2014 BAR EXAMINATIONS

COMMERCIAL LAW
II.
Bong bought 300 bags of rice from Ben for P300,000.00. As payment,
Bong indorsed to Bena Bank of the Philippine Islands (BPI) check issued by
Baby in the amount of P300,000.00. Upon presentment for payment, the BPI
check was dishonored because Baby’s account from which it was drawn has
been closed. To replace the dishonored check, Bong indorsed a crossed
Development Bank of the Philippines (DBP) check issued also by Baby for
P300,000.00. Again, the check was dishonored because of insufficient funds.
Ben sued Bong and Baby on the dishonored BPI check. Bong interposed the
defense that the BPI check was discharged by novation when Ben accepted
the crossed DBP check as replacement for the BPI check. Bong cited Section
119 of the Negotiable Instruments Law which provides that a negotiable
instrument is discharged "by any other act which will discharge a simple
contract for the payment of money."
Is Bong correct? (4%)
SUGGESTED ANSWER:
Bong is not correct. His claim that the BPI check was
discharged by novation when Ben accepted the crossed DBP check
as replacement for the BPI check is unmeritorious.
Ben’s acceptance of the DBP check, which replaced the
dishonored BPI check, did not result in novation as there was no
express agreement to establish that Bong was already discharged
from his liability to pay Ben the amount of P300,000.00 as payment
for the 300 bags of rice. Novation is never presumed. There must
be an express intention to novate. In fact, when the DBP check was
delivered to Ben, the same was also indorsed by Bong which shows
Bong’s recognition of the existing obligation to Ben to pay
P214,000.00 subject of the replaced BPI check.
Moreover, Ben’s acceptance of the DBP check did not result in
any incompatibility, since the two checks BPI and DBP checks were
precisely for the purpose of paying the amount of P214,000.00, i.e.,
the credit obtained from the purchase of the 300 bags of rice from
Ben. Indeed, there was no substantial change in the object or
principal condition of the obligation of Bong as the endorser of the
check to pay the amount of P214,000.00. It would appear that Ben
accepted the DBP check to give Bong the chance to pay his
obligation (Salazar v. J.Y. Brothers Marketing Corporation, G.R. No.
171998, October 20, 2010).
XIV.
On September 25, 2013, Danny Marcial (Danny) procured an insurance
on his life with a face value of P5,000,000.00 from RN Insurance Company
(RN), with his wife Tina Marcial (Tina) as sole beneficiary. On the same day,
Danny issued an undated check to RN for the full amount of the premium.
On October 1, 2013, RN issued the policy covering Danny’s life insurance.
On October 5, 2013, Danny met a tragic accident and died. Tina claimed the
insurance benefit, but RN was quick to deny the claim because at the time
of Danny’s death, the check was not yet encashed and therefore the
premium remained unpaid.
Is RN correct? Will your answer be the same if the check is dated
October 15, 2013? (4%)

SUGGESTED ANSWER:
To the first question (Is RN correct?):
RN Insurance is not correct. The facts of the case show that
Danny procured insurance on his life on September 25, 2013, with
his wife Tina as beneficiary, and that on the same day, i.e.,
September 25, 2013, he issued an undated check to RN for the full
amount of the premium. Since the undated check was issued to RN
on September 25, 2013, it will be considered dated as of the same
day, i.e., September 25, 2013 pursuant to Section 17 (c) of the
Negotiable Instruments Law. The facts also show that RN
Insurance issued the policy on Danny’s life on October 1, 2013 and
that Danny died in an accident on October 5, 2013.
RN Insurance denied the claim of Tina because at the time of
Danny’s death, the check was not yet encashed and, therefore, the
premium remained unpaid. Presumably, RN Insurance is relying on
the second paragraph of Article 1249 of the Civil Code which states
that 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.”
Whose fault was it that the check was not encashed?
Certainly not Danny or Tina. RN Insurance had the check as
early as September 25, 2013 and could have been encashed the
check before the death of Danny on October 5, 2013. The problem
did not indicate that there was any problem with the check, e.g.
that it was not adequately funded. RN Insurance was at fault and
Tina should not be denied the proceeds of the policy.
See the case of Malayan Insurance Co., Inc. v. Arnaldo (G.R.
No. L-67835, October 12, 1987), where the Court held that the
insurer could no longer claim forfeiture of the insured’s rights
because it held the check used to pay the premium on a fire
insurance policy for an unreasonable time; see also the comments
of Justice Jose C. Vitug (ret.) in his book, Commercial Laws and
Jurisprudence, 2006, Vol. I, p. 250, that “[p]ayment … by means of
a check or note, accepted by the insurer, bearing a date prior to the
loss , assuming an availability of funds thereof, would be sufficient
even if it remains uncashed at the time of the loss. The subsequent
effects of encashment (or impairment by the fault of the creditor)
or of legal compensation under Articles 1278-1279, in relation to
Article 1249 of the Civil Code, would retroact to the date of the
mercantile instrument and its acceptance by the creditor.
To the second question (Will your answer be the same if the
check is dated October 15, 2013):
 My answer would not be the same if the check were dated
October 15, 2013. This answer assumes that Danny was the one
who dated the check and, therefore, what he issued was a
postdated check. The payment of a promissory note or a postdated
check at a stated maturity subsequent to the loss, assuming that
there was no estoppel (e.g., written acknowledgement of the
receipt of premium), is insufficient to put the insurance into effect
(Vitug, Commercial Laws and Jurisprudence, 2006, Vol. I, p. 250).
If it were RN Insurance who dated the check October 15,
2013, then my answer would be the same as my answer to the first
question.
XXII.
Paul George Pua (Pua) filed a complaint for a sum of money against
the spouses Benito and Caroline James (Spouses James). In the complaint,
Pua prayed that the defendants pay Pua the amount of P8,500,000.00,
covered by a check. Pua asserts that defendants owed him a sum of money
way back in 1988 for which the Spouses James gave him several checks.
These checks, however, had all been dishonored and Pua has not been paid
the amount of the loan plus the agreed interest. In 1996, the Spouses James
approached Pua to get the computation of their liability including the 2%
compounded interest. After bargaining to lower the amount of their liability,
the Spouses James gave Pua postdated check bearing the discounted
amount of P8,500,000.00. Like the 1988 checks, the drawee bank likewise
dishonored this check. To prove his allegations, Pua submitted the original
copies of the 17 checks issued by Caroline in 1988 and the check issued in
1996, Manila trust Check No. 750. The Spouses James, on the other hand,
completely denied the existence of the debt asserting that they had never
approached Pua to borrow money in 1988 or in 1996. They assert, instead,
that Pua is simply acting at the instance of his sister, Lilian, to file a false
charge against them using a check left to fund a gambling business
previously operated by Lilian and Caroline. Decide. (5%)
SUGGESTED ANSWER:
I will decide in favor of Pua and against the Spouses James.
 A check is evidence of indebtedness and proof of an
obligation. It can be used in lieu of and for the same purpose as a
promissory note. In other words, a check functions more than a
promissory note since it not only contains an undertaking to pay an
amount of money but it is an order addressed to a bank and
partakes of a representation that the drawer has funds on deposit
against which the check is drawn, sufficient to ensure payment
upon its presentation to the bank. A check, the entries of which are
in writing, could prove a loan transaction. Thus, under the
Negotiable Instruments Law, 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 for value (Pua v. Spouses Benito Tiong, G.R.
No. 198660, October 23, 2013)
XXIV.
A criminal complaint for violation of B.P. 22 was filed by Foton Motors
(Foton), an entity engaged in the business of car dealership, against Pura
Felipe (Pura) with the Office of the City Prosecutor of Quezon City. The Office
found probable cause to indict Pura and filed an information before the
Metropolitan Trial Court (MeTC) of Quezon City, for her issuance of a
postdated check in the amount of P1,020,000.00 which was subsequently
dishonored upon presentment due to "Stop Payment."
Pura issued the check because her son, Freddie, attracted by a huge
discount of P220,000.00, purchased a Foton Blizzard 4x2 from Foton. The
term of the transaction was Cash-on-Delivery and no downpayment was
required. The car was delivered on May 14, 1997, but Freddie failed to pay
upon delivery. Despite non-payment, Freddie took possession of the vehicle.
Pura was eventually acquitted of the charge of violating B.P. 22 but
was found civilly liable for the amount of the check plus legal interest. Pura
appealed the decision as regards the civil liability, claiming that there was no
privity of contract between Foton and Pura. No civil liability could be
adjudged against her because of her acquittal from the criminal charge. It
was Freddie who was civilly liable to Foton, Pura claimed. Pura added that
she could not be an accommodation party either because she only came in
after Freddie failed to pay the purchase price, or six (6) months after the
execution of the contract between Foton and Freddie. Her liability was limited
to her act of issuing a worthless check, but by her acquittal in the criminal
charge, there was no more basis for her to be held civilly liable to Foton.
Pura’s act of issuing the subject check did not, by itself, assume the
obligation of Freddie to Foton or automatically make her a party to the
contract.
Is Pura liable? (5%)
SUGGESTED ANSWER:
Pura is liable to Foton Motors because it sold a car to her son
and was a holder for value of the check issued in its favor by Pura.
Any person criminally liable for felony is also civilly liable. Thus, her
acquittal in the criminal charge does not carry with it extinction of
her civil liability unless the extinction proceeds from a declaration
in a final judgment that the fact from which the civil liability might
arise did not exist. (People v. Maniego, G.R. No. L-30910, February
27, 1987).
More specifically, Pura is liable as an accommodation party.
Under Section 29 of the Negotiable Instruments Law, 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.
Pura’s liability existed although Pura issued the check after
the delivery of the car. Under Section 25 of the Negotiable
Instruments Law, an antecedent or pre-existing debt constitutes
value and is deemed such whether the instrument is payable on
demand or at a future time.
 XXVIII.
Which of the following instruments is negotiable if all the other requirements
of negotiability are met? (1%)
(A) A promissory note with promise to pay out of the U.S. Dollar account of
the maker in XYZ Bank
(B) A promissory note which designates the U.S. Dollar currency in which
payment is to be made
(C) A promissory note which contains in addition a promise to paint the
portrait of the bearer
(D) A promissory note made payable to the order of Jose Cruz or Josefa Cruz

SUGGESTED ANSWER:
(B) A promissory note which designates the U.S. Dollar currency in
which payment is to be made or
(D) A promissory note made payable to the order of Jose Cruz or
Josefa Cruz