CONSOLIDATED PLYWOOD INDUSTRIES VS.

IFC LEASING & monthly instalments starting July 15, 1978 and every 15th of the month thereafter
ACCEPTANCE CORP.149 SCRA 448 (1987) until fully paid." Considering that paragraph (d), Section 1 of the

Facts: Negotiable Instruments Law requires that a promissory note "must be

Consolidated Plywood Industries Inc. (CPII) is a corporation engaged in payable to order or bearer," it cannot be denied that the promissory note in
the logging business. It had for its program of logging activities the opening of question is not a negotiable instrument. The instrument in order to be considered
additional roads, and simultaneous logging operations along the route of said negotiable must contain the so called "words of negotiability" ³ i.e., must be
roads. With this, it requires two more units of tractors to attain its payable to "order" or "bearer. “These words serve as an expression of consent
objective. Atlantic Gulf and Pacific Company of Manila’s sister company, Industrial Products that the instrument maybe transferred. This consent is indispensable since a
Marketing maker assumes greater risk under a negotiable instrument than under a non-
negotiable one. Without the words "or order" or "to the order of," the instrument is
(IPM), offered to sell to CPII 2 "Used" Allis Crawler Tractors. IPM payable only to the person designated therein and is therefore non-negotiable.
assured CPII that the "Used" Allis Crawler Tractors which were offered are fit Any subsequent purchaser thereof will not enjoy the advantages of being a
for the job, and gave the corresponding warranty of 90 days performance of the holder of a negotiable instrument, but will merely "step into the shoes "of the
machines and availability of parts. The president and vice president of CPII, person designated in the instrument and will thus be open to all defense
agreed to purchase on instalment said 2 units of "Used" Allis Crawler Tractors available against the latter. Therefore, considering that the subject promissory
relying on IPM’s guarantee. They paid a down payment of 210,000.00. After issuance note is not a negotiable instrument, it follows that IFC Leasing can never be a
of the sales invoice, the deed of sale with chattel mortgage with promissory note holder in due course but remains a mere assignee of the note in question. Thus,
was executed. Simultaneously with the execution of the deed of sale with chattel CPII may rise against IFC Leasing all defense available to it as against IPM. This
mortgage with promissory note, IPM, by means of a deed of assignment, being so, there was no need for CPII to implead IPM when it was sued by IFC
assigned its rights and interest in the chattel mortgage in favor of IFC Leasing Leasing because CPII's defense apply to both or either of them.
and Acceptance Corporation. Immediately thereafter, IPM delivered said 2 units of "Used
“tractors to CPII's jobsite as agreed upon. Eventually, one of the tractors broke down, 9
days subsequent to the incident; the other tractor also broke down. IPM sent
mechanics to fix the tractors but was unable to do so as the units were not
serviceable. Due to this, the road building and simultaneous logging operations
were delayed. The Vice President of CPII advised IPM that the payments of the
instalments as listed in the promissory note would likewise be delayed until IPM
completely fulfils its obligation under its warranty. Since the tractors were no
longer serviceable, the President asked IPM to pull out the units and have them
reconditioned, and thereafter to offer them for sale. The proceeds were to be
given to IFC Leasing and the excess, if any, to be divided between IPM and CPII
which offered to bear 1/2 of their conditioning cost. No response to this letter was
received by CPII and despite several follow-up calls; IPM did nothing with regard
to the request, until the complaint in the case was filed by IFC Leasing against
CPII. The trial court rendered judgment, ordering CPII, et al. to pay jointly and
severally in their official and personal capacities the principal sum of P1,
093,798.71 with accrued interest. CPII et al.'s motion for reconsideration was
denied by the Intermediate Appellate Court Hence, this case.

Issue:
Whether the promissory note in question is a negotiable instrument?

Held:
The pertinent portion of the note provides that ""FORVALUE
RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL
PRODUCTS MARKETING, the sum of ONEMILLION NINETYTHREE
THOUSAND SEVEN HUNDRED EIGHTYNINE PESOS & 71/100 only (P1,
093,789.71), Philippine Currency, the said principal sum, to be payable in 24
 ROMEO C. GARCIA v. DIONISIO V. LLAMAS
G.R. No. 154127 December 8, 2003
Panganiban, J.
Doctrine:
– Novation cannot be presumed. It must be clearly and unequivocally shown that
it indeed took place, either by the express assent of the parties or by the
complete incompatibility between the old and the new agreements.
– An accommodation party is liable for the instrument to a holder for value even
if, at the time of its taking, the latter knew the former to be only an
accommodation party. The relation between an accommodation party and the
party accommodated is, in effect, one of principal and surety — the
accommodation party being the surety. It is a settled rule that a surety is bound
equally and absolutely with the principal and is deemed an original promissor and
debtor from the beginning.
Facts:
Petitioner and Eduardo De Jesus borrowed P400,000.00 from
respondent. Both executed a promissory note wherein they bound themselves
jointly and severally to pay the loan on or before 23 January 1997 with a 5%
interest per month. The loan has long been overdue and, despite repeated
demands, both have failed and refused to pay it. Hence, a complaint was filed
against both.
Resisting the complaint, Garcia averred that he assumed no liability
because he signed merely as an accommodation party for De Jesus; and that he
is relieved from any liability arising from the note inasmuch as the loan had been
paid by De Jesus by means of a check dated 17 April 1997; and that, in any
event, the issuance of the check and respondent’s acceptance thereof novated
or superseded the note.
Respondent answered that there was no novation to speak of because the check
bounced.
Issues:
1. Whether or not there was novation in the obligation
2. Whether or not the defense that petitioner was only an accommodation party
had any basis
Held:
1. No. In order to change the person of the debtor, the old one must be expressly
released from the obligation, and the third person or new debtor must assume
the former’s place in the relation (Reyes v. CA). Well-settled is the rule that
novation is never presumed (Security Bank v. Cuenca). Consequently, that which
arises from a purported change in the person of the debtor must be clear and
express. It is thus incumbent on petitioner to show clearly and unequivocally that
novation has indeed taken place. Petitioner failed to do this. In the present case,
petitioner has not shown that he was expressly released from the obligation, that
a third person was substituted in his place, or that the joint and solidary obligation
was cancelled and substituted by the solitary undertaking of De Jesus.
Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor (Idolor v. CA, February 7,
2001). Article 1293 of the Civil Code defines novation as follows:
“Art. 1293. Novation which consists in substituting a new debtor in the place of
the original one, may be made even without the knowledge or against the will of
the latter, but not without the consent of the creditor. Payment by the new debtor
gives him rights mentioned in articles 1236 and 1237.”
In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the change
does not come from — and may even be made without the knowledge of — the
debtor, since it consists of a third person’s assumption of the obligation. As such,
it logically requires the consent of the third person and the creditor.
In delegacion, the debtor offers, and the creditor accepts, a third person who
consents to the substitution and assumes the obligation; thus, the consent of
these three persons are necessary. Both modes of substitution by the debtor
require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new one that takes the place of the
former. It is merely modificatory when the old obligation subsists to the extent
that it remains compatible with the amendatory agreement (Babst v. CA).
Whether extinctive or modificatory, novation is made either by changing the
object or the principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the rights of
the creditor, an act known as subjective or personal novation (Spouses Bautista
v. Pilar Development Corporation, 371 Phil. 533, August 17, 1999). For novation
to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract (Security Bank v Cuenca, October 3,
2000)
Novation may also be express or implied. It is express when the new obligation
declares in unequivocal terms that the old obligation is extinguished. It is implied
when the new obligation is incompatible with the old one on every point (Article
1292, NCC). The test of incompatibility is whether the two obligations can stand
together, each one with its own independent existence (Molino v. Security Diners
International Corporation, August 16, 2001).
2. No. The note was made payable to a specific person rather than to bearer or
to order — a requisite for negotiability under the Negotiable Instruments Law
(NIL). Hence, petitioner cannot avail himself of the NIL’s provisions on the
liabilities and defenses of an accommodation party.
Even granting arguendo that the NIL was applicable, still, petitioner would be
liable for the promissory note. Under Article 29 of the NIL, an accommodation
party is liable for the instrument to a holder for value even if, at the time of its
taking, the latter knew the former to be only an accommodation party. The
relation between an accommodation party and the party accommodated is, in
effect, one of principal and surety — the accommodation party being the surety.
It is a settled rule that a surety is bound equally and absolutely with the principal
and is deemed an original promissor and debtor from the beginning.
 Caltex (Philippines), Inc. vs Court of Appeals Thus, de la Cruz is the depositor “insofar as the bank is concerned,” but
obviously other parties not privy to the transaction between them would not be in
212 SCRA 448 – Mercantile Law – Negotiable Instruments Law – Negotiable a position to know that the depositor is not the bearer stated in the CTDs.
Instruments in General – Bearer Instrument – Certificate of Time Deposit However, Caltex may not encash the CTDs because although the CTDs are
bearer instruments, a valid negotiation thereof for the true purpose and
In 1982, Angel de la Cruz obtained certificates of time deposit (CTDs) from agreement between Caltex and De la Cruz, requires both delivery and
Security Bank and Trust Company for the former’s deposit with the said bank indorsement. As discerned from the testimony of Caltex’ representative, the
amounting to P1,120,000.00. The said CTDs are couched in the following CTDs were delivered to them by de la Cruz merely for guarantee or security and
manner: not as payment.
This is to Certify that B E A R E R has deposited in this Bank the sum
of _______ Pesos, Philippine Currency, repayable to said
depositor _____ days. after date, upon presentation and surrender of this
certificate, with interest at the rate of ___ % per cent per annum.
Angel de la Cruz subsequently delivered the CTDs to Caltex in connection with
the purchase of fuel products from Caltex.
In March 1982, Angel de la Cruz advised Security Bank that he lost the CTDs.
He executed an affidavit of loss and submitted it to the bank. The bank then
issued another set of CTDs. In the same month, Angel de la Cruz acquired a
loan of P875,000.00 and he used his time deposits as collateral.
In November 1982, a representative from Caltex went to Security Bank to
present the CTDs (delivered by de la Cruz) for verification. Caltex advised
Security Bank that de la Cruz delivered Caltex the CTDs as security for
purchases he made with the latter. Security Bank refused to accept the CTDs
and instead required Caltex to present documents proving the agreement made
by de la Cruz with Caltex. Caltex however failed to produce said documents.
In April 1983, de la Cruz’ loan with Security bank matured and no payment was
made by de la Cruz. Security Bank eventually set-off the time deposit to pay off
the loan.
Caltex sued Security Bank to compel the bank to pay off the CTDs. Security
Bank argued that the CTDs are not negotiable instruments even though the word
“bearer” is written on their face because the word “bearer” contained therein refer
to depositor and only the depositor can encash the CTDs and no one else.
ISSUE: Whether or not the certificates of time deposit are negotiable.
HELD: Yes. The CTDs indicate that they are payable to the bearer; that there is
an implication that the depositor is the bearer but as to who the depositor is, no
one knows. It does not say on its face that the depositor is Angel de la Cruz. If it
was really the intention of respondent bank to pay the amount to Angel de la
Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word “BEARER”
stamped on the space provided for the name of the depositor in each CTD. On
the wordings of the documents, therefore, the amounts deposited are repayable
to whoever may be the bearer thereof.
 HSBC vs. CIR, G.R. No. 166018, June 04, 2014
Facts:
HSBC performs custodial services on behalf of its investor-clients with
respect to their passive investments in the Philippines, particularly investments in
shares of stocks in domestic corporations. As a custodian bank, HSBC serves as
the collection/payment agent.
HSBC’s investor-clients maintain Philippine peso and/or foreign currency
accounts, which are managed by HSBC through instructions given through
electronic messages. The said instructions are standard forms known in the
banking industry as SWIFT, or “Society for Worldwide Interbank Financial
Telecommunication.”
Pursuant to the electronic messages of its investor-clients, HSBC
purchased and paid Documentary Stamp Tax (DST) from September to
December 1997 and also from January to December 1998 amounting to
P19,572,992.10 and P32,904,437.30, respectively.
BIR, thru its then Commissioner, issued BIR Ruling to the effect that
instructions or advises from abroad on the management of funds located in the
Philippines which do not involve transfer of funds from abroad are not subject to
DST. A documentary stamp tax shall be imposed on any bill of exchange or order
for payment purporting to be drawn in a foreign country but payable in the
Philippines.
a. While the payor is residing outside the Philippines, he maintains a local and
foreign currency account in the Philippines from where he will draw the money
intended to pay a named recipient. The instruction or order to pay shall be made
through an electronic message.
Consequently, there is no negotiable instrument to be made, signed or issued by
the payee.
b. Such electronic instructions by the non-resident payor cannot be considered
as a transaction per se considering that the same do not involve any transfer of
funds from abroad or from the place where the instruction originates.
Under the Documentary Stamp Tax Law, the mere withdrawal of money from a
bank deposit, local or foreign currency account, is not subject to DST, unless the
account so maintained is a current or checking account, in which case, the
issuance of the check or bank drafts is subject to the documentary stamp tax.
c. Likewise, the receipt of funds from another bank in the Philippines for deposit
to the payee’s account and thereafter upon instruction of the non-resident
depositor-payor, through an electronic message, the depository bank to debit his
account and pay a named recipient shall not be subject to documentary stamp
tax.
With the above BIR Ruling as its basis, HSBC filed on an administrative claim for
the refund of allegedly representing erroneously paid DST to the BIR
As its claims for refund were not acted upon by the BIR, HSBC subsequently
brought the matter to the CTA, which favored HSBC and ordered payment of
refund or issuance of tax credit.
However, the CA reversed decisions of the CTA and ruled that the electronic
messages of HSBC’s investor-clients are subject to DST.
a. DST is levied on the exercise by persons of certain privileges conferred by law
for the creation, revision, or termination of specific legal relationships through the
execution of specific instruments, independently of the legal status of the
transactions giving rise thereto.
ISSUE: Whether or not the electronic messages are considered
transactions pertaining to negotiable instruments that warrant the payment of
DST.
HELD: NO.
The Court agrees with the CTA that the DST under Section 181 of the Tax Code
is levied on the acceptance or payment of “a bill of exchange purporting to be
drawn in a foreign country but payable in the Philippines” and that “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.”
The Court further agrees with the CTA that the electronic messages of HSBC’s
investor-clients containing instructions to debit their respective local or foreign
currency accounts in the Philippines and pay a certain named recipient also
residing in the Philippines is not the transaction contemplated under Section 181
of the Tax Code as such instructions are “parallel to an automatic bank transfer
of local funds from a savings account to a checking account maintained by a
depositor in one bank.” The Court favorably adopts the finding of the CTA that
the electronic messages “cannot be considered negotiable instruments as
they lack the feature of negotiability, which, is the ability to be transferred”
and that the said electronic messages are “mere memoranda” of the
transaction consisting of the “actual debiting of the [investor-client-
payor’s] local or foreign currency account in the Philippines” and “entered
as such in the books of account of the local bank,” HSBC.
The instructions given through electronic messages that are subjected to DST in
these cases are not negotiable instruments as they do not comply with the
requisites of negotiability under Section 1 of the Negotiable Instruments Law.
The electronic messages are not signed by the investor-clients as supposed
drawers of a bill of exchange; they do not contain an unconditional order to pay a
sum certain in money as the payment is supposed to come from a specific fund
or account of the investor-clients; and, they are not payable to order or bearer but
to a specifically designated third party. Thus, the electronic messages are not
bills of exchange. As there was no bill of exchange or order for the payment
drawn abroad and made payable here in the Philippines, there could have been
no acceptance or payment that will trigger the imposition of the DST under
Section 181 of the Tax Code.