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It paid the down payment of P210,000
G.R. No. 72593 April 30, 1987
Lessons Applicable: Requisites of negotiability to April 5, 1978: IPM issued the sales invoice
antedated and postdated instruments (Negotiable and the deed of sale with chattel mortgage with
Instruments Law) promissory note was executed

FACTS: Consolidated (buyer pays promossor note) IPM, by means of a deed of

> IPM (seller-assignor who violated warranty) > assignment, assigned its rights and interest in the
IFC (holder in due course or merely an assignee?) chattel mortgage in favor of IFC Leasing and
Acceptance Corp. (IFC)
Consolidated Plywood Industries, Inc
(Consolidated) is a After 14 days, one of the tractors broke
corporation engaged in the logging business down and after another 9 days, the other tractor
For the purpose of opening of
additional roads and simultaneous logging Because of the breaking down of the
operations along the route of roads, it needed 2 tractors, the road building and simultaneous
additional units of tractors logging operations were delayed

Atlantic Gulf & Pacific Company of Manila, Consolidated unilaterally rescinded the
through its sister company and marketing arm, contract w/ IPM
Industrial Products Marketing (IPM) (seller-
assignor) offered to sell 2 "Used" Allis Crawler April 7, 1979: Wee of Consolidated asked
Tractors IPM to pull out the units and have them
reconditioned, and thereafter to offer them for
IPM inspected the job site and assured sale.
that the tractors were fit for the job and gave a
90-days performance warranty of the machines The proceeds were to be given to IFC
and availability of parts. and the excess will be divided between:

Consolidated purchased on installment. IPM


that, had the vendee been aware thereof, he

Consolidated which offered to would not have acquired it or would have given a
bear one-half 1/2 of the reconditioning cost lower price for it; but said vendor shall not be
answerable for patent defects or those which may
IPM didn't do anything be visible, or for those which are not visible if the
vendee is an expert who, by reason of his trade or
IFC filed against Consolidated for the profession, should have known them.
recovery of the principal sum P1,093,789.71,
interest and attorney's fees ART. 1562. In a sale of goods, there is an implied
warranty or condition as to the quality or fitness
RTC and CA: favored IFC of the goods, as follows:
(1) Where the buyer, expressly or by implication
breach of warranty if any, is not a defense makes known to the seller the particular purpose
available to Consolidated either to withdraw from for which the goods are acquired, and it appears
the contract and/or demand a proportionate that the buyer relies on the sellers skill or judge
reduction of the price with damages in either judgment (whether he be the grower or
case manufacturer or not), there is an implied
ISSUE: W/N IFC is a holder in due course of the warranty that the goods shall be reasonably fit for
negotiable promissory note so as to bar such purpose;
completely all the available defenses of the xxx xxx xxx
Consolidated against IPM

HELD: CA reversed and set aside ART. 1564. An implied warranty or condition as to
Consolidated is a victim of warranrty the quality or fitness for a particular purpose may
be annexed by the usage of trade.
The Civil Code provides that: xxx xxx xxx

ART. 1561. The vendor shall be responsible for ART. 1566. The vendor is responsible to the
warranty against the hidden defects which the vendee for any hidden faults or defects in the
thing sold may have, should they render it unfit thing sold even though he was not aware thereof.
for the use for which it is intended, or should they This provision shall not apply if the contrary has
diminish its fitness for such use to such an extent been stipulated, and the vendor was not aware of

the hidden faults or defects in the thing sold.

(Emphasis supplied). Consolidated, having unilaterally and
GR: extends to the corporation to whom it extrajudicially rescinded its contract with the
assigned its rights and interests seller-assignor, can no longer sue IPM except by
way of counterclaim if IPM sues it because of the
EX: assignee is a holder in due course of the rescission
promissory note
Considering that paragraph (d), Section 1 of
assuming the note is negotiable the Negotiable Instruments Law requires that a
promissory note "must be payable to order or
Consolidated's defenses may not bearer" - in this case it is non-negotiable
prevail against it.
= expression of consent that the
Articles 1191 and 1567 of the Civil Code instrument may be transferred
provide that:
consent is indispensable since a
ART. 1191. The power to rescind obligations is maker assumes greater risk under a negotiable
implied in reciprocal ones, in case one of the instrument than under a non-negotiable one
obligors should not comply with what is
incumbent upon him. When instrument is payable to order
The injured party may choose between the
fulfillment and the rescission of the obligation SEC. 8. WHEN PAYABLE TO ORDER. - The
with the payment of damages in either case. He instrument is payable to order where it is drawn
may also seek rescission, even after he has payable to the order of a specified person or to
chosen fulfillment, if the latter should become him or his order. . . .
xxx xxx xxx Without the words "or order" or" to the
ART. 1567. In the cases of articles 1561, 1562, order of, "the instrument is payable only to the
1564, 1565 and 1566, the vendee may elect person designated therein and is therefore non-
between withdrawing from the contract and negotiable.
demanding a proportionate reduction of the price,
with damages in either case. (Emphasis supplied) Any subsequent purchaser thereof will not

enjoy the advantages of being a holder of a We believe the finance company is better able to
negotiable instrument but will merely "step into bear the risk of the dealer's insolvency than the
the shoes" of the person designated in the buyer and in a far better position to protect his
instrument and will thus be open to all defenses interests against unscrupulous and insolvent
available against the latter dealers. . .

Even conceding for purposes of discussion

that the promissory note in question is a
negotiable instrument, the IFC cannot be a holder
in due course due to absence of GF for knowing
that the tractors were defective
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE 109 Phil 706 Commercial Law Negotiable
COURSE. - A holder in due course is a holder who Instruments Law Negotiation after Dishonor
has taken the instrument under the following Holder in Due Course
xxx xxx xxx Tan Kim and her husband (Chen So) issued 11
xxx xxx xxx checks payable to cash or bearer to be drawn
(c) That he took it in good faith and for value against their account with the Equitable Banking
(d) That the time it was negotiated by him he had Corporation.
no notice of any infirmity in the instrument of
deffect in the title of the person negotiating it The checks were negotiated to the White House
Shoe Supply (company). White House then
SEC. 56. WHAT CONSTITUTES NOTICE OF deposited the checks to their China Bank account.
DEFFECT. - To constitute notice of an infirmity in
China Bank then presented the checks to
the instrument or defect in the title of the person
Equitable Bank but the checks were returned
negotiating the same, the person to whom it is
because Equitable Bank then had no funds to
negotiated must have had actual knowledge of cover the checks. China Bank then stamped the
the infirmity or defect, or knowledge of such facts checks with Account Closed and Non negotiable
that his action in taking the instrument amounts China Bank Corporation.
to bad faith. (Emphasis supplied)

But somehow, Chan Wan got hold of these checks Wan acquired the checks and to determine if he is
(Chan Wan was not able to explain in court how he indeed entitled to payment based on some other
got hold of the checks). Chan Wan now wants to transactions involving those checks.
encash the checks but Equitable Bank refused
accept the said checks. If maker has no defense.

ISSUE: Whether or not Chan Wan is a holder in VICENTE TAN DE OCAMPO V. GACHALIAN
due course. 3 SCRA 596 Mercantile Law Negotiable
Instruments Law Rights of the Holder What
HELD: No. As a general rule, a dishonored Constitutes a Holder in Due Course Is a payee a
check/instrument may still be negotiated either by holder in due course?
indorsement or delivery and the holder may be a
holder in due course provided that he received no Matilde Gonzales was a patient of the De Ocampo
notice regarding the dishonor of the instrument. In Clinic owned by Vicente De Ocampo. She incurred
this case, the checks were already crossed on a debt amounting to P441.75. Her husband,
their face hence Chan Wan was properly notified Manuel Gonzales designed a scheme in order to
of the dishonor of the checks at the time of his pay off this debt: In 1953, Manuel went to a
acquisition. certain Anita Gatchalian.

But may Chan Wan still recover? Manuel purported himself to be selling the car of
Yes. The Negotiable Instruments Law does not Vicente De Ocampo. Gatchalian was interested in
provide that a holder who is not a holder in due buying said car but Manuel told her that De
course, may not in any case, recover on the Ocampo will only sell the car if Gatchalian shows
instrument. The holder may recover directly from her willingness to pay for it. Manuel advised
the drawee, in this case Tan Kim and Chen So, Gatchalian to draw a check of P600.00 payable to
unless the drawees have a valid excuse in De Ocampo so that Manuel may show it to De
refusing payment. Ocampo and that Manuel in the meantime will
hold it for safekeeping. Gatchalian agreed and
The only disadvantage of a holder who is not a gave Manuel the check. After that, Manuel never
holder in due course is that the negotiable showed himself to Gatchalian.
instrument is subject to defense as if it were non-
negotiable. The case was remanded to the lower Meanwhile, Manuel gave the check to his wife who
court for a proper determination as to how Chan in turn gave the check to De Ocampo as payment

of her bills with the clinic. De Ocampo received (d) That at the time it was negotiated to him he
the check and even gave Matilde her change had no notice of any infirmity in the instrument or
(sukli). On the other hand, since Gatchalian never defect in the title of the person negotiating it.
saw Manuel again, she placed a stop-payment on
the P600.00 check so De Ocampo was not able to The Supreme Court emphasized that if one is such
cash on the check. a holder in due course, it is immaterial that he
was the payee and an immediate party to the
Eventually, the issue reached the courts and the instrument. The Supreme Court however ruled
trial court ordered Gatchalian to pay De Ocampo that De Ocampo is not a holder in due course for
the amount of the check. his lack of good faith. De Ocampo should have
Gatchalian argued that De Ocampo is not entitled inquired as to the legal title of Manuel to the said
to payment because there was no valid check. The fact that Gatchalian has no obligation
indorsement. De Ocampo argued tha he is a to De Ocampo and yet hes named as the payee
holder in due course because he is the named in the check hould have apprised De Ocampo;
payee. that the check did not correspond to Matilde
Gonzales obligation with the clinic because of the
ISSUE: Whether or not De Ocampo is a holder in fact that it was for P600.00 more than the
due course. indebtedness; that why was Manuel in possession
of the check all these gave De Ocampo the duty
HELD: No. Section 52 of the Negotiable to ascertain from the holder Manuel Gonzales
Instruments Law, defines holder in due course, what the nature of the latters title to the check
thus: was or the nature of his possession.
A holder in due course is a holder who has taken
the instrument under the following conditions: G.R. No. L-11526 January 2, 1917
B. A. GREEN, ET AL., plaintiffs-appellees,
(a) That it is complete and regular upon its face; v. M. LOPEZ, ET AL., defendants-appellants.

(b) That he became the holder of it before it was This is an appeal from a judgment for the face value of a
overdue, and without notice that it had been negotiable note, in favor of the plaintiffs who purchased
previously dishonored, if such was the fact; the note, and against the makers, with a declaration of
the subsidiary liability of the payee, from whom the note
(c) That he took it in good faith and for value; was purchased and by whom it was indorsed to the

The complaint alleged that the note was indorsed by the
payee to the plaintiffs "for value received," and this The real defense relied upon in the court below by the
allegation was conclusively established by the evidence makers of the note was that the plaintiffs were not bona
adduced at the trial. We are of opinion that this allegation fide holders of the note by indorsement, in that they had
was substantially equivalent to a formal allegation that knowledge of the existence of certain equitable defenses
the indorsement was made for a valuable consideration, which the maker were entitled to set us against the payee
and that the truth of this allegation having been of the note, before they acquired it by indorsement from
established by the introduction of competent evidence the payee.
establishing the fact that the indorsement was made for a
valuable consideration, the purchasers were clearly But there was nothing on the face of the note to put the
entitled to judgment for the face value of the note. purchasers on notice of the existence of such equitable
By the decisive weight of authority in this country, where
negotiable paper has been put in circulation, and there is It was entirely regular in form and came into their
no infirmity or defense between the antecedent parties possession in the usual course of business. Under these
thereto, a purchaser of such security is entitled to recover circumstances the burden of proof was manifestly upon
thereon, as against the maker, the whole amount, the makers of the note to establish the fact of knowledge
irrespective of what he may have paid therefor. of these equitable defenses before they could be
permitted to rely upon such defenses as against the
It follows that any allegation which sets forth the The only evidence tending to establish such knowledge
existence of a valuable consideration for the transfer by was the testimony of Lopez, one of the maker of the note,
indorsement is sufficient, notwithstanding the failure to that a person unknown to him and representing himself to
allege expressly the amount which was in fact paid by the be an employee of Green, one of the plaintiffs, came to
indorser. him, and made inquiries as to the validity and
genuineness of the note, stating that his principal desired
What has been said disposes of the various contentions this information because he was contemplating its
of appellants based upon the failure of the court below to purchase; and that he then and there explained the
sustain a demurrer to the complaint because of the lack nature of his equitable defenses ad against the payee,
of an allegation setting forth specifically the nature and and repudiated any obligation to meet the note.
amount of the consideration paid by the plaintiffs to the
payee of the note, by whom it was indoresed in their There is no evidence of record upon which to base a

finding that these alleged disclosures were in truth and in testimony to the contrary, that these gentlemen were so
fact made to an employee of either of the plaintiffs other imprudent as to discount negotiable paper, in the ordinary
than the testimony of Lopez to the effect that these course of business, after having received formal notice of
alleged disclosures were made to a person unknown to the existence of equitable defenses against the payee;
him, who represented himself to be an employee of one and our opinion in this regard is strengthened by the
of the plaintiffs; and the testimony of Green, one of the undoubted fact that they took the precaution before
plaintiffs who stated that before purchasing the note he purchasing the note to send an agent to make inquiries
sent an employed to call upon the makers of the note to as to its validity. We are forced to conclude with the trial
inquire whether it was a good note which would be paid judge that the testimony of the maker of the note as to
at maturity, and that upon his return this employee stated the disclosures made to the purchasers' agent must be
that he had been informed by the makers of the note that rejected, either on the ground that it is wholly false, or
it was a good note duly executed by them and that it upon the ground that he failed to make himself
would be paid when due. understood in the course of his alleged interview with the
plaintiffs' agent, with the result in either event that
We do not stop to consider whether this evidence is knowledge of the existence of equitable defenses was
sufficient to establish the fact that the person to whom the not brought home to the purchasers of the note.
maker of the note claims to have disclosed the alleged
equitable defenses was in truth and in fact the employee Equitable defenses of this nature can in no event defeat
sent by the plaintiffs to the makers of the note for the the right of the holders of a negotiable note by
purpose of inquiring as to is validity, because we are indorsement and for valuable consideration until and
satisfied that, admitting that the person with whom Lopez unless knowledged of the existence of such equitable
claims to have had the interview was an employee of one defenses is brought home to them, or until it appears that
or both of the purchasers, we do not think that the the holders had such knowledged of the existence of
evidence sustains an affirmative finding that the plaintiffs defects in the instrument as to charge them with bad faith
had knowledge of the alleged equitable defenses when in acquiring it under all the attendant circumstances.
they purchased the note. (Confer numerous cases cited in notes, 7 Cyc., p. 945.)

One of the purchasers of the note is a broker, engaged in The judgment entered in the court below should be
business in the city of Manila, and the other is an affirmed, with the costs of this instance against the
attorney, licensed to practice in the courts of these appellants. So ordered.
Islands, and it would require stronger and more
convincing evidence than the interested testimony of one
of the makers of the note to satisfy us, as against their FOSSUM v. HERMOSA

44 Phil 713 Commercial Law Negotiable of AIP, is well aware that the draft is
Instruments Law Presumption as to who is a unenforceable because it has no consideration,
Holder in Due Course the shaft being substandard. AIP did not comply
with its obligation thus the draft was dishonored
In 1919, the Fernandez Hermanos (FH) contracted and Fossum was well aware of this as part of the
with the American Iron Products Company, Inc. original party.
(AIP), for the latter to build a shaft for one of the
ships managed by FH. In consideration thereof, a Under Sec. 59 of the Negotiable Instruments Law,
time draft with the Philippine National Bank (PNB), there is indeed a presumption that every holder is
a negotiable instrument, was executed by FH in a holder in due course, this covers a payee or an
the amount of $2,250.00 payable in 60 days. But indorsee (for bearer instruments, the bearer). This
later, FH dishonored the draft because AIP was not presumption does not apply to Fossum because
able to comply with the specifications of the shaft he was not a payee nor an indorsee.
ordered by FH.
Hes not an indorsee because the bank merely
Nevertheless, Charles Fossum, the agent of AIP delivered the draft to him and the delivery was
here in the Philippines and the person with whom even without consideration.
FH was transacting with, was able to obtain the
draft from the bank without consideration (for But if the presumption previously applied to PNB,
free). wasnt that acquired by Fossum?

Fossum then instituted an action against FH to No. The presumption only covers the present
recover the amount covered by the draft. holder, and not the previous holder. When a
holder delivers/indorses the instrument, he loses
Fossum maintains that he is a holder in due that presumption.
course; that he inherited that status from the It will then become incumbent upon the person
previous holder (PNB, named payee in the draft); who received the instrument to prove that the
that as such, he is entitled to payment. previous holder is a holder in due course
especially in this case when the current holder,
ISSUE: Whether or not Fossum is a holder in due Fossum, cannot be granted the presumption in
course. Sec. 59, which is merely prima facie by the way,
because of the fact that he was an original party
HELD: No. In the first place, Fossum, as an agent fully notified of the failure of the consideration.

At any rate, PNB itself is not a holder in due of encashment to pay his indebtedness but for purposes
course due to the timely dishonor of the draft by of accommodation, as he had in the past accorded
FH. similar favors to petitioner. Petitioner however urges that
the postdated checks are per se evidence of liability on
Further even assuming PNB is a holder in due the part of private respondent and further argues that
course, there is a well-known rule of law that if the even assuming that the checks were for accommodation,
original payee of a note unenforceable for lack of private respondent is still liable thereunder considering
consideration repurchases (in this case, the draft that petitioner is a holder for value.
was not even repurchased, it was merely ISSUE:
delivered back) the instrument after transferring it Whether Miranda is liable on the postdated checks he
to a holder in due course, the paper again issued even assuming that said checks were issued for
becomes subject in the payees hands to the accommodation only.
same defenses to which it would have been
subject if the paper had never passed through the RULING:
hands of a holder in due course. The same is true There was no accommodation transaction in the case at
where the instrument is re-transferred to an agent bar. In accommodation transactions recognized by the
of the payee. Negotiable Instruments Law, an accommodating party
lends his credit to the accommodated party, by issuing or
indorsing a check which is held by a payee or indorsee
Travel-On, Inc. vs Court of Appeals as a holder in due course, who gave full value therefor to
G.R. No. L-56169 June 26, 1992 the accommodated party. The latter, in other words,
-accommodation party receives or realizes full value which the accommodated
party then must repay to the accommodating party. But
FACTS: the accommodating party is bound on the check to the
Petitioner Travel-On Inc. is a travel agency from which holder in due course who is necessarily a third party and
Arturo Miranda procured tickets on behalf of airline is not the accommodated party. In the case at bar,
passengers and derived commissions therefrom. Travel-On was payee of all six (6) checks, it presented
Miranda was sued by petitioner to collect on the six these checks for payment at the drawee bank but the
postdated checks he issued which were all dishonored by checks bounced. Travel-On obviously was not an
the drawee banks. Miranda, however, claimed that he accommodated party; it realized no value on the checks
had already fully paid and even overpaid his obligations which bounced. Miranda must be held liable on the
and that refunds were in fact due to him. He argued that checks involved as petitioner is entitled to the benefit of
he had issued the postdated checks not for the purpose the statutory presumption that it was a holder in due

course and that the checks were supported by valuable checks cannot be retrieved as they have been negotiated.
consideration. Before the maturity date Moulic withdrew her funds from the
bank contesting that she incurred no obligation on the checks
**InaccommodationtransactionsrecognizedbytheNegotiable because the jewellery was never sold and the checks are
InstrumentsLaw,anaccommodatingpartylendshiscreditto negotiated without her knowledge and consent. Upon
the accommodated party, by issuing or indorsing a check presentment of for payment, the checks were dishonoured for
whichisheldbyapayeeorindorseeasaholderinduecourse, insufficiency of funds.
whogavefullvaluetherefortotheaccommodatedparty. In
thecaseatbar,TravelOnwasthepayeeofallsix(6)checks, Issues:
itpresentedthesechecksforpaymentatthedraweebankbut 1. Whether or not State Investment House inc. was a holder of
the checks bounced. TravelOn obviously was not an the check in due course
bounced. 2. Whether or not Moulic can set up against the petitioner the
defense that there was failure or absence of consideration


Yes, Section 52 of the NIL provides what constitutes a holder

in due course. The evidence shows that: on the faces of the post
dated checks were complete and regular; that State Investment
House Inc. bought the checks from Victoriano before the due
State Investment House Inc. vs. CA
dates; that it was taken in good faith and for value; and there
was no knowledge with regard that the checks were issued as
GR No. 101163 January 11, 1993
security and not for value. A prima facie presumption exists
that a holder of a negotiable instrument is a holder in due
Bellosillo, J.:
course. Moulic failed to prove the contrary.
No, Moulic can only invoke this defense against the petitioner
if it was a privy to the purpose for which they were issued and
Nora Moulic issued to Corazon Victoriano, as security for
therefore is not a holder in due course.
pieces of jewellery to be sold on commission, two postdated
checks in the amount of fifty thousand each. Thereafter,
No, Section 119 of NIL provides how an instruments be
Victoriano negotiated the checks to State Investment House,
discharged. Moulic can only invoke paragraphs c and d as
Inc. When Moulic failed to sell the jewellry, she returned it to
possible grounds for the discharge of the instruments. Since
Victoriano before the maturity of the checks. However, the

Moulic failed to get back the possession of the checks as (Chan Wan was not able to explain in court how he
provided by paragraph c, intentional cancellation of instrument got hold of the checks). Chan Wan now wants to
is impossible. As provided by paragraph d, the acts which will encash the checks but Equitable Bank refused
discharge a simple contract of payment of money will accept the said checks.
discharge the instrument. Correlating Article 1231 of the Civil
Code which enumerates the modes of extinguishing obligation, ISSUE: Whether or not Chan Wan is a holder in
none of those modes outlined therein is applicable in the instant due course.
case. Thus, Moulic may not unilaterally discharge herself from
her liability by mere expediency of withdrawing her funds from HELD: No. As a general rule, a dishonored
the drawee bank. She is thus liable as she has no legal basis to check/instrument may still be negotiated either by
excuse herself from liability on her check to a holder in due indorsement or delivery and the holder may be a
course. Moreover, the fact that the petitioner failed to give holder in due course provided that he received no
notice of dishonor is of no moment. The need for such notice is notice regarding the dishonor of the instrument. In
not absolute; there are exceptions provided by Sec 114 of NIL. this case, the checks were already crossed on
their face hence Chan Wan was properly notified
of the dishonor of the checks at the time of his

Chan Wan vs Tan Kim et al

Tan Kim and her husband (Chen So) issued 11
checks payable to cash or bearer to be drawn
against their account with the Equitable Banking But may Chan Wan still recover?
Corporation. The checks were negotiated to the
White House Shoe Supply (company). White Yes. The Negotiable Instruments Law does not
House then deposited the checks to their China provide that a holder who is not a holder in due
Bank account. China Bank then presented the course, may not in any case, recover on the
checks to Equitable Bank but the checks were instrument. The holder may recover directly from
returned because Equitable Bank then had no the drawee, in this case Tan Kim and Chen So,
funds to cover the checks. China Bank then unless the drawees have a valid excuse in
stamped the checks with Account Closed and refusing payment. The only disadvantage of a
Non negotiable China Bank Corporation. holder who is not a holder in due course is that
But somehow, Chan Wan got hold of these checks the negotiable instrument is subject to defense as

if it were non- negotiable. The case was remanded jewelries can be released
to the lower court for a proper determination as to
how Chan Wan acquired the checks and to Yang deposited the draft in the
determine if he is indeed entitled to payment company's account with the Far East on June 2,
based on some other transactions involving those 1998
When Far East, the collecting bank,
Far East Bank & Trust Co. V. Gold Palace Jewelry Co. presented the draft for clearing to LBP, the drawee
(2008) bank, cleared the it and Gold Palace's account
G.R. No. 168274 August 20, 2008 with Far East was credited
Lessons Applicable: Liabilities of the Parties
(Negotiable Instruments Law) June 6, 1998: The foreigner eventually
returned to claim the purchased goods.
After ascertaining that the draft had
June 1998: Samuel Tagoe, a foreigner, been cleared, Yang released the pieces of jewelry
purchased from Gold Palace Jewellery Co.'s (Gold and his change, Far East Check of P122,000 paid
Palace's) store at SM-North EDSA several pieces by the bank
of jewelry valued at P258,000
June 26, 1998: LBP informed Far East that
paid w/ Foreign Draft issued by the the Foreign Draft had been materially altered from
United Overseas Bank (Malaysia) to Land Bank of P300 to P300,000and that it was returning the
the Philippines, Manila (LBP) for P380,000 same

Teller of Far East Bank, next door tenant, Far East refunded the amount to LBP
informed Julie Yang-Go (manager of Gold Palace) and debit only P168,053.36 of the amount left in
that a foreign draft has similar nature to Gold Palace' account without a prior written notice
a manager's check, but advised her not to release to the account holder
the pieces of jewelry until the draft had been
cleared Far East only notified by phone
the representatives of the Gold Palace
Yang issued Cash Invoice so the

August 12, 1998: Far East demanded from

Gold Palace the payment of balance and upon The payment of a check includes
refusal filed in the RTC its acceptance

RTC: in favor of Far East on the basis that The tenor of the acceptance is determined
Gold Palace was liable under the liabilities of a by the terms of the bill as it is when the drawee
general indorser accepts.

CA: reversed since Far East failed to LBP was liable on its payment of the
undergo the proceedings on the protest of the check according to the tenor of the check at the
foreign draft or to notify Gold Palace of the draft's time of payment, which was the raised amount.
dishonor; thus, Far East could not charge Gold
Palace on its secondary liability as an indorser Gold Palace was not a participant in the
alteration of the draft, was not negligent, and was
ISSUE: W/N Gold Palace should be liable for the a holder in due course
altered Foreign Draft
LBP, having the most convenient means to
HELD: NO. AFFIRMED WITH THE correspond with UOB, did not first verify the
MODIFICATION that the award of exemplary damages amount of the draft before it cleared and paid the
and attorney's fees is DELETED same

Act No. 2031, or the Negotiable Instruments Law Gold Palace had no facility to ascertain
(NIL), explicitly provides that the acceptor, by with the drawer, UOB Malaysia, the true amount in
accepting the instrument, engages that he will the draft. It was left with no option but to rely on
pay it according to the tenor of his acceptance. the representations of LBP that the draft was good
This provision applies with equal force in
case the drawee pays a bill without having Principle that the drawee bank, having paid
previously accepted it. to an innocent holder the amount of an
uncertified, altered check in good faith and
Actual payment by the drawee is without negligence which contributed to the loss,
greater than his acceptance, which is merely a could recover from the person to whom payment
promise in writing to pay was made as for money paid by mistake - NOT

applicable amount paid. This closure of the transaction is a

matter of course; otherwise, uncertainty in
The Court is also aware that under the commercial transactions, delay and annoyance
Uniform Commercial Code in the United States of will arise if a bank at some future time will call on
America, if an unaccepted draft is presented to a the payee for the return of the money paid to him
drawee for payment or acceptance and the on the check
drawee pays or accepts the draft, the person
obtaining payment or acceptance, at the time of As the transaction in this case had
presentment, and a previous transferor of the been closed and the principal-agent relationship
draft, at the time of transfer, warrant to the between the payee and the collecting bank had
drawee making payment or accepting the draft in already ceased, the latter in returning the amount
good faith that the draft has not been altered to the drawee bank was already acting on its own
- absent any similar provision in our law, cannot and should now be responsible for its own actions.
extend the same preferential treatment to the Neither can petitioner be considered to have acted
paying bank as the representative of the drawee bank when it
debited respondent's account, because, as already
Gold Palace is protected by Section 62 of explained, the drawee bank had no right to
the NIL, its collecting agent, Far East, should not recover what it paid. Likewise, Far East cannot
have debited the money paid by the drawee bank invoke the warranty of the payee/depositor who
from respondent company's account. When Gold indorsed the instrument for collection to shift the
Palace deposited the check with Far East, it, under burden it brought upon itself. This is precisely
the terms of the deposit and the provisions of the because the said indorsement is only for purposes
NIL, became an agent of the Gold Palace for the of collection which, under Section 36 of the NIL, is
collection of the amount in the draft a restrictive indorsement. It did not in any way
transfer the title of the instrument to the
The subsequent payment by the drawee collecting bank. Far East did not own the draft, it
bank and the collection of the amount by the merely presented it for payment. Considering that
collecting bank closed the transaction insofar as the warranties of a general indorser as provided in
the drawee and the holder of the check or his Section 66 of the NIL are based upon a transfer of
agent are concerned, converted the check into a title and are available only to holders in due
mere voucher, and, as already discussed, course, these warranties did not attach to the
foreclosed the recovery by the drawee of the indorsement for deposit and collection made by

Gold Palace to Far East. Without any legal right to PNB averred that Associated Bank is liable
do so, the collecting bank, therefore, could not to reimburse because of its indorsement
debit respondent's account for the amount it borne on the face of the checks:
refunded to the drawee bank. K
All prior endorsements guaranteed ASSOCIATED
Associated Bank vs Court of Appeals (1996) BANK.

K 252 SCRA 620 Mercantile Law Negotiable ISSUE: What are the liabilities of each party?
Instruments Law Liabilities of Parties HELD: The checks involved in this case are order
Forgery Collecting Bank vs Drawee Bank instruments.
K The Province of Tarlac was disbursing funds Liability of Associated Bank
to Concepcion Emergency Hospital via Where the instrument is payable to order at the
checks drawn against its account with the time of the forgery, such as the checks in this
Philippine National Bank (PNB). These case, the signature of its rightful holder (here, the
checks were drawn payable to the order of payee hospital) is essential to transfer title to the
Concepcion Emergency Hospital. Fausto same instrument. When the holders indorsement
Pangilinan was the cashier of Concepcion is forged, all parties prior to the forgery may raise
Emergency Hospital in Tarlac until his the real defense of forgery against all parties
retirement in 1978. He used to handle subsequent thereto.
checks issued by the provincial government A collecting bank (in this case Associated Bank)
of Tarlac to the said hospital. However, after where a check is deposited and which indorses
his retirement, the provincial government the check upon presentment with the drawee
still delivered checks to him until its bank (PNB), is such an indorser. So even if the
discovery of this irregularity in 1981. By indorsement on the check deposited by the
forging the signature of the chief payee of bankss client is forged, Associated Bank is bound
the hospital (Dr. Adena Canlas), Pangilinan by its warranties as an indorser and cannot set up
was able to deposit 30 checks amounting to the defense of forgery as against the PNB.
P203k to his account with the Associated EXCEPTION: If it can be shown that the drawee
Bank. bank (PNB) unreasonably delayed in notifying the
K When the province of Tarlac discovered this collecting bank (Associated Bank) of the fact of
irregularity, it demanded PNB to reimburse the forgery so much so that the latter can no
the said amount. PNB in turn demanded longer collect reimbursement from the depositor-
Associated Bank to reimburse said amount. forger.

Liability of PNB In sum, by reason of Associated Banks

The bank on which a check is drawn, known as the indorsement and warranties of prior indorsements
drawee bank (PNB), is under strict liability to pay as a party after the forgery, it is liable to refund
the check to the order of the payee (Provincial the amount to PNB. The Province of Tarlac can ask
Government of Tarlac). Payment under a forged reimbursement from PNB because the Province is
indorsement is not to the drawers order. When a party prior to the forgery. Hence, the instrument
the drawee bank pays a person other than the is inoperative. HOWEVER, it has been proven that
payee, it does not comply with the terms of the the Provincial Government of Tarlac has been
check and violates its duty to charge its negligent in issuing the checks especially when it
customers (the drawer) account only for properly continued to deliver the checks to Pangilinan even
payable items. Since the drawee bank did not pay when he already retired. Due to this contributory
a holder or other person entitled to receive negligence, PNB is only ordered to pay 50% of the
payment, it has no right to reimbursement from amount or half of P203 K.
the drawer. The general rule then is that the K BUT THEN AGAIN, since PNB can pass its
drawee bank may not debit the drawers account loss to Associated Bank (by reason of
and is not entitled to indemnification from the Associated Banks warranties), PNB can ask
drawer. The risk of loss must perforce fall on the the 50% reimbursement from Associated
drawee bank. Bank. Associated Bank can ask
EXCEPTION: If the drawee bank (PNB) can prove a reimbursement from Pangilinan but
failure by the customer/drawer (Tarlac Province) to unfortunately in this case, the court did not
exercise ordinary care that substantially acquire jurisdiction over him.
contributed to the making of the forged signature,
the drawer is precluded from asserting the