Negotiable Instruments Timoteo Aquino

NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW Volume 1 (Essentials of Negotiable Instruments Law, Warehouse Receipts Law, Letters of Credit and Trust Receipts Law) By TIMOTEO B. AQUINO Professor of Law Philippine Judicial Academy University of Perpetual Help College of Law Angeles University Fourtdation College of Law San Beda College of Law Arellano Law Foundation Former Prefect of Student Affairs, San Beda College of Law Author: Torts and Damages Philippine Corporate Law Compendium Bssentials of Insurance Law Casebook on Corporate Law Co-Author, Reviewer on Commercial Law Notes and Cases on the Law on Transportation ‘and other Publie Utilities Fundamentals of Negotiable Instruments Law Fundamentals of Obligations and Contract Revised Rules on Summary Procedure: Revisited Handbook on Summary and Small Claims Procedure and Bouncing Checks Law Third Edition ' 2009 Pubined& Oistnbuied by Book Store '856 Nicanor Reyes, Sr. St. Tel Nos. 736.05-67 "735-1064 1977 CAM. Recto Avenue Tel, Nos. 735-55-27 738.55.94 Mania, Philippines wor rexpublishing.com.phPhilippine Copyright, 2009 by Task Couino TEEN Gre arias ese For Bea, our children Leona Isabelle, Lean Carlo and Lauren Margaret No portion ofthis book may be copied or repro- 9 oa ees duced in books, pamphlets, outlines or notes, whether printed, mimeographed, typewritten, copied in dif- forent electronic devices or in any other form, for distribution or sale, without the written permission of the author except brief passages in books, articles, reviews, legal papers, and judicial or other official proceedings with proper citation. Any copy of this book without the corresponding number and the signature of the author on this page either proceeds from an illegitimate souree or is in possession of one who has no authority to dispose of the same, ALL RIGHTS RESERVED BY THE AUTHOR No 0342 (Mh 05-cm-00029 9 Wear i2tssagso Printed by ex printing company, inc. peng & nie ikea {8 Fern Qn Cy Tans Meth raatcer SRE REL VE ALAR EUR TA OS PREFACE ‘This book is the third edition of the author’s work on Nego- tiable Instruments Law and applicable laws on commercial document. The two previous incarnations of this book included a Part TIT on banking laws. The quantity of the materials on banking laws necessitated the separation of Part III into a separate valume, Vol- ume II. The two volumes are still treated as part of one integrated work, An introductory course on banking laws will be deficient ifthe study of the laws dealing with negotiable instrument laws will not be incorporated. After all, the issuance and negotiation of negotiable instruments are part of the functions of banks. ‘The book responds to the lessons learned by the author from his learned professors and in teaching the subjects included in this work. Instead of resorting to section by section annotation of the statutes, the author resorted to presentation of the topics in both transactional and conceptual lines. It is, ta the anthor's mind, the best approach to a book for use in an introductory course on the laws ‘on negotiable instruments and other commercial documents. Select- ed cases are reproduced in order to provide students with concrete examples of statutory and jurisprudential rules in operation, The present edition is leaner because the number of sample edited cas was reduced to make them more manageable for students. Some of the cases are now presented in “problem-answer” and/or digest form together with sample Bar examination problems. Nevertheless, the author believes that students should be guided by, but should not be satisfied with digest of Supreme Court cases or cases blem form provided in this work. The cases should be read in the original. THE AUTHOR ‘Teresa, RizalACKNOWLEDGMENTS Tt was Raymond Carver who said that “influences are forces — circumstances, personalities, irresistible as the tide.” Without any doubt, the greatest influence to the author's academie development 4s well as his development as a student and as a lawyer is Justice Florenz D. Regalado. The author is forever in his debt. ‘The author cannot also help but admit that his knowledge ‘about the subject matters of this book is highly “derivative” and ‘came mainly from ideas imparted to him by his professors, especially Dean Jose R. Sundiang of Arellano Law Foundation. Of course, any error in this work is the author's alone because even the bril- liance of his mentors cannot be an assurance that something will not be lost in the transmission. As usual, special thanks are also due to Assistant Dean Domingo M. Navarro of the Angeles University Foundation College of Law. Justice Isagani Cruz, the former Dean of the College of Law of the University of Perpetual Help of Rizal likewise deserves special thanks for encouraging and trusting the author to teach Commercial Law Review. The author is also grateful for the inputs of Atty. Salvador Austria, a learned professor on the ‘Negotiable Instruments Law in his own right. ‘The authoris greatly indebted to the following persons for their help: Atty. Maria Paz Tagle-Chua, Atty. Edmundo A. Cruz, Judge Eduardo Peralta, Jr., Atty. Caroline Peralta, Atty. Jane Ong, Ms. Rowena Portes, Atty. Ernesto C. Salao and Atty. Charm Nolasco of Rex Book Store INc., and the staff of the San Beda College Library.1. mm. VL Vil. VII Incidents or Stages 1 CONTENTS Partl NEGOTIABLE INSTRUMENTS INTRODUCTION CHAPTER 1 — GENERAL CONSIDERATIONS Governing Law...... 7 A. Applicability of the NIL. History of the NIL. Functions of Negoti A. Not Legal Tender. a. Coins as Legal Tender... b. Checks not Legal Tender Exception: Features of Negotiable Instruments .. A. Negotiability. 3 B. Accumulation of Secondary Contracts... Kinds of Negotiable Instruments A. Bills of Exchange .. B. Promissory Notes.. Kinds of Bonds... C. Bills Treated as Notes D. _ Bills and Notes Distinguished Parties to Negotiable Instruments... Distinguished from Non-Negotiable Instruments... ‘Negotiable Instrument, CHAPTER 2 — NEGOTIABILITY How Negotiability is DeterminedEffect of Estoppel UL, The Requisite of Ng a. Acceptance b, Indorsement.. c. Rationale of Formalities ity . Tt Must be in Writing Signed by the Maker or Drawer. a. Materials . b._ Type of Signature... Tt Must Contain an Unconditional Promise or Order to Pay a Sum Certain in Money ‘8, Promise or Order to Pay. Equivalent Words. Receipts. Consideration of Entire Instrument. b. Promise or Order to Pay Must Be ‘Unconditional. Condition under the new Civil Code. Section 3, NIL. Reference to Transa Subject to Transaction Account to be Debited or Source ‘of Payment. Payable in Sum Certain in Money Installment Payments... Payable on Demand or at a Fixed or Determinable Future Time.... ‘a. Payable on Demand b. Payable at Determinal Acceleration Clauses Insecurity Clauses. Extension Causes... Payable to Order or Bearer.. a. Bearer Instruments. Fictitious Payee Rule... Burden of Proof under Fictitious Payee Rule .. Bad Faith Exception to Fictitious Payee Rule .. 2 Only or Last Indorsement is in Blank... 1 m1. 1 b. Order Instruments. . 87 ¢. Payable to the Order of Bearer... 58 E. Identification of the Drawee.. 64 a, Two or More Drawees.. 64 b. Option to Treat as PN .. 64 ¢. Cashier's Checks 65 Omissions and Provisions that Do Not Affect ‘Negotiabilit... . 65 A. Omissions. - —— 6 a. Undated Instruments 65 B. Additional Provisions... 67 a. Collateral nnn 67 b. Confession of Judgment 68 Waiver by Obligor 68 CHAPTER 3 — INTERPRETATION OF INSTRUMENTS Adopted Statute: Effects... 70 Effect of Implied Repeal of Code of Commerce. a ales that Apply in Case of Ambiguity... a Other Rules 5 CHAPTER 4 — TRANSFER AND NEGOTIATION ‘Modes of Transfer.. 83. A. Non-Negotiable Instruments 83, B. Negotiable Instrument .... 84 a. Other Modes of Transfer... 85 C. _Distinetions Between Assignment and ‘Negotiation .. How Negotiation Takes Place... Issuanee., x Subsequent Negotiation a. Other Purposes of Transfer ... b. Indorsement of Bearer Instrument .. 98, C. Incomplete Negotiation of Order Instrument... 105 a. Equitable Assignment... 106 b. No Presumption ... 108 c. Example of Right of Holder 107 D. _Indorsement 108 a, Where indorsement should be placed 108MIL mm. b. Other Rules on Indorsement ‘Negotiation of Indorsers Severally Other Provisions on Indorsement .. ¢. Kinds of Indorsement... Blank and Special Indorsement.. Conversion of Blank to Special Indorsement... Qualified Indorsement.... Conditional Indorsement. Restrictive Indorsement 4. Negotiation by Prior Party fe. Striking out of Indorsement. Consideration for Issuance and Subsequent ‘Transfer... : ‘A. What Constitutes Value. B. Effect if Value was Previously Given... CHAPTER 5 — HOLDERS Rights of Holders in General Holders In Due Course... A b. Complete and Regular ¢. Taking before Overdue. Installment Instruments Overdue Interest Payment Demand Instruments... 4. Notice of Infirmity and Defect.. B, Accommodation Parties, CC. Presumption.. D, Payee as Holder in Due Course... Rights of Holders in Due Course. A. Personal Defenses .. B. Real Defenses . ©. Not Holder in Due Course i 108 109 109 110 0 ut ul 3. ud 116 7 us 118 120 121 125 125 125 125 126 126 126 127 127 128 130 130 131 131 131 132 133 135 138 138 138 139 IV. Shelter Rule. a. Repurchase by a Prior Party V. Consumer Transactions... A. Background: Protection in the U.S... B. Protection in Philippine Jurisprudence. C. Protection Under the Consumer Act... ‘VI. Rights of Holder in Bills in Set. CHAPTER 6 — PARTIES WHO ARE LIABLE 1. Nature of Liability, A. Primary and Secondary Liability... B. Distinguished from Warrente.. a. Maker TIL Drawer i A. Relationship with Draw. 3.__Relationshp with Colleting Bank IV. Acceptor 2 Effect of Warranties . A. Payment without Acceptance. V. _Indorsers ° A. General Indorser. a. Secondary Liability ‘Two contracts Not Guarantor b. Warranties.. ©. Order of Liability. B. Qualified Indorser. a. Warranties. b. Parole Evidence. ©. _Indorser of Bearer Instruments VI. Person Negotiating by Delivery. VIL. Agents ‘A. Person Who should Sign .... B. Tradename or assumed name A. Surety of Accommodated Party... B, Irregular Indorser..... C. Liability Among ‘Themselves. D. Corporations. 139 139 at at M1 4 uzCHAPTER 7 — DEFENSES Real Defenses and Personal Defenses 1, Minority and Other Causes of Incapacity. A. Minority... B. Ultra Vires Acts... Tl. Non-Delivery and Conditional Delivery.. ‘A. Non-Delivery of Incomplete Instrument .. B, Undelivered and Delivered Complete Instruments .. a. The Rules . b. Need for Delivery. ©. Authority to Deliver d. Presumed Delivery : ©. Conditional Delivery and Delivery for Special Purpose .. 3, Filing Up Banks Beyond Authorty ‘The Rules BL Materia! Paricolar C. Prima Facie Authority ... a, Incomplete Instrument b. Signed Blank Piece of Paper ... ©, Holder in Due Course .. IV. Fraud 7 V. Material Alteration... AL Concept. B. Alteration that Totally Prevents Recovery C. Alteration of Amount. fa, Effect of Alteration on Payee Who is a Holder in Due Course Another view with Respect to Extent of Recovery of Holder in Due Course .... Opposite view Regarding Liability of Payee and Collecting Banks VI. Ante-Dating or Post-Dating sw VII. Insertion of a Wrong Date. VIIL. Absence or Failure of Consideration IX. Duress and Intimidation... X. Mlegality XI. Prescription... XL, Forgery and Want of Authority. A. General Rules... B. Persons Preclucded from Setting Up Forgery aun au au 212 215 215 216 217 235 235 244 245 249 250 250 251 251 254 0. M1 ©. D. a. Warranty b, Negligence... . ¢. Estoppel and Ratification Forgery in Notes. ns a. Maker's Signature... b. Indorser's Signature. Order Instruments Bearer Instruments... Forgery in Bills of Exchange. a, Drawer’s Signature Drawee-Acceptor’s Warranties .... Negligence of Drawee ... b. Indorser’s Signature... Order Instruments. Bearer Instruments, CHAPTER 8 — ENFORCEMENT OF LIABILITY Steps to Charge the Parties Liable A B. Presentment for Payment. A. B, 2 mBOO a Primary Liability... Secondary Liability... a. Steps in Promissory No! Step in Billo Exchange. © Acceptor for Honor and Referee in case of Need Requisites for Sufficiency Date of Presentment. a. Fixed Date vn. b. Payable on Demand... ©. Payable at a Bank.. ‘Time of Maturity... ‘Time: How Computed. Payable at a Bank... Proper Place a. Special Place... ‘To Whom Presented... a. Partners b. Joint Debtors Instrument Exhibited . When Presentment Not Necessary or Excused. Retention of Liability Even if Not Presented zentment for Acceptance 313 313 318 313 a4 314 315 315 315 315 315 317 37 318, 319 319 320 322 323 323 324 825 825 338pe po A B. ©. D. G. H. VI. Rules Regarding Foreign Bills... Acceptance .. Notice of Dishonor.. How Made .. ‘Time to Present for Acceptance .. a. When time is insufficient... When Delay or Presentment is Excused Dishonor. ‘Where Indicated... ‘Time to Accept and Bifect of Retention a. Sections 136 and 137 Distinguished Future and Incomplete Bills. : Kinds of Acceptance... a. Presumed Unqualifie ‘ifect of Absence of Notice on Separate Contract Who Should Give Notice and Effects... a. Agent... Form of Notiee.. a, Misdescription ... b. BP 22 : ¢. How Written Notice is Given ‘To Whom Given a, Party io Dead b. Notice to Partners ©, Notice to Joint Debtors d. Notice to Bankrupt ‘Time and Place of Notice.. a, Time to give Notice b, Where Notice must be sent. Waiver of Notice. a, Types of Waiver b, To Whom Binding ¢, Waiver of Protest. Delay of Giving Notice Notice is Excused or Unnecessary a, Drawer b. Indorser Fictitious Drawee .. Sec. 115(b) . : Indorser is accommodated party ». ce. Notice when previously dishonored by non-acceptance. Effect of Failure on HDC A. Payment in Due Course. poop a. When Required and When Discretionary Inland Bills ..... Cases when Protest is Necessary . Rationale How protest is made, ‘When Made. Protest for Better Security Before Maturity . Place of Protest wn. Protest dispensed with Distinguished from Notice of Dishonor... Acceptance for Honor... a. Requisites... 'b. How Acceptance for Honor is Made ce. In whose favor .... . Liability of Acceptor for Honor fe. Maturity date of Sight Bills . £. Other provisions... 8. Distinguished from Ordinary ‘Acceptance .. Pay a b. a. aes rayment for Honor .. Preference Effect on Subsequent Parties... Holder has No Option : Rights of Payer Distinctions .. CHAPTER 9 — DISCHARGE a. By Whom Made Payment by Person Secondarily Liable Striking out Indorsement Accommodated Party ... Drawer .. Payment by Third Persons b. To Whom... Si Good Faith of Payor Renunciation. Cancellation... : Acts that Discharge Simple Contracts. Principal Debtor Becomes the HolderML Vv. 1 m1, Vv. ¥. VL Surrender of the Instrument ....- Discharge of Persons Sacondarily Liable... Discharge of Prior Party.. 3 ‘Tender of Payment... C. Release of Principal Debtor. D, Extension of Term. a, Accommodation Party... CHAPTER 10 — CHECKS Kinds.. ‘A. Cashiers and Manager's Check a. Distinguished from Draft b. Cannot be Payable to Bearer... B. Certified Checks. a. Certification Procured by Holder ©. Crossed Check. a. Applicable Laws b. Bifects of Crossing. ©. Other Provisions of BEA of 1882 on Crossed Checks. D. Memorandum and Traveler’s Checks. Cheeks and Ordinary Rills af Exchange: Distinguished .. Relationship Between Payee, Drawee and Drawer. ‘a. Effect of Death of Drawer. b. Liability of Drawer for Wrongful Dishonor of Checks : Collection of Checks A. Applicable Rules B. Relationship of Parties. a. Warranties... Warranties of Collecting Bank ... Warranties of Payee-Depositor b. Duty of Care c. Return of Items : 4d. Uncollected Deposits. Stopping Payment A. Iron Clad Rule. Crimes Involving Checks... A. Estafa.. a. Negotiable Order of Withdrawal (NOW) B, Batas Pambansa Blg. 22 .. au 412 412 414 417 421 421 421 423 424 425 427 431 < VIL. Defenses for Non-Delivery or Misdelivery.. a. Duty of Banks... ©. Check Kiting. Part Il OTHER COMMERCIAL DOCUMENTS INTRODUCTION CHAPTER 11 — DOCUMENTS OF TITLE Concepts atures and Functions. Governing Law Negotiability. A. Requirement... a, Effect of Stamp or Notation “Non-Negotiable’ . b. Other Formalities... B. How Negotiated ... a. Bearer Document .... Effect of Special Indorsement. b. Order Document. Incomplete Negotiation. C. Effects of Negotiation a. Transfer of Title Vendor's b, Pledge of Receipt D. Who May Negotiate... a, Negotiation by Fraud, Mistake or Duress. Loss and Theft... E. Warranties... ae a. Security Holder....... Non-Negotiable Receipts. A. Effect Delivery of Good: ‘a, Duties when Delivering the Goods ‘Adverse Claim of Warehouseman .. ‘A. Warehouseman's Lien a. Charges That are Included... bs Properties Tht are Subject to Lien c. Loss of Lien. 472 473, 481 482 483 485 486 487 489 439 490 490VIII. Duty of Care. ita 4. Satisfaction of Lien ... B. Alteration.. C. Adverse Claimant. D, Attachment or Levy, (CHAPTER 12 — LETTERS OF CREDIT AND ‘TRUST RECEIPTS Letters of Credit... A. Definition... BL Nature of Letters of Credit... Distinctions between Letters of Credit and Guarantee ©. Governing Law. D. Parties... a. Issuing Bank... . ‘Examination of Tender Documents. Payment : : Seller-Beneficiary. Buyer-Importer... Notifying or Advising Bank Confirming Banke... ‘Negotiating Bank. E, Transactions Involved 1a, Independent Contracts. F, Independence Principle a, Banks deal with Documents bb) Who ean invoke the Independence Principle c, Fraud Exception Requirements for Injunction under the Fraud Exception . : Protection of Innocent Party .. G. Kinds of Letters of Credit. Confirmed LC... Irrevocable LC Other kinds. Commercial Credit distinguished from Standby Credit ‘Trust Receipts.. A. Basic Concepts, B. The Statute ... C. Trust Receipt Transaction Defined . a, Not Applicable to Sale.. 491 493 494 494 495 General Index Rationale ‘The Parties Purpose of Acquisition of Goods Nature of Entruster’s Rights over the Goods a. View that Ownership is not Acquired by Entruster.. b. View that the Entruster Owns the Goods.... ©. Observations... : H. Remedies of Entruster.. Penalty Clause... a, Persons who are liable. PBBO APPENDICES Appendix 1 — Negotiable Instruments Law (Act No. 2031). ‘Appendix 2 — The Bill of Exchange Act, 1882... Appendix 3 — Code of Commerce Provisions on Letters of Credits .PARTI NEGOTIABLE INSTRUMENTS INTRODUCTION ‘Commenting on the provisions ofthe law on negotiable instruments, Professor Gilmore observed that the law “is a museum of an- tiquities — a treasure house crammed full of ancient artifacts whose use and function have long since been forgotten. Another function of codification, we may note, is to preserve the past, like a fly in amber." Professor Gilmore is not alone in This Vew regarding the rales on negotiable instruments, In this age where electronic com- ‘merce and paperless Lransuetions are commonplace, it would not be easy for some to visualize the application of many of the provisions of the Negotiable Instruments Lav. In the Philippines, the Negotiable Instruments Law remains unchanged for more than a century. Its provisions are undisturbed ‘and continue to govern instrumenis that are designed to be “couri- ers without luggage.” Although it cannot be denied that many of its provisions have already been overtaken by international commercial practice, its focal provisions still provide a wealth of stimulating discussion in the judicial sphere. Additionally, Negotiable Instruments Law is still a favorite in law school because of its coherence and internal logic. It is a potent implement in developing the students’ legal reasoning. "“Gnwons, Fouaus aso nae Law or Neoonasce Instnowenrs, 18 Creighton LeRew. 441 (1970), "Chief Justice Gibson in Overton v. ‘Tyler, 8 Pa, 246, 45 Am, Dee, 645 (1846), 1Chapter 1 GENERAL CONSIDERATIONS |. GOVERNING LAW. ‘The law that governs negotiable instruments in this jurisdiction is Act No. 2031, otherwise known as the "Negotiable Instruments Law.” Before the Negotiable Instruments Law (NIL for short) was enacted, negotiable instruments were governed by Articles 439 to 1386 of the Code of Commerce. However, most of these provisions ‘were impliedly repealed by the provisions of the NIL. Section 197 of the NIL provides: Sec. 197. Repeals. — All acts and laws and parts thereof inconsistent with this Act are hereby repealed. Since Section 197 results only in implied repeal of inconsistent ‘acts and laws, there are provisions of the Code of Commerce that are still in force because there are provisions that are not inconsistent with the NIL, For instance, the Code of Commerce provisions on crossed checks are still in force because there is no provision in the NIL that deals with crossed checks.’ ‘The New Civil Code, Republic Act No. 386, has suppletory effect in case of deficiency in the provisions of the NIL. In one case, for instance, the Supreme Court applied suppletorily the provisions of Article 1216 of the New Civil Code which provides that “the creditor ‘may proceed against any one of the solidary creditors or some or "Chan Wan ¥. Tan Kim, G.R, No, L-15380, September 30, 1960, 109 Phil. 706. 2 PARTI — NEGOTIABLE INSTRUMENTS. 3 (CHAPTER 1 — GENERAL CONSIDERATIONS all of them simultaneously” and that “demand made against one of ‘them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.” A. APPLICABILITY OF THE NIL. ‘The provisions of the NIL are not applicable if the instrument, involved is not _negotiable.* Before the provisions of the NIL can come into operation, there must be a document in existence of the character described in Section 1 of that law.t If at all, the NIL can be applied only by analogy. For instance, the Supreme Court applied Section 14 of the NIL by analogy in a case involving a Deed of Assignment of shares of stocks which was signed in blank to facilitate future assignment of the same shares. ‘The Court observed that the situation is similar to Section 14 where the blanks in an instrument may be filled up by the holder, the signing in blank being with the assumed authority to do so.’ CASE: GOVERNMENT SERVICE INSURANCE SYSTEM v. COURT OF APPEALS and MR. and MRS. ISABELO R. RACHO IG.R. No. L-40824, February 23, 1989) 170 SCRA 533, Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs. Flaviano Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor of petitioner Government Service Insurance System (hereinafter referred to as GSIS) and subsequently, another deed of mortgage, dated April 1, 1958, in connection with two loans granted by the latter in the sums of P11,500.00 and P3,000.00, respectively. A parcel of land covered by Transfer Certifiate of Title No, 38989 of the Register ‘of Deed of Quezon City, co-owned by said mortgagor spouses, was given as security under the aforesaid two deeds. They also executed a “promissory note" which states in part: “Philippine National Bank v. Concepcion Mining Co., Ine, GR. No, 1-16968, Suly 81, 1963, 6 SCRA 746, 747 . ‘Metropolitan Bank & Trust Company v. Court of Appeals, etal, GR. No. £88866, February 18, 1991, 194 SCRA 169,178 ‘Kauffman v. Philippine National Bank, G.R. No, 16454, September 21, 1921, 42 Phil 182, "Borromeo, eta. v. Sun, G.R. No, 75908, Octaber 22, 1999, 114 SCAD 616, 817 ‘SCRA 176,183.4 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME T +... for value received, we the undersigned . .. JOINT- LY, SEVERALLY and SOLIDARILY, promise to pay the GOV- ERNMENT SERVICE INSURANCE SYSTEM the sum of. (PLL,500.00) Philippine Currency, with interest atthe rate of six (6%) per centum compounded monthly payable in... (120) equal ‘monthly installments of... (127.65) each.” On July 11, 1961, the Lagasca spouses executed an instrument denominated “Assumption of Mortgage” under which they obligated themselves to assume the aforesaid obligation to the GSIS and to secure the release of the mortgage covering that portion of the land belonging to herein private respondents and which was mortgaged 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 on December 3, 1962. ‘More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint against the petitioner and the Lagasca spous- ts in the former Court of First Instance of Quezon City, praying that the extrajudicial foreclosure “made on their property and all other documents executed in relation thereto in favor of the Government Service Insurance System” be declared null and void. It was further prayed that they be allowed to recover said property, andior the GSIS be ordered to pay them the value thereof, and/or they be allowed to repurchase the land. Additionally, they asked for actual and moral damages and attorney's fees. In their aforesaid complaint, private respondents 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. [The trial court rendered judgment dismissing the com- laint for failure to establish a cause of action. Said decision was reversed by the Court of Appeats which declared the foreclosure void. Later, the Supreme Court reinstated the Decision of the trial court. One of the issues raised before the Supreme Court is whether or nat the private respondents were accommodation parties, Both parties cited Section 29 of the NIL. The Court rejected the arguments of both parties.) In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No. 2031, otherwise known as the Negotiable Instruments Law, which 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. PARTI ~ NEGOTIABLE INSTRUMENTS 5 (CHAPTER 1 ~ GENERAL CONSIDERATIONS ‘This approach of both parties appears to be misdirected and their re- lianee misplaced. The promissory note hereinbefore quoted, as well as the mortgage deeds subject ofthis case, are clearly not negotiable instruments. ‘These documents do not comply with the fourth requisite to be considered fas such under Section 1 of Aet No. 2031 becatuse they are neither payable to order nor to bearer. The note is payable to & specified party, the GSIS. Ab- sent the aforesaid requisite, the provisions of Act No, 2031 would not apply, governance shall be afforded, instead, by the provisions of the Civil Code nd special laws on mortgages. As earlier indicated, the factual findings of respondent court are that private respondents signed the documents “only to give their consent to the mortgage as required by GSIS,” with the later having full knowledge that the loans secured thereby were solely forthe benefit of the Lagasca spouses, ‘This appears to be duly supported by sufficient evidence on record. Indeed, it would be unusual for the GSIS to arrange for and deduct the monthly amortization on the loans from the salary as an army officer of Flaviano Lagasca without likewise affecting deductions from the salary of Isabelo Racho who was also an army sergeant. Then there is also the undisputed fact, as already stated, that the Lagasca spouses executed a so-called “As- sumption of Mortgage” promising to exclude private respondents and their share of the mortgaged property from liability tothe mortgagee. There is no {intimation that the former executed such instrument for a consideration, ‘thus confirming that they did so pursuant to theis orgial agreement However, contrary to the holding of the respondent court, it cannot be said that private respondents are without liability under the aforesaid ‘mortgage contracts, The factual context of this case is precisely what is contemplated in the last paragraph of Article 2085 of the Civil Code to the effect that third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca spouses would not invalidate the mortgage ‘with respect to private respondents’ share in the property. In consenting thereto, even assuming that private respondents may not be assuming li ability for the debt, their share in the property shall nevertheless secure land respond for the performance of the principal obligation. The parties to the mortgage could not have intended that the same would apply only to the aliquot portion of the Lagasca spouses in the property, otherwise the consent of the private respondents would not have been required. I HISTORY OF THE NIL, ‘The provisions of the NIL were copied from the American Uni- form Negotiable Instruments Law. In turn, the latter law was based6 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME largely on the Bills of Exchange Act of 1882. Henée, decisions of the courts in the United States and in England based on the American Uniform Negotiable Instruments Law and the Bills of Exchange Act ‘of 1882 can be applied in this jurisdiction. However, there are provisions of the Bill of Exchange Act of 1882 that were not included in the American Uniform Negotiable Instruments Law, Nevertheless, the NIL also permits resort to the provisions of the Bill of Exchange Act of 1882 on matters where the ‘NIL provisions are deficient. For instance, the NIL does not contain any provision on crossed checks; only the Code of Commerce includes provisions thereon. Hence, other matters not covered by the Code fof Commerce on crossed checks can be resolved using the Bill of Exchange Act of 1882." ‘The provisions of the Bill of Exchange Act of 1882 that were not ‘made part of the NIL can still be applied in this jurisdiction because the former and the American Uniform Negotiable Instruments Law embody rules that are founded upon the Lex Mercatoria, the Law Merchant, that developed out of international trade. Law ‘Merchant embraces the usages of merchants in different commercial countries.” Section 196 of the NIL provides: Sec, 196. Cases not provided for in the Act. — Any case not provided for in this Act shall be governed by existing legislations or in default thereof, by the rules of the law merchant. I, FUNCTIONS OF NEGOTIABLE INSTRUMENTS. ‘The two (2) main functions of negotiable instruments are: 1) ‘They serve as substitute for money; and 2) They serve as credit instruments. However, they can also be considered proof of the existence of a transaction because they may state the transaction that gave rise to the issuance of the instrument. In particular, the functions of a negotiable instrument may be ‘enumerated as follows: “Philippine National Bank v. Zuluets, GR. No, 1-7271, August 30, 1987, 101 Phil 1071 "Chan Wan ¥. Tan Kim, G.R. No, L-16380, September 30, 1960, 108 Pil 707, 708; See Appendix 2 "oun Am. dur, 2457 PARTI — NEGOTIABLE INSTRUMENTS 1 (CHAPTER 1 ~ GENERAL CONSIDERATIONS (1) Ibis a substitute for money. (2) Ibis a medium of exchange, (3) tis a credit instrument which increases credit circulation. (4) Teincreases purchasing power in circulation. (5) Ibis proof of transactions. Negotiable instruments are not mere contracts but are substitutes for money. A negotiable instrument is a medium of exchange; it is a tool that is used in commercial transactions. This function of negotiable instruments is better understood in the light of their history which was summarized by Prof. William D. Hawkland in this “In primitive times, most. men were self-sufficient. They sew their own food, erected their own shelters, and made their ‘own clothing. In this ‘subsistence’ society there was little need for money or notable instrament, because the minimal trade which existed was carried on by barter, exchanging goods for soods. ‘As men began to supply each other's wants, however, an acute need for money arose. We can speculate only as to when this need developed, but, if history is any guide, itis fair to say that the commercial demand for money probably antedated its creation by many years. There are always obstructions which impede the effectuation of commerce. Finally, however, money ‘was coined to serve as the common denominator of value and the commercial medium of exchange. This development was an {important commercial step. No longer was it necessary, for ex: ample, to exchange two bear skins for one cow; the cow could be purchased with money having the equivalent value of hides. ‘Money, then, represents property, and it has facilitated greatly the exchange of goods among men. {As trade continued to expand, nierchants discovered they’ needed something more than money to exploit effectively their ‘enterprises. Money had eliminated erude barter, but money it- ‘self was a chattel not easily moved around. Transporting it great distances involved substantial risks of robbery, and more impor- tantly, money only represents property and not eredit. Some- ‘thing was needled to represent money. And something was need- Tezano w Martinez, 146 SCRA 323,NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME ed to represent the promise of future payment of money. These \were answered by the development of negotiable instruments.”* However, negotiable instruments like checks are not only instruments of credit. They also serve as receipt or evidence for the debtor. For example, possession of a check by the drawee gives rise to presumption of payment.” A. NOT LEGAL TENDER. Negotiable Instruments are not legal tender. Section 52 of the New Central Bank Act, Republic Act No. 7653, provides that only notes and coins issued by the Bangko Sentral ng Pilipinas are considered legal tender. Sec. 52. 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 Twenty-five centavos and above, and in amounts not exceeding Twenty (P20.00) for denominations of Ten centavos or less. a. Coins as Legal Tender. Pursuant to the above-quoted Section 52 of Republic Act No. 7653 and BSP Circular No. 537, Series of 2006 adjusted the maximum amount of coins to be considered legal tender as follows: MAXIMUM AMOUNT | _ DENOMINATIONS ‘One Thousand Pesos | One Peso (P1.00) (P1,000.00) Five Pesos (P5.00) ‘Ten Pesos (P10.00) "Finns, Cases ao Manewiats on Cowowsnciat Paree ao Bane Derosrs 10 Couererons, 1967 Ba, p-9, hereinafter refered to as Hawhland. "Citibank, NA, Sabeniano, October 16,2006, 604 SCRA 278 PARTI ~ NEGOTIABLE INSTRUMENTS ° CHAPTER 1 — GENERAL CONSIDERATIONS One Hundred Pesos | One Centavo (1 Sentimo) (P100.00) Five Centavos (5 Sentimo) ‘Ten Centavos (10 Sentimo) b. Checks Not Legal Tender. Section 60 of the New Central Bank Act is categorical with respect to checks — they are declared to be not legal tender and creditors cannot be compelled to accept checks in payment of obligations.* Sec. 60. 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 toa delivery to the creditor of cash. Consistently, the Civil Code provides that delivery of negotiable instruments does not produce the effect of payment. Even if delivery of the check is accepted by the creditors, obligations are deemed paid only when the instruments are encashed." The rule covers manager's checks, cashier's checks or certified checks." A check is not legal tender and therefore cannot constitute a valid tender of payment, Since a negotiable instrument, like a check, is only a substitute for money and not money, delivery of such an instrument does not, by itself, operate as payment. Mere delivery of checks does not discharge the obligation. The obligation is not extinguished and remains suspended until the payment by commereial document is actually realized." However, applying Section 60 of New Central Bank Act, the obligation tothe creditor is deemed paid ifthe check has been cleared and credited to his account. This implies that the creditor deposited ‘co also Villanueva v. Santos, 67 Pil 648 “Atel 1249, New Civil Code ‘eTibajia, Jr. v. Court of Appeals, 223 SCRA 163; Philippine Aitlines, Ine. . Court of Appeas, 181 SCRA 587; Roman Cathole Bishop of Malolos, ne. IAC, 191 SCRA ‘411 (1900), "Bank ofthe Philippine Islands v. Spouses Reynaldo and Victoria Royeca, GR. No. 176664, July 21, 200810 NOTES AND CASES ON [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME T the check to his account and the same was honored or cleared by the drawee bank upon presentment. In this case, the check is in fact paid and the proceeds are now being kept in the bank account of the creditor. ec. Exceptions. Nevertheless, the Civil Code also provides as exceptions, cases where the check is impaired due to the fault of the creditor." In those cases, the obligation is deemed paid even if the check is not encashed. It is also important to mention that while delivery of checks may not be considered payment under the Civil Code, delivery of checks may be sufficient in the exercise of certain rights or privileges. ‘Thus, the Supreme Court ruled in a number of cases that delivery of checks is sufficient in the exercise of the right of redemption. The right of redemption is a privilege and is not an ordinary obligation. Hence, Article 1249 does not apply." IV. FEATURES OF NEGOTIABLE INSTRUMENTS. ‘There are two (2) distinctive features of negotiable instruments, thats, negotiability and accumulation of secondary contracts. These distinctive features make negotiable instruments ideal substitutes for money, A. NEGOTIABILITY. ‘The characteristic of negotiability allows negotiable instru- ‘ments to be transferred from one person to another so as to constitute the transferee a holder. Such holder can be a holder in due course ‘who is free from personal defenses. This characteristic of negotiable instrument as a credit instrument gives it freedom to circulate as ‘a substitute for money. 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.” Article 1249, Civil Code; Philippine National Bank v, Seeto, 91 Pil. 756, ‘*Portunado v. Court of Appeals, 196 SCRA 26 (1991) traders Reyal Bank v. Court of Appeals, etal, GR. No. 99997, March 3 1907, 80 SCAD 12, 269 SCRA 15, 6-27 PART I — NEGOTIABLE INSTRUMENTS n (CHAPTER 1 — GENERAL CONSIDERATION B, ACCUMULATION OF SECONDARY CONTRACTS. When negotiable instruments are transferred through negotiation, secondary contracts are accumulated because the indorsers become secondarily liable not only to their immediate transferees but also to any holder. Unless they have valid defenses against the holder or any party, these indorsers are liable to said holder or whoever may be compelled to pay the instruments. ‘There is therefore greater “security” because whoever takes the instrument has greater chances of recovery because more people are liable under the instrument. Ifthereis greater probability of payment, people are more likely to accept negotiable instruments as tools in credit transactions. ‘This is equally true in the case of checks. In checks, the drawer, by drawing the instrument, not only enters into a secondary contract, to pay the holder but also represents that there are sufficient funds in the bank to cover the check that he issued. The Supreme Court observed in one case: “The drawing and negotiation of a check have certain ef: {ects aside from transfer of title or incurring of liability in regard to the instrument by transfer. The holder who takes the negot ble paper make a contract on the face of the instrument. There implied representation that funds on credit are available fo the payment ofthe instrament in the bank upon which i V. _ KINDS OF NEGOTIABLE INSTRUMENTS. There are two (2) basic types of negotiable instruments, a promissory note and a bill of exchange. The NIL defines promissory notes and bills of exchange as follows: Sec. 126. Bill of exchange defined. — A bill of ‘exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, Fequiring 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, State Investment House, Ine. v. Court of Appeals, etal, G.R, No, 101168, Sanuary 11, 1998, 217 SCRA 83,38.2 NOTES AND CASES ON [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME T ‘Sec. 184, Promissory note, defined. — Anegotiable 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. ‘The common types of bills of exchange and promissory notes are defined hereunder. However, the enumeration is subject to the ‘caveat that the instrument specified herein are not always negotiable. Although they may be or are usually negotiable, the test is still the presence of the requisites of negotiability on the face of the instrument. The requisites of negotiability are discussed in the next Chapter of this work. ‘A. BILLS OF EXCHANGE. In other jurisdictions, a bill of exchange is commonly called a draft. In fact, the American Institute of Banking defines draft as @ Ssigmed order by one purty, the drawer, addressed to another, the drawee, directing the drawee to pay a specified sum of money to the order of third person, the payee."* However, the term draft is often ‘used to designate bills of exchange that are used in trade of goods. It has been said that the most significant modem use of the non- check draft is in documentary exchange involving letters of credit. ‘A documentary exchange is one of a number of ways in which the assumption of credit risks and payment accompanying the sale of goods may be handled.” Abill of exchange may be an inland bill or a foreign bill. An inland bill is a bill which is, or on its face purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder may treat it as an inland bill. It is important to determine if the bill is ‘a foreign bill or an inland bill because there are provisions of the NIL that apply only to foreign bills. For instance, a foreign bill must BOrenimny,lvreenariova. Bava, a Baition,p. 209. ‘Ronen J. Nonoeneon & Anwar L. Cuovis, Pros.sws ax Maremats ox Cov sustciat Parse, 1972 Ba, p. 16, hereinafter referred to as Nordstrom & Clovis, See an of Phil islands v. CA, GR. No, 137002, July 27,2006. Section 129, NIL PART] ~ NEGOTIABLE INSTRUMENTS 2 (CHAPTER 1 — GENERAL CONSIDERATIONS be protested in case of dishonor while an inland bill need not be protested." A bill of exchange or draft may be a “time draft” — one that is payable at a fixed date — or a “sight or demand draft” — one that is payable when the holder presents it for payment. A bill may also be 1 “trade acceptance” which is used in contracts of sale. In this type of bill, the seller as drawer orders the buyer (as drawee) to pay a sum certain to the same seller (payee). A banker's acceptance is time draft across the fae of which the drawee bank has writen the word accepted. _ If the seller does not trust the credit of the buyer or is not fa- miliar with him, the seller may wish to require the bank of the buyer to accept the bill or draft. In which case, the bill is called “banker's acceptance.” In the latter case, the bank is normally an accommodation payor that lends its credit to the buyer. The buyer, in return, will pay the bank commissions and other charges." ‘The most common form of bill of exchange is a “ekeck” which is defined under the NIL in this wise: “ 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. Other bills of exchange include the following: (2) Clean Bill of Exchange — a bill to which no document is attached when presentment for payment or acceptance is made. (2) Documentary Bill of Exchange — a bill of exchange to which a document/s is/are attached when presented for payment or ‘acceptance, B. PROMISSORY NOTES. Another instrument that involves banks is a “certificate of deposit.” A certificate of deposit is a form of promissory note which is a written acknowledgment of a bank ofits receipt of a certain sum with a promise to repay the same. A certificate of deposit is defined "Sections 118 and 182, NIL. I Parton’ Drcesr, 1940 Fd, . 26“ NOTES AND CASES ON [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME I as a written acknowledgment by a bank or banker of the receipt of @ ‘sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person orhis order, whereby the relation of debtor and creditor between the bank and the depositor is created. The principles governing other types of bank deposits are applicable to certificates of deposit, as are the rules governing promissory notes when they contain an ‘unconditional promise to pay a sum certain of money absolutely.” Bonds may also partake the nature of negotiable promissory notes, A bond is defined as a certificate or evidence of a debt on which the issuing company or governmental body promises to pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the expiration date" Debenture is a promissory note or bond backed by the general credit of a corporation and usually not secured by a mortgage or lien ‘on any specific property.” Bank notes are promissory notes of the issuing bank which are payable to bearer on demand. a, Kinds of Bonds.” (1) Bottomry bonds — bonds secured by mortgage of ships. (2) Chattel mortgage bonds — bonds secured by mortgage on chattels of business. (3) Collateral trust bonds — bonds secured by collateral deposited with a trustee. (4) Convertible bonds — bonds that can, at the option of the holder, be converted into stocks. (5) Coupon bonds — bonds with interest coupons attached. (6) Guaranteed bond — a bond which has interest or principal or both guaranteed by a company other than the issuer. (7) Income bond — bond on which interest is payable only ‘when earned after payment of interest upon prior mortgages. "Far Hast Bank & Trust Company v. Queremit, GR, No. 148582, January 16, 2002, acs Lax Dri, Sth Ba, p. 161 "Pid, p. 361. *BLack’s Law Dicnonazy, pp. 162164 PARTI — NEGOTIABLE INSTRUMENTS 8 (CHAPTER 1 — GENERAL CONSIDERATIONS (8) Joint and several bond — abond the principal and interest of which is guaranteed by two or more persons. (9) Joint bond — bond secured by two or more obligors who must be joined in any action on such bond. (10) Mortgage bond — bond secured by a mortgage on a prop- rty. C. BILLS TREATED AS NOTES. ‘There are instances when a bill may be treated as a promissory note by the holder. Thus, Section 190 of the NIL provides that a bill may be treated as a promissory note when: (1) the drawer and the drawee are the same person; (2) the drawee is a fictitious person; and (3) the drawee has no capacity to contract. Inaddition, Section 17(e) ofthe NIL provides thatan instrument may be treated either as a bill or a note at the election of the holder when the instrument is so ambiguous that there is daubt whether it is bill or a note, D. BILLS AND NOTES DISTINGUISHED. PROMISSORY NOTE ‘BILL OF EXCHANGE 1. Teeontains an uncondition-| 1. _Tteontains an uncondition al promise alorer, 2. There are two (2) parties}2. There are three (3) parties on its face. on its face. 8. The person who signs it in|, The person who sign the maker acerca eal 4. The person who signs i] The person who oi o signs it,|4 The person who signs it the maker, is primarily ic |” the drawer, is secondarily able. liable. 5. Theperson primarily iable|5. ‘Theperson primarily liable is the maker. is the drawee-acceptor. 6. There is only one present-|6, ,There are two present- ‘ment: for payment. ments: a) for acceptance and b) for payment.16 NOTES AND CASES ON [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME T VI. PARTIES TO NEGOTIABLE INSTRUMENTS. ‘The original parties in a promissory note are the maker and the payee. The maker is the person who promises to pay according to the tenor of the note while the payee is the person who is to receive payment from the maker. An example of a typical note is provided below (Illustration 1-1) where the maker is Juan de Ia Cruz while the payee is X Lending Corporation. A typical certificate of deposit is likewise reproduced below (1-2) where the maker is XYZ Bank while the payee is Juan de la Cruz. ‘Typical Note. 'P20,000,00 Manila, Philippines June 2. 2009 Due: August.1, Lai Sixty days afer date. For value received, the undersigned promises to pay to the order of X LENDING CORPORATION at its office in the City of ‘Manila, Twenty: Thousand Pesos Only (P20.000.00) with interest from date hereof at the rate of = 18 = Percent per annum. SIGNATURE: JUANDE LA CRUZ 1-2: Typical Certificate of Deposit. XYZ BANK 11111 Matalino Street, Manila Metro Manila, Philippines MANILA BRANCH CERTIFICATE OF DEPOSIT No. Rate: Date of Maturity: 20 ‘This is to Certify that Juan de Ia Cruz has deposited in this ‘Bank the sum of PESOS: e. ‘& ___) Pesos, Philippine Currency, repayable to the order ‘of said depositor 120 days after date, upon presentation and surrender of this certificate, with interest at the rate of _ per ‘ent per annum from date ofthis certificate ‘Authorized Bank Officer Signature PARTI ~ NEGOTIABLE INSTRUMENTS " (CHAPTER 1 — GENERAL CONSIDERATIONS On the other hand, the parties who appear on the face of a bill of exchange are the drawer, drawee and the payee. The drawer is the person who draws the bill and orders the drawee to pay the payee a sum certain in money. The drawee is the one being commanded to pay the instrument. However, in reality, the drawee is not a party unless he accepts the bill. If he accepts, the drawee, now called the acceptor, assents to the order made by the drawer. A typical bill and 1 check are reproduced below (1-3 and 1-4). In both examples, the drawer is Pedro Santos, the drawee is ABC Bank, while the payee is Juana Santos. 1-8: Typical Bill of Exchange. CITY OF MANILA January15.2009 ‘P10,000.00 One Hundred Twenty Days after above date _PAY TO ‘THE ORDER OF JUANA SANTOS the amount of Ten Thou- ‘sand Pesos _Only (P10,000.00) Philippine Currency. VALUE RECEIVED AND DEBIT THE SAME FROM ‘THE ACCOUNT OF THE DRAWER. PEDROSANTOS: Drawer ‘To: ABCBANK Makati City 1-4: Typical Check. ‘Account Name: PEDRO SANTOS No. 1234568, Date: June 3.2009. PAY TO THE ORDER OF __JUANA SANTOS P 1,000.00 (One Thousand Pesos Only PESOS: ABC BANK ‘Amorsolo Branch (Sed) Makati City18 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME Other persons who may become parties after the issuance of the instrument are the indorsers and the holders. "Indorsers” are persons who transfer or negotiate an instrument by indorsement completed by delivery. “Holder” means “the payee or indorsee of a bill or note who is in possession of it or the bearer thereof."™ A “bearer” means “the person in possession of a bill or note which is payable to bearer.” In bills of exchange, a referee in case of need may be designated by the parties. Section 131 provides: Sec. 131. Referee in case of need. — The drawer of a bill and any indorser may insert thereon the name of a person to whom the holder may resort in case of need; that is to say, in case the bill is dishonored by rnon-acceptance or non-payment. Such person is called 2 referee in case of need. Its in the option of the holder to resort to the referee in case of need or not as he may see fit. At the time the NTT. was enacted, the provision on referee in case of need has been rarely inserted in English and American bills. ‘The usual form is: “In case of need apply to AD at X.” Ifthe referee pays the bill the drawer will be liable to him for the amount." VII. DISTINGUISHED FROM NON-NEGOTIABLE INSTRUMENTS. ‘The requirements of negotiability are not concerned with the validity of the instrument. Validity is an issue independent of the issue of negotiability. Verily, the contract represented by or out of which the negotiable instrument arose may be invalid, voidable or rescissible or unenforceable but the instrument may remain negotiable. In the same manner, a non-negotiable instrument may represent a valid obligation. It may be an instrument that represents a personal property under Article 417 of the New Civil Code, that is, an obligation or action for a demandable sum. Such non-negotiable instrument may be freely transferred and such transfer is governed by Articles 1624 to 1635 of the New Civil Code on assignment of Section 16, NIL. Ibid. Paroumoe K. Bevre. Bevri’s Beason, Meooraazs Iesraowr Law, p. 1228, PART I — NEGOTIABLE INSTRUMENTS 19 CHAPTER 1 ~ GENERAL CONSIDERATIONS credit. Ifthere are no defenses available to any party, there is hardly no use to distinguish a negotiable instrument from a non-negotiable However, it is equally clear that the basic disadvantage of a non-negotiable instrument from a negotiable instrument is that there can be no holder in due course in a non-negotiable instrument. Hence, the transferee of a non-negotiable instrument is not free from personal defenses. In a non-negotiable instrument, the title acquired by the transferee is a “derivative title.” If the title of the transferor is defective (and therefore subject to defenses), the title of the transferee will also be defective. In a negotiable instrument, the transferee may acquire more rights. A holder in due course will not merely get a “derivative title” because he will get a “clean title,” one that is free from infirmities in the instrument and defects of title of prior transferors, It should be pointed out in this connection that Article 1628 of the New Civil Code provides that the “vendor in good faith shall be responsible for the existence and legality of the credits at the time of the sale, unless it shall have been sold as doubtful; but not for the solveney of the debtor, unless it has been expressly stipulated or unless the insolvency was prior to the sale and of common knowledge.” In negotiable instruments, the solvency of the debtor is in a sense guaranteed by the indorsers because they engage that the instrument will be accepted, paid or both and that they will pay if'the instrument is dishonored. In summary, the distinctions between negotiable instruments and non-negotiable instruments may be stated as follows: (2) Only negotiable instruments are governed by the NIL. If an instrument is not negotiable, the NIL does not apply. Application of the NIL to non-negotiable instruments is only by analogy." (2) Negotiable instruments can be transferred by negotiation or by assignment. Non-negotiable instruments can be transferred only by assignment.» “Government Service Insurance System ¥. Court of Appet Kauffman ¥. Philippine National Bank, supra, at note 4 “Borromeo, etal. v. Sun, eal, C.R. No. 75908, October 22, 1999, 114 SCAD 616,917 SCRA 176. The Supreme Court applied Section 14 ofthe NIL by analogy. Borromeo, etal. v. Sun, tal, GR. No. 75908, October 22, 1999, 114 SCAD (616, 317 SCRA 176. The Supreme Court applied Section 14 ofthe NIL by analogy. 5 supra, at. 42 @) Oy [NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME 1 ‘The transferee of a non-negotiable instrument can never be a holder in due course but remains to be an assignee.” A transferee of a negotiable instrument can be a holder in due course if all the requirements under Section 2 of the NIL are complied with. Since the transferee of a non-negotiable instrument cannot be a holder in due course, all defenses available to prior parties may be raised against the last transferee." Vill. INCIDENTS OR STAGES IN THE LIFE OF A NEGOTIABLE IN- ‘STRUMENT. a @ 3) “ © 6) oy Preparation and signing complete with all the requi- 1es provided for in Section 1 of the NIL. Issuance — first delivery of the instrument to the payee (Grom maker to payee/bearer or from the drawer to the payeelbearer). Negotiation — transfer from one person to another so fas to constitute the transferee a holder. Examples: a) Indorsement and delivery to Mr. A by Mr. X where the instrument is payable “to the order of Mr. X"; b) Delivery to Mr. A by Mr, X of an instrument payable to bearer. Presentment for acceptance for certain kinds of Bills of Exchange — the bill of exchange shall be presented to the drawee so that the latter will signify his agreement to the order of the drawer to pay. Acceptance — written assent of the drawee to the order. Dishonor by non-acceptance — refusal to accept by the drawee. Presentment for payment — the instrument is shown. to the maker or draweelacceptor so that the said maker or drawee/acceptor will pay. "Gesbreto v. Hon. Court of Appeals, eal, G.R. No, 89252, May 24, 1998, 222 SCRA 468. ‘Consolidated Plywood Industries, Ine v. IFC Leasing and Acceptance Corpo- tation, GR No. 1-72598, April 80, 1987, 149 SCRA 448, 458, @) @ (10) ay PARTI ~ NEGOTIABLE INSTRUMENTS. a (CHAPTER 1 — GENERAL CONSIDERATIONS Dishonor by non-payment — refusal to pay by the maker or drawee/acceptor. aed Notice of Dishonor — notice to the persons secondarily liable that the maker or the drawee/acceptor refused to pay or to accept the instrument. Protest (in some cases), Discharge.Chapter 2 NEGOTIABILITY ‘The requisites of negotiability are provided for under Section 1Lof the NIL. It is the most important provision of the NIL because the law does not apply ifthe instrument does not meet the requisites of negotiability as provided therein. Section 1 of the NIL provides: 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 tim (a) Must be payable to order or to bearer; and )_ Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. |. HOW NEGOTIABILITY IS DETERMINED. ‘Negotiability of an instrument is determined by ascertaining if all the requirements of Section 1 appear on the face ofthe instrument. The process of determining the negotiability of an instrument was described in Caltex (Philippines), Inc. v. Court of Appeals, et al.:* ‘On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the TGR. No, 97788, Avgust 10, 1092, 212 SCRA 448,455. 2 PARTI — NEGOTIABLE INSTRUMENTS 2 ‘CHAPTER 2 — NEGOTIABILITY writing, that is, from the face of the instrument itself. In the construction ofa bill or note, the intention of the parties is to control, iit ean be legally ascertained. While the writing may be read in the ight of surrounding circumstances in order to more perfectly understand the intont and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning ofthe words they have used. What the parties meant must be determined by what they said. In other words, the factors that affect the determination of negotiability of instruments are: 1) The whole of the instrument shall be considered; 2) Only what appears on the face of the instrument shall be considered; and 3) The provisions of the NIL, especially Section 1 thereof, shall be applied.* a. Acceptance. Consequently, “acceptance” of a bill of exchange is not important in the determination of its negotiability. In Philippine Bank of Commerce v. Jose M. Aruego,’ respondent Aruego signed drafts ‘as drawee-acceptor but later claimed that he was not liable under the drafts. One of the arguments that he raised was 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. The Supreme Court rejected the argument ruling that: “This is also without merit, Under the Negotiable Instru- ments Law, a bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person aiving it, requiring the person to whom it is addressed to pay on demand or ata 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 ofthe kind of liabilities of the parties involved, but not in the determination of whether a com- ‘mercial paper isa bill of exchange or not.” "Sinnox M. Gormco, Cowen Law Bat Reviewer, 1969 Ba, p. 8, hereinafter referred to ns “Gopenco.” °G.R. Nos, 1-25896-98, January 31,1981, 102 SCRA 690,m [NOTES AND CASES ON, BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME T b. Indorsement. In the same manner, the presence of an indorsement of the instrument (or lack thereof) does not affect the negotiability of the instrument. However, this rule is subject to the provision that a prom- iscory note that is payable to the order of the maker himself is not ryot complete unless itis indorsed by the maker.* Moreover, an indorser may prevent further negotiation of the instrument, in which caze, subsequent transferees can no longer be considered holders.* ec. Rationale of Formalities. ; ‘The indispensable formalities of negotiable instruments make these instruments effective substitutes for money and desirable ‘tools for credit transaction. The emphasis on the formal requisites of negotiable instruments was further explained by Professor Chafee in this wise: “Although the law usually cares little about the form of fa contract and looks to the actual understanding of the parties ‘ho made it, the form of negotiable instrument is essential for {the security of mercantile transactions. The courts ought to ¢ Toree these requisites of commercial paper at the risk of hard- ship in particular cases. A businessman must be able to tell at fa glance whether he is taking commercial paper or not. There fnuist be no twilight zone between negotiable instruments and simple contracts, If doubtful instruments are sometimes held to be negotiable, prospective purchasers of queer paper will be couraged to take a chance with the hope that an indulgent judge ‘will eall it negotiable. On the same principle, iftrains habitually Teft late, more people would miss trains than under a system of rigid punctuality.” "Section 36, NIL. Cuaree, Accrinnariow Provisions av Thur Parer, 82 Harv.LsRev. 747, 760 cas), PART — NEGOTIABLE INSTRUMENTS. (CHAPTER 2 — NEGOTIABILITY CASE: 1. Determine if the following instrument is negotiable (assume that all the blanks were duly flied): “PROMISSORY NOTE (MONTHLY) “5,138.20 en Fernando, Pampeng, Philippines Feb. 11, 1980 ve “For value recived, 1/We jointly and severally, promise to pay Vilago Motor Sales Corporation or order, at is office in San Fernando, Pampanga, the sum of FIPTY-BIGHT THOU- SAND ONE HUNDRED THIRTY EIGHT & 20/100 ONLY (P58,138.20) Philippine curreney, which amount includes inter. estat 14% per annum based on the diminishing balance the aid principal sum, to be payable, without need of noice or demand, In instalments ofthe amounts following and atthe dates herein: after st forth to wit: PI,614.95 months for'36' monthly due and payable on the 2st day ofeach month starting March 21, 1980 thru and inclusive of February 21, 1983. P ‘monthly for_____ month due and payable on the day of eack months starting 08 thre and inclusive of ___, 198 provided that interest at 14% per an- rum shall be added on each unpaid installment from matur hereof until fully paid | “Maker: (Co-Maker: (SIGNED) JUANITA SALAS Address “WITNESSES SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE TAN # TAN “PAY TO THE ORDER OF FILINVEST FINANCE AND LEASING CORPORATION “VIOLAGO MOTOR SALBS CORPORATION By: (SIGNED) GENEVEVA V. BALTAZAR Cash Manager”26 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME |A: The instrument is negotiable. “A careful study ofthe {questioned promissory note shows that it is a negotiable instru- tment, having complied with the requisites under the law as fol- ows: [a] itis in writing and signed by the maker Juanita Selas; [b) it contains an unconditional promise to pay the amount of 58,138.20; (e) itis payable at a fixed or determinable future time which is “P1,614.95 monthly for 36 months due and pas able on the 2ist day of each month starting March 21, 1980 thru ‘and inclusive of Feb, 21, 1983"; [d] it is payable to Violago Motor Sales Corporation, or order and as such. (Salas v. Hon. Court of Appeals, etal, G.R. No, 76788, January 22, 1990, 181 SCRA 296) I, EFFECT OF ESTOPPEL. If an instrument does not contain all the requisites of negotiability specified in Section 1 of the NIL, can the instrument still be considered negotiable as between the parties on the basis of estoppel? The Supreme Court took the affirmative stance in Banco de Oro Savings & Mortgage Bank v. Equitable Banking Corporation, et al.’ Tn the said case, the petitioner bank claimed that the Philippine Clearing House Corporation (PCHC for ehort) did not have jurisdiction over the controversy involved because the instrument that was the subject matter of the case was not negotiable. The High Court ruled that the PCHC had jurisdiction over the ease because its Ar- ticles of Incorporation does not distinguish if the check involved is negotiable or non-negotiable. Furthermore, the Supreme Court ruled that the check may even be treated as negotiable because the petitioner was estopped from raising the defense of non-negotiability, The Supreme Court ruled: “Moreover, petitioner is estopped from raising the defense of non-negotiability of the checks in question. It stamped its {guarantee on the back ofthe checks and subsequently presented these checks for clearing and it was on the basis of these endorsements by the petitioner that the proceeds were eredited in its elearing account. ‘The petitioner by its own acts and representation can not now deny liability because it assumed the liabilities of an endorser by stamping its guarantee at the back ofthe checks. ‘The petitioner having stamped its guaranted of “all prior endorsements and/or lack of endorsements" (Exhs! A-2 to F-2) ‘GR, No, L-74917, January 20, 1988, 157 SCRA 188, BARAT rsa etn wg oo Sere ME 8 PART I — NEGOTIABLE INSTRUMENTS 2 CHAPTER 2 — NEGOTIABILITY {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 {or all legal intents and purposes treated the said checks as ne- ‘gotiable instruments and accordingly assumed the warranty of the endorser when it stamped its guarantee of prior endorse- ‘ments 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 ofthis 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." It is believed, however, that the ruling in the above-entitled case is not sound. It is believed that the parties cannot be considered estopped from claiming that the instrument is non-negotiable. The negotiability of the instrument is determined by law and the parties cannot change what is provided by law. In the Banco de ro case, it was not even necessary to use estoppel in rejecti srgoment of the plaintilf boone the Bupreme Ouurtaltendy filed that the jurisdiction of the PCHC also includes cases involving non- negotiable instruments, Wl, THE REQUISITES OF NEGOTIABILITY. A. ITMUST BE IN WRITING SIGNED BY THE MAKER OR DRAWER. The law requires @ negotiable instrument to bein writing Where it otherwise, the insirument cannatefectvelysubtte money. Historical reasons likewise account for the requirementtthat the instrument be in writing.* As explained by Professor Hawkland: ere ey er Sai ne ae ee eee ee Ste Disa aide2 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME! ot think thom capable of transfer, because intangibles cannot be phyiely delivered, Thee beliefs were dep rooted, and i took considerable ingot to circumvent them. Eventually, themerchane found ways, They avoided the porsonal aspect of the debecreditor relationship by having the debtor promise to perform not en tothe creditor, ut tothe eedtors nominee, Eto anyone who eauld produce the paper upon which the promise was written. Soy Beanies eee Ile propery es the paper cell, det poste to entity he damand that tana fights be ‘Mfectuated by physical delivery of ame thing.” a oe oSgttoite ie ete e me lie eg al b. Type of Signature. /ith respect to the signature of the maker or the drawer, the bs aces tos eas besiege ee dyes ed Se ee eee i aa ae ee a nd wit oe out eae leanne nooner Code in the United States. The said Code defines signature as “any ca epee oak meant biotin authenticate a writing.” PROBLEMS: 1. Juan Crus borrowed P1,000.00 from Pedro Santos as evi- dlenced by a promissory note executed by X as maker. All| ‘other requisites of nogotiability are present in the note ‘except that Juan Cruz did not affix his usual signature thereon, As Juan was ailing at that time, he was only able "io. Wiri0M E. Burtos, Buss & Nore, 2nd Fd, p. 22, hereinafter referred to as Britton.” “Section 1-2001 (39) ro ame no me ER HRTEM TSU ARS PU INO PART I — NEGOTIABLE INSTRUMENTS 29 CHAPTER 2 — NEGOTIABILITY to put “X" in the blank space meant for the signature of the maker. Is the requisite that the instrument must be signed by the maker complied with? A: Yes. The letter “X" is sufficient to comply with the require- ‘ment that the instrument must be signed by the maker. It ‘appears from the problem that such letter was adopted by ‘Juan Cruz with the intent to authenticate the instrament tis not necessary that the signature is the usual signa. ture of the maker. 2. Apromissory note states as follows: ", Cecilia W. Donahue after date August 10, 2002 promises to pay tothe order of for value received with interest at 6% per annum: The note ‘was on a printed form, and the words underscored above were in the handwriting of Mrs. Donohue. No sguatare appears at any other place on the note. Is the note signed bythe maker? ‘Yes the fact that Mrs. Donohue's signature appears inthe body of the note and not at the end is unimportant, co Jong as she intended thereby to obligate herself forts pay, ment. Iti not necessary in negotiable instrument thee the simature ofthe maker or the drawer should appear at the end thereof, I?his name is written by him in any part af the contract, or at the top or the right or left hand oth the intention to sign of forthe purpose af authentivatiog the instrument, iis sufleient ta bind him. B. IT MUST CONTAIN AN UNCONDITIONAL PRO- MISE OR ORDER TO PAY A SUM CERTAIN IN INEY. Promise or Order to Pay. _,,_Anegotiable promissory note contains a promise to pay while'a bill ofexchange contains an order to pay. The promise in a promissory note is the undertaking made by the maker to pay a sum certain in money to the payee or the holder. The “order” in a bill is a command made by the drawer addressed to the drawee ordering the latter to ay the payee or the holder a sum certain in money. (1) Equivalent Words. ‘The word “promise” or“order” need not appear in the instrument to satisfy the requirements of Section 1(b) of the NIL. In fact, the "In Re Donohue's Estate, 271 Pa. 854,116 A. 878 (2922),[NOTES AND CASES ON. 30 INSTRUMENTS LAW .W AND NEGOTIABLE BANKING LA\ TROOTIABLE word “order” does not normally appear to signify the command of pee _ eth are ee pen oe ina oni see “arson ay ce it en ta st nearly plied, such as, ‘payable,’ ‘payable on a given day,’ ree Ble, sac hen alo on (00 Corpus Ja top 6B. re ona lino, 0 nt te eid Oy aro in egal fe ero rade ee SEED re nyo erm mayb rete emmy ote. {Dan No. ate, 96s Byles, Bil prin teal 5 paleo oman {acknowledge myself to be indebted to A in $109, to be paic or han ete nb psgen ey 5th rbd Pe emcets py? Dal Meee and eases ited, (Cowan vs. Hallack, (Colo) 13 P re eT is snt with the provisions of ‘The above-quoted rule is consistent wit sions of Section 10 ofthe NIL which provides that “the instrument ne aan follow the language ofthis Act, but any terms are suficient whic clearly indicate an intention to conform to the requirements heres (2) Receipts. ‘The requirement of the NIL that an order or promise must be present isnot, therefore, complied with ifthe document is mere Peceipt. Thus, a cash disbursement voucher is not a negotiet instrument because itis a nothing more than a receipt evidencing fayment by borrowers of the loans previously extended to them. Pens came manner a withdrawal slip addressed to a drawee bank GER Treas, perunry 28,1958, 109 Pil. 40,4944 eae phen’ Banc, CA-GR. Now 05100-05141. Av gust 25,1988; Vetav's Dies, 1966-C Supplement, pp. 72-74 PART — NEGOTIABLE INSTRUMENTS at CHAPTER 2 — NEGOTIABILITY that is needed for the withdrawal of funds from a bank account is not negotiable.’ (8) Consideration of Entire Instrument, ‘The presence of an unconditional promise or order may also be satisfied by going over the entire instrument. /As pointed out earlier, the whole of the instrument should be considered in determining its negotiability. Thus, the tenor of the instrument and the presence of other words of negotiability may be sufficient indication of a promise. Thus, an instrument that states “Due X P1,000.00" merely acknowledges the existence of an obligation but an instrument that states “Due X or order P1,000.00" can be deemed to contain an unconditional promise. The collective tenor of the words used in the lntter — specially the words “or order” — transform the instrument into a negotiable instrument from a mere acknowledgment. b. Promise or Order to Pay Must be Unconditional. (Condition under the New Civil Code. Under Articles 1178 and 1181 of the New Civil Code, a condi tion is a future and uncertain event,’or a past event unknown to the parties, the happening (positive) or non-happening (negative) of which may either give rise to an obligation or may extinguish existing ones. The condition is suspensive if the happening or non- happening of the event will give rise to an obligation; the condition is resolutory if the happening or non-happening of the event will extinguish existing obligations. ‘The negotiability of the instrument is destroyed if the same, on its face, contains either a resolutory or suspensive condition. Thus, 4 promissory note is not negotiable if the maker promises to pay the payee or his order if the City of Manila becomes an independent republic. The promise in the said note is conditional. (2) Section 3, NIL. Section 3 of the NIL deals with the requirement under Section 0b) that the promise or order stated in the instrument must be unconditional. Section 3 provides: “Firestone Tire & Rubber Company ofthe Philippines v, Court o Appeals and {Luzon Development Bank, G.R. No, 113236, March 5, 2001, 145 SCAD 129NoTgs AND CASES ON e [ENTS LAW > Law AND NEGOTIABLE INSTRUM BANKING LAW AND NBCOTIAB ditional. — An Sec. 3. When promise Is unco! unqualified order or promise to pay is unconditional tuthin the meaning ofthis Act though coupled tof wich ‘An indication of a particular fund out sei asone into be made particular aceount to seen with the amount © . jon which aves b)_ A statement of the transact ase Ce instrament. But an order o promise 0 Pay we Sea partcua fund isnot unconditional (3) Reference to Transaction. ‘at a statement of the transaction that gave Section 3 provides thi oe the rise tothe obligation covered by the note ort i the negotability of the intrament, However, france nar transaction or document must be descriptive esti rent must only give information In other words, the instrument must nfomation that xfs issued in connection with a particular transaé m Trust aot make the order or promise dependent on or burdened by the other transnction. : ‘Thus, an insirument that states that it was exeuted "as pet contract” “by virtue of or “pursuant to” a specified contract is ti) Stegotable because there is merely a statement of the transaction That gave rise to the obligation embodied in the instrument Consistently, reference to a Chattel Mortgage does not mal {eateument non-negotiable, It was observed that: Jc agreement, te rfrnce in ote tose eins arent exerts gay man bm wach a nen crea at the per ob rnd with hen on is wll seed that when the reference dn te contderaton fr whieh the pape given, or is a mere mention of the origin of the transaction, its Sogotability snot chereby aflectd."™ (A) Subject to Transaction. and con- ithe instrument is restricted by the terms nation contractor agreement, by ineorporat e ve ‘as part of the other, the said However i ditions of another {ng the agreement or a portion thereof Timalde & Co, Ine. v. Bian Transportation Company, CA-GR, No, 12087-R, “Apri 6, 1960, 86 0.G, 5886, 15 Vetavo's Dons 658-689. PART I — NEGOTIABLE INSTRUMENTS a CHAPTER 2 — NEGOTIABILITY instrument is non-negotiable. Consequently, a note that is “subject to” the provisions of another contract or document is not negotiable. Annote is also not negotiable under the same principle if the amount is payable “as set forth in that certain agreement dated March 12, 2004."" In fact, the negotiability of the instrument is affected the moment the holder is required to go beyond the instrument by requiring him to check the terms and conditions of another contract. Con- sequently, an instrument is not negotiable if it is “subject to the provisions of a contract of loan” irrespective of the provisions of the contract of loan.’ In other words, the negotiability of the instrument “is destroyed even if the separate contract to which the instrument is subjected to is in fact not conditional as the term is understood under the New Civil Code. Although the obligation involved is really unconditional the instrument may be considered not negotiable if, on its face, it is burdened by the separate contract, Negotiation is deterred because anybody who takes the instrument will have to check the terms and conditions of the other agreement referred to in the instrument. (5) Account to be Debited or Source of Payment, The negotiability of the instrument is affected if what is specified is the account or fund out of which payment is to be made, Henee, the instrument is not negotiable if't states: “Pay to the order of Juan de la Cruz P10,000.00 out of my account with you.” This instrument is conditional because the obligation to pay is subject to the condition that the funds in the account are sufficient. The order to pay is not absolute because no payment will be made if the amount in the account is less than P10,000.00. Consequently, a note is also not negotiable if it contains the following words: “This note is given in payment of merchandize and is to be liquidated by payments received on account of sale of such merchandize."* ‘The test that should be applied is this: Does the instrument earry the general credit of the drawer or maker, or only the credit of a particular fund?” TSalomonaky v. Kelly, 249 8.E, 24958 (1986) ‘wUnited States v. Farrington, 172 F Supp, 797, Mass; See also Annotation, 108 ALR 1378, ‘Glendora Bank v. Davi, 204 Cel. 220,267 Pac. 211 ‘Suunero Gusvars, Havonoor or CouwsaciatLaw, 10th Bt, p. 354, hereina ter referred toas GuevarraEy NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME T If the instrument specifies the account from which payment is to be debited, the instrument is still negotiable, The promis co + oo pay is alll unconditional. For example, the instrument Still negotiable (assuming all the other requirements soe present) sit matien "Pay to the order of Juan do Ia Cruz P10,000 40 and "The order is still unconditional debit the same from my account. debit te fhat is reflected it an absolute obligation to pay "he pect of P10,000.00. The specified account is only the source amolbursement after payment. If the funds in the account ore ot vemielent, Chere would still be an obligation to pay the payee ‘ithough the drawee may not be fully reimbursed. Im the latter ease where the account from which payment i$ to be debited is indicated, Uhe willingness of the drawee to pay is +o aeotal, Ifthe account to be debited may not folly cover the aoe na tated in the instrument, the drawee may be unwilling 19 pay the payee. This will not afect the negotiability becatet what is Pay ean i the unconditional nature ofthe promise or order Pa¥ aerevet the willingness of the obligor to comply with the promise or order. CASE: METROPOLITAN BANK & TRUST COMPANY ‘v. COURT OF APPEALS IG.R. No, 88866, February 18, 1991] 194 SCRA 169 ‘This ease, forall its seeming complexity, turns on a simple question of negligence The facts, pruned ofall non-essentils, are easily tld ‘The Metropolitan Bank and Trust Co, is a commercial bank with ranches threughout the Philippines and even abroad Golden Savings 202 prance ration was, atthe time these events happened, operating in Cala- Hane fndro, withthe other private respondents aa its principal ofcers In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months 98 treaeiry Golden evita total value of P1,756,228.37. They were all drawn by the sereenlac Fish Marketing Authority and purportedly signed by ts General cra nd counter-signed by its Auditor. Six of these were directly p9y- ara omen while the others appeared to have been indorsed by their Tespective payees, followed by Gomez as second indoreer. .ne 25 and July 16, 1979, all these war Castillo as Cashier of Golden ‘2498 in the Metrobank ‘On various dates between Jui rants were subsequently indorsed by Gloria Savings and deposited to its Savings Account No. PARTI — NEGOTIABLE INSTRUME: CHAPTER? ~NEGOMIABILITY = branch in Calapan, Mindoro. The cee ro. They were then sent for clean i nt wh eel ecb rea of Treasury for special clearing priate Be an vr es hn rah pi Oi th vt a astro re rh Gt ca nha retreat tease withdraw from his acount, Later, however, “exaperated™ over Gio ated nun tao a cman alued a Sree aeoadnma nies Sar ag rm tee ee tbe we aden ine Pane pr reereere pa tet ),000.00. The total withdrawal was P968,000.00. ° jeamount of tee gin ne cerry et re nt account, eventually collecting the f iuisia erage aeons ithdrawal was made on July 16, 1979. oeeeee opr tren nr i oat ren tn rng 2 Tae reas eeeaee unl wthrwn to mae oy he debt eases ns Bad en {The demand was rejected. Met Got h den ftrobank then sued Golden ital Tria Cart de sor teal ot rae eguna Glen Se intend damned the compan pelt Cort of Ape te irmed, prompting Metrobank to ile this petition for review. ‘The petition has no merit. From thea Meobant was nin nent ining Caden Seg teas thatthe trenary warrants a teen eared and That omoequeny aa sae tallow Gane to witha the prone thm i ecunt wih 4 Wie ch turn Geen Svings tu ot have lle the “shdrvaiwth ch earner nso reno tol the rua in Cte Svs nigh en ae ed at Ps ca he inte Woe id a ay ana penton, tne an fr ery Tene he oe viii eh anaes a Gs Sing deposed he et ont th Metrobank Golden Sere sie ec rine os rete dt sectmidateed rn bran bese a eae rh op ey The eo36 [NOTES AND CASES ON. [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME “Savings itself to withdraw them from its own deposit. It was only when Stealer gave the gosignal that Gomez was finally allowed by Golden ‘Savings to withdraw them from his own account. ‘The angument of Metrobank that Golden Savings should have exer. cised more care in checking the personal circumstances of Gomer before Sect tng ie deposit does not hold water. It was Gomez who was entrust ieerhhe warrants, not Golden Savings that was extending him a loan; snd eine ch the treasury warrants were subject to clearing, pending which The depecitr could not withdraw its proceeds, There was no question of o> nev's identity or of the genuineness of his signature as ‘Buvings In fac, the treasury warrants were dishonored allegedly beca1se erehe forgery of the signatures ofthe drawers, not of Gomes as payee or n- cane ir the circumstances, itis clear that Golden Savings acted with corer f and diligence and eannot be faulted for the withdrawals it allowed Gomez to make. ‘By contrast, Metrobank exhibited extraordinary carelessness. The mount invulved was not trifiing — more than ane and a half million pesos {ng ine was 1979). There was no reason why it should not have waited ot the treasury warrants had been cleared; it would not have lost a single aanrivo by waiting, Yet, despite the lack of such clearance — and notwith cena that Ie had no received a eingle centavo from the proceeds of the Trensurs warrants, as it now repeatedly stresses — it allowed Golden Sav; sear withdraw not once, not twice, but thrice ~ from the uncleared treasury warrants in the total amount of P968,000.00. Ts reason? It was “exasperated” over the persistent inquiries of Gloria Castillo about the clearance and it also wanted to “accommodate” a valued Great tespresumed? that the warrants had been cleared simply because of “tne lapse of one week.” For a bank with its long experience, this explan tion is unbelievably naive. ‘The negligence of Metrobank has been sufficiently established. To re- peat for emphasis, it was the clearance given by it that assured Golden Betings it wae already safe to allow Gomez to withdraw the proceeds of the treasury warrants he had deposited. Metrobank misled Golden Savings, ‘Thore may have been no express clearance, as Metrobank insists although thee vofated by Golden Savings) but in any case that. clearance could be {plied from its allowing Golden Savings to withdraw from its account not nly once or even twice but three times. The total withdrawl was in excess oits onianal balance before the treasury warrants were deposited, which ly added to it belie thatthe treasury warrants had indeed been cleared, Metrobank’s argument that it may recover the disputed amount if the warrants are not paid for any reason is not acceptable. Any reason does tot mean no reason at all, Otherwise, there world have been no need at Pil for Golden Savings to deposit the treasury warrants with it for clear- PARTI — NEGOTIABLE INSTRUMENTS CHAPTER 2 — NEGOTIABILITY a ance. There would have been no ned fort to wait until the w Sewn dare re eying he rose thereto Gomex ‘Sock acondtn, itsierest ia the way the petitioner suggests, is not binding for being a ru and unconscionable. And it becomes more so in the case at ber en iti cnsered that the supposed dihonor ofthe warrants was not Communicated to Galen Savings beret made ts own payment to Gomez smn Tt bated notation aggravate the pte’ earlier nie in ginger or at es pied earache easy vara an along pment heron Golden Savings. But that ot al On op orth nyse ron the doo oi ergy sg turn afthegeeral manager anh ato ofthe drawer reat has ot ben etblited This was the finding ofthe Iver outs which ese be ann dr And ow sid in MATS Cur of dpe: Prey crate presumed Sie IAC, al, 19 SRA BT be sxblbed iy dar, tive and convincing vide, hx wasnt one A no less important consideration is the eire sy ett impor tion is the circumstance that the trea- ‘ur warrants in question ae not negotiable instruments Cleary stamped gn thar fc tthe word Snonnegtale” Moreover, and thi of eq nian at they are payable from a particular fund, to ae nde ea ay ee ton that the exepton an Savion 3 ofthe Netible Insuments Ls ‘pple in thease ter. Thonn canon tr» Aad Pie oee ea ee eee in and for value of a negotiable instrument and is entit athe sinapeen crue Sienee eee ae eens off pars fnd and ot neato a do aloe te Seton (103) ofthe Negotiate Instruments Law). ns nenseand Metrobank cannot contend that hy indorsi Gatien Saving tram that thay were ein al expe wat ey puget to ben asdance with Suction ofthe Neg In stumens Law he snpa eso that tis in nt peste othe pon-negtabl tary warn The indoraeent was tudo Ch Casio not forthe purpose of arnicing the genuine fhe war ‘ants hut merely to deposi them with Metrobank fer learng. Iwas infact ank that made the guarentee when it stamped en the back oftheNoTes AND CASES OX * BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME! of endorsements guaranteed, ‘warrants: “All prior indorsement and/or lack of endc ‘Metropolitan Bank & Trust Co., Calapan Branch. ao rn tengo At Cpt a snk te yee ee ee tig ey ee ry cir Tet ne ak te ti Cle St eee isp ein a her be Ae th fag ts eee nny nr a lor a ane etc ee an estat Te aa rls aot to Golden Savings. PROBLEM ten peta money oder eal? secede vet tan Fe a ee = sa tan 1) of ae money oer which ae inensstent with pon el an Cl ee rly nd ln ey ee TE ay fre tht er a es Ma a ee oa 9 SCRA 587) Ir meg, The er a tr ta Ui ca a re Sear tl er em ie nme oe te ae sao hi a cn eee eee A BA cb cme lr et cron ceen eter oh wart Sen ee fee anon a Ceara a era 00 8, Abookstore received five postal money orders totalling P1,000. ‘as part of sales receipts, and deposited the same with a bank. A PARTI — NEGOTIABLE INSTRUMENTS 0 CHAPTER 2 — NEGOTIABILITY day after, the bank tried to lear them with the Bureau of Posts, It turned out, however, that the postal money orders were regularly issued thereby prompting the Bureau of Posts to serve notice upon all banks not to pay orders if presented for payment. The Bureau of Posts further informed the bank that the ‘amount of P1,000,00 had been deducted from the bank's clea ing account for the same amount. A complaint was filed by the bookstore against the Bureau of Posts and the bank for the recovery ofthe sum of 1,000.00 which however, was dismissed by the trial court. The bookstore appealed contending that postal ‘money orders are negotiable instruments and that their nature could not have been affected by the notice sent by the Bureau of Posts tothe banks. How would you resolve the controversy? A: The bookstore’s contention is untenable, Postal money orders are not negotiable instruments. Postal money orders are under the restrictions and limitations of the postal Jaws. Hence, they do not contain an unconditional prom- {seo order required by Sections Land 3 ofthe NIL. (1980 ar). State ifthe following documents/instruments are negotiable: a) Letters of Credit; b) Certificate of Stock; c) Bill of Lading; d) Warehouse Receipt; and d) Ava. A: a) Letters of Credit are not negotiable because they o not contain an unconditional promise or order to pay. Aletter of credit is a written instrument where- bby a person (for example a buyer) requests another (bank) and the latter agrees to advance money or sive credit to a third person (for example a seller) ‘and promises to repay the person making the ad- vaneement. Payment or advancement made by the entity (bank) requested to pay should be made only if the third person (seller) presents certain docu- ‘ments. In addition, a letter of credit under the Code of Commerce is addressed to a specified person, b) A certificate of stock is also not negotiable because ‘there is no promise or order to pay. It is the written, evidence of shareholdings ofa person in acorporation, hhence, it does not represent an obligation to pay sum certain in money. However, such certificates are also considered as quasi-negotiable because they ‘ean be transferred through indorsement. ©) A Dill of lading is not a negotiable instrument, It represents goods rather than money. A bill of lading is a form of document of title issued by the carrier whereby receipt of goods is acknovledged and theNOTES AND CASES ON PARTI — NEGOTIABLE INSTRUMENTS [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW oe a OOTIABL ‘CHAPTER 2 — NEGOTIABILITY carrier promises to deliver the goods to whoever is A: Instrument (a is negotiable because it contains all there ‘validly holding it and who can present the bill of lad ing. It may be considered a negotiable document of title under the Civil Code, but it isnot a negotiable instrument under the NIL. ‘quirements under Section 1. It contains an unconditional promise to pay. Although the word promise does not appear, an examination of the entire instrument indicates the word promise. This is specifically indicated by the presence ofthe words of negotiability because it is payable 4) A warehouse receipt is not a negotiable instrument D A ip oti Presenc because itis also a document of title that represents title to and possession of goods. It is a document is sued hy a warehouseman acknowledging receipt of goods that were deposited by another promising to Instrument (b) is not negotiable. It does not contain «8 promise or order to pay a sum certain in money. All that tated in the instrument is a mere acknowledgement of deliver to whoever is validly holding it and who can present the same, Like a bill of lading, it may be ne- fotiable under the Civil Code, but it is not a negotia- be instrument under the NIL. because it represents fronds rather than a promise or order to pay money. 6 debt. Which ofthe following instrument is conditional: @ ©) Anaval is nota negotiable instrument. An aval con- Feb, 20, 2009 templated under Articles 486 and 487 of the Code of 4 Commerce is 2 guarantee for the payment of drafts “1 promise to pay Mr. Po order P2,000.00 on that were already accepted by the drawee. Article February 14, 2007 if he wil become an engineer 4486 provides thatthe payment of draft may be se- year 2008. ‘cured by an obligation independent of that contract- tea fel by the acceptor or indorser known as an aval LS Under Article 487, ifthe aval is drawn up in general terms and without restrictions, the person giving st ny shall be liable forthe payment of the draft in the fame case and manner as the person for whom he appears as guarantor. Mar. 3, 2009 5, State ifthe following instruments are negotiable: “Pay ta Por order P1,000.00 on or before Decem- id ber 8, 2008 subject to the terms and conditions of the Contract of Sale executed by the parties.” Feb 25,2008 Sed. “Me. DR” “Due P or order P1,000.00 payable on July 5, ‘To: Mr. DW. 2008. Sed. @ Feb. 16, 2009 cy “Pay to Por order Pi "ay to Por order P1,000.00 on or before Decem- ber 6, 2010. This bill is being executed by virtue March 1, 2008 of the Contract af Sale executed bythe partie “1 hereby acknowledge that I owe Mr. P the : amount of P1,000.00. tee To: Mr. DW Sed.2 [NOTES AND CASES ON BANKING LAW AND NEGOMABLE INSTRUMENTS LAW VOLUME! @ Mar. 2, 2009 1 promise to pay to P or order P1,000.00 on or before January 5, 2011. This Note is secured by 0 chattel mortgage and is subject to the terms and conditions there, Se. Mr. MP © March 1,2009 Pay to the order of P 10,000.00 out of my account with you. Sed.“DR” To: DW 0 " Tan, 20,2000 Pay to the order of P P10,000.00 and reimburse yourself from my account with you. Sed. “DRY To: DW ® ‘March 1, 2009 Pay tothe order of P P10,000.00 and debit from my account with you, Sed. DR” ‘To: DW Instruments (a), (b), (2 are conditional and are therefore not negotiable. Instruments (), (e), (9 and (g) are not eon- ditional instruments and are therefore negotiable. Instrument (a) contains a conditional promise and is therefore not negotiable because the promise to pay is PARTI — NEGOTIABLE INSTRUMENTS Cy (CHAPTER 2 — NEGOTIABILITY dependent on a contingency that Mr, P will become an en- sineer. Instrument (b) likewise contains a conditional promise because the promise is subject to the terms and conditions of a separate agreement, The separate agreement restricts the instrument. Instrument (c) is not conditional although it men- tions a Contract of Sale. Under Section 3, par. b of the NIL, a promise or order is not conditional if it merely indicates the transaction that gave rise to the o Instrument (4) is conditional because the promise is subject to the terms and conditions of a separate agree- ‘ment. The separate agreement restricts the instrument. Instrument (e) is conditional because it is payable ut ofa particular fund. The direct source of payment is, the account of the drawer DR with the drawee DW, Hence, payment is subject to the conditions that the account is sufficient to pay for the bill. Instruments (0 and (g) are not conditional beeause they merely indicate the acount Wo be debited or out of which reimbursement is to be made. There is an absolute obligation to pay because said payment is not conditioned ‘on the availability of the funds in the account. The account is not the direct source of payment. Payable in Sum Certain in Money. () Money. ‘The word money has been defined in one case as: “Money is a generic and comprehensive term. It is not a ‘synonym of coin. It includes coin, but itis not confined tot. It n- cludes whatever is lawfully and actually current in buying and selling, ofthe value and as the equivalent of coin. By universal consent, under the sanction of all courts everywhere, or almost everywhere, bank notes lawfully issued, actually current at par {in lew of coin, are money, The common term paper money is in ‘legal sense quite as accurate as the term coined money." *Klanber v.Biggerstaf (1979) 47 Wis. 651,3N.W. 257,24 BLJ, cited in Hix 4. Bary, Tie Law oF Bav Cuncxs, 1962 Bd, p. 44, hereinafter referred to as “Bal ley." It should be noted that the banks referred to by Bailey are banks that besiclly perform the function ofa central bank, that is, money function through which they are allowed by aw to issue paper money., ‘ores AND CASES ON : BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME! ney contemplated in Section 1() is nt equivalent to Tegal Ce aarti nogeible cough the nt 0 terrae in currency that is not legal tender 0 Long #8 a ced in money Thus, an instrument tat is payable in ‘Yen or Dollars is still negotiable as it is also payable in meee rr yer eee ugal conlesion frm the provisions of Section 6) of sa enn states thot the nepotibity i nt affected even i ae ream designates the particular kind of money in w posment i tobe made won fren ae an (2) Option of Holder. 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 froney is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which — Xxx (d)_ Gives the holder an election to require something to be done in lieu of payment of money. Under the above-quoted provision, an instrument that states that the maker promises “to deliver P1,000.00 or one sack of sugar” is not negotiable. If the option to choose either P1,000.00 or one sack of sugar belongs to the holder, the instrument is still negotiable. ‘The difference if the option belongs to the holder is that in this case there is an absolute obligation to pay the sum certain in money. The maker may be compelled to pay P1,000.00. If the choice belongs to the maker, he is not absolutely required to deliver money because he can satisfy his obligation by delivering one sack of sugar. “Philippine National Bank v,Zulueta, G.R. No, L-7271, August 30, 1967, 10% Phil. 1071, 1 PARTI — NEGOTIABLE INSTRUMENTS “6 CHAPTER 2 — NEGOTIABILITY (3) Sum Certain. ‘A sum is certain within the contemplation of Section 1(b) of the NIL if the amount that is to be unconditionally paid by the maker or drawee can be determined on the face of the instrument. ‘The certainty of the sum is not affected if the exact amount can be determined after mathematical computation. However, the ‘computation should be made on the basis of what is stated in the instrument. This is true for instance where only the quantity per unit of the goods purchased as well as the price per unit is specified (600 kilos at P50.00 per kilo). All that is required is the mechanical computation to arrive at the exact amount. Section 2 of the NIL likewise specifies provisions that do not affect the negotiability of the instrument. Section 2 provides: ‘Sec. 2. What constitutes certainty as to sum. —The ‘sum payable is a sum certain within the meaning of this act, although itis to be paid — (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 du (4) 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. ‘The common feature of the provisions specified in Section 2 is the fact that the principal amount to be paid by the maker or the drawee is unaffected. There is an absolute obligation to pay a sum certain in money although certain amounts may be added, as in the case where interest or attorney's fees will be paid. Indeed, the promise to do an act or to pay another item in addition to the payment of money that will render the note not negotiable must be a promise that conflicts with some or one of the essential characteristics of a negotiable instrument." "Finley v Smith, 165 Ky. 445, 177 SW, 262 1916),46 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME T (4) Installment Payments. “Stated installments” mentioned in Section 2, paragraph (c) ‘means that the dates of each installment must be fixed or at least determinable as well as the amount to be paid for each installment. ‘Thus, the negotiability will be affected if the instrument merely states that the total amount shall be paid in five (5) installments ‘without stating when each installment should be paid and how much should be paid. The amount to be paid for each installment will be uncertain and there is no certainty when payment will be made. Nevertheless, an instrument complies with the requirement if it states that the maker promises to pay “to the order of Mr. X 10,000.00 in ten (10) equal monthly installment starting from January 5, 2004 and every month thereafter until fully paid.” In this last example, the amount of each installment and the date of payment thereof are determinable. ©. PAYABLE ON DEMAND OR AT A FIXED OR DETERMINABLE FUTURE TIME. ‘An instrument is not negotiable if the maturity date of an instrument is uncertain, Certainty of the maturity date, as well as the unconditional nature of the obligation, is required because of its effect in commercial transactions. It was observed the “Both conditional promises and uncertain maturity dates in promissory notes are offensive to the concept of negotiability because they militate against a low discount rate by involving. the holder with the administrative burden and risk of assessing contingencies, The burden and the risk are of the same kind, ‘whether the contingency is concerned with facts and events which render the obligation uncertain, facts and events which render the maturity date uncertain, oF facts and events which render both the obligation and the maturity date uncertain. In all these cates, it is the conditioning facts and events which ‘must be assessed with the discounter running the risk of proper ‘assesement.™ a, Payable on Demand. ‘When an instrument is payable on demand, the persons liable may be required to pay at any time that the holder may so request. ‘The instrument should be paid the moment it is presented for payment. Section 7 of the NIL provides: "Hlawkland, p82 PARTI — NEGOTIABLE INSTRUMENTS, a (CHAPTER 2 ~ NEGOTIABILITY 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. 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. If the instrument states “Pay to B or order P1,000" without stating the date of maturity, the instrument is payable on demand, If it is "Pay to B or order P1,000 at sight,” the instrument is also payable on demand. The word “sight” in this example means upon presentment, b. Payable at Determinable Future. ‘The instrument is payable at a determinable future if, though no date is fixed, the exact date of maturity is capable of being determined. Section 4 of the NIL enumerates the instruments that are considered payable at a determinable future time: ‘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) Ata fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (©) On or ata fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain, An instrument payable upon a contingency is not negotiable, and the happening of the event does not ‘cure the defect. To illustrate, an instrument complies with the third requirement of negotiability if the amount is to be paid “twenty-five (25) days after date” or if it is to be paid “twenty-five (25) days after sight.” The first example means that the instrument is payable twenty-five days from the date of the instrument, that is, the date8 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME stated therein as the date of issuance. The second example means that the instrument is payable twenty-five (25) days after present- ‘ment to the obligor (the drawee) for payment. Section 4(b) is demonstrated by an instrument that is payable “on or before December 12, 2005.” An instrument that is payable “on the Bra day after Good Friday of the year 2005" is payable at a determinable future time. Although the exact date of Good Friday is not known, the same is determinable. Paragraph (¢) of Section 4 is consistent with Article 1193 of the New Civil Code under which an obligation is with a period if it is payable at a day certain; a day certain is undérstood to be that which must necessarily come, although it may not be known when. ‘Thus, a note that is payable within five (5) days after the death of a specified person is payable at a determinable future time (1) Acceleration Clauses. Section 2 of the NIL provides that the certainty of the amount to be paid is not affected if it is to be paid “by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due.” What is contemplated in this provision is a typical acceleration clause. ‘An example of an instrument that is subject to an acceleration clause is provided below (2-1). In the acceleration clause in the example below, the non-payment of any installment is the circumstance that triggers the acceleration of the maturity date of the entire balance. The act or omission of the maker makes the acceleration clause operate — non-payment of any installment. 2:1: Promissory Note with Acceleration Clause. Amount: P10,000.00 June 11, 2001 I promise to pay to the order of Mr. Guido Concepcion the amount of P10,000.00 in five (6) equal monthly installments. ‘The first installment shall be paid on January 1, 2002 and the rest shall be paid on the first day of the succeeding month and every month thereafter until fully paid, Non-payment of any of the installment shall make the entire amount due and demandable. (Sd.) Marny Gonzales Maker PARTI — NEGOTIABLE INSTRUMENTS «@ ‘CHAPTER 2 — NEGOTIABILITY plained by one court where it distinguished between a situation where the acceleration is dependent on an act or omission of the maker and a situation where the acceleration is dependent on the whim of the holder: “Ttis true there are many decisions holding that the incorporation of provision authorizing acceleration of payment, either in the note or by reference to another instrument, if and when the holder deems his claim insecure renders the note non- negotiable, but there is substantial authority to the contrary. Authorities seem quite uniform, however, in holding that ifthe acceleration clause is dependent upon some act or default of the ‘maker the rule against uncertainty of maturity is not violated, ‘The general rule Notes 101 ind stated as follows in Britton, Bill “An instrument payable at a fixed date or before then at the option of the holder, or automaticaly, eon ditioned upon the occurrence of specified acts or events, postive or gat, contingent or noncntingent, which Sets or evente represent come kind of express or implied default by the obligor or such a nature as to indicate an increased risk tothe holder that the instrument may not be paid at the date of ultimate maturity, according to most authorities is negotiable” Many cases supporting the text are cited. See also Beutels Branna Negotiable. Intra rents Law (7 Bd) 275 et eq, and eases cited. A distinction is made between a situation where aecel- eration is conditioned upon a failure or default of the maker of the note and a situation where acceleration is authorized if the holder deems his claim insecure. Inthe latter, itis held in many decisions that, because the holder thay act upon his own whim oF caprice, the note is not payable at a fixed or determinable future time and hence non-negotiable. ‘he rule appliabe in situations auch as that presented in the instant cave in wel sated n the ease of Ft National Bank w. MeCortan, supra, where th curs in construing ane containing an insetrity cluse hold tha, where an elton i fiven tothe payee or holder to declare the paper due and pa Ahieindependent of my alt or conta ofthe maker, he instr ment i non-negotiable, In support ofits decision, the court pointed out that the maker ean have no control over the holder’s feelings in this re gard, and that the election contemplated may arise at any time50 [NOTES AND CASES ON, BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME I the whim or caprice ofthe holder dictates and without default fon the part of the maker; thus a maker who has complied in all particulars will find himself in the predicament of a defaulter through an election by the holder over which no one has any control, except the elector." (2) Insecurity Clauses ‘The above-quoted case refers to “insecurity” clauses. Those clauses are provisions in the contract which allow the holder to accelerate payment ‘if he deems himself insecure.” In other words, he can demand payment whenever he feels that there is a danger that maker will not be able to pay on the due date of the instrument. ‘The Court in the above-quoted case believes that the instrument is rendered non-negotiable because the holder’s whim and caprice prevail without the fault or control of the maker. ‘There are other authorities who disagree with the stated rule regarding “insecurity” clauses. Others believe that “insecurity clauses” do not affect the negotiability of instruments because they are said to be no different from demand instruments, (8) Extension Clauses. ‘There is no provision in the Negotiable Instruments Law that deals with “extension” clauses, that is, clauses in instruments that extend the maturity dates. However, it is believed that the rule Subsection 3-109(1\4) of the Uniform Commerical Code of the United States is the acceptable rule and should be applied in this jurisidietion, Subsection 3-109(1)(4) provides: “An instrument is payable ata definite time ify its terms it is payable ata definite time subject to extension at the option of the holder, or to extension to a further definite time at the ‘option of the maker or acceptor or automatically upon or after a specified net or event.” For example, an instrument is still negotiable if it is payable “two (2) years from date subject to extension for another one (1) year at the option of the maker.” An instrument is also negotiable if the fixed period is “subject to automatic extension of another one (1) year if the gross harvest of the maker for the year 2001 does not ‘exceed one hundred sacks of rice.” National City Bank of Cleveland v: Erskine & Sons, Ine, 158 Ohio St. 450, 110 NE. 24 598 (Ohio, 1953) PART — NEGOTIABLE INSTRUMENTS. ey CHAPTER 2 — NEGOTIABILITY Note that what is being referred to here is different from the situation contemplated in Section 120(f) of the NIL which provides that the person secondarily liable on the instrument is discharged “by any agreement binding upon the holder to extend the time of payment, orto postpone the holder's right to enforce the instrument, uunless made by the assent of the party secondarily liable, or unless the right of recourse against such party is expressly reserved.” The instrument contemplated in Section 120(f) does not contain an ‘extension clause but an extension is made either with the consent of the person secondarily liable or without his consent. If he consents, he is not discharged and he is discharged if it is otherwise. Ifthe extension clause is stated on the face of the instrument itself, the parties who are secondarily liable are bound by such clause because they took the instrument knowing that there is an extension clause. D. PAYABLE TO ORDER OR BEARER. An instrument that is payable to a specified person or entity is not negotiable because the NIL requires that the instrument must be payable to order or to bearer. Thus, an instrument that states that it is “payable to Juan de la Cruz” without stating anything else, is non-negotiable. The origin of the requirement that an instrument must contain such words of negotiability is to be found in the middle ages and in early modern times when instruments were drawn payable to a specified person, his nominee or simply to the producer of such document." Accordingly, a Negotiable Order of Withdrawal (NOW) is also not negotiable because it is payable to a specified person under Section X225 and Appendix 11 of the Manual of Regulations for Banks, The rule has always been that the instrument in order to be considered negotiable must contain the so called “words of negotiability” — ie., must be payable to “order” or “bearer.” These words serve as an expression of consent that the instrument may be transferred by negotiation. This consent is indispensable since a maker assumes greater risk under a negotiable instrument than under a non-negotiable one. See Government Service Insurance System v. Court of Appeals supra. See Chapter 1 Kauffman v. Philippine Netional Bank, supra, Chapter Note wiuunw E. Burro, B15 ax Nort, 2nd Bd, p. 23, hereinafter referred to sa"BritonNOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME PROBLEMS: 1 ‘Determine hefallowing instrament negotiable: “FOR VAL- SEGRE, wen nd ceveraty prone to pay othe Har Govt, th sum of ONE MILLION NINETY THREE TROUSESD SEVEN HUNDRED EIGHTE-NINE PESOS & Tals P8167) Philippine Currency, the sa prin cen em ie peytien 24 month inaliments starting Sue stead andy 1th ofthe month rete tl aly pas Th Thenete ie ot negotiable cnet i on payable to Treated tater ies payable tot apes person. Con or Meal adres Icy Cale IRC Lesg anes Copirton Gi Ne 72509, rl 30,1987 ‘io Sena ea 886) a tn ne te rnin ye ei ct ee mae aie nace ee a sel le Pe Boa Ba ey ot ae re ‘The promissory note isnot a negotiable instrument. The ‘© [fatrument snot payable to order orto bearer as required in paragraph (2) of Sesion tf the NIL. Ie shouldbe noted thatthe phrase “unconditional with- cawal ots military basen the Philippines" doesnot destroy the unconditional nature ofthe promise to pay sine the pres- thee in the eountzyof the bases merely temporary and that, {heir ultimate removal from the Philipines is asta matter of tin. (1988 Bar) X bought ajoep from Retisle Motors Company for consider Zion af P50 000.00, He paid P25,000.0 in eash and executed tho flowing promissory not on the balance: September 1, 1989 1 promise to pay the sum of P25,000.00 to Reliable ‘Motors Company on or before December 1, 1988. (Sg) X Is the promissory note a Negotiable Instrument?” A: The promissory note is not negotiable because it is neither payable to order nor to bearer. The instrument is payable PARTI — NEGOTIABLE INSTRUMENTS, 59 ‘CHAPTER 2 — NEGOTIABILITY to Reliable Motors, Inc. merely and not to “order or bearer” or words of similar import, (1989 Bar) a, Bearer Instruments. A person who is in possession of an instrument that is payable to bearer is the holder thereof. Hence, where the instrument is a bearer instrument, the person in possession can demand payment from the persons who are liable thereon. Section 9 of the NIL provides that an instrument is payable to bearer in the following instances: Sec. 9. 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. ' An instrument is a bearer instrument under Section 9, (a) and (b) if it states: “I promise to pay to bearer on or before June 2, 2002 10,000.00" or “I promise to pay Mr. Juan De la Cruz or bearer 10,000.00 on or before June 2, 2002." An instrument is payable to bearer within the contemplation of Section 4) if the amount is payable “to the order of cash” or “to the order of sundries.” ()) Fictitious Payee Rule. An instrument is a bearer instrument if it is payable to the order of a fictitious or non-existing person and such fact is known to the person making it so payable. Hence, an instrument that is intended to be issued by the maker although he made it payable to the order of Maria Makiling is a beaver instrument, However, it is "See. 197, NIL.ot NOTES AND CASES ON, [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME not necessary that the person referred to in the instrument is really non-existent or fictitious. The person to whose order the instrument is made payable may in fact be existing but he is still fictitious or non-existent under paragraph (c) of Section 9 of the NIL if the person ‘making it so payable does not intend to pay the specified person. ‘Thus, checks issued to “Prinsipe Abante” or “Si Malakas at si Maganda,” who are well-known characters in Philippine mythology, are bearer instruments because the named payees are fictitious and non-existent In Philippine National Bank v. Erlando T. Rodriguez, et al..* the Supreme Court explained the Fictitious Payee Rule under which the collecting bank and the drawee are relieved of liability even ifthe signature of the payee-indorser was forged. The drawer cannot ask for the return of the amount debited from his account. The forged signature is disregarded under the said rule because the check is treated as payable to bearer which can be negotiated by mere delivery. In other words, the forged indorsement is not necessary for the title of the transferee as a holder. The protection of extends even, to non-bank transferees of checks. The Supreme Court explained: “A review of US jurisprudence yields that an actual, existing, and living payee may also be ‘cttious’ ifthe maker of the ‘cheek did not intend for the payee to in fact receive the proceeds ‘of the check. This usually occurs when the maker places a name tf an existing payee on the check for convenience or to cover ‘up an illegal activity, Thus, a check made expressly payable to fa non-fictitious and existing person is not necessarily an order instrument. Ifthe payee is not the intended recipient of the proceeds of the check, the payee it considered a ‘fictitious’ payee land the check is a bearer instrument. In a fictitious-payee situation, the drawee bank is ab- solved from liability and the drawer bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. And since the maker knew this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in, ‘ease of controversy, the drawer of the check will bear the loss. "Philippine National Bank v, Erlando T. Rodriguez and Norma Rodrigues, GAR, No, 170325, September 26, 2008 ‘Supra. PARTI — NEGOTIABLE INSTRUMENTS. 5 CHAPTER 2 — NEGOTIABILITY ‘This rule is justified for otherwise, it will be most convenient for the maker who desires to escape payment of the check to always deny the validity of the indorsement. This despite the fact that the fictitious payee was purposely named without any intention that the payee should receive the proceeds of the check. ‘The ficitious-payee rule is best illustrated in Mueller & ‘Martin v. Liberty Insurance Bank. In the said case, the corporation Mueller & Martin was defrauded by George L. Martin, one ofits authorized signatories. Martin drew seven checks payable to the German Savings Fund Company Building Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without authority from the latter. Martin was also an officer of the GSFCBA but did not have signing authority. At the back of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as indorsement. He then successfully drew the funds from Liberty Insurance Bank for ‘own personal profit. When the corporation filed an action against the bank to recover the amount of the checks, the claim was denied. ‘The US Supreme Court held in Mueller that when the person making the check so payable did not intend for the specified payee to have any part in the transactions, the payee is considered as a fictitious payee. The check is then cousidered us 4 bearer instrument to be validly negotiated by mere delivery. ‘Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee, was authorized to make payment to the hearer of the check, regardless of whether prior indorsements were genuine or not. ‘he more recnt Getty Petroleum Corp. v. American Ex- 0 Travel Related Services Company, Ine upheld the Rei ayes rule. The rule protec the depositary bank and signs the los to the drawer ofthe check who was in beter Panton to prevent the los in the first place, Due eare isnot tven require from the drawee or depositary bank in accepting tod paving te ies. Tho ct isha showing of eligeee on the part ofthe depositary bank vl not defeat the protection ‘hate derived from tis re prot (2) Burden of Proof under the Fictitious Payee Rule. ___ Itshouldbenoted thatthe burden of proving that the instrument is payable to a fictitious payee rests on the person making such allegation. If there is an allegation that the check is payable to the "Philippine National Bank v, Erlando T. Rodriguez. and Norm 7" Rodrigues and Norma Redtigues,56 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME | order of a fictitious payee, the subject check is presumed to be an order instruments and it is up to the person making the contrary allegation to prove otherwise. There must be proof of the requisite ion of a fictitious-payee situation — that the maker of the check intended for the payee to have no interest in the transaction.”" If there is proof that the checks are payable to fictitious payee, the drawee bank can accept the check even without the indorsement, of the payee, The instrument can be negotiated by mere delivery because the instrument is considered a bearer instrument. (3) Bad Faith Exception to Fictitious Payee Rule. ‘Thereis a commercial bad faith exception to the fictitious-payee rule, A showing of commercial bad faith on the part of the drawee bank, or any transferee of the check for that matter, will work to strip it of this defense. The exception will cause it to bear the loss. ‘Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme. A transferee's lapse of wary vigilanee, disregard of suspicious circumstances which might have well induced a prudent banker to investigate and other permutations of negligence are not relovant considerations. The Court cited Section 3-405 of the Uniform Commercial Code which provides that there is a “commercial bad faith applicable when the transferee “acts dishonestly — where it has actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. In the United States, the “fictitious payee rule” has been used to counteract the effect of forged indorsements on the right of the holder to enforce payment against the drawer or the maker. It has been observed that the “fictitious payee rule” has developed as an important exception to the traditional rule that a forged indorsement in a check is inoperative and that a bank paying a check bearing fa forged indorsement may not charge the payment against the drawer. The fictitious payee rule is often applied in instances where an embezzling employee who has check signing authority draws checks to the order of payees (real or non-existent persons) who are intended by the employee to have no interest, The reasoning is the act of the agent is the act of the drawer (principal). The rule thus removes the group of eases involving a dishonest employee from the "Philippine National Bank v. Erlando T. Rodrigues and Norma Rodrigues, sbi. PART I~ NEGOTIABLE INSTRUMENTS 8 (CHAPTER 2 — NEGOTIABILITY traditional “forged indorsement doctrine” and imposes the loss on the employer who hires and fails to properly control the dishonest agent, rather than on banks which collect and pay checks with forged indorsement.” ¥ (4) Only or Last Indorsement is in Blank. Section 9(4) is applicable to cases involving instruments that are originally order instruments, that is, instruments that are payable to order from the time of issuance. An order instrument may be negotiated by delivering a duly indorsed instrument to the transferee. Such indorsement may be a special indorsement or a blank indorsement (one where no transferee is specified). A blank indorsement effectively converts the order instrument to a bearer instrument and may then be negotiated by mere delivery. If the instrument is, on its face, originally payable to bearer, that is, it is a bearer instrument under paragraphs a, b, and c of Section 9, the instrument is always a bearer instrument in the sense that it may always be negotiated by mere delivery." Even if the instrument is specially indorsed, the bearer instrument remains to be a bearer instrument and a blank indorsemont is not necessary to ‘convert it into its original nature, b. Order Instruments. ‘There are only two ways by which an instrument ean be made payable to order under Section 8 of the NIL. The instrument ean either be payable to the order of a specified person (ie, “pay to the order of Juan De La Cruz”) or to a specified person or his order (“pay to Juan De La Cruz or order”) Section 8 of the NIL also requires the presence of words of negotiability. Without the words “or order” or “to the order of,” the instrument is payable only to a specified person designated therein and is therefore non-negotiable. Section 8 of the NIL likewise identifies the persons who can be designated as payees in an order instrument — the persons to whose order the instrument may be made payable, Section 8 provides: “Basie, pp. 696-587, citing Northon v. City Bank Company (CA. Va. moras pany (CA. Va. 1923) Section 40, NIL,NOTES AND CASES ON se LAW AND NEGOTIABLE INSTRUMENTS LAW DANKING ‘VOLUME I struments ‘Sec. 8. When payable to order. — The instrument payable to order where its drawn payable tothe order of specified person or to him or his order. Itmay be drawn payable to the order of: (a) Apayee who is not maker, drawer, or drawe or (b) C) (d) Two or more payees jointly; or (e) One or some of I payes (f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. ©. Payable to the Order of Bearer. ‘There are two (2) views regarding the nature of instruments that states that itis “payable othe order of enter” Pro, Simplicio Guevarra believed that the same is a bearer instrument. He explains that an order instrument is one that is “payable to the order of a specified person” or “payable toa specified person or his order” The ‘view is that there must always be a specified person named in the instrument and the instrument must always be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same.* Hence, an instrument payable “to the order of bearer” is not an order instrument because itis neither payable to the order of a specified person or to him or his order. However, an instrument payable “to the order of Reynaldo Estrella or bearer" is payable to order.” is “payable the opposite view is that the instrument that is “pay to the order of eater” is an order instrament. This view teen supported by writers citing the ruling in American National Bank 0. Joe Kerley. However, reliance on the said case without fully ‘Salas v. Hon, Court of Appeals, eal, G.R. No. 76788, January 22, 1980, Guevara, p. 356 Bid, p. 387 109 OF. 155, 220 Pac. 116; 32 ALR. 262. See De Leow, Necoruancr Dasre: sucrs Lav, 1998 Bap. 60 PARTI — NEGOTIABLE INSTRUMENTS 80 (CHAPTER 2 — NEGOTIABILITY explaining the rationale behind the ruling may tend to mislead those who do not know the background of the case. The ruling that ‘the instrument involved therein is considered an “order instrument” was made because the intent of the makers to make it an “order instrument” was apparent on the face of the instrument, The court did not foreclose the possibility that although the instrument is payable “to the order of bearer,” it may still be considered a bearer instrument whenever the same intent is apparent on the face of the instrument, A summary of the rules and doctrines discussed in American National Bank case is elucidating. 1, The law requires negotiable instruments to be payable to order or to bearer. It does not follow that an instrument, to be negotiable, must contain only the word “order” or its equivalent, unaccompanied by the word “bearer” or that it must contain only the word “bearer” or its equivalent, ‘unaccompanied by the word “order.” The statute does not declare, nor did the law merchant declare, that a paper is not negotiable merely because it contains both words of negotiability. 2. The instrument is a “bearer instrument” if it had been drawn in the alternative, as, for example, “to the order of Aor to bearer,” “to the order of John Doe or to bearer,” “to the order of Marget A. Bitzer (or bearer)” or “to order or bearer.” In those cases where the instrument are couched in the alternative, the instrument is payable to the order of a specified (or unspecified person) or to bearer whoever he may be. If the words “to the order of" could be ignored or eliminated, the instrument is payable to bearer without the condition of indorsement being imposed upon the transfer by the payee, An instrument that is “payable to the order of bearer” is not stated in the alternative. 3. In the same manner, an instrument is payable to bearer where it is made payable “to the order of or bearer,” or “to_____or bearer," or ‘to or order or bearer.” In those cases, the words “to the order” ‘may be ignored and eliminated. ‘The instrument is payable to bearer when it is payable to the order of a fictitious or non-existent person or wheno NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME ‘the name of the payee does not purport to be the name of, 1 person, The intention of the maker or drawer in those instances is that the fictitious person or inanimate object will not indorse. Thus, the intent of the maker or drawer will be given effect by treating the instrument as one payable to bearer. ‘An instrument that is “payable to the order of bearer” is not payable to the order of a fictitious or non~ ‘existent person or to an inanimate payee. “A fictitious or non-existent person cannot be the ‘bearer’ of a paper; nor can an inanimate payee be the ‘bearer’, but a natural or artificial person may be the bearer.” is “ rer, A” the When an instrument is payable “to the bearer, same is not negotiable “because the word bearer does no more than to describe A and the paper is merely the equivalent of a writing payable ‘to A.” ‘An instrument that is “payable to the order of arcana sar. The word of egotism seen tng canbe mi ta brmerly nev “Banks issue to their customers blank checks, which ane generally printed In ane of to forms: One with the printed words ‘Pay to, followed by a blank space in which is to be written the name of the payee; and the other with printed words ‘Pay to’ followed by a blank space in which is to be written the name of the payee, followed in turn by the printed words ‘or order.’ Frequently, a depositor, when using one of such blanks, writes merely the word ‘bearer’ to indicate the payee, so that the check when it comes to the bank reads ‘Pay to the order of bearer’ or ‘Pay to the bearer or order.’ In the case of the check which reads ‘Pay to bearer or order’ no difficulty is encountered, because the instrument is in the alternative, and may be treated as a check payable to bearer and transferable by delivery.” The Court ruled that in ease of the check which reads “Pay to the order of bearer,” it is not appropriate to state that possibly it should be treated as one payable to bearer and transferable by delivery, because of the circumstances attending the paper and appearing ‘upon its face. The Court explained that: We know by observation and experience that, when a blank chee filled out in the manner indicated, the signer of the check. PART I — NEGOTIABLE INSTRUMENTS a (CHAPTER 2 — NEGOTIABILITY usually intends to make the instrument payable to bearer and transferable by delivery, and gives but little, if any, attention to the printed words ‘Pay to the order of.” The instrument involved in the case is not similar because the intention of the maker is manifest based on the way the instrument appears on its face. Based on the foregoing, it is clear that an instrument that is payable “to the order of bearer” is not necessarily an order instrument. ‘The intention of the maker or drawer should be determined based on the face of the instrument, ‘The instrument involved in American National Bank case was considered an order instrument because the intent of the maker, to make it s0 payable was apparent. “The writing was prepared by Kerley (the maker) with a typewriter, and the words ‘to the order of bearer’ were typed with the usual spacing, and the clear intention of the makers manifested by the writing, to which we must look to ascertain that intention, was to make the instrument transferable by the indorsement of the payee. The words ‘the order of cannot be eliminated or ignored” because the manner that Kerley wrule the instrument shows that “it cannot on any reasonable ground be said that he intended that the words ‘the order of should be ignored.” ‘The Court pointed out that the subject instrument was an order instrument. The requirement that the payee must be specified is satisfied. “The word ‘bearer’ alone and of itself, meets the requirements of certainty as to the payee. The word ‘bearer’ means the person in possession of the bill or note; and when, therefore, a note payable to a payee designated as ‘bearer’ is issued to a person, whether natural or artificial, it is in truth delivered to a person in being who is ascertained at the time of issue.” “It is true that we are accustomed to see the word ‘bearer’ only in instruments which are ‘designed to pass from the payee by delivery, and while it is true that ‘the word ‘bearer’ as used in the Negotiable Instruments, is used to ‘mean instruments transferable by delivery, it is also true that the Negotiable Instruments Law contains nothing which prohibits the maker of a note from using the word ‘bearer’ to describe the payee, ina note designed to pass from the payee by indorsement; and since any word which will describe the payee with certainty may be used, and the word ‘bearer’ is one of such words, the maker may employ the word ‘bearer’ for the purpose of deseribing the payee to whose order the instrument is payable,@ NOTES AND CASES ON SLAW LAW AND NEGOTIAMLE INSTRUMENT PANEING ‘VOLUME I row a check on November 16, 200 upon C Bank for the Suma 0000 pao oth order fea He vere the Shenk Mr Con the sme day in exchange fo money, LE fave the money to ATL. bene the later represented that he tay nosed the amount but eu ot withdraw om his bak Dec tet assay clined, ATL chek wa ter shoore becae the acount on which waa dav i nok Svea ds When ATL aster rested fr tala Ser Aton 15412) ofthe Revised Penal Code be alged Sint sential ping that he chk eb ot hav been presented for payment because he did not indore the same. the argument of ATL tenable? ” i untenable. A check that is payable to 1 alr of can a bearer instrument (Seton td, a ene he drae bank ay pay to the peron presenting it for upnnt without te deers indrement. fh dink eo hie to bearer i authoriy fr pagent ote bolder, Whee heck nin the inary form, and pple Barer, hat no indreenen is eed bank, to which prevented Tavmen; nd not have the holder identified, nd is not ne Fenein fing todo soc (Ang Te® Lian. Court of peat, in 12616, September 25, 1950, 87 Phil. 383). 2, SBTC Bank issued several certificates of deposit in favor of ‘Angel De la Cruz, A sample of the certificates is as follows: “SECURITY BANK ANDTRUST COMPANY No, 90101 778 Ayala Ave, Maka ro Nani Philipines Met SUCAT OFFICE ‘4,000.00 cenriricate oF DEPOstT Rate 16% Date of Matarity Pa 2, 1000 ER. 22108, we ‘This is to Certify that BEARER has deposited in this BFE P40 s, Philippine Currency, repay- thle to sid depaior Tal days ser date, upon presentation ta surrender ti cron wih atret at thera 16 per cent per annum. PARTI — NEGOTIABLE INSTRUMENTS. ‘CHAPTER 2 — NEGOTIABILITY. (Sea (Sea) AUTHORIZED SIGNATURES" In a caso involving the certificates of deposit issued by SBTC, the Court of Appeals ruled that the above-quoted certificate is non-negotiable explaining that although’ the Word “bearer” after the word ‘BEARER’ stamped on the space provided supposedly for the name of the depositor, the words “has deposited’ a certain amount” follows. The Court of Appeals believed therefore, the text of the instrument. themselves ‘manifest with clarity that they are payable, not to whoever purports to be the ‘bearer’ but only'to the specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as the person who ‘made the deposit and further engages iteelfto pay said depositor the amount indicated thereon at the stipulated date.” There was also reliance on the testimony that identified Angel dela Crus as the depositor. Is the ruling of Court of Appeals tenable’ ‘A: The ruling is not tenable. The CTDs in question are negotiable instruments. “The documents provide that the nounts deposited shall be repayable to the depositor. And who, ‘cording to the document, is the depositor? It is the "bearer." ‘The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically ta him, Rather, the amounts are to he repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment, {Fit was really the intention of the bank to pay the amount {to Angel de la Cruz only, it could have with facility 40 expressed that fact in clear and categorical terms in the documents, instead of having the word “BEARER’ stamped on the space provided {for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable ‘to whoever may be the bearer thereof. Although a witness di clared that Angel de Ia Cruz is the depositor, other parties not Privy tothe transaction between them would not be it a position, to know that the depositor is not the bearer stated in the CTD, Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel the agreement of the parties thereto through facts alt, unde. This need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calla fer the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. (Caltex [Philippines], Ine o7 NOTES AND CASES ON [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME Court of Appeals and Security Bank and Trust Company, G.R. No, 97753, August 10, 1992) E, IDENTIFICATION OF THE DRAWEE. Section 1(e) of the NIL provides that “where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.” Obviously, this requirement applies only to bills. In a bill of exchange, the drawee is the person. being commanded by the drawer to pay the payee. If he accepts, he becomes primarily liable. Itis therefore imperative that any person who will take the bill ofexchange must know the person who will be primarily responsible ‘under the instrument. He must know to whom he should present it for acceptance and for payment. If the law makes instruments negotiable even if the identity ofthe drawee is not easily discernible, the purpose of negotiable instrument as a tool in commercial dealings will be greatly hampered, a, Two or More Drawees. ‘The law however allows a bill that is addressed to more than, one drawee. A bill may be addressed to two or more drawees jointly, whether they are partners or not; but not to two or more drawees in the alternative or in succession.” Thus, an instrument may be addressed “to Juan De La Cruz and Pedro Santos" but not “to Juan De La Cruz or Pedro Santos.” The law does not also allow negotiable instruments to be addressed “to Juan De La Cruz or in his absence Pedro Santos.” b. Option to Treat as PN. Section 130 of the NIL provides that “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 fas a promissory note.” In the cases contemplated by Section 130, the bill on its face eomplies with Section (e) because the instrument is addressed to a named drawee or one identified with reasonable certainty. However, the person so identified is the drawer himself, fa fictitious person, or a person not having capacity to contract, In those cases, the instrument may be treated as a note because what is stated in the instrament amounts to the promise of the drawer. Section 198, NIL PART I — NEGOTIABLE INSTRUMENTS 6 ‘CHAPTER 2 — NEGOTIABILITY ©. Cashier's Checks. The drawee may sometimes be the drawer himself as in the cease of cashier's checks. In such cases, the instrument is in effect a promissory note executed by the drawer. IV. OMISSIONS AND PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY. A. OMISSIONS. Section 6 of the NIL enumerates matters that can be omitted inn instrament and declare that suth omissions dona all negotiability of the instrument. I Sec. 6. Omissions; seal; particular mon validity and negotiable character of an instrument are ot affected by the fact that: (a) Its not dated; or (b) Does not specify the value gi value had been given thorofor; or (c) Does not specify the pl orn ace specify the place where it is drawn (4) Bears a seal; or (e) Designates a particular kind of current. in which payment is to be made. nomen 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. a. Undated Instruments. Section 6 of the NIL provides that the instrum m6 te ¢ instrument negotiable iit isnot dated. It shouldbe noted, however, that there are cases where the date ofthe instrument is necessary and inthe ahence thereof canbe inserted in the instrument Section 18 ofthe 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 acceptanceNOTES AND CASES ON x ‘NEGOTIABLE INSTRUMENTS LAW BANKING LAW AND NEGOTIAPL of an instrument payable at a fixed perlad 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 avold the instrument in the hands of @ subsequent holder in due course; but as to him, the date so ins is to be regarded as the true dat In both situations where insertion of the date of the instrument is allowed, such date is necessary in order to determine the maturity date of the instrument. ‘A related article is Section 11 which provides that “where the mdi ciate ene ee setnin narvanac Sistema mater PROBLEMS: 1. Whatisthe effet the instrument na dated or) oes ot state te place where i made or payable? Se negtiabilty of an instrument not adversely 0) Ted ts being undated. (Se a) ven its sod to determine tne maturity ofthe instrument, the holder is mpily authored to plac the date thereot See 19, NL) oo consier dated a ofits inoue (Se 17, (b) ‘The negtiblity of an instrument isnot affected i it docs not state the place where itis made or where it is payable. All that is required under the NIL is compliance with See. 1 thereof. (1988 Ba abil of exchange or a promissory note quay 8 «neg % ite natrament I) ie oo tad) othe day and the trench but net the yar afte matty, pven; © ay {hic eat @ rit names two alternative drawees. a) You, Seton a prove that the gaat of NS @ Tosrment po ale a m atd, Te hue af onnnce ok eqs of Rog reseed by Se. NIL (b) No. Abence af the yar of atu ait he ne : gotiability. The evident intent is to make the instru- Sen pave oma fed date bu he year was os te Hence, the time for pyment rot etrminabe inthincan PARTI ~ NEGOTIABLE INSTRUMENTS a (CHAPTER 2 — NEGOTIABILITY (©) Yes. Under Sec. 9(4) of the NIL, an instrument Payable to bearer if the name of the payee does purport to be the name of any person. The name of ' payee (cash) is an inanimate object, hence, i is bearer instrument. (@) No, Section 128 ofthe NIL provides a bill may not be Addressed to two or more drawees in the alternative or in succession. Otherwise, there is no certainty as to the person to whom the instrument may be presented for payment. (1997 Bar) B. ADDITIONAL PROVISIONS. ‘Sec. 5. Additional provisions not affecting nego- ability. — 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 whic! (a) Authorizes the sale of collateral securiti 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) _Walves the benefit of any law intended for the advantage or protection of the obligor; or (4) 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. Collateral. A statement of the transaction that gave rise to the obligation does not make the instrument non-negotiable. In the same manner, a statement in the instrument that the same is secured by a collateral does not make the promise or order conditional. In fact, Section 5(a) even declares that the instrument is still negotiable even if it authorizes the sale of collateral securities in case of default. Thus, an instrument is still negotiable even if it states that it is “secured by a chattel mortgage which can be foreclosed pursuant to pertinent law if the maker defaults in payment of his obligation.” It should be6 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME reiterated however that the instrument must not be subject to the provisions of the separate contract. b. Confession of Judgment. A stipulation allowing confession of judgment does not affect the negotiability of the instrument. This stipulation takes the form ofa warrant of attorney to confess judgment. It is an authority given jn advance by the obligor to another to confess judgment in case of fature litigation. It has been ruled that this type of warrant of ‘attorney is void for being contrary to public policy. The Supreme Court explained in Philippine National Bank v. Manila Oil Refining & By-Products Company, Inc.® that “provisions in notes authorizing ‘attorneys to appear and confess judgments against makers should not be recognized in this jurisdiction.” The Court explained that “they enlarge the field of fraud, because under these instruments the promissor bargains away his right to a day in court, Confession of judgment provided for under Section § should be distinguished, however from valid confessions that are made after tthe case is filed against the debtor. These confessions are of two types: a) cognovit actionem, and b) relica verifiationem. Cognovit tactionem isa written confession by the defendant acknowledging his indebtedness to the plaintiff after the action has been filed against hhim while relicia verificationem is a confession of judgment by withdrawal of the defense.* ec. Waiver by Obligor. Waiver of the obligor of the benefit of any law for his advantage or protection does not affect the negotiability of the instrument. ‘Thus, an indorser may waive the benefit of any provision of the NIL that is designed for his benefit. For instance, the law makes the indorser liable only if the necessary proceeding on dishonor is duly taken. However, Section 109 of the NIL provides that “notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and waiver may be expressed or implied.” An express waiver given ahead of the time is made when there is a statement in the instrument that notice of dishonor is waived. GR No, 18103, June 8, 1922, 43 Phil. 44. “Gopengeo, p14 ‘Section 66, NIL PARTI — NEGOTIABLE INSTRUMENTS os ‘CHAPTER 2 — NEGOTIABILITY PROBLEM: 1. The manager and treasurer of MORB Company execu Galvered to PNB a promunory note wherky te srpany pone: ise spay tothe onde of PNB the amount of P01 0000, The noe contann the flowing stipulations: "Without efaleaton, Value received; and do hereby authorize any attorney in the Piulippines in cue the note be not pad at matury, ap. ose tn the ne and cna judgment th above st ih ret, cont of sult an attorney Toso en peren (10) fr calecion, a release ofall errors and waiver ofall hts tin Swistion and appeal, and tothe bene of all law exempting Bone eal pra om yo aa MOND cam at areinvaid Te MORD corel) nn ny ve ipulatine A: The negoalty ofthe instrument isnot the siplatinn I il negotiable iall er requir ments of Section 1 ae present, MORE is correc int ing tat the stipulations are vis They ar nthe nature of stipslatonsnthorsing confession of Judgment which is considered void for being agnnat publ policy in ts Jurado: However, Seton 6 ofthe NIL provides that the notable chracer of an instant stherfin ne- fotiabl is not alected by m provision which authorizes Confession of judgment ifthe incrument be not pid st ame ee eee stipulation is avoided. Products Co., 43 Phil. 444), Cc aeChapter 3 INTERPRETATION OF INSTRUMENTS 1. ADOPTED STATUTE: EFFECTS. history ofthe NIL as summarized in the frst chapter revel Sie theism adopted stato Already nated the NTL astray copied from the Uniform Negotiable Instruments Law Sfehe United Stats andthe latter in turn was based on Englands hil or Exchange Act of 1682, Ana consequence ofthe NIL beng an dapted statute, tho fllowing rules are applicable with reopeet to probleme relating tothe application ofthe NI a, Interpretation of courts in the United States of the provisions of the Uniform NIL can be applied in this juris tion. For instance, the Supreme Court used decisions of foreign courts in Abubakar v. Auditor General’ when it ruled that government warrants for the payment of money are not negotiable instruments. b. _ Ifthereisnoprovision in the NILor the Code of Commerce, the provisions of the Uniform Negotiable Instruments Law or the Bill of Exchange Act may be applied. For instance, in Philippine National Bank v. Jose Zulueta,*the Supreme Court used the provisions of the Bill of Exchange Act of 1882 on crossed checks because the NIL and the Code of ‘Commerce are deficient on this point. Opinions and comments of authorities or legal writers ‘on the provisions of the Uniform Negotiable Instruments Law or the Bill of Exchange Act of 1882 may also be applied in this jurisdiction. Example of these comments are those cited by the Supreme Court in Ang Tek Lian v. ‘The Court of Appeals. va, ap, Supra, Chapter 1, Note. 2Supra at p. 2. 70 PARTI — NEGOTIABLE INSTRUMENTS, n (CHAPTER 5 ~ INTERPRETATION OF INSTRUMENTS |. EFFECT OF IMPLIED REPEAL OF CODE OF COMMERCE. It was also pointed out in Chapter 1 that the NIL impliedly repealed the provisions of the Code of Commerce on promissory notes and bills but there are provisiotis of the Code of Commerce that can still be applied to cases involving negotiable instruments. For instance, in Caltex (Philippines), Inc. v. Court of Appeals, the ‘Supreme Court recognized the continued force of Articles 548 to 558 of the Code of Commerce. On the other hand, in Chan Wan v. Tan Kim,* the Supreme Court used the Code of Commerce provisions on crossed checks because the NIL contains no provision thereon. IIL’ RULES THAT APPLY IN CASE OF AMBIGUITY. Rules on interpretation of ambiguous and incomplete instru- ‘ments are set forth in Section 17 of the NIL which provides: Sec. 17. Construction where instrument is ambigu- ‘ous. — Where the language of the instrument is ambigu- us or there are omissions therein, the following rules of construction apply: (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, refe ‘ence may be had to the figures to fix the amount; (b) Where the instrument provides for the pay- ‘ment of interest, without specifying the date from which interest is to ru the interest runs from the date of the if the instrument is undated, from the (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issuet (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 itis a bill or note, the holder may treat it as either at his election;Nores AND casts ow ‘BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME! upon the in- (9. Where a signature Is so place strument that it isnot clear in what eapacty the person tnaking the same intended to sign, he Is to be deemed an indorser; (9) Where an instrument containing the word “I prom|ge to pay” Is signed by two oF more persons, they fre deemed tobe jointly and severally liable thereon. A. SECTION 17(a). ‘An example of the instrument contemplated under the first paragraph is as follows: ‘January 10, 2004 I promise to pay Mr. X or order, the sum of ONE THOU: SAND PESOS PHILIPPINE CURRENCY (P2,000) on January 5, 2006. Sed: Mr. A ‘Theres a conflict between the amount tobe paid in words (ONE ‘THOUSAND PESOS PHILIPPINE CURRENCY) and the amount in figure (P2,000.00). Under Section 17[a) the sum that is payable is the amount in words “ONE THOUSAND PESOS.” However, the mount in numbers will control if the amount in words isnot dees. example, the amount in words is ambiguous if the instrument Mites that the maker promises "to pay NINETY ZERO PESOS (P900.00).” In this example, the amount to be paid is P900.00. B, SECTION 17(b) and (c). March 11, 2004 I promise to pay Mr. X or order, the sum of P100 on Janu- ary 5, 2006 with interest at 20% per annum, Spd: Me. A ‘The example does not indicate when the interest should accrue. In other words, although the instrument expressly provides that interest will be earned, it does not indicate when it will start earning interest. In the above-example, the interest shall accrue on the date PART I — NEGOTIABLE INSTRUMENTS 3 (CHAPTER 3 ~ INTERPRETATION OF INSTRUMENTS of the instrument, March 11, 2004, because it does not indicate the accrual date, On the other hand, if there is no date on the instrument, the date of issuance is the accrual date of the interest. In the given example, if March 11, 2004 does not appear but the instrument was issued on April 1, 2004, the interest shall be deemed to accrue on April 1, 2004, Under paragraph (c) of Section 17, the instrument that does not have a date will be considered dated as of the date of its issuance. ©. SECTION 171@). Paragraph (d) of Section 17 of the NIL provides that where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail. This rule is consistent with the presumption that when a person writes something on a document that already contains printed words, the written words or figures represent the real intent of the person who is writing. It can be inferred that his intention is to modify what is printed on the document, D. SECTION 17(e). Section 17(e) provides that “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.” The following example illustrates the rule: ‘January 10, 2004 1 promise to pay Mr. P or order, the sum of TWO HUN- DRED PESOS PHILIPPINE CURRENCY (P200) on January 5, 2006. ‘Sgd: Mr. M ‘To: Mr. DW In the example above, if Mr. P is now the holder of the instrument, he has the option of treating the instrument as a note or 4 a bill of exchange. There is ambiguity in the instrument because the body of the instrument indicates that it is a promissory note but it is addressed to a drawee, Mr. DW. The situation is confusing to “whoever will look at the instrument because a drawee is not a party toa promissory note,u [NOTES AND CASES ON [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME T E, SECTION 17(). ‘The persons whose signature appear on the face of the instrument are the makers of promissory notes and drawers of bills of exchange. In the ease of a bill, the signature of the acceptor ‘might appear indicating his assent to the order of the drawer to pay the payee. In all these eases, the maker, drawer, or acceptor ‘must indicate in what capacity they are signing. In other words, if the maker signs the instrument, there must be no doubt that he is signing as the maker. If there is a signature in the instrument and there is doubt as to what capacity the person who affixed the signature is signing, then Seetion 17(f) provides that he is deemed to be an indorser. F. SECTION 17(g). If there are two or more debtors or obligors with respect to the same obligation, their liability may either be joint or it may be joint and several. A joint and several obligation or liability is also referred to as solidary obligation, a, Joint Obligation. If the liability is joint, two or more debtors are bound to pay only their proportionate share in the obligation. For example, Mr. A ‘and Mr. B are indebted to Mr. X for the same obligation to pay the ‘amount of P200.00, If their liability is joint, Mr. A can be compelled to pay only his proportionate share which is presumed to be equal to his co-debtor. Hence, the presumption is that he is liable only for P100.00 while Mr. B is liable for P100.00. If the liability is joint, Mr. A cannot be compelled to pay P200.00. b. Joint and Several Obligation. On the other hand, if the liability is joint and several or solidary liability, two or more persons are bound to and can be made to comply with the entire obligation. In the preceding example, Mr. ‘A can be made to pay the entire amount of P200.00 (and not only 100.00) if the obligation is solidary or joint and several. Under Article 1207 of the New Civil Code, the presumption is that the liability of the debtors is joint. Thus, in the previous ‘example, the presumption is that the liability of Mr. A and Mr. B is joint. In other words, they can be compelled to pay only P100.00 each. PART I — NEGOTIABLE INSTRUMENTS 7 (CHAPTER 3 ~ INTERPRETATION OF INSTRUMENTS ____ However, Article 1207 of the Civil Code also states that there is solidary liability when the obligations expressly so states, or when the law or the nature of the obligation requires solidarity. Section 17(g) is an example of a law which expressly provides for a situation when the liability is deemed joint and several. In the example provided below, Mr. M1 and Mr. M2 are deemed jointly and severally liable. Either Mr. M1 or Mr. M2 can be compelled to pay the whole amount of P200.00. Nevertheless, Mr. M1 and Mr. M2 cannot be made to pay P200.00 at the same time. If Mr. M2 already paid P200.00, Mr. M1 can no longer be made to pay, I Mr. Ml alrendy paid P200.00, Mr, M2can no longer be made ay. January 10, 2004 I promise to pay Mr. P or order, the sum of TWO HUN- DRED PESOS PHILIPPINE CURRENCY (P200)on January 5, ‘Spd: Mr. M1 and Mr. M2 IV. OTHER RULES In addition, there are other rules set forth in jurisprudence that can be applied in cases involving ambiguous instruments. Thus, the Supreme Court ruled in Equitable Banking Corporation v. The Hon Intermediate Appellate Court, etal, that if there is an ambiguity, the ambiguity should be construed against the party who caused the ambiguity. In the said ease, the plaintiff Edward J. Nell Company advanced the required marginal deposit for a letter of credit that was issued by the petitioner bank to facilitate the sale between th pin and Case Enterprises, the Iter represented by a in Casals. The c as payable iti contains the following notetin: = Davun® he Petitioner bank ‘lof Cavile Entries In. fo Marginal depo payment of balance on stra Property tobe weds secungy fr trast receipt fr opening LC of Carsett Siddes i avr ot the award J. Nel Ca” Sad chock tgethor with he eh i bureement voucher (xhibit'-A) conning the explanation ‘Payment for marginal deposit and other expenses re opening of LIC for account of Casville Ent,’ 2 "GR No. 174451, May 25, 1988, 161 SCRA 518.76 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME ‘When it was learned later that a bigger amount was needed, the plaintiff replaced the above-referred check and issued another check. payable “to the order of EQUITABLE BANKING CORPORATION ‘NC CASVILLE ENTERPRISES, INC.” and drawn against the First National City Bank. The check did not contain the notation found in the previous check issued by the plaintiff but the substance of said notation was reproduced in a covering letter that went with the check. Both the check and the covering letter were sent to defendant bank through defendant Casals. Plaintiff entrusted the delivery of the check and the latter to defendant Casals because it believed that no one, including defendant Casals, could encash the same as it was made payable to the defendant bank alone. Besides, defendant Casals was known to the bank as the one following up the ‘application for the letters of credit, Unfortunately, upon receiving the ccheck entrusted to him by plaintiff, Casals immediately deposited it ‘with the petitioner bank and the bank teller accepted the same for deposit in defendant Casville's checking account. After depositing said check, defendant Casville, acting through defendant Casals, then withdrew all the amount deposited. The plaintiff sought to make the petitioner bank liable but the Supreme Court rejected such claim against the petitioner bank ruling that: "1)_ The subject check was equivocal and patently am- Diguous. By making the check read: “Pay to the EQUITABLE BANKING CORPO- RATION Order of AIC OF CASVILLE ENTERPRIS- ES, INC” the payee ceased to be indicated with reasonable certainty in contravention of Section 8 of the Negotiable Instruments Law. ‘As worded, it could be accepted as deposit to the account of the party named after the aymbols “AVC,” or payable to the Bank as trustee, of as an agent, for Casville Enterprises, Inc., with the latter being the ultimate beneficiary. That ambiguity is to be taken contra proferentem, that is, construed against NELL who caused the ambiguity and could have also avoided it by the exercise ofa little more care. Thus, Article 1877 of the Civil Code, provides: “Art. 1977. The interpretation of obscure words or stipulations in a contract shall not favor the party ‘who eaused the obscurity.” 2) Contrary to the finding of respondent Appellate Court, the subject check was, initially, not non-negotiable. [Neither was ita crossed check. The rubber-stamping transver~ » “Equitable Banking Corpor: PARTI — NEGOTIABLE INSTRUMENTS (CHAPTER 5 ~ INTERPRETATION OF INSTRUMENTS sally on the face of the subject check of the words “Non-nego- table for Payee's Account Only” between two (2) parallel lines, and “Non-negotiable, Teller No. 4, August 17, 1986,” separately boxed, was made only by the Bank teller in accordance with cus- ‘tomary bank practice, and not by NELL as the drawer of the check, and simply meant that thereafter the same check could no longer be negotiated. 3) NELL's own acts and omissions in connection with, the drawing, issuance and delivery of the 16 August 1976 cheek, Exhibit “E-1,” and its implicit trust in Casals, were the proxi mate cause of its own defraudation: (a) The original check of 5 August 1976, Exhibit "2," was payable to the order solely of ion.” NELL changed the payee in the subject check, Exhibit "E-1,” however, to “Equitable Bank- ing Corporation, A/C of Casville Enterprises, Inc,” upon Casals, request. NELL also eliminated both the cash disbursement voucher accompanying the check which read: “Payment for marginal deposit and other ‘expenses re opening of LIC for account of Casville Ent” ‘and the memorandum: “ale of Casville Enterprises Ine. for Marginal deposit and payment of balance on Estrada Property tobe used as security for trust receipt for opening L/C ‘of Garrett Skidders in favor of the Edward J. Nell Co.” Evidencing the real nature of the transaction was merely 1 separate covering letter, dated 16 August 1976, which Casals, sinisterly enough, suppressed from the Bank officials and teller. (b)__ NELL entrusted the subject check and its covering letter, Exhibit “E,” to Casals who, obviously, had his own at tagonistic interests to promote. Thus it was shown that Casals did not purposely present the subject check to the Executive Vice-President of the Bank, who was aware of the negotiations rogarding the Letter of Credit, and who had rejected the previous check, Exhibit “2,” including its three documents because the terms and conditions required by the Bank for the opening ofthe Letter of Credit had not yet been agreed on. (© NELL was extremely accommodating to Casals. ‘Thus, to facilitate the sales transaction, NELL even advanced the marginal deposit forthe garrett skidder. Itis, indeed, abnor- ‘mal for the seller of goods, the price of which is to be covered by «letter of eredit, to advance the marginal deposit for the same. (a) NELL had received three (3) postdated checks all dated 16 November, 1976 from Casville to secure the subjectn NOTES AND CASES ON [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME check and had accepted the deposit with it of two (2) titles of real properties as collateral for said postdated checks. Thus, NELL ‘was erroneously confident that its interests were sufficiently protected, Never had it auspected that those postdated checks would be dishonored, nor that the subject check would be utilized by Casals for a purpose other than for opening the letter of credit. In the last analysis, it was NELL’s own atts, which put it {into the power of Casals and Casville Enterprises to perpetuate the fraud against it and, consequently, it must bear the los. (Blondeau, eal. vs. Nano, etal, 61 Phil. 25 [1935]; Sta. Maria ts, Hongkong and Shanghai Banking Corporation, 89 Phil. 780 (1951); Republic ofthe Philippines vs. Equitable Banking Corpo- ration, L-15895, January 30, 1964, 10 SCRA 8). “xxx As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the los In State Investment House, Inc. v. Court of Appeals, et al.," the Supreme Court observed that the NIL was enacted for the purpose of facilitating, not hindering or hampering transactions in ‘commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case. PROBLEMS: 1. How do you treat a negotiable instrument that is so ambiguous that there is doubt as to whether it i a bill or a note? A: Where a negotiable instrument is so ambiguous that there is doubt whether itis a bill or a note, the holder may treat it either as a bill of exchange or a promissory note at his lection. (1998 Bar) 2. X,Y and Z signed a promissory note in favor of A stating: "We promise to pay A on December 31, 2001 the sum of P5,000.00." ‘When the note fell due, A sued X and Y who put up the defense that A should have impleaded X. Is the defense valid? Why? A: The defense isnot valid. The libility of X, Y and Zs joint because solidary liability is not provided for in the note. Henee, they can be sued for their reipective shares. How- ever, X and ¥ can invoke as a defense that there is no ‘GR No 101163, January 11, 1993, 217 SCRA 22,38. PARTI — NEGOTIABLE INSTRUMENTS 9 (CHAPTER S ~ INTERPRETATION OF INSTRUMENTS cause of action against them with respect to the proportionate share of Z in the obligation because only Z is responsible therefore. (2001 Bar) (Note: The instrument involved here is a non-negotiable instrument because it is payable to a specified person. There is an opinion to the effect that even if tis negotiable, the presumption under Section 17(g) of the NIL. cannot apply because the instrument states "We promise” rather than “I promise." A contrary view is however supported by Republic Planters Bank v. Court of Appeals and Cantas. (infra.) Nevertheless, even if the linblity is sol- ‘dary, there is still no valid defense because any one of them can be held liable for the entire obligation.) CASES: PHILIPPINE NATIONAL BANK v. CONCEPCION MINING COMPANY, INC., ET AL. [G.R. No. L-16968, July 31, 1962] 5 SCRA 745 ‘The present action was instituted by the plaintiff to recover from the defendants the face of a promisoory note the pertinent part of which reads ‘as follows “Manila, March 12, 1954 “NINETY DAYS after date, for value received, I promise to pay to the ‘order ofthe Philippine National Bank x x x. “In case it is necessary to collect this note by or through an attorney-at-law, the makers and indorsers shall pay ten percent (10%) of the amount due on the note as attorney's fees, which in no ease shall be less an P100,00 exclusive of all costs and fees allowed by law as atipulated in the contract of realestate mortgage. Demand and Dishonor Waived. Holder may acep partial payment reserving ht righ of recourse aguinst each and (Purpose — mining industry) CONCEPCION MINING COMPANY, INC. By: (Sgd.) VICENTE LEGARDA President (Sgd.) VICENTE LEGARDA (Sgd.) JOSE S. SARTE “Please issue check to — Mr. Jose 8. Sarte”80 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME 1 Upon the filing of the complaint the defendants presented their an- sewer in which they allege that the co-maker of the promissory note Don Vicente L. Legarda, died on February 24, 1946 and his estate is in the process of judicial determination in Special Proceedings No. 29060 ofthe Court of First Instance of Manila. On the basis of this allegation it is prayed, as ‘special defense, that the estate of aaid deceased Vicente L. Legarda be ineluded as party-defendant. The court in its decision ruled that the inclu- sion of said defendant is unnecessary and immaterial, in accordance with the provisions of Article 1216 of the new Civil Code and Section 17(g) of the Negotiable Instruments Law. A motion to reconsider this decision was denied and thereupon defen- ants presented a petition for relief, asking that the effects ofthe judgment bbe suspended for the reason that the deceased Vicente L. Legarda should have been included as a party-defendant and his liability should be deter- ‘mined in pursuance ofthe provisions of the promissory note. This motion for relief was also denied, hence defendant appealed to this Court. Section 17(g) ofthe Negotiable Instruments Law provides as fellows: “SEC. 17, Construction where instrument is ambiguous. — Where the language of the instrument is ambiguous or there are ‘omission therein, the following rules of construction apply: (g) _ Where an instrument containing the words ‘I prom- {se to pay” is signed by two or more persons, they are deemed to be jointly and severally Hable thereon.” And Article 1216 of the Civil Code of the Philippines also provides as follows: “ART. 1216. The ereditor may proceed against any one of the solidary debtors or some of them simultaneously. The de- ‘mand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, 0 long. as the debt has not heen fully collected." In view of the above quoted provisions, and as the promissory note ‘was executed jointly and severally by the same parties, namely, Concepcion ‘Mining Company, Inc. and Vicente L. Legarda and Jose 8. Sarte, the payee of the promissory note had the right to hold any one or any two ofthe sign- ers ofthe promissory note responsible for the payment ofthe amount of the note. This judgment of the lower court should be affirmed, REPUBLIC PLANTERS BANK v. COURT OF APPEALS and FERMIN CANLAS [G.R. No, 98073, December 21, 1992] 216 SCRA 738 From the records, these facts are established: Defendant Shozo Yama- suchi and private respondent Fermin Canlas were PresidentiChief Oper- PARTI — NEGOTIABLE INSTRUMENTS a (CHAPTER 5 ~ INTERPRETATION OF INSTRUMENTS ating Officer and Treasurer respectively, of Worldwide Garment Manu- facturing, Ine. By virtue of Board Resolution No. 1 dated August 1, 1979, defendant Shozo Yamaguchi and private respondent Fermin Canlas were ‘authorized to apply for credit facilities with the petitioner Republic Plant- cers Bank in the forms of export advances and letters of ereditrust receipts ‘accommodations. Petitioner bank issued nine promissory notes, marked as Exhibits A to I inclusive, each of which were siniformly worded in the following manner: a after date, for value received, Live, 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 x x x" On the right bottom margin ofthe promissory notes appeared the signatures of Shozo Yamaguchi and Fermin Canlas above their printed names with the phrase “and (in) his personal capacity” typewritten below. At the bottom of the promissory notes appeared: "Please eredit proceeds of this note to ‘Savings Account __XX Current Account No. 1972-00267-6 of WORLDWIDE GARMENT MFG. corp. ‘These entries were separated from the text of the notes with a bold line which ran horizontally across the pages. In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment Manufacturing, Inc. was apparently rubber stamped above the signatures of defendant and private respondent, On December 20, 1982, Worldwide Garment Manufacturing, Inc. vot ed to change its corporate name to Pinch Manufacturing Corporation. On February 5, 1982, petitioner bank filed a complaint for the recov- ‘ery of sums of money covered among others, by the nine promissory notes ‘with interest thereon, plus attorney's fees and penalty charges. The complaint was originally brought against Worldwide Garment Manufacturing, Inc. inter alia, but it was later amended to drop Worldwide Manufacturing, Ine, as defendant and substitute Pinch Manufacturing Corporation in its place. Defendants Pinch Manufacturing Corporation and Shozo Yamaguchi did not file an Amended Answer and failed to appear at the scheduled pre- trial conference despite due notice. Only private respondent Fermin Canlas filed an Amended Answer wherein he denied having issued the promissory ‘notes in question since according to him, he was not an officer of Pinch Man ‘facturing Corporation, but instead of Worldwide Garment Manufacturing, Ine., and that when he issued said promissory notes in behalf of Worldwide Garment Manufacturing, Ine, the same were in blank, the typewritten en- ‘ries not appearing therein prior to the time he affixed#2 [NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME 1 In the mind of this Court, the only issue material to the resolution of this appeal is whether private respondent Fermin Canlas is solidarily liable with the other defendants, namely Pinch Manufacturing Corporation and Shozo Yamaguchi, on the nine promissory notes. We hold that private respondent Fermin Canlas is solidarily liable ‘on each of the promissory notes bearing his signature forthe following rea- ‘The promissory notes are negotiable instruments and must be gov- cerned by the Negotiable Instruments Law. Under the Negotiable Instruments Lew, 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. Based on the above provisions of law, there is no denying that private respondent Fermin Canlas is one of the co-makers of the promissory notes. As such, he cannot escape liability arising therefrom. Where an instrument containing the words “I promise to pay” is signed by two or more perzons, they are deemed to be jointly and severally Tiable thereon, An instrument which begins with “I” “We,” or “Either of us” promise to pay, when signed by two or more persons, makes them solidarily Hable, ihe fact that the singular pronoun is used indicates that the promise is individual as to each other; meaning that each of the co-signersis deemed tohave made an independent singular promise to pay the notes in full In the case at bar, 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. A joint and several hte is one in which the makers bind themselves both jointly and individu- ally o the payee so that all may be sued together for its enforeement, or the creditor may select one or more aa the object of the suit. A joint and several ‘obligation in common law corresponds to a eivilInw solidary obligation; that is, one of several debtors bound in such wise that each is lible for the en tire amount, and not merely for his proportionate share. By making a joint ‘and several promise to pay to the order of Republic Planters Bank, private respondent Fermin Canlas assumed the solidary liability of a debtor and the payce may choose to enforce the notes against him alone or jointly with ‘Yamaguchi and Pinch Manufacturing Corporation as solidary debtors. As to whether the interpolation of the phrase and (in) his personal capacity” below the signatures of the makers in the notes will affect the liability of the makers, We do not find it necessary to resolve and decide, be- ‘cause itis immaterial and will not affect the liability of private respondent Fermin Canlas as a joint and several debtor of the notes. With or without the presence of said phrase, private respondent Fermin Canlas is primarily linble as a co-maker of each ofthe notes and his lability is that ofa solidary debtor. Chapter 4 , TRANSFER AND NEGOTIATION MODES OF TRANSFER. Negotiation is defined in Section 191 of the NIL as the transfer of the instrument from one person to another so as to constitute the transferee the holder thereof. The said holder may, in proper cases, be a holder in due course who is free from personal defenses of prior parties, Such feature of negotiable instruments is central to its function as a substitute for money. “The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money.”: A. _NON-NEGOTIABLE INSTRUMENTS. fan instrument is not negotiable, it ean still be transferred but only through assignment. The transferee is an assignee who ‘merely steps into the shoes of the transferor. The transferee cannot bea holder in due course and he is therefore subject tothe defenses of prior parties. For example, M (maker) issued a non-negotiable promissory note to P (payee) promising to pay the latter P10,000.00. ‘The note was issued because P promised to deliver a television set to M. Before the maturity date, P discounted the note with A for 9,500.00. Without A’s knowledge, P failed to deliver the television set that was agreed upon. There is nothing.in thenote which indicates that there was non-delivery. In this case, M can still refuse to pay A. Since the seller (P) did not deliver what was agreed upon, the buyer (Qf) can also refuse to pay the price agreed upon. M can still claim that he is not liable because P failed to deliver the television set. He “Traders Royal Bank v. Court of Appeals ea, G.R. No. 93397, March 3, 1997, {80 SCAD 12, 269 SCRA 15, 26; Firestone Tire & Raber Company of the Philippines ¥. Court of Appeals, G.R. No. 118236, March 5, 201,148 SCAD 127 ‘Consolidated Plywood Industries, Inc. v. IFC Leasing and Aceeptance Corpo- ration, supro; Salas v. Hon. Cour of Appeals, supra. 80oa [NOTES AND CASES ON [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME | ‘can raise this as a defense against A because A merely stepped into the shoes of P. B, NEGOTIABLE INSTRUMENT. If the instrument is negotiable, voluntary transfer thereof can be effected either through negotiation or through assignment. If the instrument is merely assigned, the transferee does not become a holder and he merely steps into the shoes of the transferor. Any defense available against the transferor is available against the transferee. This may happen, for instance, if the prescribed formal requirements for negotiation are not complied with as in the case where indorsement is required but is absent, ‘The Supreme Court explained the most important difference between assignment and negotiation of negotiable instruments in Salas v. Court of Appeals:* “x x x Any subsequent purchaser thereof will enjoy the advantages of being a holder of a negotiable instrument, but will ‘merely ‘step into the shoes’ of the person designated in the instrument and will thus be open to all defenses available against the latter. Such being the situation in the above-cited case, it, ‘was held that therein private respondent is not a holder in due course but a mere assignce against whom all defenses available to the assignor may be raised.” Itshould be emphasized, however, that the distinction between negotiation and assignment of negotiable instruments is immaterial tothe holder where there is no available defense between the parties. There would still be an effective transfer of credit to the transferee even if the transfer is by way of assignment and the assignee can recover from the person liable. Likewise, the distinction may be immaterial between immediate or contracting parties or privie because defenses may always be raised against each other based on their contract. Moreover, it should also be pointed out that there are also warranties even if the mode of transfer is assignment. In other ‘words, the transferor also gives warranties at the time he assigned the instrument. Assignment is in the nature of sale and the assignor is therefore bound by certain warranties in favor of the assignee. For example, the assignor warrants the existence and legality of the "Supra PARTI - NEGOTIABLE INSTRUMENTS 85 (CHAPTER 4 — TRANSFER AND NEGOTIATION credit at the time of the sale under Article 1628 of the New Civil Code. a. Other Modes of Transfer. Note that the mode of transfer may also be through means that are not through the positive act of the transferor. These include cases involving transfer by operation of law. Included is transfer through intestate succession. ©. DISTINCTIONS BETWEEN ASSIGNMENT AND NEGOTIATION. NEGOTIATION ASSIGNMENT Te apt tae: Negi: Code Pins Sean © fab pe of raancinin | mn ol msg strument: Negotiable instru- | rights. ceed 3 tote tar res |e eins ao The rate ia er who Be eee cen 7 fatete ety besos [ia aaiew wa ore itera tence nase The entre on ea der mhcwots pneu © eetirighnnperst [awn cc aqare are The. transfer may Hts a he tar bce er Te ma an [ie mee eT oe is eens © ar analy of praia wanton eae sea Pol dane The wnat may bo te tease Se ee eee “Sonny Lav. KIS Eco-Formwork System Phil, Ine, GR No, 149420, October 8, 200386 NOTES AND CASES ON [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME T CASES: RAUL SESBRENO v. HON. COURT OF APPEALS IG.R. No. 89252, May 24, 1993] 222 SCRA 466 [On February 9, 1981, RB made a money market placement in the ‘amount of P300,000.00 with Philfinance that would mature on March 13, 1981. On the same date, Philfinance executed a Certificate of Confirmation of Sale in favor of RB over a Promissory Note (DMC PN No. 2731 ) executed bby Delta in favor of Philfinance and which PN was kept by Pilipinas Bank (as evidenced by a Denominated Custodian Receipt, DCR No. 10805). Phil- finance delivered DCR No. 10805 to RB on March 26, 1981. It reads as fo ows: “PILIPINAS BANK Makati Stock Exchange Bldg., ‘Ayala Avenue, Makati, Metro Manila February 9, 1981 VALUE DATE TO Raul Sesbreto, April 6, 1981 ‘MATURITY DATE. NO. 10805 DENOMINATED CUSTODIAN RECEIPT ‘This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITERS| FINANCE CORPORATION, we have in our eustody the following securities {to.you (sc) the extent herein indicated. SERIAL MAT. FACE ISSUED REGISTERED AMOUNT NUMBER DATE VALUEBY HOLDER PAYEE 2731 4-6-81 2,300,899.34 DMC PHIL. 307,993.33. UNDERWRITERS FINANCE CORP. We further certify that these securities may be inspected by you or your duly authorized representative at any time during ‘regular banking hours. Upon your written instructions we shall undertake physical delivery of the above securities fully assigned to you should PART I — NEGOTIABLE INSTRUMENTS a (CHAPTER 4 — TRANSFER AND NEGOTIATION this Denominated Custodianship Receipt remain outstanding in ‘your favor thirty (30) days after its maturity.” PILIPINAS BANK (By Blizabeth De Villa Mlegible Signature)” On April 2, 1981, RB demanded from Pilipinas Bank the delivery of Delta's PN. Itwas then that RB discovered that the PN bears a stamp ‘NOT. NEGOTIABLE." The bank did not release the PN; thereafter RB demanded ‘payment from Delta but the latter refused to pay on the ground that the obli- zation covered by the PN was already subject of offsetting or compensation. with an obligation owed by Philfinance. ISSUBS: (1) Whether or not rights can be acquired by RB over the PN ‘even ifthe instrument is stamped "NON-NEGOTIABLB"; (2) Whether or not RB can recover from Delta} We consider Delta's arguments seriatim. Firstly, itis important to bear in mind that the negotiation of a negotiable instrument must be distinguished from the assignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The logal consequences of negotiation a8 distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or transfer writen in the face ofthe instrument: “The words not negotiable’ stamped on the face of the bil of lading, did not destroy its assignability, but the sole effect was to exempt the hl from the statutory provisions relative thereto, and a bill, though not negotiable, maybe transferred by assignment; the assignee taking subject tothe equities between the original parties.” (Emphasis added) DMC PN No. 2731, while marked “non-negotiable,” was not at the sme time stamped “non-transferrable” or “non-assignable.” It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note. Delta adduced the “Letter of Agreement” which it had entered into with Philfinanee and which should be quoted in ful:8 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME “April 10, 1980 Philippine Underwriters Finance Corp. 2 St, Makati Attention: Mr. Alfredo O. Ba SVP-Treasurer GENTLEMEN: ‘This refers to our outstanding placement of P4,601,666.67 ‘as evidenced by your Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981, As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted (sie) against your PN No. 143-A upon co terminal maturity. Please deliver the proceeds of our PNs to our representative, Mr. Erie Castillo Very Truly Yours, (Sed) Florencio B. Biagan Senior Vice President” We find nothing in this “Letter of Agreement” which ean be reason- ably construed as a prohibition tupon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof, It is scarcely necessary to add that, even had this “Letter of Agreement” set forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration in good faith and without notice of such prohibition It is not disputed that petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of promissory notes was this: Delta i vested, by making a money market placement with Philfinance, approxi- ‘mately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk ofthat placement, Le, P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was let with not P4,600,000.00 ‘but only P600,000.00 in cash and the two (2) Delta promissory notes. Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the assignment in favor of petitioner. Delta's argument that Philfinance's PARTI — NEGOTIABLE INSTRUMENTS "9 (CHAPTER 4 — TRANSFER AND NEGOTIATION sale or assignment of part ofits rights to DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mis taken. Conventional subrogation, which in the first place is never lightly inferred, must be clearly established by the unequivocal terms of the substi- tuting obligation or by the evident incompatibility of the new and old obligations on every point, Nothing ofthe sort is present in the instant case tis in fact dificult to be impressed with Delta’s complaint, since it released its DMC PN No, 2731 to Philfinance, an entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in money market transactions. In Perez v. Court of Appeals, the Court, speaking through Mime. Justice Herrera, made the following important statement: “There is another aspect to this ease. What is involved here is a money ‘market transaction. As defined by Lawrence Smith ‘the money market i market dealing in standardized short-term credit instruments (invol large amounts) where lenders and borrowers do not deal directly with each other but through a middle man or dealer in the open market.’ It involves ‘commercial papers’ which are instruments ‘evidencing indebtedness of any person or entity . .. which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse. ‘The fundamental function of the money market device in its operation is to ‘match and Dring together in a ost impersonal manner but the ‘aad us: ers’ and the fund suppliers.’ The money market is an ‘impersonal market, {free from personal considerations.’ The market mechanism is intended to provide quick mobility of money and securities ‘The impersonal character of the money market device overlooks the individual or entities concerned. The issuer of a commercial paper in the money market necessarily knows in advanoe that it would be expeditiously transacted and transferred to any investor lender without need of notice to ‘said iseuer. In practice, no notification is given to the borrower or issuer of commercial paper ofthe sale or transfer to the investor. ‘There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial scene. It has been intended to facilitate the low and acquisition of capital on an impersonal basis, And as specifically required by Presidential Decree No. 678, the investing public ‘must be given adequate and effective protection in availing of the credit of ‘a borrower in the commercial paper market.” (Citations omitted; emphasis supplied) We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is ‘important to note that at the time Philfinance sold part of ite rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had0 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME I as yet taken place and indeed none could have taken place. The essential requirements of eompensation are liste in the Civil Code as follows: “Art. 1279, In order that compensation may be proper, its necessary: (1) That each one of the obligors be bound principally, tnd that he he at the same time a principal creditor of the oth- (2) That both debts consist in a sum of money, or ifthe things due are consumable, they be ofthe same kind, and also of the same quality if the latter has been stated; (3) ‘That the two debts are due; (A) That they be liquidated and demandable; (6) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.” (Emphasis supplied) (On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April 1980 “Letter of Agreement” with Philfinance, where Delta acknowledged that the relevant promissory notes were “to be offsetted (si) against (Phil- finance] PN No. 143-A upon co-terminal maturity.” ‘As noted, the assignment to petitioner was made on 9'Februry 1981 ‘or from forty-nine (49) days before the “eo-terminal maturity” date, thatis to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation from taking place between Philfinance and Delta to the extent of P904, 533,33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have ‘ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we con- clude that the assignment effected by Philfinance in favor of petitioner was valid one and that petitioner accordingly became owner of DMC PN No. 2781 to the extent ofthe portion thereof assigned to him. ‘The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, that is, after the maturity not only of the money market placement made by petitioner but also of both DMC PN No, 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by operation of law because the offsetting instruments had hoth reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater than the rights ofthe assignor, since the assignee is merely substituted in the place ofthe assignor and that the assignee acquires his rights subject to the equities, ic, the defenses — which the debtor could PARTI ~ NEGOTIABLE INSTRUMENTS a (CHAPTER 4 — TRANSFER AND NEGOTIATION hhave set up against the original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil Code provides that: “ART, 1285, The debtor who has consented to the assign- ‘ment of rights made by a creditor in favor of third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was hotified by the debtor at the time he gave his consent, that he ‘reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter,may set up the compensation of debts previous to the cession, but not of subsequent If the ossignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the ‘same and also later ones until he had knowledge of the assign: ment.” (Emphasis supplied. Article 1626 ofthe same Code states that: “the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation.” In Sisdn v. Yap-Tico, the Court explained that: {ule man is bound to remain a debtor; he may pay to him with whom he contracted to pay; and if he pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to give his debtor notice.” At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to It bears some emphasis that petitioner could have notified Delta of ‘the assignment in his favor as soon as that assignment or aale was effected ‘on 9 February 1981. He could have also notified Delta as soon as his money market placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC PN No. 2731. Again, petitioner could have notified Delta ‘on 26 March 1981 when petitioner received from Philfinance the Denomi- nated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do s0, and because the record is bare of any indication2 NOTES AND CASES ON [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME 1 that Philfinance had itselfnotified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private respondent Delta, Ofcourse, Philfinance remains lisble to petitioner under the terms ofthe assignment made by Philfinance to petitioner. CONSOLIDATED PLYWOOD, INC. v. IFC LEASING AND ACCEPTANCE CORPORATION [G.R. No, L-72599, April 30, 1987) 149 SCRA 448, ‘The petitioner is a corporation engaged in the logging business. Tt hhad for ite program of logging activities for the year 1978 the opening of additional roads, and simultaneous logging operations along the route of said roads, in ts logging concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it needed two (2) additional units of tractors. Cognizant of petitioner-corporation’s need and purpose Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing ‘arm, Industrial Products Marketing (the “seller-assignor”), a corporation dealing in tractors and other heavy equipment business, offered to sell to petitioner-corporation two (2) “Used” Allis Crawler Tractors, one (1) an HD- 2LB and the other an HD-16-B, In order to ascertain the extent of work to which the tractors were to be exposed (ts.n., May 28, 1980, p. 44), and to determine the capability of the “Used” tractors being offered, petitioner-corporation requested the seller-assignor to inspect the jobsite. After conducting said inspection, the seller-assignor assured petitioner-corporation that the “Used” Allis Crawler ‘Tractors which were being offered were fit for the job, and gave the corresponding warranty of ninety (90) days performance of the machines and availablity of parts (ts.n., May 28, 1980, pp. 59-66). With said assurance and warranty, and relying on the seller-assign- cor’ skill and judgment, peitioner-corporation through petitioners Wee and ‘Vergara, president and vice-president, respectively, agreed to purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (P210,000.00). On April 5, 1978, the seller-assignor issued the sales invoice for the ‘wo (2) units of tractors (Exh. "3-A") At the same time, therdeed of sale with chattel mortgage with promissory note was executed (Exh. “2” ‘Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the seller-assignor, by means of a deed of assignment (Exh. “I"), assigned its rights and interest in the chattel mort szage in favor of the respondent, Immediately thereafter, the seller-assignor delivered said two (2) ‘units of “Used” tractors to the petitioner-corporation’s jobsite and as agreed, PARTI — NEGOTIABLE INSTRUMENTS 99 . CHAPTER 4 — TRANSFER AND NEGOTIATION the seller-assignor stationed its own mechanics to supervise the operations of the machines. Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after another nine (9) days, the other tractor likewise broke down. (t.s.n., May 28, 1980, pp. 68-68), On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assigmor ofthe fact that the tractors broke down and requested for the seller-assignor's usual prompt attention under the warranty. (Exh. *5") In response to the formal advice by petitioner Rodolfo T. Vergara, Ex- hibit “6,” the seller-assignor sent to the jobsite its mechanics to conduct the necessary repairs (Exhs. 6," "6-8," °6-B," "6.C,” “6-C-1," 6-D," and "GE", but the tractors did not come out to be what they should be after the repairs wore undertaken because the units were no longer serviceable. (t..n., May 28, 1980, p. 78). Because of the breaking down of the tractors, the road building end simultaneous logging operations of petitioner-corporation were delayed and Petitioner Vergara advised the seller-assignor that the payments of the in- ‘tallments as listed in the promissory note would likewise be delayed un. til the seller-assignoy completely fulfils its obligation under its warranty. (tsn., May 28, 1980, p. 79) Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor to pull out the units and have them reconditioned, and thereafter to offer them for sale, The proceeds were to be given to the respondent and the exéess, if any, to be divided between the seller-assignor and petitioner-corporation which offered to bear one-half (1/2) of the reconditioning cost (Exh. “7), No response to this letter, Exhibit “7,” was received by the petitioner- corporation and despite several follow-up calls the seller-assignor did noth- ‘ing with regard to the request, until the complaint in this ease was filed by the respondent against the petitioners, the corporation, Wee, and Vergara. (The trial court rendered judgment in favor ofthe respondent and the defen dants were ordered to pay principal plus accrued interest. The decision was ‘affirmed in toto by the then Intermediate Appellate Court.) ‘The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as well as the resolution dated October 17, 1985 and dismissing the complaint but granting petitioners’ counterclaims before the court of origin, _On the other hand, the respondent corporation in its comment to the petition fled on February 20, 1986, contended that the petition was filed out oftime; that the promissory note is a negotiable instrument and respondent94 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME 1 holder in due course; that respondent is not liable for any breach of warranty; and finally, that the promissory note is admissible in evidence. ‘The core issue herein is whether or not the promissory note in question is a negotiable instrument so as to bar completely all the available defenses ofthe petitioner against the respondent-assignee. Initially, the Supreme Court explained that there was breach of warranty ‘on the part ofthe seller-assignor — the payee of the PM ~ who assigned its Tight to respondent IFC Leasing. The Supreme Court cited Articles 1561, 1662, 1564 and 1566 ofthe Civil Code] tis patent then, thatthe sller-assignoris liable for its breach of warranty against the petitioner. This liability asa general rule, extends to the ‘corporation to whom i assigned it rights and interests unless the assignee isa holder in due course of the promissory note in question, assuming the note is negotiable, in which ease the latter’ rights are based on the nego- ‘able instrument and assuming further that the petitioney’s defenses may not prevail against it % Secondly, it ikewise cannot be denied that as soon as the tractors broke down, the petitioner-corporation notified the seller-assignor’s sister company, AG & P, about the breakdown based on the seller-assignor’s express 90-day warranty, with which the latter complied by sending its me- ‘chanics. However, due to the selle-assignor’s delay and its failure to comply with its warranty, the tractors heeame totally unserviceable and useless for the purpote for which they were purchased. ‘Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor. Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller.assignor, necessarily ean no longer sue the seller-assignor except by way of counterclaim if the seller-assignor sues it because of the rescission. Going back to the core issue, we rule that the promissory note in question is not a negotiable instrument. ‘The pertinent portion of the note is as follows: “FOR VALUE RECEIVED, Uwe jointly and severally promise to pay to the INDUSTRIAL PRODUCTS MARKET. ING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P1,093,789.71), Philippine Currency, the said prineipal sum, to be payable in 24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid.” PART NecomiAnLE misrMUMENTS CHAPTER 4 — TRANSFER AND NEGOTIATION in Considering that paragraph (@), Sesion 1 of the Negotiable Instr sons Law eqs tht «promise "mast b pnb re rer" cannot be denied thatthe Promissory note fn quetion cca a negotiable instrument. " iiclaalon " “The instrament in oder ob contidered negotiable mu contain the socalled ‘words of negtiabiity’, Le, sant be ase ‘let ‘order or bearer’ These words serve asa expen Consent thatthe instrument maybe tranoforred. Tas coneeat Indispensable since maker assumes greater rick nde negotiable instrument than under nownepeiale on, “When instrument is payable to order. — “SEC. 8. WHEN PAYABLE TO ORDER. ~ The instr ‘enti payable to order where its drawn payable tthe oor of a specified person or to him or his order ve ie “These re the oly two ways hy whch an instrument ma bemade payable to order. There must alwaya bet tpctied ea sennamed in tho intent nena tt the ae aes tobe pid to the person designate inthe Instrument rae ron to whom he has indrsed and delivered the tare, Wa Out the words or ardr’or to the oder af the instromuey payable only tothe person designated thoren ant these tonenegtale, Any nubeeent purchaser theret wil eto jp the advantages of being «holder ofa negate inetrcac, but will merely stp into th shoe ofthe person designated the instrument and wll thon be open taal daneee seat aan! he ata” (Canpon ad Gomi, Netra cee anes on Negotiable Inatruments Law, Tina Baion oy (Emphasis supplied) Se ‘Therefore, considering tha the subject promissory nates {able instrument, follows that the respondent can never be shakes le course bt remains a mere assignee othe note in sueaion Thee ae Petitioner may raise against the respondent all defenses available to it as aginst the sllerassgnor, Industral Products Markets This being so, there was no need forthe petit seller-assigor when it was sued by the respondent arepnee benead Petitioner's defenses apply to both or either of them. eee Actually, the records show that even thi ine even the respondent itself admitted to being a mere assignee of the promissory note in question, to witt% NOTBS AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME I Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable instrument, the respondent cannot be ‘a holder in due course for a more significant reason. ‘The evidence presented in the instant ease shows that prior to the ‘sale on installment of the tractors, there was an arrangement between the seller-assignor, Industrial Products Marketing, and the respondent whereby the latter would pay the seller-assignor the entire purchase price and the seller-assigor, in turn, would assign its rights to the respondent which ‘acquired the right to collect the price from the buyer, herein petitioner Con- solidated Plywood Industries, Inc. ‘A mere perusal ofthe Deed of Sale with Chattel Mortgage with Promis- sory Note, the Deed of Assignment and the Disclosure of Loan/Credit Trans- faction shows that said documents evidencing the sale on installment of the tractors were all executed on the same day by and among the buyer, which is herein petitioner Consolidated Plywood Industries, Ine; the seller-a signor which isthe Industrial Products Marketing; and the assignee-financ- {ng company, which is the respondent. Therefore, the respondent had actual, knowledge of the fact that the seller-assignor’s right to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors sold were not defective. The respondent knew that when the trac tors turned out to be defective, it would be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners. Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith, is nota holder in due course, As such, the respondent is subject to all, defenses which the petitioners may raise against the seller-assignor. Any other interpretation would be most inequitous to the unfortunate buyer who js not only saddled with two useless tractors but must also face a lavesuit from the assignee forthe entire purchase price and al its incidents without being able to raise valid defenses available as against the assignor, II HOW NEGOTIATION TAKES PLACE. A. ISSUANCE. ‘The first incident in the life of a negotiable instrument is its preparation, complete with all the requirements of negotiability under Section 1. This incident is followed by its transfer to the payee, ‘the process known as issuance. Section 191 of the NIL defines “issue” as the first delivery of the instrument complete in form to a person who takes it as a holder. Issuance to the payee is negotiation because the transfer constitutes the payee the holder of the instrument. The majority view is that the payee can even be a holder in due course. PART I — NEGOTIABLE INSTRUMENTS 97 (CHAPTER 4 — TRANSFER AND NEGOTIATION It can be inferred from the definition of the word “issue” that delivery is the final act essential to the consummation of the instru- ‘ment as an obligation. Without delivery, the instrument cannot be deemed to have been issued. Delivery is defined as the transfer of possession of the instrument by the maker or drawer with the intention to transfer title to the payee and recognize him as holder thereof Delivery means more than handing over to another; it imports such transfer of the instrument to another as to enable the latter to hold it for himself* B. SUBSEQUENT NEGOTIATION. 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 completed by delivery. A negotiable instrument that is paysble to bearer may be negotiated by mere delivery. No further act other than delivery is necessary in order to negotiate the instrument and to make the transferee a holder.” On the other hand, an order instrument may be negotiated by indorsement completed by delivery. Without indorsement, the negotiation is incomplete and the transferee does not become a holder. In both cases, delivery must be intended to give effect to the transfer of the instrument. Section 16 of the NIL provides that “as between immediate parties and as regards a remote party other than 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 he; 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 the instrument.” It is likewise provided that “where the instrument ‘Dela Victoria v. Hon. Burgos, fa, G.R. No, 111190, June 27,1985, 28CAD 112, 245 SCRA 374, 979. ‘Lewis County v. State Bank, 31 da. 244, 170 P. 96 (1918), citing Brostow, Buss Notes ano Cites, 2nd Ed, p13. “Caltex (Philippines) v, Court of Appeals, pra,96 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME I 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.” a. Other Purposes of Transfer. ‘Thus, it may be established as against a holder other than fa holder in due course that the delivery was not intended as an absolute transfer of title. Section 16 provides that “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.” For instance, it may be established that delivery was only for the purpose of safekeeping and this may be proved against a holder who is not in due course, b, _Indorsement of Bearer Instrument. It should likewise be noted that a bearer instrument can also bbe negotiated by indorsement and delivery. Although indorsement is not necessary, the NIL does not prohibit such indorsement. Tt is, provided in Section 40 of the NIL, however, that: ‘Sec, 40, Indorsement of instrument payable to bearer, — Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but any person indorsing specially is liable as indorser to only such holders as make title through his indorsement. ‘This means that a bearer instrument is always a bearer instrument in the sense that even if it is indorsed specially, it ean be further negotiated by mere delivery. (See Chapter 5 for discussion of liability of indorsers of bearer instruments.) PROBLEMS: 1, _X makes a note payable to bearer, and delivers the same to Y. ¥ indorses it to Z in this manner: “Pay to Z, sgd. Y.” Later Z without indorsing the promissory note transfers and delivers the same to R. The note is subsequently dishonored by X. May R hold X liable? Reason, A. Yes R may hold X liable, The instrument is a bearer instrument, hence, the special indorsement did not convert PARTI — NEGOTIABLE INSTRUMENTS (CHAPTER 4 — TRANSFER AND NEGOTIATION * the instrument into an order instrument. Section 40 of the NIL provides that “where the instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery. Hence, delivery constitutes negotiation ofthe instrument to R and he became a holder of the instrument. (1975 Bar) 2 Richard Clinton makes a promisory ne payable to bearer and elivers the same to Aurora Page. Aurora Page, however, indorses it to Xin this manner rictanind “Payable to X. Signed: Aurora Page” Later, witout indorsing the promissory note, rants and aaiver th tan apton Rardin sane Wy dahonos the note, May Napleonproeed guia Clinton for the note? dois en ‘A: Yes, Napoleon may proceed against Richard Clinton. The instrument was negotiated by delivery to Napoleon. De- spite the special indorsement of Ms. Page it ean still be negotiated by delivery because it is originally a bearer instrument. (Section 40 of the NIL). Hence, Napoleon be- ‘came a holder who has the right ta enforce the inetrument ‘against the maker, Richard Clinton, (1998 Bar)" CASES: MANUEL LIM AND ROSITA LIM v. COURT OF APPEALS AND PEOPLE OF THE PHIL. [G.R. No, 107898, December 19, 1995] 251 SCRA 409 (Spouses Manuel Lim and Rots Lim (Lond Rt) purchased good ; ia Lim pu from Linon Camera Company, Ie Compa I pnment hee the ret chs gata characte pyolsteoder Cong ty. The calor of Company pic up the checkin the fie of ML od in Coleoees City and remitted the same in the office of L Company in Navo- tos When criminal ee for sain of BP Bg 2 ts ft the rel ot ing ursicton over Neots, ME ond RL moved to ucah the inal ae een that the case should have been filed in Caloocan te the check were nue nthe Calotan iy. Dic thao Navotas have jurisdiction over the case?) a "Seo also Bar 1967, 1988 and 1997100 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME In determining proper venue in these cases, the following acts material and essential to each crime and requisite to its consummation must be considered: (a) the seven (7) checks were issued to LINTON at its place of business in Balut, Navotas; (b) they were delivered to LINTON at the ‘Game place; (c) they were dishonored in Caloocan City; and (@) petitioners hhad knowledge of the insufficiency of their funds in SOLIDBANK at the time the checks were issued, Since there is no dispute that the checks were fishonored in Calooeen City, it is no longer necessary to diseuss where the checks were dishonored. Under Sec. 191 of the Negotiable Instruments Law the term “issue” ‘means the first delivery of the instrument complete if form to a person who fakes it as a holder. On the other hand, the term “holder” refers to the payee or indorsee of a bill or note who isin possession of it or the bearer thereof. In People v, Yabut this Court explained — ‘The place where the bills were written, signed, or dated does not necessarily fx or determine the place where they were executed. What is of Gecisive importance is the delivery thereof. The delivery of the instrument {s the final act escential to its consummation as an obligation. An undeliv- ‘ered bill or note is inoperative. Until delivery, the contract is revocable. And the issuance as well as the delivery of the check must be to a person who takes it as a holder, which means (Che payee or indorsee of a bill or note, ‘who isin possession of it, or the bearer thereof. Delivery of the check signi fies transfer of possession, whether actual or constructive, from one person. to another with intent to transfer ttle thereto Although LINTON sent a collector who received the checks from petitioners at their place of business in Caloocan City, they were actually i sued and delivered to LINTON at its place of business in Balut, Navota ‘The receipt of the checks by the collector of LINTON is not the issuance ‘and delivery to the payee in contemplation of law. The collector was not the person who could take the checks as a holder, ic, a8 a payee or indorsee thereof, with the intent to transfer title thereto. Neither could the collector be deemed an agent of LINTON with respect to the checks because he was a ‘mere employee. As this Court further explained in People v. Yabut Modesto Yambao's receipt of the bad checks from Cecilia Oue Yabut cor Geminiano Yabut, Jr. in Caloocan City cannot, contrary to the holding fof the respondent Judges, be licitly taken as delivery of the checks to the complainant Alida P, Andan at Caloocan City to fx the venue there. He did hot take delivery of the checks as holder, i, as ‘payee’ or ‘indorsce,’ And there appears to be no contract of agency between Yambao and Andan s0 25 to bind the latter for the acts ofthe former. Alicia P. Andan declared in that ‘sworn testimony before the investigating fiscal that Yambao is but her ‘mes- Senger or ‘part-time employee. There was no special fiduciary relationship that permeated their dealings, For a contract of agency to exist, the consent of both parties is essential. The principal consents that the other party, the ‘agent, shall act on his behalf, and the agent consents so as to act. It must PARTI — NEGOTIABLE INSTRUMENTS 101 (CHAPTER 4 — TRANSFER AND NEGOTIATION cxst at a fact. The law makes no presumption theret. The person allen Shae harden prs n how ntl thet often itenatore and extent Section 2 of B.P. Blg, 22 establishes a prime facie evidence of knowledge of insufficient funds as follows: oe a Th taking dreving nd aoane of «check payment rene bythe beak boca of ince funds ined wth uch Sank when presented win sey (0) aye fom the a ofthe cs ‘halle prins face evden of kanwlodga ef tach inten of fond ot Crd lar ach maker or rower ap the bse theres te oman do ‘nme range rea liye ree fh cin ae eh eh ck ha The prima feta evdance bas oot buen overcome by petoners in che canen before bese they di ot pay LINTON the atounts due on the ches neither they make arangeent for payment nly the tame bank within five banking dapsafler rosving notes tht the check had nt ben pid bythe dene bank, tn Pep: Grove ting ‘People Manzoni web tai""noweige onthe per athe maker or drawer ofthe check of te fnaconey of hs ands taf eatin Ingeventaly, wheter the eosved be within ne ferry or anther™ Consequently, venue or jurisdiction lies either in the Court of Calvan City or Malan Moree, we ald in th sume Grespe and Manzanilla cases as reiterated in Lim v. Rodrigo that venue or jurisdic- tin determined bythe allegations inthe Information The Infometins inthe can under eonideration slog thatthe ofenses were emmited inthe Manipal of Nevotan whe i conrling and suficent to vest Siradeton upon the Reponal Tal Cour of Malabe, LORETO DE LA VICTORIA v. HON. JOSE P. BURGOS and RAUL SESBRENO_ [GR No, 111190, June 27, 1995) 245 SCRA 974 (Fiscal Bienvenido N. Mabanto, Jr is an Assistant City Fiscal in Mandaue City. As such, he receives his salaries in the form of checks from the De- partment of Justice through the City Fiscal. A Regional Trial Court upon {he instance of Judgrent credo of Fiscal Mabant, Raul. Sete, rrished one ofthe checks while sill in the hands of the Is the serie ne fe ‘ofthe City Fiscal. Is the Carnishent is considered a «species of attachment for reach crete being tte aden! dete ving him oma sca 3 Hgndon: Bmphase les on the phase belonging othe fudge Sebo sineet ithe al pent in resolving the mse sed102 [NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME [As Assistant City Fiscal, the source of the salary of Mabanto, Jr. is public funds, He receives his compensation in the form of checks from the Department of Justice through petitioner as City Fiscal of Mandaue City and head of office. Under Sec. 16 of the Negotiable Instruments Law, every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto, As ordinarily ‘understood, delivery means the transfer ofthe possession ofthe instrument by the maker or the drawer with intent to transfer title to the payee and recognize him as the holder thereof. ¥ According to the trial court, the checks of Mabanto, Jr., were already released by the Department of Justice duly signed by the officer concerned ‘through petitioner and upon service ofthe writ of garnishment by the sher- iff petitioner was under obligation to hold them for the judgment creditor. It recognized the role of petitioner as custodian of the checks. At the same time however it considered the checks as no longer government funds and presumed delivered to the payee based on the ast sentence of Sec. 16 of the Negotiable Instruments Law which states: “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.” Yet, the presumption is not conclusive because the last portion of the provision says “until the contrary is proved.” However, this phrase was deleted by the trial eourt for no appar- tent reason, Proof to the contrary is ite own finding that the checks were in the custody of petitioner. Inasmuch as said checks had not yet been deliv- cred to Mabanto, Jr, they did not belong to him and still had the character of public funds. In Tiro v. Hontanosas, we ruled that — ‘The salary check of a government officer or employee such as a teach: cer does not belong to him before itis physically delivered to him. Until that time the check belongs to the government. Accordingly, before there is actual delivery of the check, the payee has no power over it; he eannot assign it without the consent of the Government, As a necessary consequence of being public fund, the checks may not be garnished to satisfy the judgment. The rationale behind this doctrine is obvious consideration of public policy. The Court succinctly stated in Com. ‘missioner of Public Highways v. San Diego that — ‘The functions and public services rendered by the State cannot be allowed to be paralyzed or disrupted by the diversion of public funds from their legitimate and specific objects, as appropriated by law. In denying petitioner's motion for reconsideration, the trial court ex: pressed the additional ratiocination that it was not the duty of the gar- nisheo to inquire or judge for himself whether the issuance of the order of ‘execution, the writ of execution, and the notice of garnishment was justified, citing our ruling in Philippine Commercial Industrial Bank v. Court of Ap- ppeals, Our precise ruling in that case that “(I}t is not ineumbent upon the ‘garnishee to inquire or to judge for itself whether or not the order for the PARTI — NEGOTIABLE INSTRUMENTS 103 (CHAPTER 4 — TRANSFER AND NEGOTIATION advance execution of a judgment is valid” But that is invoking onty the general rule, We have also established therein the compelling reasons, as txceptions thereto, which were not taken into account by the tril court, fa defect on the face of the writ or actual knowledge by the garnishee of lack of entitlement on the part of the garnisher. Tes worth to nove that {he ruling refered tothe vlity of advance execution of judgmente, but a careful seruting ofthat case and similar cases reveals tat it was apiicable to a notice of garnishment as wel. Inthe case at bench, it was incumbent ‘pon petitioner to inquire into the validity ofthe notice of garnishment as hh had actual knowledge ofthe non-entitlement of private respondent to the checks in question. Consequently, we find no difficulty coneluing that the trial court exceeded its jurisdiction in issuing the notice of garnishment concerning the salary checks of Mabanto Jt in the possesion of petitioner. [The Supreme Court set aside the orders of the RTC and discharged the notice of garnishment.) DEVELOPMENT BANK OF RIZAL v. SIMA WEI, ET AL. IG.R. No. 85419, March 217 SCRA 743, [Sima Wei (SW) issued two crossed checks payable to Development Bank of Rizal (DBP) drawn against China Banking Corporation. The checks were supposed to have been issued in full settlement of SW's loan from DBP. The ‘too checks were not delivered to DBP. For reasons not known, they came into the possession of Lee Kian Huat who deposited the checks without indorse- ‘ments in the account of Plastic Corp. with Producer B Bank. Later, DBP ‘sued SW, Lee Kian Huat, Plastic Corporation and Producers Bank, based on ‘two causes of action: 1) To enforce payment of the checks, and 2) To enforce ‘payment ofthe balance of the unpaid loan. Will the action prosper? ‘The Supreme Court ruled that action will prosper against Sima Wei based ‘only on the second cause of action but not against the rest of the defendants. However, the Court ruled that it does not necessarily follow that the drawer ‘SW is freed from liability.) ‘The main issue before Us is whether petitioner Bank has a cause of action against any or all of the defendants, in the alternative or otherwise 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) legat right ofthe plaintiff (2) correlative obligation ofthe defendant; and (3) ‘an actor omission ofthe defendant in violation of said legal right. ‘The normal parties to a check are the drawer, the payee and the draw- fe bank. Courts have long recognized the business custom of using printed checks where blanks are provided for the date of issuance, the name of theNOTES AND CASES ON ™ BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOUUME! ee ee ee prin en era md res te A se eae es a ea ae ‘any liability on his part, until and unless the check is delivered to the payee Sle ie a ee Spe ra A ee au torte epee fai ee et cer oa CE ee ra “Every contract on a negotiable instrument is incomplete ‘and revocable until delivery of the instrument for the purpose of siving effect thereto. . eneaae ae ee a ope aaa nee aaa a sm hs an, rs oes een a crete emt Pen re Maton a dey eit ee re sn nnn ning ops et Sarees nee aaa eaten shred Ctr fen wee te cee spencer ye fre tr ee oe rs a ee nthe rina! complaint, petitioner Bank, a plant, ed repon- dent Sina Wolo the promipery note and te alterative detent, cluding Sina Wer on the wo checks, On apes rm the order of miss ct the Regional Tl Cour, einer Bank aloged that ease of ction tra at Tao on electing tn sumo money evince byt geile Iistruments sad but on guas-eit— dai for damages on he gon ottreudlon acs and evident bd faith ofthe aerativeeopndent This Starcom sn stamp hy the paitoner Bank to change not oly the teary its coo bathe bao his eum fection. ie we eed Sata prey ‘anol conoge theory en een su ix wold in ofves Speirs the eet tary dy in cour. Notwithstanding the above, it does not necessarily follow that the drawer Sima Wel i reed frum lability to pottoner Bank under the loan evidenced hy the promissory note agreed toby her. Her allegation that she has pad the balance ofr loan with the two checks payble to petitioner Bankhas no merit for, as Wehave earlier explained hee checks were nev- cr delivered to petitioner Bank. And even granting, without admiting, that there was delivery to petitioner Bank, the delivery of checks in payment of PARTI — NEGOTIABLE INSTRUMENTS 105 (CHAPTER 4 — TRANSFER AND NEGOTIATION an obligation does not constitute payment unless they are cashed or their ‘value is impaired through the fault ofthe 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 eause, 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, Ifat 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. C. INCOMPLETE NEGOTIATION OF ORDER IN- STRUMENT. Section 49 of the NIL governs cases where an order is delivered to another for the purpose of transferring title but no indorsement was made. It provides: 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 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. Based on the above-quoted provision, if negotiation of an order instrument is incomplete because of the absence of indorsement, the instrument is in effect merely assigned to the transferee. It is only at the time of indorsement that the transferee acquires all the rights of a holder. The requisites of a holder in due course must therefore be present at the time of such indorsement and not at the time of delivery. This means that any knowledge about any infirmity in the instrument, acquired after delivery but before indorsement, will Prevent the transferee from becoming a holder in due course.106 [NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME a. Equitable Assignment, ‘The transaction is an equitable assignment and the transferee acquires the instrument subject to defenses and equities available among prior parties. Thus, if the transferor had legal title, the transferee acquires such title and, in addition, the right to have the indorsement of the transferor and also the right, as holder of the legal title, to maintain legal action against the maker or acceptor or other party liable to the transferor. The underlying premise of Section 49 of the Negotiable Instruments Law, however, is that a valid transfer of ownership of the negotiable instrument in question, has taken place." b. No presumption. ‘The presumption of sufficiency of consideration and title that is enjoyed by holders of duly negotiated instruments will notbe enjoyed by the transferee contemplated under Section 49. The nature and effect of transfer without indorsement of an order instrument under Section 49 was further explained in this wise: ‘Transferees in this situation a not enjay the presumption ‘of ownership in favor of holders since they are neither payees nor indarsees of such instruments. The weight of authority is ‘that the mere possession of a negotiable instrument does not in itself conclusively establish either the right of the possessor to receive payment, or of the right of one who has made payment. tobe discharged from liability. Thus, something more than mere possession by persons who are not payees or indorsers of the instrument it necessary to authorize payment to them in the ‘absence of any other facts from which the authority to receive payment may be inferred, ‘The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrument was given for a sufficient consideration will not inure to the benefit of Salazar beeause the term “given” does not pertain merely to a transfer of physical possession of the instrument. The phrase “given ‘or indorsed” in the context of a negotiable instrument refers to the manner in which such instrument may be negotiated. Ne- gotiable instruments are negotiated by “transfer to one person ‘or another in such a manner as to constitute the transferee the ‘Bank of Philippine Islands v. Court of Appe ary 25, 2007 ol, GR, No, 198202, Jan PARTI — NEGOTIABLE INSTRUMENTS 107 (CHAPTER 4 — TRANSFER AND NEGOTIATION holder thereof. If payable to bearer it is negotiated by delivery. If payable to order it is negotiated by the indorsement completed by delivery.” The present case involves checks payable to order. Not being a payee or indorsee of the checks, private respondent Salazar could not be a holder thereof. It is an exception to the general rule for a payee of an order instrument to transfer the instrument without indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to prior holders to require possessors to prove without the aid of an initial presumption in their favor, that they came into possession by virtue of a legitimate transaction with the last holder. Salazar failed to discharge this burden, and the return ofthe check proceeds to Templonuevo was there fore warranted under the circumstances despite the fact that ‘Templonuevo may not have clearly demonstrated that he never authorized Salazar to deposit the checks or to encash the same. ‘Noteworthy also is the fact that petitioner stamped on the back of the checks the words: “All prior endorsements and/or lack of | endorsements guaranteed,” thereby making the assurance that it had ascertained the genuineness ofall prior endorsements. Having assumed the liability of a general indorser, petitioner's liability to the designated payee cannot be denied. ¢. Example of Right of Holder. For example, Mr. M through fraud was induced by Mr. A to issue a negotiable promissory note payable to the order of Mr. A. The payee, Mr. A, delivered the note to Mr. B on May 3, 2003 without indorsing it. On May 20, 2003, Mr. A, upon Mr. B's request, placed his indorsement at the back of the note: “Pay to B, Sgd. A.” If Mr. B learned about the fraud committed by Mr. A prior to May 20, 2003, Mr. B cannot be a holder in due course because he had knowledge of the defect of title of Mr. A at the time the negotiation ‘was made complete. He can be a holder in due course if he had no such knowledge at the time the indorsement was made on May 20, 2003. "Bank of Philippine Islands v. Court of Appeals, eal, ibid. ting 11 Am Jur 24, § 988, citing Doubleday v. Kress, 60 NY 410; Hoffmaster . Black, 4 NE 423, and First Nat. Bank v. Gorman, 21 P2d 649 and Campos Jr. and Lopex Campos, “Norss ‘ano SeuscreD Casts ox Naooruacs Ivers Lavy p. 108 (1994),108 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME D. INDORSEMENT. ‘a, Where indorsement should be placed. Indorsementis necessary to complete the negotiation ofan order instrument. It is most often written at the back of the instrument, itself. However, an indorsement on the face of the instrument is ‘equally effective, In fact, if there is doubt as to the nature of the signature appearing in the instrument, the presumption is that the person affixing the same did so as an indorser. In other words, in the absence of any indication to the contrary, the signature appearing ‘even on the face the instrument is deemed an indorsement. Section 31 of the NIL likewise provides that the indorsement may also ‘be made in the separate paper attached to the instrument called “allonge.” Section 31 provides: Sec.31.Indorsement; howmade.—Theindorsement 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. ‘The above-quoted provision requires attachment of the separate piece of paper where the indorsement is supposed to be made. Such attachment must be firmly affixed to the instrument so as to become part thereof, If this is not the case, then the paper on which the indorsement is made may be lost in the process of negotiation. For instance, a separate piece of paper attached to the instrument only by paper clip does not comply with the requirements of an allonge. ‘The weight of authority under the American Uniform Nego- tiable Instruments Law is that an allonge may not be utilized for indorsement if there is still sufficient space at the dorsal portion of the instrument itself. However, it is believed that the contrary view is more sound. ” b. Other rules on Indorsement. A promissory note which states that the maker promises to pay P20,000.00 should be indorsed for the same amount. An indorser cannot indorse the instrument for less than P20,000.00 because Section 32 of the NIL provides that indorsement must be of the entire instrument. If the instrument is indorsed for a lesser amount, the transfer is still effective but it is merely an assignment of credit. Thus, ifthe face value of the note is P100,000.00 and what ‘was indorsed only P30,000.00 ("Pay to A P30,000.00, Sgd. B”), the PARTI — NEGOTIABLE INSTRUMENTS. 109 (CHAPTER 4 — TRANSFER AND NEGOTIATION transfer of the negotiable instrument is a mere assignment." The only exception provided for under the same provision is when there ‘was previous partial payment. Hence, if the P20,000.00 note was already partially paid up to P10,000.00, the indorser can already indorse the same for the balance of 10,000.00. Sec. 32. Indorsement must be of entire instrument. —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, 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. (1) Negotiation of Indorsers Severally. Section 32 likewise disallows negotiation to two or more indorsees severally. This happens when the indorser indorses the instrument for the entire amount reflected therein but divides the ‘same to two or more persons. Thus, an indorsement of a P20,000.00 note that states “Pay to Jose Cruz, 15,000.00 and Pedro Santos 5,000.00" is mot considered negotiation although it may be solos thet Paes 0 indorsement provided for under the NIL are as follows: ‘Sec. 41, Indorsement where payable to two or more persons. — 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, ‘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 deemed prima facie to be payable to the bank or corporation of which he is such “"Montinolav. Philippine National Bank, eal, G.R, No, L-2861, February 26, 1951, 88 Phil. 178,194110 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME 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. — Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature. Sec. 44, Indorsement in representative capacity. Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. Sec. 45, Time of indorsement; presumption. — Ex- cept 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. Sec. 46. Place of indorsement; presumption. — Ex- cept where the contrary appears, every indorsoment Is presumed prima facie to have been made at the place where the instrument is dated. ec. Kinds of Indorsement. An indorsement may either be an indorsement in blank or a special indorsement. It may also be an indorsement that is restrictive, qualified, or conditional.” (1) Blank and Special Indorsement. Ina blank indorsement, no indorsee is specified and it is done by affixing the indorser’s signature. A special indorsement on the other hand, designates the indorsee. In other words, the indorser identifies the person to whom he intends to make the instrument payable. Sec. 34. Special indorsement; indorsement in blank. —A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and "Section 88, NIL. PARTI — NEGOTIABLE INSTRUMENTS, m CHAPTER 4 — TRANSFER AND NEGOTIATION 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. ‘Thus, an indorsement is a special indorsement if it appears as follows: "Pay to Rey Estrella, Sgd. Eric Francisco.” (2) Conversion of Blank to Special Indorsement, An order instrument is converted into a bearer instrument if the indorsement is in blank. Consequently, if the last indorsement is a blank indorsement, the risk of loss from theft is increased because the taker need not commit any forgery before he can validly negotiate the same. All he needs to do is to deliver it to an innocent transferee and the latter may become a holder in due course, To prevent this eventuality, the law allows the holder of the instrument, to convert the blank indorsement to a special indorsement. Section 35 of the NIL provides: Sec. 38. Blank indorsement; how changed to spe- clal 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. (8) Qualified Indorsement. Secondary contracts are accumulated whenever an instrument is indorsed because the indorser becomes secondarily liable, Thus, an indorser by placing his indorsement in the instrument is actually entering into two (2) contracts: 1) the contract for the assignment or transfer of his right over the instrument and 2) the secondary contract where he assumes secondary liability." If the indorser wants to transfer his rights over the instrument but does not want to assume responsibilities under the secondary contract, he may do so by resorting to what is known as qualified indorsement. Section 38 provides: 1 TCANPIS FF and Leper Campos, Navona Iermers Lam, 194 Ba Pp.uz NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME ‘Sec. 38 Qualified indorsement. — A qualified \dorsement 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 doe: ot impair the negotiable character of the instrument. By his qualified indorsement, the indorser disclaims his liability to any holder or any subsequent party who might be compelled to pay by another. He is only linble for breach of warranties under Section 65 of the NIL. Usually, he negatives liability by placing a notation “without recourse” or ‘sans recourse” on his special or blank indorsement. cas METROPOL (BACOLOD) FINANCING & INVESTMENT CORP. v. SAMBOK MOTORS CO., ET AL. IGR. No. 1-89641, February 28, 1983] 120 SCRA 864 [Sambok Motors Co. (SM Co. for short) indorsed to Metropol (Bacolod) Financing & Investment Corp. (MBFI for short) a negotiable note issued in its favor by Dr. Javier Villaruel (JV for short. The indorsement states: “Pay to the order of Metropol Bacolod Financing & Invest: ment Corporation with recourse. Notice of Demand; Dishonor; Protest; and Presentment are hereby waived. ‘SAMBOK MOTORS CO. (BACOLOD) By: RODOLFO @. NONILLO ‘Asst, General Manager” When Dr. JV failed to pay the note, MBFI proceeded against SM. SM. claims that itis not secondarily liable because it was a qualified indorser. Is the contention tenable?) ‘A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser'ssig- nature the words “without recourse” or any words of similar import. Such indorsement relieves the indorser of the general obligation to pay if the instrument is dishonored but not of the liability arising from warranties on the instrument as provided in Section 65 of the Negotiable Instruments PARTI — NEGOTIABLE INSTRUMENTS 13 (CHAPTER 4 — TRANSFER AND NEGOTIATION Law already mentioned herein, However, appellant Sambok indorsed the note “with recourse” and even waived the notice of demand, dishonor, protest and presentment. “Recourse” means resort tow person who is secondarily able after the default of the person who is primarily liable. Appellant, by indorsing the note “with recourse" does not make itself a qualified indorser but a general indorser who is secondarily liable, beeause by euch indorsement, it agreed ‘hat if Dr. Villaruel fails to pay the note, plaintiff-appellee 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 Sambol’s intention of indorsing the note without 4ualification is made even more apparent by the fact that the notice of de- ‘mand, dishonor, protest and presentment were all waived. The words added by said appellant do not limit his liability, but rather confirm his obligation as a general indorser. Lastly, the lower court did not err in not declaring appellant as only secondarily liable because after an instrument is dishonored by non-pay~ ment, the person secondarily liable thereon ceases to he stich and becomes 4 principal debtor. His liability becomes the same as that of the original obligor. Consequently, the holder need not even proceed against the maker before suing the indorser. (4) Conditional Indorsement. An indorsement that states that the payment should be made only when a specified shipment of goods reaches Manila is a conditional indorsement (i, “Pay Ariel San Gabriel upon arrival of 100 sacks of wheat at the Manila Port Area on or before January 2, 2005"). In an indorsement of this nature, there is no legal obligation to pay until the arrival of the goods; the indorsement is subject to a suspensive condition, However, Section 39 of the NIL allows payment by the obligor even before the happening of the event that. serves as a suspensive condition. Section 39 provides: 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.

Negotiable Instruments Timoteo Aquino

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