec. 57
Example: Where the maximum allowed interest rate is 24% per annum, a
check was ante-dated for six months in order to collect additional 12% without
indicating it in the contract to hide the usurious nature of the transaction in
considered made for fraudulent purposes and may give rise to the personal
defense of antedating against the one who made the ante-dating.
a.
2.
INSERTION OF A WRONG DATE
Sec. 13.When date may be inserted. - Where an instrument expressed to

be payable at a fixed period after date is issued undated, or where the
acceptance of an instrument payable at a fixed period after sight is undated,
any holder may insert therein the true date of issue or acceptance, and the
instrument shall be payable accordingly. The insertion of a wrong date
does not avoid the instrument in the hands of a subsequent holder in
due course; but as to him, the date so inserted is to be regarded as
the true date.
Example: On Jan. 1, 2013, M issued a promissory note payable to the order of
P for P10,000 with 12% within 6 months from date and the date is not
specified in the instrument. If A inserted Dec. 1, 2012 as the date to collect
more interest and thereafter indorsed it to B.
a.
b.
If B was aware of the fraudulent insertion of the wrong date, the

instrument is avoided as to him;
If B is a holder in due course, he can treat Dec. 1, 2012 as the true date.
3.
FILLING UP BLANKS BEYOND AUTHORITY
a.
Filling up in excess of the authority given as provided in Sec. 14 is only a

personal defense. See p.8 for discussion on Sec. 14 and illustration.
Signed blank piece of paper (1) there must delivery of the instrument to
another person; (2) the paper that was delivered was a blank paper
containing the signature of the person who will deliver; and (3) there must
be intention to convert it to a negotiable instrument.
b.
b.
Absent no. (3) above, the instrument cannot be enforced against the one
who delivered the instrument. Example: If P a fan of Vilma Aunor, asked
for her autograph and later on filled-up the paper to be a promissory note
payable to his order. P then endorsed it to A. In this example, even if A is
a holder in due course, he cannot enforce it against Vilma Aunor, as the
act of P converting the blank piece of paper into a negotiable instrument,
without intention from the indicated maker, would constitute fraud in
factum, which, as discussed earlier, is a real defense which may be raised
even against a holder in due course.
4.
ABSENCE OR FAILURE OF CONSIDERATION

STATE INVESTMENT HOUSE VS. CA (supra, p. 19) - Being not a holder in
due course, plaintiff is subject to personal defenses, such as lack of
consideration between appellants and New Sikatuna Wood Industries. Note
32
32
When title defective. - The title of a person who negotiates 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.
What constitutes notice of defect. - To constitutes notice of
an infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated must
have had actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the instrument
amounted to bad faith.
Rights of holder in due course. - A holder in due course 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 against all parties liable thereon.
DURESS AND INTIMIDATION

1. Generally, duress and/or intimidation exerted against a person gives
the latter a personal defense and is available even if there is some
form of consideration.
2. To constitute duress, there must be an actual or threatened exercise
or power possessed by the party benefited thereby, for the purpose
of obtaining the note (or bill), such as to deprive the maker of the
quality of mind essential to making of a contract.
3. Duress is relative, hence threats to a feeble and old person might be
duress to one while it may not be so to another.
4. Duress is a real defense if it is vicious or if it is what is referred to as
duress amounting to forgery, like when a person who exerted the
same is practically writing the note itself by holding the hands of
another.
ILLEGALITY
1. Generally, illegality of the transaction that gave rise to a particular
transaction is only a personal defense. For example, if a check was
issued as payment for marijuana, the transaction involved is illegal
but the same cannot be raised against a holder in due course.
2. Exception to the rule is when the law which declares the transaction
or document issued in connection thereto is void against any party.
GREAT EASTERN LIFE INSURANCE CO. (GELIC) VS. HONGKONG &
SHANGHAI BANKING CORP (HSBC) and PNB (GR No. 18657; Aug. 23,
1922) - In May 1920, petitioner GELIC drew its check for P2,000 on HSBC
whom it had an account, payable to the order of Lazaro Melicor. E. M.
Maasim fraudulently obtained possession of the check, forged Melicor's
signature, as an endorser, and then personally endorsed and presented it to
PNB where the amount of the check was placed to his credit. After having
paid the check, and on the next day, PNB endorsed the check to HSBC which
paid it and charged the amount of the check to the account of the plaintiff.
In the ordinary course of business, HSBC rendered a bank statement to
GELIC showing that the amount of the check was charged to its account,
and no objection was then made to the statement. About four (4) months
after the check was charged to the account of the plaintiff, it developed that
Lazaro Melicor, to whom the check was made payable, had never received it,
and that his signature, as an endorser, was forged by Maasim, who
presented and deposited it to his private account in PNB. With this
knowledge, the plaintiff promptly made a demand upon the HSBC that it
should be given credit for the amount of the forged check, which the bank
refused to do, and GELIC commenced this action to recover the P2,000
which was paid on the forged check. On the petition of HSBC, PNB was
made defendant. The former Bank denies any liability, but prays that, if a
judgment should be rendered against it, in turn, it should have like judgment
against the latter Bank which denies all liability to either party. Upon the
issues being joined, a trial was had and judgment was rendered against

GELIC and in favor HSBC and PNB from which GELIC appealed. ISSUE:
WON plaintiff GELIC can recover? HELD: Yes. GELICs check was drawn on
HSBC payable to the order of Melicor. In other words, GELIC authorized and
directed HSBC to pay Melicor, or his order, P2,000. It did not authorize or
direct the bank to pay the check to any other person than Melicor, or his
order, and the testimony is undisputed that Melicor never did part with his
title or endorse the check, and never received any of its proceeds. Neither is
GELIC estopped or bound by the bank statement, which was made to it by
the HSBC. This is not a case where the GELIC's own signature was forged to
one of it checks. In such a case, the plaintiff would have known of the
forgery, and it would have been its duty to have promptly notified the bank
of any forged signature, and any failure on its part would have released bank
from any liability. That is not this case. Here, the forgery was that of Melicor,
who was the payee of the check, and the legal presumption is that the bank
would not honor the check without the genuine endorsement of Melicor. In
other words, when GELIC received its banks statement, it had a right to
assume that Melicor had personally endorsed the check, and that, otherwise,
the bank would not have paid it. Sec. 23 of the NIL is square in point. The
money was on deposit in HSBC, and it had no legal right to pay it out to
anyone except GELIC or its order. Here, GELIC ordered HSBC to pay the
P2,000 to Melicor, and the money was actually paid to Maasim and was
never paid to Melicor, and he never paid to Melicor, and he never personally
endorsed the check, or authorized any one to endorse it for him, and the
alleged endorsement was a forgery. Hence, upon the undisputed facts, it
must follow that HSBC has no defense to this action. It is admitted that the
PNB cashed the check upon a forged signature, and placed the money to the
credit of Maasim, who was a forger. That the PNB then endorsed the check
and forwarded it to HSBC by whom it was paid. PNB had no license or
authority to pay the money to Maasim or anyone else upon a forge
signature. It was its legal duty to know that Melicor's endorsement was
genuine before cashing the check. Its remedy is against Maasim to whom it
paid the money. The Supreme Court reversed the lower court's judgment,
and entered another in favor of GELIC and against HSBC for P2,000, with
interest thereon from 8 November 1920, at the rate of 6% per annum, and
the costs of the action, and a corresponding judgment will be entered in
favor of HSBC against PNB for the same amount, together with the amount
of its costs in the action.
QUIRINO GONZALEZ LOGGING VS. CA (GR No. 126568; April 20, 2003) In the expansion of its logging business, petitioner Quirino Gonzales Logging
Concessionaire (QGLC), through its proprietor, general manager - co-petitioner
Quirino Gonzales, applied for credit accommodations with respondent Republic
Bank . The Bank approved QGLCs application. In separate transactions,
petitioners, to secure certain advances from the Bank in connection with
QGLCs exportation of logs, executed a promissory note in 1964 in favor of the
Bank. They were to execute three more promissory notes in 1967. On January
27, 1977, alleging non-payment of the balance of QGLCs obligation, and nonpayment of the promissory notes despite repeated demands, the Bank filed a
complaint for sum of money against petitioners. The complaint listed ten
causes of action, the sixth to ninth of which were anchored on the promissory
notes issued by petitioners allegedly to secure certain advances from the Bank
in connection with the exportation of logs as reflected above. The notes were
payable 30 days after date and provided for the solidary liability of petitioners
as well as attorneys fees at ten percent of the total amount due in the event of
their non-payment at maturity. Petitioners seek to avoid liability by claiming
that Quirino and Eufemia Gonzales signed the promissory notes in blank; that
they had not received the value of said notes, and that the credit line thereon
was unnecessary in view of their money deposits, and unremitted proceeds on
log exports from the Bank. ISSUE: WON petitioners may interpose the
defense of lack of consideration and that the Promissory Notes were signed in
blank against the bank? HELD: NO. The genuineness and due execution of the
notes had been deemed admitted by petitioners, they having failed to deny the
same under oath. Their claim that they signed the notes in blank does not thus
lie. Petitioners admission of the genuineness and due execution of the
promissory notes notwithstanding, they raise want of consideration thereof.
The promissory notes, however, appear to be negotiable as they meet
the requirements of Section 1 of the Negotiable Instruments Law.
Such being the case, the notes are prima facie deemed to have been
issued for consideration. It bears noting that no sufficient evidence was
adduced by petitioners to show otherwise. In any case, it is no defense that
the promissory notes were signed in blank as Section 14 of the
Negotiable Instruments Law concedes the prima facie authority of the
33
person in possession of negotiable instruments, such as the notes

herein, to fill in the blanks.
VII.
A.
ENFORCEMENT OF LIABILITY
PARTIES PRIMARILY AND SECONDARILY LIABLE
How to Enforce Primary Liability
Sec. 60
Sec. 62
Liability of maker. - The maker of a negotiable instrument, by
making it, engages that he will pay it according to its tenor, and
admits the existence of the payee and his then capacity to indorse
Liability of acceptor. - The acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of
his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
The unconditional promise attaches the moment the maker makes the
instrument while the acceptors assent to the unconditional order attaches the
moment he accepts the instrument. No further act is necessary in order for the
liability to accrue. What is only necessary later is for the holder to enforce such
liability by presenting it for payment.
B.
1.
GENERAL STEPS IN ENFORCING SECONDARY LIABILITY

Promissory Notes
a.
Presentment for payment must be made within the required

period to the maker;
Sec. 70. Effect of want of demand on principal debtor. - Presentment for

payment is not necessary in order to charge the person primarily liable on the
instrument; but if the instrument is, by its terms, payable at a special place,
and he is able and willing to pay it there at maturity, such ability and
willingness are equivalent to a tender of payment upon his part. But except as
herein otherwise provided, presentment for payment is necessary in order to
charge the drawer and indorsers.
b.
Notice of dishonor should be given, if promissory note is disonored

by non-payment by the maker;
Sec. 89. To whom notice of dishonor must be given. - Except as herein

otherwise provided, 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
Other than PRESENTMENT FOR ACCEPTANCE, the rules under Bills of Exchange
are similar to Promissory Notes as regards Presentment for Payment and
Dishonor.
2.
Bills of Exchange
PRESENTMENT FOR ACCEPTANCE

Sec. 143. When presentment for acceptance must be made. Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the maturity of the
instrument; or
(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place
of business of the drawee.
33
In no other case is presentment for acceptance necessary in order to render

any party to the bill liable.

Sec. 143 provides three instances when presentment for acceptance is

required, otherwise, it is dispensable and the instrument maybe directly
presented for payment.
a.
Sec. 145
other means than the payment of money.

If the drawee merely stated that I return the drawers order. Balance of his
account is in the same as order, confirming the amount in the instrument,
does not necessarily signify assent to the order, and consequently, its
acceptance.
How Made; Time for Presentment
Presentment; how made. - Presentment for acceptance must

be made by or on behalf of the holder at a reasonable hour, on a
business day and before the bill is overdue, to the drawee or
some person authorized to accept or refuse acceptance on his
behalf; and
How made?
i. Proof of Acceptance
Sec. 133
(a) Where a bill is addressed to two or more drawees who are

not partners, presentment must be made to them all unless one
has authority to accept or refuse acceptance for all, in which case
presentment may be made to him only;
Sec. 134
(b) Where the drawee is dead, presentment may be made to his

personal representative;
Sec. 146
Sec. 85
Sec. 72
Sec. 134: If acceptance is made by a telegram, the acceptance stated therein

will not bind the acceptor to the subsequent holder if the said holder is not
aware thereof.
ii. When Deemed Accepted
Sec. 137. Liability of drawee returning or destroying bill. - Where a
drawee to whom a bill is delivered for acceptance destroys the same, or refuses
within twenty-four hours after such delivery or within such other period as the
holder may allow, to return the bill accepted or non-accepted to the holder, he
will be deemed to have accepted the same.
iii. Future Bills
Sec. 135. Promise to accept; when equivalent to acceptance. - An
unconditional promise in writing to accept a bill before it is drawn is deemed an
actual acceptance in favor of every person who, upon the faith thereof,
receives the bill for value.
PRESENTMENT FOR PAYMENT.
iv. Time to Accept
In Summary, the following rules should be followed:

1. Fixed day for presentment for acceptance day fixed;
2. If the day fixed falls on a Sunday or holiday next succeeding business day;
3. If payable on demand at the option of the holder, before 12:00 noon on a
Saturday when the entire day is not a holiday.
Sec. 147. Presentment where time is insufficient. - Where the holder of a

bill drawn payable elsewhere than at the place of business or the residence of
the drawee has no time, with the exercise of reasonable diligence, to present
the bill for acceptance before presenting it for payment on the day that it falls
due, the delay caused by presenting the bill for acceptance before presenting it
for payment is excused and does not discharge the drawers and indorsers.
EXAMPLE: When the instrument is payable in Pasay City two days after
acceptance, and is required to be accepted in Davao City, the delay for the
presentment for payment is excused and does not discharge the drawers and
indorsers.
Time allowed drawee to accept. - The drawee is allowed
Sec. 147
Presentment where time is insufficient see When Time is

Insufficient, p. 34
twenty-four hours after presentment in which to decide whether

or not he will accept the bill; the acceptance, if given, dates as of
the day of presentation.
v. Rule When Incomplete Bill is Accepted
ACCEPTANCE
34
Sec. 136
SEC. 136 vs. SEC. 137: The bill is at all times the property of the holder, and
he is entitled to have it if he wants it. If the holder should demand return
before the 24 hours provided by Sec. 136, the drawee would be required to
comply on pain of being held as an acceptor; but return within 24 hours
unaccepted would not be a dishonor; the drawee can still accept by notification
within 24 hours; if the drawee after returning the bill still refused to act after
the expiration of the time allowed, the holder then would be required to treat
the bill as dishonored or lose his rights against prior parties (Beutels Brannans,
p. 1248).
When Time is Insufficient
Sec. 132. Acceptance; how made, by and so forth. - The acceptance of a

bill is the signification by the drawee of his assent to the order of the drawer.
The acceptance must be (1) in writing and (2) signed by the drawee. (3) It
must not express that the drawee will perform his promise by any
bill presenting the same for acceptance may require that the
acceptance be written on the bill, and, if such request is refused,
may treat the bill as dishonored.
Acceptance by separate instrument. - Where an acceptance is
written on a paper other than the bill itself, it does not bind the
acceptor except in favor of a person to whom it is shown and who,
on the faith thereof, receives the bill for value.
Acceptance may be made on the instrument itself or in a separate instrument.

However, under Sec. 133, the holder may require the acceptance on the bill
itself, otherwise, it may be treated as dishonored.
(c) Where the drawee has been adjudged a bankrupt or an

insolvent or has made an assignment for the benefit of
creditors, presentment may be made to him or to his trustee or
assignee.
On what days presentment may be made. - A bill may be
presented for acceptance on any day on which negotiable
instruments may be presented for payment under the
provisions of Sections seventy-two and eighty-five of this
Act. When Saturday is not otherwise a holiday, presentment for
acceptance may be made before twelve o'clock noon on that day.
Time of maturity. - Every negotiable instrument is payable at
the time fixed therein without grace. When the day of maturity
falls upon Sunday or a holiday, the instruments falling due or
becoming payable on Saturday are to be presented for payment
on the next succeeding business day except that instruments
payable on demand may, at the option of the holder, be presented
for payment before twelve o'clock noon on Saturday when that
entire day is not a holiday
What constitutes a sufficient presentment. see
The Rule under Sec. 146 is different from Sec. 85 in that when the instrument
is payable on a Saturday which is not a holiday, presentment may be made
before 12:00 noon on that day, this rule is applicable in Sec. 85 if the
instrument is payable on demand, Sec. 146 makes no such distinction.
b.
Holder entitled to acceptance on face of bill. - The holder of a
34
Sec. 138. Acceptance of incomplete bill. - A bill may be accepted before it

has been signed by the drawer, or while otherwise incomplete, or when it is
overdue, or after it has been dishonored by a previous refusal to accept, or by
non-payment. But when a bill payable after sight is dishonored by nonacceptance and the drawee subsequently accepts it, the holder, in the absence
of any different agreement, is entitled to have the bill accepted as of the date
of the first presentment.

vi. Kinds of Acceptance

Sec. 139
Sec. 140
Sec. 141
Sec. 142
payable on demand, presentment must be made within a reasonable time

after its issue, except that in the case of a bill of exchange, presentment for
payment will be sufficient if made within a reasonable time after the last
negotiation thereof.
Kinds of acceptance. - An acceptance is either (1) general or (2)
qualified. A general acceptance assents without qualification to

the order of the drawer. A qualified acceptance in express terms
varies the effect of the bill as drawn
What constitutes a general acceptance. - An acceptance to
pay at a particular place is a general acceptance unless it expressly
states that the bill is to be paid there only and not elsewhere
Qualified acceptance. - An acceptance is qualified which is:
i. Rule in determining MATURITY

Sec. 85. Time of maturity. - Every negotiable instrument is payable at the
time fixed therein without grace. When the day of maturity falls upon Sunday
or a holiday, the instruments falling due or becoming payable on Saturday are
to be presented for payment on the next succeeding business day except that
instruments payable on demand may, at the option of the holder, be presented
for payment before twelve o'clock noon on Saturday when that entire day is not
a holiday.
(a) Conditional; that is to say, which makes payment by the

acceptor dependent on the fulfillment of a condition therein stated;
(b) Partial; that is to say, an acceptance to pay part only of the
amount for which the bill is drawn;
(c) Local; that is to say, an acceptance to pay only at a particular
place;
(d) Qualified as to time;
(e) The acceptance of some, one or more of the drawees but
not of all.
Rights of parties as to qualified acceptance. (1) The holder
may refuse to take a qualified acceptance and if he does not
obtain an unqualified acceptance, he may treat the bill as
dishonored by non-acceptance.
See p. 34, time for presentment for acceptance

ii. Rule in computing time
Sec. 86. Time; how computed. - When the instrument is payable at a fixed
period after date, after sight, or after that happening of a specified event, the
time of payment is determined by excluding the day from which the time
is to begin to run, and by including the date of payment.
iii. Rule if payable AT A BANK
(2) Where a qualified acceptance is taken, the drawer and

indorsers are discharged from liability on the bill unless they
have expressly or impliedly authorized the holder to take a qualified
acceptance, or subsequently assent thereto.
Sec. 75
(3) When the drawer or an indorser receives notice of a qualified

acceptance, he must, within a reasonable time, express his
dissent to the holder or he will be deemed to have assented
thereto. (segregation and emphasis supplied)
Sec. 87
WHEN PRESENTMENT EXCUSED

Sec. 127
Sec. 148. Where presentment is excused. - Presentment for acceptance is

excused and a bill may be treated as dishonored by non-acceptance in either of
the following cases:
Sec. 187
(a) Where the drawee is dead, or has absconded, or is a fictitious person

or a person not having capacity to contract by bill.
(b) Where, after the exercise of reasonable diligence, presentment cannot
be made.
(c) Where, although presentment has been irregular, acceptance has been
refused on some other ground.
In presentment for payment, the holder exhibits the instrument to the maker or
the acceptor to demand payment of the amount reflected in the negotiable
instrument or whatever balance that is due.
c.
Requisites for Sufficiency
Sec. 73
(a) By the holder, or by some person authorized to receive payment on his

behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is absent or
inaccessible, to any person found at the place where the presentment is made.
Date of Presentment
Sec. 71. Presentment where instrument is not payable on demand and

where payable on demand. - Where the instrument is not payable on
demand, presentment must be made on the day it falls due. Where it is
35
Place of Presentment
Place of presentment. - Presentment for payment is made at the

proper place:
Sec. 72. What constitutes sufficient presentment. - Presentment for

payment, to be sufficient, must be made: (HRPT)
b.
instrument is payable at a bank, presentment for payment must be

made during banking hours, unless the person to make payment
has no funds there to meet it at any time during the day, in which
case presentment at any hour before the bank is closed on that
day is sufficient
Rule where instrument payable at bank. - 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.
Bill not an assignment of funds in hands of drawee. - A bill of
itself does not operate as an assignment of the funds in the hands
of the drawee available for the payment thereof, and the drawee is
not liable on the bill unless and until he accepts the same.
Certification of check; effect of. - Where a check is certified by
the bank on which it is drawn, the certification is equivalent to an
acceptance.
SEC. 127 & 87: A check of itself does not operate as assignment of any part
of the funds to the credit of the drawer with the bank, and the bank is not
liable to the holder, unless and until it accepts or certifies the check.
Nevertheless, even if there is no assignment of funds, the statement in the
instrument that it is payable at a bank is equivalent to an order to the bank to
pay the same for the account of the principal debtor thereof. However, the
order must specify the particular bank.
PRESENTMENT FOR PAYMENT
a.
Presentment where instrument payable at bank. - Where the
Sec. 70
35
(a) Where a place of payment is specified in the instrument and it is

there presented;
(b) Where no place of payment is specified but the address of the
person to make payment is given in the instrument and it is there
presented;
(c) Where no place of payment is specified and no address is given
and the instrument is presented at the usual place of business or
residence of the person to make payment;
(d) In any other case if presented to the person to make payment
wherever he can be found, or if presented at his last known place
of business or residence.
Effect of want of demand on principal debtor. - Presentment
for payment is not necessary in order to charge the person primarily
liable on the instrument; but if the instrument is, by its terms,

payable at a special place, and he is able and willing to pay

it there at maturity, such ability and willingness are
equivalent to a tender of payment upon his part. But except
as herein otherwise provided, presentment for payment is
necessary in order to charge the drawer and indorsers
If the holder will not present the instrument for payment at such special place
provided under Sec. 70, he loses his right to the payment of interest.
PLACE OF PAYMENT means a house, bank, counting room, store, or place of
business, where the holder can present a note, where the maker can deposit or
provide funds to meet it, and where a legal offer to pay can be made
(Hutchinson vs. Crutcher). Thus, a designation of a town or city is not
sufficient.
d.
Presentment to the Party Primarily Liable
i. How Presentment Made

Sec. 74. Instrument must be exhibited. - The instrument must be exhibited
to the person from whom payment is demanded, and when it is paid, must be
delivered up to the party paying it.
ii. Rule in case Party Primarily Liable is Dead
Sec. 76. Presentment where principal debtor is dead. - Where the person
primarily liable on the instrument is dead and no place of payment is specified,
presentment for payment must be made to his personal representative, if
such there be, and if, with the exercise of reasonable diligence, he can be
found.
iii. Presentment to Partners
Sec. 77. Presentment to persons liable as partners. - Where the (1)
persons primarily liable on the instrument are liable as partners and (2) no
place of payment is specified, presentment for payment may be made to any
one of them, even though there has been a dissolution of the firm.
EXAMPLE: A and B, partners, issued a note payable at #8 Ayala Ave., Makati
City, to C who indorsed it to D, present holder, who resides in Quezon City,
where A also resides. Even if it would be more convenient for D to present the
note for payment at As residence, he cannot do so, since there is a specified
place for presentment for payment. Note that the instrument may be presented
for payment to ANY partner only if there is no place of payment specified.
iv. Presentment to Joint Debtors
Sec. 78. Presentment to joint debtors. - Where there are several persons,
not partners, primarily liable on the instrument and no place of payment is
specified, presentment must be made to them all.
e.
When Presentment is NOT NECESSARY or EXCUSED
Sec. 79
When presentment not required to charge the drawer. -
Sec. 80
When presentment not required to charge the indorser. -
Sec. 81
Sec. 82
Presentment for payment is not required in order to charge the

drawer where he has no right to expect or require that the
drawee or acceptor will pay the instrument.
Presentment is not required in order to charge an indorser where

the instrument was made or accepted for his accommodation
and he has no reason to expect that the instrument will be
paid if presented.
When delay in making presentment is excused. - Delay in
making presentment for payment is excused when the delay is
caused by circumstances beyond the control of the holder
and not imputable to his default, misconduct, or negligence. When
the cause of delay ceases to operate, presentment must be made

with reasonable diligence.
When presentment for payment is excused. - Presentment for
payment is excused:
36
(a) Where, after the exercise of reasonable diligence, presentment,

as required by this Act, cannot be made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
Sec. 79: When the drawer does not have sufficient funds with the drawee so
as to require or expect it to pay the check, presentment for payment is excused
(Vda. De Victoria vs. Gutierrez).
REASONABLE TIME
LUIS WONG VS. CA (G.R. No. 117857; February 2, 2001) - Petitioner
Wong was an agent of Limtong Press. Inc. (LPI). 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. Petitioner, however, had a history of unremitted collections, which
he duly acknowledged in a confirmation receipt he co-signed with his wife.
Hence, petitioners customers were required to issue post-dated checks
before LPI would accept their purchase orders. Wong issued six (6) postdated checks initially intended to guarantee the calendar orders of customers
who failed to issue post-dated checks. However, following company policy,
LPI refused to accept the checks as guarantees. Instead, the parties agreed
to apply the checks to the payment of petitioners unremitted. Before the
maturity of the checks, petitioner prevailed upon LPI not to deposit the
checks and promised to replace them within 30 days. However, petitioner
reneged on his promise. LPI deposited the checks with Rizal Commercial
Banking Corporation (RCBC) which were returned because the account was
closed. Despite receipt of the notice of dishonor, petitioner failed to make
arrangements for payment within five (5) banking days so he was charged
with violation of BP 22. ISSUE: What constitutes REASONABLE TIME for
checks? HELD: Contrary to petitioners assertions, the law does not require
a maker to maintain funds in his bank account for only 90 days. Under
Section 186 of the Negotiable Instruments Law, "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 six (6) months, or 180 days. Private respondent herein
deposited the checks 157 days after the date of the check. Hence said
checks cannot be considered stale. Only the presumption of knowledge of
insufficiency of funds was lost, but such knowledge could still be proven by
direct or circumstantial evidence. As found by the trial court, private
respondent did not deposit the checks because of the reassurance of
petitioner 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,
petitioner was duly notified of such fact but failed to make arrangements for
full payment within five (5) banking days thereof. There is, on record,
sufficient evidence that petitioner had knowledge of the insufficiency of his
funds in or credit with the drawee bank at the time of issuance of the
checks. And despite petitioners insistent plea of innocence, we find no error
in the respondent courts affirmance of his conviction by the trial court for
violations of the Bouncing Checks Law.
DISHONOR
If DISHONORED BY NON-ACCEPTANCE
Sec. 149
When dishonored by nonacceptance. - A bill is dishonored by
Sec. 150

obtained; or
(b) When presentment for acceptance is excused and the bill is not
accepted.
Duty of holder where bill not accepted. - Where a bill is duly
presented for acceptance and is not accepted within the prescribed
time, the person presenting it must treat the bill as dishonored
by non-acceptance or he loses the right of recourse against
the drawer and indorsers.
36 Sec. 151
non-acceptance:


presentment for payment is necessary.
Sec. 149
NOTICE OF DISHONOR
Sec. 89. To whom notice of dishonor must be given. - Except as herein
otherwise provided, 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
ASIA BANKING VS. JAVIER (GR No. L-19051; April 4, 1923) - Salvador
Chaves drew two checks against PNB in favor of La Insular. This check was
indorsed by the limited partners of La Insular, and then deposited by Chaves
in his current account with the plaintiff, Asia Banking Corporation. The
amount represented by both checks was used by Chaves after they were
deposited in the plaintiff bank, by drawing checks on the plaintiff.
Subsequently these checks were presented by the plaintiff to the Philippine
National Bank for payment, but the latter refused to pay on the ground that
the drawer, Chaves, had no funds therein. The lower court sentenced the
defendant, as indorser, to pay the plaintiff, hence, this petition. ISSUE:
WON defendants liability can be enforced? HELD: No. Section 89 of the
Negotiable Instruments Law (Act No. 2031) provides that, when a negotiable
instrument is dishonored for non-acceptance or non-payment, notice thereof
must be given to the drawer and each of the indorsers, and those who are
not notified shall be discharged from liability, except where this act provides
otherwise. According to this, the indorsers are not liable unless they are
notified that the document was dishonored. Then, under the general
principle of the law of procedure, it will be incumbent upon the plaintiff, who
seeks to enforce the defendant's liability upon these checks as indorser, to
establish said liability by proving that notice was given to the defendant
within the time, and in the manner, required by the law that the checks in
question had been dishonored. If these facts are not proven, the plaintiff has
not sufficiently established the defendant's liability. There is no proof in the
record tending to show that plaintiff gave any notice whatsoever to the
defendant that the checks in question had been dishonored, and there it has
not established its cause of action. Hence, petition was granted.
GULLAS VS PNB (GR. NO. L-43191; NOV. 13, 1935) - The Treasurer of the
United States issued a warrant in the amount of $361 payable to Francisco
Bacos. Petitioner and Pedro Lopez signed as endorsers of this check.
Thereupon it was cashed by PNB. Subsequently the treasurer warrant was
dishonored by the Insular Treasurer. At that time, Gullas has an outstanding
balance of P509 with PNB and had issued certain checks before he left his
residence for Manila. The bank on learning of the dishonor of the treasury
warrant sent notices by mail to Gullas which could not delivered to him
because he is not in Manila. In view of this, the bank applied the outstanding
balances of Gullas current account with the PNB for the payment of the
check. On the return of Gullas, notice of dishonor was received and the
unpaid balance of the US Treasury was paid by him. As a result of this, the
checks issued by him before he left for Manila were not paid because of lack
of funds standing to his credit in the bank. ISSUE: WON PNB has the right
to apply a deposit to the debt of the depositor to the bank? HELD: No. The
NIL contains provisions establishing the liability of a general indorser and
giving the procedure for a notice of dishonor. The general indorser engages
that if he be dishonored and the necessary proceedings of dishonor be duly
taken, he will pay the amount to the holder. The notice of dishonor is in
order to charge all indorser and that the right of action against him does not
accrue until the notice is given. As a general rule, a bank has a right to set
off the deposits in its hands for the payment of any indebtedness to it on the
part of the depositor. In the case at bar, though this right to set off exist, the
remedy was not properly enforced because prior to the mailing of the notice
of dishonor, and without waiting for any action by Gullas, the bank made use
of the money standing in his account to make good for the treasury warrant.
a.
Sec. 83
When instrument considered dishonored
When instrument dishonored by non-payment. - The

instrument is dishonored by non-payment when:
(a) It is duly presented for payment and payment is refused or
cannot be obtained; or
37
Sec. 151
b.
(b) Presentment is excused and the instrument is overdue and

unpaid.
When dishonored by nonacceptance. - A bill is dishonored by
non-acceptance:
obtained; or
(b) When presentment for acceptance is excused and the bill is not
accepted.
presentment for payment is necessary
Effect of Absence of Notice on Separate Contract
Failure to give notice of dishonor will not necessarily result in absence of

liability on the part of the drawer. The right of the payee to recover from the
drawer based on the latters contractual obligation that is separate from the
negotiable instrument is still binding. The drawer may no longer be secondarily
liable but his contractual liability is preserved (Producers Bank of the Philippines
vs. Excelsa Industries, Inc.)
NYCO SALES CORPORATION VS. BA FINANCE CORPORATION (GR
No. 71694; Aug. 16, 1991) - Nyco Sales has discounting privileges with BA
Finance. In 1978, brothers Renato Fernandez and Santiago Renato (officers
of Sanshell Corporation) approached Rufino Yao, president and general
manager of Nyco Sales Corporation (Nyco) for a credit accommodation in
order for the brothers to make use of Nycos discounting privileges. Nyco
agreed and so on November 15, 1978, Sanshell issued a post-dated
(November 17, 1978) BPI check to Nyco in the amount of P60,000. Following
the discounting process agreed upon, Nyco, thru its president Rufino Yao,
endorsed the check in favor of BA Finance. Thereafter, BA Finance issued a
check payable to Nyco which endorsed it in favor of Sanshell. Sanshell then
made use of and/or negotiated the check. Accompanying the exchange of
checks was a Deed of Assignment executed by Nyco (assignor) in favor of BA
Finance (assignee) with the conformity of Sanshell. The check bounced. BA
Finance notified Sanshell. Sanshell substituted the BPI check with a Security
Bank and Trust Company check. This check again bounced. BA Finance
made repeated demands to Nyco and Sanshell but neither of the two settled
the obligation. Hence, BA Finance sued Nyco who averred that it received no
notice of dishonor when the second check was dishonored. ISSUE: WON
Nyco Sales is liable to pay BA Finance? HELD: Yes. The relationship between
Nyco and BA Finance is one of assignor-assignee. The assignor-vendor
warrants both the credit itself (its existence and legality) and the person of
the debtor (his solvency), if so stipulated, as in the case at bar.
Consequently, if there be any breach of the above warranties, the assignorvendor should be held answerable therefor. There is no question then that
the assignor-vendor is indeed liable for the invalidity of whatever he assigned
to the assignee-vendee. Considering now the facts of the case at bar, it is
beyond dispute that Nyco executed a deed of assignment in favor of BA
Finance with Sanshell Corporation as the debtor-obligor. BA Finance is
actually enforcing said deed and the check covered thereby is merely an
incidental or collateral matter. This particular check merely evidenced the
credit which was actually assigned to BA Finance. Thus, the designation is
immaterial as it could be any other check. It is only what is represented by
the said checks that Nyco is being asked to pay. Nycos pretension that it
had not been notified of the fact of dishonor is belied not only by the formal
demand letter issued by BA Finance but also by the fact that Nyco and
Sanshell had frequent contacts before, during and after the dishonor. More
importantly, as long as the credit remains outstanding, Nyco Sales shall
continue to be liable to BA Finance as its assignor. The dishonor of an
assigned check simply stresses its liability and the failure to give a
notice of dishonor will not discharge it from such liability. This is
because the cause of action stems from the breach of the
warranties embodied in the Deed of Assignment, and not from the
dishonoring of the check alone.
c.
37 Sec 90
Who should give notice
By whom given. - The notice may be given by or on behalf of the

holder, or by or on behalf of any party to the instrument who might

be compelled to pay it to the holder, and who, upon taking it up,

would have a right to reimbursement from the party to whom the
notice is given.
Notice given by agent. - Notice of dishonor may be given by any
agent either in his own name or in the name of any party entitled to
given notice, whether that party be his principal or not.
Effect of notice on behalf of holder. - Where notice is given by
or on behalf of the holder, it inures to the benefit of all subsequent
holders and all prior parties who have a right of recourse against the
party to whom it is given.
Effect where notice is given by party entitled thereto. Where notice is given by or on behalf of a party entitled to give
notice, it inures to the benefit of the holder and all parties
subsequent to the party to whom notice is given.
Sec. 91
Sec. 92
Sec. 93
(a) Either to the post-office nearest to his place of residence or to

the post-office where he is accustomed to receive his letters; or
(b) If he lives in one place and has his place of business in
another, notice may be sent to either place; or
(c) If he is sojourning in another place, notice may be sent to the
place where he is so sojourning.
But where the notice is actually received by the party within the
time specified in this Act, it will be sufficient, though not sent in
accordance with the requirement of this section.
FAR EAST REALTY INVESTMENT INC., vs. THE HONORABLE COURT
OF APPEALS, DY HIAN TAT, SIY CHEE and GAW SUY AN [G.R. No. L36549, October 5, 1988] - Respondent Dy Hian Tat, Siy Chee and Gaw Suy
An sought the extension of an accommodation loan from petitioner Far East
Realty Investment which the former will use to further their business.
Respondents promised to pay, jointly and severally, in one month time. To
insure payment, respondents delivered to Far East Realty Investment a
China Bank Check drawn by Dy Hian Tat issued on September 13, 1960, and
signed by them at the back of said check, with the assurance that after one
month from September 13, 1960, the said check would be redeemed by
respondents by paying cash or the said check can be presented for payment
on or immediately after one month. The loan was actually extended but
when the check was presented for payment on March 5, 1964, it was
dishonoredthe account on which it is drawn has long been closed. The trial
court held in favor of petitioner but this was reversed by the CA by ruling
that the said check wasnt presented within reasonable time and after its
issuance. Petitioner contends that presentment for payment and notice of
dishonor are not necessary as when funds are insufficient to meet a check,
the drawer is liable, whether such presentment and notice be totally omitted
or merely delayed. ISSUE: WON presentment for payment and notice of
dishonor of the questioned check were made within reasonable time? HELD:
No. Where the instrument is not payable on demand, presentment must be
made on the day it falls due. Where it is payable on demand, presentment
must be made within a reasonable time after issue, except that in the case
of a bill of exchange, presentment for payment will be sufficient if made
within a reasonable time after the last negotiation thereof. (Section 71,
Negotiable Instruments Law). "Reasonable time" has been defined as so
much time as is necessary under the circumstances for a reasonable prudent
and diligent man to do, conveniently, what the contract or duty requires
should be done, having a regard for the rights and possibility of loss, if any,
to the other party. In the instant case, the check in question was issued on
September 13, 1960, but was presented to the drawee bank only on March
5, 1964, and dishonored on the same date. After dishonor by the drawee
bank, a formal notice of dishonor was made by the petitioner through a
letter dated April 27, 1968. Under these circumstances, the petitioner
undoubtedly failed to exercise prudence and diligence on what he ought to
do as required by law. The petitioner likewise failed to show any justification
for the unreasonable delay. Notice may be given as soon as instrument has
been dishonored and unless delay is excused must be given within the time
fixed by law
EXAMPLE: If M issued a note to P or his order, who indorsed it to A, A to B, B

to C, C to D, present holder, and M dishonors the instrument, D may notify C,
who in turn may notify B, A and P. B may notify A and P and A may notify P.
If D gave notice of dishonor to P, A, B and C: C may not notify P, A and B
because the notice by the holder inures to the benefit of all prior parties who
have the right of recourse against the party to whom it is given.
On the other hand, if D notified only C but C, in turn, notified P, A and B, D can
already hold P, A and B liable because notice by an indorser inures to the
benefit of the holder. Additionally, P need not be notified by A and B because
the notice given by C inures to the benefit of all parties subsequent to the party
to whom notice is given.
d.
Time and Place to give notice
Sec. 103
Sec. 104
Where parties reside in same place. - Where the person

giving and the person to receive notice reside in the same place,
notice must be given within the following times:
(a) If given at the place of business of the person to receive

notice, it must be given before the close of business hours on the
day following.
(b) If given at his residence, it must be given before the usual
hours of rest on the day following.
(c) If sent by mail, it must be deposited in the post office in time
to reach him in usual course on the day following.
Where parties reside in different places. - Where the person
giving and the person to receive notice reside in different places,
the notice must be given within the following times:
(a) If sent by mail, it must be deposited in the post office in time
to go by mail the day following the day of dishonor, or if there be
no mail at a convenient hour on last day, by the next mail
thereafter.
(b) If given otherwise than through the post office, then within
the time that notice would have been received in due course of
mail, if it had been deposited in the post office within the time
Sec. 104: If a note is dishonored on March 1, 2013:

(a) by mail: the notice must be deposited with the appropriate address duly
stamped in such a way that it would be part of the mail that would depart on
March 2, 2013;
(b) personal service: within the same time that the mail will normally reach the
destination. Thus, if it usually takes 3 days, then the person may give notice
personally within such 3 days.
specified in the last subdivision.

Sec. 105
Sec. 106
Sec. 107
Sec. 108
When sender deemed to have given due notice. - Where
notice of dishonor is duly addressed and deposited in the post

office, the sender is deemed to have given due notice,
notwithstanding any miscarriage in the mails.
Deposit in post office; what constitutes. - Notice is deemed
to have been deposited in the post-office when deposited in any
branch post office or in any letter box under the control of the
post-office department.
Notice to subsequent party; time of. - Where a party
receives notice of dishonor, he has, after the receipt of such
notice, the same time for giving notice to antecedent parties that
the holder has after the dishonor.
Where notice must be sent. - Where a party has added an
address to his signature, notice of dishonor must be sent to that
address; but if he has not given such address, then the notice
must be sent as follows:
38
e.
When Notice Not Required, Excused or Dispensed With
Sec. 109
Sec. 110
38
Waiver of notice. - Notice of dishonor may be waived either
before the time of giving notice has arrived or after the omission
to give due notice, and the waiver may be expressed or implied.
Whom affected by waiver. - Where the waiver is embodied in
the instrument itself, it is binding upon all parties; but, where it is
written above the signature of an indorser, it binds him only
By waiver, the person renounces the benefit of the act or matter in his favor,
which in the case of Sec. 109 is the benefit of the notice. Accordingly, by
waiver of notice, a drawer or indorser is not discharged from liability by failure

of the holder to give notice, in fact, the giving of the notice is not necessary
anymore to hold them liable.
It may be made either (1) expressly or (2) impliedly;
It may be given either (1) before the time of giving of notice; or (2) after the
failure to give notice.
BINDING EFFECT: If the instrument reads Pay to the order of P, P10,000 on
March 1, 2013. Notice of dishonor waived, it is binding upon all parties
secondarily liable thereon. If the waiver is found on an indorsement only, such
as Pay to the order of A. Notice of Dishonor Waived, Sgd. P, the waiver is
binding only on P.
Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a
foreign bill of exchange or other negotiable instrument, is deemed to be a
waiver not only of a formal protest but also of presentment and notice of
dishonor.
PROTEST is a formal statement in writing made by a notary public at the
instance of the holder declaring that the instrument has been presented for
payment or for acceptance but the same was dishonored.
Such is indispensable only in a FOREIGN BILL OF EXCHANGE but may also be
the subject of a waiver.
Sec. 118. When protest need not be made; when must be made. Where any negotiable instrument has been dishonored, it may be protested for
non-acceptance or non-payment, as the case may be; but protest is not
required except in the case of foreign bills of exchange.
NOTICE OF DISHONOR VS. PROTEST
NOTICE OF DISHONOR
Apply to inland bills
PROTEST
Required in foreign bills,
permissive inland bills
Always in writing
Made by a notary public or a
respectable resident
Protest or noting thereof should
be made on the day of dishonor
As a rule to be made in the place
of dishonor
May be verbal or written

Made by a holder or any person
who may be compelled to pay
Required to be made usually
within one day after dishonor
Not made or given in the place of
dishonor but in the residence of
the parties and other places
mentioned in Sec. 103
Sec. 112
When notice is dispensed with. - Notice of dishonor is
dispensed with when, after the exercise of reasonable diligence,
it cannot be given to or does not reach the parties sought to be
charged.
Sec. 113
Delay in giving notice; how excused. - Delay in giving notice
of dishonor is excused when the delay is caused by
circumstances beyond the control of the holder and not
imputable to his default, misconduct, or negligence. When the
cause of delay ceases to operate, notice must be given with
reasonable diligence.
Sec. 114 (c): When the drawer is the agent of the drawee, and the former
dishonors the bill.
Sec. 114 (d): When the drawer closed his account or does not have sufficient
funds with the drawee.
Sec. 114 (e): When the drawer directed or ordered the drawee not to pay, such
as in ordering a Stop Payment.
GREAT ASIAN SALES CENTER CORPORATION and TAN CHONG LIN
VS. CA and BANCASIA FINANCE AND INVESTMENT CORPORATIO
(G.R. No. 105774; April 25, 2002) - 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 herein Respondent (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 second 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 turn, Great Asian President, 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, which were dishonored 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. ISSUE: WON Petitioners liability
remains despite absence of notice of dishonor from Respondent. HELD:
YES. Great Asians four contracts assigning its fifteen (15) postdated checks
to Bancasia expressly stipulate the suspensive condition that in the event the
drawers of the checks fail to pay, Great Asian itself will pay Bancasia. Since
the common condition in the contracts had transpired, an obligation on the
part of Great Asian arose from the four contracts, and that obligation is to
pay Bancasia the full value of the checks, including the stipulated penalty
and attorneys fees. It is to be noted that 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.
Furthermore, 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.
Sec. 115. When notice need not be given to indorser. Notice of
dishonor is not required to be given to an indorser in either of the following
cases:
EXAMPLE: If notice was not given due to a calamity like flood and typhoon, the
delay is excused. However, the holder must give notice once the flood or
typhoon ceases.
(a) When the drawee is a fictitious person or person not having capacity to
contract, and the indorser was aware of that fact at the time he indorsed the
instrument;
(b) Where the indorser is the person to whom the instrument is presented for
payment;
(c) Where the instrument was made or accepted for his accommodation.
Sec. 114. When notice need not be given to drawer. - Notice of dishonor
is not required to be given to the drawer in either of the following cases:
Sec. 115 (c): Since the indorser is the principal, he cannot really expect the
accommodation maker to pay.
(a) Where the drawer and drawee are the same person;
(b) When the drawee is 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 has countermanded payment.
39
f.
Notice when previously dishonored by non-acceptance
Sec. 116. Notice of non-payment where acceptance refused. - Where

due notice of dishonor by non-acceptance has been given, notice of a
subsequent dishonor by non-payment is not necessary unless in the meantime
the instrument has been accepted.
DR issued a bill of exchange against DW, drawee, payable to P or
39 EXAMPLE:
order. P indorsed the same to A, then A to B. When B presented it for

acceptance, DW dishonored it. B thereafter gave notice of dishonor to DR, P

and A. Later, B still presented:
1. For payment and dishonored, there would be no need to give a second
notice of dishonor for the non-payment;
2. For acceptance and it was accepted, then later on dishonored by nonpayment, it is necessary to give a notice of dishonor for non-acceptance.
payment to the acceptor for honor or referee in case of need

f.
Presentment for Payment and Dishonor by Non-Payment
Sec. 168
be made as follows:
ACCEPTANCE FOR HONOR

Sec. 165. Agreement of acceptor for honor. - The acceptor for honor, by
such acceptance, engages that he will, on due presentment, pay the bill
according to the terms of his acceptance provided it shall not have been paid
by the drawee and provided also that is shall have been duly presented for
payment and protested for non-payment and notice of dishonor given to him.
The liability of the acceptor for honor is in effect secondary because his
engagement is to pay only if it shall not have been paid by the drawee and
provided also that it shall have been duly presented for payment and protested
for non-payment and notice of dishonor given to him. Acceptance for honor is
also called acceptance supra protest or acceptance after protest.
a.
Sec. 169
Sec. 170
Requisites
Sec. 161. When bill may be accepted for honor. - When a bill of exchange
has been (1) protested for dishonor by non-acceptance or protested for better
security and is (2) not overdue, (3) any person not being a party already
liable thereon may, (4) with the consent of the holder, intervene and accept
the bill supra protest for the honor of any party liable thereon or for the honor
of the person for whose account the bill is drawn. The acceptance for honor
may be for part only of the sum for which the bill is drawn; and where there
has been an acceptance for honor for one party, there may be a further
acceptance by a different person for the honor of another party.

Protest is a prerequisite
The acceptor must be a stranger
There must be an express
statement that it is for honor
Consent of the holder is necessary
Liability of acceptor is secondary
Payment of the acceptor will not
discharge the bill
Acceptance may be in favor of
only one or some of the parties
In whose favor?
Sec. 163. When deemed to be an acceptance for honor of the drawer. Where an acceptance for honor does not expressly state for whose honor it is
made, it is deemed to be an acceptance for the honor of the drawer.
c.
Liability of Acceptor for Honor
Sec. 164. Liability of the acceptor for honor. - The acceptor for honor is
liable to the holder and to all parties to the bill subsequent to the party for
whose honor he has accepted
EXAMPLE: DR issued a bill of exchange ordering DW to pay P or order P10,000.
P indorsed it to A, A to B, B to C, C to D, present holder. DW refused to accept
the instrument and protest was duly made. X accepted the instrument in favor
of B. X is liable as acceptor for honor to B and the parties subsequent to him (C
and D); X is not liable to P and A.
d.
A.
B.
HOW INSTRUMENT IS DISCHARGED
Sec. 119
Instrument; how discharged. - A negotiable instrument is

discharged:
(a) By payment in due course by or on behalf of the principal

debtor;
(b) By payment in due course by the party accommodated,
where the instrument is made or accepted for his
accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for
the payment of money;
(e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
EXAMPLE: If a bill is payable 10 days after sight and was dishonored by nonacceptance on March 1, 2013 but was accepted for honor on March 5, 2013,
the maturity date shall be March 11, 2013 not March 15, 2013.
Protest required
40
CONCEPT
Discharge means release from further liability, obligation, or from the binding
effect of the negotiable instrument.
1. As to the paper itself, it puts an end to it as a contractual obligation;
2. As to the parties to the instrument, it operates as a release of some or all
of them from further obligation and liability under the instrument although
the instrument may not be discharged, as where only part of the obligors
are released.
Maturity Date of Sight Bills
Sec. 167. Protest of bill accepted for honor, and so forth. - Where a
dishonored bill has been accepted for honor supra protest or contains a referee
in case of need, it must be protested for non-payment before it is presented for
ORDINARY ACCEPTANCE
Protest is not necessary
The person who accepts is a party
the drawee
Any word indicating an acceptance
is enough
Consent of the holder is not
necessary
Acceptor is primarily liable
Payment by the acceptor in due
course discharges the bill
Acceptance involves the entire
instrument
VIII. DISCHARGE
Sec. 166. Maturity of bill payable after sight; accepted for honor. Where a bill payable after sight is accepted for honor, its maturity is calculated
from the date of the noting for non-acceptance and not from the date of the
acceptance for honor
e.
(a) If it is to be presented in the place where the protest for nonpayment was made, it must be presented not later than the day
following its maturity.
(b) If it is to be presented in some other place than the place
where it was protested, then it must be forwarded within the time
specified in Section one hundred and four.
When delay in making presentment is excused. - The
provisions of Section eighty-one apply where there is delay in
making presentment to the acceptor for honor or referee in case
of need
Dishonor of bill by acceptor for honor. - When the bill is
dishonored by the acceptor for honor, it must be protested for
non-payment by him
ORDINARY ACCEPTANCE VS. ACCEPTANCE FOR HONOR
Sec. 162. Acceptance for honor; how made. - An acceptance for honor
supra protest (5) must be in writing and indicate that it is an acceptance for
honor and must be signed by the acceptor for honor. (formal requisites)
b.
Presentment for payment to acceptor for honor, how

made. - Presentment for payment to the acceptor for honor must
A.
Payment in Due Course
Sec. 88. What constitutes payment in due course. - Payment is made in
40 due course when it is made at or after the maturity of the payment to the

holder thereof in good faith and without notice that his title is defective
cancellation was made unintentionally or under a mistake or without authority
a.
1.
2.
3.
By Whom Made:
Primary Party Liabile, i.e., a maker or acceptor;
Surety for the principal debtor, signing as a secondary party;
A person paying on behalf of the principal debtor also discharges
the instrument under the principles of the law on agency;
Unlike renunciation, the law does not require cancellation to be in writing.

Thus, there is cancellation if the agent of the holder burned the note with the
knowledge and consent of the said holder.
b.
Payment By Person Secondarily Liable does not discharge

the instrument; EXCEPTIONS.
Civil Code, Art. 1231. Obligations are extinguished:

(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
D.
Sec. 121. Right of party who discharges instrument. - Where the instrument is
paid by a party secondarily liable thereon, it is not discharged; but the party so
paying it is remitted to his former rights as regard all prior parties, and he may
strike out his own and all subsequent indorsements and against negotiate the
instrument, except:
Other causes of extinguishment of obligations, such as annulment, rescission,

fulfillment of a resolutory condition, and prescription, are governed elsewhere
in this Code.
(a) Where it is payable to the order of a third person and has been paid by the
drawer; and
(b) Where it was made or accepted for accommodation and has been paid by
the party accommodated.
STATE INVESTMENT HOUSE VS. COURT OF APPEALS (217 SCRA 32

[1993]) Nora Moulic issued checks to Corazon Victoriano as deposit for
jewelry that she obtained from the latter which were meant to be sold to
other persons. When she was returning the jewelry, the payee failed to
return the checks because she already negotiated the same to the petitioner.
Moulic withdrew her funds from the drawee bank. ISSUE: WON the
obligation is extinguished? HELD: No. The acts which will discharge a simple
contract for the payment of money under Sec. 119(d) are determined by
other existing legislations, e.g., Art. 1231 of the Civil Code. None of the
modes outlined therein is applicable in the instant case as Sec. 199
contemplates of a situation where the holder is the creditor while its drawer
is the debtor. In the present action, the payee, Corazon Victoriano, was no
longer Moulics creditor at the time the jewelry were returned.
Payment by the drawer discharges the instrument since he is the one ultimately
liable. If he were to seek reimbursement from the payee, indorsee(s) or the
drawee, the liability to such parties would ultimately be his. Unless, the amount
in the instrument has been advanced by the drawer to the drawee, in such
case, he may recover the amount paid to the holder from such drawee.
Payment by the accommodated party discharges the instrument because he is
the principal in the case contemplated by Sec. 121(b).
c.
Payment by a Third Person
Payment by a third person who pays for the benefit or in behalf of the maker
and does not wish to acquire any right over the instrument also discharges the
instrument. If he intends to acquire a right over such instrument, he may be
considered a holder or assignee, as the case may be. Under the Civil Code, a
creditor, though not bound to accept payment from a third person, is not
prohibited from doing so.
d.
E.
b.
To Whom
c.
d.
Renunciation
Sec. 122. Renunciation by holder. - The holder may expressly renounce his
rights against any party to the instrument before, at, or after its maturity. An
absolute and unconditional renunciation of his rights against the principal
debtor made at or after the maturity of the instrument discharges the
instrument. But a renunciation does not affect the rights of a holder in due
course without notice. A renunciation must be in writing unless the
instrument is delivered up to the person primarily liable thereon.
C.
F.
Payment for Honor
Sec. 171
Intentional Cancellation Sec. 119(c)
Sec. 172
Rule in Case of Unintentional Cancellation

Sec. 123. Cancellation; unintentional; burden of proof. - 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
41
An instrument is discharged when the principal debtor becomes the

holder of the instrument at or after maturity date in his own right.
In his own right has been construed to exclude a case where a
maker acquires the instrument in a purely representative capacity.
Thus, the note is not discharged when the maker acquires it as agent
of another.
Nor is it discharged when the maker becomes the holder for
example, as executor or administrator.
HOWEVER, the maker is discharged even if he acquired the
instrument through an agent who did not disclose his principal.
SIGLER VS. SIGLER (98 Kans. 158, p. 864 [1916]) A certain Joseph
Sigler issued a negotiable note to Ode Sigler. Later, Joseph employed RC
Wilson to purchase the note from Ode at the lowest possible price. When
Ode learned that Wilson was really the agent of Joseph, he sued the latter
but Joseph claimed that the instrument was discharged. HELD: The Court
sustained Joseph explaining that there is no principle of law that would
prevent an individual from going into the market and purchasing, at a
discount or otherwise, securities upon which he is indebted and which he has
put in circulation. If he may do so himself, he may accomplish the same
thing through an agent who acts without disclosing the agency.
Good Faith
Sec. 88 also requires that the payor be in good faith and without notice that
the payees title is defective. Accordingly, a holder who has been deprived of
the instrument may still enforce payment against a payor who HAD NOTICE of
defect in the payees title.
B.
Principal Debtor Becomes the Holder Sec. 119(e)

a.
Payment must be to the holder. Payment to a payee who already negotiated

the instrument will not discharge the instrument because he is no longer the
holder, the same is true when payment is made to a possessor to whom the
instrument was not indorsed.
e.
Acts that Discharges Simple Contracts Sec. 1199(d)
Sec. 173
41
Who may make payment for honor. - Where a bill has been
protested for non-payment, any person may intervene and pay it

supra protest for the honor of any person liable thereon or for the
honor of the person for whose account it was drawn.
Payment for honor; how made. - The payment for honor supra
protest, in order to operate as such and not as a mere voluntary
payment, must be attested by a notarial act of honor which
may be appended to the protest or form an extension to it.
Declaration before payment for honor. - The notarial act of
honor must be founded on a declaration made by the payer for
honor or by his agent in that behalf declaring his intention to
pay the bill for honor and for whose honor he pays

a.
honor payment is made
Preference
G.
Sec. 174. Preference of parties offering to pay for honor. - Where two or
more persons offer to pay a bill for the honor of different parties, the person
whose payment will discharge most parties to the bill is to be given the
preference.
b.
The instrument must be surrendered to the payor whenever discharge is by

payment by or in behalf of the principal debtor, payment by the accommodated
party, by renunciation or by any other ground that discharges simple contracts.
If the instrument is not surrendered, it may fall in the hands of a holder in due
course who may have the right to enforce the instrument despite the previous
payment that was made.
Effect on Subsequent Parties
Sec. 175. Effect on subsequent parties where bill is paid for honor. Where a bill has been paid for honor, all parties subsequent to the party for
whose honor it is paid are discharged but the payer for honor is subrogated
for, and succeeds to, both the rights and duties of the holder as regards the
party for whose honor he pays and all parties liable to the latter.
H.
(a) By any act which discharges the instrument;

(b) By the intentional cancellation of his signature by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party;
(e) By a release of the principal debtor unless the holder's right of recourse
against the party secondarily liable is expressly reserved;
(f) By any agreement binding upon the holder to extend the time of payment or
to postpone the holder's right to enforce the instrument unless made with the
assent of the party secondarily liable or unless the right of recourse against
such party is expressly reserved.
Holder has no option
Sec. 176. Where holder refuses to receive payment supra protest. Where the holder of a bill refuses to receive payment supra protest, he loses
his right of recourse against any party who would have been
discharged by such payment.
Sec. 120(a): Those previously discussed mentioned in Sec. 119;

Sec. 120(b) and (c): The cancellation of an indorsement of a person
secondarily liable may result in the discharge of that person whose signature
was stricken-off and also of subsequent parties, as provided in Sec. 48 (see p.
13). The subsequent parties are likewise discharged since they are deprived of
their right of recourse against the party whose signature was stricken-off.
In the previous example, if D refused to accept payment for the honor of A, he

loses his right of recourse against B and C, who would have been discharged.
d.
Rights of Payer
Sec. 177. Rights of payer for honor. - The payer for honor, on paying to the
holder the (1) amount of the bill and the (2) notarial expenses incidental to its
dishonor, is entitled to receive both the bill itself and the protest.
e.
The bill is already overdue

The person who will pay may be a
stranger or a party
The consent of the holder is not
necessary and the holder who
refuses to accept payment loses his
right of recourse against any party
who may be discharged by such
payment.
f.
Sec. 120(c): As suggested by the majority view, does not include discharge by
operation of law, such as bankruptcy, insolvency, prescription or failure to give
notice of dishonor but only those discharged by virtue of some act of the
creditor.
Payment for Honor vs. Acceptance for Honor
PAYMENT FOR HONOR

There must be protest for nonpayment
Sec. 120(d): Tender of Payment means the act by one which produces and
offers to a person holding a claim or demand against him the amount of money
which he considers and admits to be due, in satisfaction of such claim or
demand without any stipulation or condition. The rule is only fair because it is
the fault of the holder that he did not receive payment. If he accepted the
tender of payment by a prior party, the subsequent party would have been
discharged.

There must be prior protest for
non-acceptance or for better
security
The bill is not yet overdue
The acceptor must be a stranger
The consent of the holder is a
requisite
Sec. 120(e): When the principal debtor is released from liability, the parties
secondarily liable loses their right of recourse against the former. Under this
paragraph, in order to holder the secondary liability, there must be express
reservation of the right of recourse against parties secondarily liable, which
produces the implied reservation of their (parties secondarily liable) right of
recourse against the maker.
Payment for Honor vs. Payment by Person Primarily Liable

PAYMENT FOR HONOR
There must be protest for nonpayment

A notarial act is necessary
The person who will pay may be a
stranger or may be a party
It cannot be payment in due
course and payment discharges
only the parties after the party in
whose favor payment for honor is
made
In favor of a specified person and
the law requires that there is a
statement of the person for whose
42
Sec. 120(f): Extension of Term: the assurance of the drawer and the
indorsers is payment according to the tenor of the instruments, an extension of
time agreed by the holder and the principal debtor, therefore, releases those
parties from secondary liability which varies from the original undertaking of
the secondary parties. It is suggested by Aquino that this rule applies to an
accommodated party who is the principal debtor but not to an accommodation
indorser, who must also be discharged by the extension agreed upon by the
principal debtor and the holder.
PAYMENT BY PERSON
PRIMARILY LIABLE
There is no need to protest for
non-payment or non-acceptance
A notarial act is not necessary
The person who will pay is a party
maker or drawee-acceptor
Payment in due course discharges
the instrument
IX. CHECKS
A.
Payment is not in favor of specific

parties
Discharge of Persons SECONDARILY LIABLE
Sec. 120. When persons secondarily liable on the instrument are

discharged. - A person secondarily liable on the instrument is discharged:
EXAMPLE: DR issued a bill of exchange ordering DW to pay P or order. P

indorsed it to A, A to B, B to C and C to D, present holder. Later, DW refused to
pay and protest was duly made. X made a payment for the honor of A.
1. B, C and D are discharged;
2. X has a right of recourse against the persons liable to A, i.e., DR and P.
c.
Surrender of Instrument Upon Discharge
42
CHECKS DEFINED
Sec. 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
Act applicable to a bill of exchange payable on demand apply to a check

Checks are used between banks and bankers and their customers, and are
designed to facilitate banking operations. It is the essence to be payable on
demand, because the contract between the banker and the customer is that
the money is needed on demand (Banco de Oro Savings vs. Equitable Banking
possesses funds of a depositor, it is bound to honor his checks to the extent

of the amount of his deposits. The failure of the bank to pay the check when
the deposit is sufficient, entitles the drawer to substantial damages without
any proof of actual damages. Conversely, a bank is not liable for its refusal
to pay a check on account of insufficient funds, notwithstanding the fact that
a deposit may be made later in the day.
Corporation, supra, p.3)

B.
DISINGUISHED FROM DRAFT
This relationship between the drawer and the drawee bank makes the
drawee bank liable to the drawer in case of wrongful dishonor of checks. A
drawee bank who wrongfully dishonors a check is not liable to the
payee for lack of privity but it is liable to the drawer because of
breach of contract.
REPUBLIC OF THE PHILIPPINES VS. PNB (GR No. L-16106; Dec. 30,
1961) A demand draft is a bill of exchange payable on demand, as such, it
is an open letter request from, and an order by, one person on another to
pay a sum of money therein mentioned to a third person, on demand or at a
future time specified therein. In fact, the term draft is often used, and is
the common term, for all bills of exchange. And the two words are used
indiscriminately.
Sec. 189. When check operates as an assignment. - A check of itself does

not operate as an assignment of any part of the funds to the credit of the
drawer with the bank, and the bank is not liable to the holder unless and until it
accepts or certifies the check
A bill of exchange, within the meaning of NIL does not operate as an

assignment of funds in the hands of the drawee who is not liable on
the instrument until he accepts it (Sec. 127). In fact, our law requires
that they be presented either for acceptance or for payment within a
reasonable time after their issuance or after their last negotiation (Sec. 71),
failure of which will discharge the drawer from liability or to the extent of the
loss caused by the delay (Sec. 186).
3.
A demand draft is very different from a cashiers or managers check,

contrary to appellants pretense, for it has been held that the latter is a
primary obligation of the bank which issues it and constitutes its written
promise to pay upon demand. In In Re Bank of the United States (277 NYS
96, 100), a cashiers check has been characterized as follows:
HSBC INTERNATIONAL TRUSTEE LIMITED vs. CECILIA DIEZ

CATALAN (G.R. No. 159590 & 15959; October 18, 2004) - Frederick Arthur
Thomson drew 5 checks payable to Catalan in the total amount of HK$3.2
million. Catalan presented these checks to HSBC. The checks were
dishonored for having insufficient funds. Thomson demanded that the checks
be made good because he, in fact, had sufficient funds. Catalan knowing
that Thomson had communicated with the Bank, asked HSBC Bank to clear
the checks and pay her the said amount. HSBC did not heed her. Thomson
died but Catalan was not paid yet. The account was transferred to HSBC
[Trustee]. Catalan then requested Trustee to pay her. They still refused and
even asked her to submit back to them the original checks for verification.
Catalan and her lawyer went to Hongkong on their own expense to
personally submit the checks. They still were not honored, leading Catalan to
file a suit against HSBC to collect her HK$3.2M. ISSUE: Whether or not
Catalan has a cause of action. HELD: Yes. Although Catalan has no cause of
action because under Section 189, they payee may sue the drawee based on
tort under Art. 19 of the Civil Code. HSBC is not being sued on the value of
the check itself but for how it acted in relation to Catalans claim for payment
despite the repeated directives of the drawer Thomson to recognize the
check the latter issued. Catalan may have prayed that she be paid the value
of the checks but it is axiomatic that what determines the nature of an
action, as well as which court has jurisdiction over it, are the allegations of
the complaint, irrespective of whether or not the plaintiff is entitled to
recover upon all or some of the claims asserted therein.
A cashier's check issued by a bank, however, is not an ordinary draft. The

latter is a bill of exchange payable demand. It is an order upon a third party
purporting to be drawn upon a deposit of funds. A cashier's check is of a
very different character. It is the primary obligation of the bank which issues
it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and constitutes its
written promise to pay upon demand (Steinmetz v. Schultz, 59 S.D. 603, 241
N.W. 734)
The following definitions cited by appellant also confirm this view:
A cashier's check is a check of the bank's cashier on his or another bank. It
is in effect a bill of exchange drawn by a bank on itself and accepted in
advance by the act of issuance (10 C.J.S. 409).
A cashier's check issued on request of a depositor is the substantial
equivalent of a certified check and the deposit represented by the check
passes to the credit of the checkholder, who is thereafter a depositor to that
amount (Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756, 195 Ala. 552).
A cashier's check, being merely a bill of exchange drawn by a bank on itself,
and accepted in advance by the act of issuance, is not subject to
countermand by the payee after indorsement, and has the same legal effects
as a certificate deposit or a certified check (Walker v. Sellers, 77 So. 715,
201 Ala. 189).
D.
KINDS OF CHECK
1.
Cashiers Check and Managers Check
A demand draft is not therefore of the same category as a cashier's check

which should come within the purview of the law.
The Monetary Board, in its Resolution No. 707 dated 10 May 2001 decided to
authorize the issuance of cashiers, managers or certified checks or other
similar instruments in blank or payable to cash, bearer or numbered account as
an exception from the provisions of Circular no. 259, subject to the following
conditions:
C.
RELATIONSHIP BETWEEN DRAWER, DRAWEE AND PAYEE
1.
Ordinarily, checks are drawn on bank accounts that are opened by

drawers on drawee banks. The drawer of the check is a depositor of the
drawee bank.
2.
As a consequence of the above provision, the drawee is not liable to the

payee just because the drawer actually issued the check to him for
valuable consideration. There is no obligation on the drawees part to
honor the check and the payee has no cause of action against the drawee
even if the dishonor was wrongful.
BSP Circular No. 291 Series of 2001
a. That the amount of each check shall not exceed P10,000;

b. That the buyer of the check is properly identified as required under Circular
No. 259 dated 29 September 2000; and
The drawer issues checks in payment of an obligation to a payee. But a

payee does not have contractual relationship with the drawee bank.
SPOUSES MORAN AND LIBRADA MORAN VS. CA (GR No. 105836;
March 7, 1994) The relationship between the bank and the depositor is
that of a debtor and creditor. By virtue of the contract of deposit between
them, the banker agrees to pay checks drawn by the depositor provided that
said depositor has money in the hands of the bank. Hence, where the bank
43
43
c. That a register of gift checks issued shall be maintained with the following
minimum information:
1. Date issued;
2. Amount;
3. Name of buyer;
4. Date paid;

5.
PNB VS. NATIONAL CITY BANK OF NEW YORK (63 Phil 11) When a
check is certified, it ceases to possess the character, or to perform the
functions, of a check, and represents so much money on deposit, payable to
the holder on demand. The check becomes a basis of credit an easy mode
of passing money from hand to hand, and answers the purposes of money.
If the aggregate instruments purchased by the same person within any

thirty (30) day period amounts to at least fifty thousand pesos
(P50,000), the purpose of the buyer should be stated.
d. That banks which issue as well as those which accept as deposits, said
cashiers, managers or certified checks or other similar instruments issued in
blank or payable to cash, bearer or numbered account shall take such
measure(s) as may be necessary to ensure that said instruments are not being
used/resorted to by the buyer or depositor in furtherance of a moneylaundering activity.
d.
e. That the deposit of said instruments shall be subject to the same

requirements/scrutiny applicable to cash deposits.
f. That transactions involving said instruments should be accordingly reported
to the Bangko Sentral ng Pilipinas if there is reasonable ground to suspect that
said transactions are being used to launder funds of illegitimate origin.
2.
Certified Check
a.
A certified check is one drawn by a depositor upon funds to his credit in a

bank which a proper officer of the bank certifies will be paid when duly
presented for payment. It is analogous to a certificate of deposit of a
certifying bank.
Certification is similar to acceptance but different in the sense that: (1)
Certification at the instance of the holder discharges while there is no
discharge in an ordinary acceptance; (2) In certification, the bank debits
the drawers account at the time of certification and sets aside funds out
of the drawers control.
Thus, the effect of certification is the same as thought the money had
been paid by the bank to the holder and redeposited by him in his own
credit.
b.
c.
NEW PACIFIC TIMBER & SUPPLY COMPANY, INC. vs. HON.

ALBERTO V. SENERIS RICARDO A. TONG and EX-OFFICIO SHERIFF
HAKIM S. ABDULWAHID [G.R. No. L-41764 December 19, 1980] - A
compromise judgment was rendered by the respondent Judge against New
Pacific Timber. For failure of the petitioner to comply with his judgment
obligation, a writ of execution was issued for the amount of P63,130.00
pursuant to which, the Ex-Officio Sheriff levied upon the following personal
properties of the petitioner. Prior to the auction sale, petitioner deposited
with the CFI, in his capacity as Ex-Officio Sheriff of Zamboanga City, the sum
of P63,130.00. Private respondent refused to accept the check as well as the
cash deposit. Private respondent requested the scheduled auction to proceed
if the petitioner cannot produce the cash. In the course of the proceedings,
Deputy Sheriff Castro sold the levied properties item by item to the private
respondent as the highest bidder in the amount of P50,000.00. As a result
thereof, the Ex-Officio Sheriff declared a deficiency of P13,130.00. Petitioner
filed an ex-parte motion for issuance of certificate of satisfaction of
judgment. This motion was denied by the respondent Judge. Petitioner now
questions said order as there was already a full satisfaction of the judgment
before the auction sale was conducted. ISSUE: WON the private respondent
can validly refuse acceptance of the payment of the judgment obligation in
Cashier's check which it deposited with the Ex-Officio Sheriff before the date
of the scheduled auction sale? HELD: No valid reason for the private
respondent to have refused acceptance of the payment of the obligation in
his favor. It is to be emphasized in this connection that the check deposited
by the petitioner in the amount of P50,000.00 is not an ordinary check but a
Cashier's Check of the Equitable Banking Corporation, a bank of good
standing and reputation. As testified to by the Ex-Officio Sheriff with whom it
has been deposited, it is a certified crossed check. It is a well-known and
accepted practice in the business sector that a Cashier's Check is deemed as
cash. Moreover, since the said check had been certified by the
drawee bank, by the certification, the funds represented by the
check 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 exception to the rule enunciated under
Section 63 of the Central Bank Act to the effect "that a check which has
been cleared and credited to the account of the creditor shall be equivalent
to a delivery to the creditor in cash in an amount equal to the amount
credited to his account" shall apply in this case.
44
Provisions in NIL Related to Certified Checks
Sec. 187
Certification of check; effect of. - Where a check is certified by
Sec. 188
Effect where the holder of check procures it to be certified.

- Where the holder of a check procures it to be accepted or
Sec. 189
the bank on which it is drawn, the certification is equivalent to an

acceptance
certified, the drawer and all indorsers are discharged from liability
thereon
When check operates as an assignment. - A check of itself
does not operate as an assignment of any part of the funds to the
credit of the drawer with the bank, and the bank is not liable to the
holder unless and until it accepts or certifies the check
Sec. 188: The holder, by requesting such certification instead of payment,

enters into a new contract with the bank, and one not within the contemplation
of the drawer or a prior indorser, since they expect that the check will be
presented for payment and not to be certified.
3.
Crossed Checks
ASSOCIATED BANK VS CA (GR No. 89802; May 7, 1992) ISSUE: WON

Private Respondent Merle Reyes, doing business under the name and style
Melissas RWT, has a cause of action against petitioners Associated Bank and
Conrado Cruz for their encashment and payment to another person of certain
crossed checks issued in her favor? HELD: Yes. Under accepted banking
practice, crossing a check is done by writing two parallel lines
diagonally on the left top portion of the checks. The crossing is special
where the name of a bank or a business institution is written between
the two parallel lines, which means that the drawee should pay only
with the intervention of that company. The crossing is general where
the words written between the two parallel lines are "and Co." or "for
payee's account only," as in the case at bar. This means that the drawee
bank should not encash the check but merely accept it for deposit. In State
Investment House Inc vs. IAC (supra, p. 19), the Court declared the effects of
crossing a check. The effects therefore of crossing a check relate to the mode
of its presentment for payment. Under Sec. 72 of the Negotiable Instruments
Law, presentment for 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 six checks in the case at bar had been crossed and issued "for
payee's account only." This could only signify that the drawers had intended
the same for deposit only by the person indicated, to wit, Melissa's RTW. There
being no evidence that the crossed checks were actually received by the private
respondent, she would have a right of action against the drawer companies,
which in turn could go against their respective drawee banks, which in turn
could sue the herein petitioner as collecting bank. In a similar situation, it was
held that, to simplify proceedings, the payee of the illegally encashed checks
should 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.
a.
APPLICABLE LAW
There is no provision in the NIL that governs crossed check. However, a

provision concerning such type of check can be found in the Code of
Commerce:
Sec. 541. The maker or any legal holder of a check shall be entitled to indicate
therein that it be paid to a certain banker or institution, which he shall do by
writing across the face the name of said banker or institution, or only the words
and company.
44
The payment made to a person other than the banker or institution shall not
exempt the person on whom it is drawn, if the payment was not correctly
made.

And the Bills of Exchange Act of 1882, cited in Chan Wan vs. Tan Kim (supra,
p. 15):
76
Respondent Court with violation of B.P. 22 in an Information alleging that he

drew and issued to one Fatima Cortez Sasaki a check in the amount of
Php143,000.00, well knowing, however, that at the time of issue, he did not
have sufficient funds with the drawee bank the reason for the latter to
dishonor the subject check. Respondent Lim, despite receipt of notice of
such dishonor, failed to pay Sasaki the amount of said check or to make
arrangement for full payment of the same within five (5) banking days after
receiving said notice. In his Motion to Quash, Lim averred that the facts did
not constitute a felony because the kind of check he issued, it being a
memorandum check, was in the nature of a promissory note, perforce, and
civil in nature. Citing U.S. v. Isham, private respondent contended that
although a memorandum check may not differ in form and appearance from
an ordinary check, such a check is given by the drawer to the payee more in
the nature of memorandum of indebtedness and, should be sued upon in a
civil action. Consequently, herein Respondent Judge Nitafan, ruling that B.P.
22 on which the Information was based was unconstitutional, issued the
questioned Order quashing the Information. Hence, this petition for review
on certiorari filed by the Solicitor General in behalf of the government.
ISSUE: WON the parameters of a concept of check under B.P. 22 include all
checks, specifically, memorandum check, that are drawn against bank?
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. From the above definition, it
is clear that a memorandum check, which is in the form of an ordinary
check, is still drawn on a bank and should therefore be distinguished from a
promissory note, which is but a mere promise to pay. If private respondent
seeks to equate memorandum check with promissory note, as he does to
skirt the provisions of B.P. 22, he could very well have issued a promissory
note, and this would be have exempted him form the coverage of the law. In
the business community a promissory note, certainly, has less impact and
persuadability than a check. A memorandum check must therefore fall within
the ambit of B.P. 22 which does not distinguish but merely provides that
"[a]ny person who makes or draws and issues any check knowing at the
time of issue that he does not have sufficient funds in or credit with the
drawee bank . . . which check is subsequently dishonored . . . shall be
punished by imprisonment.
General and special crossings defined.

(1)Where a cheque bears across its face an addition of
(a)The words and company or any abbreviation thereof between two
parallel transverse lines, either with or without the words not
negotiable; or
(b)Two parallel transverse lines simply, either with or without the
words not negotiable;
That addition constitutes a crossing, and the cheque is crossed
generally.
(2)Where a cheque bears across its face an addition of the name of a
banker, either with or without the words not negotiable, that addition
constitutes a crossing, and the cheque is crossed specially and to that
banker.
Crossing by drawer or after issue.
77
(1)A cheque may be crossed generally or specially by the drawer.

(2)Where a cheque is uncrossed, the holder may cross it generally or
specially.
(3)Where a cheque is crossed generally the holder may cross it
specially.
(4)Where a cheque is crossed generally or specially, the holder may
add the words not negotiable.
(5)Where a cheque is crossed specially, the banker to whom it is
crossed may again cross it specially to another banker for collection.
(6)Where an uncrossed cheque, or a cheque crossed generally, is sent
to a banker for collection, he may cross it specially to himself.
b.
EFFECTS OF CROSSING CHECKS

STATE INVESTMENT HOUSE INC. VS. IAC (supra, p.19) (1) the check
may not be encashed but only deposited in the bank; (2) the check may be
negotiated only once to one who has an account with a bank; and (3) 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.
b.
Travellers checks are instruments purchased from banks, express companies,

or the like, in various denominations, which can be used like cash upon second
signature by the purchaser. It has the characteristics of a cashiers check of the
issuer. It requires the signature of the purchaser at the time he buys it and also
at the time he uses it that is when he obtains the check from the bank and
also at the time he delivers the same to the establishment that will be paid
thereby (Blacks Law Dictionary).
BATAAN CIGAR AND CIGARETTE FACTORY, INC. VS. CA (supra, p. 18)

The negotiability of the check is not affected by it being crossed, whether
generally or specially. 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
parallel lines.
E.
MEMORANDUM AND TRAVELLERS CHECK

a.
Memorandum Check
PEOPLE VS. NITAFAN (GR No. 75954; Oct. 22, 1992) - Accused K.T. Lim
a.k.a Mariano Lim, herein Private Respondent, was charged before
45
CHECKS AND BILLS OF EXCHANGE DISTINGUISHED

BILLS OF EXCHANGE
Not necessarily drawn on a deposit
GEMPESAW VS. CA (supra, p. 14) Issuing a crossed check imposes no

obligation on the drawee not 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 payees
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 payees or indorsers
account.
4.
Travellers Check
45
Death of a drawer of a BOE with

the knowledge of the bank does
not revoke the authority of the
banker to pay
May be presented for payment
within a reasonable tie after its
last negotiation if payable on
demand
The drawee may or may not be a
bank
Presentment for acceptance is
necessary for certain types of bills
of exchange
May be payable on demand or at a
fixed or determinable future time
CHECKS
It is necessary that a check is
drawn on a deposit
Death of the drawer of a check,
with the knowledge of the bank,
revokes the authority of the
banker to pay
Must be presented for payment
within a reasonable time after its
issue
The drawee is always a bank
Presentment for acceptance is not
necessary
Always payable on demand

F.
WHEN REQUIRED TO BE PRESENTED FOR PAYMENT
Sec. 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 Act applicable to a bill of exchange payable on demand apply
to a check.
G.
The holder of the check may either present it for payment or he may
deposit it in his account with his bank known as the depositary bank or
collecting bank.
The depositary bank will then make a provisional credit to his account in
the amount of the check.
The check thereafter goes through the process of clearing through the
clearinghouse
The clearinghouse is defined as an association of banks or other payors
for the purpose of settling accounts with each other on a daily basis. Each
member of the clearinghouse forwards all deposited checks drawn on
other members and receives from the clearinghouse all checks drawn on
it. Balances are adjusted and settled each day.
It is only after the check has been cleared and collected from the drawee
bank that final credit is made in the payee-depositors account.
The normal bank policy is to disallow withdrawal from the account of the
amount covered by the check. IN some cases, the collecting bank may be
held liable for damages if it allows withdrawal of deposit even if the check
has not yet been cleared by the drawee bank.
2.
3.
4.
5.
6.
I.
PERTINENT
RULES
PHILIPPINE
CLEARING
HOUSE
xxx
(d) By postdating a check, or issuing a check in payment of an obligation
when the offender had no funds in the bank, or his funds deposited
therein were not sufficient to cover the amount of the check. The
failure of the drawer of the check to deposit the amount necessary to cover his
check within three (3) days from receipt of notice from the bank and/or payee
or holder that said check has been dishonored for lack or insufficiency of funds
shall be prima facie evidence of deceit constituting false pretense or fraudulent
act.
ESSENTIAL ELEMENTS:
a. That the offender postdated or issued a check in payment of an obligation
contracted at the time the check was issued;
b. That such postdating or issuing a check was done when the offender had no
funds in the bank, or his funds deposited therein were not sufficient to cover
the amount of the check;
c. Deceit or damage to the payee thereof.
2.
Bouncing Checks Law (Batas Pambansa Bilang 22)
BP Blg 22 was enacted to prevent the proliferation of worthless checks in the

mainstream of daily business and to avert not only the undermining of the
banking system of the country but also the infliction of damage and injury upon
trade and commerce occasioned by the indiscriminate issuances of such
checks.
ELEMENTS:
a. The making, drawing and issuance of any check to apply for account or for
value;
b. 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
c. 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.
CORPORATION
Section 102. Interbank Settlement. - The Bangko Sentral shall establish

facilities for interbank clearing under such rules and regulations as the
Monetary Board may prescribe: Provided, That the Bangko Sentral may charge
administrative and other fees for the maintenance of such facilities.
The deposit reserves maintained by the banks in the Bangko Sentral in
accordance with the provisions of Section 94 of this Act shall serve as basis for
the clearing of checks and the settlement of interbank balances, subject to such
rules and regulations as the Monetary Board may issue with respect to such
operations: Provided, That any bank which incurs on overdrawing in its deposit
account with the Bangko Sentral shall fully cover said overdraft, including
interest thereon at a rate equivalent to one-tenth of one percent (1/10 of 1%)
per day or the prevailing ninety-one-day treasury bill rate plus three percentage
points, whichever is higher, not later than the next clearing day: Provided,
further, That settlement of clearing balances shall not be effected for any
account which continues to be overdrawn for five (5) consecutive banking days
until such time as the overdrawing is fully covered or otherwise converted into
an emergency loan or advance pursuant to the provisions of Section 84 of this
Act: Provided, finally, That the appropriate clearing office shall be officially
notified of banks with overdrawn balances. Banks with existing overdrafts with
the Bangko Sentral as of the effectivity of this Act shall, within such period as
may be prescribed by the Monetary Board, either convert the overdraft into an
emergency loan or advance with a plan of payment, or settle such overdrafts,
and that, upon failure to so comply herewith, the Bangko Sentral shall take
such action against the bank as may be warranted under this Act.
DOMAGASANG VS. CA (347 SCRA 75 [2000]) While Sec. 2 of BP Blg. 22

does not state that the notice of dishonor be in writing, taken in conjunction,
however, with Sec. 3 of the law, a mere oral notice or demand to pay would
appear to be insufficient for conviction under the law.
3.
Check Kiting
Art. 315, 1: With unfaithfulness or abuse of confidence, namely:

xxx
(b) By misappropriating or converting, to the prejudice of another, money,
goods or any other personal property received by the offender in trust, or on
commission, or for administration, or under any other obligation involving the
duty to make delivery of, or to return the same, even though such obligation be
totally or partially guaranteed by a bond; or by denying having received such
money, goods or other property.
46
46
Estafa
2. By means of any of the following false pretenses or fraudulent acts executed

prior to or simultaneously with the commission of the fraud:
Moreover, the National Internal Revenue Code already disallows withdrawal

from the bank account of the deceased unless proper taxes are paid to the
Bureau of Internal Revenue.
1.
1.
xxx
The authority of the drawee bank to honor a check drawn against it is said to
be terminated by the death of the drawer. There is no provision in the NIL
expressing this rule. However, the Bill of Exchange Act of 1882 provides that
notice of the customers death revokes the bankers authority to pay.
COLLECTION OF CHECKS
CRIMES INVOLVING CHECKS
RPC, Art. 315. Swindling (Estafa). Any person who shall defraud another
by any of the means mentioned hereinbelow shall be punished by:
EFFECT OF DEATH OF DRAWER
H.
J.
a. KITING is the wrongful practice of taking advantage of the float, the time
that elapses between the deposit of the check in one bank and its collection at
another.
b. The depositary bank will honor the checks even if it has not yet been
cleared. In anticipation of the dishonor of the check that was deposited, the

conspirators will replace the original check with another worthless check.
c. Check kiting has been described as a procedure whereby checks written on
accounts in separate banks are used to generate short-term purchasing power
through the use of the banks credit.
FERMINA RAMOS VS. CA (GR. NO. L-64129-31; Nov. 18, 1991) Fermina
Ramos, then manager of Family Savings Bank, was accused and convicted of
Estafa for allowing her co-accused to withdraw right there and then from
their uncollected and uncleared deposit which were subsequently dishonored
by the drawee banks, which were covered by 3 different informations filed
against her of the 23 criminal charges filed. ISSUE: WON such acts are
considered estafa? HELD: Yes. The crime committed by the accused was
estafa with unfaithfulness or abuse of confidence under Article 315
subparagraph 1 (b) of the Revised Penal Code, in that she conspired and
cooperated with her co-accused to defraud the bank by allowing them to
withdraw funds of the bank against their worthless check deposits.
I.
STOP PAYMENT
1.
A check is a mere order on a bank to pay money from the drawers

account. As such, it is subject to revocation by the drawer at any time
before it is accepted.
The drawer may countermand payment if he has a valid defense against
the holder of the check such as failure to deliver the goods that the latter
is supposed to deliver.
If there was no valid reason, the drawee is still contractually obligated to
dishonor the check on the basis of the stop payment order.
However, if he has no valid defense, the drawer remains liable and he is
not released from the legal obligation he contracted.
IRON CLAD RULE a cashiers check is in the nature of an accepted or
certified check and the payment thereon cannot be countermanded by the
payor, provided the holder is not a holder in due course (Mesinca vs. IAC).
2.
3.
4.
5.
47
47


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NEGOTIABLE INSTRUMENTS LAW

GOVERNING LAWS ACT No. 2031 effective June 2, 1911 (which

APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW the

provide that an accommodation party is one who has signed an

CONCEPT OF NEGOTIABLE INSTRUMENTS

DEFINITION: Negotiable Instruments are written statements

FUNCTIONS OF NEGOTIABLE INSTRUMENTS

LEGAL TENDER that amount which the creditor can be compelled

Legal Tender Power. All notes and coins issued by the

Bangko Sentral shall be fully guaranteed by the Government

TIBAJIA VS. CA (GR No. 100290, June 4, 1993) - A writ of attachment

Cesar Nickolai F. Soriano Jr.

of Pasig be withdrawn to satisfy the judgment obligation. Petitioners filed

NEGOTIABILITY is that quality or attribute of a bill or note

KINDS OF NEGOTIABLE INSTRUMENTS

PROMISSORY NOTES (Sec. 184, NIL) An unconditional promise

BILLS OF EXCHANGE (Sec. 126, 185, NIL) An unconditional

WHEN BILLS TREATED AS NOTES

When bill may be treated as promissory note. - Where

BILLS AND NOTES DISTINGUISHED

CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

INCIDENTS IN THE LIFE OF NEGOTIABLE INSTRUMENTS

Liability of the maker is primary and

NEGOTIABLE INSTRUMENTS COMPARE WITH OTHER PAPERS

Cesar Nickolai F. Soriano Jr.

Philippine Underwriters Finance Corporation (PhilFinance), with a term of

II. FORM AND INTERPRETATION OF NEGOTIABLE INSTRUMENTS

SOME NON-NEGOTIABLE INSTRUMENTS

HOW NEGOTIABILITY IS DETERMINED?

Section 1, of Act No. 2031, otherwise known as the Negotiable

Cesar Nickolai F. Soriano Jr.

Equitable for the purpose of claiming reimbursement from the latter.

pieces of evidence of indebtedness because payments were made before

Section 1. Form of negotiable instruments. - An instrument to be

(a) It must be in writing and signed by the maker or drawer;

Signature is presumed valid, the person denying and to whom the

(b) Must contain an unconditional promise or order to pay a sum

Money is the medium of exchange authorized or adopted by a domestic or

Cesar Nickolai F. Soriano Jr.

Promise or Order to Pay

Terms, when sufficient. - The instrument need not follow the

Mere defect in language or grammatical error The words himself

Promise or Order to Pay Must be Unconditional

Condition Resolutory or Suspensive - In conditional obligations, the

acquisition of rights, as well as the extinguishment or loss of those already

Period As opposed to a condition, is when the event is certain to happen or

When is a promise unconditional

The Basic Test: is whether the holder can determine by calculation or

computation the amount payable when the instrument is due.

Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum

An order is a command or imperative direction and, therefore, a mere request,

(a) with interest; or

When promise is unconditional. - An unqualified order or

(a) An indication of a particular fund out of which

Sec. 2(c): Stated instalments with acceleration clause:

But an order or promise to pay out of a particular fund is not

Sec. 3, last paragraph: The instrument is deemed non-negotiable because

Provisions which do not affect certainty of sum

Sec. 2(d): refers to instruments payable in foreign currency. Exchange is the

Cesar Nickolai F. Soriano Jr.

payable to meet the instrument which is issued at another place. It may be at a

accommodation party when his obligation will arise.

Additional provisions not affecting negotiability. - An

__ Savings Account XX Current Account No. 1372-00257-6 of