NEGOTIABLE INSTRUMENTS LAW

A collection of cases under Dean Raul Villanueva

Behiga-Manto-Villamor Digests

Chapter 1 – Form and Interpretation
Traders Royal Bank
vs.
CA, Filriters, Central Bank
(G.R. No. 93397 March 3, 1997)
Form of negotiable instruments
Facts:
Filriters Guaranty Assurance Corporation (Filriters) as
registered owner of Central Bank Certificates of
Indebtedness (CBCI) of P500,000 and having an
aggregate value of P3,500,000.00.
Filriters transferred the CBCI to Philippine
Underwriters Finance Corporation (Philfinance). The
transfer was made by one of its agents and without
the knowledge and consent of the directors of
Filriters.
Subsequently, Philfinance transferred same CBCI to
Traders Royal Bank (TRB) under a repurchase
agreement. PhilFinance failed to repurchase the CBCI
on the agreed date of maturity.
Petitioner sought to have its title registered in the
books of respondent Central Bank. But Central Bank
refused to register the transfer as requested, and
continues to do so notwithstanding petitioner's valid
and just title over the same and despite repeated
demands in writing.
Petitioner filed an action before the RTC praying for
the registration by the Central Bank of the subject
CBCI in its name.
The RTC found the assignment of CBCI in favor of
Philfinance, and the subsequent assignment of the
same CBCI by Philfinance in favor of Traders Royal
Bank null and void and of no force and effect.
Petitioner appealed to CA, but it was denied.
Issue:
Whether the CBCI is a negotiable instrument.
Held:
No.
The subject CBCI is not a negotiable instrument in the
absence of words of negotiability within the meaning
of the negotiable instruments law (Act 2031).
NEGOTIABLE INSTRUMENTS LAW
1
The appellate court ruled that the subject CBCI is not
a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay
Filriters Guaranty Assurance Corporation, the
registered owner hereof." Very clearly, the instrument
is payable only to Filriters, the registered owner, whose
name is inscribed thereon. It lacks the words of
negotiability which should have served as an expression
of consent that the instrument may be transferred by
negotiation.
A reading of the subject CBCI indicates that the same
is payable to FILRITERS GUARANTY ASSURANCE
CORPORATION, and to no one else, thus, discounting
the petitioner's submission that the same is a
negotiable instrument, and that it is a holder in due
course of the certificate.
The language of negotiability which characterize a
negotiable paper as a credit instrument is its freedom
to circulate as a substitute for money. Hence,
freedom of negotiability is the touchtone 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 (11 Am. Jur. 2d, 32). This freedom in
negotiability is totally absent in a certificate
indebtedness as it merely to pay a sum of money to a
specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals:
The accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. In
the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained.
While the writing may be read in the light of
surrounding circumstance in order to more perfectly
understand the intent 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 of the words they have used. What
the parties meant must be determined by what they
said.
Thus, the transfer of the instrument from Philfinance
to TRB was merely an assignment, and is not
governed by the negotiable instruments law.
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Chapter 1 – Form and Interpretation
Raymundo Crystal
vs.
CA, De Gracia, Ocang
(G.R. No. L-35767 June 18, 1976)
Dishonored and stale check
Facts:
In its decision promulgated on February 25, 1975, SC
affirmed the decision of CA in favor of private
respondents which held that petitioner's redemption
of the property acquired by said respondents in an
execution sale pursuant to a final judgment of the CFI
of Cebu, was invalid inasmuch as the check which
petitioner had used in paying the redemption price
had been either dishonored or had become stale.
Petitioner filed the instant motion for
reconsideration.
Issue:
Whether the check being dishonored and becoming
stale affect the validity of the redemption sale.
Held:
For a check to the dishonored upon presentment on
the one hand, and to be stale for not being presented
at all in time, on the other, are incompatible
developments that naturally have variant legal
consequences. Thus, if the check in question had
been dishonored, then there can be no doubt that
petitioner's redemption was null and void. On the
other hand, if it had only become stale, then it
becomes imperative that the circumstances that
caused its non-presentment be determined, for if this
was not due to the fault of the petitioner, then it
would be unfair to deprive him of the rights he had
acquired as redemptioner, particularly, the value of
the check has otherwise been received or realized by
the party concerned.
There is a strong showing in the motion for
reconsideration that not only was said check not
dishonored, although it became stale, but that
respondent Pelagia Ocang had actually been paid
already the full value thereof. And in this connection,
it is notable that in the comment of respondents on
petitioner's motion for reconsideration, there is no
clear and categorical denial of these important and
decisive facts.
NEGOTIABLE INSTRUMENTS LAW
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SC reconsidered its decision and remanded the case
for further proceedings.
Salvacion Vda. de Eduque, etc.
vs.
Jose Ocampo
(G.R. No. L-222 April 26, 1950)
Cashier’s check representing war notes
Facts:
On February 16, 1935, Dr. Jose Eduque secured two
loans from Mariano Ocampo de Leon, Doña
Escolastica de los Reyes and Don Jose M. Ocampo, the
first in the amount of P40,000 and the second in the
sum of P15,000, both payable within the period of
twenty years, with interest at the rate of 5% per
annum. Payment of these two loans was guaranteed
by mortgage on real property. In the mortgage
contract it is stipulated that any of the mortgage
creditors may receive payment and execute deeds of
cancellation of the mortgage debts.
On December 6, 1943, plaintiff and appellee, as
administratrix of the estate of the deceased Dr. Jose
Eduque, tendered payment, by means of cashier's
check, of the total amount of the two loans, P55,000,
to defendant-appellant Jose M. Ocampo, one of the
creditors, who refused to accept payment. By reason
of such refusal, an action was brought and a cashier's
check for the total amount of P55,000 deposited in
court. After trial, judgment was rendered against
defendant compelling him to accept the P55,000
deposited in court, to issue deeds for cancellation of
the mortgage debts, and to pay the expenses of
consignation and costs.
Defendant accepted the judgment with respect to the
second loan of P15,000 but appealed to the first loan.
Issue:
Whether tender of payment by means of a cashier's
check representing Japanese war notes is valid.
Held:
Yes.
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Chapter 1 – Form and Interpretation
SC previously held that Japanese military notes were
legal tender during the Japanese occupation. But
appellant argues, further, that the consignation of a
cashier's check, which is not legal tender, is not
binding upon him. This question, however, has never
been raised in the lower court. Upon the contrary,
defendant accepted impliedly the consignation of the
cashier's check when he himself asked the court that
out of the money thus consigned he be paid the
amount of the second loan of P15,000. It is a rule that
"a cashier's check may constitute a sufficient tender
where no objection is made on this ground."
New Pacific Timber & Supply
Co. Inc.
vs.
Seneris, Tong and ex-officio
sheriff Abdulwahid
(G.R. No. L-41764 December 19, 1980)
Cashier’s check - good as cash (old ruling)
Facts:
Petitioner is the defendant in a complaint for
collection of a sum of money filed by the private
respondent. On July 19, 1974, a compromise
judgment was rendered by the respondent Judge in
accordance with an amicable settlement entered into
by the parties. It was agreed that petitioner will pay
to private respondent P54, 500.00 at 6% interest per
annum and P6, 000 as attorney's fee, P5, 000 of which
was paid.
For failure of the petitioner to comply with his
judgment obligation, the respondent Judge, upon
motion of the private respondent, issued an order for
the issuance of a writ of execution for the amount of
P63, 130.00 pursuant to which, the Ex-Officio Sheriff
levied upon the personal properties of the petitioner
and set the auction sale. However, prior to the
auction sale, petitioner deposited with the Clerk of
Court, CFI Zamboanga City the sum of P63, 130.00 for
the payment of the judgment obligation, consisting of
P50, 000.00 in Cashier's Check and P13, 130.00 in
cash.
Private respondent refused to accept the check as
well as the cash deposit. Private respondent insisted
NEGOTIABLE INSTRUMENTS LAW
3
that the sale must proceed and the Ex-Officio Sheriff
proceeded with the auction sale. Private respondent
is the highest bidder in the amount of P50, 000.00
with a deficiency of P13, 130.00.
Subsequently, petitioner filed an ex-parte motion for
issuance of certificate of satisfaction of judgment.
This motion was denied by the respondent Judge. In
view thereof, petitioner now questions said order by
alleging that said respondent Judge capriciously and
whimsically abused his discretion in not granting the
motion for issuance of certificate of satisfaction of
judgment that there was already a full satisfaction of
the judgment before the auction sale was conducted
with the deposit made to the Ex-Officio Sheriff in the
amount of P63, 000 consisting of P50, 000 in Cashier's
Check and P13, 130 in cash.
In upholding private respondent's claim that he has
the right to refuse payment by means of a check, the
respondent Judge cited the following:
Section 63 of the Central Bank Act:
Sec. 63. Legal Character. — Checks representing deposit
money do not have legal tender power and their
acceptance in payment of debts, both public and
private, is at the option of the creditor, Provided,
however, that a check which has been cleared and
credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an
amount equal to the amount credited to his account.
Article 1249 of the New Civil Code:
Art. 1249. — The payment of debts in money shall be
made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency which is
legal tender in the Philippines.
The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall
produce the effect of payment only when they have
been cashed, or when through the fault of the creditor
they have been impaired.
In the meantime, the action derived from the original
obligation shall be held in abeyance.
Article 1249 of the New Civil Code:
Art. 1248. Unless there is an express stipulation to that
effect, the creditor cannot be compelled partially to
receive the presentations in which the obligation
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Chapter 1 – Form and Interpretation
consists. Neither may the debtor be required to make
partial payment.
However, when the debt is in part liquidated and in part
unliquidated, the creditor may demand and the debtor
may effect the payment of the former without waiting
for the liquidation of the latter.
Issue:
Whether payment of cashier’s check be considered
valid payment of the judgment obligation.
Held:
Yes.
It is to be emphasized in this connection that the
check deposited by the petitioner in the amount of
P50, 000 is not an ordinary check but a Cashier's
Check of the Equitable Banking Corporation. As
testified to by the Ex-Officio Sheriff with whom it has
been deposited, it is a certified crossed check.
It is a well-known and accepted practice in the
business sector that a Cashier's Check is deemed as
cash. Moreover, since the said check had been
certified by the drawee bank, by the certification, the
funds represented by the check are transferred from
the credit of the maker to that of the payee or holder,
and for all intents and purposes, the latter becomes
the depositor of the drawee bank, with rights and
duties of one in such situation. Where a check is
certified by the bank on which it is drawn, the
certification is equivalent to acceptance. Said
certification "implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they
have been set apart for its satisfaction, and that they
shall be so applied whenever the check is presented
for payment. It is an understanding that the check is
good then, and shall continue good, and this
agreement is as binding on the bank as its notes in
circulation, a certificate of deposit payable to the
order of the depositor, or any other obligation it can
assume. The object of certifying a check, as regards
both parties, is to enable the holder to use it as
money." When the holder procures the check to be
certified, "the check operates as an assignment of a
part of the funds to the creditors." Hence, the
exception to the rule enunciated under Section 63 of
the Central Bank Act to the effect "that a check which
has been cleared and credited to the account of the
creditor shall be equivalent to a delivery to the
NEGOTIABLE INSTRUMENTS LAW
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creditor in cash in an amount equal to the amount
credited to his account" shall apply in this case.
Roman Catholic Bishop of
Malolos
vs.
IAC and Robes-
Francisco Realty and Dev.
Corp.
(G.R. No. 72110 November 16, 1990)
Check as tender of payment
Facts:
Petitioner sold a parcel of land to private respondent
through its then president, Mr. Carlos F. Robes, with
a downpayment of P23,930.00 and the balance of
P100,000.00 plus 12% interest per annum to be paid
within four (4) years from execution of the contract.
The contract likewise provides for cancellation,
forfeiture of previous payments, and reconveyance of
the land in question in case the private respondent
would fail to complete payment within the period.
Private respondent, through its new president, Atty.
Adalia Francisco, addressed a letter to Father
Vasquez, parish priest of San Jose Del Monte,
Bulacan, requesting to be furnished with a copy of the
subject contract and the supporting documents.
After the expiration of the stipulated period for
payment, the same Atty. Francisco wrote the
petitioner a formal request that her company be
allowed to pay the principal amount of P100,000.00
in three (3) equal installments of six (6) months each
with the first installment and the accrued interest of
P24,000.00 to be paid immediately upon approval of
the said request.
The petitioner, through its counsel denied the said
request of the private respondent, but granted the
latter a grace period of five (5) days from the receipt
of the denial, otherwise, the provisions of the
contract regarding cancellation, forfeiture, and
reconveyance would be implemented.
Private respondent sought an extension of 30 days to
fully settle its account. The counsel for the petitioner
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Chapter 1 – Form and Interpretation
received the said letter on the same day. The request
for extension was denied.
Consequently, private respondent’s president, wrote
a letter directly addressed to the petitioner,
protesting the alleged refusal of the latter to accept
tender of payment purportedly made by the former
on the last day of the grace period. In the same letter,
received on the following day by the petitioner, the
private respondent demanded the execution of a
deed of absolute sale over the land in question and
after which it would pay its account in full, otherwise,
judicial action would be resorted to.
The petitioner’s counsel, Atty. Fernandez, wrote a
reply to the private respondent stating the refusal of
his client to execute the deed of absolute sale due to
its (private respondent’s) failure to pay its full
obligation. Moreover, the petitioner denied that the
private respondent had made any tender of payment
whatsoever within the grace period. In view of this
alleged breach of contract, the petitioner cancelled
the contract and considered all previous payments
forfeited and the land as ipso facto reconveyed.
Private respondent filed an action against the
petitioner for specific performance with damages,
based on a contract. CFI ruled in favor of petitioner.
On appeal, IAC reversed the CFI decision.
Issue:
Whether an offer of a check a valid tender of payment
of an obligation under a contract which stipulates
that the consideration of the sale is in Philippine
Currency.
Held:
No.
Tender of payment involves a positive and
unconditional act by the obligor of offering legal
tender currency as payment to the obligee for the
former’s obligation and demanding that the latter
accept the same. Thus, tender of payment cannot be
presumed by a mere inference from surrounding
circumstances. At most, sufficiency of available funds
is only affirmative of the capacity or ability of the
obligor to fulfill his part of the bargain.
NEGOTIABLE INSTRUMENTS LAW
5
The case of the private respondent cannot succeed in
view of the fact that it used a certified personal check
which is not legal tender nor the currency stipulated,
and therefore, cannot constitute valid tender of
payment. The first paragraph of Art. 1249 of the Civil
Code provides that "the payment of debts in money
shall be made in the currency stipulated, and if it is
not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The Court en banc in the recent case of Philippine
Airlines v. Court of Appeals, 24 G.R. No. L-49188,
stated thus:
Since a negotiable instrument is only a substitute for
money and not money, the delivery of such an
instrument does not, by itself, operate as payment
(citing Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil
Code; Bryan London Co. v. American Bank, 7 Phil. 255;
Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check,
whether a manager’s check or ordinary check, is not
legal tender, and an offer of a check in payment of a
debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor.
Hence, where the tender of payment by the private
respondent was not valid for failure to comply with
the requisite payment in legal tender or currency
stipulated within the grace period and as such, was
validly refused receipt by the petitioner, the
subsequent consignation did not operate to discharge
the former from its obligation to the latter.
In view of the foregoing, the petitioner in the
legitimate exercise of its rights pursuant to the
subject contract, did validly order therefore the
cancellation of the said contract, the forfeiture of the
previous payment, and the reconveyance ipso facto
of the land in question.
Norberto Tibajia Jr. and
Carmen Tibajia
vs.
CA and Eden Tan
(G.R. No. 100290 June 4, 1993)
Cashier’s check as tender of payment
Facts:
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Chapter 1 – Form and Interpretation
A suit for collection of a sum of money was filed by
Eden Tan against the Tibajia spouses. A writ of
attachment was issued by the trial court. The Deputy
Sheriff filed a return stating that a deposit made by
the Tibajia spouses in the RTC of Caloocan City for
P442,750.00. The RTC of Pasig, Metro Manila
rendered its decision in favor of the plaintiff Eden Tan,
ordering the Tibajia spouses to pay her an amount in
excess P300, 000.00.
On appeal, CA modified the decision by reducing the
award of moral and exemplary damages. The decision
having become final, Eden Tan filed the
corresponding motion for execution and thereafter,
the garnished funds which by then were on deposit
with the cashier of the RTC of Pasig, Metro Manila,
were levied upon.
The Tibajia spouses delivered to Deputy Sheriff
Eduardo Bolima the total money judgment in the
following form:
Cashier's Check P262, 750.00
Cash 135,733.70
————
Total P398, 483.70
Private respondent, Eden Tan, refused to accept the
payment made by the Tibajia spouses and instead
insisted that the garnished funds deposited with the
cashier of the RTC of Pasig, Metro Manila be
withdrawn to satisfy the judgment obligation.
Defendant spouses (petitioners) filed a motion to lift
the writ of execution on the ground that the
judgment debt had already been paid. The motion
was denied by the trial court on the ground that
payment in cashier's check is not payment in legal
tender and that payment was made by a third party
other than the defendant. A motion for
reconsideration was denied.
Thereafter, the spouses Tibajia filed a petition for
certiorari, prohibition and injunction in the CA. The
appellate court dismissed the petition holding that
payment by cashier's check is not payment in legal
tender as required by Republic Act No. 529. The
motion for reconsideration was denied.
Issue:
NEGOTIABLE INSTRUMENTS LAW
6
Whether payment by means of cashier’s check is
considered payment in legal tender.
Held:
No.
It is contended by the petitioners that the check,
which was a cashier's check of the Bank of the
Philippine Islands, undoubtedly a bank of good
standing and reputation, and which was a crossed
check marked "For Payee's Account Only" and
payable to private respondent Eden Tan, is
considered legal tender, payment with which
operates to discharge their monetary obligation.
Petitioners, to support their contention, cite the case
of New Pacific Timber and Supply Co., Inc. v. Señeris
where this Court held through Mr. Justice
Hermogenes Concepcion, Jr. that "It is a well-known
and accepted practice in the business sector that a
cashier's check is deemed as cash".
Petition must fail.
In the recent cases of Philippine Airlines, Inc. vs. Court
of Appeals and Roman Catholic Bishop of Malolos,
Inc. vs. Intermediate Appellate Court, 5 this Court
held that —
A check, whether a manager's check or ordinary check,
is not legal tender, and an offer of a check in payment
of a debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor.
The ruling in these two (2) cases merely applies the
statutory provisions which lay down the rule that a
check is not legal tender and that a creditor may
validly refuse payment by check, whether it be a
manager's, cashier's or personal check.
In the more recent case of Fortunado vs. Court of
Appeals, this Court stressed that, "We are not, by this
decision, sanctioning the use of a check for the
payment of obligations over the objection of the
creditor."
Raul Sesbreño
vs.
CA, Delta Motors Corp. and
Pilipinas Bank
(G.R. No. 89252 May 24, 1993)
Nature of non-negotiable instrument
Facts:
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Chapter 1 – Form and Interpretation
Petitioner Raul Sesbreño made a money market
placement in the amount of P300, 000 with the
Philippine Underwriters Finance Corporation
(Philfinance). In turn, Philfinance issued to petitioner
a Delta Motors Corp promissory note (DMC PN) and
postdated checks, with petitioner as payee.
Petitioner handed Pilipinas Bank a demand letter
informing the bank that his placement with
Philfinance had remained unpaid and outstanding,
and that he in effect was asking for the physical
delivery of the underlying promissory note. Petitioner
then examined the original of the DMC PN and found
that it had a face value of P2,300,833.33, with the
Philfinance as "payee" and private respondent Delta
Motors Corporation (Delta) as "maker" and that on
face of the promissory note was stamped "NON
NEGOTIABLE." Pilipinas did not deliver the Note, nor
any certificate of participation in respect thereof, to
petitioner.
Petitioner later made similar demand letters asking
private respondent Pilipinas for physical delivery of
the original of DMC PN.
Petitioner also made a written demand upon private
respondent Delta for the partial satisfaction of DMC
PN, explaining that Philfinance, as payee thereof, had
assigned to him said Note to the extent of
P307,933.33. Delta, however, denied any liability to
petitioner on the promissory note.
As petitioner had failed to collect his investment and
interest thereon, he filed an action for damages with
the RTC of Cebu City against private respondents
Delta and Pilipinas. The trial court, in a decision
dismissed the complaint and counterclaims for lack of
merit and for lack of cause of action.
Petitioner appealed to CA. CA denied the appeal.
Issue:
Whether non-negotiability of a promissory note
prevents its assignment.
Held:
No.
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 INSTRUMENTS LAW
7
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 legal
consequences of negotiation as 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 written in the face of the
instrument:
The words "not negotiable," stamped on the face of the
bill of lading, did not destroy its assignability, but the
sole effect was to exempt the bill from the statutory
provisions relative thereto, and a bill, though not
negotiable, may be transferred by assignment; the
assignee taking subject to the equities between the
original parties.
DMC PN, while marked "non-negotiable," was not at
the same time stamped "non-transferable" or "non-
assignable." It contained no stipulation which
prohibited Philfinance from assigning or transferring,
in whole or in part, that Note.
Philippine Bank of Commerce
vs.
Jose Aruego
(G.R. Nos. L-25836-37 January 31, 1981)
Bills of exchange – Accommodation party – Liability of a person
signing as an agent
Facts:
To facilitate the payment of the printing of "World
Current Events," a periodical published by the
defendant Aruego, he obtained a credit
accommodation from the plaintiff PBC. Thus, for
every printing of the "World Current Events," the
printer, Encal Press and Photo Engraving (Encal),
collected the cost of printing by drawing a draft
against PBC, said draft being sent later to the
defendant for acceptance. As an added security for
the payment of the amounts advanced to Encal, the
PBC also required Aruego to execute a trust receipt in
favor of said bank wherein said Aruego undertook to
hold in trust for PBC the periodicals and to sell the
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Chapter 1 – Form and Interpretation
same with the promise to turn over to the plaintiff the
proceeds of the sale of said publication to answer for
the payment of all obligations arising from the draft.
PBC instituted against Aruego for the recovery of the
total sum of about P35, 000. The complaint filed by
the PBC contains twenty-two (22) causes of action
referring to twenty-two (22) transactions entered
into by the said Bank and Aruego on different dates.
Aruego argued that he signed the document upon
which the plaintiff sues in his capacity as President of
the Philippine Education Foundation; that his liability
is only secondary; and that he believed that he was
signing only as an accommodation party.
Issue:
1. Whether Aruego can be held liable by the
petitioner although he signed the supposed bills of
exchange only as an agent of Philippine Education
Foundation Company.
2. Whether Aruego signed the drafts only as an
accommodation party and as such, should be made
liable only after a showing that the drawer (Encal) is
incapable of paying.
3. Whether the drafts were bills of exchange or mere
pieces of evidence of indebtedness.
Held:
1. Yes.
Section 20 of the Negotiable Instruments Law
provides that:
"Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf
of a principal or in a representative capacity, he is not
liable on the instrument if he was duly authorized; but
the mere addition of words describing him as an agent
or as filing a representative character, without
disclosing his principal, does not exempt him from
personal liability."
An inspection of the drafts accepted by the defendant
shows that nowhere has he disclosed that he was
signing as a representative of the Philippine
Education Foundation Company. He merely signed as
follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE
ARGUEGO
NEGOTIABLE INSTRUMENTS LAW
8
For failure to disclose his principal, Aruego is
personally liable for the drafts he accepted.
2. No.
An accommodation party is one who has signed the
instrument as maker, drawer, indorser, without
receiving value therefor and for the purpose of
lending his name to some other person. Such person
is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking
of the instrument knew him to be only an
accommodation party.
In lending his name to the accommodated party, the
accommodation party is in effect a surety for the
latter. He lends his name to enable the
accommodated party to obtain credit or to raise
money. He receives no part of the consideration for
the instrument but assumes liability to the other
parties thereto because he wants to accommodate
another.
In the instant case, the defendant signed as a
drawee/acceptor. Under the Negotiable Instrument
Law, a drawee is primarily liable. Thus, if the
defendant who is a lawyer, he should not have signed
as an acceptor/drawee. In doing so, he became
primarily and personally liable for the drafts.
3. The drafts were bills of exchange.
Under the Negotiable Instruments Law, a bill of
exchange is an unconditional order in writing
addressed by one person to another, signed by the
person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to
order or to bearer.
As long as a commercial paper conforms with the
definition of a bill of exchange, that paper is
considered a bill of exchange. The nature of
acceptance is important only in the determination of
the kind of liabilities of the parties involved, but not
in the determination of whether a commercial paper
is a bill of exchange or not.
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
Baldomero Inciong, Jr.
vs.
CA and PBC
(G.R. No. 96405. June 26, 1996)
Solidary obligation
Facts:
Petitioner's liability resulted from the promissory
note in the amount of P50, 000 which he signed with
Rene C. Naybe and Gregorio D. Pantanosas, holding
themselves jointly and severally liable to private
respondent Philippine Bank of Communications
(PBC).
Said promissory note expired without the promisors
having paid their obligation. Consequently, PBC
telegrams demanding payment thereof. PBC also sent
by registered mail a final letter of demand to Rene C.
Naybe. Since both obligors did not respond to the
demands made, PBC filed a complaint for collection
of the sum of P50, 000 against the three obligors.
The lower court dismissed the case against defendant
Pantanosas. Meanwhile, only the summons
addressed to petitioner was served as the sheriff
learned that defendant Naybe had gone to Saudi
Arabia.
Inciong was left to face the suit. He argued that that
since the complaint against Naybe was dropped, and
that Pantanosas was released from his obligations, he
too should have been released.
Issue:
Whether Inciong should be held liable.
Held:
Yes.
Petitioner argues that the dismissal of the complaint
against Naybe, the principal debtor, and against
Pantanosas, his co-maker, constituted a release of his
obligation, especially because the dismissal of the
case against Pantanosas was upon the motion of
private respondent itself. He cites as basis for his
argument, Article 2080 of the Civil Code which
provides that:
"The guarantors, even though they be solidary, are
released from their obligation whenever by some act of
NEGOTIABLE INSTRUMENTS LAW
9
the creditor, they cannot be subrogated to the rights,
mortgages, and preferences of the latter."
It is to be noted, however, that petitioner signed the
promissory note as a solidary co-maker and not as a
guarantor. This is patent even from the first sentence
of the promissory note which states as follows:
"Ninety one (91) days after date, for value received,
I/we, JOINTLY and SEVERALLY promise to pay to the
PHILIPPINE BANK OF COMMUNICATIONS at its office in
the City of Cagayan de Oro, Philippines the sum of FIFTY
THOUSAND ONLY (P50,000. 00) Pesos, Philippine
Currency, together with interest x x x at the rate of
SIXTEEN (16) per cent per annum until fully paid."
A solidary or joint and several obligation is one in
which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole
obligation. On the other hand, Article 2047 of the Civil
Code states:
"By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed, In such a case the contract
is called a suretyship."
While a guarantor may bind himself solidarily with the
principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus,
Tolentino explains:
"A guarantor who binds himself in solidum with the
principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a
solidary co-debtor, and a fiador in solidum (surety). The
later, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been
exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the fiansa;
while a solidary co-debtor has no other rights than
those bestowed upon him in Section 4, Chapter 3, title
I, Book IV of the Civil Code."
Section 4, Chapter 3, Title I, Book IV of the Civil Code
states the law on joint and several obligations. Under
Art. 1207 thereof, when there are two or more
debtors in one and the same obligation, the
presumption is that the obligation is joint so that each
of the debtors is liable only for a proportionate part
of the debt. There is a solidarity liability only when the
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
obligation expressly so states, when the law so
provides or when the nature of the obligation so
requires.
Because the promissory note involved in this case
expressly states that the three signatories therein are
jointly and severally liable, any one, some or all of
them may be proceeded against for the entire
obligation. The choice is left to the solidary creditor to
determine against whom he will enforce collection.
Consequently, the dismissal of the case against Judge
Pontanosas may not be deemed as having discharged
petitioner from liability as well. As regards Naybe,
suffice it to say that the court never acquired
jurisdiction over him. Petitioner, therefore, may only
have recourse against his co-makers, as provided by
law.
Republic Planters Bank
vs.
CA and Fermin Canlas
(G.R. No. 93073 December 21, 1992)
Solidary obligation
Facts:
Shozo Yamaguchi (President/Chief Operating Officer)
and Fermin Canlas (Treasurer) by virtue of Board
Resolution of Worldwide Garment Manufacturing, Inc
were authorized to apply for credit facilities with the
Republic Planters Bank (RPB) in the forms of export
advances and letters of credit/trust receipts
accommodations.
RPB issued 9 promissory notes each of which were
uniformly worded in the following manner:
___________, after date, for value received, I/we,
jointly and severally promise to pay to the ORDER of the
REPUBLIC PLANTERS BANK, at its office in Manila,
Philippines, the sum of ___________ PESOS(….)
Philippine Currency…
Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6 of WORLDWIDE GARMENT MFG.
CORP.
Sgd. Shozo Yamaguchi
Sgd. Fermin Canlas
NEGOTIABLE INSTRUMENTS LAW
10
Worldwide Garment Manufacturing, Inc. noted to
change its corporate name to Pinch Manufacturing
Corporation.
RPB filed a complaint for the recovery of sums of
money covered among others, by the nine promissory
notes with interest thereon, plus attorney's fees and
penalty charges.
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 Manufacturing Corporation, but
instead of Worldwide Garment Manufacturing, Inc.,
and that when he issued said promissory notes in
behalf of Worldwide Garment Manufacturing, Inc.,
the same were in blank, the typewritten entries not
appearing therein prior to the time he affixed his
signature.
Issue:
Whether private respondent Fermin Canlas is
solidarily liable with Pinch Manufacturing
Corporation and Shozo Yamaguchi, on the nine
promissory notes.
Held:
Yes.
The promissory notes are negotiable instruments and
must be governed by the Negotiable Instruments
Law.
Under the Negotiable lnstruments Law, persons who
write their names on the face of promissory notes are
makers and are liable as such. By signing the notes,
the maker promises to pay to the order of the payee
or any holder according to the tenor thereof. 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 persons, they are
deemed to be jointly and severally liable thereon. An
instrument which begins" with "I”, “We”, or "Either of
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
us" promise to, pay, when signed by two or more
persons, makes them solidarily liable. The fact that
the singular pronoun is used indicates that the
promise is individual as to each other; meaning that
each of the co-signers is deemed to have 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
note is one in which the makers bind themselves both
jointly and individually to the payee so that all may be
sued together for its enforcement, or the creditor
may select one or more as the object of the suit. A
joint and several obligation in common law
corresponds to a civil law solidary obligation; that is,
one of several debtors bound in such wise that each
is liable for the entire 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 payee 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, because it is immaterial and will not affect to
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 liable as a co-maker of each
of the notes and his liability is that of a solidary
debtor.
Nelia Ponce and Vicente Ponce
vs.
CA and Jesusa Afable
(G.R. No. L-49494 May 31, 1979)
Agreement to pay in foreign currency
Facts:
NEGOTIABLE INSTRUMENTS LAW
11
Private respondent Jesusa B. Afable, together with
Felisa L. Mendoza and Ma. Aurora C. Diño executed a
promissory note in favor of petitioner Nelia G. Ponce
in the sum of P814, 868.42, without interest.
Upon the failure of the debtors to comply with the
terms of the promissory note, petitioners filed a
complaint against them with the CFI of Manila for the
recovery of the principal sum of P814, 868.42, plus
interest and damages.
The trial Court rendered judgment ordering
respondent Afable and her co-debtors, Felisa L.
Mendoza and Ma. Aurora C. Diño to pay petitioners,
jointly and severally.
Respondent Afable appealed to CA. She argued that
the contract under consideration involved the
payment of US dollars and was, therefore, illegal; and
that under the in pari delicto rule, since both parties
are guilty of violating the law, neither one can
recover. It is to be noted that said defense was not
raised in her Answer.
CA affirmed the decision of the trial court, but
subsequently reversed its own decision and ruled in
favor of Afable. CA opined that the intent of the
parties was that the promissory note was payable in
US dollars, and, therefore, the transaction was illegal
with neither party entitled to recover under the in
pari delicto rule.
Issue:
Whether petitioners may recover.
Held:
Yes.
It is to be noted that while an agreement to pay in
dollars is declared as null and void and of no effect,
what the law specifically prohibits is payment in
currency other than legal tender. It does not defeat a
creditor's claim for payment, as it specifically provides
that "every other domestic obligation ... whether or
not any such provision as to payment is contained
therein or made with respect thereto, shall be
discharged upon payment in any coin or currency
which at the time of payment is legal tender for public
and private debts." A contrary rule would allow a
person to profit or enrich himself inequitably at
another's expense.
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
The promissory note in question provided on its face
for payment of the obligation in Philippine currency,
i.e., P814,868.42. So that, while the agreement
between the parties originally involved a dollar
transaction and that petitioners expected to be paid
in the amount of US$194,016.29, petitioners are not
now insisting on their agreement with respondent
Afable for the payment of the obligation in dollars. On
the contrary, they are suing on the basis of the
promissory note whereby the parties have already
agreed to convert the dollar loan into Philippine
currency at the rate of P4.20 to $1.00. It may likewise
be pointed out that the Promissory Note contains no
provision "giving the obligee the right to require
payment in a particular kind of currency other than
Philippine currency, " which is what is specifically
prohibited by RA No. 529.
At any rate, even if we were to disregard the
promissory note providing for the payment of the
obligation in Philippine currency and consider that
the intention of the parties was really to provide for
payment of the obligation would be made in dollars,
petitioners can still recover the amount of
US$194,016.29, which respondent Afable and her co-
debtors do not deny having received, in its peso
equivalent. As held in Eastboard Navigation, Ltd. vs.
Juan Ysmael & Co. Inc., 102 Phil. 1 (1957), and Arrieta
vs. National Rice & Corn Corp., if there is any
agreement to pay an obligation in a currency other
than Philippine legal tender, the same is null and void
as contrary to public policy, pursuant to Republic Act
No. 529, and the most that could be demanded is to
pay said obligation in Philippine currency. In other
words, what is prohibited by RA No. 529 is the
payment of an obligation in dollars, meaning that a
creditor cannot oblige the debtor to pay him in
dollars, even if the loan were given in said currency.
In such a case, the indemnity to be allowed should be
expressed in Philippine currency on the basis of the
current rate of exchange at the time of payment.
NOTE: RA 529 has already been repealed by Republic
Act 8183 which provides that every monetary
obligation must be paid in Philippine currency which
is legal tender in the Philippines. However, the parties
may agree that the obligation or transaction shall be
settled in any other currency at the time of payment.
(The Philippine Negotiable Instruments Law, De Leon
and De Leon Jr., p. 30)
NEGOTIABLE INSTRUMENTS LAW
12
Equitable Banking Corporation
vs.
IAC and Edward J. Nell
Company
(G.R. No. 74451 May 25, 1988)
When instrument payable to order
Facts:
In 1975, defendant Liberato Casals (represented
himself as the majority stockholder, president and
general manager of Casville Enterprises, Inc.)
purchased from plaintiff Edward J. Nell Company
(Nell), a dealer of machineries, equipment and
supplies, two units of Garrett skidders for P970,000.
To pay thereof, Casals agreed to open a letter of
credit with the Equitable Banking Corporation
(Equitable).
Plaintiff Nell shipped 1 unit of Garrett skidder.
Plaintiff paid the shipping cost in the amount of
P10,640 because of the verbal assurance of
defendant Casville that it would be covered by the
letter of credit soon to be opened.
Casville informed the Nell that their application for a
letter of credit for the payment of the Garrett
skidders had been approved by the Equitable.
However, the defendants said that they would need
the sum of P300,000.00 to stand as collateral or
marginal deposit in favor of Equitable. Nell agreed to
advance the necessary amount in order to facilitate
the transaction. Accordingly, Nell issued a check for
P427,300, which read:
Pay to the EQUITABLE BANKING CORPORATION Order
of A/C OF CASVILLE ENTERPRISES, INC.
Upon receiving the check for P427,300 entrusted to
him by plaintiff defendant Casals immediately
deposited it with the defendant 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.
Meanwhile, upon their presentation for encashment,
Nell discovered that the three checks in the total
amount of P427,300, that were issued by defendant
BEHIGA-MANTO-VILLAMOR DIGESTS
 13
Chapter 1 – Form and Interpretation

Casville as collateral were all dishonored for having Facts:

been drawn against a closed account.
Issue:
Whether petitioner Equitable is liable to private
respondent Edward J. Nell Co. for the value of the
check.
Held:
No.
The subject check was equivocal and patently
ambiguous. By making the check read:
Pay to the EQUITABLE BANKING CORPORATION Order
of A/C OF CASVILLE ENTERPRISES, INC.
PNB instituted an action to recover from the
defendants Concepcion Mining Company and Jose
Sarte in connection with a promissory note which
reads:
Manila, March 12, 1954
NINETY DAYS after date, for value received, I promise
to pay to the order of the Philippine National Bank . . . .
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 case shall be less
than P100.00 exclusive of all costs and fees allowed by
law as stipulated in the contract of real estate
mortgage. Demand and Dishonor Waived. Holder may
accept partial payment reserving his right of recourse
again each and all indorsers.

the payee ceased to be indicated with reasonable (Purpose — mining industry)

certainty in contravention of Section 8 of the CONCEPCION MINING COMPANY, INC.,
Negotiable Instruments Law. As worded, it could be By:
(Sgd.) VICENTE LEGARDA
accepted as deposit to the account of the party
President
named after the symbols "A/C," or payable to the (Sgd.) VICENTE LEGARDA
Bank as trustee, or as an agent, for Casville (Sgd.) JOSE S SARTE
Enterprises, Inc., with the latter being the ultimate
"Please issue check to —
beneficiary. That ambiguity is to be taken contra
Mr. Jose S. Sarte"
proferentem that is, construed against Nell who
caused the ambiguity and could have also avoided it
In their answer, defendants allege that the co-maker
by the exercise of a little more care. Thus, Article 1377
the promissory note Don Vicente L. Legarda died and
of the Civil Code, provides:
his estate is in the process of judicial determination.
Art. 1377. The interpretation of obscure words or
They prayed that the estate of said deceased Legarda
stipulations in a contract shall not favor the party who be included as party-defendant.
caused the obscurity.
Issue:
Nell’s own acts and omissions in connection with the Whether the estate of Legarda should be included in
drawing, and its implicit trust in Casals, were the the suit.
proximate cause of its own defraudation.
Consequently, it must bear the loss. Held:
No.
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
Section 17 (g) of the Negotiable Instruments Law
the loss. provides as follows:

PNB SEC. 17. Construction where instrument is ambiguous.

vs. — Where the language of the instrument is ambiguous
or there are omissions therein, the following rules of
Concepcion Mining Co. Inc., et.
construction apply:
al.
xxx xxx xxx
(G.R. No. L-16968 July 31, 1962)
Construction where instrument is ambiguous

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Chapter 1 – Form and Interpretation
(g) Where an instrument containing the word "I promise
to pay" is signed by two or more persons, they are
deemed to be jointly and severally liable thereon.
And Article 1216 of the Civil Code of the Philippines
also provides as follows:
ART. 1216. The creditor may proceed against any one of
the solidary debtors or some of them simultaneously.
The 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.
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 S.
Sarte, the payee of the promissory note had the right
to hold any one or any two of the signers of the
promissory note responsible for the payment of the
amount of the note.
Loreto De la Victoria
vs.
Hon. Jose P. Burgos, Presiding
Judge, and Raul Sesbreño
(G.R. No. 111190 June 27, 1995)
Complete and undelivered instrument
Facts:
Sesbreño filed a complaint Mabanto, Jr. and Rama,
Jr., before the RTC of Cebu City. After trial, judgment
was rendered ordering the defendants to pay
P11,000.00 to Sesbreño. The decision having become
final and executory, the trial court ordered its
execution. This order was questioned by the
defendants before the CA. However, a writ of
execution was issued.
A notice of garnishment was served on petitioner
Loreto D. de la Victoria as City Fiscal of Mandaue City
where defendant Mabanto, Jr., was then detailed.
The notice directed petitioner not to disburse,
transfer, release or convey to any other person
except to the deputy sheriff concerned the salary
checks or other checks, monies, or cash due or
belonging to Mabanto, Jr.
NEGOTIABLE INSTRUMENTS LAW
14
Subsequently, the petition pending before the CA was
dismissed. Thus the trial court directed petitioner to
submit his report showing the amount of the
garnished salaries of Mabanto, Jr. Sesbreño filed a
motion to require petitioner to explain why he should
not be cited in contempt of court for failing to comply
with the order.
Petitioner moved to quash the notice of garnishment
claiming that he was not in possession of any money,
funds, credit, property or anything of value belonging
to Mabanto, Jr., except his salary and RATA checks,
but that said checks were not yet properties of
Mabanto, Jr., until delivered to him. He further
claimed that, as such, they were still public funds
which could not be subject to garnishment.
Trial court denied both motions and ordered
petitioner to immediately comply with its order.
Issue:
Whether a check still in the hands of the maker or its
duly authorized representative is owned by the payee
before physical delivery to the latter.
Held:
No.
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
of the possession of the instrument by the maker or
drawer with intent to transfer title to the payee and
recognize him as the holder thereof.
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 of the writ of
garnishment by the sheriff 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 last sentence of
Sec. 16 of the Negotiable Instruments Law which
states: "And where the instrument is no longer in the
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
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 court for no apparent reason.
Proof to the contrary is its own finding that the checks
were in the custody of petitioner. Inasmuch as said
checks had not yet been delivered 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 teacher does not belong to him before it is
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 cannot assign it without the consent of the
Government.
Development Bank of Rizal
vs.
Sima Wei and/or Lee Kian
Huat, Mary Cheng Uy, Samson
Tung, Asian Industrial Plastic
Corp and Producers Bank of
the Philippines
(G.R. No. 85419 March 9, 1993)
Complete and undelivered instrument
Facts:
In consideration for a loan extended by Development
Bank of Rizal (DBR) to respondent Sima Wei, the latter
executed and delivered to the former a promissory
note, engaging to pay DBR or order the amount of
P1,820,000.00 with interest at 32% per annum. Sima
Wei made partial payments on the note, leaving a
balance of P1,032,450.02.
Sima Wei issued two crossed checks payable to DBR
drawn against China Banking Corporation in full
settlement of the drawer's account evidenced by the
promissory note. These two checks were not
delivered to the petitioner-payee or to any of its
authorized representatives. For reasons not shown,
these checks came into the possession of respondent
Lee Kian Huat, who deposited the checks without the
petitioner-payee's indorsement (forged or otherwise)
NEGOTIABLE INSTRUMENTS LAW
15
to the account of respondent Plastic Corporation of
the Producers Bank. Cheng Uy, Branch Manager of
the Balintawak branch of Producers Bank, relying on
the assurance of respondent Samson Tung, President
of Plastic Corporation, that the transaction was legal
and regular, instructed the cashier of Producers Bank
to accept the checks for deposit and to credit them to
the account of said Plastic Corporation, inspite of the
fact that the checks were crossed and payable to DBR
and bore no indorsement of the latter.
Hence, DBR filed a complaint for a sum of money
against respondents Sima Wei and/or Lee Kian Huat,
Mary Cheng Uy, Samson Tung, Asian Industrial Plastic
Corporation (Plastic Corporation for short) and the
Producers Bank of the Philippines.
Issue:
Whether DBR may enforce payment of the two
checks executed by Sima Wei.
Held:
No.
The normal parties to a check are the drawer, the
payee and the drawee bank. Courts have long
recognized the business custom of using printed
checks where blanks are provided for the date of
issuance, the name of the payee, the amount payable
and the drawer's signature. All the drawer has to do
when he wishes to issue a check is to properly fill up
the blanks and sign it. However, the mere fact that he
has done these does not give rise to any liability on
his part, until and unless the check is delivered to the
payee or his representative. A negotiable instrument,
of which a check is, is not only a written evidence of a
contract right but is also a species of property. Just as
a deed to a piece of land must be delivered in order
to convey title to the grantee, so must a negotiable
instrument be delivered to the payee in order to
evidence its existence as a binding contract. Section
16 of the Negotiable Instruments Law, which governs
checks, provides in part:
Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the
purpose of giving effect thereto. . . .
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Chapter 1 – Form and Interpretation
Thus, the payee of a negotiable instrument acquires
no interest with respect thereto until its delivery to
him. Delivery of an instrument means transfer of
possession, actual or constructive, from one person
to another. Without the initial delivery of the
instrument from the drawer to the payee, there can
be no liability on the instrument. Moreover, such
delivery must be intended to give effect to the
instrument.
The allegations of the petitioner in the original
complaint show that the two (2) China Bank checks
were not delivered to the payee, the petitioner
herein. Without the delivery of said checks to DBR,
DBR did not acquire any right or interest therein and
cannot therefore assert any cause of action, founded
on said checks, whether against the drawer Sima Wei
or against the Producers Bank or any of the other
respondents.
Dispositive: Judgment of CA dismissing the
petitioner's complaint is AFFIRMED. The case is
REMANDED to the trial court for a trial on the merits
in order to determine whether respondent Sima Wei
is liable to the Development Bank of Rizal for any
amount under the promissory note allegedly signed
by her.
Republic Bank
vs.
Mauricia Ebrada
(G.R. No. L-40796 July 31, 1975)
Right of DRAWEE to recover from last indorser where indorser’s
signature is forged
Facts:
Ebrada encashed a “Back Pay Check” issued by the
Bureau of Treasury at the Republic Bank in Escolta
Manila. Republic Bank was advised the said bureau
that the alleged indorsement on the reverse side of
the aforesaid check by the payee, "Martin Lorenzo"
was a forgery since the latter had allegedly died, 11
years before the check was issued. Republic Bank was
then requested by the Bureau of Treasury to refund
the amount of P1,246.08.
To recover what it had refunded to the Bureau of
Treasury, plaintiff Bank made verbal and formal
NEGOTIABLE INSTRUMENTS LAW
16
demands upon defendant Ebrada, but Ebrada refused
to do so. So Republic Bank sued defendant Ebrada
before the City Court of Manila.
The back side of aforementioned check bears the
following signatures, in this order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA
The check was delivered to Ebrada by Dominguez for
the purpose of encashment. After defendant Ebrada
received the cash from the Republic Bank, she
immediately turned over the said amount to
Dominguez, who in turn handed the said amount to
Justina Tinio.
RTC ruled in favor of Republic Bank.
Issue:
Whether Ebrada is liable for the value of the check.
Held:
Yes.
It is admitted that defendant-appellant was the last
indorser of the said check. As such indorser, she was
supposed to have warranted that she has good title
to said check; for under Section 65 of the Negotiable
Instruments Law:
Every person negotiating an instrument by delivery or
by qualified indorsement, warrants:
(a) That the instrument is genuine and in all respects
what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification
warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions
(a), (b), and (c) of the next preceding sections;
(b) That the instrument is at the time of his indorsement
valid and subsisting.
BEHIGA-MANTO-VILLAMOR DIGESTS
 17
Chapter 1 – Form and Interpretation

In the case of State v. Broadway Mut. Bank, 282 S.W.

It turned out, however, that the signature of the 196, 197, it was held that the drawee of a check can
original payee of the check, Martin Lorenzo was a recover from the holder the money paid to him on a
forgery because he was already dead almost 11 years forged instrument. It is not supposed to be its duty to
before the check in question was issued by the ascertain whether the signatures of the payee or
Bureau of Treasury. Under Section 23 of the indorsers are genuine or not. This is because the
Negotiable Instruments Law (Act 2031): indorser is supposed to warrant to the drawee that
the signatures of the payee and previous indorsers
When a signature is forged or made without the are genuine, warranty not extending only to holders
authority of the person whose signature it purports to
in due course. One who purchases a check or draft is
be, it is wholly inoperative, and no right to retain the
instruments, or to give a discharge thereof against any bound to satisfy himself that the paper is genuine and
party thereto, can be acquired through or under such that by indorsing it or presenting it for payment or
signature unless the party against whom it is sought to putting it into circulation before presentation he
enforce such right is precluded from setting up the
impliedly asserts that he has performed his duty and
forgery or want of authority.
the drawee who has paid the forged check, without
actual negligence on his part, may recover the money
It is clear from the provision that where the signature
paid from such negligent purchasers. In such cases
on a negotiable instrument if forged, the negotiation
the recovery is permitted because although the
of the check is without force or effect. But does this
drawee was in a way negligent in failing to detect the
mean that the existence of one forged signature
forgery, yet if the encasher of the check had
therein will render void all the other negotiations of
performed his duty, the forgery would in all
the check with respect to the other parties whose
probability, have been detected and the fraud
signature are genuine?
defeated.
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W.
590, where a check has several indorsements on it, it
was held that it is only the negotiation based on the
Adalia Francisco
forged or unauthorized signature which is vs.
inoperative. Applying this principle to the case at bar,
CA, et. al.
it can be safely concluded that it is only the
negotiation predicated on the forged indorsement (G. R. No. 116320 November 29, 1999)
Liability of person signing as agent
that should be declared inoperative. This means that
Facts:
the negotiation of the check in question from Martin
A. Francisco Realty & Development Corporation
Lorenzo, the original payee, to Ramon R. Lorenzo, the
(AFRDC), of which petitioner Francisco is the
second indorser, should be declared of no effect, but
president, entered into a Land Development and
the negotiation of the aforesaid check from Ramon R.
Construction Contract with private respondent Herby
Lorenzo to Adelaida Dominguez, the third indorser,
Commercial & Construction Corporation (HCCC),
and from Adelaida Dominguez to the defendant-
represented by its President and General Manager
appellant who did not know of the forgery, should be
private respondent Ong. Under the contract, HCCC
considered valid and enforceable, barring any claim
was to be paid on the basis of the completed houses
of forgery.
and developed lands delivered to and accepted by
AFRDC and the GSIS.
What happens then, if, after the drawee bank has
paid the amount of the check to the holder thereof, it
To facilitate payment, AFRDC executed a Deed of
was discovered that the signature of the payee was
Assignment in favor of HCCC to enable the latter to
forged? Can the drawee bank recover from the one
collect payments directly from the GSIS. Furthermore,
who encashed the check?
the GSIS and AFRDC put up an Executive Committee
Account with the Insular Bank of Asia & America
(IBAA) in the amount of P4,000,000 from which

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Chapter 1 – Form and Interpretation
checks would be issued and co-signed by petitioner
Francisco and the GSIS Vice-President Armando Diaz
(Diaz).
Sometime in 1979, Ong discovered that Diaz and
Francisco had executed and signed seven checks, of
various dates and amounts, drawn against the IBAA
and payable to HCCC for completed and delivered
work under the contract. Ong, however, claims that
these checks were never delivered to HCCC. Upon
inquiry with Diaz, Ong learned that the GSIS gave
Francisco custody of the checks since she promised
that she would deliver the same to HCCC. Instead,
Francisco forged the signature of Ong, without his
knowledge or consent, at the dorsal portion of the
said checks to make it appear that HCCC had indorsed
the checks; Francisco then indorsed the checks for a
second time by signing her name at the back of the
checks and deposited the checks in her IBAA savings
account. IBAA credited Franciscos account with the
amount of the checks and the latter withdrew the
amount so credited.
Ong filed complaints with the office of the city fiscal
of Quezon City, charging Francisco with estafa thru
falsification of commercial documents. Francisco
denied having forged Ongs signature on the checks,
claiming that Ong himself indorsed the seven checks
in behalf of HCCC and delivered the same to Francisco
in payment of the loans extended by Francisco to
HCCC.
Issue:
Whether petitioner can be held liable on the
questioned checks by virtue of the Certification
executed by Ong giving her the authority to collect
such checks from the GSIS.
Held:
Yes.
The Negotiable Instruments Law provides that where
any person is under obligation to indorse in a
representative capacity, he may indorse in such terms
as to negative personal liability. An agent, when so
signing, should indicate that he is merely signing in
behalf of the principal and must disclose the name of
his principal; otherwise he shall be held personally
liable. Even assuming that Francisco was authorized
NEGOTIABLE INSTRUMENTS LAW
18
by HCCC to sign Ongs name, still, Francisco did not
indorse the instrument in accordance with law.
Instead of signing Ongs name, Francisco should have
signed her own name and expressly indicated that she
was signing as an agent of HCCC. Thus, the
Certification cannot be used by Francisco to validate
her act of forgery.
Philippine Commercial
International Bank
vs.
CA
(G.R. No. 121413 and 121479 January 29, 2001)
Bank paid a forged check
Facts:
Ford drew and issued its Citibank Check in the amount
of P4,746,114.41, in favor of the Commissioner of
Internal Revenue as payment of plaintiffs percentage
or manufacturers sales taxes for the third quarter of
1977. The aforesaid check was deposited with the
defendant IBAA (now PCIBank) and was subsequently
cleared at the Central Bank. Upon presentment with
the defendant Citibank, the proceeds of the check
was paid to IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the
plaintiff was never paid to or received by the payee
thereof, the CIR. As a consequence, upon demand of
CIR, the Ford was compelled to make a second
payment to BIR.
Meanwhile, according to the NBI report, one of the
checks issued by petitioner was withdrawn from PCIB
for alleged mistake in the amount to be paid. This was
replaced with manager’s check by PCIB, which were
allegedly stolen by the syndicate and deposited in
their own account.
Issue:
Whether Ford has the right to recover from the
collecting bank (PCIBank) and the drawee bank
(Citibank) the value of the checks intended as
payment to the Commissioner of Internal Revenue.
Held:
Yes.
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Chapter 1 – Form and Interpretation
The checks were drawn against the drawee bank, but
the title of the person negotiating the same was
allegedly defective because the instrument was
obtained by fraud and unlawful means, and the
proceeds of the checks were not remitted to the
payee. It was established that instead of paying the
checks to the CIR, for the settlement of the
appropriate quarterly percentage taxes of Ford, the
checks were diverted and encashed for the eventual
distribution among the members of the syndicate. As
to the unlawful negotiation of the check the
applicable law is Section 55 of the Negotiable
Instruments Law (NIL), which provides:
When title defective -- The title of a person who
negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument,
or any signature thereto, by fraud, duress, or force and
fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of
faith or under such circumstances as amount to a fraud.
Pursuant to this provision, it is vital to show that the
negotiation is made by the perpetrator in breach of
faith amounting to fraud. The person negotiating the
checks must have gone beyond the authority given by
his principal. If the principal could prove that there
was no negligence in the performance of his duties,
he may set up the personal defense to escape liability
and recover from other parties who, through their
own negligence, allowed the commission of the
crime.
In this case, we note that the direct perpetrators of
the offense, namely the embezzlers belonging to a
syndicate, are now fugitives from justice. They have,
even if temporarily, escaped liability for the
embezzlement of millions of pesos. We are thus left
only with the task of determining who of the present
parties before us must bear the burden of loss of
these millions. It all boils down to the question of
liability based on the degree of negligence among the
parties concerned.
Foremost, we must resolve whether the injured
party, Ford, is guilty of the imputed contributory
negligence that would defeat its claim for
reimbursement, bearing in mind that its employees,
Godofredo Rivera and Alexis Marindo, were among
the members of the syndicate.
NEGOTIABLE INSTRUMENTS LAW
19
It appears that although the employees of Ford
initiated the transactions attributable to an organized
syndicate, in our view, their actions were not the
proximate cause of encashing the checks payable to
the CIR. The degree of Fords negligence, if any, could
not be characterized as the proximate cause of the
injury to the parties.
The mere fact that the forgery was committed by a
drawer-payors confidential employee or agent, who
by virtue of his position had unusual facilities for
perpetrating the fraud and imposing the forged paper
upon the bank, does not entitle the bank to shift the
loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer.
Note: SC found that PCIB was negligent for the
payment of the three checks involved. Citibank is also
responsible for negligence. Citibank was negligent in
the performance of its duties as a drawee bank. It
failed to establish its payments of Ford’s checks
were made in due course and legally in order.
Associated Bank
vs.
CA
(G.R. No. 107382. January 31, 1996)
Rights of parties in forgery of an order instrument
Facts:
The Province of Tarlac maintains a current account
with the Philippine National Bank (PNB) where the
provincial funds are deposited.
A portion of the funds of the province is allocated to
the Concepcion Emergency Hospital. The allotment
checks for said government hospital are drawn to the
order of Concepcion. Emergency Hospital,
Concepcion, Tarlac or The Chief, Concepcion
Emergency Hospital, Concepcion, Tarlac. The checks
are released by the Office of the Provincial Treasurer
and received for the hospital by its administrative
officer and cashier.
In January 1981, the books of account of the
Provincial Treasurer were post-audited by the
Provincial Auditor. It was then discovered that the
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
hospital did not receive several allotment checks
drawn by the Province.
After the checks were examined, the Provincial
Treasurer learned that 30 checks amounting to
P203,300.00 were encashed by one Fausto
Pangilinan, with the Associated Bank acting as
collecting bank.
It turned out that Fausto Pangilinan, who was the
administrative officer and cashier of payee hospital
until his retirement on February 1978, collected the
questioned checks from the office of the Provincial
Treasurer. He claimed to be assisting or helping the
hospital follow up the release of the checks and had
official receipts. Pangilinan sought to encash the first
check with Associated Bank. However, the manager
of Associated Bank refused and suggested that
Pangilinan deposit the check in his personal savings
account with the same bank. Pangilinan was able to
withdraw the money when the check was cleared and
paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who
was chief of the payee hospital, Pangilinan followed
the same procedure for the second check, in the
amount of P5,000.00 and as well as for twenty-eight
other checks, of various amounts and on various
dates. All the checks bore the stamp of Associated
Bank which reads “All prior endorsements
guaranteed ASSOCIATED BANK.”
The Provincial Treasurer wrote the manager of the
PNB seeking the restoration of the various amounts
debited from the current account of the Province.
In turn, the PNB manager demanded reimbursement
from the Associated Bank.
As both banks resisted payment, the Province of
Tarlac brought suit against PNB which, in turn,
impleaded Associated Bank as third-party defendant.
The latter then filed a fourth-party complaint against
Adena Canlas and Fausto Pangilinan.
The trial court ruled that:
1) PNB should pay the Province of Tarlac the
P203,300 with legal interests,
NEGOTIABLE INSTRUMENTS LAW
20
2) Associated Bank should pay the same
amount to PNB and
3) Dismissed the complaints against Canlas
and Pangilinan.
On appeal, the CA affirmed the ruling of the trial
court.
Issue:
Who should bear the loss.
Held:
Checks having forged indorsements should be
differentiated from forged checks or checks bearing
the forged signature of the drawer.
Forged signature wholly inoperative
Section 23 of the Negotiable Instruments Law (NIL)
provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. - When a
signature is forged or made without authority of the
person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired
through or under such signature unless the party
against whom it is sought to enforce such right is
precluded from setting up the forgery or want of
authority.
A forged signature, whether it be that of the drawer
or the payee, is wholly inoperative and no one can
gain title to the instrument through it. A person
whose signature to an instrument was forged was
never a party and never consented to the contract
which allegedly gave rise to such instrument.18
Section 23 does not avoid the instrument but only the
forged signature. Thus, a forged indorsement does
not operate as the payees indorsement.
Exception
The exception to the general rule in Section 23 is
where a party against whom it is sought to enforce a
right is precluded from setting up the forgery or want
of authority. Parties who warrant or admit the
genuineness of the signature in question and those
who, by their acts, silence or negligence are estopped
from setting up the defense of forgery, are precluded
from using this defense. Indorsers, persons
negotiating by delivery and acceptors are warrantors
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
of the genuineness of the signatures on the
instrument.
In bearer instruments, the signature of the payee or
holder is unnecessary to pass title to the instrument.
Hence, when the indorsement is a forgery, only the
person whose signature is forged can raise the
defense of forgery against a holder in due course.
The checks involved in this case are order
instruments, hence, the following discussion is made
with reference to the effects of a forged indorsement
on an instrument payable to order.
Where the instrument is payable to order at the time
of the forgery, such as the checks in this case, the
signature of its rightful holder (here, the payee
hospital) is essential to transfer title to the same
instrument. When the holders indorsement is forged,
all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent
thereto.
Liability of general indorser
An indorser of an order instrument warrants that the
instrument is genuine and in all respects what it
purports to be; that he has a good title to it; that all
prior parties had capacity to contract; and that the
instrument is at the time of his indorsement valid and
subsisting. He cannot interpose the defense that
signatures prior to him are forged.
Collecting bank where check is deposited and indorses
check, an indorser
A collecting bank where a check is deposited and
which indorses the check upon presentment with the
drawee bank, is such an indorser. So even if the
indorsement on the check deposited by the banks
client is forged, the collecting bank is bound by his
warranties as an indorser and cannot set up the
defense of forgery as against the drawee bank.
Payment under a forged indorsement is not to the
drawers order; reason
The bank on which a check is drawn, known as the
drawee bank, is under strict liability to pay the check
to the order of the payee. The drawers instructions
are reflected on the face and by the terms of the
check. Payment under a forged indorsement is not to
NEGOTIABLE INSTRUMENTS LAW
21
the drawers order. When the drawee bank pays a
person other than the payee, it does not comply with
the terms of the check and violates its duty to charge
its customers (the drawer) account only for properly
payable items. Since the drawee bank did not pay a
holder or other person entitled to receive payment, it
has no right to reimbursement from the drawer. The
general rule then is that the drawee bank may not
debit the drawers account and is not entitled to
indemnification from the drawer. The risk of loss
must perforce fall on the drawee bank.
Exceptions
However, if the drawee bank can prove a failure by
the customer/drawer to exercise ordinary care that
substantially contributed to the making of the forged
signature, the drawer is precluded from asserting the
forgery.
If at the same time the drawee bank was also
negligent to the point of substantially contributing to
the loss, then such loss from the forgery can be
apportioned between the negligent drawer and the
negligent bank.
In cases of forged indorsements, the loss falls on the
party who took the check from the forger or the forger
himself
In cases involving checks with forged indorsements,
such as the present petition, the chain of liability does
not end with the drawee bank. The drawee bank may
not debit the account of the drawer but may generally
pass liability back through the collection chain to the
party who took from the forger and, of course, to the
forger himself, if available. In other words, the
drawee bank can seek reimbursement or a return of
the amount it paid from the presentor bank or
person. Theoretically, the latter can demand
reimbursement from the person who indorsed the
check to it and so on. The loss falls on the party who
took the check from the forger, or on the forger
himself. Since a forged indorsement is inoperative,
the collecting bank had no right to be paid by the
drawee bank. The former must necessarily return the
money paid by the latter because it was paid
wrongfully.
Case at bar
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
In this case, the checks were indorsed by the
collecting bank (Associated Bank) to the drawee bank
(PNB). The former will necessarily be liable to the
latter for the checks bearing forged indorsements. If
the forgery is that of the payees or holders
indorsement, the collecting bank is held liable,
without prejudice to the latter proceeding against the
forger.
General indorser; collecting bank or last endorser
suffers loss on forged in-dorsement; reason
More importantly, by reason of the statutory
warranty of a general indorser in Section 66 of the
Negotiable Instruments Law, a collecting bank which
indorses a check bearing a forged indorsement and
presents it to .the drawee bank guarantees all prior
indorsements, including the forged indorsement. It
warrants that the instrument is genuine, and that it is
valid and subsisting at the time of his indorsement.
Because the indorsement is a forgery, the collecting
bank commits a breach of this warranty and will be
accountable to the drawee bank. This liability scheme
operates without regard to fault on the part of the
collecting/presenting bank. Even if the latter bank
was not negligent, it would still be liable to the
drawee bank because of its indorsement. The Court
has consistently ruled that the collecting bank or last
endorser generally suffers the loss because it has the
duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting
the check for payment to the drawee is an assertion
that the party making the presentment has done its
duty to ascertain the genuineness of the
endorsements. Moreover, the collecting bank is made
liable because it is privy to the depositor who
negotiated the check. The bank knows him, his
address and history because he is a client. It has taken
a risk on his deposit. The bank is also in a better
position to detect forgery, fraud or irregularity in the
indorsement.
Drawee bank not liable for loss on forged
indorsement; reason
The drawee bank is not similarly situated as the
collecting bank because the former makes no
warranty as to the genuineness of any indorsement.
The drawee banks duty is but to verify the
genuineness of the drawer’s signature and not of the
indorsement because the drawer is its client.
NEGOTIABLE INSTRUMENTS LAW
22
Duty of drawee bank to promptly inform presentor of
the forgery upon discovery; effect of failure to
promptly inform
The drawee bank can recover the amount paid on the
check bearing a forged indorsement from the
collecting bank. However, a drawee bank has the duty
to promptly inform the presentor of the forgery upon
discovery. If the drawee bank delays in informing the
presentor of the forgery, thereby depriving said
presentor of the right to recover from the forger, the
former is deemed negligent and can no longer
recover from the presentor.
Effect of contributory negligence in case at bar
Applying these rules to the case at bench, PNB, the
drawee bank, cannot debit the current account of the
Province of Tarlac because it paid checks which bore
forged indorsements. However, if the Province of
Tarlac as drawer was negligent to the point of
substantially contributing to the loss, then the
drawee bank PNB can charge its account. If both
drawee bank-PNB and drawer-Province of Tarlac
were negligent, the loss should be properly
apportioned between them. The loss incurred by
drawee bank-PNB can be passed on to the collecting
bank-Associated Bank which presented and indorsed
the checks to it. Associated Bank can, in turn, hold the
forger, Fausto Pangilinan, liable. If PNB negligently
delayed in informing Associated Bank of the forgery,
thus depriving the latter of the opportunity to recover
from the forger, it forfeits its right to reimbursement
and will be made to bear the loss. After careful
examination of the records, the Court finds that the
Province of Tarlac was equally negligent and should,
therefore, share the burden of loss from the checks
bearing a forged indorsement. The Province of Tarlac
permitted Fausto Pangilinan to collect the checks
when the latter, having already retired from
government service, was no longer connected with
the hospital. With the exception of the first check, all
the checks were issued and released after Pangilinans
retirement. After nearly three years, the Treasurers
office was still releasing the checks to the retired
cashier. In addition, some of the aid allotment checks
were released to Pangilinan and the others to
Elizabeth Juco, the new cashier. The fact that there
were now two persons collecting the checks for the
hospital is an unmistakable sign of an irregularity
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
which should have alerted employees in the
Treasurers office of the fraud being committed. There
is also evidence indicating that the provincial
employees were aware of Pangilinans retirement and
consequent dissociation from the hospital. The failure
of the Province of Tarlac to exercise due care
contributed to a significant degree to the loss
tantamount to negligence. Hence, the Province of
Tarlac should be liable for part of the total amount
paid on the questioned checks. The drawee bank PNB
also breached its duty to pay only according to the
terms of the check. Hence, it cannot escape liability
and should also bear part of the loss. The Court finds
as reasonable, the proportionate sharing of fifty
percent - fifty percent (50%-50%). Due to the
negligence of the Province of Tarlac in releasing the
checks to an unauthorized person (Fausto
Pangilinan), in allowing the retired hospital cashier to
receive the checks for the payee hospital for a period
close to three years and in not properly ascertaining
why the retired hospital cashier was collecting checks
for the payee hospital in addition to the hospitals real
cashier, respondent Province contributed to the loss
amounting to P203,300.00 and shall be liable to the
PNB for fifty (50%) percent thereof. In effect, the
Province of Tarlac can only recover fifty percent (50%)
of P203,300.00 from PNB. The collecting bank,
Associated Bank, shall be liable to PNB for fifty (50%)
percent of P203,300.00. It is liable on its warranties as
indorser of the checks which were deposited by
Fausto Pangilinan, having guaranteed the
genuineness of all prior indorsements, including that
of the chief of the payee hospital, Dr. Adena Canlas.
Associated Bank was also remiss in its duty to
ascertain the genuineness of the payees
indorsement.
Forgery; delay in informing collecting bank of forgery
by the drawee bank signifies negligence
A delay in informing the collecting bank (Associated
Bank) of the forgery, which deprives it of the
opportunity to go after the forger, signifies
negligence on the part of the drawee bank (PNB) and
will preclude it from claiming reimbursement.
Return of forged indorsement; 24-hour period but
not beyond period for filing legal action for banks
outside Metro Manila; case at bar
NEGOTIABLE INSTRUMENTS LAW
23
Under Section 4(c) of CB Circular No. 580, items
bearing a forged endorsement shall be returned
within twenty-four (24) hours after discovery of the
forgery but in no event beyond the period fixed or
provided by law for filing of a legal action by the
returning bank. Section 23 of the PCHC Rules deleted
the requirement that items bearing a forged
endorsement should be returned within twenty-four
hours. Associated Bank now argues that the
aforementioned Central Bank Circular is applicable.
Since PNB did not return the questioned checks
within twenty-four hours, but several days later,
Associated Bank alleges that PNB should be
considered negligent and not entitled to
reimbursement of the amount it paid on the checks.
The Central Bank circular was in force for all banks
until June 1980 when the Philippine Clearing House
Corporation (PCHC) was set up and commenced
operations. Banks in Metro Manila were covered by
the PCHC while banks located elsewhere still had to
go through Central Bank Clearing. In any event, the
twenty-four-hour return rule was adopted by the
PCHC until it was changed in 1982. The contending
banks herein, which are both branches in Tarlac
province, are therefore not covered by PCHC Rules
but by CB Circular No. 580. Clearly then, the CB
circular was applicable when the forgery of the checks
was discovered in 1981.
Rationale
The rule mandates that the checks be returned within
twenty-four hours after discovery of the forgery but
in no event beyond the period fixed by law for filing a
legal action. The rationale of the rule is to give the
collecting bank (which indorsed the check) adequate
opportunity to proceed against the forger. If prompt
notice is not given, the collecting bank may be
prejudiced and lose the opportunity to go after its
depositor.
Failure to return forged indorsement within 24 hours
from discovery does not prejudice collecting bank
which presented forger as its rebuttal witness
The Court finds that even if PNB did not return the
questioned checks to Associated Bank within twenty-
four hours, as mandated by the rule, PNB did not
commit negligent delay. Under the circumstances,
PNB gave prompt notice to Associated Bank and the
latter bank was not prejudiced in going after Fausto
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
Pangilinan. After the Province of Tarlac informed PNB
of the forgeries, PNB necessarily had to inspect the
checks and conduct its own investigation. Thereafter,
it requested the Provincial Treasurers office on March
31, 1981 to return the checks for verification. The
Province of Tarlac returned the checks only on April
22, 1981. Two days later, Associated Bank received
the checks from PNB. Associated Bank was also
furnished a copy of the Provinces letter of demand to
PNB dated March 20, 1981, thus giving it notice of the
forgeries. At this time, however, Pangilinans account
with Associated had only P24.63 in it. Had Associated
Bank decided to debit Pangilinans account, it could
not have recovered the amounts paid on the
questioned checks. In addition, while Associated Bank
filed a fourth-party complaint against Fausto
Pangilinan, it did not present evidence against
Pangilinan and even presented him as its rebuttal
witness. Hence, Associated Bank was not prejudiced
by PNBs failure to comply with the twenty-four-hour
return rule.
Ruling on liabilities of parties:
The SC held that the Province and Associated Bank
should bear losses in the proportion of 50-50.
The Province can only recover 50% of the P203,300
from PNB because of the negligence they exhibited in
releasing the checks to the then already retired
Pangilinan who is an unauthorized person to handle
the said checks.
On the other hand, Associated Bank is liable to PNB
only to 50% of the same amount because of its
liability as indorser of the checks that were deposited
by Pangilinan, and guaranteed the genuineness of the
said checks. They failed to exercise due diligence in
checking the veracity of indorsements.
PNB
vs.
Romulo Quimpo and Francisco
Gozon
(G.R. No. L-53194 March 14, 1988)
Right of drawee to recover payment made where drawer’s
signature was forged
Facts:
NEGOTIABLE INSTRUMENTS LAW
24
Francisco S. Gozon II, who was a depositor of PNB,
went to the bank in his car accompanied by his friend
Ernesto Santos whom he left in the car while he
transacted business in the bank. When Santos saw
that Gozon left his check book, he took a check
therefrom, filled it up for the amount of P5,000.00,
forged the signature of Gozon, and thereafter he
encashed the check in the bank on the same day. The
account of Gozon was debited the said amount. Upon
receipt of the statement of account from the bank,
Gozon asked that the said amount of P5,000.00
should be returned to his account as his signature on
the check was forged but the bank refused.
Gozon filed a complaint for recovery of the amount of
P5,000.00 against PNB at CFI of Rizal. Trial court ruled
in favor of Gozon.
PNB appealed where it argued that Gozon was
negligent and precluded from setting up forgery.
Issue:
Whether Gozon may recover from PNB.
Held:
Yes.
A bank is bound to know the signatures of its
customers; and if it pays a forged check, it must be
considered as making the payment out of its own
funds, and cannot ordinarily change the amount so
paid to the account of the depositor whose name was
forged' (San Carlos Milling Co. vs. Bank of the P.I., 59
Phil. 59).
The prime duty of a bank is to ascertain the
genuineness of the signature of the drawer or the
depositor on the check being encashed. It is expected
to use reasonable business prudence in accepting and
cashing a check presented to it.
There is nothing inequitable in such a rule. If the
paper comes to the drawee in the regular course of
business, and he, having the opportunity ascertaining
its character, pronounces it to be valid and pays it, it
is not only a question of payment under mistake, but
payment in neglect of duty which the commercial law
places upon him, and the result of his negligence must
rest upon him.
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
Petitioner was negligent in encashing said forged
check without carefully examining the signature
which shows marked variation from the genuine
signature of private respondent. The trial court found
that a comparison of the signature on the forged
check and the sample signatures of private
respondent show marked differences.
Metropolitan Waterworks and
Sewerage System
vs.
CA
(G.R. No. L-62943 July 14, 1986)
Barred to set up defense of forgery due to negligence
Facts:
Metropolitan Waterworks and Sewerage System
(hereinafter referred to as MWSS) is a government
owned and controlled corporation, the successor-in-
interest of the defunct NWSA. The Philippine National
Bank (PNB) is the depository bank of MWSS and its
predecessor-in-interest NWSA. The authorized
signature for the account were those of MWSS
treasurer Jose Sanchez, auditor Pedro Aguilar, and
acting General Manager Victor L. Recio. By special
arrangement with the PNB, the MWSS used
personalized checks in drawing from this account.
During the months of March, April and May 1969,
twenty-three (23) checks were prepared, processed,
issued and released by NWSA, all of which were paid
and cleared by PNB and debited by PNB against NWSA
Account.
The foregoing checks were deposited by the payees
Raul Dizon, Arturo Sison and Antonio Mendoza in
their respective current accounts with the Philippine
Commercial and Industrial Bank (PCIB) and Philippine
Bank of Commerce (PBC). At the time of their
presentation to PNB these checks bear the standard
indorsement which reads 'all prior indorsement
and/or lack of endorsement guaranteed.'
Subsequent investigation however, conducted by the
NBI showed that Raul Dizon, Arturo Sison and Antonio
Mendoza were all fictitious persons.
NEGOTIABLE INSTRUMENTS LAW
25
NWSA addressed a letter to PNB requesting the
immediate restoration to its Account No. 6, of the
total sum of P3,457,903.00 corresponding to the total
amount of these twenty-three (23) checks claimed by
NWSA to be forged and/or spurious checks. In view of
the refusal of PNB, MWSS filed a complaint on CFI of
Manila.
In its answer, PNB contended among others, that the
checks in question were regular on its face in all
respects, including the genuineness of the signatures
of authorized NWSA signing officers and there was
nothing on its face that could have aroused any
suspicion as to its genuineness and due execution
and; that NWSA was guilty of negligence which was
the proximate cause of the loss.
Issue:
Whether PNB is liable to MWSS.
Held:
No.
There is no express and categorical finding in these
documents that the twenty-three (23) questioned
checks were indeed signed by persons other than the
authorized MWSS signatories. On the contrary, the
findings of the NBI show that the MWSS fraud was an
"inside job" and that the petitioner's delay in the
reconciliation of bank statements and the laxity and
loose records control in the printing of its
personalized checks facilitated the fraud.
Likewise, the questioned documents of the NBI does
not declare or prove that the signatures appearing on
the questioned checks are forgeries.
It is clear that these three (3) NBI Reports relied upon
by the petitioner are inadequate to sustain its
allegations of forgery. These reports did not touch on
the inherent qualities of the signatures which are
indispensable in the determination of the existence of
forgery. There must be conclusive findings that there
is a variance in the inherent characteristics of the
signatures and that they were written by two or more
different persons.
Forgery cannot be presumed (Siasat, et al. v.
Intermediate Appellate Court, et al, 139 SCRA 238). It
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
must be established by clear, positive, and convincing
evidence. This was not done in the present case.
Moreover, the petitioner is barred from setting up the
defense of forgery under Section 23 of the Negotiable
Instruments Law which provides that:
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the
signature is forged or made without authority of the
person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment
thereof against any party thereto can be acquired
through or under such signature unless the party
against whom it is sought to enforce such right is
precluded from setting up the forgery or want of
authority.
because it was guilty of negligence not only before
the questioned checks were negotiated but even
after the same had already been negotiated. The
records show that at the time the twenty-three (23)
checks were prepared, negotiated, and encashed, the
petitioner was using its own personalized checks,
instead of the official PNB Commercial blank checks.
In the exercise of this special privilege, however, the
petitioner failed to provide the needed security
measures.
Even if the twenty-three (23) checks in question are
considered forgeries, considering the petitioner's
gross negligence, it is barred from setting up the
defense of forgery under Section 23 of the Negotiable
Instruments Law.
PNB
vs.
CA
(G.R. No. L-26001 October 29, 1968)
Liability of drawee of encashing a check where the maker’s
signature is forged
Facts:
Augusto Lim deposited in his current account with the
PCIB branch a GSIS check in the sum of P57,415.00,
drawn against the PNB.
Following an established banking practice, the check
was forwarded for clearing through the Central Bank
to the PNB, which did not return said check the next
day, or at any other time, but retained it and paid its
NEGOTIABLE INSTRUMENTS LAW
26
amount to the PCIB. PNB debited it against the
account of the GSIS.
Subsequently, upon demand from the GSIS, said sum
of P57,415.00 was re-credited to the GSIS’s account,
for the reason that the signatures of its officers on the
check were forged. PNB demanded from the PCIB the
refund of said sum, which the PCIB refused to do.
The signatures of the General Manager and the
Auditor of the GSIS on the check, as drawer thereof,
are forged. The person named in the check as its
payee was one Mariano D. Pulido, who purportedly
indorsed it to one Manuel Go. The check purports to
have been indorsed by Manuel Go to Augusto Lim,
who, in turn, deposited it with the PCIB, which it
stamped the following on the back of the check: "All
prior indorsements and/or Lack of Endorsement
Guaranteed, Philippine Commercial and Industrial
Bank,"
Issue:
Whether PCIB should refund the amount to PNB.
Held:
No.
PNB argues that, since the signatures of the drawer
are forged, so must the signatures of the supposed
indorsers be; but this conclusion does not necessarily
follow from said premise. Besides, there is absolutely
no evidence, and the PNB has not even tried to prove
that the aforementioned indorsements are spurious.
Again, the PNB refunded the amount of the check to
the GSIS, on account of the forgery in the signatures,
not of the indorsers or supposed indorsers, but of the
officers of the GSIS as drawer of the instrument. In
other words, the question whether or not the
indorsements have been falsified is immaterial to the
PNB's liability as a drawee, or to its right to recover
from the PCIB, for, as against the drawee, the
indorsement of an intermediate bank does not
guarantee the signature of the drawer, since the
forgery of the indorsement is not the cause of the
loss.
With respect to the warranty on the back of the
check, to which the third assignment of error refers,
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
it should be noted that the PCIB thereby guaranteed
"all prior indorsements," not the authenticity of the
signatures of the officers of the GSIS who signed on
its behalf, because the GSIS is not an indorser of the
check, but its drawer. Said warranty is irrelevant,
therefore, to the PNB's alleged right to recover from
the PCIB. It could have been availed of by a
subsequent indorsee or a holder in due course
subsequent to the PCIB, but, the PNB is neither.
Indeed, upon payment by the PNB, as drawee, the
check ceased to be a negotiable instrument, and
became a mere voucher or proof of payment.
Manila Lighter Transportation,
Inc.
vs.
CA
(G.R. No. L-50373 February 15, 1990)
Liability of collecting bank
Facts:
From January 1960 to June 1961, Augusto Perez,
collector of the Manila Lighter Transportation (MLT),
collected 49 checks from MLT’s clients. The checks
amounted to P91,153.11. The checks were
subsequently indorsed and the signature of Luis
Gaskell, MLT’s general manager, appeared on the
checks as indorser. The checks were indorsed to three
persons who deposited the checks with their
respective accounts with China Bank.
Luis Gaskell disclaimed such signatures and presented
a handwriting expert who gave the opinion that the
signatures “L. Gaskell” on the indorsement were
indeed forgeries.
MLT then demanded China Bank to refund the
aggregate amount of the checks. The trial court ruled
that both MLT and China Bank are negligent hence
they should share the loss at 50-50 basis. The Court of
Appeals absolved China Bank of its liabilities.
Issue:
Whether China Bank should refund the checks.
Held:
No.
NEGOTIABLE INSTRUMENTS LAW
27
Since MLT was not a client of China Bank, i.e., did not
maintain an account in said Bank, the latter had no
way of ascertaining the authenticity of its
indorsements on the checks which were deposited in
the accounts of the third-party defendants in said
Bank. China Bank was not negligent because, in
accordance with banking practice, it caused the
checks to pass through the clearing house before it
allowed their proceeds to be withdrawn by the three
depositors.
Republic Bank
vs.
CA
(G.R. No. 42725 April 22, 1991)
24-hour clearing house rule
Facts:
San Miguel Corporation (SMC) drew a dividend check
for P240, Philippine currency First National City Bank
(FNCB) in favor of J. Roberto C. Delgado, a
stockholder. After the check had been delivered to
Delgado, the amount on its face was fraudulently and
without authority of the drawer, SMC, altered by
increasing it from P240 to P9,240. The check was
indorsed and deposited by Delgado in his account
with the petitioner Republic Bank (Republic).
Republic accepted the check for deposit without
ascertaining its genuineness and regularity. Later,
Republic endorsed the check to FNCB by stamping on
the back of the check “all prior and/or lack of
indorsement guaranteed” and presented it to FNCB
for payment through the Central Bank Clearing
House.
Believing the check was genuine, and relying on the
guaranty and endorsement of Republic appearing on
the back of the check, FNCB paid P9,240 to Republic
through the Central Bank Clearing House.
SMC notified FNCB of the material alteration in the
amount of the check in question. FNCB lost no time in
recrediting P9,240 to SMC. FNCB informed Republic
in writing of the alteration and the forgery of the
endorsement of J. Roberto C. Delgado. By then,
Delgado had already withdrawn his account from
Republic.
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
FNCB demanded that Republic refund the P9,240 on
the basis of the latter’s endorsement and guaranty.
Republic refused, claiming there was delay in giving it
notice of the alteration and that FNCB, as drawee,
was absolved of any liability to the drawer (SMC).
Thus, FNCB had no right of recourse against Republic.
Trial court rendered judgment ordering Republic to
pay P9,240 to FNCB. CA affirmed the decision.
Issue:
Whether Republic, as the collecting bank, is
protected, by the 24-hour clearing house rule, found
in CB Circular No. 9, as amended, from liability to
refund the amount paid by FNCB, as drawee of the
SMC dividend check.
Held:
Yes.
The 24-hour clearing house rule embodied in Section
4(c) of Central Bank Circular No. 9, as amended,
applies to this case. This rule mandates banks that
after a clearing, all cleared items must be returned
not later than 3:00 PM of the following business day.
It is true that when an endorsement is forged, the
collecting bank or last endorser, as a general rule,
bears the loss (Banco de Oro Savings & Mortgage
Bank vs. Equitable Banking Corp., 167 SCRA 188). But
the unqualified endorsement of the collecting bank
on the check should be read together with the 24-
hour regulation on clearing house operation
(Metropolitan Bank & Trust Co. vs. First National City
Bank, supra). Thus, when the drawee bank fails to
return a forged or altered check to the collecting bank
within the 24-hour clearing period, the collecting
bank is absolved from liability.
Every bank that issues checks for the use of its
customers should know whether or not the drawer’s
signature thereon is genuine, whether there are
sufficient funds in the drawers account to cover
checks issued, and it should be able to detect
alterations, erasures, superimpositions or
intercalations thereon, for these instruments are
prepared, printed and issued by itself, it has control
of the drawer’s account, and it is supposed to be
NEGOTIABLE INSTRUMENTS LAW
28
familiar with the drawer’s signature. It should possess
appropriate detecting devices for uncovering
forgeries and/or alterations on these instruments.
Unless an alteration is attributable to the fault or
negligence of the drawer himself, such as when he
leaves spaces on the check which would allow the
fraudulent insertion of additional numerals in the
amount appearing thereon, the remedy of the
drawee bank that negligently clears a forged and/or
altered check for payment is against the party
responsible for the forgery or alteration (Hongkong &
Shanghai Banking Corp. vs. People’s Bank & Trust Co.,
35 SCRA 140), otherwise, it bears the loss.
The Court of Appeals erred in laying upon Republic,
instead of on FNCB the drawee bank, the burden of
loss for the payment of the altered SMC check, the
fraudulent character of which FNCB failed to detect
and warn Republic about, within the 24-hour clearing
house rule. The Court of Appeals departed from the
ruling of this Court in an earlier PNB case, that:
“Where a loss, which must be borne by one of two
parties alike innocent of forgery, can be traced to the
neglect or fault of either, it is reasonable that it would
be borne by him, even if innocent of any intentional
fraud, through whose means it has succeeded. (Phil.
National Bank vs. National City Bank of New York, 63
Phil. 711, 733.)”
Natividad Gempesaw
vs.
CA
(G.R. No. 92244 February 9, 1993)
Liabilities of parties
Facts:
Petitioner Natividad O. Gempesaw (petitioner) owns
and operates four grocery stores. Petitioner
maintains a checking account with the Caloocan City
Branch of respondent PBCom.
To facilitate payment of debts to her suppliers,
petitioner draws checks against her checking account
with the respondent bank as drawee. Her customary
practice of issuing checks in payment of her suppliers
was as follows: the checks were prepared and filled
up as to all material particulars by her trusted
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
bookkeeper, Alicia Galang, an employee for more
than eight (8) years. After the bookkeeper prepared
the checks, the completed checks were submitted to
the petitioner for her signature, together with the
corresponding invoice receipts which indicate the
correct obligations due and payable to her suppliers.
Petitioner signed each and every check without
bothering to verify the accuracy of the checks against
the corresponding invoices because she reposed full
and implicit trust and confidence on her bookkeeper.
The issuance and delivery of the checks to the payees
named therein were left to the bookkeeper.
Petitioner admitted that she did not make any
verification as to whether or not the checks were
delivered to their respective payees. Although the
respondent drawee Bank notified her of all checks
presented to and paid by the bank, petitioner did not
verify the correctness of the returned checks, much
less check if the payees actually received the checks
in payment for the supplies she received.
In the course of her business operations covering a
period of two years, petitioner issued, following her
usual practice stated above, a total of eighty-two (82)
checks in favor of several suppliers. These checks
were all presented by the indorsees as holders
thereof to, and honored by, the respondent drawee
Bank. Most of the checks were for amounts in excess
of her actual obligations to the various payees as
shown in their corresponding invoices.
All the eighty-two (82) checks with forged signatures
of the payees were brought to Ernest L. Boon, Chief
Accountant of respondent drawee Bank at the
Buendia branch, who, without authority therefor,
accepted them all for deposit at the Buendia branch
to the credit and/or in the accounts of Alfredo Y.
Romero and Benito Lam.
Petitioner made a written demand on respondent
drawee Bank to credit her account with the money
value of the eighty-two (82) checks totaling
P1,208.606.89 for having been wrongfully charged
against her account. Respondent drawee Bank
refused to grant petitioner’s demand.
Issue:
Whether drawee bank should refund the money lost
by reason of the forged indorsements.
NEGOTIABLE INSTRUMENTS LAW
29
Held:
No.
As a matter of practical significance, problems arising
from forged indorsements of checks may generally be
broken into two types of cases: (1) where forgery was
accomplished by a person not associated with the
drawer — for example a mail robbery; and (2) where
the indorsement was forged by an agent of the
drawer.
This difference in situations would determine the
effect of the drawer’s negligence with respect to
forged indorsements. While there is no duty resting
on the depositor to look for forged indorsements on
his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a
depositor is under a duty to set up an accounting
system and a business procedure as are reasonably
calculated to prevent or render difficult the forgery of
indorsements, particularly by the depositor’s own
employees. And if the drawer (depositor) learns that
a check drawn by him has been paid under a forged
indorsement, the drawer is under duty promptly to
report such fact to the drawee bank. For his
negligence or failure either to discover or to report
promptly the fact of such forgery to the drawee, the
drawer loses his right against the drawee who has
debited his account under a forged indorsement. In
other words, he is precluded from using forgery as a
basis for his claim for re-crediting of his account.
Gempesaw cannot set up the defense of forgery by
reason of her negligence.
As a rule, a drawee bank who has paid a check on
which an indorsement has been forged cannot charge
the drawer’s account for the amount of said check. An
exception to this rule is where the drawer is guilty of
such negligence which causes the bank to honor such
a check or checks. If a check is stolen from the payee,
it is quite obvious that the drawer cannot possibly
discover the forged indorsement by mere
examination of his cancelled check. This accounts for
the rule that although a depositor owes a duty to his
drawee bank to examine his cancelled checks for
forgery of his own signature, he has no similar duty as
to forged indorsements. A different situation arises
where the indorsement was forged by an employee
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 1 – Form and Interpretation
or agent of the drawer, or done with the active
participation of the latter.
The negligence of a depositor which will prevent
recovery of an unauthorized payment is based on
failure of the depositor to act as a prudent
businessman would under the circumstances. In the
case at bar, the petitioner relied implicitly upon the
honesty and loyalty of her bookkeeper, and did not
even verify the accuracy of amounts of the checks she
signed against the invoices attached thereto.
Furthermore, although she regularly received her
bank statements, she apparently did not carefully
examine the same nor the check stubs and the
returned checks, and did not compare them with the
same invoices. Otherwise, she could have easily
discovered the discrepancies between the checks and
the documents serving as bases for the checks. With
such discovery, the subsequent forgeries would not
have been accomplished. It was not until two years
after the bookkeeper commenced her fraudulent
scheme that petitioner discovered that eighty-two
(82) checks were wrongfully charged to her account,
at which she notified the respondent drawee bank.
PNB
vs.
CA
(G.R. No. 107508. April 25, 1996)
Material alteration
Facts:
A check in the amount of P97,650.00 was issued by
the Ministry of Education and Culture (now
Department of Education, Culture and Sports [DECS])
payable to F. Abante Marketing. This check was
drawn against PNB.
F. Abante Marketing, a client of Capitol City
Development Bank (Capitol), deposited the
questioned check in its savings account with said
bank. In turn, Capitol deposited the same in its
account with the Philippine Bank of Communications
(PBCom) which, in turn, sent the check to petitioner
for clearing.
NEGOTIABLE INSTRUMENTS LAW
30
Petitioner cleared the check as good and, thereafter,
PBCom credited Capitols account for the amount
stated in the check. However, petitioner returned the
check to PBCom and debited PBComs account for the
amount covered by the check, the reason being that
there was a material alteration of the check number.
PBCom, as collecting agent of Capitol, then
proceeded to debit the latter’s account for the same
amount, and subsequently, sent the check back to
petitioner. Petitioner, however, returned the check to
PBCom.
On the other hand, Capitol could not, in turn, debit F.
Abante Marketings account since the latter had
already withdrawn the amount of the check. Capitol
sought clarification from PBCom and demanded the
re-crediting of the amount. PBCom followed suit by
requesting an explanation and re-crediting from
petitioner.
Since the demands of Capitol were not heeded, it filed
a civil suit with the RTC of Manila against PBCom
which, in turn, filed a third-party complaint against
petitioner for reimbursement/indemnity with respect
to the claims of Capitol. Petitioner, on its part, filed a
fourth-party complaint against F. Abante Marketing.
Issue:
Whether an alteration of the serial number of a check
is a material alteration under the Negotiable
Instruments Law.
Held:
No.
Section 1 of the Negotiable Instruments Law
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 time;
(d) Must be payable to order or to bearer; and
BEHIGA-MANTO-VILLAMOR DIGESTS
 31
Chapter 1 – Form and Interpretation

(e) Where the instrument is addressed to a drawee, he

must be named or otherwise indicated therein with
reasonable certainty.

An alteration is said to be material if it alters the effect

of the instrument. It means an unauthorized change
in the instrument that purports to modify in any
respect the obligation of a party or an
unauthorized addition of words or numbers or other
change to an incomplete instrument relating to the
obligation of the party. In other words, a material
alteration is one which changes the items which are
required to be stated under Section 1 of the NIL.

In this case, the alleged material alteration was the

alteration of the serial number of the check in
issue—which is not an essential element of a
negotiable instrument under Section 1. PNB alleges
that the alteration was material since it is an
accepted concept that a TCAA check by its very
nature is the medium of exchange of governments,
instrumentalities and agencies. As a safety measure,
every government office or agency is assigned checks
bearing different serial numbers.

But this contention has to fail. The check’s serial

number is not the sole indicia of its origin. The name
of the government agency issuing the check is clearly
stated therein. Thus, the check’s drawer is
sufficiently identified, rendering redundant the
referral to its serial number.

Therefore, there being no material alteration in the

check committed, PNB could not return the check to
PBCOM. It should pay the same.

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Chapter 2 – Consideration
Jesus Pineda
vs.
Jose dela Rama and CA
(G.R. No. L-31831 April 28, 1983)
Presumption of consideration
Facts:
Jose V. dela Rama is a lawyer whose services were
retained by Jesus Pineda for the purpose of making
representations with the chairman and general
manager of the National Rice and Corn
Administration to stop and delay the institution of
criminal charges against Pineda who allegedly
misappropriated 11,000 cavans of palay deposited at
his ricemill in Concepcion, Tarlac. Subsequently, Dela
Rama filed suit to collect a P9,300 loan, evidenced by
the matured promissory note, and P5,000 as
attorney’s fees. The Court of First Instance ruled in
favor of Pineda, which was reversed by the Court of
Appeals.
Issue:
Whether the promissory note is void for lack of
consideration.
Held:
No.
The Court of Appeals relied on the efficacy of the
promissory note for its decision, citing Section 24 of
the Negotiable Instruments Law which reads:
SECTION 24. Presumption of consideration.—Every
negotiable instrument is deemed prima facie to have
been issued for a valuable consideration; and every
person whose signature appears thereon to have
become a party thereto for value.
The Court of Appeals' reliance on the above provision
is misplaced. The presumption that a negotiable
instrument is issued for a valuable consideration is
only prima facie. It can be rebutted by proof to the
contrary. (Bank of the Philippine Islands v. Laguna
Coconut Oil Co. et al., 48 Phil. 5).
According to Dela Rama, he loaned the P9,300.00 to
Pineda in two installments on two occasions five days
apart - first loan for P5,000.00 and second loan for
P4,300.00, both given in cash. He also alleged that
NEGOTIABLE INSTRUMENTS LAW
32
previously he loaned P3,000.00 but Pineda paid this
other loan two days afterward.
These allegations of Dela Rama are belied by the
promissory note itself. The second sentence of the
note reads - "This represents the cash advances made
by him in connection with my case for which he is my
attorney-in- law."
The terms of the note sustain the version of Pineda
that he signed the P9,300.00 promissory note
because he believed Dela Rama's story that these
amounts had already been advanced by Dela Rama
and given as gifts for NARIC officials. Dela Rama
himself admits that Pineda engaged his services to
delay by one month the filing of the NARIC case
against Pineda while the latter was trying to work out
an amicable settlement.
SC agreed with the trial court which believed Pineda.
It is indeed unusual for a lawyer to lend money to his
client whom he had known for only three months,
with no security for the loan and on interest. Dela
Rama testified that he did not even know what Pineda
was going to do with the money he borrowed from
him.
SC further agreed with the trial court that the
promissory note was executed for an illegal
consideration. Articles 1409 and 1412 of the Civil
Code in part, provide:
Art. 1409. The following contracts are inexistent and
void from the beginning:
(1) Those whose cause, object or purpose is contrary to
law, morals, good customs, public order and public
policy;
xxx xxx xxx
Art. 1412. If the act in which the unlawful or forbidden
cause consists does not constitute a criminal offense,
the following rules shall be observed:
(1) When the fault is on the part of both contracting
parties, neither may recover what he has given by virtue
of the contract, or demand the performance of the
other's undertaking.
xxx xxx xxx
Whether or not the supposed cash advances reached
their destination is of no moment. The consideration
for the promissory note - to influence public officers
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 2 – Consideration
in the performance of their duties - is contrary to law
and public policy. The promissory note is void ab initio
and no cause of action for the collection cases can
arise from it.
Ang Tiong
vs.
Lorenzo Ting
(G.R. No. L-26767 February 22, 1968)
Accommodation party
Facts:
Lorenzo Ting issued Philippine Bank of
Communications check for the sum of P4,000,
payable to "cash or bearer". With Felipe Ang's
signature (indorsement in blank) at the back thereof,
the instrument was received by the plaintiff Ang Tiong
who thereafter presented it to the drawee bank for
payment. The bank dishonored it. The plaintiff then
made written demands on both Lorenzo Ting and
Felipe Ang that they make good the amount
represented by the check. These demands went
unheeded; so he filed in the municipal court of Manila
an action for collection of the sum of P4,000. On The
municipal court adjudged for the plaintiff against the
two defendants.
Only Felipe Ang appealed to the CFI of Manila, which
amended the previous order directing him to pay to
plaintiff. Felipe Ang then elevated the case to CA,
which certified it to SC because the issues raised are
purely of law.
Respondent contend that the trial court erred that it
adjudged him a general indorser under the
Negotiable Instruments Law.
Issue:
Whether Ang is an accommodating indorser and not
a general indorser.
Held:
No.
SC agreed with the trial judge that nothing in the
check in question indicates that the appellant is not a
general indorser within the purview of section 63 of
the Negotiable Instruments Law which makes "a
NEGOTIABLE INSTRUMENTS LAW
33
person placing his signature upon an instrument
otherwise than as maker, drawer or acceptor" a
general indorser, — "unless he clearly indicates
plaintiff appropriate words his intention to be bound
in some other capacity," which he did not do.
And section 66 ordains that "every indorser who
indorses without qualification, warrants to all
subsequent holders in due course" (a) that the
instrument is genuine and in all respects what it
purports to be; (b) that he has a good title to it; (c)
that all prior parties have capacity to contract; and (d)
that the instrument is at the time of his indorsement
valid and subsisting.
In addition, "he engages that on due presentment, it
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."
Even on the assumption that the appellant is a
mere accommodation party, as he professes to be, he
is nevertheless, by the clear mandate of section 29 of
the Negotiable Instruments Law, yet "liable on the
instrument to a holder for value, notwithstanding
that such holder at the time of taking the instrument
knew him to be only an accommodation party." To
paraphrase, the accommodation party is liable to a
holder for value as if the contract was not for
accommodation. It is not a valid defense that the
accommodation party did not receive any valuable
consideration when he executed the instrument. Nor
is it correct to say that the holder for value is not a
holder in due course merely because at the time he
acquired the instrument, he knew that the indorser
was only an accommodation party.
3. That the appellant, again assuming him to be
an accommodation indorser, may obtain security
from the maker to protect himself against the danger
of insolvency of the latter, cannot in any manner
affect his liability to the appellee, as the said remedy
is a matter of concern exclusively between
accommodation indorser and accommodated party.
So that the fact that the appellant stands only as a
surety in relation to the maker, granting this to be
true for the sake of argument, is immaterial to the
claim of the appellee, and does not a whit diminish
nor defeat the rights of the latter who is a holder for
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 2 – Consideration
value. The liability of the appellant remains primary
and unconditional. To sanction the appellant's theory
is to give unwarranted legal recognition to the patent
absurdity of a situation where an indorser, when sued
on an instrument by a holder in due course and for
value, can escape liability on his indorsement by the
convenient expedient of interposing the defense that
he is a mere accomodation indorser.
Travel-On Inc.
vs.
CA and Arturo Miranda
(G.R. No. L-56169 June 26, 1992)
Accommodation party – Presumption of consideration
Facts:
Petitioner Travel-On. Inc. is a travel agency selling
airline tickets on commission basis for and in behalf
of different airline companies. Private respondent
Arturo S. Miranda had a revolving credit line with
petitioner. He procured tickets from petitioner on
behalf of airline passengers and derived commissions
therefrom.
Travel-On filed suit before the CFI of Manila to collect
on six (6) checks issued by private respondent with a
total face amount of P115,000.00. The complaint
averred that from a certain period, petitioner sold
and delivered various airline tickets to respondent at
a total price of P278,201.57; that to settle said
account, private respondent paid various amounts in
cash and in kind, and thereafter issued six (6)
postdated checks amounting to P115,000.00 which
were all dishonored by the drawee banks.
Private respondent claimed that he had already fully
paid and even overpaid his obligations and that
refunds were in fact due to him. He argued that he
had issued the postdated checks for purposes of
accommodation, as he had in the past accorded
similar favors to petitioner.
The trial court ruled that private respondent's
indebtedness to petitioner was not satisfactorily
established and that the postdated checks were
issued not for the purpose of encashment to pay his
indebtedness but to accommodate the General
Manager of Travel-On to enable her to show to the
NEGOTIABLE INSTRUMENTS LAW
34
Board of Directors that Travel-On was financially
stable.
Issue:
Whether the checks are evidence of the liability of the
respondent to the petitioner even assuming that they
were for purposes of accommodation.
Held:
Yes.
The checks clearly established private respondent's
indebtedness to petitioner; that private respondent
was liable thereunder.
It is important to stress that a check which is regular
on its face is deemed prima facie to have been issued
for a valuable consideration and every person whose
signature appears thereon is deemed to have become
a party thereto for value. Thus, the mere introduction
of the instrument sued on in evidence prima facie
entitles the plaintiff to recovery. Further, the rule is
quite settled that a negotiable instrument is
presumed to have been given or indorsed for a
sufficient consideration unless otherwise
contradicted and overcome by other competent
evidence.
In the case at bar, the CA, contrary to these
established rules, placed the burden of proving the
existence of valuable consideration upon petitioner.
This cannot be countenanced; it was up to private
respondent to show that he had indeed issued the
checks without sufficient consideration. The SC
considers that private respondent was unable to
rebut satisfactorily this legal presumption. It must
also be noted that those checks were issued
immediately after a letter demanding payment had
been sent to private respondent by petitioner Travel-
On.
The conclusion that the checks involved were issued
for "accommodation" and that accordingly private
respondent maker of those checks was not liable
thereon to petitioner payee of those checks is
without merit.
In the first place, while the Negotiable Instruments
Law does refer to accommodation transactions, no
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 2 – Consideration
such transaction was here shown. Section 29 of the
Negotiable Instruments Law provides as follows:
Sec. 29. Liability of accommodation party. — An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person. Such a person
is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation
party.
In the case at bar, Travel-On was payee of all six (6)
checks, it presented these checks for payment at the
drawee bank but the checks bounced. Travel-On
obviously was not an accommodated party; it realized
no value on the checks which bounced.
The argument of the respondent that the checks were
merely “simulated” cannot stand without the clearest
and most convincing kinds of evidence. No such
evidence was submitted by the respondent.
Agro Conglomerates and
Mario Soriano
vs.
CA and Regent Savings and
Loan Bank, Inc.
(G.R. No. 117660. December 18, 2000)
Accommodation party
Facts:
Petitioner Agro Conglomerates, Inc. as vendor, sold
two parcels of land to Wonderland Food Industries,
Inc. In their Memorandum of Agreement, the parties
covenanted that the purchase price of P5,000,000
would be settled by the vendee, under the following
terms and conditions: (1) P1,000,000 shall be paid in
cash upon the signing of the agreement; (2)
P2,000,000 worth of common shares of stock of the
Wonderland Food Industries, Inc.; and (3) the balance
of P2,000,000.00 shall be paid in four equal
installments.
Subsequently, the vendor, the vendee, and the
respondent bank Regent Savings & Loan Bank
executed an Addendum to the previous
Memorandum of Agreement. The vendee authorized
the vendor to obtain a loan from the financier on
NEGOTIABLE INSTRUMENTS LAW
35
which the vendee bound itself to pay for. This loan
was to cover for the payment of P1,000,000. This
addendum was not notarized.
Consequently, petitioner Mario Soriano signed as
maker several promissory notes, payable to the
respondent bank. Thereafter, the bank released the
proceeds of the loan to petitioners. However,
petitioners failed to meet their obligations as they fell
due. During that time, the bank was experiencing
financial turmoil and was under the supervision of the
Central Bank.
Respondent bank filed three separate complaints
before the RTC of Manila for collection of sum of
money.
Petitioners interposed the defense of novation and
insisted there was a valid substitution of debtor. They
alleged that the addendum specifically states that
although the promissory notes were in their names,
Wonderland shall be responsible for the payment
thereof.
The trial court held that petitioners are liable. CA
affirmed the trial court decision.
Issue:
Whether petitioners should be liable to respondent
bank.
Held:
Yes.
No sale materialized.
A contract of sale is a reciprocal transaction. The
obligation or promise of each party is the cause or
consideration for the obligation or promise by the
other. The vendee is obliged to pay the price, while
the vendor must deliver actual possession of the land.
In the instant case the original plan was that the initial
payments would be paid in cash. Subsequently, the
parties (with the participation of respondent bank)
executed an addendum providing instead, that the
petitioners would secure a loan in the name of Agro
Conglomerates Inc. for the total amount of the initial
payments, while the settlement of said loan would be
assumed by Wonderland. Thereafter, petitioner
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 2 – Consideration
Soriano signed several promissory notes and received
the proceeds in behalf of petitioner-company.
By this time, we note a subsidiary contract of
suretyship had taken effect since petitioners signed
the promissory notes as maker and accommodation
party for the benefit of Wonderland. Petitioners
became liable as accommodation party. An
accommodation party is a person who has signed the
instrument as maker, acceptor, or indorser, without
receiving value therefor, and for the purpose of
lending his name to some other person and is liable
on the instrument to a holder for value,
notwithstanding such holder at the time of taking the
instrument knew (the signatory) to be an
accommodation party. He has the right, after paying
the holder, to obtain reimbursement from the party
accommodated, since the relation between them has
in effect become one of principal and surety, the
accommodation party being the surety.
Suretyship is defined as the relation which exists
where one person has undertaken an obligation and
another person is also under the obligation or other
duty to the obligee, who is entitled to but one
performance, and as between the two who are
bound, one rather than the other should perform.
The surety’s liability to the creditor or promisee of the
principal is said to be direct, primary and absolute; in
other words, he is directly and equally bound with the
principal. And the creditor may proceed against any
one of the solidary debtors.
Petitioners had no legal or just ground to retain the
proceeds of the loan at the expense of private
respondent. Neither could petitioners excuse
themselves and hold Wonderland still liable to pay
the loan upon the rescission of their sales contract. If
petitioners sustained damages as a result of the
rescission, they should have impleaded Wonderland
and asked damages. The non-inclusion of a necessary
party does not prevent the court from proceeding in
the action, and the judgment rendered therein shall
be without prejudice to the rights of such necessary
party.
NEGOTIABLE INSTRUMENTS LAW
36
Eulalio Prudencio and Elisa
Prudencio
vs.
CA
(G.R. No. L-34539 July 14, 1986)
Accommodation party
Facts:
Petitioners are the owners of a property, which
they mortgaged to help secure a loan of a certain
Domingo Prudencio. On a later date, they were
approached by their relative who was the attorney-
in-fact of a construction company, which was in dire
need of funds for the completion of a municipal
building. After some persuasion, the appellants
amended the mortgage wherein the terms and
conditions of the original mortgage was made an
integral part of the new mortgage. The
promissory note covering the “second loan” was
signed by their relative. It was also signed by them,
indicating the request that the check be released by
the bank.
After the amendment of the mortgage was executed,
a deed of assignment was made by Toribio,
assigning all the payments to the Bureau to the
construction company. This notwithstanding, the
Bureau with approval of the bank, conditioned
however that they should be for labor and materials,
made three payments to the company. The last
request was denied by the bank, averring that the
account was long overdue, the remaining balance of
the contract price should be applied to the loan.
The company abandoned the work and as
consequence, the Bureau rescinded the contract
and assumed the work. Later on, the appellants
wrote to the PNB that since the latter has
authorized payments to the company instead of on
account of the loan guaranteed by the mortgage,
there was a change in the conditions of the contract
without the knowledge of appellants, which entitled
the latter to cancel the mortgage contract.
The trial court held them still liable together with
their co-makers. It has also been held that if the
judgment is not satisfied within a period of time, the
mortgaged properties would be foreclosed and sold
in public auction.
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 2 – Consideration
In their appeal, petitioners contend that as
accommodation makers, the nature of their liability
is only that of mere sureties instead of solidary co-
debtors such that a material alteration in the principal
contract, effected by the creditor without the
knowledge and consent of the sureties, completely
discharges the sureties from all liabilities on the
contract of suretyship.
Issue:
Whether petitioners were solidary-debtors or
sureties.
Held:
The petitioners contend that as accommodation
makers, the nature of their liability is only that of
mere sureties instead of solidary co-debtors such that
"a material alteration in the principal contract,
effected by the creditor without the knowledge and
consent of the sureties, completely discharges the
sureties from all liability on the contract of
suretyship.” They state that when respondent PNB
did not apply the initial and subsequent payments to
the petitioners' debt as provided for in the deed of
assignment, they were released from their obligation
as sureties and, therefore, the real estate mortgage
executed by them should have been cancelled.
Section 29 of the Negotiable Instrument Law
provides:
Liability of accommodation party. —An accommodation
party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the
instrument to a holder for value, notwithstanding such
holder at the time of taking the instrument knew him to
be only an accommodation party.
In the case of Philippine Bank of Commerce v. Aruego
(102 SCRA 530, 539), we held that "... in lending his
name to the accommodated party, the
accommodation party is in effect a surety. ... ."
However, unlike in a contract of suretyship, the
liability of the accommodation party remains not only
primary but also unconditional to a holder for value
such that even if the accommodated party receives an
extension of the period for payment without the
consent of the accommodation party, the latter is still
liable for the whole obligation and such extension
NEGOTIABLE INSTRUMENTS LAW
37
does not release him because as far as a holder for
value is concerned, he is a solidary co- debtor.
Expounding on the nature of the liability of an
accommodation petition party under the
aforequoted section, we ruled in Ang Tiong v. Ting (22
SCRA 713, 716):
3. That the appellant, again assuming him to be an
accommodation indorser, may obtain security from the
maker to protect himself against the danger of
insolvency of the latter, cannot in any manner affect his
liability to the appellee, as the said remedy is a matter
of concern exclusively between accommodation
indorser and accommodated party. So that the
appellant stands only as a surety in relation to the
maker, granting this to be true for the sake of argument,
is immaterial to the claim of the appellee, and does not
a whit diminish nor defeat the rights of the latter who is
a holder for value. The liability of the appellant remains
primary and unconditional. To sanction the appellant's
theory is to give unwarranted legal recognition to the
patent absurdity of a situation where an indorser, when
sued on an instrument by a holder in due course and for
value, can escape liability on his indorsement by the
convenient expedient of interposing the defense that
he is a mere accommodation indorser.
There is, therefore, no question that as
accommodation makers, petitioners would be
primarily and unconditionally liable on the
promissory note to a holder for value, regardless of
whether they stand as sureties or solidary co-debtors
since such distinction would be entirely immaterial
and inconsequential as far as a holder for value is
concerned. Consequently, the petitioners cannot
claim to have been released from their obligation
simply because the time of payment of such
obligation was temporarily deferred by PNB without
their knowledge and consent. There has to be
another basis for their claim of having been freed
from their obligation. The question which should be
resolved in this instant petition, therefore, is whether
or not PNB can be considered a holder for value under
Section 29 of the Negotiable Instruments Law such
that the petitioners must be necessarily barred from
setting up the defense of want of consideration or
some other personal defenses which may be set up
against a party who is not a holder in due course.
BEHIGA-MANTO-VILLAMOR DIGESTS
 38
Chapter 2 – Consideration

People acceptor ** unless he clearly indicates by appropriate

vs.
Julia Maniego
(G.R. No. L-30910 February 27, 1987)
Accommodation party
Facts:
Lt. Rizalino M. Ubay is a duly appointed officer in the
AFP. He was designated as Disbursing Officer in the
Office of the Chief of Finance, GHQ, Camp Murphy,
Quezon City. He was entrusted with and had under
his custody and control public funds.
words his intention to be bound in some other
capacity. " Such an indorser "who indorses without
qualification," inter alia "engages that on due
presentment, ** (the instrument) shall be accepted
or paid, or both, as the case may be, according to its
tenor, and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay
the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay
it."

He conspired with co-accused Milagros Pamintuan
and Julia T. Maniego. The accused take, receive, and
accept from his said co-accused several personal
checks drawn against the PNB and BPI of which
Pamintuan is the drawer and Maniego is the indorser,
in the total amount of P66,434.50. The checks were
dishonored and rejected by the said banks when
presented for encashment.
An information for the crime of malversation was
filed against the 3. Only Lt. Ubay and Mrs. Maniego
were arraigned, Mrs. Pamintuan having apparently
fled to the United States. Both Ubay and Maniego
entered a plea of not guilty.
Maniego may also be deemed an "accommodation
party" in the light of the facts, i.e., a person "who has
signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the
purpose of lending his name to some other person."
As such, she is under the law "liable on the instrument
to a holder for value, notwithstanding such holder at
the time of taking the instrument knew ** (her) to be
only an accommodation party," although she has the
right, after paying the holder, to obtain
reimbursement from the party accommodated,
"since the relation between them is in effect that of
principal and surety, the accommodation party being
the surety."

Maniego was acquitted but both she and Ubay are

ordered to pay jointly and severally the amount of
P57,434.50 to the government.

Issue:
Whether Maniego should be held liable to the
government.

Held:
Yes.

Appellant's contention that as mere indorser, she

may not be made liable on account of the dishonor of
the checks indorsed by her, is untenable.

Under the law, the holder or last indorsee of a

negotiable instrument has the right to "enforce
payment of the instrument for the full amount
thereof against all parties liable thereon." Among the
"parties liable thereon" is an indorser of the
instrument i.e., "a person placing his signature upon
an instrument otherwise than as maker, drawer, or

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS

 39
Chapter 3 – Negotiation

Ang Tek Lian A check payable to the order of cash is a bearer

vs.
CA
(G.R. No. L-2516 September 25, 1950)
Check payable to bearer
Facts:
Ang Tek Lian, knowing he had no funds, drew a check
upon the China Banking Corporation for the sum of
P4,000, payable to the order of "cash". He delivered
it to Lee Hua Hong in exchange for money. The next
business day, the check was presented by Lee Hua
Hong to the drawee bank for payment, but it was
dishonored for insufficiency of funds.
Ang Tek Lian was convicted for estafa.
On appeal, he argued that as the check had been
made payable to "cash" and had not been endorsed
by him, he is not guilty of the offense charged. Based
on the proposition that "by uniform practice of all
banks in the Philippines a check so drawn is invariably
dishonored," the following line of reasoning is
advanced in support of the argument:
When the offended party accepted the
check from the appellant, he did so with full
knowledge that it would be dishonored upon
presentment. In that sense, the appellant could not
be said to have acted fraudulently because the
complainant, in so accepting the check as it was
drawn, must be considered, by every rational
consideration, to have done so fully aware of the risk
he was running thereby."
instrument.
Where a check is made payable to the order of "cash",
the word cash "does not purport to be the name of
any person", and hence the instrument is payable to
bearer. The drawee bank need not obtain any
indorsement of the check, but may pay it to the
person presenting it without any indorsement.
If the bank is not sure of the bearer's identity or
financial solvency, it has the right to demand
identification and /or assurance against possible
complications, — for instance, (a) forgery of drawer's
signature, (b) loss of the check by the rightful owner,
(c) raising of the amount payable, etc. The bank may
therefore require, for its protection, that the
indorsement of the drawer — or of some other
person known to it — be obtained. But where the
Bank is satisfied of the identity and /or the economic
standing of the bearer who tenders the check for
collection, it will pay the instrument without further
question; and it would incur no liability to the drawer
in thus acting.

Issue:
Whether the check issued by Ang Tek Lian that is
payable to the order to “cash” and not have been
indorsed by Ang Tek Lian.

Held:
No. It is a check payable to bearer.

Under the Negotiable Instruments Law Sec. 9 [d], a

check drawn payable to the order of "cash" is a check
payable to bearer, and the bank may pay it to the
person presenting it for payment without the
drawer's indorsement.

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS

 40
Chapter 4 – Rights of the holder

Republic of the Philippines of the alleged defect of said warrants and demanded
vs. reimbursement of the amounts and this demand was
Equitable Bank Corp. rejected by the Equitable Bank.

(G.R. No. L-15894-95 January 30, 1964)

Thus, the Government seeks to recover: (1) from the
Right of drawee and collecting banks
Facts: Equitable Banking Corporation the sum of P17,100,
representing the aggregate value of four (4) treasury
In G.R. No. L-15895, the Corporacion de los Padres
warrants; and (2) from BPI the total sum of
Dominicos had acquired 24 treasury warrants by
P342,767.63, representing the aggregate value of
accommodating its former trusted employee who
twenty-four (24) warrants similarly paid by the
asked the Corporacion to cash the warrants. The
Treasurer to the PI Bank.
Corporacion acceded to the request, provided that
the warrants would first be deposited with BPI Bank,
Issue:
and that actual payment of the value of the warrants
Whether the Government can recover the amounts
would be made only after the same had been duly
paid erroneously in consideration of the 28 treasury
accepted and cleared by the Treasurer of the
warrants, which in fact, were forged.
Philippines and the proceeds thereof duly credited to
the account of the Corporacion in the BPI Bank.
Held:
No.
The warrants were, accordingly, deposited by the
The Government maintains that it is not bound by this
Corporacion with said bank, which accepted them
rule because: (1) the Treasury is not a bank; and (2)
"subject to collection only". When the warrants were
the Treasurer has objected to the application of said
deposited with the PI Bank, each bore the
rule to his office.
indorsement of the respective payees and that of the
Corporation. Subsequently, the PI Bank presented the
This contention, however, untenable for, admittedly,
warrants for payment to the drawee thereof — the
the Treasury is a member of the aforementioned
Government — thru the Clearing Office of the Central
Clearing Office and clearly shows that the former "has
Bank. After being cleared, the warrants were paid by
agreed to clear its clearable items through" the latter
the Treasurer.
"subject to the rules and regulations of the Central
Bank." Besides, the rule applies not only to banks, but,
Accordingly, the PI Bank credited the proceeds of said
also, to the institutions and entities therein alluded
warrants to the Corporation, which, in turn, withdrew
to. Then too, the opposition of the Treasurer to the
said proceeds by means of its own checks. The
"24-hour clearing house rule" is not sufficient to
Treasurer returned, on separate dates, returned the
exempt the Treasury from the operation thereof.
warrants to the Central Bank, and demanded, on the
ground that they had been forged, that the value
Further, the aforementioned twenty-eight (28)
thereof be charged against the accounts of the PI
warrants were cleared and paid by the Treasurer, in
Bank in the Clearing Office and credited back to the
view which the PI Bank and the Equitable Bank
demand deposit of the Bureau of the Treasury.
credited the corresponding amounts to the
respective depositors of the warrants and then
In G.R. No. L-15894, 4 warrants involved were
honored their checks for said amounts. Thus, the
deposited with the Equitable Bank by persons known
Treasury had not only been negligent in clearing its
thereto as its depositors or customers, namely,
own warrants, but had, also, thereby induced the BPI
Robert Wong, Lu Chill Kau and Chung Ching. In due
and the Equitable Bank to pay the amounts thereof to
course, the Equitable Bank cleared said warrants, thru
said depositors.
the Clearing Office, then collected the corresponding
amounts from the Treasurer and thereafter credited
The gross nature of the negligence of the Treasury
said amounts to the accounts of the respective
becomes more apparent when we consider that each
depositors. The Treasurer notified the Equitable Bank
one of the twenty-four (24) warrants involve was for

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Chapter 4 – Rights of the holder
over P5,000, and, hence; beyond the authority of the
auditor of the Treasury — whose signature thereon
had been forged — to approve. In other words, the
irregularity of said warrants was apparent the face
thereof, from the viewpoint of the Treasury.
Moreover, the same had not advertised the loss of
genuine forms of its warrants. Neither had the BPI nor
the Equitable Bank been informed of any irregularity
in connection with any of the warrants involved in
these two (2) cases, until after the warrants had been
cleared and honored — when the Treasury gave
notice of the forgeries adverted to above. As a
consequence, the loss of the amounts thereof is
mainly imputable to acts and omissions of the
Treasury, for which the BPI and the Equitable Bank
should not and cannot be penalized.
Where a loss, which must be borne by one of two
parties alike innocent of forgery, can be traced to the
neglect or fault of either, it is reasonable that it would
be borne by him, even if innocent of any intentional
fraud, through whose means it has succeeded.
Generally, where a drawee bank otherwise would
have a right of recovery against a collecting or
indorsing bank for its payment of a forged check its
action will be barred if it is guilty of an unreasonable
delay in discovering the forgery and in giving notice
thereof.
Where defendant bank, on presentation to it on
September 2, of forged check drawn on another bank,
paid part of amount to presenter, drawee paying
check through clearing house on said day, held that
the latter, not giving notice of forgery until December
5, could not hold defendant for amount so paid.
Mesina
vs.
IAC
(G.R. No. 70145 November 13, 1986)
Holder in due course
Facts:
Jose Go purchased from Associated Bank cashier's
check for P800,000. Unfortunately, Jose Go left said
check on the top of the desk of the bank manager
when he left the bank. The bank manager entrusted
NEGOTIABLE INSTRUMENTS LAW
41
the check for safekeeping to a bank official, a certain
Albert Uy, who had then a visitor in the person of
Alexander Lim. Uy had to answer a phone call on a
nearby telephone after which he proceeded to the
men's room. When he returned to his desk, his visitor
Lim was already gone. When Jose Go inquired for his
cashier's check from Albert Uy, the check was not in
his folder and nowhere to be found. The latter
advised Jose Go to go to the bank to accomplish a
"STOP PAYMENT" order, which suggestion Jose Go
immediately followed. He also executed an affidavit
of loss. Albert Uy went to the police to report the loss
of the check, pointing to the person of Alexander Lim
as the one who could shed light on it.
The records of the police show that Associated Bank
received the lost check for clearing, coming from
Prudential Bank. The check was immediately
dishonored by Associated Bank by sending it back to
Prudential Bank, with the words "Payment Stopped"
stamped on it. However, the same was again returned
to Associated Bank and for the second time it was
dishonored.
Several days later, respondent Associated Bank
received a letter from a certain Atty. Lorenzo Navarro
demanding payment on the cashier's check in
question, which was being held by his client. He
however refused to reveal the name of his client and
threatened to sue, if payment is not made.
Respondent bank, in its letter, replied saying the
check belonged to Jose Go who lost it in the bank and
is laying claim to it.
Respondent Associated Bank filed an action for
Interpleader naming as respondent, Jose Go and one
John Doe, Atty. Navarro's then unnamed client. On
even date, respondent bank received summons and
copy of the complaint for damages of a certain
Marcelo Mesina from the RTC of Caloocan City.
Petitioner claims that a cashier's check cannot be
countermanded in the hands of a holder in due
course.
Issue:
Whether petitioner can collect on the stolen check on
the ground that he is a holder in due course.
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 4 – Rights of the holder
Held:
No.
Petitioner's allegations hold no water. Theories and
examples advanced by petitioner on causes and
effects of a cashier's check such as 1) it cannot be
countermanded in the hands of a holder in due
course and 2) a cashier's check is a bill of exchange
drawn by the bank against itself-are general
principles which cannot be aptly applied to the case
at bar, without considering other things.
Petitioner failed to substantiate his claim that he is a
holder in due course and for consideration or value as
shown by the established facts of the case.
Admittedly, petitioner became the holder of the
cashier's check as endorsed by Alexander Lim who
stole the check. He refused to say how and why it was
passed to him. He had therefore notice of the defect
of his title over the check from the start.
The holder of a cashier's check who is not a holder in
due course cannot enforce such check against the
issuing bank which dishonors the same. If a payee of
a cashier's check obtained it from the issuing bank by
fraud, or if there is some other reason why the payee
is not entitled to collect the check, the respondent
bank would, of course, have the right to refuse
payment of the check when presented by the payee,
since respondent bank was aware of the facts
surrounding the loss of the check in question.
Moreover, there is no similarity in the cases cited by
petitioner since respondent bank did not issue the
cashier's check in payment of its obligation. Jose Go
bought it from respondent bank for purposes of
transferring his funds from respondent bank to
another bank near his establishment realizing that
carrying money in this form is safer than if it were in
cash. The check was Jose Go's property when it was
misplaced or stolen, hence he stopped its payment.
At the outset, respondent bank knew it was Jose Go's
check and no one else since Go had not paid or
indorsed it to anyone. The bank was therefore liable
to nobody on the check but Jose Go. The bank had no
intention to issue it to petitioner but only to buyer
Jose Go. When payment on it was therefore stopped,
respondent bank was not the one who did it but Jose
Go, the owner of the check. Respondent bank could
NEGOTIABLE INSTRUMENTS LAW
42
not be drawer and drawee for clearly, Jose Go owns
the money it represents and he is therefore the
drawer and the drawee in the same manner as if he
has a current account and he issued a check against
it; and from the moment said cashier's check was lost
and/or stolen no one outside of Jose Go can be
termed a holder in due course because Jose Go had
not indorsed it in due course. The check in question
suffers from the infirmity of not having been properly
negotiated and for value by respondent Jose Go who
has already been said is the real owner of said
instrument.
Banco Atlantico
vs.
Auditor General
(G.R. No. L-33549 January 31, 1978)
Holder in due course
Facts:
Petitioner is a commercial Bank doing business in
Madrid, Spain. Virginia Boncan, then the Finance
Officer of the Philippine Embassy in Madrid, Spain,
negotiated with Banco Atlantico several Philippine
Embassy checks signed by Luis M. Gonzales, its
ambassador, and by said Virginia Boncan as Finance
Officer payable to Azucena Pace and drawn against
the Philippine National Bank branch in New York,
U.S.A. The check was endorsed by Azucena Pace and
Virginia Boncan. The petitioner, without clearing the
checks with the drawn bank in New York, U.S.A., paid
the full amount to Virginia Boncan.
Upon presentment for acceptance and payment of
the aforementioned checks by Banco Atlantico
through its collecting bank in New York, U.S.A. to the
drawn bank, the Philippine National Bank branch in
U.S.A., said drawee bank dishonored the checks by
non-acceptance allegedly on the ground that the
drawer had ordered payments to be stopped. Upon
receipt of the notice of the dishonor, the collecting
bank of the petitioner in New York, U.S.A. sent
individual notices of protest with respect to the
checks in question to the Philippine Embassy in
Madrid, Spain and to Virginia Boncan as endorser
payee that Virginia Boncan and the Philippine
Embassy in Madrid, Spain refused to pay the
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 4 – Rights of the holder
petitioner the amounts of the aforementioned
checks.
The petitioner, Banco Atlantico, filed the
corresponding money claim with the Auditor General.
Issue:
Whether petitioner is a holder in due course and thus,
it is not precluded from setting up forgery.
Held:
No.
Banco Atlantico argues that it has every right to
recover from the Embassy as drawer of the checks
because it is a holder in due course. Basis for the claim
is Section 61 of the Negotiable Instruments Law, to
wit:
SEC. 61. Liability of drawer — The drawer by drawing
the instrument admits the existence of the payee and
his then capacity to endorse and engages that on the
due presentment the instrument will be accepted or
paid, or both, according to its tenor and that if it be
dishonored, and the n proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder, or
to any subsequent indorser who may be compelled to
pay it. But the drawer may insert in the instrument an
express stipulation negativing or limiting his own
liability to the holder.
It is erroneous for claimant bank's Counsel to single
out this particular provision because the
interpretation thereof would be out of context. All
the other related provisions of said law must be
interpreted together, and it would then be doubtful if
Banco Atlantico could qualify as a holder in due
course.
Section 61 of the Negotiable instruments Law can
only be availed of by holders in due course and Banco
Atlantico cannot be considered as one under the
definition of Section 52 of the N.I.L., to wit:
SEC. 52. What constitutes a holder in due course — A
holder in due course is a holder who has taken the
instrument under the following conditions:
a. That it is complete and regular on its face;
b. That he became the holder of it before it was
overdue, and without notice that it has been previously
dishonored, if such was the fact;
NEGOTIABLE INSTRUMENTS LAW
43
c. That he took it in good faith and for value;
d. That at the time it was negotiated to him he had no
notice of infirmity in the instrument or defect in the title
of the person negotiating it.
All four conditions enumerated under this section
must concur before a holder can be considered as a
holder in due course. The absence or failure to
comply with any of the conditions set forth under this
section will make one's title to the instrument
defective.
The check for US$90,000.00 was a demand note.
When Miss Boncan the payee of this check,
negotiated the same by depositing it in her account,
at the game time informing the bank in writing that it
be not presented for collection until a later date,
Banco Atlantico through its agent teller or cashier
should have been put on guard that there was
something wrong with the check. The fact that the
amount involved was quite big and it was the payee
herself who made the request that the same not be
presented for collection until a fixed date in the future
was proof of a glaring infirmity or defect in the
instrument. It loudly proclaims, "Take me at your
risk." The interest of the payee was the immediate
punishment of the check of which she was the
beneficiary and not the deferment of the
presentment for collection of the same to the drawee
bank. This being the case, Banco Atlantico was not a
holder in due course as defined by Section of the
N.I.L., because it was obvious that it had knowledge
of the infirmity or defect of the cheek. The fact that
the check was honored by claimant bank was proof
not only of their gross negligence but a further
manifestation of the special treatment they were
according Miss Boncan.
Vicente De Ocampo & Co.
vs.
Anita Gatchalian, et. al.
(G.R. No. L-15126 November 30, 1961)
Holder in due course
Facts:
Defendant Anita Gatchalian was shown and offered a
car by Manuel Gonzales who was accompanied by
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 4 – Rights of the holder
Emil Fajardo, the latter being personally known to
defendant Gatchalian. Gonzales represented to
defend Gatchalian that he was duly authorized by the
owner of the car, Ocampo Clinic, to look for a buyer
of said car and to negotiate for and accomplish said
sale, but which facts were not known to plaintiff
Vicente De Ocampo.
Gatchalian requested Gonzales to bring the car the
day following together with the certificate of
registration of the car. Gonzales advised her that the
owner of the car will not be willing to give the
certificate of registration unless there is a showing
that the party interested in the purchase of said car is
ready and willing to make such purchase and for this
purpose Gonzales requested defendant Gatchalian to
give him a check which will be shown to the owner as
evidence of buyer's good faith in the intention to
purchase the said car. The said check to be for
safekeeping only of Gonzales and to be returned to
defendant Gatchalian the following day when Manuel
Gonzales brings the car and the certificate of
registration. Thus, Gatchalian drew and issued a
check .
On the failure of Gonzales to appear the day
following, defendant Anita C. Gatchalian issued a
"Stop Payment Order" on the check with the drawee
bank.
Gonzales delivered the check to the Ocampo Clinic, in
payment of the fees and expenses arising from the
hospitalization of his wife. Plaintiff accepted said
check, applying P441.75 thereof to payment of said
fees and expenses and delivering to Gonzales the
amount of P158.25 representing the balance on the
amount of the said check.
CFI ordered Gatchalian to pay the amount of the
check to De Ocampo.
Issue:
Whether or not De Ocampo is a holder in due course.
Held:
No.
The stipulation of facts expressly states that plaintiff-
appellee was not aware of the circumstances under
NEGOTIABLE INSTRUMENTS LAW
44
which the check was delivered to Manuel Gonzales,
but SC agreed with the defendants-appellants that
the circumstances indicated by them in their briefs,
such as the fact that appellants had no obligation or
liability to the Ocampo Clinic; that the amount of the
check did not correspond exactly with the obligation
of Matilde Gonzales to Dr. V. R. de Ocampo; and that
the check had two parallel lines in the upper left hand
corner, which practice means that the check could
only be deposited but may not be converted into cash
— all these circumstances should have put the
plaintiff-appellee to inquiry as to the why and
wherefore of the possession of the check by Manuel
Gonzales, and why he used it to pay Matilde's
account.
It was payee's duty to ascertain from the holder
Manuel Gonzales what the nature of the latter's title
to the check was or the nature of his possession.
Having failed in this respect, we must declare that
plaintiff-appellee was guilty of gross neglect in not
finding out the nature of the title and possession of
Manuel Gonzales, amounting to legal absence of
good faith, and it may not be considered as a holder
of the check in good faith. To such effect is the
consensus of authority.
In order to show that the defendant had "knowledge
of such facts that his action in taking the instrument
amounted to bad faith," it is not necessary to prove
that the defendant knew the exact fraud that was
practiced upon the plaintiff by the defendant's
assignor, it being sufficient to show that the
defendant had notice that there was something
wrong about his assignor's acquisition of title,
although he did not have notice of the particular
wrong that was committed.
It is sufficient that the buyer of a note had notice or
knowledge that the note was in some way tainted
with fraud. It is not necessary that he should know the
particulars or even the nature of the fraud, since all
that is required is knowledge of such facts that his
action in taking the note amounted bad faith.
The above considerations would seem sufficient to
justify our ruling that plaintiff-appellee should not be
allowed to recover the value of the check. Let us now
examine the express provisions of the Negotiable
BEHIGA-MANTO-VILLAMOR DIGESTS
 45
Chapter 4 – Rights of the holder

Instruments Law pertinent to the matter to find if our

ruling conforms thereto. Section 52 (c) provides that
a holder in due course is one who takes the
instrument "in good faith and for value;" Section 59,
"that every holder is deemed prima facie to be a
holder in due course;" and Section 52 (d), that in
order that one may be a holder in due course it is
necessary that "at the time the instrument was
negotiated to him "he had no notice of any . . . defect
in the title of the person negotiating it;" and lastly
Section 59, that every holder is deemed prima facie
to be a holder in due course.

In the case at bar the rule that a possessor of the

instrument is prima facie a holder in due course does
not apply because there was a defect in the title of
the holder (Manuel Gonzales), because the
instrument is not payable to him or to bearer. On the
other hand, the stipulation of facts indicated by the
appellants in their brief, like the fact that the drawer
had no account with the payee; that the holder did
not show or tell the payee why he had the check in his
possession and why he was using it for the payment
of his own personal account — show that holder's
title was defective or suspicious, to say the least. As
holder's title was defective or suspicious, it cannot be
stated that the payee acquired the check without
knowledge of said defect in holder's title, and for this
reason the presumption that it is a holder in due
course or that it acquired the instrument in good faith
does not exist. And having presented no evidence
that it acquired the check in good faith, it (payee)
cannot be considered as a holder in due course. In
other words, under the circumstances of the case,
instead of the presumption that payee was a holder
in good faith, the fact is that it acquired possession of
the instrument under circumstances that should have
put it to inquiry as to the title of the holder who
negotiated the check to it. The burden was, therefore,
placed upon it to show that notwithstanding the
suspicious circumstances, it acquired the check in
actual good faith.

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Chapter 5 – Liabilities of Parties
J. Antonio Araneta
vs.
Antonio Perez
(G.R. Nos. L-20787-8 June 29, 1965)
Liability of maker
Facts:
Antonio M. Perez executed a promissory note
wherein he agreed to pay J. Antonio Araneta, or
order, the sum of P3,700.00, and if it is not paid on
the date of maturity, to pay interest at 9% per annum
on the amount of the loan, and P370.00 as attorney's
fees in addition to costs and other disbursements
taxable under the Rules of Court.
The note having become due and Antonio M. Perez
having failed to pay it despite demand made upon
him to do so, Araneta filed on October 31, 1961 a
complaint in the Municipal Court of Manila to collect
its import under the terms therein stipulated.
In his answer, defendant Perez alleged that the
proceeds of the note were applied by him to the
payment of the medical treatment of his minor
daughter Angela Perez y Tuason, who is the
beneficiary of the trust then administered by Araneta
as trustee in Special Proceeding No. Q-73 of the Court
of First Instance of Quezon City, and that the trust
estate is bound to pay the expenses of said treatment
because they were for the benefit of said minor and
so the personal fund he borrowed from Araneta and
for which he executed the aforesaid promissory note
should be paid by Araneta in the manner above-
stated.
The trial court ruled in favor of Araneta and ordered
Perez to pay the amount of the check.
In the meantime, or on February 8, 1962, Perez filed
a complaint in the Municipal Court of Manila against
Araneta in his capacity as trustee of the minor child
Angela Perez y Tuason in Special Proceeding No. Q-73
of the Court of First Instance of Quezon City wherein,
making reference to civil case filed against him by
Araneta, he repeated the same allegations contained
in the answer he interposed to the complaint of
Araneta and prayed that Araneta as trustee be
required to pay Perez the amount of P3,700 advanced
by the latter in order to meet the obligation of the
NEGOTIABLE INSTRUMENTS LAW
46
trust estate. And on the basis of a motion to dismiss
filed by Araneta as trustee, and over the opposition
of Perez, the municipal court dismissed the latter's
complaint. His motion for reconsideration having
been denied, Perez appealed to the court a quo
where he filed an amended complaint against
Araneta.
Considering that the two cases involved the same
parties and the same promissory note, they were
ordered consolidated.
Issue:
Whether Perez is liable for the value of the check.
Held:
Yes.
The promissory note signed by Perez clearly states
that he agreed to pay Araneta or order the sum of
P3,700.00 and if the same is not paid on said date to
pay 9% interest thereon per annum until fully paid,
plus the sum of P370.00 as attorney's fees, in addition
to the costs and other disbursements taxable under
the Rules of Court. Under these terms it is clear that
Perez bound himself to pay personally said
promissory note which he cannot shift to another
without the consent of the payee. Such is the
undertaking of the maker. Indeed, Section 60 of the
Negotiable Instrument, Law provides that "the maker
of a negotiable instrument by making it engages that
he will pay it according to its tenor and admits the
existence of the payee and his then capacity to
indorse so that appellant cannot now escape liability
as maker by alleging that he spent the money for the
medical treatment of his daughter since it is not the
payee's concern to know how said proceeds should
be spent. That is the sole concern of the maker.
Payee's interest is merely to see that the note be paid
according to its terms.
It is clear that insofar as the personal liability of
appellant Perez on the promissory note is concerned,
which he admittedly executed for value in favor of
appellee Araneta, all the above recited allegations are
irrelevant and immaterial and cannot tender any
issue that will affect his personal liability under the
note. And this is so because the allegation regarding
the existence of the trust and its mismanagement on
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 5 – Liabilities of Parties
the part of appellee Araneta as trustee, certainly, has
nothing to do with the money lent by him to
appellant. Neither has the allegation that the
proceeds of the note were spent by appellant for the
medical treatment of minor Angela anything to do
with his personal obligation because the destination
of the proceeds of said note is certainly not the
concern of Araneta.
But even assuming for the sake of argument that
what is claimed by appellant as to how he spent the
proceeds of the notes is true, that will not exempt him
from his liability to Araneta but would merely give
him some basis to claim for recoupment against the
share of the trust fund belonging to the benefited
minor if it is properly shown that there is fund coming
to said minor. Here, no such showing was made.
Moreover, the trust herein created merely provides
for delivery to the beneficiaries of the share that may
correspond to them in the net income of the trust
fund, but does not impose upon the trustee the duty
to pay any obligation or expenses that may be needed
by said beneficiaries.
Palmares
vs.
CA and MB Lending Corp.
(G.R. No. 126490 March 31, 1998)
Liability of co-maker
Facts:
Pursuant to a promissory note, private respondent
M.B. Lending Corporation extended a loan to the
spouses Osmeña and Merlyn Azarraga, together with
petitioner Estrella Palmares, in the amount of
P30,000. On four occasions after the execution of the
promissory note and even after the loan matured,
petitioner and the Azarraga spouses were able to pay
a total of P16,300, thereby leaving a balance of
P13,700.
Consequently, on the basis of petitioner's solidary
liability under the promissory note, respondent
corporation filed a complaint against petitioner
Palmares as the lone party-defendant, to the
exclusion of the principal debtors, allegedly by reason
of the insolvency of the latter.
NEGOTIABLE INSTRUMENTS LAW
47
In her Amended Answer with Counterclaim,
petitioner alleged that immediately after the loan
matured, she offered to settle the obligation with
respondent corporation but the latter informed her
that they would try to collect from the spouses
Azarraga and that she need not worry about it; that
there has already been a partial payment in the
amount of P17,010; that the interest of 6% per month
compounded at the same rate per month, as well as
the penalty charges of 3% per month, are usurious
and unconscionable; and that while she agrees to be
liable on the note but only upon default of the
principal debtor, respondent corporation acted in bad
faith in suing her alone without including the
Azarragas when they were the only ones who
benefited from the proceeds of the loan.
RTC dismissed the complaint without prejudice to the
filing of a separate action for a sum of money against
the spouses Osmeña and Merlyn Azarraga who are
primarily liable on the instrument. On appeal, CA
reversed the RTC decision and held Palmares liable.
Issue:
Whether Estrella Palmares is only a guarantor with a
subsidiary liability and not a co-maker with primary
liability.
Held:
Palmares is a surety or a co-maker.
The basis of petitioner Palmares' liability under the
promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-
quoted loan, have fully understood the contents of this
Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly
and severally or solidarily liable with the above principal
maker of this note;
That in fact, I hereby agree that M.B. LENDING
CORPORATION may demand payment of the above loan
from me in case the principal maker, Mrs. Merlyn
Azarraga defaults in the payment of the note subject to
the same conditions above-contained.
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 5 – Liabilities of Parties
Petitioner contends that the provisions of the second
and third paragraph are conflicting in that while the
second paragraph seems to define her liability as that
of a surety which is joint and solidary with the
principal maker, on the other hand, under the third
paragraph her liability is actually that of a mere
guarantor because she bound herself to fulfill the
obligation only in case the principal debtor should fail
to do so, which is the essence of a contract of
guaranty. More simply stated, although the second
paragraph says that she is liable as a surety, the third
paragraph defines the nature of her liability as that of
a guarantor. According to petitioner, these are two
conflicting provisions in the promissory note and the
rule is that clauses in the contract should be
interpreted in relation to one another and not by
parts. In other words, the second paragraph should
not be taken in isolation, but should be read in
relation to the third paragraph.
In the case at bar, petitioner expressly bound herself
to be jointly and severally or solidarily liable with the
principal maker of the note. The terms of the contract
are clear, explicit and unequivocal that petitioner's
liability is that of a surety.
Her pretension that the terms "jointly and severally
or solidarily liable" contained in the second paragraph
of her contract are technical and legal terms which
could not be easily understood by an ordinary layman
like her is diametrically opposed to her manifestation
in the contract that she "fully understood the
contents" of the promissory note and that she is "fully
aware" of her solidary liability with the principal
maker. Petitioner admits that she voluntarily affixed
her signature thereto; ergo, she cannot now be heard
to claim otherwise. Any reference to the existence of
fraud is unavailing. Fraud must be established by clear
and convincing evidence, mere preponderance of
evidence not even being adequate. Petitioner's
attempt to prove fraud must, therefore, fail as it was
evidenced only by her own uncorroborated and,
expectedly, self-serving allegations.
Having entered into the contract with full knowledge
of its terms and conditions, petitioner is estopped to
assert that she did so under a misapprehension or in
ignorance of their legal effect, or as to the legal effect
of the undertaking. The rule that ignorance of the
NEGOTIABLE INSTRUMENTS LAW
48
contents of an instrument does not ordinarily affect
the liability of one who signs it also applies to
contracts of suretyship. And the mistake of a surety
as to the legal effect of her obligation is ordinarily no
reason for relieving her of liability.
Petitioner would like to make capital of the fact that
although she obligated herself to be jointly and
severally liable with the principal maker, her liability
is deemed restricted by the provisions of the third
paragraph of her contract wherein she agreed "that
M.B. Lending Corporation may demand payment of
the above loan from me in case the principal maker,
Mrs. Merlyn Azarraga defaults in the payment of the
note," which makes her contract one of guaranty and
not suretyship. The purported discordance is more
apparent than real.
A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the debtor.
A suretyship is an undertaking that the debt shall be
paid; a guaranty, an undertaking that the debtor shall
pay. Stated differently, a surety promises to pay the
principal's debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the
guarantor if the principal is unable to pay. A surety
binds himself to perform if the principal does not,
without regard to his ability to do so. A guarantor, on
the other hand, does not contract that the principal
will pay, but simply that he is able to do so. In other
words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor
makes default, while a guarantor contracts to pay if,
by the use of due diligence, the debt cannot be made
out of the principal debtor.
Quintessentially, the undertaking to pay upon default
of the principal debtor does not automatically
remove it from the ambit of a contract of suretyship.
The second and third paragraphs of the aforequoted
portion of the promissory note do not contain any
other condition for the enforcement of respondent
corporation's right against petitioner. It has not been
shown, either in the contract or the pleadings, that
respondent corporation agreed to proceed against
herein petitioner only if and when the defaulting
principal has become insolvent. A contract of
suretyship, to repeat, is that wherein one lends his
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 5 – Liabilities of Parties
credit by joining in the principal debtor's obligation,
so as to render himself directly and primarily
responsible with him, and without reference to the
solvency of the principal.
In a desperate effort to exonerate herself from
liability, petitioner erroneously invokes the rule on
strictissimi juris, which holds that when the meaning
of a contract of indemnity or guaranty has once been
judicially determined under the rule of reasonable
construction applicable to all written contracts, then
the liability of the surety, under his contract, as thus
interpreted and construed, is not to be extended
beyond its strict meaning. The rule, however, will
apply only after it has been definitely ascertained that
the contract is one of suretyship and not a contract of
guaranty. It cannot be used as an aid in determining
whether a party's undertaking is that of a surety or a
guarantor.
Prescinding from these jurisprudential authorities,
there can be no doubt that the stipulation contained
in the third paragraph of the controverted suretyship
contract merely elucidated on and made more
specific the obligation of petitioner as generally
defined in the second paragraph thereof. Resultantly,
the theory advanced by petitioner, that she is merely
a guarantor because her liability attaches only upon
default of the principal debtor, must necessarily fail
for being incongruent with the judicial
pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the
intention of the contracting parties, their
contemporaneous and subsequent acts shall also be
principally considered. Several attendant factors in
that genre lend support to our finding that petitioner
is a surety. For one, when petitioner was informed
about the failure of the principal debtor to pay the
loan, she immediately offered to settle the account
with respondent corporation. Obviously, in her mind,
she knew that she was directly and primarily liable
upon default of her principal. For another, and this is
most revealing, petitioner presented the receipts of
the payments already made, from the time of initial
payment up to the last, which were all issued in her
name and of the Azarraga spouses. This can only be
construed to mean that the payments made by the
principal debtors were considered by respondent
NEGOTIABLE INSTRUMENTS LAW
49
corporation as creditable directly upon the account
and inuring to the benefit of petitioner. The
concomitant and simultaneous compliance of
petitioner's obligation with that of her principals only
goes to show that, from the very start, petitioner
considered herself equally bound by the contract of
the principal makers.
In this regard, we need only to reiterate the rule that
a surety is bound equally and absolutely with the
principal, and as such is deemed an original promisor
and debtor from the beginning. This is because in
suretyship there is but one contract, and the surety is
bound by the same agreement which binds the
principal. In essence, the contract of a surety starts
with the agreement, which is precisely the situation
obtaining in this case before the Court.
It will further be observed that petitioner's
undertaking as co-maker immediately follows the
terms and conditions stipulated between respondent
corporation, as creditor, and the principal obligors. A
surety is usually bound with his principal by the same
instrument, executed at the same time and upon the
same consideration; he is an original debtor, and his
liability is immediate and direct. Thus, it has been held
that where a written agreement on the same sheet of
paper with and immediately following the principal
contract between the buyer and seller is executed
simultaneously therewith, providing that the signers
of the agreement agreed to the terms of the principal
contract, the signers were "sureties" jointly liable
with the buyer. A surety usually enters into the same
obligation as that of his principal, and the signatures
of both usually appear upon the same instrument,
and the same consideration usually supports the
obligation for both the principal and the surety.
There is no merit in petitioner's contention that the
complaint was prematurely filed because the
principal debtors cannot as yet be considered in
default, there having been no judicial or extrajudicial
demand made by respondent corporation. Petitioner
has agreed that respondent corporation may demand
payment of the loan from her in case the principal
maker defaults, subject to the same conditions
expressed in the promissory note. Significantly,
paragraph (G) of the note states that "should I fail to
pay in accordance with the above schedule of
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 5 – Liabilities of Parties
payment, I hereby waive my right to notice and
demand." Hence, demand by the creditor is no longer
necessary in order that delay may exist since the
contract itself already expressly so declares. As a
surety, petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is
not necessary before bringing suit against them, since
the commencement of the suit is a sufficient demand.
On this point, it may be worth mentioning that a
surety is not even entitled, as a matter of right, to be
given notice of the principal's default. Inasmuch as
the creditor owes no duty of active diligence to take
care of the interest of the surety, his mere failure to
voluntarily give information to the surety of the
default of the principal cannot have the effect of
discharging the surety. The surety is bound to take
notice of the principal's default and to perform the
obligation. He cannot complain that the creditor has
not notified him in the absence of a special
agreement to that effect in the contract of suretyship.
The alleged failure of respondent corporation to
prove the fact of demand on the principal debtors, by
not attaching copies thereof to its pleadings, is
likewise immaterial. In the absence of a statutory or
contractual requirement, it is not necessary that
payment or performance of his obligation be first
demanded of the principal, especially where demand
would have been useless; nor is it a requisite, before
proceeding against the sureties, that the principal be
called on to account. The underlying principle
therefor is that a suretyship is a direct contract to pay
the debt of another. A surety is liable as much as his
principal is liable, and absolutely liable as soon as
default is made, without any demand upon the
principal whatsoever or any notice of default. As an
original promisor and debtor from the beginning, he
is held ordinarily to know every default of his
principal.
Petitioner questions the propriety of the filing of a
complaint solely against her to the exclusion of the
principal debtors who allegedly were the only ones
who benefited from the proceeds of the loan. What
petitioner is trying to imply is that the creditor, herein
respondent corporation, should have proceeded first
against the principal before suing on her obligation as
surety. We disagree.
NEGOTIABLE INSTRUMENTS LAW
50
A creditor's right to proceed against the surety exists
independently of his right to proceed against the
principal. Under Article 1216 of the Civil Code, the
creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The
rule, therefore, is that if the obligation is joint and
several, the creditor has the right to proceed even
against the surety alone. Since, generally, it is not
necessary for the creditor to proceed against a
principal in order to hold the surety liable, where, by
the terms of the contract, the obligation of the surety
is the same that of the principal, then soon as the
principal is in default, the surety is likewise in default,
and may be sued immediately and before any
proceedings are had against the principal. Perforce, in
accordance with the rule that, in the absence of
statute or agreement otherwise, a surety is primarily
liable, and with the rule that his proper remedy is to
pay the debt and pursue the principal for
reimbursement, the surety cannot at law, unless
permitted by statute and in the absence of any
agreement limiting the application of the security,
require the creditor or obligee, before proceeding
against the surety, to resort to and exhaust his
remedies against the principal, particularly where
both principal and surety are equally bound.
Associated Bank and
Conrado Cruz
vs.
CA and Merle Reyes
(G.R. No. 89802 May 7, 1992)
Liability of a bank for encashing a crossed check
Facts:
The private respondent is engaged in the business of
ready-to-wear garments under the firm name
"Melissa's RTW." She deals with, among other
customers, Robinson's Department Store, Payless
Department Store, Rempson Department Store, and
the Corona Bazaar.
When she went to these companies to collect on what
she thought were still unpaid accounts, she was
informed of the issuance of the above-listed crossed
checks. Further inquiry revealed that the said checks
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 5 – Liabilities of Parties
had been deposited with the Associated Bank and
subsequently paid by it to one Rafael Sayson, one of
its "trusted depositors," in the words of its branch
manager and co-petitioner, Conrado Cruz, Sayson had
not been authorized by the private respondent to
deposit and encash the said checks.
The private respondent sued the petitioners in the
RTC of Quezon City for recovery of the total value of
the checks plus damages. After trial, judgment was
rendered requiring them to pay the private
respondent the total value of the subject checks in
the amount of P15,805 plus interest and damages.
The petitioners appealed to the respondent court,
reiterating their argument that the private
respondent had no cause of action against them and
should have proceeded instead against the
companies that issued the checks. CA dismissed the
appeal.
Issue:
Whether the private respondent has a cause of action
against the petitioners for their encashment and
payment to another person of certain crossed checks
issued in her favor.
Held:
Yes.
Under accepted banking practice, crossing a check is
done by writing two parallel lines diagonally on the
left top portion of the checks. The crossing is special
where the name of a bank or a business institution is
written between the two parallel lines, which means
that the drawee should pay only with the intervention
of that company. The crossing is general where the
words written between the two parallel lines are "and
Co." or "for payee's account only," as in the case at
bar. This means that the drawee bank should not
encash the check but merely accept it for deposit.
In State Investment House vs. IAC, this Court declared
that "the effects of crossing a check are: (1) that the
check may not be encashed but only deposited in the
bank; (2) that the check may be negotiated only once
–– to one who has an account with a bank; and (3)
that the act of crossing the check serves as a warning
to the holder that the check has been issued for a
NEGOTIABLE INSTRUMENTS LAW
51
definite purpose so that he must inquire if he has
received the check pursuant to that purpose."
The effects therefore of crossing a check relate to the
mode of its presentment for payment. Under Sec. 72
of the Negotiable Instruments Law, presentment for
payment, to be sufficient, must be made by the
holder or by some person authorized to receive
payment on his behalf. Who the holder or authorized
person is depends on the instruction stated on the
face of the check.
The six checks in the case at bar had been crossed and
issued "for payee's account only." This could only
signify that the drawers had intended the same for
deposit only by the person indicated, to wit, Melissa's
RTW.
The petitioners argue that the cause of action for
violation of the common instruction found on the
face of the checks exclusively belongs to the issuers
thereof and not to the payee. Moreover, having acted
in good faith as they merely facilitated the
encashment of the checks, they cannot be made
liable to the private respondent.
The subject checks were accepted for deposit by the
Bank for the account of Rafael Sayson although they
were crossed checks and the payee was not Sayson
but Melissa's RTW. The Bank stamped thereon its
guarantee that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such
deliberate and positive act, the Bank had for all legal
intents and purposes treated the said checks as
negotiable instruments and, accordingly, assumed
the warranty of the endorser.
The weight of authority is to the effect that "the
possession of check on a forged or unauthorized
indorsement is wrongful, and when the money is
collected on the check, the bank can be held 'for
moneys had and received." The proceeds are held for
the rightful owner of the payment and may be
recovered by him. The position of the bank taking the
check on the forged or unauthorized indorsement is
the same as if it had taken the check and collected
without indorsement at all. The act of the bank
amounts to conversion of the check.
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 5 – Liabilities of Parties
It is not disputed that the proceeds of the subject
checks belonged to the private respondent. As she
had not at any time authorized Rafael Sayson to
endorse or encash them, there was conversion of the
funds by the Bank.
When the Bank paid the checks so endorsed
notwithstanding that title had not passed to the
endorser, it did so at its peril and became liable to the
payee for the value of the checks. This liability
attached whether or not the Bank was aware of the
unauthorized endorsement.
The petitioners were negligent when they permitted
the encashment of the checks by Sayson. The Bank
should have first verified his right to endorse the
crossed checks, of which he was not the payee, and
to deposit the proceeds of the checks to his own
account. The Bank was by reason of the nature of the
checks put upon notice that they were issued for
deposit only to the private respondent's account. Its
failure to inquire into Sayson's authority was a breach
of a duty it owed to the private respondent.
As the Court stressed in Banco de Oro Savings and
Mortgage Bank vs. Equitable Banking Corp., "the law
imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity. The
collecting bank, being primarily engaged in banking,
holds itself out to the public as the expert on this field,
and the law thus holds it to a high standard of
conduct."
The petitioners insist that the private respondent has
no cause of action against them because they have no
privity of contract with her. They also argue that it
was Eddie Reyes, the private respondent's own
husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed
checks, we hold that the Bank would still be liable to
the private respondent because he was not
authorized to make the endorsements. And even if
the endorsements were forged, as alleged, the Bank
would still be liable to the private respondent for not
verifying the endorser's authority. There is no
substantial difference between an actual forging of a
name to a check as an endorsement by a person not
NEGOTIABLE INSTRUMENTS LAW
52
authorized to make the signature and the affixing of a
name to a check as an endorsement by a person not
authorized to endorse it.
The Bank does not deny collecting the money on the
endorsement. It was its responsibility to inquire as to
the authority of Rafael Sayson to deposit crossed
checks payable to Melissa's RTW upon a prior
endorsement by Eddie Reyes. The failure of the Bank
to make this inquiry was a breach of duty that made
it liable to the private respondent for the amount of
the checks.
There being no evidence that the crossed checks were
actually received by the private respondent, she
would have a right of action against the drawer
companies, which in turn could go against their
respective drawee banks, which in turn could sue the
herein petitioner as collecting bank. In a similar
situation, it was held that, to simplify proceedings,
the payee of the illegally encashed checks should be
allowed to recover directly from the bank responsible
for such encashment regardless of whether or not the
checks were actually delivered to the payee.
It is worth repeating that before presenting the
checks for clearing and for payment, the Bank had
stamped on the back thereof the words: "All prior
endorsements and/or lack of endorsements
guaranteed," and thus made the assurance that it had
ascertained the genuineness of all prior
endorsements.
Myron Papa, Administrator of
the Testate Estate of Angela
Butte
vs.
A.U. Valencia and Co. Inc.,
Felix Penarroyo, Sps Arsenio
Reyes and Amanda Santos and
Delfin Jao
(G.R. No. 105188 January 23, 1998)
Unencashed check
Facts:
Private respondents A.U. Valencia and Co., Inc. and
Felix Peñarroyo, filed with the RTC of Pasig a
complaint for specific performance against herein
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 5 – Liabilities of Parties
petitioner Myron C. Papa, in his capacity as
administrator of the Testate Estate of one Angela M.
Butte.
The complaint alleged that petitioner Myron C. Papa,
acting as attorney-in-fact of Angela M. Butte, sold to
respondent Peñarroyo, through respondent Valencia,
a parcel of land, consisting of 286.60 square meters,
located at corner Retiro and Cadiz Streets, La Loma,
Quezon City. Prior to the alleged sale, the said
property, together with several other parcels of land
likewise owned by Angela M. Butte, had been
mortgaged by her to the Associated Banking
Corporation. After the alleged sale, but before the
title to the subject property had been released,
Angela M. Butte passed away. Despite
representations made by herein respondents to the
bank to release the title to the property sold to
respondent Peñarroyo, the bank refused to release it
unless and until all the mortgaged properties of the
late Angela M. Butte were also redeemed. In order to
protect his rights and interests over the property,
respondent Peñarroyo caused the annotation on the
title of an adverse claim.
The complaint further alleged that it was only upon
the release of the title to the property that
respondents Valencia and Peñarroyo discovered that
the mortgage rights of the bank had been assigned to
one Tomas L. Parpana (now deceased), as special
administrator of the Estate of Ramon Papa, Jr. Since
then, herein petitioner had been collecting monthly
rentals in the amount of P800.00 from the tenants of
the property, knowing that said property had already
been sold to private respondents. Despite repeated
demands from said respondents, petitioner refused
and failed to deliver the title to the property.
Thereupon, respondents Valencia and Peñarroyo
filed a complaint for specific performance, praying
that petitioner be ordered to deliver to respondent
Peñarroyo the title to the subject property and to turn
over to the latter the sum of P72,000 as accrued
rentals.
Trial court ruled in favor of private respondents. On
appeal, petitioner argued that the sale was never
"consummated" as he did not encash the check (in
the amount of P40,000) given by respondents
Valencia and Peñarroyo in payment of the full
NEGOTIABLE INSTRUMENTS LAW
53
purchase price of the subject lot. He maintained that
what said respondent had actually paid was only the
amount of P5,000 (in cash) as earnest money.
Issue:
Whether the sale was consummated.
Held:
Yes.
Petitioner argues that respondent Court of Appeals
erred in concluding that alleged sale of the subject
property had been consummated. He contends that
such a conclusion is based on the erroneous
presumption that the check (in the amount of
P40,000) had been cashed, citing Art. 1249 of the Civil
Code, which provides, in part, that payment by checks
shall produce the effect of payment only when they
have been cashed or when through the fault of the
creditor they have been impaired. Petitioner insists
that he never cashed said check; and, such being the
case, its delivery never produced the effect of
payment. Petitioner, while admitting that he had
issued receipts for the payments, asserts that said
receipts, particularly the receipt of PCIB Check No.
761025 in the amount of P40,000, do not prove
payment. He avers that there must be a showing that
said check had been encashed.
It is an undisputed fact that respondents Valencia and
Peñarroyo had given petitioner Myron C. Papa the
amounts of Five Thousand Pesos (P5,000.00) in cash
on 24 May 1973, and Forty Thousand Pesos
(P40,000.00) in check on 15 June 1973, in payment of
the purchase price of the subject lot. Petitioner
himself admits having received said amounts, and
having issued receipts therefor. Petitioner's assertion
that he never encashed the aforesaid check is not
substantiated and is at odds with his statement in his
answer that "he can no longer recall the transaction
which is supposed to have happened 10 years ago."
After more than ten (10) years from the payment in
party by cash and in part by check, the presumption
is that the check had been encashed. As already
stated, he even waived the presentation of oral
evidence.
Granting that petitioner had never encashed the
check, his failure to do so for more than ten (10) years
BEHIGA-MANTO-VILLAMOR DIGESTS
 54
Chapter 5 – Liabilities of Parties

undoubtedly resulted in the impairment of the check

through his unreasonable and unexplained delay.

While it is true that the delivery of a check produces

the effect of payment only when it is cashed,
pursuant to Art. 1249 of the Civil Code, the rule is
otherwise if the debtor is prejudiced by the creditor's
unreasonable delay in presentment. The acceptance
of a check implies an undertaking of due diligence in
presenting it for payment, and if he from whom it is
received sustains loss by want of such diligence, it will
be held to operate as actual payment of the debt or
obligation for which it was given. It has, likewise, been
held that if no presentment is made at all, the drawer
cannot be held liable irrespective of loss or injury
unless presentment is otherwise excused. This is in
harmony with Article 1249 of the Civil Code under
which payment by way of check or other negotiable
instrument is conditioned on its being cashed, except
when through the fault of the creditor, the
instrument is impaired. The payee of a check would
be a creditor under this provision and if its no-
payment is caused by his negligence, payment will be
deemed effected and the obligation for which the
check was given as conditional payment will be
discharged.

Considering that respondents Valencia and Peñarroyo

had fulfilled their part of the contract of sale by
delivering the payment of the purchase price, said
respondents, therefore, had the right to compel
petitioner to deliver to them the owner's duplicate of
Angela M. Butte and the peaceful possession and
enjoyment of the lot in question.

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Chapter 6 – Presentment for Payment
Westmont Bank (formerly
Associated Banking Corp.)
vs.
Eugene Ong
(G.R. No. 132560. January 30, 2002)
Facts:
Respondent Eugene Ong maintained a current
account with petitioner, formerly the Associated
Banking Corporation, but now known as Westmont
Bank. Sometime in May 1976, he sold certain shares
of stocks through Island Securities Corporation. To
pay Ong, Island Securities purchased two (2) Pacific
Banking Corporation managers checks, both dated
May 4, 1976, issued in the name of Eugene Ong as
payee. Before Ong could get hold of the checks, his
friend Paciano Tanlimco got hold of them, forged
Ong’s signature and deposited these with petitioner,
where Tanlimco was also a depositor. Even though
Ong’s specimen signature was on file, petitioner
accepted and credited both checks to the account of
Tanlimco, without verifying the signature
indorsements appearing at the back thereof.
Tanlimco then immediately withdrew the money and
absconded.
Instead of going straight to the bank to stop or
question the payment, Ong first sought the help of
Tanlimco’s family to recover the amount. Later, he
reported the incident to the Central Bank, which like
the first effort, unfortunately proved futile.
It was only on October 7, 1977, about five (5) months
from discovery of the fraud, did Ong cry foul and
demanded in his complaint that petitioner pay the
value of the two checks from the bank on whose gross
negligence he imputed his loss. In his suit, he insisted
that he did not deliver, negotiate, endorse or transfer
to any person or entity the subject checks issued to
him and asserted that the signatures on the back
were spurious.
The bank did not present evidence to the contrary,
but simply contended that since plaintiff Ong claimed
to have never received the originals of the two (2)
checks in question from Island Securities, much less
NEGOTIABLE INSTRUMENTS LAW
55
to have authorized Tanlimco to receive the same, he
never acquired ownership of these checks. Thus, he
had no legal personality to sue as he is not a real party
in interest. The bank then filed a demurrer to
evidence which was denied.
RTC ruled in favor of Ong. Petitioner was ordered to
pay the value of the checks.
CA affirmed in toto the RTC decision.
Issue:
1. Whether respondent Ong has a cause of action
against petitioner Westmont Bank.
2. Whether Ong is barred to recover the money from
Westmont Bank due to laches.
Held:
1. Yes.
Petitioners claim that respondent has no cause of
action against the bank is clearly misplaced. As
defined, a cause of action is the act or omission by
which a party violates a right of another. The essential
elements of a cause of action are: (a) a legal right or
rights of the plaintiff, (b) a correlative obligation of
the defendant, and (c) an act or omission of the
defendant in violation of said legal right.
The complaint filed before the trial court expressly
alleged respondents right as payee of the managers
checks to receive the amount involved, petitioners
correlative duty as collecting bank to ensure that the
amount gets to the rightful payee or his order, and a
breach of that duty because of a blatant act of
negligence on the part of petitioner which violated
respondents rights.
Under Section 23 of the Negotiable Instruments Law:
When a signature is forged or made without the
authority of the person whose signature it purports to
be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto, can
be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of
authority.
Since the signature of the payee, in the case at bar,
was forged to make it appear that he had made an
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 6 – Presentment for Payment
indorsement in favor of the forger, such signature
should be deemed as inoperative and ineffectual.
Petitioner, as the collecting bank, grossly erred in
making payment by virtue of said forged signature.
The payee, herein respondent, should therefore be
allowed to recover from the collecting bank.
The collecting bank is liable to the payee and must
bear the loss because it is its legal duty to ascertain
that the payees endorsement was genuine before
cashing the check. As a general rule, a bank or
corporation who has obtained possession of a check
upon an unauthorized or forged indorsement of the
payees signature and who collects the amount of the
check from the drawee, is liable for the proceeds
thereof to the payee or other owner, notwithstanding
that the amount has been paid to the person from
whom the check was obtained.
The theory of the rule is that the possession of the
check on the forged or unauthorized indorsement is
wrongful, and when the money had been collected on
the check, the bank or other person or corporation
can be held as for moneys had and received, and the
proceeds are held for the rightful owners who may
recover them. The position of the bank taking the
check on the forged or unauthorized indorsement is
the same as if it had taken the check and collected the
money without indorsement at all and the act of the
bank amounts to conversion of the check.
Petitioners claim that since there was no delivery yet
and respondent has never acquired possession of the
checks, respondents remedy is with the drawer and
not with petitioner bank. Petitioner relies on the view
to the effect that where there is no delivery to the
payee and no title vests in him, he ought not to be
allowed to recover on the ground that he lost nothing
because he never became the owner of the check and
still retained his claim of debt against the drawer.
However, another view in certain cases holds that
even if the absence of delivery is considered, such
consideration is not material. The rationale for this
view is that in said cases the plaintiff uses one action
to reach, by a desirable short cut, the person who
ought in any event to be ultimately liable as among
the innocent persons involved in the transaction. In
other words, the payee ought to be allowed to
recover directly from the collecting bank, regardless
NEGOTIABLE INSTRUMENTS LAW
56
of whether the check was delivered to the payee or
not.
2. No.
Petitioner avers that respondent Ong is barred by
laches for failing to assert his right for recovery from
the bank as soon as he discovered the scam. The lapse
of five months before he went to seek relief from the
bank, according to petitioner, constitutes laches.
Laches may be defined as the failure or neglect for an
unreasonable and unexplained length of time, to do
that which, by exercising due diligence, could or
should have been done earlier. It is negligence or
omission to assert a right within a reasonable time,
warranting a presumption that the party entitled
thereto has either abandoned or declined to assert it.
It concerns itself with whether or not by reason of
long inaction or inexcusable neglect, a person
claiming a right should be barred from asserting the
same, because to allow him to do so would be unjust
to the person against whom such right is sought to be
enforced.
In the case at bar, it cannot be said that respondent
sat on his rights. He immediately acted after knowing
of the forgery by proceeding to seek help from the
Tanlimco family and later the Central Bank, to remedy
the situation and recover his money from the forger,
Paciano Tanlimco. Only after he had exhausted
possibilities of settling the matter amicably with the
family of Tanlimco and through the CB, about five
months after the unlawful transaction took place, did
he resort to making the demand upon the petitioner
and eventually before the court for recovery of the
money value of the two checks. These acts cannot be
construed as undue delay in or abandonment of the
assertion of his rights.
Maria Tuazon, Alejandro
Tuazon, Melecio Tuazon,
Spouses Anastacio and Mary
Buenaventura
vs.
Heirs of Bartolome Ramos
(G.R. No. 156262. July 14, 2005)
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 6 – Presentment for Payment
Presentment for payment to persons secondarily liable
Facts:
Respondents alleged that between the period of May
2, 1988 and June 5, 1988, spouses Leonilo and Maria
Tuazon purchased a total of 8,326 cavans of rice from
the deceased Bartolome Ramos predecessor-in-
interest of respondents. Only 4,437 cavans have been
paid for so far, leaving unpaid 3,889 cavans valued at
P1,211,919. In payment therefor, the spouses Tuazon
issued several Traders Royal Bank checks.
But when these checks were encashed, all of the
checks bounced due to insufficiency of funds.
Respondents advanced that before issuing said
checks, spouses Tuazon already knew that they had
no available fund to support the checks, and they
failed to provide for the payment of these despite
repeated demands made on them.
Respondents averred that because spouses Tuazon
anticipated that they would be sued, they conspired
with the other defendants to defraud them as
creditors by executing fictitious sales of their
properties. They executed simulated sales of three
lots in favor of the spouses Buenaventura, as well as
other properties. As a result of the said sales, the
titles of these properties issued in the names of
spouses Tuazon were cancelled and new ones were
issued in favor of the co-defendants. Resultantly, by
the said ante-dated and simulated sales and the
corresponding transfers, there was no more property
left registered in the names of spouses Tuazon
answerable to creditors, to the damage and prejudice
of respondents.
For their part, defendants denied having purchased
rice from Bartolome Ramos. They alleged that it was
Magdalena Ramos, wife of said deceased, who owned
and traded the merchandise and Maria Tuazon was
merely her agent. They argued that it was Evangeline
Santos who was the buyer of the rice and issued the
checks to Maria Tuazon as payments therefor. In
good faith, the checks were received by petitioner
from Evangeline Santos and turned over to Ramos
without knowing that these were not funded. And it
is for this reason that petitioners have been insisting
on the inclusion of Evangeline Santos as an
indispensable party, and her non-inclusion was a fatal
error. Refuting that the sale of several properties
NEGOTIABLE INSTRUMENTS LAW
57
were fictitious or simulated, spouses Tuazon
contended that these were sold because they were
then meeting financial difficulties but the disposals
were made for value and in good faith and done
before the filing of the instant suit. To dispute the
contention of plaintiffs that they were the buyers of
the rice, they argued that there was no sales invoice,
official receipts or like evidence to prove this. They
assert that they were merely agents and should not
be held answerable.
The corresponding civil and criminal cases were filed
by respondents against Spouses Tuazon.
Contending that Evangeline Santos was an
indispensable party in the case, petitioners moved to
file a third-party complaint against her. Allegedly, she
was primarily liable to respondents, because she was
the one who had purchased the merchandise from
their predecessor, as evidenced by the fact that the
checks had been drawn in her name. The RTC,
however, denied petitioners Motion.
Trial court acquitted petitioners in all three of the
consolidated criminal cases, they appealed only its
decision finding them civilly liable to respondents.
On appeal, CA affirmed the trial court decision. CA
held that petitioners had failed to prove the existence
of an agency between respondents and Spouses
Tuazon.
Issue:
Whether CA erred in rendering judgment against the
petitioners despite the failure of the respondents to
include in their action Evangeline Santos, an
indispensable party to the suit.
Held:
No.
Petitioners argue that the lower courts erred in not
allowing Evangeline Santos to be impleaded as an
indispensable party. They insist that respondents
Complaint against them is based on the bouncing
checks she issued; hence, they point to her as the
person primarily liable for the obligation.
We hold that respondents’ cause of action is clearly
founded on petitioners failure to pay the purchase
price of the rice. The trial court held that Petitioner
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 6 – Presentment for Payment
Maria Tuazon had indorsed the questioned checks in
favor of respondents, in accordance with Sections 31
and 63 of the Negotiable Instruments Law. That
Santos was the drawer of the checks is thus
immaterial to the respondents cause of action.
As indorser, Petitioner Maria Tuazon warranted that
upon due presentment, the checks were to be
accepted or paid, or both, according to their tenor;
and that in case they were dishonored, she would pay
the corresponding amount. After an instrument is
dishonored by nonpayment, indorsers cease to be
merely secondarily liable; they become principal
debtors whose liability becomes identical to that of
the original obligor. The holder of a negotiable
instrument need not even proceed against the maker
before suing the indorser. Clearly, Evangeline Santos
-- as the drawer of the checks -- is not an
indispensable party in an action against Maria
Tuazon, the indorser of the checks.
Indispensable parties are defined as parties in
interest without whom no final determination can be
had. The instant case was originally one for the
collection of the purchase price of the rice bought by
Maria Tuazon from respondents’ predecessor. In this
case, it is clear that there is no privity of contract
between respondents and Santos. Hence, a final
determination of the rights and interest of the parties
may be made without any need to implead her.
The International Corporate
Bank (now Union Bank of the
Philippines)
vs.
Sps. Francis S. Gueco and Ma.
Luz E. Gueco
(G.R. No. 141968. February 12, 2001)
Presentment where instrument payable on demand
Facts:
The respondents Gueco Spouses obtained a loan from
petitioner Bank to purchase a car. In consideration
thereof, the Spouses executed promissory notes
which were payable in monthly installments and
chattel mortgage over the car to serve as security for
the notes.
NEGOTIABLE INSTRUMENTS LAW
58
The Spouses defaulted in payment of installments.
Consequently, the Bank filed a civil action for Sum of
Money with Prayer for a Writ of Replevin before the
MTC of Pasay City. Dr. Francis Gueco was served
summons and was fetched by the sheriff and
representative of the bank for a meeting in the bank
premises. Desi Tomas, the Bank’s Assistant Vice
President demanded payment of the amount of
P184,000 which represents the unpaid balance for
the car loan. After some negotiations and
computation, the amount was lowered to P154,000.
However, as a result of the non-payment of the
reduced amount on that date, the car was detained
inside the banks compound.
Dr. Gueco went to the bank and negotiations resulted
in the further reduction of the outstanding loan to
P150,000.
Dr. Gueco delivered a manager’s check in the amount
of P150,000 but the car was not released because of
his refusal to sign the Joint Motion to Dismiss. It is the
contention of the Gueco spouses and their counsel
that Dr. Gueco need not sign the motion for joint
dismissal considering that they had not yet filed their
Answer. Petitioner, however, insisted that the joint
motion to dismiss is standard operating procedure in
their bank to effect a compromise and to preclude
future filing of claims, counterclaims or suits for
damages.
After several demand letters and meetings with bank
representatives, the respondents Gueco spouses
initiated a civil action for damages before the MTC of
Quezon City. The MTC dismissed the complaint for
lack of merit.
On appeal to the RTC of Quezon City, the decision of
the MTC was reversed. In its decision, the RTC held
that there was a meeting of the minds between the
parties as to the reduction of the amount of
indebtedness and the release of the car but said
agreement did not include the signing of the joint
motion to dismiss as a condition sine qua non for the
effectivity of the compromise.
On appeal, CA affirmed the RTC decision. In the
meantime, the manager’s check has become stale.
Issue:
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 6 – Presentment for Payment
Whether CA erred in holding that the petitioner
return the subject car to the respondents, without
making any provision for the issuance of the new
managers/cashier’s check by the respondents in favor
of the petitioner in lieu of the original cashier’s check
that already became stale.
Held:
No.
The decision of the Regional Trial Court, which was
affirmed in toto by the Court of Appeals, orders the
petitioner:
1. to return immediately the subject car to the
appellants in good working condition. Appellee may
deposit the Managers Check the proceeds of which
have long been under the control of the issuing bank in
favor of the appellee since its issuance, whereas the
funds have long been paid by appellants to secure said
Managers Check over which appellants have no control.
Respondents would make us hold that petitioner
should return the car or its value and that the latter,
because of its own negligence, should suffer the loss
occasioned by the fact that the check had become
stale. It is their position that delivery of the manager’s
check produced the effect of payment and, thus,
petitioner was negligent in opting not to deposit or
use said check. Rudimentary sense of justice and fair
play would not countenance respondents’ position.
A stale check is one which has not been presented for
payment within a reasonable time after its issue. It is
valueless and, therefore, should not be paid. Under
the negotiable instruments law, an instrument not
payable on demand must be presented for payment
on the day it falls due. When the instrument is
payable on demand, presentment must be made
within a reasonable time after its issue. In the case of
a bill of exchange, presentment is sufficient if made
within a reasonable time after the last negotiation
thereof.
A check must be presented for payment within a
reasonable time after its issue, and in determining
what is a reasonable time, regard is to be had to the
nature of the instrument, the usage of trade or
business with respect to such instruments, and the
facts of the particular case. The test is whether the
payee employed such diligence as a prudent man
exercises in his own affairs. This is because the nature
NEGOTIABLE INSTRUMENTS LAW
59
and theory behind the use of a check points to its
immediate use and payability. In a case, a check
payable on demand which was long overdue by about
two and a half (2-1/2) years was considered a stale
check. Failure of a payee to encash a check for more
than ten (10) years undoubtedly resulted in the check
becoming stale. Thus, even a delay of one (1) week or
two (2) days, under the specific circumstances of the
cited cases constituted unreasonable time as a matter
of law.
In the case at bar, however, the check involved is not
an ordinary bill of exchange but a manager’s check. A
manager’s check is one drawn by the bank’s manager
upon the bank itself. It is similar to a cashier’s check
both as to effect and use. A cashier’s check is a check
of the bank’s cashier on his own or another check. In
effect, it is a bill of exchange drawn by the cashier of
a bank upon the bank itself, and accepted in advance
by the act of its issuance. It is really the banks own
check and may be treated as a promissory note with
the bank as a maker. The check becomes the primary
obligation of the bank which issues it and constitutes
its written promise to pay upon demand. The mere
issuance of it is considered an acceptance thereof. If
treated as promissory note, the drawer would be the
maker and in which case the holder need not prove
presentment for payment or present the bill to the
drawee for acceptance.
Even assuming that presentment is needed, failure to
present for payment within a reasonable time will
result to the discharge of the drawer only to the
extent of the loss caused by the delay. Failure to
present on time, thus, does not totally wipe out all
liability. In fact, the legal situation amounts to an
acknowledgment of liability in the sum stated in the
check. In this case, the Gueco spouses have not
alleged, much less shown that they or the bank which
issued the managers check has suffered damage or
loss caused by the delay or non-presentment.
Definitely, the original obligation to pay certainly has
not been erased.
It has been held that, if the check had become stale,
it becomes imperative that the circumstances that
caused its non-presentment be determined. In the
case at bar, there is no doubt that the petitioner bank
held on the check and refused to encash the same
because of the controversy surrounding the signing of
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 6 – Presentment for Payment
the joint motion to dismiss. We see no bad faith or
negligence in this position taken by the Bank.
Allied Banking Corp.
vs.
Bank of the Philippine Islands
(GR. 188363 February 27, 2013)
Doctrine of last clear chance
Facts:
On October 10, 2002, a check in the amount of
P1,000,000 payable to "Mateo Mgt. Group
International" (MMGI) was presented for deposit and
accepted at petitioner’s Kawit Branch. The check,
post-dated “Oct. 9, 2003” was drawn against the
account of Marcia no Silva, Jr. (Silva) with respondent
BPI Bel-Air Branch. Upon receipt, petitioner sent the
check for clearing to respondent through the
Philippine Clearing House Corporation (PCHC).
The check was cleared by respondent and petitioner
credited the account of MMGI with P1,000,000. On
October 22, 2002, MMGI’s account was closed and all
the funds therein were withdrawn. A month later,
Silva discovered the debit of P1,000,000 from his
account. In response to Silva’s complaint, respondent
credited his account with the aforesaid sum.
On March 21, 2003, respondent returned a
photocopy of the check to petitioner for the reason:
“Postdated.” Petitioner, however, refused to accept
and sent back to respondent a photocopy of the
check. Thereafter, the check, or more accurately, the
Charge Slip, was tossed several times from petitioner
to respondent, and back to petitioner, until on May 6,
2003, respondent requested the PCHC to take
custody of the check. Acting on the request, PCHC
directed the respondent to deliver the original check
and informed it of PCHC’s authority under Clearing
House Operating Memo (CHOM) No. 279 dated 06
September 1996 to split 50/50 the amount of the
check subject of a “Ping-Pong” controversy which
shall be implemented thru the issuance of Debit
Adjustment Tickets against the outward demands of
the banks involved. PCHC likewise encouraged
NEGOTIABLE INSTRUMENTS LAW
60
respondent to submit the controversy for resolution
thru the PCHC Arbitration Mechanism.
Petitioner who filed a complaint before the
Arbitration Committee, asserting that respondent
should solely bear the entire face value of the check
due to its negligence in failing to return the check to
petitioner within the 24-hour reglementary period as
provided in Section 20.1 of the Clearing House Rules
and Regulations (CHRR) 2000. Petitioner prayed that
respondent be ordered to reimburse the sum of
P500,000 with 12% interest per annum, and to pay
attorney’s fees and other arbitration expenses.
In its Answer with Counterclaims, respondent
charged petitioner with gross negligence for
accepting the post-dated check in the first place. It
contended that petitioner’s admitted negligence was
the sole and proximate cause of the loss.
On December 8, 2004, the Arbitration Committee
rendered its Decision in favor of petitioner and
against the respondent. First, it ruled that the
situation of the parties does not involve a “Ping-Pong”
controversy since the subject check was neither
returned within the reglementary time or through the
PCHC return window, nor coursed through the
clearing facilities of the PCHC.
As to respondent’s direct presentation of a
photocopy of the subject check, it was declared to be
without legal basis because Section 21.1 of the CHRR
2000 does not apply to post-dated checks. The
Arbitration Committee further noted that respondent
not only failed to return the check within the 24-hour
reglementary period, it also failed to institute any
formal complaint within the contemplation of Section
20.3 and it appears that respondent was already
contented with the 50-50 split initially implemented
by the PCHC. Finding both parties negligent in the
performance of their duties, the Committee applied
the doctrine of “Last Clear Chance” and ruled that the
loss should be shouldered by respondent alone.
On appeal, RTC affirmed the previous decision.
However, on appeal to the CA, CA set aside the RTC
judgment and ruled for a 60-40 sharing of the loss as
it found petitioner guilty of contributory negligence in
accepting what is clearly a post-dated check. The CA
found that petitioner’s failure to notice the
irregularity on the face of the check was a breach of
BEHIGA-MANTO-VILLAMOR DIGESTS
 61
Chapter 6 – Presentment for Payment

its duty to the public and a telling sign of its lack of
due diligence in handling checks coursed through it.
While the CA conceded that the drawee bank has a
bigger responsibility in the clearing of checks, it
declared that the presenting bank cannot take lightly
its obligation to make sure that only valid checks are
introduced into the clearing system.
Issues:
Whether the doctrine of last clear chance applies in
this case.
could have easily noticed the glaring defect upon
seeing the date written on the face of the check “Oct.
9, 2003”. Respondent could have then promptly
returned the check and with the check thus
dishonored, petitioner would have not credited the
amount thereof to the payee’s account. Thus,
notwithstanding the antecedent negligence of the
petitioner in accepting the post-dated check for
deposit, it can seek reimbursement from respondent
the amount credited to the payee’s account covering
the check.

Held: What petitioner omitted to mention is that in the

cited case of Philippine Bank of Commerce v. Court
Yes. of Appeals, while the Court found petitioner bank as
the culpable party under the doctrine of last clear
As well established by the records, both petitioner
chance since it had, thru its teller, the last
and respondent were admittedly negligent in the
opportunity to avert the injury incurred by its client
encashment of a check post-dated one year from its
simply by faithfully observing its own validation
presentment.
procedure, it nevertheless ruled that the plaintiff
The doctrine of last clear chance, stated broadly, is depositor (private respondent) must share in the loss
that the negligence of the plaintiff does not preclude on account of its contributory negligence.
a recovery for the negligence of the defendant where
it appears that the defendant, by exercising
reasonable care and prudence, might have avoided
injurious consequences to the plaintiff
notwithstanding the plaintiff’s negligence. The
doctrine necessarily assumes negligence on the part
of the defendant and contributory negligence on the
part of the plaintiff, and does not apply except upon
that assumption. Stated differently, the antecedent
negligence of the plaintiff does not preclude him from
recovering damages caused by the supervening
negligence of the defendant, who had the last fair
chance to prevent the impending harm by the
exercise of due diligence. Moreover, in situations
where the doctrine has been applied, it was
defendant’s failure to exercise such ordinary care,
having the last clear chance to avoid loss or injury,
which was the proximate cause of the occurrence of
such loss or injury.

In this case, the evidence clearly shows that the

proximate cause of the unwarranted encashment of
the subject check was the negligence of respondent
who cleared a post-dated check sent to it thru the
PCHC clearing facility without observing its own
verification procedure. As correctly found by the
PCHC and upheld by the RTC, if only respondent
exercised ordinary care in the clearing process, it

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Chapter 7 – Notice of Dishonor
Jaime Dico
vs.
CA and People of the Philippines
(G.R. No. 141669. February 28, 2005)
Once issuer receives notice of dishonor and fail to
pay within 5 days from receipt shall be prima facie
evidence of knowledge of insufficiency
Facts:
Accused Jaime Dico, now petitioner, was charged
with three (3) counts of violation of BP 22 before the
MTCC, Cebu City.
Accused is a credit card holder of Equitable Card
Network, Inc. The complaint was filed because the
three (3) checks which the accused issued in its favor,
and in payment of his obligation to the complainant
card network all bounced, for reason Account Closed.
The complainant sent a letter to the accused to
redeem or pay the amounts of the checks but the
accused refused to comply.
The credit line of the accused with the complainant
was P499,000. The accused had a good record with
the complainant until he issued the bouncing checks
above-mentioned. The outstanding obligation of the
accused to the complainant including interests and
charges thereon is P1,035,590.28. The obligation of
the accused to the complainant rose to a million
because the accused abused his credit card. In
January 1993, the accused applied with the
complainant for an increase of his credit line to
P699,000 but this was rejected by the complainant,
because the amount of P499,000.00 is the highest
credit line that the complainant can give the accused,
and besides, the current obligation of the accused has
not yet been settled.
For his defense, accused admits that he issued the
subject checks. Due to the conflicts and
inconsistencies in the billings made upon him by the
complainant with regards to amounts reflected in his
accounts, he advised the Branch Manager not to
present to the bank the checks that he has issued until
all the said conflicts and inconsistencies in his
accounts shall have been reconciled.
NEGOTIABLE INSTRUMENTS LAW
62
Further, he argues that he does not understand why
his total obligation to the complainant has already
reached P1,035,589.28 when his credit line is only
P499,000.00; hence, he approached the
complainants manager to reconcile his accounts and
find out where the complainant was mistaken; that
even if his accounts were reconciled, he cannot admit
that his obligation to the complainant has already
reached millions; and that the problem with the
complainant is that it did not return to him the checks
which he sent to the complainant together with his
proposal to reconcile his accounts.
MTCC find the accused Dico guilty of violation of BP
22. RTC affirmed in toto the MTCC decision. On
appeal, CA acquitted the accused on the issuance of 1
check on the ground that there was no such prima
facie evidence of knowledge of insufficiency of funds
or credit exists. However, he was convicted on the
other 2 checks.
Issue:
Whether CA erred in convicting petitioner to 2 out of
the 3 counts of violation of BP 22.
Held:
Yes.
The essential elements of the offense penalized
under Section 1, B.P. Blg. 22 are as follows: (1) the
making, drawing and issuance of any check to apply
to account or for value; (2) the knowledge of the
maker, drawer or issuer that at the time of issue he
does not have sufficient funds or credit with the
drawee bank for the payment of such check in full
upon its presentment; and (3) subsequent dishonor
of the check by the drawee bank for insufficiency of
funds or credit or dishonor for the same reason had
not the drawer, without any valid cause, ordered the
bank to stop payment. The prosecution has the
burden to prove all the elements of the crime beyond
reasonable doubt. Failure to do so will necessarily
result in exoneration.
In the cases at bar, petitioner argues that the first and
second elements of the crime are not present.
Based on the records, there was variance of the
subject checks. The variance in the identity of the
check nullifies petitioner’s conviction. The identity of
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 7 – Notice of Dishonor
the check enters into the first element of the offense
under Section 1 of B.P. Blg. 22 that a person draws or
issues a check on account or for value. There being a
discrepancy in the identity of the checks described in
the information and that presented in court,
petitioners constitutional right to be informed of the
nature of the offense charged will be violated if his
conviction is upheld.
To hold a person liable under B.P. Blg. 22, the
prosecution must not only establish that a check was
issued and that the same was subsequently
dishonored, it must further be shown that accused
knew at the time of the issuance of the check that he
did not have sufficient funds or credit with the
drawee bank for the payment of such check in full
upon its presentment.
This knowledge of insufficiency of funds or credit at
the time of the issuance of the check is the second
element of the offense. Inasmuch as this element
involves a state of mind of the person making,
drawing or issuing the check which is difficult to
prove, Section 2 of B.P. Blg. 22 creates a prima facie
presumption of such knowledge. Said section reads:
SEC. 2. Evidence of knowledge of insufficient funds. The making,
drawing and issuance of a check payment of which is refused by the
drawee because of insufficient funds in or credit with such bank,
when presented within ninety (90) days from the date of the check,
shall be prima facie evidence of knowledge of such insufficiency of
funds or credit unless such maker or drawer pays the holder
thereof the amount due thereon, or makes arrangements for
payment in full by the drawee of such check within five (5) banking
days after receiving notice that such check has not been paid by the
drawee.
For this presumption to arise, the prosecution must
prove the following: (a) the check is presented within
ninety (90) days from the date of the check; (b) the
drawer or maker of the check receives notice that
such check has not been paid by the drawee; and (c)
the drawer or maker of the check fails to pay the
holder of the check the amount due thereon, or make
arrangements for payment in full within five (5)
banking days after receiving notice that such check
has not been paid by the drawee. In other words, the
presumption is brought into existence only after it is
proved that the issuer had received a notice of
dishonor and that within five days from receipt
thereof, he failed to pay the amount of the check or
to make arrangements for its payment. The
NEGOTIABLE INSTRUMENTS LAW
63
presumption or prima facie evidence as provided in
this section cannot arise, if such notice of
nonpayment by the drawee bank is not sent to the
maker or drawer, or if there is no proof as to when
such notice was received by the drawer, since there
would simply be no way of reckoning the crucial 5-day
period.
A notice of dishonor received by the maker or drawer
of the check is thus indispensable before a conviction
can ensue. The notice of dishonor may be sent by the
offended party or the drawee bank. The notice must
be in writing. A mere oral notice to pay a dishonored
check will not suffice. The lack of a written notice is
fatal for the prosecution.
In this case, the only notice received by petitioner for
the three checks involved in these cases was that
dated 08 June 1993. There is no dispute that there
was indeed a demand letter from the counsel of
Equitable Card Network, Inc., but the same was
received by petitioner before the checks maturity or
due date on 12 June 1993. As testified to by
prosecution witness Lily Canlas, the demand letter
was sent to petitioner on 08 June 1993 and the check
was deposited on 14 June 1993. The demand letter
was sent four days before the date of the check and
six days before said check was deposited.
SC held petitioner did not receive the notice of
dishonor contemplated by the law. There was no valid
notice of dishonor to speak of. The term notice of
dishonor denotes that a check has been presented for
payment and was subsequently dishonored by the
drawee bank. This means that the check must
necessarily be due and demandable because only a
check that has become due can be presented for
payment and subsequently be dishonored. A
postdated check cannot be dishonored if presented
for payment before its due date.
The failure of Equitable Card Network, Inc., to send
another letter demanding that FEBTC Check No.
369404 be paid within five days after it has been
dishonored prevents the disputable presumption -
that petitioner had knowledge of the insufficiency of
his funds at the time he issued the check - from
arising. Absent such presumption, the burden of
evidence shifts to the prosecution to prove such
knowledge.
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There being no evidence presented by the
prosecution to show that petitioner had knowledge of
the insufficiency of his funds at the time he issued the
check, the second element of the offense was not
satisfied. Accordingly, having failed to prove all the
elements of B.P. Blg. 22, petitioner must, perforce, be
acquitted in Criminal Case No. 38255-R. The decisions
convicting petitioner of violation of B.P. Blg. 22 before
the CA, the RTC and the MTCC are reversed and set
aside.
Lina Lim Lao
vs.
CA and People of the Philippines
(G.R. No. 119178. June 20, 1997)
Mere employee who signs blank corporate checks
does so without actual knowledge of whether such
checks are funded and thus cannot be held criminally
liable for BP 22
Facts:
Petitioner Lina Lim Lao was a junior officer of
Premiere Investment House (Premiere). As such
officer, she was authorized to sign checks for and in
behalf of the corporation. In the course of the
business, she met complainant Father Artelijo Pelijo,
the provincial treasurer of the Society of the Divine
Word through Mrs. Rosemarie Lachenal, a trader for
Premiere. Father Palijo was authorized to invest
donations to the society and had been investing the
society’s money with Premiere. Father Palijo had
invested a total of P514,484.04. Father Palijo was also
issued 3 Traders Royal Bank (TRB) checks in payment
of interest.
All the checks were issued in favor of Artelijo A. Palijo
and signed by appellant (herein petitioner) and
Teodulo Asprec, who was the head of operations.
When Father Palijo presented the checks for
encashment, the same were dishonored for the
reason Drawn Against Insufficient Funds (DAIF).
Father Palijo immediately made demands on
Premiere to pay him the necessary amounts. For his
efforts, he was paid P5,000. Since no other payments
followed, Father Palijo wrote Premiere a formal letter
NEGOTIABLE INSTRUMENTS LAW
64
of demand. Subsequently, Premiere was placed
under receivership.
Thereafter, Father Palijo filed an affidavit-complaint
against Petitioner Lina Lim Lao and Teodulo Asprec
for violation of B.P. 22. After preliminary
investigation, three Informations charging Lao and
Asprec with the offense defined in the first paragraph
of Section 1, B.P. 22.
For her defense, in the regular course of her duties as
a junior officer, petitioner was required to co-sign
checks drawn against the account of the corporation.
The other co-signor was her head of office, Mr.
Teodulo Asprec. Since part of her duties required her
to be mostly in the field and out of the office, it was
normal procedure for her to sign the checks in blank,
that is, without the names of the payees, the amounts
and the dates of maturity.
In signing the checks as part of her duties as junior
officer of the corporation, petitioner had no
knowledge of the actual funds available in the
corporate account.
RTC found petitioner guilty. The decision was
affirmed by CA.
Issue:
Whether CA erred in finding petitioner guilty of
violation of BP 22 despite the lack of actual
knowledge of insufficiency of funds on her part.
Held:
Yes.
Petitioner argues that the notice of dishonor sent to
the main office of the corporation, and not to
petitioner herself who holds office in that
corporation’s branch office, does not constitute the
notice mandated in Section 2 of BP 22. Thus, there
can be no prima facie presumption that she had
knowledge of the insufficiency of funds.
SC listed the elements of the offense penalized under
B.P. 22, as follows: (1) the making, drawing and
issuance of any check to apply to account or for value;
(2) the knowledge of the maker, drawer or issuer that
at the time of issue he does not have sufficient funds
in or credit with the drawee bank for the payment of
such check in full upon its presentment; and (3)
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subsequent dishonor of the check by the drawee bank
for insufficiency of funds or credit or dishonor for the
same reason had not the drawer, without any valid
cause, ordered the bank to stop payment.
Justice Luis B. Reyes, an eminent authority in criminal
law, also enumerated the elements of the offense
defined in the first paragraph of Section 1 of B.P. 22,
thus:
1. That a person makes or draws and issues any check.
2. That the check is made or drawn and issued to apply on account
or for value.
3. That the person who makes or draws and issues the check knows
at the time of issue that he does not have sufficient funds in or
credit with the drawee bank for the payment of such check in full
upon its presentment.
4. That the check is subsequently dishonored by the drawee bank
for insufficiency of funds or credit, or would have been dishonored
for the same reason had not the drawer, without any valid reason,
ordered the bank to stop payment.
Knowledge of insufficiency of funds or credit in the
drawee bank for the payment of a check upon its
presentment is an essential element of the offense.
There is a prima facie presumption of the existence of
this element from the fact of drawing, issuing or
making a check, the payment of which was
subsequently refused for insufficiency of funds. It is
important to stress, however, that this is not a
conclusive presumption that forecloses or precludes
the presentation of evidence to the contrary.
In the present case, the fact alone that petitioner was
a signatory to the checks that were subsequently
dishonored merely engenders the prima facie
presumption that she knew of the insufficiency of
funds, but it does not render her automatically guilty
under B.P. 22. The prosecution has a duty to prove all
the elements of the crime, including the acts that give
rise to the prima facie presumption; petitioner, on the
other hand, has a right to rebut the prima facie
presumption. Therefore, if such knowledge of
insufficiency of funds is proven to be actually absent
or non-existent, the accused should not be held liable
for the offense defined under the first paragraph of
Section 1 of B.P. 22. Although the offense charged is
a malum prohibitum, the prosecution is not thereby
excused from its responsibility of proving beyond
reasonable doubt all the elements of the offense, one
of which is knowledge of the insufficiency of funds.
NEGOTIABLE INSTRUMENTS LAW
65
After a thorough review of the case at bar, SC finds
that petitioner did not have actual knowledge of the
insufficiency of funds in the corporate accounts at the
time she affixed her signature to the checks involved
in this case, at the time the same were issued, and
even at the time the checks were subsequently
dishonored by the drawee bank.
The scope of petitioner’s duties and responsibilities
did not encompass the funding of the corporations
checks; her duties were limited to the marketing
department of the Binondo branch.
Moreover, there can be no prima facie evidence of
knowledge of insufficiency of funds in the instant case
because no notice of dishonor was actually sent to or
received by the petitioner.
The notice of dishonor may be sent by the offended
party or the drawee bank. The trial court itself found
absent a personal notice of dishonor to petitioner by
the drawee bank based on the unrebutted testimony
of Veronilyn Ocampo, head of the Treasury Dept. at
the main office, that the checks bounced when
presented with the drawee bank but she did not
inform anymore petitioner as there was no need to
inform them as the corporation was in distress.
Ofelia Marigomen
vs.
People of the Philippines
(G.R. No. 153451 May 26, 2005)
Facts:
Caltex Philippines, Inc. (Caltex) is engaged in the sale
of gasoline and oil products to its customers, one of
which was the Industrial Sugar Resources, Inc.
(INSURECO). Caltex had granted a credit line to
INSURECO, and the latter purchased gasoline and
lubricants from Caltex through its sales
representative. The finance officer of INSURECO was
Ofelia Marigomen, while John V. Dalao was the
assistant to the general manager. They were
authorized to draw and sign checks against the
account of INSURECO at the Far East Bank and Trust
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Company. Caltex had agreed for INSURECO to pay its
purchases via postdated checks, which were
delivered to Caltex upon the release of the purchased
oil products.
As evidenced by separate delivery receipts,
INSURECO bought and took delivery of oil products
from Caltex. In payment thereof, postdated checks,
drawn and signed by Marigomen and Dalao, were
issued in favor of Caltex.
On due dates, Caltex presented the said checks for
payment. However, the checks were dishonored by
the drawee bank, for the reasons that they were
"drawn against insufficient funds" and "account
closed." Hence, Caltex made verbal demands to
INSURECO for the replacement of the dishonored
checks with either manager’s checks or cash, to no
avail.
Thus, Caltex filed criminal complaints for violation of
B.P. Blg. 22 against Marigomen and Dalao with the
Office of the City Prosecutor of Bacolod City. They
were, thereafter, charged with three counts of
violation of B.P. Blg. 22 in three separate Informations
filed with the RTC of Bacolod City.
When she testified, Marigomen admitted to having
drawn and signed the postdated checks subject
matter of the cases, along with Dalao, and that these
were issued in payment for the gasoline and oil
products purchased by INSURECO. She declared that
she was employed by INSURECO as finance officer on,
and that she subsequently resigned. She claimed that
she had no participation whatsoever in the purchase
of Caltex oil products by INSURECO. She had no
knowledge that Caltex had sent confirmation
telegrams demanding payment from INSURECO,
because by then she was no longer employed therein.
Moreover, she never received any written notice or
telegram from Caltex demanding payment of the
amounts of the dishonored checks. It was only when
she received a subpoena from the Office of the City
Prosecutor of Bacolod City that she discovered that
the checks had been dishonored, and that she had
been charged in connection therewith.
After trial, the trial court rendered judgment
convicting Marigomen and Dalao of the crimes
charged. On appeal, CA rendered judgment affirming
the decision of the RTC, with the modification that
NEGOTIABLE INSTRUMENTS LAW
66
Marigomen and Dalao pay fines, with subsidiary
imprisonment in case of insolvency, in lieu of
imprisonment.
Issue:
Whether petitioner is guilty of violation of BP22.
Held:
No.
The ruling of Lao v. Court of Appeals36 is applicable in
this case. In acquitting the petitioner therein, SC
explained:
It has been observed that the State, under this statute, actually
offers the violator "a compromise by allowing him to perform some
act which operates to preempt the criminal action, and if he opts
to perform it the action is abated." This was also compared to
certain laws allowing illegal possessors of firearms a certain period
of time to surrender the illegally possessed firearms to the
Government, without incurring any criminal liability. In this light,
the full payment of the amount appearing in the check within five
banking days from notice of dishonor is a "complete defense." The
absence of a notice of dishonor necessarily deprives an accused an
opportunity to preclude a criminal prosecution. Accordingly,
procedural due process clearly enjoins that a notice of dishonor be
actually served on petitioner. Petitioner has a right to demand –
and the basic postulates of fairness require - that the notice of
dishonor be actually sent to and received by her to afford her the
opportunity to avert prosecution under B.P. Blg. 22.
Moreover, the notice of dishonor must be in writing;
a verbal notice is not enough.
Further, if the drawer or maker is an officer of a
corporation, the notice of dishonor to the said
corporation is not notice to the employee or officer
who drew or issued the check for and in its behalf. The
Court explained in Lao v. Court of Appeals, to wit:
In this light, the postulate of CA that "demand on the Corporation
constitutes demand on appellant (herein petitioner)," is
erroneous. Premiere has no obligation to forward the notice
addressed to it to the employee concerned, especially because the
corporation itself incurs no criminal liability under B.P. Blg. 22 for
the issuance of a bouncing check. Responsibility under B.P. Blg. 22
is personal to the accused; hence, personal knowledge of the
notice of dishonor is necessary. Consequently, constructive notice
to the corporation is not enough to satisfy due process. Moreover,
it is petitioner, as an officer of the corporation, who is the latter’s
agent for purposes of receiving notices and other documents, and
not the other way around. It is but axiomatic that notice to the
corporation, which has a personality distinct and separate from the
petitioner, does not constitute notice to the latter.
In this case, the prosecution failed to present any
employee of the PT&T to prove that the telegrams
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Chapter 7 – Notice of Dishonor
from the offended party were in fact transmitted to
INSURECO and that the latter received the same.
Furthermore, there is no evidence on record that the
petitioner ever received the said telegrams from
INSURECO, or that separate copies thereof were
transmitted to and received by the petitioner.
In fine, the respondent failed to prove the second
element of the crime. Hence, the petitioner should be
acquitted of the crimes charged.
Great Asian Sales Center Corporation and Tan
Chong Lin
vs.
CA and Bancasia Finance and Investment
Corporation
(G.R. No. 105774 April 25, 2002)
With recourse stipulation
Facts:
Great Asian is engaged in the business of buying and
selling general merchandise, in particular household
appliances. The board of directors of Great Asian
approved a resolution authorizing its Treasurer and
General Manager, Arsenio Lim Piat, Jr. to secure a
loan from Bancasia in an amount not to exceed P1
million. Thereafter, the board of directors of Great
Asian approved a second resolution authorizing Great
Asian to secure a discounting line with Bancasia in an
amount not exceeding P2 million. On both occasions,
the board resolution designated Arsenio as the
authorized signatory to sign all instruments,
documents and checks necessary to secure the
discounting line.
Tan Chong Lin signed a Surety Agreement in favor of
Bancasia to guarantee, solidarily, the debts of Great
Asian to Bancasia. In addition, he signed a
Comprehensive and Continuing Surety Agreement in
favor of Bancasia to guarantee, solidarily, the debts of
Great Asian to Bancasia.
Great Asian, through its Treasurer and General
Manager Arsenio, signed four (4) Deeds of
Assignment of Receivables, assigning to Bancasia
fifteen (15) postdated checks. Nine of the checks
NEGOTIABLE INSTRUMENTS LAW
67
were payable to Great Asian, three were payable to
"New Asian Emp.", and the last three were payable to
cash. Various customers of Great Asian issued these
postdated checks in payment for appliances and
other merchandise.
Arsenio endorsed all the fifteen dishonored checks by
signing his name at the back of the checks. Eight of
the dishonored checks bore the endorsement of
Arsenio below the stamped name of "Great Asian
Sales Center", while the rest of the dishonored checks
just bore the signature of Arsenio. The drawee banks
dishonored the fifteen checks on maturity when
deposited for collection by Bancasia, with any of the
following as reason for the dishonor: "account
closed", "payment stopped", "account under
garnishment", and "insufficiency of funds".
Bancasia sent by personal delivery a letter to Tan
Chong Lin, notifying him of the dishonor of the fifteen
checks and demanding payment from him. Neither
Great Asian nor Tan Chong Lin paid Bancasia the
dishonored checks.
Bancasia filed a complaint for collection of a sum of
money against Great Asian and Tan Chong Lin.
Bancasia impleaded Tan Chong Lin because of the
Surety Agreements he signed in favor of Bancasia.
Trial court ruled in favor of Bancasia. Defendants
were ordered to pay jointly and solidarily to plaintiff.
CA affirmed the trial court ruling.
Issue:
Whether Great Asian is liable to Bancasia under the
Deeds of Assignment for breach of contract pursuant
to the Civil Code, independent of the Negotiable
Instruments Law.
Held:
Yes.
Bancasia’s complaint against Great Asian is founded
on the latter’s breach of contract under the Deeds of
Assignment. The Deeds of Assignment uniformly
stipulate:
"xxx Likewise, it is hereby understood that the warranties which the
ASSIGNOR hereby made are deemed part of the consideration for
this transaction, such that any violation of any one, some, or all of
said warranties shall be deemed as deliberate misrepresentation
on the part of the ASSIGNOR. In such event, the monetary
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obligation herein conveyed unto the ASSIGNEE shall be
conclusively deemed defaulted, giving rise to the immediate
responsibility on the part of the ASSIGNOR to make good said
obligation, and making the ASSIGNOR liable to pay the penalty
stipulated hereinabove as if the original obligor/s of the receivables
actually defaulted. xxx"
Obviously, there is one vital suspensive condition in
the Deeds of Assignment. That is, in case the drawers
fail to pay the checks on maturity, Great Asian
obligated itself to pay Bancasia the full face value of
the dishonored checks, including penalty and
attorney’s fees. The failure of the drawers to pay the
checks is a suspensive condition, the happening of
which gives rise to Bancasia’s right to demand
payment from Great Asian.
By express provision in the Deeds of Assignment,
Great Asian unconditionally obligated itself to pay
Bancasia the full value of the dishonored checks. In
short, Great Asian sold the postdated checks on with
recourse basis against itself.
Great Asian and Bancasia agreed on this specific with
recourse stipulation, despite the fact that the
receivables were negotiable instruments with the
endorsement of Arsenio. The contracting parties had
the right to adopt the with recourse stipulation which
is separate and distinct from the warranties of an
endorser under the Negotiable Instruments Law.
The explicit with recourse stipulation against Great
Asian effectively enlarges, by agreement of the
parties, the liability of Great Asian beyond that of a
mere endorser of a negotiable instrument. Thus,
whether or not Bancasia gives notice of dishonor to
Great Asian, the latter remains liable to Bancasia
because of the with recourse stipulation which is
independent of the warranties of an endorser under
the Negotiable Instruments Law.
As endorsee of Great Asian, Bancasia had the option
to proceed against Great Asian under the Negotiable
Instruments Law. Had it so proceeded, the Negotiable
Instruments Law would have governed Bancasia’s
cause of action. Bancasia, however, did not choose
this route. Instead, Bancasia decided to sue Great
Asian for breach of contract under the Civil Code, a
right that Bancasia had under the express with
recourse stipulation in the Deeds of Assignment.
NEGOTIABLE INSTRUMENTS LAW
68
The exercise by Bancasia of its option to sue for
breach of contract under the Civil Code will not leave
Great Asian holding an empty bag. Great Asian, after
paying Bancasia, is subrogated back as creditor of the
receivables. Great Asian can then proceed against the
drawers who issued the checks. Even if Bancasia
failed to give timely notice of dishonor, still there
would be no prejudice whatever to Great Asian.
Under the Negotiable Instruments Law, notice of
dishonor is not required if the drawer has no right to
expect or require the bank to honor the check, or if
the drawer has countermanded payment. In the
instant case, all the checks were dishonored for any
of the following reasons: "account closed", "account
under garnishment", insufficiency of funds", or
"payment stopped". In the first three instances, the
drawers had no right to expect or require the bank to
honor the checks, and in the last instance, the
drawers had countermanded payment.
Eliza Tan
vs.
People of the Philippines
(G.R. No. 141466 January 19, 2001)
Facts:
Eliza Tan is the VP of Hometown Development, Inc.
(HDI). Fidel Francisco, Jr. is the president of the
construction firm F. M. Francisco & Associates (FMF).
Eliza, representing HDI, and Fidel, for FMF, entered
into a Construction Agreement whereby the FMF was
hired by Eliza to undertake land development
(construction of roads, railings, curbs, and gutters) at
the South Garden Homes. Among others, the
Construction Agreement set forth that the manner of
payment would be on a monthly progress billing
based on accomplishment reports to be submitted by
the FMF.
Based on the testimony of Fidel, it appears that when
Eliza failed to pay, both parties terminated the
contract. For its accomplishment for the month of
November 1992, FMF was paid P23,739.09 by Eliza
with a check.
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Chapter 7 – Notice of Dishonor
Upon presentment for payment, however, subject
check was dishonored. After receipt of the notice of
dishonor, Fidel verbally notified Eliza and the latter
promised to pay. Later on, when Eliza still did not pay,
Fidel sent her a demand letter by registered mail.
Failing to heed his demand letter, Eliza was charged
in court.
Meanwhile, Eliza presented a different version of the
case altogether. According to her, she initially issued
for (4) checks with P50,000 each to FMF as advance
partial payment.
When FMF failed to accomplish land development in
Cavite, the Construction Agreement was terminated
and Eliza asked for the return of the four (4) above-
mentioned checks. With the excuse, however, one of
the checks got lost, Fidel gave back only 3 of the 4
checks.
As their accounting records reflected that HDI still had
an account of P46,000 with FMF, and at the behest of
Fidel, Eliza issued to the latter, 2 checks, each for
P23,739.09, as replacement checks for the one that
got lost.
Subsequently, it was realized by HDI's accounting
department that the 2 checks had already been
replaced with cash and so a request to stop payment
of these two (2) checks were made by Eliza to the
bank.
Eliza maintains that the check was dishonored not
because it was drawn against insufficient funds but
precisely because of her order to stop payment
therefor. She stressed that although that bank had
stamped "DAUD" in subject check upon its
presentment, she had sufficient funds to cover the
check because at that time, she had a credit limit of
P25 million with Philtrust Bank.
Trial court found accused guilty. It was affirmed by
CA.
Issue:
Whether petitioner-accused is guilty of violation of BP
22.
Held:
No.
NEGOTIABLE INSTRUMENTS LAW
69
The elements of the offense defined and penalized in
Section 1 of Batas Pambansa Blg. 22 are:
1. That a person makes or draws and issues any check;
2. That the check is made or drawn and issued to apply on account
or for value;
3. That the person who makes or draws and issues the check knows
at the time of issue that he does not have sufficient funds in or
credit with the drawee bank for the payment of such check in full
upon its presentment, and
4. That the check is subsequently dishonored by the drawee bank
for insufficiency of funds or credit, or would have been dishonored
for the same reason had not the drawer, without any valid reason,
ordered the bank to stop payment.
In this case, the third and fourth elements of the
offense charged were not established or proved.
In the first place, the bank's representative testified
that petitioner's account at the time of the
presentment of the check she issued was funded, as
she had a credit line to the extent of P25 million,
much more than the amount of the check issued.
In the second place, even without relying on the
credit line, petitioner's bank account covered the
check she issued because even though there were
some deposits that were still uncollected the deposits
became "good" and the bank certified that the check
was "funded."
Actually, the check in question was not issued without
sufficient funds and was not dishonored due to
insufficiency of funds. What was stamped on the
check in question was "Payment Stopped-Funded" at
the same time "DAUD" meaning drawn against
uncollected deposits. Even with uncollected deposits,
the bank may honor the check at its discretion in favor
of favored clients, in which case there would be no
violation of B.P. 22.
In fact, petitioner requested the bank to stop
payment of the check for a valid reason, namely, that
the account has been paid in cash.
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Chapter 7 – Notice of Dishonor
James Svendsen
vs.
People of the Philippines
(G.R. No. 175381 February 26, 2008)
Mere registered receipt insufficient to establish proof of receipt of
written notice of dishonor
Facts:
In October 1997, Cristina Reyes (Cristina) extended a
loan to petitioner in the amount of P200,000, to bear
interest at 10% a month. After petitioner had partially
paid his obligation, he failed to settle the balance
thereof which had reached P380,000 inclusive of
interest.
Cristina thus filed a collection suit against petitioner,
which was eventually settled when petitioner paid
her P200,000 and issued in her favor an International
Exchange Bank check postdated February 2, 1999 in
the amount of P160,000 representing interest. The
check was co-signed by one Wilhelm Bolton.
When the check was presented for payment on
February 9, 1999, it was dishonored for having been
Drawn Against Insufficient Funds (DAIF).
Cristina, through counsel, thus sent a letter to
petitioner by registered mail informing him that the
check was dishonored by the drawee bank, and
demanding that he make it good within five (5) days
from receipt thereof.
No settlement having been made by petitioner,
Cristina filed a complaint against him and his co-
signatory to the check, Bolton, for violation of B.P.
Blg. 22 before the City Prosecutor’s Office of Manila.
Thereafter, an Information dated for violation of B.P.
Blg. No. 22 was thus filed before the MeTC of Manila
against the two.
Bolton having remained at large, the trial court never
acquired jurisdiction over his person.
Trial court found petitioner guilty. CA and RTC
affirmed the trial court decision.
Issue:
Whether petitioner is guilty of violation of BP 22.
Held:
NEGOTIABLE INSTRUMENTS LAW
70
No.
For petitioner to be validly convicted of the crime
under B.P. Blg. 22, the following requisites must thus
concur: (1) the making, drawing and issuance of any
check to apply for account or for value; (2) the
knowledge of the maker, drawer, or issuer that at the
time of issue he does not have sufficient funds in or
credit with the drawee bank for the payment of the
check in full upon its presentment; and (3) the
subsequent dishonor of the check by the drawee bank
for insufficiency of funds or credit or dishonor for the
same reason had not the drawer, without any valid
cause, ordered the bank to stop payment.
Petitioner admits having issued the postdated check
to Cristina. The check, however, was dishonored
when deposited for payment in Banco de Oro due to
DAIF. Hence, the first and the third elements obtain
in the case.
As for the second element, Section 2 of B.P. Blg. 22
provides that
[t]he making, drawing and issuance of a check payment of which is
refused by the drawee because of insufficient funds in or credit
with such bank, when presented within ninety (90) days from the
date of the check, shall be prima facie evidence of knowledge of
such insufficiency of funds or credit unless such maker or drawer
pays the holder thereof the amount due thereon, or makes
arrangements for payment in full by the drawee of such check
within five (5) banking days after receiving notice that such check
has not been paid by the drawee.
In Rico v. People of the Philippines, SC held:
x x x In recent cases, we had the occasion to emphasize that not
only must there be a written notice of dishonor or demand letters
actually received by the drawer of a dishonored check, but there
must also be proof of receipt thereof that is properly
authenticated, and not mere registered receipt and/or return
receipt.
Thus, as held in Domagsang vs. Court of Appeals, while Section 2 of
B.P. 22 indeed does not state that the notice of dishonor be in
writing, this must be taken in conjunction with Section 3 of the law,
i.e., "that where there are no sufficient funds in or credit with such
drawee bank, such fact shall always be explicitly stated in the notice
of dishonor or refusal". A mere oral notice or demand to pay would
appear to be insufficient for conviction under the law. In our view,
both the spirit and letter of the Bouncing Checks Law require for
the act to be punished thereunder not only that the accused
issued a check that is dishonored, but also that the accused has
actually been notified in writing of the fact of dishonor. This is
consistent with the rule that penal statues must be construed
strictly against the state and liberally in favor of the accused. x x x
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 71
Chapter 7 – Notice of Dishonor

In fine, the failure of the prosecution to prove the existence and

receipt by petitioner of the requisite written notice of dishonor and
that he was given at least five banking days within which to settle
his account constitutes sufficient ground for his acquittal.

The evidence for the prosecution failed to prove the

second element. While the registry receipt, which is
said to cover the letter-notice of dishonor and of
demand sent to petitioner, was presented, there is no
proof that he or a duly authorized agent received the
same. Receipts for registered letters including return
receipts do not themselves prove receipt; they must
be properly authenticated to serve as proof of receipt
of the letters.

For failure then to prove all the elements of violation

of B.P. Blg. 22, petitioner’s acquittal is in order.

Petitioner is civilly liable, however. For in a criminal

case, the social injury is sought to be repaired through
the imposition of the corresponding penalty, whereas
with respect to the personal injury of the victim, it is
sought to be compensated through indemnity, which
is civil in nature.

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Chapter 8 – Discharge of Negotiable Instrument
Cebu International Finance Corporation
vs.
CA, Vicente Alegre
(G.R. No. 123031. October 12, 1999)
Facts:
CIFC, a quasi-banking institution, is engaged in money
market operations.
Private respondent, Vicente Alegre, invested with
CIFC for P500,000. Petitioner issued a promissory
note for P516,238.67, covering private respondents
placement plus interest.
On maturity date, CIFC issued a check for P514,390.94
in favor of Alegre as proceeds of his matured
investment plus interest. The check was drawn from
petitioner’s current account with BPI.
Alegre’s wife deposited the check with RCBC. BPI
dishonored the check with the annotation, that the
check is subject of an investigation. BPI took custody
of the check pending an investigation of several
counterfeit checks drawn against CIFC’s checking
account. BPI used the check to trace the perpetrators
of the forgery.
Immediately, Alegre notified CIFC of the dishonored
check and demanded, on several occasions, that he
be paid in cash. CIFC refused the request, and instead
instructed Alegre to wait for its ongoing bank
reconciliation with BPI. Thereafter, Alegre, through
counsel, made a formal demand for the payment of
his money market placement. In turn, CIFC promised
to replace the check but required an impossible
condition that the original must first be surrendered.
Thus, Alegre filed a complaint for recovery of a sum
of money against the petitioner with the RTC.
CIFC sought to recover its lost funds and formally filed
against BPI, a separate civil action for collection of a
sum of money with the RTC. The collection suit
alleged that BPI unlawfully deducted from CIFC’s
checking account, counterfeit checks amounting to
P1,724,364.58. The action included the prayer to
NEGOTIABLE INSTRUMENTS LAW
72
collect the amount of the check paid to Alegre but
dishonored by BPI.
Thereafter, during the hearing by RTC, Vito Arieta,
Bank Manager of BPI, testified that the bank, indeed,
dishonored the check, retained the original copy and
forwarded only a certified true copy to RCBC. BPI
encashed and deducted the said amount from the
account of CIFC, but the proceeds, as well as the
check remained in BPI’s custody. The bank’s move
was in accordance with the Compromise Agreement
it entered with CIFC to end the litigation in RTC.
BPI filed a separate collection suit against Vicente
Alegre with the RTC. The complaint alleged that
Vicente Alegre connived with certain Lina Pena and
Lita Anda and forged several checks of BPIs client,
CIFC.
In the Alegre-CIFC case, RTC rendered judgment in
favor of Vicente Alegre. CIFC appealed from the
adverse decision of the trial court. CA affirmed the
decision of the trial court.
Issue:
1. Whether Article 1249 of the New Civil Code applies
in the present case.
2. Whether the subject check was validly discharged.
Held:
1. No.
Petitioner stresses that it had already been
discharged from the liability of paying the value of the
check due to the following circumstances:
1) There was acceptance of the subject check by BPI, the
drawee bank, as defined under the Negotiable
Instruments Law, and therefore, BPI, the drawee bank,
became primarily liable for the payment of the check,
and consequently, the drawer, herein petitioner, was
discharged from its liability thereon;
2) Moreover, BPI, the drawee bank, has not validly
dishonored the subject check; and,
3) The act of BPI, the drawee bank of debiting/deducting
the value of the check from petitioners account
amounted to and/or constituted a discharge of the
drawers (petitioners) liability under the
instrument/subject check.
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Chapter 8 – Discharge of Negotiable Instrument
Petitioner cites Section 137 of the Negotiable
Instruments Law, which states:
Liability of drawee retaining or destroying bill - Where a drawee to
whom a bill is delivered for acceptance destroys the same, or
refuses within twenty-four hours after such delivery or such other
period as the holder may allow, to return the bill accepted or non-
accepted to the Holder, he will be deemed to have accepted the
same.
Petitioner asserts that since BPI accepted the
instrument, the bank became primarily liable for the
payment of the check. Consequently, when BPI offset
the value of check against the losses from the forged
checks allegedly committed by the private
respondent, the check was deemed paid.
Article 1249 of the New Civil Code deals with a mode
of extinction of an obligation and expressly provides
for the medium in the payment of debts. It provides
that:
The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in
the currency, which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect
of payment only when they have been cashed, or when through
the fault of the creditor they have been impaired.
As held in Perez vs. Court of Appeals, a money market
is a market dealing in standardized short-term credit
instruments (involving large amounts) where lenders
and borrowers do not deal directly with each other
but through a middle man or dealer in open market.
In a money market transaction, the investor is a
lender who loans his money to a borrower through a
middleman or dealer.
In the case at bar, the money market transaction
between the petitioner and the private respondent is
in the nature of a loan. The private respondent
accepted the check, instead of requiring payment in
money. Yet, when he presented it to RCBC for
encashment, the same was dishonored by non-
acceptance. Under these circumstances, and after the
notice of dishonor, the holder has an immediate right
of recourse against the drawer, and consequently
could immediately file an action for the recovery of
the value of the check.
In a loan transaction, the obligation to pay a sum
certain in money may be paid in money, which is the
legal tender or, by the use of a check. A check is not a
NEGOTIABLE INSTRUMENTS LAW
73
legal tender, and therefore cannot constitute valid
tender of payment.
2. No.
When the bank deducted the amount of the check
from CIFC’s current account, this did not ipso facto
operate as a discharge or payment of the instrument.
Although the value of the check was deducted from
the funds of CIFC, it was not delivered to the payee,
Vicente Alegre. Instead, BPI offset the amount against
the losses it incurred from forgeries of CIFC checks,
allegedly committed by Alegre.
Anamer Salazar
vs.
J.Y. Brothers Marketing Corporation
(G.R. No. 171998 October 20, 2010)
Facts:
J.Y. Bros. is a corporation engaged in the business of
selling sugar, rice and other commodities. Petitioner
Anamer Salazar, a freelance sales agent, was
approached by Isagani Calleja and Jess Kallos, if she
knew a supplier of rice. Answering in the positive,
Salazar accompanied the two to J.Y. Bros. As a
consequence, Salazar with Calleja and Kallos
procured from J. Y. Bros. 300 cavans of rice worth
P214,000. As payment, Salazar negotiated and
indorsed to J.Y. Bros. a check issued by Nena Jaucian
Timario in the amount of P214,000 with the
assurance that the check is good as cash. On that
assurance, J.Y. Bros. parted with 300 cavans of rice to
Salazar. However, upon presentment, the check was
dishonored due to "closed account."
Informed of the dishonor of the check, Calleja, Kallos
and Salazar delivered to J.Y. Bros. a replacement cross
check again issued by Nena Jaucian Timario in the
amount of P214,000 but which, just the same,
bounced due to insufficient funds. When despite the
demand letter, Salazar failed to settle the amount due
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 8 – Discharge of Negotiable Instrument
J.Y. Bros., the latter charged Salazar and Timario with
the crime of estafa before the RTC of Legaspi City.
Salazar filed a demurrer to evidence. Salazar was
acquitted with the criminal charged, but she was held
liable for the value of the 300 bags of rice.
Aggrieved, accused attempted a reconsideration on
the civil aspect of the order and to allow her to
present evidence thereon. The motion was denied.
Accused went up to the SC on a petition for review.
SC granted the petition and remanded the case to the
trial court for reception of evidence petitioner on the
civil aspect.
RTC proceeded with the trial. After hearing, it
dismissed the case.
On appeal, CA found petitioner liable. In so ruling, the
CA found that petitioner indorsed the first check,
which was later replaced by a Solid Bank check issued
by Timario, also indorsed by petitioner as payment for
the 300 cavans of rice bought from respondent. The
CA, applying Sections 63, 66 and 29 of the Negotiable
Instruments Law, found that petitioner was
considered an indorser of the checks paid to
respondent and considered her as an accommodation
indorser, who was liable on the instrument to a
holder for value, notwithstanding that such holder at
the time of the taking of the instrument knew her only
to be an accommodation party.
Issue:
Whether CA erred in ignoring the ramifications of the
issuance of the Solidbank check in replacement of the
initial check which would have resulted to the
novation of the obligation arising from the issuance of
the latter check.
Held:
No.
Petitioner contends that the issuance of the Solid
Bank check and the acceptance thereof by the
respondent, in replacement of the dishonored
Prudential Bank check, amounted to novation that
discharged the latter check; that respondent's
acceptance of the Solid Bank check, notwithstanding
its eventual dishonor by the drawee bank, had the
effect of erasing whatever criminal responsibility,
NEGOTIABLE INSTRUMENTS LAW
74
under Article 315 of the Revised Penal Code, the
drawer or indorser of the Prudential Bank check
would have incurred in the issuance thereof in the
amount of P214,000; and that a check is a contract
which is susceptible to a novation just like any other
contract.
Section 119 of the Negotiable Instrument Law
provides, thus:
SECTION 119. Instrument; how discharged. – A negotiable
instrument is discharged:
(a) By payment in due course by or on behalf of the principal
debtor;
(b) By payment in due course by the party accommodated, where
the instrument is made or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the
payment of money;
(e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
And, under Article 1231 of the Civil Code, obligations
are extinguished:
xxxx
(6) By novation.
Contention of petitioner has no merit.
Petitioner's claim that respondent's acceptance of
the Solid Bank check which replaced the dishonored
Prudential bank check (first check) resulted to
novation which discharged the latter check is
unmeritorious.
Novation may either be extinctive or modificatory,
much being dependent on the nature of the change
and the intention of the parties. Extinctive novation is
never presumed; there must be an express intention
to novate; in cases where it is implied, the acts of the
parties must clearly demonstrate their intent to
dissolve the old obligation as the moving
consideration for the emergence of the new one.
Implied novation necessitates that the
incompatibility between the old and new obligation
be total on every point such that the old obligation is
completely superceded by the new one. The test of
incompatibility is whether they can stand together,
each one having an independent existence; if they
BEHIGA-MANTO-VILLAMOR DIGESTS
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Chapter 8 – Discharge of Negotiable Instrument

cannot and are irreconcilable, the subsequent

obligation would also extinguish the first.

The obligation to pay a sum of money is not novated

by an instrument that expressly recognizes the old,
changes only the terms of payment, adds other
obligations not incompatible with the old ones or the
new contract merely supplements the old one.

In this case, respondent’s acceptance of the Solid

Bank check, which replaced the dishonored
Prudential Bank check, did not result to novation as
there was no express agreement to establish that
petitioner was already discharged from his liability to
pay respondent the amount of P214,000 as payment
for the 300 bags of rice. As aforementioned, novation
is never presumed, there must be an express
intention to novate. In fact, when the Solid Bank
check was delivered to respondent, the same was
also indorsed by petitioner which shows petitioner’s
recognition of the existing obligation to respondent
to pay P214,000 subject of the replaced Prudential
Bank check.

Moreover, respondent’s acceptance of the Solid Bank

check did not result to any incompatibility, since the
two checks − Prudential and Solid Bank checks − were
precisely for the purpose of paying the amount of
P214,000, i.e., the credit obtained from the purchase
of the 300 bags of rice from respondent. Indeed,
there was no substantial change in the object or
principal condition of the obligation of petitioner as
the indorser of the check to pay the amount of
P214,000. It would appear that respondent accepted
the Solid Bank check to give petitioner the chance to
pay her obligation.

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Chapter 9 – Material Alteration
The International Corporate Bank
vs.
CA and Philippine National Bank
(G.R. No. 129910 September 5, 2006)
Alteration of the serial number of a check is not a material
alteration
Facts:
The Ministry of Education and Culture issued 15
checks drawn against PNB which International Corp.
Bank accepted for deposit on various dates. After 24
hours from submission of the checks to International
Corp. Bank for clearing, it paid the value of the checks
and allowed the withdrawals of the deposits.
However, PNB returned all the checks to International
Corp. Bank without clearing them on the ground that
they were materially altered which led to the
institution of an action for collection of sums of
money against PNB to recover the value of the checks.
RTC dismissed the case but was reversed by the CA
which applied Section 4(c) of Central Bank Circular
No. 580, series of 1977. The CA held that checks that
have been materially altered shall be returned within
24 hours after discovery of the alteration
Issue:
Whether the checks were materially altered.
Held:
No.
Sections 124 and 125 of Act No. 2031, otherwise
known as the Negotiable Instruments Law, provide:
SEC. 124. Alteration of instrument; effect of. ― Where a negotiable
instrument is materially altered without the assent of all parties
liable thereon, it is avoided, except as against a party who has
himself made, authorized, or assented to the alteration and
subsequent indorsers.
But when an instrument has been materially altered and is in the
hands of a holder in due course, not a party to the alteration, he
may enforce payment thereof according to its original tenor.
SEC. 125. What constitutes a material alteration. ―
Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
NEGOTIABLE INSTRUMENTS LAW
76
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of
the instrument in any respect is a material alteration.
The question on whether an alteration of the serial
number of a check is a material alteration under the
Negotiable Instruments Law is already a settled
matter. In Philippine National Bank v. Court of
Appeals, this Court ruled that the alteration on the
serial number of a check is not a material alteration.
Thus:
An alteration is said to be material if it alters the effect of the
instrument. It means an unauthorized change in an instrument that
purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party. In other
words, a material alteration is one which changes the items which
are required to be stated under Section 1 of the Negotiable
Instruments Law.
The case at the bench is unique in the sense that what
was altered is the serial number of the check in
question, an item which, it can readily be observed, is
not an essential requisite for negotiability under
Section 1 of the Negotiable Instruments Law. The
aforementioned alteration did not change the
relations between the parties. The name of the
drawer and the drawee were not altered. The
intended payee was the same. The sum of money due
to the payee remained the same.
Metropolitan Bank and Trust Company
vs.
Renato Cabilzo
(G.R. No. 154469 December 6, 2006)
Facts:
On Novermber 12, 1994, Renato Cabilzo issued a
Metrobank Check payable to "CASH" and postdated
on November 24, 1994 in the amount of P1,000
drawn against his Metrobank account to Mr.
Marquez, as his sales commission. The check was
presented to Westmont Bank for payment who
BEHIGA-MANTO-VILLAMOR DIGESTS

Chapter 9 – Material Alteration
indorsed it to Metrobank for appropriate clearing.
After the entries thereon were examined, including
the availability of funds and the authenticity of the
signature of the drawer, Metrobank cleared the check
for encashment in accordance with the Philippine
Clearing House Corporation (PCHC) Rules.
On November 16, 1994, Cabilzo’s representative was
at Metrobank when he was asked by a bank
personnel if Cabilzo had issued a check in the amount
of P91K to which he replied in negative. That
afternoon, Cabilzo called Metrobank to reiterate that
he did not issue the check. He later discovered that
the check of P1K was altered to P91K and date was
changed from Nov 24 to Nov 14. Cabilzo demanded
that Metrobank re-credit the amount of P91,000.00
to his account.
Cabilzo, thru counsel, finally sent a letter-demand to
Metrobank for the payment of P90,000, after
deducting the original value of the check in the
amount of P1,000. Such written demand
notwithstanding, Metrobank still failed or refused to
comply with its obligation.
Consequently, Cabilzo instituted a civil action for
damages against Metrobank before the RTC of
Manila.
RTC ruled in favor respondent. CA affirmed the RTC
decision.
Issue:
Whether CA erred in holding Metrobank, as drawee
bank, liable for the alterations on the subject check
bearing the authentic signature of the drawer
thereof.
Held:
Yes.
An alteration is said to be material if it changes the
effect of the instrument. It means that an
unauthorized change in an instrument that purports
to modify in any respect the obligation of a party or
an unauthorized addition of words or numbers or
other change to an incomplete instrument relating to
the obligation of a party. In other words, a material
alteration is one which changes the items which are
NEGOTIABLE INSTRUMENTS LAW
77
required to be stated under Section 1 of the
Negotiable Instruments Law.
Also pertinent is the following provision in the
Negotiable Instrument Law which states:
Section 125. What constitutes material alteration. – Any alteration
which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relation of the parties;
(e) The medium or currency in which payment is to be made;
Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of
the instrument in any respect is a material alteration.
In the case at bar, the check was altered so that the
amount was increased from P1,000 to P91,000 and
the date was changed from 24 November 1994 to 14
November 1994. Apparently, since the entries altered
were among those enumerated under Section 1 and
125, namely, the sum of money payable and the date
of the check, the instant controversy therefore
squarely falls within the purview of material
alteration.
Now, having laid the premise that the present
petition is a case of material alteration, it is now
necessary for to determine the effect of a materially
altered instrument, as well as the rights and
obligations of the parties thereunder. The following
provision of the Negotiable Instrument Law will shed
us some light in threshing out this issue:
Section 124. Alteration of instrument; effect of. – Where a
negotiable instrument is materially altered without the assent of all
parties liable thereon, it is avoided, except as against a party who
has himself made, authorized, and assented to the alteration and
subsequent indorsers.
But when the instrument has been materially altered and is in the
hands of a holder in due course not a party to the alteration, he
may enforce the payment thereof according to its original tenor.
Indubitably, Cabilzo was not the one who made nor
authorized the alteration. Neither did he assent to the
alteration by his express or implied acts. There is no
showing that he failed to exercise such reasonable
degree of diligence required of a prudent man which
could have otherwise prevented the loss. As correctly
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Chapter 9 – Material Alteration

ruled by the appellate court, Cabilzo was never remiss

in the preparation and issuance of the check, and
there were no indicia of evidence that would prove
otherwise. Indeed, Cabilzo placed asterisks before
and after the amount in words and figures in order to
forewarn the subsequent holders that nothing
follows before and after the amount indicated other
than the one specified between the asterisks.

When the drawee bank pays a materially altered

check, it violates the terms of the check, as well as its
duty to charge its client’s account only for bona fide
disbursements he had made. Since the drawee bank,
in the instant case, did not pay according to the
original tenor of the instrument, as directed by the
drawer, then it has no right to claim reimbursement
from the drawer, much less, the right to deduct the
erroneous payment it made from the drawer’s
account which it was expected to treat with utmost
fidelity.

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Chapter 10 – Acceptance
Prudential Bank
vs.
IAC, Philippine Rayon Mills, Inc. and Anacleto R. Chi
(G.R. No. 74886 December 8, 1992)
Facts:
Philippine Rayon Mills, Inc. entered into a contract
with Nissho Co., Ltd. of Japan for the importation of
textile machineries under a five-year deferred
payment plan. To effect payment for said
machineries, Philippine Rayon Mills opened a
commercial letter of credit with the Prudential Bank
and Trust Company in favor of Nissho. Against this
letter of credit, drafts were drawn and issued by
Nissho, which were all paid by the Prudential Bank
through its correspondent in Japan. Two of these
drafts were accepted by Philippine Rayon Mills while
the others were not. Petitioner instituted an action
for the recovery of the sum of money it paid to Nissho
as Philippine Rayon Mills was not able to pay its
obligations arising from the letter of credit.
Respondent court ruled that with regard to the ten
drafts which were not presented and accepted, no
valid demand for payment can be made. Petitioner
however claims that the drafts were sight drafts
which did not require presentment for acceptance to
Philippine Rayon.
Issue:
Whether presentment for acceptance of the drafts
was indispensable to make Philippine Rayon liable
thereon.
Held:
A letter of credit is defined as an engagement by a
bank or other person made at the request of a
customer that the issuer will honor drafts or other
demands for payment upon compliance with the
conditions specified in the credit. Through a letter of
credit, the bank merely substitutes its own promise to
pay for one of its customers who in return promises
to pay the bank the amount of funds mentioned in the
letter of credit plus credit or commitment fees
mutually agreed upon.
NEGOTIABLE INSTRUMENTS LAW
79
In the case at bar, the drawee was necessarily the
herein petitioner. It was to the latter that the drafts
were presented for payment. There was in fact no
need for acceptance as the issued drafts are sight
drafts. Presentment for acceptance is necessary only
in the cases expressly provided for in Section 143 of
the Negotiable Instruments Law (NIL). The said
section provides that presentment for acceptance
must be made:
(a) Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to fix the
maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be
presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order
to render any party to the bill liable.
Obviously then, sight drafts do not require
presentment for acceptance.
The parties herein agree, and the trial court explicitly
ruled, that the subject, drafts are sight drafts. Said the
latter:
. . . In the instant case the drafts being at sight, they are supposed
to be payable upon acceptance unless plaintiff bank has given the
Philippine Rayon Mills Inc. time within which to pay the same. The
first two drafts were duly accepted as indicated on their face, and
upon such acceptance should have been paid forthwith. These two
drafts were not paid and although Philippine Rayon Mills ought to
have paid the same, the fact remains that until now they are still
unpaid.
Philippine National Bank
vs.
CA and Philippine Commercial and Industrial Bank
(G.R. No. L-26001 October 29, 1968)
Facts:
Augusto Lim deposited in his current account with the
PCIB a GSIS Check in the sum of P57,415, drawn
against the PNB. The check was, on the same date,
forwarded, for clearing, through the Central Bank, to
the PNB, which did not return said check the next day,
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Chapter 10 – Acceptance

or at any other time, but retained it and paid its honored the check and paid its amount to the PCIB;
amount to the PCIB, as well as debited it against the and that only then did the PCIB allow Augusto Lim to
account of the GSIS in the PNB. Subsequently, upon draw said amount from his aforementioned current
demand from the GSIS, said sum was re-credited to account.
the latter's account, for the reason that the signatures
Thus, by not returning the check to the PCIB, by
of its officers on the check were forged. PNB
thereby indicating that the PNB had found nothing
demanded from the PCIB the refund of said sum,
wrong with the check and would honor the same, and
which the PCIB refused to do. Hence, the present
by actually paying its amount to the PCIB, the PNB
action against the PCIB, which was dismissed by the
induced the latter, not only to believe that the check
CFI of Manila, whose decision was, in turn, affirmed
was genuine and good in every respect, but, also, to
by the CA.
pay its amount to Augusto Lim. In other words, the
Issue: PNB was the primary or proximate cause of the loss,
and, hence, may not recover from the PCIB.
Whether CA erred in not holding that "clearing" is not
"acceptance", in contemplation of the Negotiable
Instruments law, and since the check had not been
accepted by the PNB, the latter is entitled to
reimbursement therefor.

Held:

No.

In general, "acceptance", in the sense in which this

term is used in the Negotiable Instruments Law is not
required for checks, for the same are payable on
demand. Indeed, "acceptance" and "payment" are,
within the purview of said Law, essentially different
things, for the former is "a promise to perform an
act," whereas the latter is the "actual performance"
thereof. In the words of the Law, "the acceptance of
a bill is the signification by the drawee of his assent to
the order of the drawer," which, in the case of checks,
is the payment, on demand, of a given sum of money.
Upon the other hand, actual payment of the amount
of a check implies not only an assent to said order of
the drawer and a recognition of the drawer's
obligation to pay the aforementioned sum, but, also,
a compliance with such obligation.

It will be recalled that the PCIB did not cash the check
upon its presentation by Augusto Lim; that the latter
had merely deposited it in his current account with
the PCIB; that, on the same day, the PCIB sent it,
through the Central Bank, to the PNB, for clearing;
that the PNB did not return the check to the PCIB the
next day or at any other time; that said failure to
return the check to the PCIB implied, under the
current banking practice, that the PNB considered the
check good and would honor it; that, in fact, the PNB

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Checks
State Investment House
vs.
IAC, Anita Chua and Harris Chua
(G.R. No. 72764 July 13, 1989)
Cross check
Facts:
New Sikatuna Wood Industries, Inc. requested for a
loan from private respondent; the latter then issued
three (3) crossed checks payable to New Sikatuna
Wood Industries, Inc. all postdated. Subsequently,
New Sikatuna Wood Industries, Inc. entered into an
agreement with herein petitioner whereby the
former assigned and discounted with petitioner
eleven (11) postdated checks including the
aforementioned three (3) postdated checks issued by
herein private respondent to New Sikatuna Wood
Industries, Inc.
When the three checks were allegedly deposited by
petitioner, these checks were dishonored by reason
of "insufficient funds", "stop payment" and "account
closed", respectively. Petitioner claims that despite
demands on private respondent, the latter failed to
pay the same necessitating the former to file an
action for collection.
RTC: The defendants, Harris and Anita Chua, were
ordered to pay the plaintiff.
CA: Reversed the lower court’s judgment.
Issue:
Whether petitioner is a holder in due course as to
entitle it to proceed against private respondents for
the amount stated in the dishonored checks.
Held:
Section 52(c) of the Negotiable Instruments Law
defines a holder in due course as one who takes the
instrument "in good faith and for value". On the other
hand, Section 52(d) provides that in order that one
may be a holder in due course, it is necessary that "at
the time the instrument was negotiated to him he had
no notice of any x x x defect in the title of the person
negotiating it." However, under Section 59 every
NEGOTIABLE INSTRUMENTS LAW
81
holder is deemed prima facie to be a holder in due
course.
This Court has taken cognizance of the practice that a
check with two parallel lines in the upper left hand
corner means that it could only be deposited and may
not be converted into cash. Consequently, such
circumstance should put the payee on inquiry and
upon him devolves the duty to ascertain the holder's
title to the check or the nature of his possession.
Failing in this respect, the payee is declared guilty of
gross negligence amounting to legal absence of good
faith and as such the consensus of authority is to the
effect that the holder of the check is not a holder in
good faith.
The three subject checks in the case at bar had been
crossed generally and issued payable to New Sikatuna
Wood Industries, Inc. which could only mean that the
drawer had intended the same for deposit only by the
rightful person, i.e., the payee named therein.
Apparently, it was not the payee who presented the
same for payment and therefore, there was no proper
presentment, and the liability did not attach to the
drawer.
Thus, in the absence of due presentment, the drawer
did not become liable. Consequently, no right of
recourse is available to petitioner against the drawer
of the subject checks considering that petitioner is
not the proper party authorized to make
presentment of the checks in question.
Far East Bank & Trust Co
vs.
Diaz Realty Inc
(G.R. No. 138588. August 23, 2001)
Checks not valid tender of payment
Facts:
Diaz and Company got a loan from the former PaBC
[Pacific Banking Corporation]. The loan was secured
by a real estate mortgage. In 1981, Allied Banking
Corporation rented an office space in the building
constructed on the properties covered by the
mortgage contract, with the conformity of mortgagee
BEHIGA-MANTO-VILLAMOR DIGESTS
 82
Checks

PaBC, whereby the parties agreed that the monthly Facts:

rentals shall be paid directly to the mortgagee for the
Petitioner, in consideration of the amount of
lessors account, either to partly or fully pay off the
P15,487,500.00, agreed to sell to respondent a lot.
aforesaid mortgage indebtedness. Four years after,
Respondent paid petitioner the amount of
the Central Bank closed PaBC, placed it under
P600,000.00 as option/reservation fee and the
receivership, and appointed Renan Santos as its
balance of P14,887,500.00 to be paid within 60 days
liquidator. Sometime in December 1986, appellant
from the execution of the contract, simultaneous
FEBTC purchased the credit of Diaz & Company in
with delivery of various legal documents. The parties
favor of PaBC. Subsequently, Diaz tendered to FEBTC
further agreed that failure on the part of respondent
the amount of P1,450,000 through an Interbank
to pay the balance of the purchase price entitles
check, in order to prevent the imposition of additional
petitioner to forfeit the P600,000 option/reservation
interests, penalties and surcharges on its loan. FEBTC
fee; while non-delivery by the latter of the necessary
did not accept it as payment; instead, Diaz was asked
documents obliges him to return to respondent the
to deposit the amount with PaBC’s Davao City Branch
said option/reservation fee with interest at 18% per
Office.
annum.
RTC: There was a valid tender of payment made by
Petitioner failed to deliver the required documents. In
Diaz Realty Inc. in favor of Far East Bank and Trust
compliance with their agreement, he returned to
Company.
respondent the latter’s option/reservation fee by way
CA: Affirmed RTC’s decision. of Far East Bank & Trust Company check, which was,
however, dishonored.
Issue:
Petitioner claimed that he twice tendered to
Whether there was a valid tender of payment.
respondent, through his counsel, the amount of
Held: P672,900.00 (representing the P600,000.00
option/reservation fee plus 18% interest per annum)
Yes. Jurisprudence holds that, in general, a check does in the form of Far East Bank & Trust Company
not constitute legal tender, and that a creditor may Manager’s Check but said counsel refused to accept
validly refuse it. It must be emphasized, however, the same. The second tender was in the form of a
that this dictum does not prevent a creditor from manager’s check attached to a letter and was sent via
accepting a check as payment. In other words, the DHL Worldwide Services. Subsequently, petitioner
creditor has the option and the discretion of refusing filed a complaint for consignation.
or accepting it.
RTC: The consignation was invalid for a manager’s
In the present case, petitioner bank did not refuse check does not constitute a legal tender.
respondent’s check. On the contrary, it accepted the
check which, it insisted, was a deposit. As earlier CA: Reversed RTC’s decision.
stated, the check proved to be fully funded and was
Issues:
in fact honored by the drawee bank.
1. Was there a valid consignation?

2. Can petitioner withdraw the amount consigned as

Teddy G. Pabugais
a matter of right?
vs.
Held:
Dave P. Sahijwani 1. Yes. While it is true that in general, a manager’s
(G.R. No. 156846. February 23, 2004) check is not legal tender, the creditor has the option
of refusing or accepting it. The petitioner’s tender of
payment in the form of manager’s check is valid.
There being a valid tender of payment in an amount

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Checks
sufficient to extinguish the obligation, the
consignation is valid.
Consignation is the act of depositing the thing due
with the court or judicial authorities whenever the
creditor cannot accept or refuses to accept payment
and it generally requires a prior tender of payment. In
order that consignation may be effective, the debtor
must show that: (1) there was a debt due; (2) the
consignation of the obligation had been made
because the creditor to whom tender of payment was
made refused to accept it, or because he was absent
or incapacitated, or because several persons claimed
to be entitled to receive the amount due or because
the title to the obligation has been lost; (3) previous
notice of the consignation had been given to the
person interested in the performance of the
obligation; (4) the amount due was placed at the
disposal of the court; and (5) after the consignation
had been made the person interested was notified
thereof. Failure in any of these requirements is
enough ground to render a consignation ineffective.
2. The amount consigned with the trial court can no
longer be withdrawn by petitioner because
respondent’s prayer in his answer that the amount
consigned be awarded to him is equivalent to an
acceptance of the consignation, which has the effect
of extinguishing petitioner’s obligation.
People of the Philippines
vs.
Hon. Judge David Nitafan and K.T. Lim alias
Mariano Lim
(G.R. No. 75954 October 22, 1992)
Memorandum check
Facts:
Private respondent K.T. Lim was charged before
respondent court with violation of B.P. 22. He moved
to quash the Information on the ground that the facts
charged did not constitute a felony as B.P. 22 was
unconstitutional and that the check he issued was a
memorandum check which was in the nature of a
promissory note. The respondent judge ruled that
B.P. 22, on which the Information was based, was
unconstitutional and issued the questioned Order
NEGOTIABLE INSTRUMENTS LAW
83
quashing the Information. Hence, this petition for
review on certiorari filed by the Solicitor General in
behalf of the government.
Issue:
Whether respondent’s contention is tenable.
Held:
No. A memorandum check is in the form of an
ordinary check, with the word "memorandum",
"memo" or "mem" written across its face, signifying
that the maker or drawer engages to pay the bona
fide holder absolutely, without any condition
concerning its presentment. Such a check is an
evidence of debt against the drawer, and although
may not be intended to be presented, has the same
effect as an ordinary check, and if passed to the third
person, will be valid in his hands like any other check.
From the above definition, it is clear that a
memorandum check, which is in the form of an
ordinary check, is still drawn on a bank and should
therefore be distinguished from a promissory note,
which is but a mere promise to pay.
A memorandum check must therefore fall within the
ambit of B.P. 22 which does not distinguish but
merely provides that "[a]ny person who makes or
draws and issues any check knowing at the time of
issue that he does not have sufficient funds in or
credit with the drawee bank . . . which check is
subsequently dishonored . . . shall be punished by
imprisonment . . ."
A memorandum check, upon presentment, is
generally accepted by the bank. Hence it does not
matter whether the check issued is in the nature of a
memorandum as evidence of indebtedness or
whether it was issued is partial fulfillment of a pre-
existing obligation, for what the law punishes is the
issuance itself of a bouncing check and not the
purpose for which it was issuance.
BEHIGA-MANTO-VILLAMOR DIGESTS
 84
Checks

Ramon Tan use in the commercial world is regarded substantially

to be as good as the money which it represents. In this
vs. case, therefore, PCIB by issuing the check created an
CA and Rizal Commercial Banking Corporation unconditional credit in favor of any collecting bank.
RCBC could surely rely on the solvency of PCIB when
(G.R. No. 108555 December 20, 1994) the latter issued its cashier's check.
Facts:

Petitioner had maintained an account with

respondent bank's Binondo branch. To avoid carrying
cash while en route to Manila, he secured a Cashier's
Check from the Philippine Commercial Industrial Bank
(PCIB), Puerto Princesa branch, in the amount of
Thirty Thousand (P30,000.00) Pesos, payable to his
order. He deposited the check in his account with
RCBC Binondo. On the same day, RCBC erroneously
sent the same cashier's check for clearing to the
Central Bank which was returned for having been
"missent" or "misrouted." The next day, RCBC debited
the amount covered by the same cashier's check from
the account of the petitioner. Respondent bank at
this time had not informed the petitioner of its action
which the latter claims he learned of only 42 days
after. Relying on his common knowledge that a
cashier’s check was as good as cash, and a month
after depositing the check, he issued two personal
checks which subsequently bounced due to
insufficiency of funds. Petitioner filed a suit against
RCBC.

RTC: The court rendered a decision in favor of the

petitioner.

CA: Reversed the lower court’s judgment.

Issue:

Whether a cashier’s check is as good as cash, so as to

have funded the two checks subsequently drawn.

Held:

Yes. In this case, what was presented for deposit was

not just an ordinary check but a cashier's check
payable to the account of the depositor himself. A
cashier's check is a primary obligation of the issuing
bank and accepted in advance by its mere issuance.
By its very nature, a cashier's check is the bank's order
to pay drawn upon itself, committing in effect its total
resources, integrity and honor behind the check. A
cashier's check by its peculiar character and general

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Letters of Credit
Bank of the Philippine Islands
vs.
De Reny Fabric Industries, Inc., Aurora Tuyo and
Aurora Carcereny alias Aurora Gonzales
(G.R. No. L-24821 October 16, 1970)
A custom in international banking and financing circles negates
any duty on the part of a bank to verify whether what has been
described in letters of credits or drafts or shipping documents
actually tallies with what was loaded aboard ship
Facts:
On four (4) different occasions in 1961, the De Reny
Fabric Industries, Inc., a Philippine corporation,
applied to the Bank for four (4) irrevocable
commercial letters of credit to cover the purchase by
the corporation of goods described in the covering
L/C applications as "dyestuffs of various colors" from
its American supplier, the J.B. Distributing Company.
All the applications of the corporation were
approved, and the corresponding Commercial L/C
Agreements were executed pursuant to banking
procedures. Pursuant to banking regulations then in
force, the corporation delivered to the Bank peso
marginal deposits as each letter of credit was opened.
By virtue of the foregoing transactions, the Bank
issued irrevocable commercial letters of credit
addressed to its correspondent banks in the United
States, with uniform instructions for them to notify
the beneficiary thereof, the JB. Distributing Company,
that they have been authorized to negotiate the
latter's sight drafts up to the amounts mentioned
therein, respectively, if accompanied, upon
presentation, by a full set of negotiable clean "on
board" ocean bills of lading, covering the
merchandise appearing in the L/Cs, that is, dyestuffs
of various colors, Consequently, the J.B. Distributing
Company drew upon, presented to and negotiated
with these banks, its sight drafts covering the
amounts of the merchandise ostensibly being
exported by it, together with clean bills of lading, and
collected the full value of the drafts up to the
amounts appearing in the L/ Cs as above indicated.
These correspondent banks then debited the account
of the Bank of the Philippine Islands with them up to
the full value of the drafts presented by the J.B.
Distributing Company, thereafter, endorsed and
NEGOTIABLE INSTRUMENTS LAW
85
forwarded all documents to the Bank of the Philippine
Islands. In the meantime, as each shipment (covered
by the above-mentioned letters of credit) arrived in
the Philippines, the De Reny Fabric Industries, Inc.
made partial payments to the Bank amounting, in the
aggregate, to P90,000. Further payments were,
however, subsequently discontinued by the
corporation when it became established, as a result
of a chemical test conducted by the National Science
Development Board, that the goods that arrived in
Manila were colored chalks instead of dyestuffs. The
corporation also refused to take possession of these
goods, and for this reason, the Bank caused them to
be deposited with a bonded warehouse paying
therefor the amount of P12,609.64 up to the filing of
its complaint with the court below on December 10,
1962.
The Lower Court ordered the corporation and its co-
defendants (the herein appellants) to pay BPI the
amount of the LC agreement.
The contention of De Reny is that it was the duty of
the foreign correspondent banks of the Bank of the
Philippine Islands to take the necessary precautions
to insure that the goods shipped under the covering
L/Cs conformed with the item appearing therein, and,
that the foreign banks having failed to perform this
duty, no claim for recoupment against the
defendants-appellants, arising from the losses
incurred for the non-delivery or defective delivery of
the articles ordered, could accrue.
Issue:
Whether De Reny Fabrics is liable under the Letter of
Credit.
Held:
Yes.
Under the terms of their Commercial Letter of Credit
Agreements with the Bank, the appellants agreed
that the Bank shall not be responsible for the
"existence, chancier, quality, quantity, conditions,
packing, value, or delivery of the property purporting
to be represented by documents, for any difference
in character, quality, quantity, condition, or value of
the property front that expressed in documents," or
for "partial or incomplete shipment, or failure or
omission to ship my or all of the property referred to
BEHIGA-MANTO-VILLAMOR DIGESTS

Letters of Credit
in the Credit," as well as "for any deviation from
instructions, delay, default or fraud by the shipper or
in anyone else in connection with the property or the
shipping thereof," and "for any breach of contract
between the shippers or vendors and ourselves,
[purchasers] or any of us." Having agreed to these
terms, the appellants have, therefore, no recourse
but to comply with their covenant to the rules of
evidence.
But even without the stipulation recited above, the
appellants cannot shift the burden of loss to the Bank
on account of the violation by their vendor of its
prestation.
The Code of Commerce, in its Article 2, likewise
provides that "Acts of commerce, whether those who
execute them be merchants or not, and whether
specified in this Code or not, should be governed by
the provisions contained in it, in their absence, b) the
usages of commerce generally observed in each
place, and in the absence of both rules, by those of
the civil law" "Those acts contained in this Code and
all Others of analogous character, shall be deemed
acts of commerce." It must be noted that certain
principles governing the issuance, acceptance and
payment of letters of credit arc specifically provided
for in the Code of Commerce. But even without the
stipulation recited above, the appellants cannot shift
the burden of loss to the Bank on account of the
violation by their vendor of its prestation. Banks, in
providing financing in international business
transactions such as those entered into by the
appellants, do not deal with the property to be
exported or shipped to the importer, but deal only
with documents.
The Bank introduced in evidence a provision
contained in the "Uniform Customs and Practices for
Commercial Documentary Credits Fixed for the
Thirteenth Congress of International Chamber of
Commerce," to which the Philippines is a signatory
nation. Article 10 thereof provides:
Its documentary credit operations, all parties concerned deal in
documents and not in goods, payment, negotiation or acceptance
against documents in accordance with the terms and conditions of
a credit by a Bank authorized to do so binds the party giving the
authorization to take up the documents and reimbursed the Bank
making the payment, negotiation or acceptance.
NEGOTIABLE INSTRUMENTS LAW
86
The existence of a custom in international banking
and financing circles negating any duty on the part of
a bank to verify whether what has been described in
letters of credits or drafts or shipping documents
actually tallies with what was loaded aboard ship,
having been positively proven as a fact, the appellants
are bound by this established usage. They were, after
all, the ones who tapped the facilities afforded by the
Bank in order to engage in international business.
Philippine Virginia Tobacco Administration
vs.
Hon. Walfrido de los Angeles, Judge of the CFI of
Rizal, (Quezon City) and Timoteo Sevilla, doing
business under the name and style of Philippine
Associated Resources and Prudential Bank and
Trust Company
(G.R. No. L-27829 August 19, 1988)
An irrevocable letter of credit cannot, during its lifetime, be
cancelled or modified without the express permission of the
beneficiary
Facts:
Timoteo Sevilla, proprietor and General Manager of
the Philippine Associated Resources (PAR) was
awarded in a public bidding the right to import
Virginia leaf tobacco. Subsequently, the Philippine
Virginia Tobacco Administration (PVTA) and Sevilla
entered into a contract for the importation of 85
million kilos of Virginia leaf tobacco and a counterpart
exportation of 2.53 million kilos of tobacco and 5.1
million kilos of farmer’s and tobacco at P3.00 a kilo.
In accordance with their contract Sevilla purchased
from PVZTA and exported 2,101.470 kilos of tobacco,
paying the PVTA the sum of P2,482,938.50 and
leaving a balance of P3,713,908.91. Before
respondent Sevilla could import the counterpart
blending Virginia tobacco, amounting to 525,560
kilos, Republic Act No. 4155 was passed and took
effect on June 20, 1 964, authorizing the PVTA to
grant import privileges at the ratio of 4 to 1 instead of
9 to 1 and to dispose of all its tobacco stock at the
best price available.
Because of the prevailing export or world market
price under which Sevilla will be exporting at a loss,
the agreement was further amended to require
BEHIGA-MANTO-VILLAMOR DIGESTS

Letters of Credit
Sevilla would open an irrevocable letter of credit with
the Prudential Bank and Trust Co. (Prudential) in favor
of the PVTA to secure the payment of said balance,
drawable upon the release from the Bureau of
Customs of the imported Virginia blending tobacco.
While Sevilla was trying to negotiate the reduction of
the procurement cost of the 2,101.479 kilos of PVTA
tobacco already exported which attempt was denied
by PVTA and also by the Office of the President. PVTA
attempted to collect from the letter of Credit with
Prudential. Sevilla filed an injunction for the release
of funds with Prudential in the sala of Judge Delos
Santos. Judge Delos Santos issued the injunction
order and in a subsequent petition, ordered the funds
of the letter of credit released to Sevilla.
Issue:
Whether Judge Sevilla acted with grave abuse of
discretion in releasing the funds to the applicant of
the letter of credit.
Held:
Yes.
Judge Delos Santos violated the irrevocability of the
letter of credit issued by respondent Bank in favor of
petitioner. An irrevocable letter of credit cannot,
during its lifetime, be cancelled or modified without
the express permission of the beneficiary.
Consequently, if the finding of the trial on the merits
is that respondent Sevilla has alleged unpaid balance
due the petitioner, such unpaid obligation would be
unsecured.
Insular Bank of Asia & America (now Philippine
Commercial International Bank)
vs.
IAC, The Philippine American Life Insurance Co.,
Sps. Ben Mendoza & Juanita M. Mendoza
(G.R. No. 74834 November 17, 1988)
Facts:
Sometime in 1976 and 1977 spouses Ben S. Mendoza
and Juanita M. Mendoza (the Mendozas, for brevity),
NEGOTIABLE INSTRUMENTS LAW
87
obtained two (2) loans from Philippine American Life
Insurance Co. (Philam Life) in the total amount of
P600,000 to finance the construction of their
residential house at Mandaue City.
To secure payment, Philam Life required that
amortizations be guaranteed by an irrevocable
standby letter of credit of a commercial bank. Thus,
the Mendozas contracted with petitioner Insular Bank
of Asia and America (IBAA) for the issuance of two (2)
irrevocable standby Letters of Credit in favor of
Philam Life for the total amount of P600,000. These
two (2) irrevocable standby L/Cs were, in turn,
secured by a real estate mortgage for the same
amount on the property of Respondent Spouses in
favor of IBAA.
The Mendozas failed to pay Philam Life the
amortization that fell due on 1 June 1978 so that
Philam Life informed IBAA that it was declaring both
loans as "entirely due and demandable" and
demanded payment of P492,996.30. However,
because IBAA contested the propriety of calling in the
entire loan, Philam Life desisted and resumed availing
of the L/Cs by drawing on them for five (5) more
amortizations.
Because the Mendozas defaulted again on their
amortization due on, Philam Life again informed IBAA
that it was declaring the entire balance outstanding
on both loans, including liquidated damages,
"immediately due and payable." Philam Life then
demanded the payment of P274,779.56 from IBAA
but the latter took the position that, as a mere
guarantor of the Mendozas who are the principal
debtors, its remaining outstanding obligation under
the two(2) standby L/Cs was only P30,100.60. Later,
IBAA corrected the latter and demanded refund
because the partial payment by Mendozas have the
effect of reducing its liability as guarantor or surety
under the terms of the standbyL/Cs in question.
The real Estate Mortgage, which secured the two (2)
standby L/Cs, was extrajudicially foreclosed by, and
sold at public auction to petitioner IBAA as the lone
and highest bidder.
Philam Life filed suit against Respondent Spouses and
IBAA before the RTC of Manila for the recovery of the
sum of P274,779.56, the amount allegedly still owing
under the loan.
BEHIGA-MANTO-VILLAMOR DIGESTS

Letters of Credit
Trial Court took the position that IBAA, "as surety,"
was discharged of its liability to the extent of the
payment made by the Mendozas, as the principal
debtors, to the creditor, Philam Life.
The CA reversed the Trial Court and ruled instead that
IBAA's liability was not reduced by virtue of the
payments made by the Mendozas.
Issue:
Whether the partial payments made by the principal
obligors (respondent MENDOZAS) would have the
corresponding effect of reducing the liability of the
petitioner as guarantor or surety under the terms of
the standby LCs in question.
Held:
No.
In construing the terms of a Letter of Credit, as in
other contracts, it is the intention of the parties that
must govern.
"Letters of credit and contracts for the issuance of
such letters are subject to the same rules of
construction as are ordinary commercial contracts.
They are to receive a reasonable and not a technical
construction and although usage and custom cannot
control express terms in letters of credit, they are to
be construed with reference to all the surrounding
facts and circumstances, to the particular and often
varying terms in which they may be expressed, the
circumstances and intention of the parties to them,
and the usages of the particular trade of business
contemplated."
Unequivocally, the subject standby Letters of Credit
secure the payment of any obligation of the
Mendozas to Philam Life including all interests,
surcharges and expenses thereon but not to exceed
P600,000. But while they are a security arrangement,
they are not converted thereby into contracts of
guaranty. That would make them ultra vires rather
than a letter of credit, which is within the powers of a
bank. The standby L/Cs are, "in effect an absolute
undertaking to pay the money advanced or the
amount for which credit is given on the faith of the
instrument." They are primary obligations and not
accessory contracts. Being separate and independent
agreements, the payments made by the Mendozas
NEGOTIABLE INSTRUMENTS LAW
88
cannot be added in computing IBAA's liability under
its own standby letters of credit. Payments made by
the Mendozas directly to Philam Life are in
compliance with their own prestation under the loan
agreement.
As to the liability of the Mendozas to IBAA, it bears
recalling that the Mendozas, upon their application
for the opening and issuance of the Irrevocable
Standby Letters of Credit in favor of Philam Life, had
executed a Real Estate Mortgage as security to IBAA
for any payment that the latter may remit to Philam
Life on the strength of said Letters of Credit; and that
IBAA had recovered from the Mendozas the amount
of P432,386.07 when it foreclosed on the mortgaged
property of said spouses in the concept of "principal
(unpaid advances under the 2 standby LCs plus
interest and charges)." In addition, IBAA had
recovered P255,364.95 representing its clean loans to
the Mendozas plus accrued interest besides the fact
that it now has the foreclosed property. As between
IBAA and the Mendozas, therefore, there has been
full liquidation. The remaining obligation of P222,000
on the loan of the Mendozas, therefore, is now IBAA's
sole responsibility to pay to Philam Life by virtue of its
absolute and irrevocable undertaking under the
standby L/Cs. Specially so, since the promissory notes
executed by the Mendozas in favor of IBAA
authorized the sale of the mortgaged security "for the
purpose of applying their proceeds to x x x payments"
of their obligations to IBAA.
Feati Bank & Trust Company
vs.
CA and Bernardo E. Villaluz
(G.R. No. 94209 April 30, 1991)
Classification of obligations assumed by a correspondent bank in a
Letter of Credit
Facts:
Bernardo E. Villaluz agreed to sell to the then
defendant Axel Christiansen 2,000 cubic meters of
lauan logs at $27.00 per cubic meter FOB. After
inspecting the logs, Christiansen issued purchase
order.
BEHIGA-MANTO-VILLAMOR DIGESTS

Letters of Credit
On the arrangements made and upon the instructions
of the consignee, Hanmi Trade Development, Ltd., de
Santa Ana, California, the Security Pacific National
Bank of Los Angeles, California issued Irrevocable
Letter of Credit available at sight in favor of Villaluz
for the sum of $54,000, the total purchase price of the
lauan logs.
The letter of credit was mailed to the Feati Bank and
Trust Company (now Citytrust) with the instruction to
the latter that it "forward the enclosed letter of credit
to the beneficiary.” The letter of credit further
provided that the draft to be drawn is on Security
Pacific National Bank and that it be accompanied by
the documents specified therein. Also incorporated
by reference is the Uniform Customs and Practice for
Documentary Credits.
The logs were thereafter loaded on the vessel "Zenlin
Glory" which was chartered by Christiansen. Before
its loading, the logs were inspected by custom
inspectors, all of whom certified to the good
condition and exportability of the logs, and the
loading was completed.
However, Christiansen refused to issue the
certification as required in paragraph 4 of the letter
of credit, despite several requests made by the
private respondent. Because of the absence of the
certification by Christiansen, the Feati Bank and Trust
Company refused to advance the payment on the
letter of credit. Meanwhile, the logs arrived at Inchon,
Korea and were received by the consignee, Hanmi
Trade Development Company, to whom Christiansen
sold the logs and obtained profit. Hanmi Trade
Development Company, on the other hand sold the
logs to Taisung Lumber Company at Inchon, Korea.
Since the demands by the private respondent for
Christiansen to execute the certification proved futile,
Villaluz, instituted an action for mandamus and
specific performance against Christiansen and the
Feati Bank and Trust Company (now Citytrust).The
petitioner was impleaded as defendant before the
lower court only to afford complete relief should the
court a quo order Christiansen to execute the
required certification.
While the case was still pending trial, Christiansen left
the Philippines without informing the Court and his
NEGOTIABLE INSTRUMENTS LAW
89
counsel. Hence, Villaluz, filed an amended complaint
make the petitioner solidarily liable with Christiansen.
Issue:
Whether a correspondent bank is to be held liable
under the letter of credit despite non-compliance by
the beneficiary with the terms thereon.
Held:
Commercial transactions involving letter of credits
are governed by the rule on strict compliance. It is a
settled rule in commercial transactions involving
letters of credit that the documents tendered must
strictly conform to the terms of the letter of credit.
The tender of documents by the beneficiary (seller)
must include all documents required by the letter. A
correspondent bank which departs from what has
been stipulated under the letter of credit, as when it
accepts a faulty tender, acts on its own risks and it
may not thereafter be able to recover from the buyer
or the issuing bank, as the case may be, the money
thus paid to the beneficiary, thus the rule of strict
compliance.
In the United States, commercial transactions
involving letters of credit are governed by the rule of
strict compliance. In the Philippines, the same holds
true. The same rule must also be followed.
Although in some American decisions, banks are
granted a little discretion to accept a faulty tender as
when the other documents may be considered
immaterial or superfluous; this theory could lead to
dangerous precedents. Since a bank deals only with
documents, it is not in a position to determine
whether or not the documents required by the letter
of credit are material or superfluous. The mere fact
that the document was specified therein readily
means that the document is of vital importance to the
buyer.
In commercial transactions involving letters of credit,
the functions assumed by a correspondent bank are
classified according to the obligations taken up by it.
The correspondent bank may be called a notifying
bank, a negotiating bank, or a confirming bank.
BEHIGA-MANTO-VILLAMOR DIGESTS

Letters of Credit
In case of a notifying bank, the correspondent bank
assumes no liability except to notify and/or transmit
to the beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a
correspondent bank which buys or discounts a draft
under the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the
seller but after negotiation, a contractual relationship
will then prevail between the negotiating bank and
the seller.
In the case of a confirming bank, the correspondent
bank assumes a direct obligation to the seller and its
liability is a primary one as if the correspondent bank
itself had issued the letter of credit.
In this case, the letter merely provided that the
petitioner "forward the enclosed original credit to the
beneficiary." Considering the aforesaid instruction to
the petitioner by the issuing bank, the Security Pacific
National Bank, it is indubitable that the petitioner is
only a notifying bank and not a confirming bank as
ruled by the courts below.
The notifying bank may suggest to the seller its
willingness to negotiate, but this fact alone does not
imply that the notifying bank promises to accept the
draft drawn under the documentary credit.
A notifying bank is not a privy to the contract of sale
between the buyer and the seller, its relationship is
only with that of the issuing bank and not with the
beneficiary to whom he assumes no liability. It follows
therefore that when the petitioner refused to
negotiate with the private respondent, the latter has
no cause of action against the petitioner for the
enforcement of his rights under the letter.
Prudential Bank v. IAC, 216 SCRA 257 (1992)
[Same as above, Chapter 8 – Acceptance]
Bank of America, NT & SA
vs.
CA, Inter-Resin Industrial Corporation, Francisco
Trajano, John Doe and Jane Doe
(G.R. No. 105395 December 10, 1993)
Facts:
NEGOTIABLE INSTRUMENTS LAW
90
Bank of America, NT & SA, Manila, received by
registered mail an Irrevocable Letter of Credit
purportedly issued by Bank of Ayudhya, Sarnyaek
Branch, for the account of General Chemicals, Ltd., of
Thailand in the amount to cover the sale of Plastic
ropes and "agricultural files," with the Bank of
America as advising bank and Inter-Resin Industrial
Corporation as beneficiary.
Upon receipt of the letter-advice with the letter of
credit, Inter-Resin sent its lawyer to Bank of America
to have the letter of credit confirmed. The bank did
not. The bank employee in charge of letters of credit,
however, explained to that there was no need for
confirmation because the letter of credit would not
have been transmitted if it were not genuine.
Inter-Resin sought to make a partial availment under
the letter of credit by submitting to Bank of America
invoices, covering the shipment of 24,000 bales of
polyethylene rope to General Chemicals valued at
US$1,320,600.00, the corresponding packing list,
export declaration and bill of lading. Finally, after
being satisfied that Inter-Resin's documents
conformed with the conditions expressed in the letter
of credit, Bank of America issued in favor of Inter-
Resin a Cashier's Check for P10,219,093.20 the peso
equivalent of the draft. Bank of America wrote Bank
of Ayudhya advising the latter of the availment under
the letter of credit and sought the corresponding
reimbursement therefor.
Meanwhile, Inter-Resin, presented to Bank of
America the documents for the second availment
under the same letter of credit. Immediately upon
receipt of a telex from Bank of Ayudhya declaring the
letter of credit fraudulent, Bank of America stopped
the processing of Inter-Resin's documents and sent a
telex to its branch office in Bangkok, Thailand,
requesting assistance in determining the authenticity
of the letter of credit. Bank of America sued Inter-
Resin for the recovery of the peso equivalent of the
draft on the partial availment of the now disowned
letter of credit.
Bank of America sued Inter-Resin for the recovery of
P10,219,093.20, the peso equivalent of the draft for
US$1,320,600.00 on the partial availment of the now
disowned letter of credit. On the other hand, Inter-
Resin claimed that not only was it entitled to retain
BEHIGA-MANTO-VILLAMOR DIGESTS

Letters of Credit
P10,219,093.20 on its first shipment but also to the
balance US$1,461,400.00 covering the second
shipment.
Trial Court ruled for Inter-Resin, holding that Bank of
America cannot recover from Inter-Resin because the
drawer of the letter of credit is the Bank of Ayudhya
and not Inter-Resin, that Bank of America made
assurances that enticed Inter-Resin and the
merchandise to Thailand; CA sustained the Trial
Court.
Issue:
Whether or not the Bank of America acted merely as
an advising bank or a confirming bank, corollarily,
Bank of America can recover from Inter-Resin.
Held:
It cannot seriously be disputed, looking at this case,
that Bank of America has, in fact, only been an
advising, not confirming bank, and this much is
clearly evident, among other things, by the provisions
of the letter of credit itself, the petitioner bank's
letter of advice, its request for payment of advising
fee, and the admission of Inter-Resin that it has paid
the same. That Bank of America has asked Inter-Resin
to submit documents required by the letter of credit
and eventually has paid the proceeds thereof, did not
obviously make it a confirming bank. The fact, too,
that the draft required by the letter of credit is to be
drawn under the account of General Chemicals
(buyer) only means that the same had to be
presented to Bank of Ayudhya (issuing, bank) for
payment. It may be significant to recall that the letter
of credit is an engagement of the issuing bank, not the
advising bank, to pay the draft.
No less important is that Bank of America's letter of
11 March 1981 has expressly stated that "[t]he
enclosure is solely an advise of credit opened by the
abovementioned correspondent and conveys no
engagement by us." This written reservation by Bank
of America in limiting its obligation only to being an
advising bank is in consonance with the provisions of
U.C.P.
As an advising or notifying bank, Bank of America did
not incur any obligation more than just notifying
Inter-Resin of the letter of credit issued in its favor, let
alone to confirm the letter of credit. The bare
NEGOTIABLE INSTRUMENTS LAW
91
statement of the bank employee, aforementioned, in
responding to the inquiry made by Atty. Tanay, Inter-
Resin's representative, on the authenticity of the
letter of credit certainly did not have the effect of
novating the letter of credit and Bank of America’s
letter of advise, nor can it justify the conclusion that
the bank must now assume total liability on the letter
of credit. Indeed, Inter-Resin itself cannot claim to
have been all that free from fault. As the seller, the
issuance of the letter of credit should have obviously
been a great concern to it. It would have, in fact, been
strange if it did not, prior to the letter of credit, enter
into a contract, or negotiated at the very least, with
General Chemicals. In the ordinary course of business,
the perfection of contract precedes the issuance of a
letter of credit.
Reliance Commodities, Inc.
vs.
Daewoo Industrial Co., Ltd.
(G.R. No. L-100831 December 17, 1993)
Facts:
Reliance Commodities and Daewoo Industrial
entered into a contract of sale of foundry pig iron.
Pursuant to this, Daewoo shipped from Pohang,
Republic of Korea, 2,000 metric tons of foundry pig
iron for delivery to its consignee Reliance. The
shipment was fully paid for. Upon arrival in Manila,
the cargo was found to be short of 135.655 metric
tons.
Subsequently, another contract was entered into
between the same parties for the purchase of
another 2,000metric tons of foundry pig iron.
Daewoo acknowledged the short shipment, and to
compensate Reliance therefore, bound itself to
reduce the price. The agreement was made part of
the subsequent contract, however, that contract was
not consummated and was later superseded by still
another contract.
Reliance filed with the China Banking Corporation, an
application for a letter of credit in favor of Daewoo.
The application was endorsed to the Iron Steel
BEHIGA-MANTO-VILLAMOR DIGESTS

Letters of Credit
Authority (ISA) for approval, but the application was
denied. Reliance was instead asked to submit
purchase orders from end-users to support its
application for a letter of credit. However, Reliance
was not able to raise purchase orders for 2,000 metric
tons. Reliance alleges that it was able to raise
purchase orders for 1,900 metric tons. Daewoo, upon
the other hand, contends that reliance was only able
to raise purchase orders for 900 metric tons. An
examination of the exhibits' presented by Reliance in
the trial court shows that only purchase orders for
900metric tons were stamped "Received" by the ISA.
The other purchase orders for 1,000 metric tons
allegedly sent by prospective end-users to Reliance
were not shown to have been duly sent and exhibited
to the ISA. Whatever the exact amount of the
purchase orders was, Daewoo rejected the proposed
L/C for the reason that the goods covered fell short of
the contracted tonnage. Thus, Reliance withdrew the
application for the L/C.
Subsequently, Daewoo learned that the failure of
Reliance to open the LC was due to the fact that
Reliance had already exceeded its foreign exchange
allocation. Because of the failure of Reliance to
comply with its undertaking, Daewoo was compelled
to sell the 2,000 metric tons to another buyer at a
lower price, to cut losses and expenses Daewoo had
begun to incur due to its inability to ship the 2000
metric tons to Reliance under their contract.
Reliance, through its counsel, wrote Daewoo
requesting of the amount of P226,370.48,
representing the value of the short delivery of
135.655 metric tons of foundry pig iron under the 1st
contract. Not being heeded, Reliance filed an action
for damages against Daewoo with the trial court.
Daewoo responded, inter alia, with a counterclaim for
damages, contending that Reliance was guilty of
breach of contract when it failed to open and L/C as
required in the 31 July 1980 contract.
Trial Court ruled that Reliance is in turn liable for
breach of contract for its failure to open a letter of
credit in favor of Daewoo pursuant to their contract
and must therefore pay the latter actual damages
with legal interest plus attorney's fees. CA: affirmed
Trial Court.
Issue:
NEGOTIABLE INSTRUMENTS LAW
92
Whether the failure of an importer (Reliance) to open
a letter of credit on the date agreed upon makes him
liable to the exporter (Daewoo) for damages.
Held:
Yes.
A letter of credit transaction may thus be seen to be
a composite of at least three (3) distinct but
intertwined relationships being concretized in a
contract:
(a) One contract relationship links the party applying for
the L/C (the account party or buyer or importer) and the
party for whose benefit the L/C is issued (the beneficiary
or seller or exporter). In this contract, the account party,
here Reliance, agrees, among other things and subject
to the terms and conditions of the contract, to pay
money to the beneficiary, here Daewoo.
(b) A second contract relationship is between the
account party and the issuing bank. Under this contract,
(sometimes called the "Application and Agreement" or
the "Reimbursement Agreement"), the account party
among other things, applies to the issuing bank for a
specified L/C and agrees to reimburse the bank for
amounts paid by that bank pursuant to the L/C.
(c) The third contract relationship is established
between the issuing bank and the beneficiary, in order
to support the contract, under (a) above, of the account
party and the beneficiary to, inter alia, pay certain
monies to the latter.
Certain other parties may be added to the foregoing,
but the above three are the indispensable ones.
Failure of Reliance to open the appropriate letter of
credit did not prevent the birth of the contract and
neither did such failure extinguish that contract.
Reliance and Daewoo, having reached "a meeting of
minds" in respect of the subject matter of the
contract (2000 metric of foundry pig iron with a
specified chemical composition), the price thereof
(US $380,600), and other principal provisions, "they
had a perfected contract”. The failure of Reliance to
open, the appropriate L/C did not prevent the birth of
that contract, and neither did the failure extinguish
that contract. The opening of the L/C in favor of
Daewoo was an obligation of Reliance and the
performance of that obligation by Reliance was a
condition for enforcement of the reciprocal
obligation of Daewoo to ship the subject matter of
the contract-the foundry pig iron-to Reliance. But the
BEHIGA-MANTO-VILLAMOR DIGESTS
 93
Letters of Credit

contract itself between Reliance and Daewoo had Held:

already sprung into legal existence and was
1. No.
enforceable.
The subject Letter of Credit had become invalid upon
Failure of a buyer seasonably to furnish an agreed
the lapse of the period fixed therein. Thus, FBTC
letter of credit is a breach of the contract between
should not have paid Ekman; it was not obliged to do
buyer and seller. Where the buyer fails to open a
so. In the same vein, of no moment was Ekman’s
letter of credit as stipulated, the seller or exporter is
presentation, within the prescribed period, of all the
entitled to claim damages for such breach. Damages
documents necessary for collection, as the Letter of
for failure to open a commercial credit may, in
appropriate cases, include the loss of profit which the Credit had already expired and had in fact been
seller would reasonably have made had the cancelled.
transaction been carried out. 2. Yes.

Be that as it may, SC agree with the CA that Rodzssen

should pay FBTC the amount the latter expended for
Rodzssen Supply Company, Inc.
the equipment belatedly delivered by Ekman and
vs. voluntarily received and kept by petitioner. FBTC’s
right to seek recovery from petitioner is anchored,
Far East Bank and Trust Company not upon the inefficacious Letter of Credit, but on
(G.R. No. 109087. May 9, 2001) Article 2142 of the Civil Code which reads as follows:
Letter of Credit becomes invalid upon the lapse of the period fixed
therein “Certain lawful, voluntary and unilateral acts give rise to the
juridical relation of quasi-contract to the end that no one shall be
unjustly enriched or benefited at the expense of another.”
Facts:
Indeed, equitable considerations behoove us to allow
Rodzssen Supply opened an irrevocable letter 30-day
recovery by FBTC. True, it erred in paying Ekman, but
domestic letter of credit from Far East Bank and Trust
Rodzssen itself was not without fault in the
in favor of Ekman and Company, Inc. for the purchase
transaction. It must be noted that the latter had
of five units of hydraulic loaders; subsequent
voluntarily received and kept the loaders. When both
amendments extended the validity of the said LC for
parties to a transaction are mutually negligent in the
eight months. For the first three hydraulic loaders
performance of their obligations, the fault of one
that were delivered, the Bank paid for the amount
cancels the negligence of the other and, as in this
specified in the letter of credit. The last two hydraulic
case, their rights and obligations may be determined
loaders were delivered late, nevertheless, Rodzssen
equitably under the law proscribing unjust
accepted the same. Upon Ekman’s presentation of
enrichment.
documents, FBTC paid even if it was no longer bound
to do so, because the letter of credit has already
expired five months ago. FBTC demanded payment
from Rodzssen, but the latter refused to pay and Ramon L. Abad
instead offered to return the last two pieces of
vs.
equipment.
CA & The Philippine Commercial and Industrial
Trial Court and CA: Ordered Rodzssen to pay FBTC.
Bank
Issues:
(G.R. No. L-42735 January 22, 1990)
1. Whether it is proper for a banking institution to pay
a letter of credit which has long expired or been
cancelled. Facts:

2. Whether Rodzssen is liable to reimburse FBTC.

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Letters of Credit
TOMCO, Inc. applied for, and was granted by the
Philippine Commercial and Industrial Bank (hereafter
called "PCIB"), a domestic letter of credit in favor of
its supplier, Oregon Industries, Inc., to pay for one
Skagit Yarder with accessories. PCIB paid to Oregon
Industries the cost of the machinery against a bill of
exchange. After making the required marginal
deposit, TOMCO, Inc. signed and delivered to the
bank a trust receipt acknowledging receipt of the
merchandise in trust for the bank, with the obligation
"to hold the same in storage" as property of PCIB,
with a right to sell the same for cash provided that the
entire proceeds thereof are turned over to the bank,
to be applied against acceptance(s) and any other
indebtedness of TOMCO, Inc. In consideration of the
release to TOMCO, Inc. by PCIB of the machinery
covered by the trust receipt, Ramon Abad signed an
undertaking entitled, "Deed of Continuing Guaranty"
appearing on the back of the trust receipt, whereby
he promised to pay the obligation jointly and
severally with TOMCO, Inc.
Except for TOMCO’s P28,000 marginal deposit in the
bank, no payment has been made to PCIB by either
TOMCO, Inc. or its surety, Abad, on the P80,000 letter
of credit. Consequently, the bank sued TOMCO, Inc.
and Abad, TOMCO did not deny its liability to PCIB
under the letter of credit but it alleged that inasmuch
as it made a marginal deposit the same should have
been deducted from its principal obligation, on which
the bank should have computed the interest, bank
charges, and attorney's fees.
Trial Court ruled in favor of PCIB ordering TOMCO and
ABAD to pay jointly and severally to PCIB with the
marginal deposit still included in the computation of
the obligation. CA affirmed in toto the decision of
lower court.
Issue:
Whether the marginal deposit paid for should first be
deducted from its principal before computing
interests and other charges.
Held:
Yes.
The marginal deposit requirement is a Central Bank
measure to cut off excess currency liquidity which
would create inflationary pressure. It is a collateral
NEGOTIABLE INSTRUMENTS LAW
94
security given by the debtor, and is supposed to be
returned to him upon his compliance with his secured
obligation. Consequently, the bank pays no interest
on the marginal deposit, unlike an ordinary bank
deposit which earns interest in the bank. As a matter
of fact, the marginal deposit requirement for letters
of credit has been discontinued, except in those cases
where the applicant for a letter of credit is not known
to the bank or does not maintain a good credit
standing therein.
It is only fair then that the marginal deposit (if one
was made, as in this case), should be set off against
his debt, for while the importer earns no interest on
his marginal deposit, the bank, apart from being able
to use said deposit for its own purposes, also earns
interest on the money it loaned to the importer. It
would be onerous to compute interest and other
charges on the face value of the letter of credit which
the bank issued, without first crediting or setting off
the marginal deposit which the importer paid to the
bank. To allow such would be a clear case of unjust
enrichment.
Metropolitan Waterworks and Sewerage System
vs.
Hon. Reynaldo B. Daway, in his capacity as
Presiding Judge of the RTC of Quezon City and
Maynilad Water Services, Inc.
(G.R. No. 160732. June 21, 2004)
Facts:
MWSS granted Maynilad a 20- year period to manage,
operate, repair, decommission and refurbish the
existing MWSS water delivery and sewerage services
in the west zone service area, for which Maynilad
undertook to pay the corresponding concession fees
on the date agreed upon in the said agreement which
consisted of the payments of MWSS’ foreign loans
To secure the concessionaire’s performance of its
obligation under the Concession Agreement,
Maynilad was required to put up a bond, bank
guarantee or other security acceptable to MWSS. In
compliance with this requirement, Maynilad
arranged for a 3 year facility with a number of foreign
BEHIGA-MANTO-VILLAMOR DIGESTS

Letters of Credit
banks, led by Citicorp International Limited for the
issuance of an irrevocable Standby Letter of Credit for
the full and prompt performance of Maynilad’s
obligations under MWSS. As a result, of the
depreciation of the Philippine Peso against US dollar,
Maynilad incurred losses and issued a force majeure
notice and unilaterally suspend payment of the
concession fees. In an effort to salvage the concession
agreement, the parties entered into a Memorandum
of Agreement wherein Maynilad was allowed to
recover foreign exchange losses under a formula
agreed upon between them. Maynilad filed again
another force majeure notice and since MWSS could
not agree with the terms of the notice, the same was
referred to the Appeals Panel for arbitration. New
term was agreed upon.
Prior to that Maynilad had filed a petition for
rehabilitation. RTC issued an order staying the
enforcement of the claims and stopping payment of
liabilities, because it is under rehabilitation. It
effectively stopped the commencing process of
payment by the bank to MWSS. When MWSS
demanded payment and commenced drawing on the
irrevocable standby letter of credit, another order
was issued by the RTC declaring such act of MWSS as
violative of stay order earlier issued. Aggrieved,
MWSS filed this petition for review by way of
certiorari under rule 65.
Issue:
Whether Court has the authority to issue order
enjoining MWSS from proceeding against the Stand-
by Letter of Credit.
Held:
Letters of credit are in effect absolute undertakings to
pay the money advanced or the amount for which
credit is given on the faith of the instrument; they are
primary obligations and not accessory contracts and
while they are security arrangements, they are not
converted into contracts of guaranty. – Letters of
credit were developed for the purpose of insuring to
a seller payment of a definite amount upon the
presentation of documents and is thus a commitment
by the issuer that the party in whose favor it is issued
and who can collect upon it will have his credit against
the applicant of the letter, duly paid in the amount
specified in the letter. They are in effect absolute
NEGOTIABLE INSTRUMENTS LAW
95
undertakings to pay the money advanced or the
amount for which credit is given on the faith of the
instrument. They are primary obligations and not
accessory contracts and while they are security
arrangements, they are not converted thereby into
contracts of guaranty. What distinguishes letters of
credit from other accessory contracts is the
engagement of the issuing bank to pay the seller once
draft and other required shipping documents are
presented to it. They are definite undertakings to pay
at sight once the documents stipulated therein are
presented.
The obligation of the banks issuing letters of credit
are solidary with that of the person or entity
requesting for its issuance, the same being a direct,
primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of
documents required therein. Being a solidary
obligation, the letter of credit is excluded from the
jurisdiction of the rehabilitation and therefore in
enjoining MWSS from proceeding against the Standby
Letters of Credit to which it had a clear right under the
law and the terms of said Standby Letter of credit,
Hon. Daway acted in excess of his jurisdiction.
Transfield Philippines, Inc.
vs.
Luzon Hydro Corp, Australia and New Zealand
Banking Group Limited and Security Bank
Corporation
(G.R. No. 146717. November 22, 2004)
Facts:
Transfield and Luzon Hydro Corporation entered into
a Turnkey contract whereby Transfield, as turnkey
contractor, undertook to construct, on a turnkey
basis, a seventy Megawatt Hydro-Electric power
station at the Bakun River in the provinces of Benguet
and Ilocos Sur. Transfield was given the sole
responsibility for the design, construction,
commissioning, testing and completion of the
project. The turnkey contract entitled Transfield to
claim extensions of time for reasons enumerated in
BEHIGA-MANTO-VILLAMOR DIGESTS

Letters of Credit
the turnkey contract, among which are variations,
force majeure and delays caused by LHC itself.
To secure performance of Transfield’s obligation on
or before target completion date, Transfield opened
in favor of LHC two stand-by letters of credit.
In the course of construction of the project, Transfield
sought various extension of time to complete the
project. The extensions were requested allegedly due
to several factors which prevented the completion of
the project on the target date, such as force majeure
occasioned by typhoon Zeb, barricades and
demonstration. LHC denied the requests.
Arbitration proceeding were initiated. Asserting that
LHC had no right to call on the securities until the
resolution of disputes before the arbitration
tribunals, Transfield warned the banks that any
transfer, release or disposition of the securities in
favor of LHC would constrain it to hold them liable for
damages. Despite warning, however, the banks
informed Transfield that they would pay on the
securities if and when LHC calls on them.
Subsequently, LHC declared Transfield in default and
demanded payment for the delay until actual
completion of the project pursuant to the turnkey
contract. Also, LHC served notice that it would call on
the securities for payment of liquidated damages for
the delay. Hence, Transfield filed a complaint for
injunction against LHC and the banks.
Issues:
1. Whether or not it is only the issuing bank that may
invoke the independence principle on letters of
credit.
2. Whether or not there is necessity of resolving first
any dispute by the parties before the beneficiary is
entitled to call on the letter of credit.
3. Whether or not injunction is the proper remedy to
restrain wrongful draws on the securities.
4. Whether the banks were justified in releasing the
amounts due under the securities.
Held:
Letters of credit are also used in non-sale settings
where they serve to reduce the risk of non-
NEGOTIABLE INSTRUMENTS LAW
96
performance. Letters of credit in non-sale settings are
known as standby letters of credit. There are three
significant differences between commercial and
standby credits.
First, commercial credits involve the payment of
money under a contract of sale. Such credits become
payable upon the presentation by the seller-
beneficiary of documents that show he has taken
affirmative steps to comply with the sales agreement.
In the standby type, the credit is payable upon
certification of a party's nonperformance of the
agreement. The documents that accompany the
beneficiary's draft tend to show that the applicant has
not performed. The beneficiary of a commercial
credit must demonstrate by documents that he has
performed his contract.
The beneficiary of the standby credit must certify that
his obligor has not performed the contract. As
beneficiary of the letter of credit, LHC is entitled to
invoke the principle.
The so-called “independence principle” assures the
seller or the beneficiary of prompt payment
independent of any breach of the main contract and
precludes the issuing bank from determining whether
the main contract is actually accomplished or not.
Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any
documents, or for the general and/or particular
conditions stipulated in the documents or
superimposed thereon, nor do they assume any
liability or responsibility for the description, quantity,
weight, quality, condition, packing, delivery, value or
existence of the goods represented by any
documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the
consign or, the carriers, or the insurers of the goods,
or any other person whomsoever.
The independent nature of the letter of credit may
be:
(a) Independence in toto where the credit is
independent from the justification aspect and is a
separate obligation from the underlying agreement
like for instance a typical standby; or
BEHIGA-MANTO-VILLAMOR DIGESTS

Letters of Credit
(b) Independence may be only as to the justification
aspect like in a commercial letter of credit or
repayment standby, which is identical with the same
obligations under the underlying agreement. In both
cases the payment may be enjoined if in the light of
the purpose of the credit the payment of the credit
would constitute fraudulent abuse of the credit.
The “fraud exception principle” is an exception to the
independence principle. The untruthfulness of a
certificate accompanying a demand for payment
under a standby letter of credit may qualify as fraud
sufficient to support an injunction against payment.
The remedy for fraudulent abuse is an injunction.
However, injunction should not be granted unless:(a)
there is a clear proof of fraud;(b) the fraud constitutes
fraudulent abuse of the independent purpose of the
letter of credit and not only fraud in the main
agreement; and (c) irreparable injury might follow if
injunction is not granted or the recovery of damages
would be seriously damaged.
Where the applicant entered into a Turnkey contract
whereby it undertook to construct, on a turnkey
basis, a seventy (70) megawatt hydroelectric power
station, the performance of which is secured by a
standby letter of credit, the resort to arbitration by
the applicant/ contractor to arbitration to determine
if the latter is guilty of delay does not preclude the
beneficiary to draw on the letter of credit upon the
issuance of certificate of default because whether or
not the issuance of certification of default amounted
to fraud was not raised in the lower court and the
parties did not stipulate that all dispute regarding
delay should first be settled through arbitration
before the beneficiary would be allowed to call upon
the letter of credit. If drawing upon the letter of credit
was wrongful due to the non-existent of the fact of
default, the right of the applicant to seek
indemnification for damages it suffered would not
normally be foreclosed pursuant to general principle
of law.
Bank of Commerce
vs.
Teresita Serrano
(G.R. No. 151895. February 16, 2005)
NEGOTIABLE INSTRUMENTS LAW
97
Facts:
Via Moda International, through Serrano, obtained an
export packing loan from, Bank of Commerce (BOC)
secured by a Deed of Assignment over Irrevocable
Transferable Letter of Credit, Serrano executed in
favor of BOC Promissory Note. Via Moda then opened
a deposit account for the proceeds of the said loan.
BOC issued to Via Moda, Irrevocable Letter of Credit
for the purchase and importation of fabric and textile
products from Tiger Ear Fabric Co. Ltd. of Taiwan. To
secure the release of the goods covered, Serrano, in
representation of Via Moda, executed Trust Receipt.
Under the terms of the trust receipt, Via Moda agreed
to hold the goods in trust for BOC as the latter’s
property and to sell the same for the latter’s account.
In case of sale, the proceeds are to be remitted to the
bank as soon as it is received, but not later than the
maturity date. Said proceeds are to be applied to the
relative acceptances, with interest and penalty or in
the alternative, to return the goods in case of non-
sale.
The goods covered by the trust receipt were shipped
by Via Moda to its consignee in New Jersey, USA, who
sent an Export Letter of Credit issued by the Bank of
New York, in favor of BOC. The Regional Operations
Officer of BOC signed the export declarations to show
consent to the shipment. The proceeds of the
entrusted goods sold were not credited to the trust
receipt but, were applied by the bank to the principal,
penalties and interest of the export packing loan. The
excess was applied to the trust receipt, leaving a
balance.
BOC sent a demand letter to Via Moda to pay the said
amount plus interest and penalty charges, or to
return the goods covered by Trust Receipt within 5
days from receipt. The demand was not heeded.
Serrano was charged with the crime of estafa under
Article 315 (b) of the Revised Penal Code in relation
to Presidential Decree No. 115.
Trial Court ruled Serrano guilty and ordered to pay
civil liability to BOC. CA then reversed the decision of
Trial Court.
Issue:
BEHIGA-MANTO-VILLAMOR DIGESTS

Letters of Credit
Whether Serrano is jointly and severally liable with
Via Moda under the guarantee of the Letter of Credit
secured by the Trust Receipt.
Held:
A letter of credit is a separate document from a trust
receipt. While the trust receipt may have been
executed as a security on the letter of credit, still the
two documents involve different undertakings and
obligations. A letter of credit is an engagement by a
bank or other person made at the request of a
customer that the issuer will honor drafts or other
demands for payment upon compliance with the
conditions specified in the credit. Through a letter of
credit, the bank merely substitutes its own promise to
pay for the promise to pay of one of its customers
who in return promises to pay the bank the amount
of funds mentioned in the letter of credit plus credit
or commitment fees mutually agreed upon. By
contrast, a trust receipt transaction is one where the
entruster, who holds an absolute title or security
interests over certain goods, documents or
instruments, released the same to the entrustee, who
executes a trust receipt binding himself to hold the
goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the
goods, documents and instruments with the
obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the
entruster, or as appears in the trust receipt, or return
the goods, documents or instruments themselves if
they are unsold, or not otherwise disposed of, in
accordance with the terms and conditions specified in
the trust receipt.
Serrano cannot be held civilly liable under the trust
receipt since she was not made personally liable nor
was she a guarantor therein. The parties stipulated
during the pre-trial that respondent Serrano executed
the trust receipt in representation of Via Moda, Inc.,
which has a separate personality from Serrano, and
petitioner BOC failed to show sufficient reason to
justify the piercing of the veil of corporate fiction. It
thus ruled that this was not Serrano’s personal
obligation but that of Via Moda and there was no
basis of finding her solidarily liable with Via Moda.
NEGOTIABLE INSTRUMENTS LAW
98
Land Bank of the Philippines
vs.
Monet’s Export and Manufacturing Corp., Sps.
Vicente Tagle, Sr. and Ma. Consuelo Tagle
(G.R. No. 161865. March 10, 2005)
Facts:
Land Bank of the Philippines (Land Bank), and
Monet's Export and Manufacturing Corporation
(Monet) executed an Export Packing Credit Line
Agreement under which Monet was given a credit line
in the amount of P250,000.00, secured by the
proceeds of its export letters of credit, the continuing
guaranty of the spouses Vicente V. Tagle, Sr. and Ma.
Consuelo G. Tagle, and the third party mortgage. The
credit line agreement was renewed and amended
several times until it was increased to P5,000,000.00.
Owing to the continued failure and refusal of Monet,
notwithstanding repeated demands, to pay its
indebtedness to Land Bank, which have ballooned to
P11,464,246.19 a complaint for collection of sum of
money with prayer for preliminary attachment was
filed by Land Bank.
The contention of Monet and Tagle spouses is that
Land Bank failed and refused to collect the
receivables on their export letter of credit against
Wishbone Trading Company, while it made
unauthorized payment on their import letter of credit
to Beautilike Limited which seriously damaged the
business interests of Monet.
Lower Court and CA’s ruling is that Land Bank was
responsible for the mismanagement of the Wishbone
and Beautilike accounts of Monet. That because of
the non- collection and unauthorized payment made
by Land Bank on behalf of Monet and considering that
the latter could no longer draw from its credit line
with Land Bank, it suffered from lack of financial
resources sufficient to buy the needed materials to fill
up the standing orders from its customers.
Issue:
Whether fault or acts of mismanagement can be
attributed to Land Bank relative to Monet's import
letter of credit
BEHIGA-MANTO-VILLAMOR DIGESTS
 99
Letters of Credit

Held:

The engagement of the issuing bank is to pay the

seller or beneficiary of the credit once the draft and
the required documents are presented to it. The so-
called 'independence principle assures the seller or
the beneficiary of prompt payment independent of
any breach of the main contract and precludes the
issuing bank from determining whether the main
contract is actually accomplished or not.

Accordingly, we find merit in the contention of Land

Bank that, as the issuing bank in the Beautilike
transaction involving an import letter of credit, it only
deals in documents and it is not involved in the
contract between the parties. The relationship
between the beneficiary and the issuer of a letter of
credit is not strictly contractual, because both privity
and a meeting of the minds are lacking. Thus, upon
receipt by Land Bank of the documents of title which
conform to what the letter of credit requires, it is duty
bound to pay the seller, as it did in this case. Thus, no
fault or acts of mismanagement can be attributed to
Land Bank relative to Monet's import letter of credit.

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Trust Receipts
Fernando Ong
vs.
CA and Judge P. Purisima
(G.R. No. L-58476. September 2, 1983)
Facts:
Fernando Ong obtained and received from Tramat
Merchantile Inc. several units of machineries for the
purpose of displaying and selling the machineries for
cash, under the express obligation on the part of Ong
to turn over to Tramat the proceeds from the sale of
the goods, if sold, or to return the said goods if not
sold. Ong allegedly failed to do as covenanted.
Information of estafa was filed against Ong. A few
months after, Tramat Merchantile filed a complaint
against Ong for sum of money. The parties entered
into a compromise agreement to settle the claim,
which the court approved. Ong moved for the
dismissal of the criminal charge of estafa against him
on the ground of NOVATION by virtue of the
compromise agreement entered into by him and
Tramat.
Trial Court denied the motion to dismiss the charge of
estafa.
CA: Dismissed petition for certiorari on the ground
that novation does not extinguish criminal liability if
the crime of estafa had been completed.
Issue:
Whether the compromise agreement constitute as
novation, thus, extinguish the criminal liability of Ong.
Contention of Ong was that there being novation, it is
respectfully submitted that even if novation took
place after the filing of the information in the criminal
case, the transaction had nonetheless been
converted from a criminal violation to civil obligation
which would therefore necessitate the consequence
dismissal of the criminal case.
Held:
After the filing of information for estafa, liability of
accused cannot be novated into a civil one anymore
by the parties’ compromise agreement. The novation
NEGOTIABLE INSTRUMENTS LAW
100
theory may perhaps apply prior to the filing of the
criminal information in court by the state prosecutors
because up to that time the trust relation may be
converted by the parties into an ordinary creditor-
debtor situation, thereby placing the complainant in
in estoppels to insist the original trust. But after the
justice authorities have taken cognizance of the crime
and instituted action in court, the offended party may
no longer divest the prosecution of its power to exact
criminal liability, as distinguished from civil. The crime
being an offense against the State, only the latter can
renounce it.
Spouses Tirso Vintola and Loreto Vintola
vs.
Insular Bank of Asia and America
(G.R. No. 73271 May 29, 1987)
Facts:
Spouses Vintola, doing business under the name and
style Dax Kin International was engaged in the
manufacture of raw sea shells into finished products.
They applied for and were granted a domestic letter
of credit by applied for and were granted a domestic
letter of credit by the Insular Bank of Asia and
America (IBAA), Cebu City. The Letter of Credit
authorized the bank to negotiate for their account
drafts drawn by their supplier, one Stalin Tan, on Dax
Kin International for the purchase of puka and olive
seashells. VINTOLAS received from Stalin Tan the
puka and olive shells and executed a Trust Receipt
agreement with IBAA. Under that Agreement, the
VINTOLAS agreed to hold the goods in trust for IBAA
as the "latter's property with liberty to sell the same
for its account, "and "in case of sale" to turn over the
proceeds. Having defaulted on their obligation, IBAA
demanded payment from the VINTOLAS. The
VINTOLAS, who were unable to dispose of the shells,
responded by offering to return the goods but IBAA
refused to accept the merchandise and due to the
continued refusal of the VINTOLAS to make good their
undertaking, IBAA charged them with Estafa for
having misappropriated, misapplied and converted
for their own personal use and benefit the aforesaid
goods. During the trial of the criminal case the
VINTOLAS turned over the seashells to the custody of
the Trial Court.
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
TC: Acquitted the VINTOLAS of the crime charged,
after finding that the element of misappropriation or
conversion was inexistent. IBAA commenced a
separate civil action to recover the goods.
CA: Holding that the complaint was barred by the
judgment of acquittal in the criminal case, CA
dismissed the complaint, however, upon motion by
IBAA, CA granted the reconsideration. Sps. Vintola
appealed alleging that their acquittal in the Estafa
case bars IBAA's filing of the civil action because IBAA
had not reserved in the criminal case its right to
enforce separately their civil liability. They maintain
that by intervening actively in the prosecution of the
criminal case through a private prosecutor, IBAA had
chosen to file thecivil action impliedly with the
criminal action-The CA certified the case to the
Supreme Court, the issue involved being purely legal.
Issue:
Whether the acquittal of the Sps. Vintola in the
criminal charge of estafa extinguished their civil
liability
Held:
A letter of credit-trust receipt arrangement is
endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a
loan covered by the Letter of Credit, with the trust
receipt as a security for the loan. In other words, the
transaction involves a loan feature represented by
the letter of credit, and a security feature which is in
the covering trust receipt. A trust receipt, therefore,
is a security agreement, pursuant to which a bank
acquires a "security interest" in the goods. "It secures
indebtedness and there can be no such thing as
security interest that secures no obligation." IBAA did
not become the real owner of the goods. It was
merely the holder of a security title for the advances
it had made to the VINTOLAS. The goods the
VINTOLAS had purchased through IBAA financing
remain their own property and they hold it at their
own risk. The trust receipt arrangement did not
convert the IBAA into an investor; the latter remained
a lender and creditor. The foregoing premises
considered, it follows that the acquittal of the
VINTOLAS in the Estafa case is no bar to the institution
of a civil action for collection. It is inaccurate for the
VINTOLAS to claim that the judgment in the estafa
NEGOTIABLE INSTRUMENTS LAW
101
case had declared that the facts from which the civil
action might arise, did not exist, for, it will be recalled
that the decision of acquittal expressly declared that
"the remedy of the Bank is civil and not criminal in
nature." The VINTOLAS are liable ex contractu for
breach of the Letter of Credit — Trust Receipt,
whether they did or they did not "misappropriate,
misapply or convert" the merchandise as charged in
the criminal case. Their civil liability does not arise ex
delicto, the action for the recovery of which would
have been deemed instituted with the criminal-action
(unless waived or reserved) and where acquittal
based on a judicial declaration that the criminal acts
charged do not exist would have extinguished the civil
action. Rather, the civil suit instituted by IBAA is based
ex contractu and as such is distinct and independent
from any criminal proceedings and may proceed
regardless of the result of the latter.
Trinidad Ramos
vs.
CA and People of the Philippines
(G.R. No. L-39922-25 August 21, 1987)
Facts:
Trinidad Ramos filed with the Philippine National
Cooperative Bank four applications for letters of
credit. After the applications were processed and
approved, domestic letters of credit were opened on
the same dates of the applications and in the amounts
applied for. Among the papers filed for the issuance
of the domestic letters of credit were commercial
invoices of the different suppliers of the merchandise
sought to be purchase, also bearing the same dates of
the applications for letters of credit with which they
were respectively attached. The different suppliers
then drew sight drafts against the applicant payable
to the order of the PNCB, also bearing the same dates
as the respective applications and for the same
amounts. The PNCB then drew its own drafts against
Ramos as the buyer of the merchandise and which
drafts were accepted by the Ramos also on the same
dates of the respective applications. After such
acceptance, the corresponding trust receipts were
signed by the Ramos also on the same dates of the
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
respective applications. When Ramos failed to pay
despite demands, PNCB charged her with estafa.
TC and CA: Found Ramos guilty of four counts of
Estafa.
Ramos’s Defense:
(1) Elements of Estafa are not present.(2) that there
is no adequate proof of her receipt of the goods
subject of the trust receipts in question or of her
having paid anything on account thereof or in
connection therewith;(3) that complainant Bank had
suffered no damage whatever, since it had made no
payment at all on account of the commercial invoices
for which the trust receipts were issued; and(4) that
under the laws at the time, transactions involving
trust receipts could only give rise to purely civil
liability.
Held:
The assailed factual findings as to the receipt of the
merchandise and the damage sustained by the Bank
cannot stand. The proofs are indeed inadequate on
these propositions of fact. It is difficult to accept the
prosecution's theory that it has furnished sufficient
proof of delivery by the introduction in evidence of
the commercial invoices attached to the applications
for the letters of credit and of the trust receipts.
The invoices are actually nothing more than lists of
the items sought to be purchased and their prices;
and it can scarcely be believed that goods worth no
mean sum actually transferred hands without the
unpaid vendor requiring the vendee to acknowledge
this fact in some way, even by a simple signature on
these documents alone if not in fact by the execution
of some appropriate document, such as a delivery
receipt.
The trust receipts do not fare any better as proofs of
the delivery to Ramos of the goods. Except for the
invoices, and documents relating to each trust receipt
agreement, including the trust receipts themselves,
appear to be standard Bank forms accomplished by
the Bank personnel, and were all signed by Ramos in
one sitting, no doubt with a view to facilitating the
pending transactions between the parties. If, as she
claims, Ramos was made to believe that bank usage
or regulations require the signing of the papers in this
way, i.e., on a single occasion, there was neither
NEGOTIABLE INSTRUMENTS LAW
102
reason nor opportunity for her to question the
statement therein of receipt of the goods since it was
evidently assumed that delivery to her of the goods
would shortly come to pass.
Allied Banking Corporation
vs.
Secretary Sedfrey Ordoñez and Alfredo Ching
(G.R. No. 82495 December 10, 1990)
Facts:
Philippine Blooming Mills applied for thru its duly
authorized officer Alfredo Ching, applied for the
issuance of commercial letters of credit with Allied
Banking Corporation to finance the purchase of 500
M/T Magtar BranchDolomites and one (1) Lot high
Fired Refractory Sliding Nozzle Bricks. Allied Banking
Corporation issued an irrevocable letter of credit in
favor of Nikko Industry Co., Ltd by virtue of which the
latter drew four (4) drafts which were accepted by
PBM and duly honored and paid by the Allied
BankingCorp. To secure payment of the amount
covered by the drafts, and in consideration of the
transfer by Allied banking of the possession of the
goods to PBM, PBM, thru Ching, executed four (4)
Trust receipts agreement acknowledging Allied
Banking’s ownership of the goods and its obligation
to turn over the proceeds of the sale of the goods, if
sold, or to return the same, if unsold within the stated
period. PBM, despite repeated demands, failed to
comply with its obligation; hence Allied Banking filed
a criminal complaint against Alfredo Ching for
Violation of PD 115. After preliminary investigation,
the Fiscal found a prima facie case for violation of PD
115 on four counts and filed corresponding
information in court.
On appeal to the Department of Justice, DOJ
Secretary Neptali A. Gonzales held that the raw
materials for manufactures of goods to be ultimately
sold are proper objects of Trust Receipt and the
failure to remit the proceeds constitutes violation of
PD 115. Another Motion of Reconsideration was filed,
and DOJ secretary Ordonez rectified former Sec.
Gonzales’ supposed reversible error, and held that PD
115 covers goods which are ultimately destined for
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
goods, and since the goods covered by the TRs in this
case, are to be utilized in the operation of the
equipment and machineries of the corporation, they
could not have been contemplated as being covered
by PD 115.
Issue:
Does the penal provision of PD 115 apply when goods
covered by a Trust receipt do not form part of the
finished products which are ultimately sold but are
instead, utilized/ used up in the operation of the
equipment and machineries of the entrustee-
manufacturer?
Held:
The penal provision of PD115 encompasses any act
violative of an obligation covered by a trust receipt.
The non-payment of the amount covered by a Trust
receipt is an act violative of the entrustee’s obligation
to pay. There is no reason why the law should not
apply to all transactions covered by trust receipts,
except those expressly excluded. It is not limited to
transactions in goods which are to be sold (retailed),
reshipped, stored, and processed as a component of
a product ultimately sold.
Philippine National Bank
vs.
Hon. Gregorio Pineda, in his capacity as Presiding
Judge of CFI of Rizal and Tayabas Cement Company
(G.R. No. L-46658 May 13, 1991)
Facts:
Spouses Arroyo, obtained a loan Philippine National
Bank to purchase 60% of the subscribed capital stock,
and thereby acquire the controlling interest of
Tayabas Cement Company, Inc. (TCC). As security for
said loan, the spouses Arroyo executed a real estate
mortgage over a parcel of land known as the La Vista
property. Thereafter, TCC filed with PNB an
application and agreement for the establishment of
an eight (8) year deferred letter of in favor of Toyo
Menka Kaisha, Ltd. of Tokyo, Japan, to cover the
importation of a cement plant machinery and
NEGOTIABLE INSTRUMENTS LAW
103
equipment. Upon approval of said application and
opening of an L/C by PNB in favor of Toyo Menka
Kaisha, Ltd. for the account of TCC, the Arroyo
spouses executed a Surety Agreement and a
Covenant to secure the loan accommodation. The
imported cement plant machinery and equipment
arrived from Japan and were released to TCC under a
Trust Receipt Agreement. Subsequently, Toyo Menka
Kaisha Ltd. made corresponding drawings against the
Letters of Credit as scheduled. TCC, however, failed to
remit and/ or pay the corresponding amount covered
by the drawings. Pursuant to the trust receipt
agreement, PNB notified TCC of its intention to
repossess as it did later, the imported machineries
and equipment for failure of TCC to settle obligations
under the Letter of Credit. In the meantime, the
personal accounts of the spouses Arroyo had become
due. The spouses Arroyo having failed to satisfy their
obligations with PNB, the latter decided to foreclose
the real estate mortgages executed by the spouses
Arroyo in its favor. PNB sought to apply the proceeds
to satisfy not only the amount owed by the Sps.
Arroyo on their personal account, but also the
amount owed as sureties of TCC. It was opposed by
the Sps. Arroyo. PNB filed a petition for mandamus to
compel the city sheriff to proceed with the
foreclosure which was granted. Before the decision
could attain finality, TCC a complaint against PNB,
Dungca, and the Provincial Sheriff of Negros
Occidental and Ex-Officio Sheriff of Bacolod City
seeking, the issuance of a writ of preliminary
injunction to restrain the foreclosure of the
mortgages over the La Vista property and Hacienda
Bacon as well as a declaration that its obligation with
PNB had been fully paid by reason of the latter's
repossession of the imported machinery and
equipment.
Issue:
Whether or not, TCC’s liability has been extinguished
by the repossession of PNB of the imported cement
plant machinery and equipment.
Held:
PNB's possession of the subject machinery and
equipment being precisely as a form of security for
the advances given to TCC under the Letter of Credit,
said possession by itself cannot be considered
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
payment of the loan secured thereby. Payment would
legally result only after PNB had foreclosed on said
securities, sold the same and applied the proceeds
thereof to TCC's loan obligation. Mere possession
does not amount to foreclosure for foreclosure
denotes the procedure adopted by the mortgagee to
terminate the rights of the mortgagor on the property
and includes the sale itself. Neither can said
repossession amount to dacion en pago. Dation in
payment takes place when property is alienated to
the creditor in satisfaction of a debt in money and the
same is governed by sales. Dation in payment is the
delivery and transmission of ownership of a thing by
the debtor to the creditor as an accepted equivalent
of the performance of the obligation. As aforesaid,
the repossession of the machinery and equipment in
question was merely to secure the payment of TCC's
loan obligation and not for the purpose of
transferring ownership thereof to PNB in satisfaction
of said loan. Thus, no dacion en pago was ever
accomplished.
People of the Philippines and Allied Banking Corp.
vs.
Hon. Judge David Nitafan and Betty Sia Ang
(G.R. No. 81559-60 April 6, 1992)
Facts:
Allied banking Corporation (ABC) charged Betty Sia
Ang, for estafa for willfully, unlawfully and feloniously
defrauds ABC. Betty Sia Ang received in trust from
ABC Gordon plastics, plastic sheeting and Hook
Chromed amounting toP398,000.00 covered by a
domestic letter of credit, under the express obligation
to sell the same and account for the proceeds of the
sale, if sold, or to return the merchandise , if not sold.
Upon demand, private respondent paid only
P283,115.78. ABC charged Betty Sia Ang with esstafa.
Betty Sia Ang filed a motion to quash the information
on the grounds that the facts charged do not
constitute an offense. Respondent judge granted the
motion to quash. Hence, this appeal.
BETTY SIA ANG’S CONTENTIONS:
NEGOTIABLE INSTRUMENTS LAW
104
1. A trust receipt is an evidence of loan being secured,
so that there is, between the parties to it, a creditor-
debtor relationship;
2. The violation merely gives rise to a civil obligation;
3. PD 115 is unconstitutional as it violates
constitutional prohibition against imprisonment for
non-payment of debt.
Issue:
a. Whether or not an entrustee in a trust receipt
agreement who fails to deliver the proceeds of the
sale or to return the goods if not sold to the entruster-
bank is liable for the crime of estafa
b. Whether or not PD 115 is unconstitutional.
Held:
A trust receipt arrangement does not involve a simple
loan transaction between a creditor and debtor-
importer.
Apart from a loan feature, the trust receipt
arrangement has a security feature that is covered by
the trust receipt itself. That second feature is what
provides the much needed financial assistance to our
traders in the importation or purchase of goods or
merchandise through the use of those goods or
merchandise as collateral for the advancements
made by a bank. The title of the bank to the security
is the one sought to be protected and not the loan
which is a separate and distinct agreement.
The Trust Receipts Law punishes the dishonesty and
abuse of confidence in the handling of money or
goods to the prejudice of another regardless of
whether the latter is the owner or not. The law does
not seek to enforce payment of the loan. Thus, there
can be no violation of a right against imprisonment
for non-payment of a debt.
Trust receipts are indispensable contracts in
international and domestic business transactions. The
prevalent use of trust receipts, the danger of their
misuse and/or misappropriation of the goods or
proceeds realized from the sale of goods, documents
or instruments held in trust for entruster-banks, and
the need for regulation of trust receipt transactions
to safeguard the rights and enforce the obligations of
the parties involved are the main thrusts of P.D. 115.
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
As correctly observed by the Solicitor General, P.D.
115, like Batas Pambansa Blg. 22, punishes the act
"not as an offense against property, but as an offense
against public order. . . ." The misuse of trust receipts
therefore should be deterred to prevent any possible
havoc in trade circles and the banking community. It
is in the context of upholding public interest that the
law now specifically designates a breach of a trust
receipt agreement to be an act that "shall" make one
liable for estafa.
Prudential Bank
vs.
NLRC, Cecilia Orquello, et.al., Zenaida Uchi et.al.,
ALU-Interasia Container Industries, Inc. and Raul
Remodo
(G.R. No. 112592 December 19, 1995)
Facts:
Interasia Container Industries, Inc. (INTERASIA) was
embroiled in three (3) labor cases which were
eventually resolved against it. Monetary awards
consisting of 13th-month pay differentials and other
benefits were granted to complainants. Subsequently
the monetary award was recomputed to include
separation pay, occasioned by the closure of
operations of INTERASIA. In another case, the Labor
Arbiter declared the closure or shutdown of
operations effected by INTERASIA as illegal and
awarded to complainants the wage differentials,
separation pay and other benefits.
The sheriff levied on execution personal properties
located in the factory of InterAsia. Prudential Bank
filed an affidavit of Third Party claim asserting
ownership over the sized properties. As a result, the
sheriff suspended the Public auction Sale. However,
the Labor Arbiter denied the claim of Prudential and
directed the sheriff to proceed with the levy of the
properties. On appeal, NLRC also disregarded the
third party claim of Prudential Bank.
CONTENTION OF PRUDENTIAL BANK:
While it may not have absolute ownership over the
properties, still it has right, interest and ownership
consisting of a security title which attaches to the
NEGOTIABLE INSTRUMENTS LAW
105
properties and that the security title of the bank in a
Trust receipt must necessarily of the same or greater
extent than the nature of security arising from a real
mortgage. It is a preferred claimant to the proceeds
from the foreclosure to the extent of its security title
in the goods.
NLRC:
Trust Receipt Agreement are mere security
transaction which do not vest upon Prudential Bank
any title of ownership, and that although the Trust
receipt Agreements described Prudential Bank as
owner of the goods, there was no showing that it
cancelled the trust receipt and took possession of the
goods.
Held:
The security interest of the entruster is not merely an
empty or idle title. To a certain extent, such interest
becomes a "lien" on the goods because the
entruster's advances will have to be settled first
before the entrustee can consolidate his ownership
over the goods. A contrary view would be disastrous.
For to refuse to recognize the title of the banker
under the trust receipt as security for the advance of
the purchase price would be to strike down a bona
fide and honest transaction of great commercial
benefit and advantage founded upon a well-
recognized custom by which banking credit is
officially mobilized for manufacturers and importers
of small means.
The law warrants the validity of petitioner's security
interest in the goods pursuant to the written terms of
the trust receipt as against all creditors of the trust
receipt agreement. The only exception to the rule is
when the properties are in the hands of an innocent
purchaser for value and in good faith. The records
however do not show that the winning bidder is such
purchaser. Neither can private respondents plead
preferential claims to the properties as Prudential
Bank has the primary right to them until its advances
are fully paid
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
Metropolitan Bank and Trust Company
vs.
Joaquin Tonda and Ma. Cristina Tonda
(G.R. No. 134436. August 16, 2000)
Facts:
Spouses Joaquin Tonda and Maria Cristina U. Tonda,
applied for and was granted commercial letters of
credit by Metropolitan Bank and Trust Company, for
a period of eight (8) months, in connection with the
importation of raw textile materials to be used in the
manufacturing of garments.
The TONDAS acting both in their capacity as officers
of Honey Tree Apparel Corporation (HTAC) and in
their personal capacities, executed eleven (11) trust
receipts to secure the release of the raw materials to
HTAC. The imported fabrics were withdrawn by HTAC
under the 11 trust receipts executed by the TONDAS.
When HTAC had some financial reversals making it
difficult for them to comply with their loan obligations
with Metrobank, they were then constrained to
propose a loan restructuring agreement with the
Metrobank to enable them to finally settle all
outstanding obligations with the latter, wherein they
proposed to immediately pay in full their outstanding
principal charges under the trust receipt and the
remaining obligations under a separate schedule of
payment.
A sum of money was deposited in a joint account of
Joaquin Tonda and Wang Tien. However, the parties
failed to finalize the restructuring agreement.
METROBANK through counsel sent a letter making its
final demand upon the TONDAS to settle their past
due TR/LC accounts. Despite repeated demands
however, the TONDAS failed to comply with their
obligations.
Consequently, Metrobank, through its account officer
Eligio Labog, Jr. filed a complaint/affidavit against the
TONDAS for violation of P.D. No. 115 (Trust Receipts
Law) in relation to Article 315 (1) (b) of the Revised
Penal Code, which was dismissed on the ground that
the complainants had failed to establish “the
existence of the essential elements of Estafa as
charged.”
NEGOTIABLE INSTRUMENTS LAW
106
METROBANK then appealed to the Department of
Justice (DOJ), which reversed the findings of the
Provincial Prosecutor of Rizal and ordered the latter
to file the appropriate information against the
TONDAS as charged in the complaint.
The TONDAS immediately sought a reconsideration of
the DOJ Resolution but their motion was denied by
the then acting Justice Secretary Demetrio G.
Demetria. A second motion for reconsideration by
the TONDAS was likewise denied by then Justice
Secretary Teofisto Guingona.
Subsequently, the TONDAS filed with the Court of
Appeals a special civil action for certiorari and
prohibition with application for a temporary
restraining order or a writ of preliminary injunction.
They contended therein that the Secretary of Justice
acted without or in excess of jurisdiction in denying
with finality their motion for reconsideration and,
directing to file the appropriate Information against
the TONDAS.
The Court of Appeals granted the TONDAS' petition
and ordered the criminal complaint against them
dismissed. The Court of Appeals held that
METROBANK had failed to show a prima facie case
that the TONDAS violated the Trust Receipts Law in
relation to Art. 315 (1) (b) of the Revised Penal Code
in the face of convincing proof that "that the amount
of P2.8 Million representing the outstanding
obligation of the TONDAS under the trust receipts
account had already been settled by them in
compliance with the loan restructuring proposal; and
that in the absence of a loan restructuring agreement,
METROBANK could still validly apply the amount as
payment thereof."
Issue:
Whether the sum of money deposited without
reference to the trust receipt’s obligation of the
Tondas extinguishes the criminal liability of the
spouses arising therefrom.
Held:
First, the amount of P2.8 million was not directly paid
to METROBANK to settle the trust receipt accounts,
but deposited in a joint account of Joaquin G. Tonda
and a certain Wang Tien En. In a letter, signed by
HTAC's Vice President for Finance, METROBANK was
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
informed that the amount "may be applied anytime
to the payment of the trust receipts account upon
implementation of the parties of the terms of the
restructuring." The parties failed to agree on the
terms of the loan restructuring agreement as the
offer by the TONDAS to restructure the loan was
followed by a series of counter-offers which yielded
nothing. It is axiomatic that acceptance of an offer
must be unqualified and absolute to perfect a
contract. The alleged payment of the trust receipts
accounts never became effectual on account of the
failure of the parties to finalize a loan restructuring
arrangement.
Second, the handwritten note by the METROBANK
officer acknowledging receipt of the checks
amounting to P2.8Million made no reference to the
TONDAS' trust receipt obligations, and we cannot
presume that it was anything more than an ordinary
bank deposit. Article 1288 of the Civil Code provides
that "compensation shall not be proper when one of
the debts consists in civil liability arising from a penal
offense" as in the case at bar. The raison d'etre for
this is that, "if one of the debts consists in civil liability
arising from a penal offense, compensation would be
improper and inadvisable because the satisfaction of
such obligation is imperative."
Third, reliance on the negotiations for the settlement
of the trust receipts obligations between the TONDAS
and METROBANK is simply misplaced. The
negotiations pertain and affect only the civil aspect of
the case but do not preclude prosecution for the
offense already committed. It has been held that
"[a]ny compromise relating to the civil liability arising
from an offense does not automatically terminate the
criminal proceeding against or extinguish the criminal
liability of the malefactor." All told, the P2.8 Million
deposit could not be considered as having settled the
trust receipts obligations of the TONDAS to the end of
extinguishing any incipient criminal culpability arising
therefrom.
Melvin Colinares and Lordino Veloso
vs.
CA and People of the Philippines
(G.R. No. 90828. September 5, 2000)
NEGOTIABLE INSTRUMENTS LAW
107
Facts:
Colinares et al., applied for a commercial letter of
credit with the Philippine Banking Corporation (PBC)
in favor of CM builders for the purchased of various
construction supplies. PBC approved the letter of
credit to cover the full invoice value of the goods and
subsequently signed a prom-forma trust receipt as
security. PBC wrote a demand letter to petitioner
demanding the amount be paid within seven days but
instance of complying they confessed that they can’t
pay and requested a grace period to settle the
account. Colinares et al., proposed to modify the
payment of the loan. Colinares et al., were charged
with estafa. During trial, petitioner Veloso insisted
that the transaction was a “clean loan”. He and
petitioner Colinares signed the documents without
reading the fine print, and learning that the trust
receipt was merely a formality.
TC: Rendered a decision convicting the Colinares et al
with estafa. The trial court considered the transaction
between PBC and Petitioners as a trust receipt
transaction under Section 4, P.D. No. 115.
CA: Modified the judgment of the trial court by
increasing the penalty.
Issue:
Whether the transaction is a simple loan or a trust
receipt agreement.
Held:
A thorough examination of the facts obtaining in the
case at bar reveals that the transaction intended by
the parties was a simple loan, not a trust receipt
agreement.
The Trust Receipts Law does not seek to enforce
payment of the loan, rather it punishes the
dishonesty and abuse of confidence in the handling of
money or goods to the prejudice of another
regardless of whether the latter is the owner.
Here, it is crystal clear that on the part of Colinares et
al there was neither dishonesty nor abuse of
confidence in the handling of money to the prejudice
of PBC. Colinares etal continually endeavored to meet
their obligations, as shown by several receipts issued
by PBC acknowledging payment of the loan.
BEHIGA-MANTO-VILLAMOR DIGESTS
 108
Trust Receipts

There are two possible situations in a trust receipt Philippine Bank of Communications
transaction. The first is covered by the provision
which refers to money received under the obligation vs.
involving the duty to deliver it (entregarla) to the CA and Filipinas textile Mills Inc.
owner of the merchandise sold. The second is
covered by the provision which refers to merchandise (G.R. No. 119723, February 23, 2001)
received under the obligation to “return” it
Facts:
(devolvera) to the owner.
Petitioner, on April 8, 1991, of a Complaint against
Failure of the entrustee to turn over the proceeds of
private respondent Bernardino Villanueva, private
the sale of the goods, covered by the trust receipt to
respondent Filipinas Textile Mills and one Sochi
the entruster or to return said goods if they were not
Villanueva (now deceased) before the Regional Trial
disposed of in accordance with the terms of the trust
Court of Manila. In the said Complaint, petitioner
receipt shall be punishable as estafa under Article 315
sought the payment of P2,244,926.30 representing
(1) of the Revised Penal Code, without need of
the proceeds or value of various textile goods, the
proving intent to defraud. Colinares et al received the
purchase of which was covered by irrevocable letters
merchandise from CM Builders Centre on 30 October
of credit and trust receipts executed by petitioner
1979. On that day, ownership over the merchandise
with private respondent Filipinas Textile Mills as
was already transferred to Colinares et al who were
obligor; which, in turn, were covered by surety
to use the materials for their construction project. It
agreements executed by private respondent
was only a day later, 31 October 1979, that they went
Bernardino Villanueva and Sochi Villanueva. In their
to the bank to apply for a loan to pay for the
Answer, private respondents admitted the existence
merchandise.
of the surety agreements and trust receipts but
This situation belies what normally obtains in a pure countered that they had already made payments on
trust receipt transaction where goods are owned by the amount demanded and that the interest and
the bank and only released to the importer in trust other charges imposed by petitioner were onerous.
subsequent to the grant of the loan. The bank
On May 31, 1993, petitioner filed a Motion for
acquires a “security interest” in the goods as holder
Attachment, contending that violation of the trust
of a security title for the advances it had made to the
receipts law constitutes estafa, thus providing ground
entrustee. The ownership of the merchandise
for the issuance of a writ of preliminary attachment.
continues to be vested in the person who had
advanced payment until he has been paid in full, or if Issue:
the merchandise has already been sold, the proceeds
of the sale should be turned over to him by the Whether there was a sufficient basis for the issuance
importer or by his representative or successor in of the writ of preliminary attachment.
interest. To secure that the bank shall be paid, it takes Held:
full title to the goods at the very beginning and
continues to hold that title as his indispensable No.
security until the goods are sold and the vendee is
The Motion for Attachment filed by petitioner and its
called upon to pay for them; hence, the importer has
supporting affidavit did not sufficiently establish the
never owned the goods and is not able to deliver
grounds relied upon in applying for the writ of
possession. In a certain manner, trust receipts
preliminary attachment. While the Motion refers to
partake of the nature of a conditional sale where the
the transaction complained of as involving trust
importer becomes absolute owner of the imported
receipts, the violation of the terms of which is
merchandise as soon as he has paid its price.
qualified by law as constituting estafa, it does not
follow that a writ of attachment can and should
automatically issue. Private respondents claimed that
substantial payments were made on the proceeds of

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS


Trust Receipts
the trust receipts sued upon. They also refuted the
allegations of fraud, embezzlement and
misappropriation by averring that private respondent
Filipinas Textile Mills could not have done these as it
had ceased its operations starting in June of 1984 due
to workers' strike.
The allegation that the entrustee failed to remit the
proceeds of the sale of the entrusted goods or to
return the same is not sufficient for attachment to
issue. To sustain an attachment on this ground, it
must be shown that the debtor in contracting the
debt or incurring the obligation intended to defraud
the creditor. The fraud must relate to the execution
of the agreement and must have been the reason
which induced the other party into giving consent
which he would not have otherwise given. To
constitute a ground for attachment in Section 1 (d),
Rule 57 of the Rules of Court, fraud should be
committed upon contracting the obligation sued
upon.
A debt is fraudulently contracted if at the time of
contracting it the debtor has a preconceived plan or
intention not to pay, as it is in this case. Fraud is a
state of mind and need not be proved by direct
evidence but may be inferred from the circumstances
attendant in each case. Fraudulent intent not to
honor the admitted obligation cannot be inferred
from the debtor’s inability to pay or to comply with
the obligations.
South City Homes
vs.
BA Finance
(G.R. No. 135462 December 7, 2001)
Facts:
On January 17, 1983, Joseph L. G. Chua, President of
Fortune Motors Corporation, executed in favor of
plaintiff-appellant a Continuing Suretyship
Agreement, in which he "jointly and severally
unconditionally" guaranteed the "full, faithful and
prompt payment and discharge of any and all
indebtedness" of Fortune Motors Corporation to BA
Finance Corporation. On February 3, 1983, Palawan
NEGOTIABLE INSTRUMENTS LAW
109
Lumber Manufacturing Corporation represented by
Joseph L.G. Chua, George D. Tan, Edgar C. Rodrigueza
and Joselito C. Baltazar, executed in favor of plaintiff-
appellant a Continuing Suretyship Agreement in
which, said corporation "jointly and severally
unconditionally" guaranteed the "full, faithful and
prompt payment and discharge of any and all
indebtedness of Fortune Motors Corporation to BA
Finance Corporation. On the same date, South City
Homes, Inc. represented by Edgar C. Rodrigueza and
Aurelio F. Tablante, likewise executed a Continuing
Suretyship Agreement in which said corporation
"jointly and severally unconditionally" guaranteed
the "full, faithful and prompt payment and discharge
of any and all indebtedness" of Fortune Motors
Corporation to BA Finance Corporation.
Fortune Motors Corporation thereafter executed
trust receipts covering the motor vehicles delivered
to it by CARCO under which it agreed to remit to the
Entruster (CARCO) the proceeds of any sale and
immediately surrender the remaining unsold
vehicles. ). The drafts and trust receipts were assigned
to plaintiff-appellant, under Deeds of Assignment
executed by CARCO.
Upon failure of the defendant-appellant Fortune
Motors Corporation to pay the amounts due under
the drafts and to remit the proceeds of motor vehicles
sold or to return those remaining unsold in
accordance with the terms of the trust receipt
agreements, BA Finance Corporation sent demand
letter to Edgar C. Rodrigueza, South City Homes, Inc.,
Aurelio Tablante, Palawan Lumber Manufacturing
Corporation, Joseph L. G. Chua, George D. Tan and
Joselito C. Baltazar. Since the defendants-appellants
failed to settle their outstanding account with
plaintiff-appellant, the latter filed on December 22,
1983 a complaint for a sum of money with prayer for
preliminary attachment, with the Regional Trial Court
of Manila.
Issue:
Whether respondent BAFC has a valid cause of action
for a sum of money following the drafts and trust
receipts transactions.
Held:
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
As an entruster, respondent BAFC must first demand
the return of the unsold vehicles from Fortune
Motors Corporation, pursuant to the terms of the
trust receipts. Having failed to do so, petitioners had
no cause of action whatsoever against Fortune
Motors Corporation and the action for collection of
sum of money was, therefore, premature.
A trust receipt is a security transaction intended to aid
in financing importers and retail dealers who do not
have sufficient funds or resources to finance the
importation or purchase of merchandise, and who
may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported
or purchased. In the event of default by the entrustee
on his obligations under the trust receipt agreement,
it is not absolutely necessary that the entruster cancel
the trust and take possession of the goods to be able
to enforce his rights thereunder.
Charles Lee
vs.
CA and PBCom
(G.R. NO. 117913-117914 February 1, 2002)
Facts:
Charles Lee, as President of MICO, requested for
grant of several discounting loan/ credit line with
PBCom secured by REM which were all granted and
availed of and renewed under promissory notes.
Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap
and Richard Velasco, in their personal capacities
executed a two Surety Agreements in favor of PBCom
whereby the petitioners jointly and severally,
guaranteed the prompt payment on due dates or at
maturity of overdrafts, promissory notes, discounts,
drafts, letters of credit, bills of exchange, trust
receipts, and other obligations of every kind and
nature, for which MICO may be held accountable by
PBCom. MICO furnished PBCom with a notarized
certification issued by its corporate secretary, Atty.
P.B.Barrera, that Chua Siok Suy was duly authorized
by the Board of Directors to negotiate on behalf of
MICO for loans and other credit availments from
PBCom.
NEGOTIABLE INSTRUMENTS LAW
110
Several applications for domestic as well as foreign
letters of credit and availments of the credit line were
made by MICO.
Upon maturity of all credit availments obtained by
MICO from PBCom, the latter made a demand for
payment. For failure of petitioner MICO to pay the
obligations incurred despite repeated demands,
private PBCom extrajudicially foreclosed MICO’s REM
and sold the said mortgaged properties in a public
auction sale. PBCom then demanded the settlement
of the aforesaid obligations from sureties who,
however, refused to acknowledge their obligations to
PBCom under the surety agreements.
Hence, PBCom filed a complaint with prayer for writ
of preliminary attachment before the RTC of Manila
alleging that MICO was no longer in operation and
had no properties to answer for its obligations.
Petitioners denied having received the loans, and
that, since no loan was ever released or received by
MICO, the corresponding real estate mortgage and
surety agreements signed concededly by MICO are
null and void.
TC: Dismissed the case in favor of MICO, ruling that
PBcom failed to adequately prove that the proceeds
of the loan were ever delivered to MICO, no proof has
been adduced as to the existence of the goods
covered and paid by the said amounts. Hence,
inasmuch as no consideration ever passed from
PBcom to MICO, all the documents involved therein,
such as the promissory notes, real estate mortgage,
including the suretyship agreements were all void for
lack of cause or consideration
The Court of Appeals reversed the ruling of the trial
court, saying that the latter committed an erroneous
application and appreciation of the rules governing
the burden of proof. Citing Section 24 of the
Negotiable Instruments Law which provides that
“Every negotiable instrument is deemed prima facie
to have been issued for valuable consideration and
every person whose signature appears thereon to
have become a party thereto for value”, the Court of
Appeals said that while the subject promissory notes
and letters of credit issued by the PBCom made no
mention of delivery of cash, it is presumed that said
negotiable instruments were issued for valuable
consideration.
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
Issue:
Whether there is sufficient consideration with
respect to the drafts issued in connection with the
Letters of Credit.
Held:
Letters of Credit and trust receipts are not negotiable
instruments. But drafts issued in connection with the
letters of credit are negotiable instruments. Hence,
while the presumption of consideration under the
negotiable instruments law may not necessarily be
applicable to trust receipts and letters of credit, the
presumption that the drafts drawn in connection with
the letter of credit have sufficient consideration
apply.
Pilipinas Bank
vs.
Alfredo Ong and Leoncia Lim
(G.R. No. 133176. August 8, 2002)
Facts:
On April 1991, Baliwag Mahogany Corporation (BMC),
through its president, respondent Alfredo T. Ong,
applied for a domestic commercial letter of credit
with petitioner Pilipinas Bank (hereinafter referred to
as the bank) to finance the purchase of about 100,000
board feet of "Air Dried, Dark Red Lauan" sawn
lumber. The bank approved the application and
issued Letter of Credit in the amount of
P3,500,000.00. To secure payment of the amount,
BMC, through respondent Ong, executed two (2) trust
receipts providing inter alia that it shall turn over the
proceeds of the goods to the bank, if sold, or return
the goods, if unsold, upon maturity on July 28, 1991
and August 4, 1991.
On due dates, BMC failed to comply with the trust
receipt agreement. On November 22, 1991, it filed
with the Securities and Exchange Commission (SEC) a
Petition for Rehabilitation and for a Declaration in a
State of Suspension of Payments under Section 6 (c)
of P.D. No. 902-A, as amended. On November 27,
1992, the SEC rendered a Decision approving the
NEGOTIABLE INSTRUMENTS LAW
111
Rehabilitation Plan of BMC as contained in the MOA
and declaring it in a state of suspension of payments.
However, BMC and respondent Ong defaulted in the
payment of their obligations under the rescheduled
payment scheme provided in the MOA.
CA directed the prosecutors to file the appropriate
criminal charges for violation of PD 115, otherwise
known as The Trust Receipts Law, against Ong, et.al.
Issue:
1. Whether or not the Memorandum of Agreement
entered into extinguished the obligation s of BMC
under the Trust receipt Agreement.
2. Whether or not the officers of BMC can be held
liable for the violation of the Trust receipts Law.
Held:
Section 4 of PD No. 115 (The Trust Receipts Law)
defines a trust receipt as any transaction by and
between a person referred to as the entruster, and
another person referred to as the entrustee, whereby
the entruster who owns or holds absolute title or
security interest over certain specified goods,
documents or instruments, releases the same to the
possession of the entrustee upon the latter's
execution and delivery to the entruster of a signed
document called a "trust receipt" wherein the
entrustee binds himself to hold the designated goods,
documents or instruments with the obligation to turn
over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as
appears in the trust receipt, or the goods, documents
or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt.
Failure of the entrustee to turn over the proceeds of
the sale of the goods covered by a trust receipt to the
entruster or to return the goods, if they were not
disposed of, shall constitute the crime of estafa under
Article 315, par. 1(b) of the Revised Penal Code. If the
violation or offense is committed by a corporation,
the penalty shall be imposed upon the directors,
officers, employees or other officials or persons
therein responsible for the offense, without prejudice
to the civil liabilities arising from the criminal offense.
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
It is on this premise that petitioner bank charged
respondents with violation of the Trust Receipts Law.
Mere failure to deliver the proceeds of the sale or the
goods, if not sold, constitutes violation of PD No.
115.However, what is being punished by the law is
the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of
another regardless of whether the latter is the owner.
In this case, no dishonesty nor abuse of confidence
can be attributed to respondents. Record shows that
BMC failed to comply with its obligations upon
maturity of the trust receipts due to serious liquidity
problems, prompting it to file a Petition for
Rehabilitation and Declaration in a State of
Suspension of Payments. It bears emphasis that when
petitioner bank made a demand upon BMC on
February 11, 1994 to comply with its obligations
under the trust receipts, the latter was already under
the control of the Management Committee created
by the SEC in its Order dated January 8, 1992. The
Management Committee took custody of all BMC’s
assets and liabilities, including the red lauan lumber
subject of the trust receipts, and authorized their use
in the ordinary course of business operations. Clearly,
it was the Management Committee which could
settle BMC’s obligations. Moreover, it has not
escaped this Court’s observation that respondent
Ong paid P21, 000,000.00 in compliance with the
equity infusion required by the MOA. The mala
prohibita nature of the offense notwithstanding,
respondents’ intent to misuse or misappropriate the
goods or their proceeds has not been established by
the records.
The MOA did not only reschedule BMC’s debts, but
more importantly, it provided principal conditions
which are incompatible with the trust agreement.
Hence, the MOA novated and effectively extinguished
BMC's obligations under the trust receipt agreement.
Lorenzo Sarmiento and Gregorio Limpin
vs.
CA and Associated Banking Corp
(G.R. No. 122502. December 27, 2002)
NEGOTIABLE INSTRUMENTS LAW
112
Facts:
On September 6, 1978, defendant Gregorio Limpin, Jr.
and Antonio Apostol, doing business under the name
and style of ‘Davao Libra Industrial Sales,’ filed an
application for an Irrevocable Domestic Letter of
Credit with the plaintiff Bank for the amount of
P495,000.00 in favor of LS Parts Hardware and
Machine Shop (herein after referred to as LS Parts) for
the purchase of assorted scrap irons. Said application
was signed by defendant Limpin and Apostol. The
aforesaid application was approved, and plaintiff
Bank issued Domestic Letter of Credit in favor of LS
Parts for P495,000.00. Thereafter, a Trust Receipt
dated September 6, 1978, was executed by defendant
Limpin and Antonio Apostol. The defendants
acknowledged to have received in trust from the
plaintiff Bank the merchandise covered by the
documents and agreed to hold said merchandise in
storage as the property of the Bank.
The defendants failed to comply with their
undertaking under the Trust Receipt. Hence as early
as March, 1980, demands were made for them to
comply with their undertaking. The defendants claim
that they cannot be held liable as the 825 tons of
assorted scrap iron, subject of the trust receipt
agreement, were lost when the vessel transporting
them sunk, and that said scrap iron were delivered to
‘Davao Libra Industrial Sales’, a business concern over
which they had no interest whatsoever. Thereafter,
the corresponding Information was filed against the
defendants. Defendant Lorenzo Sarmiento, Jr. was,
however, dropped from the Information while
defendant Gregorio Limpin, Jr. was convicted.
Issue:
Whether private respondents have the right to
institute a separate civil action against Sarmiento for
civil liability?
Held:
Article 31 of the Civil Code provides that “When the
civil action is based on an obligation not arising from
the act or omission complained of as a felony, such
civil action may proceed independently of the
criminal proceedings and regardless of the result of
the latter.”
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
In the present case, private respondent’s complaint
against petitioners was based on the failure of the
latter to comply with their obligation as spelled out in
the Trust Receipt executed by them. This breach of
obligation is separate and distinct from any criminal
liability for “misuse and/or misappropriation of goods
or proceeds realized from the sale of goods,
documents or instruments released under trust
receipts”, punishable under Section 13 of the Trust
Receipts Law (P.D. 115) in relation to Article 315(1),
(b) of the Revised Penal Code.
Being based on an obligation ex contractu and not ex
delicto, the civil action may proceed independently of
the criminal proceedings instituted against
petitioners regardless of the result of the latter.
Edward Ong
vs.
CA and People of the Philippines
(G.R. No. 119858. April 29, 2003)
Facts:
Assistant City Prosecutor Dina P. Teves of the City of
Manila charged petitioner and Benito Ong with two
counts of estafa under separate Informations.
In Criminal Case No. 92-101989, the Information
indicts petitioner and Benito Ong of the crime of
estafa committed as follows:
That on or about July 23, 1990, in the City of Manila,
Philippines, the said accused, representing ARMAGRI
International Corporation, conspiring and
confederating together did then and there willfully,
unlawfully and feloniously defraud the SOLIDBANK
Corporation represented by its Accountant,
DEMETRIO LAZARO, a corporation duly organized and
existing under the laws of the Philippines located at
Juan Luna Street, Binondo, this City, in the following
manner, to wit: the said accused received in trust
from said SOLIDBANK Corporation the following, to
wit: 10,000 bags of urea valued at P2,050,000.00
specified in a Trust Receipt Agreement and covered
by a Letter of Credit No. DOM GD 90-009 in favor of
the Fertiphil Corporation.
NEGOTIABLE INSTRUMENTS LAW
113
In Criminal Case No. 92-101990, the Information
likewise charges petitioner of the crime of estafa
committed as follows:
That on or about July 6, 1990, in the City of Manila,
Philippines, the said accused, representing ARMAGRI
International Corporation, defraud the SOLIDBANK
Corporation represented by its Accountant,
DEMETRIO LAZARO. The said accused received in
trust from said SOLIDBANK Corporation the following
goods, to wit: 125 pcs. Rear diff. assy RNZO 49” 50
pcs. Front & Rear diff assy. Isuzu Elof, 85 units 1-Beam
assy. Isuzu Spz all valued at P2,532,500.00 specified in
a Trust Receipt Agreement and covered by a Domestic
Letter of Credit No. DOM GD 90-006 in favor of the
Metropole Industrial Sales with address at P.O. Box
AC 219, Quezon City.
Issue:
Whether petitioner was necessarily the one
responsible for the offense, by the mere circumstance
that petitioner acted as agent and signed for the
entrustee corporation.
Held:
Section 13 of the Trust Receipts Law which provides:
x x x. If the violation is committed by a corporation,
partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed
upon the directors, officers, employees or other
officials or persons therein responsible for the
offense, without prejudice to the civil liabilities arising
from the offense. We hold that petitioner is a person
responsible for violation of the Trust Receipts Law.
The Trust Receipts Law is violated whenever the
entrustee fails to: (1) turn over the proceeds of the
sale of the goods, or (2) return the goods covered by
the trust receipts if the goods are not sold. The mere
failure to account or return gives rise to the crime
which is malum prohibitum. There is no requirement
to prove intent to defraud.
The Trust Receipts Law recognizes the impossibility of
imposing the penalty of imprisonment on a
corporation. Hence, if the entrustee is a corporation,
the law makes the officers or employees or other
persons responsible for the offense liable to suffer
the penalty of imprisonment. The reason is obvious:
corporations, partnerships, associations and other
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
juridical entities cannot be put to jail. Hence, the
criminal liability falls on the human agent responsible
for the violation of the Trust Receipts Law.
LANDL & Co. Inc. and Percival LLban, and Manueal
Lucente
vs.
Metropolitan Bank & Trust Company
(G.R. No. 159622. July 30, 2004)
Facts:
Landl and Co. is engaged in the business of selling
imported welding rods and alloys. It opened a
commercial letter of credit with MBTC for the
purchase of various welding rods and electrons from
PERMA ALLOYS Inc., New York, USA. Landl put up a
marginal deposit of P50, 000.00 from the proceeds of
a separate clean loan.
As an additional security, and as a condition for the
approval of the application, MBTC required Percival
Llaban and Manuel Lucente to execute a continuing
surety agreement. Lucente also executed a Deed of
assignment in favor of MBTC to cover the amount of
the corporation’s obligation to the bank. Upon
compliance with these requisites, MBTC opened an
irrevocable Letter of Credit for Landl.
Trust Receipt was executed to secure indebtedness of
Landl. Upon Maturity, Landl defaulted payment of its
obligation or to return the goods to MBTC. The goods
were sold at public auction to MBTC as the highest
bidder. However, the proceeds of the auction sale
were insufficient to completely satisfy the
outstanding obligation of Landl notwithstanding the
application of the time deposit account of its director
Lucente. Accordingly, MBTC demanded that Landl pay
the remaining balance of their obligation. Landl failed
to do so. MBTC filed a complaint for sum of money
against Landl and its directors for the amount of the
deficiency.
TC and CA: Ordered Landl to pay the bank.
Issue:
NEGOTIABLE INSTRUMENTS LAW
114
Whether or not in a trust receipt transaction, an
entruster which had taken actual and juridical
possession of the goods covered by trust receipt may
subsequently avail of the right to demand from the
entrustee the deficiency of the amount covered by
the trust receipt.
Held:
A trust receipt agreement is merely a collateral
agreement, the purpose of which is to serve as
security for a loan.
In the event of default or failure of the entrustee to
comply with the terms of the trust receipt agreement,
the entruster may cancel the trust and take
possession of the goods subject of the trust receipt
and while in possession cause the sale of the goods
after at least five (5) day notice to the entrustee, in a
private or public sale. The entruster may at public sale
become a purchaser. If the proceeds of the sale were
insufficient to satisfy entirely entrustee’s
indebtedness, the entruster is well within its rights to
file an action to collect the deficiency.
Rosario Textile Mills Corp. and Edilberto Yujuico
vs.
Home Bankers Savings and Trust Company
(G.R. No. 137232. June 29, 2005)
Facts:
Rosario Textile Mills Corporation (RTMC) applied
from Home Bankers Savings & Trust Co. for an
Omnibus Credit Line for P10 million. The bank
approved RTMC’s credit line but for only P8 million.
The bank notified RTMC of the grant of the said loan
thru a letter which contains terms and conditions
conformed by RTMC thru Edilberto V. Yujuico. Yujuico
signed a Surety Agreement in favor of the bank, in
which he bounds himself jointly and severally with
RTMC for the payment of all RTMC’s indebtedness to
the bank. RTMC availed of the credit line by making
numerous drawdowns, each drawdown being
covered by a separate promissory note and trust
receipt. RTMC, represented by Yujuico, executed in
favor of the bank a total of eleven (11) promissory
notes. Despite the lapse of the respective due dates
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under the promissory notes and notwithstanding the
bank’s demand letters, RTMC failed to pay its loans.
Hence, the bank filed a complaint for sum of money
against RTMC and Yujuico.
CONTENTION OF RTMC AND YUJUICO:
They claimed that although the grant of the credit line
and the execution of the suretyship agreement are
admitted, the bank gave assurance that the
suretyship agreement was merely a formality under
which Yujuico will not be personally liable; that the
importation of raw materials under the credit line was
with a grant of option to them to turn-over to the
bank the imported raw materials should these fail to
meet their manufacturing requirements. RTMC
offered to make such turn-over since the imported
materials did not conform to the required
specifications. However, the bank refused to accept
the same, until the materials were destroyed by a fire
which gutted down RTMC’s premises. For failure of
the parties to amicably settle the case, trial on the
merits proceeded.
TC ruled in favor of the bank and orderd RTMC and
Yujuico to pay. RMTC appealed contending that under
the trust receipt contracts between the parties, they
merely held the goods described therein in trust for
Home Bankers Savings and Trust Company (the bank)
which owns the same. Since the ownership of the
goods remains with the bank, then it should bear the
loss. With the destruction of the goods by fire,
petitioners should have been relieved of any
obligation to pay
CA Affirmed the trial court’s judgment, holding that
the bank is merely the holder of the security for its
advance payments to petitioners and that the goods
they purchased, through the credit line extended by
the bank, belong to them and hold said goods at their
own risk.
Issue:
Whether RMTC and Yujuico are not relieved of their
obligation to pay their loan after they tried to tender
the goods to the bank which the bank refused to
accept the same, and which goods were subsequently
lost in fire.
Held:
NEGOTIABLE INSTRUMENTS LAW
115
Petitioners theorize that when petitioner RTMC
imported the raw materials needed for its
manufacture, using the credit line, it was merely
acting on behalf of the bank, the true owner of the
goods by virtue of the trust receipts. Hence, under the
doctrine of res perit domino, the bank took the risk of
the loss of said raw materials. RTMC’s role in the
transaction was that of end user of the raw materials
and when it did not accept those materials as they did
not meet the manufacturing requirements, RTMC
made a valid and effective tender of the goods to the
bank. Since the bank refused to accept the raw
materials, RTMC stored them in its warehouse. When
the warehouse and its contents were gutted by fire,
petitioners’ obligation to the bank was accordingly
extinguished.
Petitioners’ stance, however, conveniently ignores
the true nature of its transaction with the bank. We
recall that RTMC filed with the bank an application for
a credit line in the amount of P10 million, but only P8
million was approved. RTMC then made withdrawals
from this credit line and issued several promissory
notes in favor of the bank. In banking and commerce,
a credit line is “that amount of money or merchandise
which a banker, merchant, or supplier agrees to
supply to a person on credit and generally agreed to
in advance.” It is the fixed limit of credit granted by a
bank, retailer, or credit card issuer to a customer, to
the full extent of which the latter may avail himself of
his dealings with the former but which he must not
exceed and is usually intended to cover a series of
transactions in which case, when the customer’s line
of credit is nearly exhausted, he is expected to reduce
his indebtedness by payments before making any
further drawings.
It is thus clear that the principal transaction between
petitioner RTMC and the bank is a contract of loan.
RTMC used the proceeds of this loan to purchase raw
materials from a supplier abroad. In order to secure
the payment of the loan, RTMC delivered the raw
materials to the bank as collateral. Trust receipts
were executed by the parties to evidence this security
arrangement. Simply stated, the trust receipts were
mere securities.
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
Jose Tupaz and Petronilla Tupaz
vs.
CA and Bank of the Philippine Islands
(G.R. No. 145578 November 18, 2005)
Facts:
Jose C. Tupaz IV and Petronila C. Tupaz were Vice-
President for Operations and Vice-
President/Treasurer,respectively, of El Oro Engraver
Corporation (“El Oro Corporation”). El Oro
Corporation had a contract with the Philippine Army
to supply the latter with “survival bolos.”
To finance the purchase of the raw materials for the
survival bolos, the Tupazs, on behalf of El Oro
Corporation, applied with Bank of the Philippine
Islands (“BPI”) for two commercial letters of credit.
The letters of credit were in favor of El Oro
Corporation’s suppliers, Tanchaoco Manufacturing
Incorporated (“Tanchaoco Incorporated”) and
Maresco Rubber and Retreading Corporation
(“Maresco Corporation”). BPI granted Tupazs
application and issued Letters of Credit to Tanchaoco
Incorporated to Maresco Corporation.
Simultaneous with the issuance of the letters of
credit, the Tupazs signed trust receipts in favor of BPI.
Jose C.Tupaz IV (“petitioner Jose Tupaz”) signed, in his
personal capacity, a trust receipt corresponding to
the letter of credit given to Tanchaoco Incorporated.
Jose Tupaz bound himself to sell the goods covered
by the letter of credit and to remit the proceeds to
respondent bank, if sold, or to return the goods, if not
sold.
The Tupazs signed, in their capacities as officers of El
Oro Corporation, a trust receipt corresponding to
Letter of Credit in favor of Manresco Corporation. The
Tupazs bound themselves to sell the goods covered
by that letter of credit and to remit the proceeds to
respondent bank, if sold, or to return the goods, if not
sold. After Tanchaoco Incorporated and Maresco
Corporation delivered the raw materials to El Oro
Corporation, respondent bank paid the former.
The Tupazs did not comply with their undertaking
under the trust receipts. BPI made several demands
for payments but El Oro Corporation made partial
NEGOTIABLE INSTRUMENTS LAW
116
payments only. On BPI’s counsel and its
representative respectively sent final demand letters
to El Oro Corporation. El Oro Corporation replied that
it could not fully pay its debt because the Armed
Forces of the Philippines had delayed paying for the
survival bolos. BPI charged the Tupazs with estafa.
TC, affirmed by CA: The Tupazs are acquitted but
found solidarily liable with El Oro for the balance of El
Oro Corporations principal debt under the Trust
Receipt. Inability to collect with AFP is not a valid
defense to wipe out their civil liability.
Issues:
1. Whether petitioners bound themselves personally
liable for El Oro Corporation’s debts under the trust
receipts;
2. If so —(a) whether petitioners’ liability is solidary
with El Oro Corporation; and (b) whether petitioners’
acquittal of estafa under Section 13, PD 115
extinguished their civil liability.
Held:
A corporation, being a juridical entity, may act only
through its directors, officers, and employees. Debts
incurred by these individuals, acting as such
corporate agents, are not theirs but the direct liability
of the corporation they represent. As an exception,
directors or officers are personally liable for the
corporation’s debts only if they so contractually agree
or stipulate. Jose Tupaz is liable is Guarantor.
Jose Tupaz’s Acquittal did not Extinguish his Civil
Liability. The rule is that where the civil action is
impliedly instituted with the criminal action, the civil
liability is not extinguished by acquittal —
[w]here the acquittal is based on reasonable doubt xxx as only
preponderance of evidence is required in civil cases; where the
court expressly declares that the liability of the accused is not
criminal but only civil in nature xxx as, for instance, in the felonies
of estafa, theft, and malicious mischief committed by certain
relatives who thereby incur only civil liability (See Art. 332, Revised
Penal Code); and, where the civil liability does not arise from or is
not based upon the criminal act of which the accused was acquitted
xxx.
Here, BPI chose not to file a separate civil action to
recover payment under the trust receipts. Instead,
BPI sought to recover payment in the Criminal cases.
Although the trial court acquitted Jose Tupaz, his
BEHIGA-MANTO-VILLAMOR DIGESTS

Trust Receipts
acquittal did not extinguish his civil liability. As the
Court of Appeals correctly held, his liability arose not
from the criminal act of which he was acquitted (ex
delito) but from the trust receipt contract (ex
contractu).Jose Tupaz signed the trust receipt of in his
personal capacity.
Development Bank of the Philippines
vs.
Prudential Bank
(G.R. No. 143772 November 22, 2005)
Facts:
Lirag Textile Mills, Inc. (Litex) opened an irrevocable
commercial letter of credit with Prudential Bank. This
was in connection with its importation of 5,000
spindles for spinning machinery with drawing frame,
simplex fly frame, ring spinning frame and various
accessories, spare parts and tool gauge. These were
released to Litex under covering “trust receipts” it
executed in favor of Prudential Bank. Litex installed
and used the items in its textile mill located in
Montalban, Rizal.
On 1980, DBP granted a foreign currency loan in the
amount of US$4,807,551 to Litex. To secure the loan,
Litex executed real estate and chattel mortgages on
its plant site in Montalban, Rizal, including the
buildings and other improvements, machineries and
equipment’s there. Among the machineries and
equipments mortgaged in favor of DBP were the
articles covered by the “trust receipts.”
When Prudential Bank learned about DBP’s plan for
the overall rehabilitation of Litex, Prudential Bank
notified DBP of its claim over the various items
covered by the “trust receipts” which had been
installed and used by Litex in the textile mill.
Prudential Bank informed DBP that it was the
absolute and juridical owner of the said items and
they were thus not part of the mortgaged assets that
could be legally ceded to DBP.
For the failure of Litex to pay its obligation, DBP extra-
judicially foreclosed on the real estate and chattel
mortgages, including the articles claimed by
Prudential Bank.
NEGOTIABLE INSTRUMENTS LAW
117
Prudential Bank sent again a letter to DBP reasserting
its claim over the items covered by “trust receipts” in
its name and advising DBP not to include them in the
auction. It also demanded the turn-over of the articles
or alternatively, the payment of their value.
There being no concrete action on DBP’s part,
Prudential Bank, in a letter dated, made a final
demand on DBP for the turn-over of the contested
articles or the payment of their value. Without the
knowledge of Prudential Bank, however, DBP sold the
Litex textile mill, as well as the machineries and
equipments therein, to Lyon Textile Mills,Inc. (Lyon)
Since its demands remained unheeded, Prudential
Bank filed a complaint for a sum of money with
damages against DBP.
TC and CA ruled in favor of Prudential Bank. Applying
the provisions of PD 115 and held that the ownership
over the contested articles belonged to Prudential
Bank as entrustor, not to Litex. Consequently, even if
Litex mortgaged the items to DBP and the latter
foreclosed on such mortgage, DBP was duty bound to
turn-over the proceeds to Prudential Bank being the
party that advanced the payment for them.
Held:
The articles were owned by Prudential Bank and they
were only held by Litex in trust. While it was allowed
to sell the items, Litex had no authority to dispose of
them or any part thereof or their proceeds through
conditional sale, pledge or any other means.
Article 2085 (2) of the Civil Code requires that, in a
contract of pledge or mortgage, it is essential that the
pledgor or mortgagor should be the absolute owner
of the thing pledged or mortgaged. Article 2085 (3)
further mandates that the person constituting the
pledge or mortgage must have the free disposal of his
property, and in the absence thereof, that he be
legally authorized for the purpose.
Litex had neither absolute ownership, free disposal
nor the authority to freely dispose of the articles.
Litex could not have subjected them to a chattel
mortgage. Their inclusion in the mortgage was void
and had no legal effect. There being no valid
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 118
Trust Receipts

mortgage, there could also be no valid foreclosure or
valid auction sale.
Alfredo Ching
vs.
Sec. of Justice
(G. R. No. 164317 February 6, 2006)
Facts:
Ching was the Senior Vice President of Philippine
Blooming Mills, Inc (PBMI). PBMI, through Ching
applied with the Rizal Commercial Banking
Corporation (RCBC) for the issuance of Commercial
Letters of Credit to finance its importation of assorted
goods. RCBC approved the application, and
irrevocable Letters of Credit were issued in favor of
Ching (PBMI). The goods were purchased and
delivered in trust to PBMI. Ching signed 13 trust
receipts as SURETY, acknowledging delivery of the
goods. When the trust receipt matured, Ching failed
to return the goods to RCBC or to return their value
despite repeated demands.
Thus, RCBC filed a criminal complaint for estafa
against Ching. City Prosecutor found probable cause
for estafa, thus 13 information were filed. Ching
appealed to the Minister of Justice which ordered the
withdrawal of the information.
Whether Ching can be held criminally liable for
violation of the Trust Receipts Law, when he signed
the trust receipts merely as a surety and not as the
entrustee.
Held:
An officer of a corporation who signed a trust receipt
cannot hide behind the cloak of the separate
corporate personality of the corporation and cannot
avoid criminal prosecution even though he had no
physical possession of the goods nor are benefitted
by the delictual acts.
Though the entrustee is a corporation, nevertheless,
the law specifically makes the officers, employees and
other officers or persons responsible for the offense,
without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or
other officials or employees responsible for the
offense.
The rationale is that such officers or employees are
vested with authority and responsibility to devise
means necessary to ensure compliance with the law
and, if they fail to do so, are held criminally
accountable.
A corporation cannot be arrested and imprisoned;
hence, cannot be penalized for a crime punishable by
imprisonment. However a corporation may be
charged and prosecuted for a crime if the imposable
penalty is FINE.

RCBC refilled the criminal complaint for estafa before

the office of the City Prosecutor. City Prosecutor ruled
that there was no probable cause to charge Ching as
his liability was only civil and not criminal having
signed the trust receipts as surety.

RCBC appealed to the Secretary of Justice which

reversed the resolution of the City prosecutor,
holding that Ching as senior Vice-President of PBMI,
executed the 13 trust receipts and as such, was one
responsible for the offense. The execution of said
receipts is enough to indict Ching as the official
responsible for the violation of PD 115.

CA affirmed the Decision of Secretary of Justice.

Issue:

NEGOTIABLE INSTRUMENTS LAW BEHIGA-MANTO-VILLAMOR DIGESTS