Nego Cases

NEGOTIABLE INSTRUMENTS
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TOPIC Applicable laws MODULE 1

Case 1
CASE TITLE GSIS VS. Court of Appeals and Mr. and Mrs. Isabelo Racho GR NO
L-40824
REGALADO , J.
PONENTE DATE
February 23, 1989
DOCTRINE Applicability of the Negotiable Instruments Law
FACTS Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs Flaviano Lagasca,
executed a deed of mortgage, dated November 13, 1957, in favor of petitioner GSIS and subsequently,
another deed of mortgage in connection with two loans granted by the latter in the sums of P11,500 and
P3,000, respectively. A parcel of land, co-owned by said mortgagor spouses, was given as a security.
They also executed a promissory note which states in part: JOINTLY, SEVERALLY and SOLIDARILY, promise to
pay the GOVERNMENT SERVICE INSURANCE SYSTEM the sum of . . . (P 11,500.00) Philippine Currency, with
interest at the rate of six (6%) per centum compounded monthly payable in . . . (120)equal monthly
installments of . . . (P 127.65) each.
Lagasca spouses executed an instrument denominated as “Assumption of Mortgage” where they promised
to exclude private respondents Racho and their share of the mortgaged property from liability to the
mortgagee.
Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment of
the amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the mortgaged property to
be sold at public auction.
ARGUMENTS Petitioner (GSIS):

N/A
Respondent (CA) & Private Respondents (Racho):

a. Prayer: that the extrajudicial foreclosure in favor of GSIS be declared null and void; that they be allowed
to recover said property, and/or the GSIS be ordered to pay them the value thereof, and/or they be allowed
to repurchase the land, and; actual and moral damages and attorney’s fees.
b. Racho alleged that they signed the mortgage contracts not as sureties or guarantors for the Lagasca
spouses but they merely gave their common property to the said co-owners who were solely benefited by
the loans from the GSIS.
LOWER COURT RTC: DISMISSED. Failure to establish cause of action.

RULING CA: REVERSED. Although formally they are co-mortgagors, they are so only for accomodation in that the
GSIS required their consent to the mortgage of the entire parcel of land which was covered with only one
certificate of title, with full knowledge that the loans secured thereby were solely for the benefit of the
appellant spouses who alone applied for the loan.
- Mortgage VOID insofar as it affects the share of the appellants.
- GSIS to reconvey to appellants their share of the mortgaged property, or the value thereof if already
sold to third party
ISSUE/S Whether Act No. 2031 (Negotiable Instruments Law), is applicable to the parties.
- Whether the executed mortgage of deeds and promissory note are negotiable instruments.
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SC RULING NO. The promissory note and the mortgage deeds are clearly not negotiable instruments.
These documents do not comply with the fourth requisite to be considered as such under Section 1 of Act
No. 2031 because they are neither payable to order nor to bearer. The note is payable to a specified party,
the GSIS.
The applicable law shall be the Civil Code and special laws on mortgages. The private respondents Racho
signed the documents "only to give their consent to the mortgage as required by GSIS", with the latter having
full knowledge that the loans secured thereby were solely for the benefit of the Lagasca spouses. So long as
valid consent was given, the fact that the loans were solely for the benefit of the Lagasca spouses would not
invalidate the mortgage with respect to private respondents' share in the property. The facts also show that
the private respondents expressly bound themselves as solidary debtors in the promissory note.
The CA erred in annulling the mortgage insofar as it affected the share of Rachos or in directing the
reconveyance of their property or the payment of the value thereof.
NOTES SECTION 1: FORM OF NEGOTIABLE INSTRUMENTS

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
e. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
Accommodation Party - is one who has signed an instrument as maker, drawer, acceptor of indorser without
receiving value therefor, but is held liable on the instrument to a holder for value although the latter knew
him to be only an accommodation party.
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TOPIC PARTIES IN A CHECK MODULE 1

Case 2
CASE TITLE FEDERAL EXPRESS CORP. VS. LUWALHATI ANTONINO GR NO
199455
LEONEN, J.:
PONENTE DATE
JUNE 27, 2018
DOCTRINE
FACTS 1. Eliza was the owner of Unit 22-A (the Unit) in Allegro Condominium, located in the United States.
2. Sometime in November 2003, monthly common charges on the Unit became due and were for a total
amount of US$9,742.81.
3. As the monthly common charges on the Unit became due, Luwalhati and Eliza decided to send Citibank
checks amounting to more than US$17,000 for the payment of monthly
charges and real estate taxes through the petitioner corporation.
4. The package was addressed to Ms. Sison who was tasked to deliver the checks payable to Maxwell Kates,
Inc and the New York County Department of Finance.
5. Sison allegedly did not receive the package, resulting in the non-payment of Luwalhati and Eliza’s
obligation the lead to the foreclosure of the Unit.
6. Sison contacted FedEx to inquire about the non-delivery. She was informed that the package was delivered
to her neighbor but there was no signed receipt.
7. Luwalhati and Eliza, through their counsel, sent a demand letter to FedEx for payment of damages due to
the non-delivery of the package, but FedEx refused to heed their demand.
ARGUMENTS Petitioner:
N/A
Respondent:
a. FedEx claimed that Luwalhati and Eliza "ha[d] no cause of action against it because Luwalhati and Eliza
shipped prohibited items and mis-declared these items as "documents."
b. It pointed to conditions under its Air Way bill prohibiting the "transportation of money (including but not
limited to coins or negotiable instruments equivalent to cash such as endorsed stocks and bonds)."
LOWER COURT RTC: The Regional Trial Court found that Luwalhati failed to accurately declare the contents of the
RULING package as “checks”. However, it ruled that a check is not legal tender or a negotiable instrument
equivalent to “cash,” as prohibited by the Air Waybill.
CA: The CA affirmed the RTC’S ruling. It further noted that an Air Waybill is a contract of adhesion and
should be construed against the party that drafted it.
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ISSUE/S Whether or not the check in the instant case was deemed as a legal tender or a negotiable instrument
equivalent to cash that is prohibited in the Air Waybill.
SC RULING NO. It is settled in jurisprudence that checks, being only negotiable instruments, are only substitutes for
money and are not legal tender; more so when the check has a named payee and is not payable to bearer.
In Cebu International Finance Corporation v. Court of Appeals, 60 this Court held that the debts paid in a
money market transaction through the use of a check is not a valid tender of payment as a check is not legal
tender in the Philippines.
The Air Waybill’s prohibition mentions “negotiable instruments” only in the course of making an example.
Thus, they are not prohibited items themselves. Moreover, the illustrative example does not even pertain to
negotiable instruments per se but to “negotiable instruments equivalent to cash.”
The checks involved here are payable to specific payees, Maxwell-Kates, Inc. and the New York County
Department of Finance. Thus, they are order instruments. They are not payable to their bearer, i.e., bearer
instruments.
The more relevant consideration is whether checks with a specified payee are negotiable
instruments equivalent to cash, as contemplated in the example added to the Air Waybill’s
prohibition.
This Court thinks not. An order instrument, which has to be endorsed by the payee before it may be
negotiated, cannot be a negotiable instrument equivalent to cash. It is worth emphasizing that the
instruments given as further examples under the Air Waybill must be endorsed to be considered equivalent
to cash.
NOTES
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TOPIC MODULE 1
Case 3
CASE TITLE MANUEL C. UBAS, SR vs WILSON CHAN GR NO 215910
Perlas-Bernabe February 6, 2017

PONENTE DATE
DOCTRINE 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.
FACTS Petitioner filed a complaint for sum of money with application for writ of attachment against Wilson Chan,
the respondent, alleging that the respondent, “doing business under the name and style of UNIMASTER”,
was indebted to him of 1,500,00php, representing the price of construction materials purchased by
respondent from petitioner for the construction of Macagtas Dam in Northern Samar.
Petitioner further claimed that the obligation has long become due and demandable and yet, respondent
unjustly refused to pay the same despite repeated demands. Petitioner averred that respondent is guilty of
fraud because the latter issued three bank checks, payable to “CASH” in the amount of 500,000 each on
January 31, 1998, March 13, 1998, and April 3, 1998, respectively, which were dishonored due to a stop
payment order. Petitioner’s evidence are the dishonored checks which were in his possession and the
demand letter he sent to the respondent detailing the serial numbers of the checks that were issued by the
latter.
Respondent filed an answer with motion to dismiss on the grounds that the complaint states no cause of
action, considering that the checks do not belong to him but to Unimaster Conglomeration, Inc., that there
is no contract that ever existed between him and petitioner and if petitioner even had a right of action at all,
the complaint should not have been filed against him but against Unimasters, a duly registered construction
company which has a separate juridical personality from him. Respondent admitted to having issued subject
checks but they were not issued to petitioner but to a project engineer, named Engr. Merelos, who was in
charge of negotiating the supply for the said dam project and that the checks were issued for the
replenishment of the revolving fund which Engr. Merelos lost.
LOWER COURT RTC:

RULING RTC ruled that petitioner had a cause of action. The respondent failed to overcome the disputable
presumption that every party to an instrument acquired the same for a valuable consideration under
Section 24 of Negotiable Instruments Law.
CA:
CA reversed and set aside the RTC’s ruling, dismissing petitioner’s complaint on the ground of lack of cause
of action and ruled that the respondent was not the proper party. Also, that the subject checks cannot be
validly used as proof of alleged transactions between petitioner and respondent, it can only serve as
evidence of transaction between Unimasters and petitioner.
ISSUE/S
Whether or not the CA erred in dismissing petitioner’s complaint for lack of cause of action.
SC RULING
Yes, the Court holds that the CA erred in dismissing petitioner’s complaint against respondent on the ground
of lack of cause of action.
Jurisprudence holds that "in a suit for a recovery of sum of money, as here, the plaintiff-creditor [(petitioner
in this case)] has the burden of proof to show that defendant [(respondent in this case)] had not paid [him]
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the amount of the contracted loan. However, it has also been long established that where the plaintiff-
creditor possesses and submits in evidence an instrument showing the indebtedness, a presumption that
the credit has not been satisfied arises in [his] favor. Hence, the defendant is required to overcome the said
presumption and present evidence to prove the fact of payment so that no judgment will be entered against
him.
RTC correctly ruled, it is presumed that the subject checks were issued for a valid consideration, which
therefore, dispensed with the necessity of any documentary evidence to support petitioner's monetary
claim. Unless otherwise rebutted, the legal presumption of consideration under Section 24 of the NIL stands.
Verily, "the vital function of legal presumption is to dispense with the need for proof."
NOTES
• Cause of action is defined as the act or omission by which a party violates a right of another. It is
well-settled that the existence of a cause of action is determined by the allegations in the complaint.
• NIL 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.
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TOPIC Parties in Checks MODULE 1

Case 4
172652
CASE TITLE METROPOLITAN BANK AND TRUST COMPANY vs. CHIOK
GR NO
Leonardo-De Castro, J. November 26, 2014

PONENTE DATE
DOCTRINE
Under the civil law principle of relativity of contracts under Article 1311 of the Civil Code, contracts can only
bind parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such
contract and has acted with knowledge thereof.
FACTS
Respondent Wilfred N. Chiok (Chiok) had been engaged in dollar trading for several years. He usually buys
dollars from Gonzalo B. Nuguid (Nuguid) whom he had been dealing with for about six to eight years. On
June 5, 1995, Chiok deposited three checks, two of which are issued by the Asian Bank (or Global Bank) and
one was issued by Metrobank, with an aggregate value of PHP 26,068,250.00, in Nuguid’s account with the
Far East Bank & Trust Company. The said checks were issued in the name of “Gonzalo Bernardo”. Nuguid
was supposed to deliver to Chiok the dollar equivalent of the three checks; however, Nuguid failed to do so.
This prompted Chiok to request that payment on the three checks be stopped. On the following day, Chiok
filed a Complaint for damages with application for ex parte restraining order and/or preliminary injunction
with the RTC of Quezon City against the spouses Gonzalo and Marinella Nuguid, and the depositary banks,
Asian Bank and Metrobank. On the same day, the RTC issued a TRO directing spouses Nuguid to refrain from
presenting the said checks for payment and the depository banks from honoring the same until further
orders from the court.
LOWER COURT RTC: Nuguid failed to prove the delivery of dollars to Chiok. The RTC ruled that manager’s checks and
RULING cashier's checks may be subject of a Stop Payment Order form the purchaser on the basis of the payee’s
contractual breach. The RTC concluded that since Nuguid did not have a valid title to the proceeds of the
manager’s and cashier’s checks, Chiok is to be entitled to be paid back everything he had paid to the
drawees for the checks. With respect to Metrobank and Asian Bank, it is ruled that the entire amount
covered by the checks in question shall be paid to Chiok, with an interest of 12% per annum.
CA: On May 26, 2004, CA affirmed the decision of the RTC with modifications. CA invoked Article 1191 as
the legal basis of the right of the purchaser of manager’s check (MC) and cashier’s check (CC) to make a
stop payment order on the ground that the failure of the payee to perform his obligation for the purchaser.
By deposition the subject checks to the account of Nuguid, Chiok had already performed his obligations
under the contract, and the subsequent failure to comply with what was incumbent upon him gave rise to
an action for rescission pursuant to Article 1911 of the Civil Code.
ISSUE/S
W/N the purchaser of manager’s and cashier’s checks has the right to have the checks cancelled by filing
an action for rescission of its contract with the payee
SC RULING
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NO. The Supreme Court ruled that the principle of rescission under Article 1191 of the Civil Code cannot be
applied in this case, and thus cannot be invoked as the legal basis of Chiok’s right to make a stop payment
order.
The cause of action supplied by the said article is clearly predicated upon the reciprocity of the obligations
of the injured party and the guilty party. When Nuguid failed to deliver the agreed amount to Chiok, the
latter had a cause of action against Nuguid to ask for the rescission of their contract. On the other hand,
Chiok did not have a cause of action against Metrobank and Global Bank that would allow him to rescind the
contracts of sale of the manager’s or cashier’s checks, which would have resulted in the crediting of the
amounts thereof back to his accounts.
Under the civil law principle of relativity of contracts under Article 1311 of the Civil Code, contracts can only
bind parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such
contract and has acted with knowledge thereof. Metrobank and Global Bank are not parties to the contract
to buy foreign currency between Chiok and Nuguid. Therefore, they are not bound by such contract and
cannot be prejudiced by the failure of Nuguid to comply with the terms thereof.
Chiok could have and should have proceeded directly against Nuguid to claim damages for breach of contract
and to have the very account where he deposited the subject checks garnished under Section 7(d) and
Section 8, Rule 57 of the Rules of Court. Instead, Chiok filed an action to enjoin Metrobank and Global Bank
from complying with their primary obligation under checks in which they are both liable as both drawer and
drawee.
NOTES
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TOPIC Negotiable instruments compared with other papers MODULE 1

Case 5
CASE TITLE NATIONAL MARKETING CORPORATION v. FEDERATION OF UNITED NAMARCO GR NO
DISTRIBUTORS, INC. L-22578
J. Antonio
PONENTE DATE
January 31, 1973
DOCTRINE The clause of Article 1249 relative to the impairment of the negotiable character of the commercial paper
by the fault of the creditor, is applicable only to instruments executed by third persons and delivered by the
debtor to the creditor, and does not apply to instruments executed by the debtor himself and delivered to
the creditor.
FACTS
NAMARCO (plaintiff), a government owned and controlled corporation and FEDERATION (defendant), a non-
stock corporation entered into a Contract of Sale. Among the goods in the said sale were 2,000 cartons of PK
Chewing Gums, 1,000 cartons of Juicy Fruit Chewing Gums, 500 cartons of Adams Chicklets, 168 cartons of
Blue Denims, and 138 bales of Khaki Twill.
To insure payment of the goods by FEDERATION, NAMARCO accepted three domestic letters of credit:
● PNB Domestic L/C No. 600570, dated January 27, 1960, in favor of the NAMARCO for the account of
the FEDERATION, available by draft up to the aggregate amount of P277,357.91, covering the full
invoice value of the 2,000 cartons PK-5 Chewing Gums; 1,000 cartons of Juicy Fruit Chewing Gums,
and 500 cartons of Adams Chicklets;
invoice value of the 168 cartons of Blue Denims; and
invoice value of the 183 bales of Khaki Twill,
each to be accompanied by statement of account of buyer issued by the NAMARCO, accepted draft and duly
executed trust receipt approved by the Philippine National Bank.
Upon the arrival of the goods, NAMARCO submitted to FEDERATION Statement of Account for the shipment
of the goods. Thereafter, FEDERATION received from NAMARCO the 2,000 cartons of PK Chewing Gums,
1,000 cartons of Juicy Fruit Chewing Gums, and 500 cartons of Adams Chicklets amounting to P277,357.91,
under the condition that the cost would be paid in cash through PNB Domestic L/C No. 600570. FEDERATION
received from the NAMARCO the 168 cartons of Blue Denims and 183 bales of Khaki Twill, amounting to
P135,891.82 and P197,804.12, respectively, under the condition that the cost would be paid in cash through
PNB Domestic L/C Nos. 600606 and 600586, respectively.
Subsequently, FEDERATION and some of its members filed a complaint for specific performance and
damages against NAMARCO, and alleged that after the NAMARCO had delivered a great portion of the goods
listed in the Contract of Sale, it refused to deliver the other goods mentioned in the said contract. NAMARCO
presented to PNB Manila for payment Sight Draft of the goods. NAMARCO answered the complaint, alleging
that the Contract of Sale was not validly entered into by the NAMARCO. PNB informed the NAMARCO that
could not negotiate and effect payment on the sight drafts drawn under PNB Domestic L/C Nos. 600570,
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600606 and 606586, in the amounts of P277,357.91, P135,891.82 and P197,804.12, respectively, as the
requirements of the covering letters of credit had not been complied with. The common condition of the
three letters of credit is that the sight drafts drawn on them must be duly accepted by the FEDERATION
before they will be honored by the Philippine National Bank. But the said drafts were not presented to the
FEDERATION for acceptance. The NAMARCO demanded from the FEDERATION payment amounting to
611,053.35, but the latter failed to pay.
NAMARCO alleged that the Contract of Sale was not validly entered into by the NAMARCO since PNB could
not negotiate and effect payment on the sight drafts drawn under PNB Domestic L/C Nos. 600570, 600606
and 606586 as the requirements of the covering letters of credit had not been complied with. The common
condition of the three letters of credit is that the sight drafts drawn on them must be duly accepted by the
FEDERATION before they will be honored by the Philippine National Bank. But the said drafts were not
presented to the FEDERATION for acceptance. The NAMARCO demanded from the FEDERATION payment
amounting to 611,053.35, but the latter failed to pay.
Respondent:
FEDERATION and some of its members filed a complaint for specific performance and damages against
NAMARCO, and alleged that after the NAMARCO had delivered a great portion of the goods listed in the
Contract of Sale, it refused to deliver the other goods mentioned in the said contract.
LOWER COURT
RULING CFI Manila ordered the NAMARCO to specifically perform its obligation in the Contract of Sale, by delivering
to the FEDERATION the undelivered goods.
On appealed decision, the Supreme Court rendered a decision on NAMARCO's appeal and held that the
Contract of Sale was valid.
ISSUE/S Whether or not the delivery of FEDERATION of domestic letters of credit to NAMARCO operate to discharge
the debt of FEDERATION
SC RULING No, mere delivery by the FEDERATION of the domestic letters of credit to NAMARCO did not operate to
discharge the debt of the FEDERATION. NAMARCO accepted the three letters of credit "to insure the
payment of those goods by the FEDERATION ... ." It was given therefore as a mere guarantee for the payment
of the merchandise.
Art. 1249 of NCC states that “The delivery of promissory notes payable to order, or bills of exchange or drafts
or other mercantile document shall produce the effect of payment only when realized, or when by the fault
of the creditor, the privileges inherent in their negotiable character have been impaired.”
The clause of Article 1249 relative to the impairment of the negotiable character of the commercial paper
by the fault of the creditor, is applicable only to instruments executed by third persons and delivered by the
debtor to the creditor, and does not apply to instruments executed by the debtor himself and delivered to
the creditor.
In the present case, it is not even pretended that the negotiable character of the sight drafts was impaired
as a result of the fault of NAMARCO. The fact that NAMARCO attempted to collect from the Philippine
National Bank on the sight drafts on March 10, 1960, is of no material significance. There was no agreement
that they should be accepted as payment. The mere fact that NAMARCO proceeded in good faith to try to
collect payments thereon, did not amount to an appropriation by it of the amounts mentioned in the sight
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drafts so as to release its claims against the FEDERATION. A mere attempt to collect or enforce a bill or note
from which no payment results is not such an appropriation of it as to discharge the debt.
NOTES In any event NAMARCO's action is not based on the domestic letters of credit, but on its legal right to the
cost of the goods delivered to the FEDERATION the correlative obligation of the latter to pay for the same,
and its default or refusal to make such payments.
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TOPIC Parties to Negotiable Instruments (Parties in Checks) MODULE 1

Case 6
CASE TITLE FORTUNADO vs. COURT OF APPEALS GR NO 196 SCRA
28 (1991)
Cruz, J. 25 April 1991
PONENTE DATE
DOCTRINE The redemption is not rendered invalid by the fact that the said officer accepted a check for the amount
necessary to make the redemption instead of requiring payment in money.
TENDER OF CHECK SUFFICIENT TO COMPEL REDEMPTION BUT IS NOT IN ITSELF A PAYMENT
FACTS April 21, 1981- the RTC of Quezon City rendered judgment in Civil Case No. Q-22367, entitled "Alfaro
Fortunado v. Angel Bautista," ordering the defendant to pay damages to the plaintiff. Pursuant to the said
judgment, Basilisa Campano, City Sheriff of Iligan City, levied upon two parcels of land registered in the name
of Bautista located at Iligan City and covered by TCT Nos. T-7625 and T-14133. The latter lot had already
been purchased by National Steel Corporation (NSC) as of August 17, 1983, but had not yet been registered
in its name.
After due notice, these lots were sold at public auction to the petitioners as the only bidder on April 23, 1984.
They were issued a certificate of sale which was registered on April 25, 1984.
On January 10, 1985, NSC gave notice to the sheriff of its intention to redeem the lot covered by TCT No. T-
14133. The sheriff suggested that as the two lots had been sold together for the lump sum of P267,013.00,
both of them should be redeemed by NSC. The NSC filed with the trial court an urgent motion to redeem
both lots, however, as the motion remained unresolved and the period of redemption would expire on April
18, 1985, NSC issued to the sheriff on March 20, 1985, PNB Check No. 313551 in the amount of P296,384.43
as the redemption price for the lot covered by TCT No. T-14133. The sheriff acknowledged receipt of the
check on the same date.
The sheriff acknowledged receipt of the check as redemption money for the two parcels of land on March
21, 1985 and issued a certificate of redemption in favor of NSC and Bautista. On March 25, 1985, Bautista
wrote the sheriff that he would no longer effect the redemption because there was nothing to redeem, the
auction sale being null and void. In an Urgent Motion dated March 27, 1985, Bautista prayed that the sum
covered by the PNB check be delivered to and kept by the Clerk of Court of the RTC of Quezon City until such
time as all incidents relative to the validity of the auction sale conducted by the sheriff were finally resolved.
On March 29, 1985, the sheriff wired the petitioners’ counsel, notifying him of the deposit of the PNB check.
The said counsel told the sheriff that he was rejecting the check because it was not legal tender and was
not intended for payment but merely for deposit.
On April 25, 1985, the petitioner requested the sheriff to issue a final deed of sale over the two lots and
deliver the same to them on the ground that no valid redemption had been effected within the 12-month
period from the registration of the sale. When the request was not granted, the petitioners filed with the
respondent court a petition for mandamus.
According to the petitioners, NSC and Bautista failed to comply with the provisions of the Rules of Court in
exercising their right of redemption and invoked Article 1249 of the Civil Code, arguing that the provision
was applicable to redemption under Rule 39, Section 30, of the Rules of Court.
They contended that the check issued by NSC, not being legal tender, could not be considered payment of
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the redemption price. Moreover, since there was no delivery to the creditor of the redemption price, there
was no payment within the meaning of Article 1233 of the Civil Code.
The CA denied the petition for mandamus but granted injunction to restrain the registration of the
certificate of redemption in favor of NSC and Bautista. While the petitioner’s motion for partial
reconsideration was pending, NSC filed a Manifestation dated March 18, 1987, informing the CA that the
certificate of redemption had already been registered and TCT No. T-27154 had been issued in its favor on
September 12, 1985. On May 8, 1987, the respondent court denied the petitioners’ motion for
reconsideration.
ARGUMENTS Petitioner: ALFARO FORTUNADO, EDITH FORTUNADO, NESTOR FORTUNADO and RAMON A. GONZALES
a. Article 1249 of the Civil Code apply to the payment of the redemption price of property sold at public
auction and
b. The redemption of NSC is unconditional and without reservation.
c. They invoke Belisario v. Natividad –even if the check had been good, the defendant was not legally
bound to accept it because such a check does not satisfy the requirements of a legal tender
d. They cite Villanueva v. Santos, Legarda v. Miailhe, New Pacific Timber and Supply Co., Inc. v. Seneris,
and Philippine Air Lines v. Court of Appeals, claiming these have overruled Javellana.
Respondent: COURT OF APPEALS, BASILISA CAMPANO, as City Sheriff of Iligan City, REGISTER OF DEEDS,
Iligan City, ANGEL L. BAUTISTA and NATIONAL STEEL CORPORATION
a. Article 1249 of the New Civil Code is inapplicable as it deals with a mode of extinction of debts while
the right to redeem is not an obligation, nor is it intended to discharge a pre-existing debt.
b. They rely on Javellana – a redemption of property sold under execution is not rendered invalid by
reason of the fact that the payment to the sheriff for the purpose of redemption is effected by means
of a check for the amount due
LOWER COURT CA: Denied the petition for mandamus but granted injunction to restrain the registration of the certificate
RULING of redemption in favor of NSC and Bautista. Article 1249 is not applicable in cases of redemption as the
right of redemption is not an obligation nor is it intended to discharge a pre-existing debt, the right of
redemption being in fact a privilege.
The redemption was not rendered invalid by the fact that the officer accepted a check for the amount
necessary to make the redemption instead of requiring payment in money. (Javellana v. Mirasol) On the
failure to deliver the redemption price to the petitioners directly, it said that the payment of the
redemption money to the sheriff was legally sanctioned under Rule 39, Section 31, of the Rules of Court.
The court observed, however, that the validity of redemption was dependent on the validity of the
certificate of sale, which had to be resolved by the trial court.
ISSUE/S
Whether or not redemption had been validly effected by the private respondents. -YES
SC RULING
YES, the redemption is not rendered invalid by the fact that the said officer accepted a check for the
amount necessary to make the redemption instead of requiring payment in money. It goes without saying
that if he had seen fit to do so, the officer could have required payment to be made in lawful money, and he
undoubtedly, in accepting a check, placed himself in a position where he could be liable to the purchaser at
the public auction if any damage had been suffered by the latter as a result of the medium in which payment
was made.
The right of redemption is an absolute privilege, the exercise of which is entirely dependent upon the will
and discretion of the redemptioners. There is, thus, no legal obligation to exercise the right of redemption.
Said right, can in no sense, be considered an obligation, should they choose not to exercise it, nobody can
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compel them to do so nor will such choice give rise to a cause of action in favor of the purchaser at the
auction sale.
On the other hand, if the redemptioners choose to exercise their right of redemption, it is the policy of the
law to aid rather than to defeat the right of redemption. It stands to reason therefore, that redemptions
should be looked upon with favor and where no injury is to follow, a liberal construction will be given to our
redemption laws as well as to the exercise of the right of redemption.
Although the private respondents in the case at bar did not file a redemption case against petitioners, it
should not be noted that private respondents NSC filed an Urgent Motion for Redemption dated February
11, 1985, and Bautista filed an Urgent Motion (To Deposit Redemption Money with Quezon City Clerk of
Court) dated March 27, 1985. The motions were well within the redemption period.
The case applicable to the present controversy is Javellana v. Mirasol. The cases cited by the petitioners do
not involve redemption by check.
Finally, the petitioners pray that we rule on the validity of the certificate of sale assailed by Bautista on the
ground that it covers more than one lot and does not indicate the price paid for each parcel. The facts
surrounding the sale are not before us. In response to a query from this Court regarding the status of CC No.
Q22367, the clerk of the trial court replied that the records of that court were totally burned during the fire
which razed the Quezon City Hall on June 11, 1988. Apart from the circumstance that we are not a trier of
facts, the facts we are asked to try are not at hand.
We are not sanctioning the use of a check for the payment of obligations over the objection of the creditor.
What we are saying is a check may be used for the exercise of the right of redemption, the same being a
right, not an obligation. The tender of a check is sufficient to compel redemption but is not in itself a
payment that relieves the redemptioner from his liability to pay the redemption price. While we hold that
the private respondents properly exercised their right or redemption, they remain liable of course, for the
payment of the redemption price. WHEREFORE, the appealed decision is AFFIRMED, with the modification
that the redemption made by Angel L. Bautista was also unconditional like that of the National Steel
Corporation
NOTES Article 1249 of the Civil Code

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 the abeyance.
Article 1233 of the Civil Code

A debt shall not be understood to have been paid unless the thing or service in which the obligation consists
has been completely delivered or rendered, as the case may be.
2F 2020-2021
TOPIC Requisites of Negotiability MODULE 1
Case 7
CASE TITLE NEIL B. AGUILAR and RUBEN CALIMBAS VS. LIGHTBRINGERS CREDIT GR NO 209605
COOPERATIVE
MENDOZA, J. January 12, 2015

PONENTE DATE
DOCTRINE A check was sufficient evidence of a loan transaction.
This case stemmed from the three (3) complaints for sum of money separately filed by respondent
Lightbringers Credit Cooperative on July 14, 2008 against petitioners Aguilar and Calimbas, and one
Perlita Tantiangco, which were consolidated before the First Municipal Circuit Trial Court, Dinalupihan,
Bataan (MCTC). The complaints alleged that Tantiangco, Aguilar and Calimbas were members of the
cooperative who borrowed the following funds:
1. In Civil Case No. 1428, Tantiangco allegedly borrowed ₱206,315.71 as evidenced by Cash
Disbursement Voucher No. 4010 but the net loan was only ₱45,862.00 as supported by PNB Check No.
0000005133.
2. In Civil Case No. 1429, petitioner Calimbas allegedly borrowed ₱202,800.18 as evidenced by Cash
Disbursement Voucher No. 3962 but the net loan was only ₱60,024.00 as supported by PNB Check No.
0000005088;
3. In Civil Case No. 1430, petitioner Aguilar allegedly borrowed ₱126,849.00 as evidenced by Cash
FACTS Disbursement Voucher No. 3902 but the net loan was only ₱76,152.00 as supported by PNB Check No.
0000005026.
Tantiangco, Aguilar and Calimbas filed their respective answers. They uniformly claimed that the
discrepancy between the principal amount of the loan evidenced by the cash disbursement voucher
and the net amount of loan reflected in the PNB checks showed that they never borrowed the amounts
being collected. They also asserted that no interest could be claimed because there was no written
agreement as to its imposition.
Petitioner:
ARGUMENTS
a. NEIL B. AGUILAR
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b. RUBEN CALIMBAS
Tantiangco, Aguilar and Calimbas uniformly claimed that the discrepancy between the principal
amount of the loan evidenced by the cash disbursement voucher and the net amount of loan reflected
in the PNB checks showed that they never borrowed the amounts being collected. They also asserted
that no interest could be claimed because there was no written agreement as to its imposition.
Respondent:
a. LIGHTBRINGERS CREDIT COOPERATIVE
Fernando Manalili (Manalili), respondent’s incumbent General Manager, as its sole witness, in his
testimony, Manalili explained that the discrepancy between the amounts of the loan reflected in the
checks and those in the cash disbursement vouchers were due to the accumulated interests from
previous outstanding obligations, withheld share capital, as well as the service and miscellaneous fees.
He stated, however, that it was their bookkeeper who could best explain the details.
LOWER COURT RTC:

RULING RTC affirmed the MCTC decisions. It held that the PNB checks were concrete evidence of the
indebtedness of the petitioners to respondent. The RTC relied on the findings of the MCTC that the
checks bore no endorsement to another person or entity. The checks were issued in the name of the
petitioners and, thus, they had the right to encash the same and appropriate the proceeds.
CA:
Aggrieved, Aguilar and Calimbas filed a petition for review before the CA but it was dismissed,
however, in the questioned resolution, stating that the petition was formally defective because the
"verification and disclaimer of forum shopping" and the "affidavit of service" had a defective jurat
for failure of the notary public to indicate his notarial commission number and office address.
Moreover, the entire records of the case, inclusive of the oral and documents evidence, were not
attached to the petition in contravention of Section 2, Rule 42 of the Rules of Court.
A motion for reconsideration was filed by the petitioners which sought the leniency of the CA. They
attached a corrected verification and disclaimer of forum shopping and affidavit of service. They
asked the CA to simply order the RTC to elevate the records of the case pursuant to Section 7, Rule
42 of the Rules of Court. Moreover, the petitioners could not attach the records of the case because
the flooding caused by "Habagat" in August 2012 soaked the said records in water.
In the other questioned resolution, dated October 9, 2013, the CA denied the motion because the
petitioners still failed to attach the entire records of the case which was a mandatory requirement
under Section 2, Rule 42.
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ISSUE/S Whether or not there was indeed a contract of loan between the petitioners and respondent.
SC RULING Yes. On the merits of the case, the Court holds that there was indeed a contract of loan between the
petitioners and respondent.
The Court agrees with the findings of fact of the MCTC and the RTC that a check was sufficient
evidence of a loan transaction. The findings of fact of the trial court, its calibration of the testimonies
of the witnesses and its assessment of the probative weight thereof, as well as its conclusions
anchored on the findings are accorded high respect, if not conclusive effect.
There is no dispute that the signatures of the petitioners were present on both the PNB checks and
the cash disbursement vouchers. The checks were also made payable to the order of the petitioners.
Hence, respondent can properly demand that they pay the amounts borrowed. If the petitioners
believe that there is some other bogus scheme afoot, then they must institute a separate action
against the responsible personalities. Otherwise, the Court can only rule on the evidence on record in
the case at bench, applying the appropriate laws and jurisprudence.
NOTES
2F 2020-2021
TOPIC Negotiability, Omissions and Provisions that Do Not Affect Negotiability. MODULE 1 (Add’l case)
Case 8
CASE TITLE Caltex (Philippines), Inc. v. Court of Appeals GR NO 97753
PONENTE REGALADO, J.: DATE August 10, 1992
DOCTRINE 1.) 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.
2.) Although the Certificate of Time Deposits are bearer instruments, a valid negotiation thereof for the true
purpose and agreement between the parties, as ultimately ascertained, requires both delivery and
indorsement.
FACTS Security Bank , a commercial banking institution, through its Sucat Branch issued 280 Certificates of Time
Deposit (CTDs) in favor of Angel dela Cruz who deposited with herein defendant the aggregate amount of
P1,120,000.00. Angel dela Cruz delivered the said certificates of time (CTDs) to Caltex f in connection with
his purchase of fuel products from the latter.
Thereafter, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manager, that he lost all the
CTD in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss, as
required by Security Bank's procedure, if he desired replacement of said lost CTDs. Therefore, Angel dela
Cruz executed and delivered to Security Bank the required Affidavit of Loss. On the basis of said affidavit of
loss, 280 replacement CTDs were issued in favor of said depositor.
Angel dela Cruz negotiated and obtained a loan from Security Bank in the amount of P875,000.00 and
executed a notarized Deed of Assignment of Time Deposit which stated, among others, that de la Cruz
surrenders to Security Bank "full control of the indicated time deposits from and after date" of the
assignment and further authorizes said bank to pre-terminate, set-off and "apply the said time deposits to
the payment of whatever amount or amounts may be due" on the loan upon its maturity.
Mr. Aranas, Credit Manager of Caltex (Phils.) Inc., went to the Security Bank's Sucat branch and presented
for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to Caltex "as
security for purchases made with Caltex Philippines, Inc." by said depositor. Security Bank received a letter
from Caltex formally informing it of its possession of the CTDs in question and of its decision to pre-terminate
the same. Caltex was requested by Security Bank to furnish the latter "a copy of the document evidencing
the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation
against which Caltex proposed to apply the time deposits. No copy of the requested documents was
furnished herein defendant.
Security Bank rejected Caltex's demand and claim for payment of the value of the CTDs in a letter. Thereafter,
the loan of dela Cruz with the defendant bank matured and fell due, the latter set-off and applied the time
deposits in question to the payment of the matured loan.
In view of the foregoing, Caltex filed the instant complaint, praying that defendant bank be ordered to pay
it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and
compounded interest therein at 16% per annum, moral and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant complaint.
A sample text of the certificates of time deposit is reproduced below to provide a better understanding of
the issues involved in this recourse.
2F 2020-2021
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY,
SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731
days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per
cent per annum.
(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————
AUTHORIZED SIGNATURES
The certificates of deposit were given by de la Cruz as security for purchases made with Caltex Philippines,
Inc.
Respondent:
Respondent bank rejected the claim for the petitioner’s failure to furnish the document evidencing the
guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation
against which plaintiff proposed to apply the time deposits.
LOWER COURT RTC:

RULING Complaint Dismissed.
CA:
Affirmed the Dismissal of the Complaint.
ISSUE/S 1.) Whether or not the certificates of time deposit (CTD) in this case are negotiable. - YES
2.) Whether or not Plaintiff Caltex can recover. - NO
SC RULING 1.) Yes, Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
(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
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of
contention is with regard to requisite (d) set forth above. On this score, the accepted rule is that the
negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face
2F 2020-2021
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 circumstances 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 cases is to ascertain, not what the parties may have
secretly intended as contra distinguishable 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.
Contrary to what the respondent court held, the CTDs are negotiable instruments. The documents provide
that the amounts deposited shall be repayable to the depositor. And who, according to the document, is
the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that
the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the
bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment.
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.
Thus, petitioner's aforesaid witness merely declared that Angel 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
a position to know that the depositor is not the bearer stated in the CTDs. Hence, the situation would require
any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel the
agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is
sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule
that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused
the obscurity.
2.) No, the records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons
of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent
bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid
negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For, although the petitioner seeks to deflect this fact,
the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt
as to whether the CTDs were delivered as payment for the fuel products or as a security has been
dissipated and resolved in favor of the latter by the petitioner's own authorized and responsible
representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex
Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela
Cruz to guarantee his purchases of fuel products." This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is
rendered conclusive upon the person making it, and cannot be denied or disproved as against the person
relying thereon
NOTES
2F 2020-2021
TOPIC Requisites of Negotiability MODULE 2

CASE #1
CASE TITLE Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank GR NO 97753
and Trust Company
Regalado, J. DAT August 10, 1992
PONENTE
E
DOCTRINE - Section 1, Act No. 2031 or the NIL enumerates the requisites for an instrument to be negotiable:

(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty
- Negotiability or non-negotiability of an instrument is determined in the writing, hence, 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.
- An instrument is negotiated when it is transferred from one person to another in such a manner as
to constitute the transferee the holder thereof, and a holder may be the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof.
FACTS ● On various dates, defendant, a commercial banking institution, through its Sucat Branch,
issued 280 certificates of time deposits (CTDs) in favor of one Angel dela Cruz who
deposited with herein defendant the aggregate amount the Php 1,120,000.00.
● Angel dela Cruz delivered the CTDs to herein plaintiff in connection with his purchase of fuel
products from the latter.
● Dela Cruz informed Mr. Tiangco, the Sucat Branch Manager, that he lost all the CTDs in
dispute. Mr. Tiangco advised the said depositor to execute and submit a notarized Affidavit
of Loss, as required by defendant bank's procedure, if he desired replacement of said lost
CTDs
● Dela Cruz executed and delivered to the defendant bank the required Affidavit of Loss. 280
CTDs were issued in favor of the depositor, on the basis of the Affidavit of Loss
● On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in
the amount of Php 875,000.00. The said depositor executed a notarized Deed of
Assignment of Time Deposit on the same date, which stated: “among others, that he (Dela
Cruz) surrenders to defendant bank ‘full control of the indicated time deposits from and after
date of the assignment and further authorizes said bank to pre-terminate, set-off and 'apply
the said time deposits to the payment of whatever amount or amounts may be due' on the
loan upon its maturity.”
● In November 1982, Mr. Aranas, the Credit Manager of plaintiff Caltex, went to the defendant
bank’s Sucat branch and presented for verification the CTDs declared lost by Dela Cruz,
alleging that the same were delivered to herein plaintiff as “security for purchases made with
Caltex Philippines Inc. by Dela Cruz.
● The defendant received a letter from plaintiff, informing it of its possession of the CTDs in
question and of its decision to preterminate the same.
● Plaintiff was requested by herein defendant to furnish the former a copy of the document
evidencing the “guarantee agreement with Dela Cruz” and the “details of Mr. Angel dela
Cruz' obligations against which' plaintiff proposed to apply the time deposits”, but no copy of
the requested documents was given.
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● The defendant bank rejected the plaintiff’s demand and claim for the payment of the value of
the CTDs.
● Dela Cruz’ loan with the defendant bank fell due and on August 5, 1983, the latter set-off
and applied the time deposits in question to the payment of the matured loan.
● The plaintiff filed the instant complaint.
ARGUMENTS Petitioner (Caltex):

Faulted respondent court in ruling that the subject CTDs are non-negotiable instruments, despite
being clearly negotiable instruments.
Respondent (CA):
CTDs in question are not negotiable instruments.
LOWER RTC: The lower court dismissed the complaint filed by herein petitioner against private
COURT respondent bank.
RULING
CA: The CA affirmed the lower court's dismissal of the complaint.
ISSUE/S Whether or not the subject CTDs are negotiable instruments.
SC RULING YES. The subject CTDs are negotiable instruments.
Section 1 of Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable:

(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The
parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo
P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the
depositor referred to in the CTDs is no other than Mr. Angel de la Cruz.
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 circumstances 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.
Contrary to what the respondent court held, the CTDs are negotiable instruments. The documents
provide that the amounts deposited shall be repayable to the depositor. The depositor is the
"bearer." The documents do not say that the depositor is Angel de la Cruz and that the
amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to
the bearer of the documents or, for that matter, whosoever may be the bearer at the time of
presentment.
2F 2020-2021
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. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is
the depositor "insofar as the bank is concerned," but obviously other parties not privy to the import to
the transaction between them would not be in a position to know that the depositor is not the bearer
stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind
the plain import of what is written thereon to unravel the agreement of the parties thereto through
facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the
Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation
of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.
NOTES Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one
person to another in such a manner as to constitute the transferee the holder thereof, and a holder
may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof, in
the present case, however, there was no negotiation in the sense of a transfer of the legal title
to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the
bearer CTDs would have sufficed. Here, the delivery thereof only as security for the
purchases of Angel de la Cruz could at the most constitute petitioner only as a holder for
value by reason of his lien.
2F 2020-2021
TOPIC NEGOTIABILITY MODULE 2

CASE #2
CASE TITLE HONGKONG AND SHANGHAI BANKING CORP (HSBC) V GR NO 166018
COMMISSIONER OF INTERNAL REVENUE (CIR)
Leonardo-De Castro J DAT
PONENTE
E JUNE 4 2014
DOCTRINE These electronic message instructions cannot be considered negotiable instruments as

they lack the feature of negotiability, which is the ability to be transferred. The instructions
are mere memoranda and entered as such in the books of account of the local bank and
the actual debiting of the payor’s local or foreign currency account in the PH is the actual
transaction that should be properly entered as such.
FACTS
HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts,
which are managed 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.” In purchasing shares of stock and
other investment in securities, the investor-clients would send electronic messages from
abroad instructing HSBC to debit their local or foreign currency accounts and to pay the
purchase price therefor upon receipt of the securities.
HSBC purchased and paid Documentary Stamp Tax (DST) from September -
December 1997 and also from January - December 1998 amounting to P19,572,992.10
and P32,904,437.30 respectively. On August 23, 1999 the BIR thru Commissioner
Beethoven Rualo issues BIR Ruling No 132-99 to the effect that instructions or advises
from abroad on the management of funds located in the PH which do not involve
transfer of funds from abroad are not subject to DST.
HSBC filed an administrative claim for the refund of the amounts allegedly representing
erroneously paid DST to the BIR. HSBC did not act upon the matter and so HSBC
brought the matter to the CTA.
LOWER CTA: IN FAVOR OF HSBC. HSBC is entitled to tax refund credit because Sections 180
COURT and 181 of the 1997 Tax Code do not apply to electronic message instructions transmitted
RULINGS: by HSBC’s non-resident investor-clients. These electronic message instructions cannot
be considered negotiable instruments as they lack the feature of negotiability, which
is the ability to be transferred. The instructions are mere memoranda and entered as
such in the books of account of the local bank and the actual debiting of the payor’s local or
foreign currency account in the PH is the actual transaction that should be properly entered
as such.
CA: REVERSED. The DST was exacted on HSBC’s exercise of its privilege under its
drawee-drawer relationship with its client-investor through the execution of a specific
instrument which, in the case at bar, is the acceptance of the order for payment of money
ARGUMENTS Respondent CIR: Section 181 of 1997 Tax Code imposes DST on the acceptance or
payment of a bill of exchange or order for the payment of money.
2F 2020-2021
ISSUE/S Whether or not the electronic messages of HSBC’s investor-clients are subject to DST
SC RULING NO. 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 electronic message instructions is not the transaction contemplated under Section 181
of the Tax Code as such as 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
electronic message instructions are not negotiable instruments as they lack the
feature of negotiability which is the ability to be transferred. Moreover, they do not
comply with the requisites of Section 1 of NIL. They are not signed by the investor-
clients. 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. They are not bills of exchange.
Section 181 levies DST on either (a) acceptance or (b) payment of a foreign bill of
exchange or order for the payment of money that was drawn abroad but payable in the
Philippines. Acceptance applies only to bills of exchange. It is the manifestation of the
drawee’s consent to the drawer’s order to pay money and the expression of the drawee’s
promise to pay.
NOTES
2F 2020-2021
TOPIC Requisites of Negotiability MODULE

CASE #3 #2
CASE TITLE Rivera vs. Spouses Chua GR NO 184458
184472
PEREZ, J. DAT
PONENTE January 14, 2015
E
DOCTRINE A Promissory Note must comply with the requisites before it may be considered as a
negotiable instrument.
FACTS The parties were friends and kumpadres for a long time already. Rivera obtained
a loan from the Spouses Chua evidenced by a Promissory Note. The relevant
parts of the note are the following:
(a) FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses

SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of One Hundred Twenty
Thousand Philippine Currency (_120,000.00) on December 31, 1995.
(b) It is agreed and understood that failure on my part to pay the amount of
(_120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. I
agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from
the date of default until the entire obligation is fully paid for.
Three years from the date of payment stipulated in the promissory note, Rivera,
issued
and delivered to Spouses Chua two (2) checks drawn against his account at
Philippine Commercial International Bank (PCIB) but upon presentment for
payment, the two checks were dishonored for the reason “account closed.” As of
31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00
covering the principal of P120,000.00 plus five percent (5%) interest per month
from 1 January 1996 to 31 May 1999.
The Spouses Chua alleged that they have repeatedly demanded payment from
Rivera to no avail. Because of Rivera’s unjustified refusal to pay, the Spouses
Chua were constrained to file a suit before the MeTC, Branch 30, Manila.
ARGUMENTS Petitioner (Name):

a. Rodrigo Rivera
Respondent (Name):
a.SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA
LOWER RTC: The MeTC ruled against Rivera requiring him to pay the spouses Chua
COURT P120,000.00 plus stipulated interest at the rate of 5% per month from 1 January
RULING
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1996, and legal interest at the rate of 12% percent per annum from 11 June
1999 and was affirmed by the RTC of Manila.
CA: The Court of Appeals further affirmed the decision upon appeal of the two
inferior courts but with modification of lowering the stipulated interest to 12% per
annum.
ISSUE/S 1. Whether or not the Promissory Note executed as evidence of loan falls under
Negotiable Instruments Law.
2. Whether or not a demand from spouses Chua is needed to make Rivera liable
SC RULING
1. NO, the Promissory Note executed as evidence of loan does not fall under
Negotiable Instruments Law. The instrument is still governed by the Civil Code as
to interpretation of their obligations. The Supreme Court held that the Instrument
was not able to meet the requisites laid down by Section 1 of the Negotiable
Instruments Law as the instrument was made out to specific persons, herein
respondents, the Spouses Chua, and not to order or to bearer, or to the order of
the Spouses Chua as payees.
2. NO. Article 1169 of the Civil Code explicitly provides that the demand by the
creditor shall not be necessary in order that delay may exist when the obligation
or the law expressly so declare. The clause in the Promissory Note containing
the stipulation of interest (letter B in the above facts) which expressly requires the
debtor (Rivera) to pay a 5% monthly interest from the “date of default” until the
entire obligation is fully paid for. The parties evidently agreed that the maturity of
the obligation at a date certain, 31 December 1995, will give rise to the obligation
to pay interest.
NOTES
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TOPIC Payable to Order or Bearer MODULE 2

CASE #4
CASE TITLE PEOPLE v. GILBERT REYES WAGAS GR NO G.R. No.
157943
BERSAMIN, J. DAT
PONENTE September 04, 2013
E
DOCTRINE Under the Negotiable Instruments Law, check payable to cash is payable to the bearer and
could be negotiated by mere delivery without the need of an indorsement.
FACTS
● Ligaray testified that on April 30, 1997, Wagas placed an order for 200 bags of rice
over the telephone.
● He released the goods to Wagas on April 30, 1997 and at the same time received
Bank of the Philippine Islands (BPI) Check No. 0011003 for P200,000.00 payable to
cash and postdated May 8, 1997.
● He later deposited the check with Solid Bank, his depository bank, but the check
was dishonored due to insufficiency of funds.
● He called Wagas about the matter, and the latter told him that he would pay upon his
return to Cebu; and that despite repeated demands, Wagas did not pay him.
● On cross-examination, Ligaray admitted that he did not personally meet Wagas
because they transacted through telephone only; that he released the 200 bags of
rice directly to Robert Cañada, the brother-in-law of Wagas, who signed the delivery
receipt upon receiving the rice.
● In his defense, Wagas himself testified. He admitted having issued BPI Check No.
0011003 to Cañada, his brother-in-law, not to Ligaray. He denied having any
telephone conversation or any dealings with Ligaray. He explained that the check
was intended as payment for a portion of Cañada’s property that he wanted to buy,
but when the sale did not push through, he did not anymore fund the check.
● On cross-examination, the Prosecution confronted Wagas with a letter dated July 3,
1997 apparently signed by him and addressed to Ligaray’s counsel, wherein he
admitted owing Ligaray P200,000.00 for goods received.
● Wagas admitted the letter, but insisted that it was Cañada who had transacted with
Ligaray, and that he had signed the letter only because his sister and her husband
(Cañada) had begged him to assume the responsibility. On redirect examination,
Wagas declared that Cañada, a seafarer, was then out of the country; that he signed
the letter only to accommodate the pleas of his sister and Cañada, and to avoid
jeopardizing Cañada’s application for overseas employment. The Prosecution
subsequently offered and the RTC admitted the letter as rebuttal evidence.
ARGUMENT
S Respondent (Name):GILBERT REYES WAGAS
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a.it was highly incredible that Ligaray, a businessman, would have entered into a
transaction with him involving a huge amount of money only over the telephone
b.the evidence pointed to Cañada as the person with whom Ligaray had transacted,
considering that the delivery receipt, which had been signed by Cañada, indicated that the
goods had been “Ordered by ROBERT CAÑADA,” that the goods had been received by
Cañada in good order and condition
c. Cañada had negotiated the check to Ligaray; and that the element of deceit had not
been established because it had not been proved with certainty that it was him who had
transacted with Ligaray over the telephone.
LOWER RTC:
COURT RTC convicted Wagas of estafa.
RULING
CA:
n/a Wagas appealed directly to this Court by notice of appeal.
ISSUE/S
Whether or not the prosecution established beyond reasonable doubt that it was
Wagas who had defrauded Ligaray by issuing the check.
SC RULING
No, the prosecution did not establish beyond reasonable doubt that it was Wagas
who had defrauded Ligaray by issuing the check.
Firstly, Ligaray expressly admitted that he did not personally meet the person with whom he
was transacting over the telephone.
Secondly, the check delivered to Ligaray was made payable to cash. Under the
Negotiable Instruments Law, this type of check was payable to the bearer and could
be negotiated by mere delivery without the need of an indorsement. This rendered it
highly probable that Wagas had issued the check not to Ligaray, but to somebody else like
Cañada, his brother-in-law, who then negotiated it to Ligaray. Relevantly, Ligaray confirmed
that he did not himself see or meet Wagas at the time of the transaction and thereafter, and
expressly stated that the person who signed for and received the stocks of rice was
Cañada.
It bears stressing that the accused, to be guilty of estafa as charged, must have used the
check in order to defraud the complainant. What the law punishes is the fraud or deceit, not
the mere issuance of the worthless check. Wagas could not be held guilty of estafa simply
because he had issued the check used to defraud Ligaray. The proof of guilt must still
clearly show that it had been Wagas as the drawer who had defrauded Ligaray by means of
the check.
Thirdly, Ligaray admitted that it was Cañada who received the rice from him and who
delivered the check to him. Considering that the records are bereft of any showing that
Cañada was then acting on behalf of Wagas, the RTC had no factual and legal bases to
conclude and find that Cañada had been acting for Wagas. This lack of factual and legal
bases for the RTC to infer so obtained despite Wagas being Cañada’s brother-in-law.
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Finally, Ligaray’s declaration that it was Wagas who had transacted with him over the
telephone was not reliable because he did not explain how he determined that the person
with whom he had the telephone conversation was really Wagas whom he had not yet met
or known before then. We deem it essential for purposes of reliability and trustworthiness
that a telephone conversation like that one Ligaray supposedly had with the buyer of rice to
be first authenticated before it could be received in evidence.
NOTES
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TOPIC Omissions and Provisions that do not affect negotiability MODULE 2

CASE #5
CASE TITLE Metropolitan Bank & Trust Company vs CA GR NO 88866
G.R. no. 88866, February 18, 1991
DAT
PONENTE
Cruz, J. E February 18, 1991
DOCTRINE Treasury warrants are not negotiable instruments.

An order to promise to pay out of a particular fund is not unconditional
FACTS ● Eduardo Gomez opened an account with Golden Savings and deposited 38 treasury
warrants.
● All warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden
Savings and deposited to its Savings account in Metrobank branch in Calapan,
Mindoro. They were sent for clearance.
● Meanwhile, Gomez is not allowed to withdraw from his account, later, however,
“exasperated” over Castillo’s repeated inquiries and also as an accommodation for a
“valued” client, Metrobank decided to allow Golden Savings to withdraw from
proceeds of the warrants.
● In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his
own account.
● Metrobank informed Golden Savings that 32 of the warrants had been dishonored by
the Bureau of Treasury and demanded the refund by Golden Savings of the amount
it had previously withdrawn, to make up the deficit in its account. The demand was
rejected. Metrobank then sued Golden Savings.
ARGUMENTS Petitioner (Name): N/A
Respondent (Name): N/A
LOWER RTC: N/A

COURT
RULING CA: N/A
ISSUE/S
Whether treasury warrants are negotiable instruments
SC RULING
NO. The treasury warrants are not negotiable instruments. Clearly stamped on their face is the
word: non negotiable. Moreover, and this is of equal significance, it is indicated that they are
payable from a particular fund, to wit, Fund 501. An instrument to be negotiable instrument
must contain an unconditional promise or orders to pay a sum certain in money.
As provided by Sec 3 of NIL an unqualified order or promise to pay is unconditional though coupled
with: 1st, an indication of a particular fund out of which reimbursement is to be made or a particular
account to be debited with the amount; or 2nd, a statement of the transaction which give rise to the
instrument. But an order to promise to pay out of a particular fund is not unconditional. The
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indication of Fund 501 as the source of the payment to be made on the treasury warrants makes
the order or promise to pay “not conditional” and the warrants themselves non-negotiable. There
should be no question that the exception on Section 3 of NIL is applicable in the case at bar.
NOTES
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TOPIC Bearer v. Order Instrument MODULE 2

CASE #6
CASE TITLE PHILIPPINE NATIONAL BANK vs. ERLANDO T. RODRIGUEZ GR NO 170325
and NORMA RODRIGUEZ
J. REYES DAT
PONENTE
E Sept 26, 2008
DOCTRINE There is a commercial bad faith exception to the fictitious-payee rule. A showing of
commercial bad faith on the part of the drawee bank, or any transferee of the check for that
matter, will work to strip it of this defense. The exception will cause it to bear the loss.
Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party
to the fraudulent scheme.
FACTS Spouses Erlando and Norma Rodriguez were clients of Philippine National Bank (PNB),
Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking
accounts, namely, PNBig Demand Deposit No. 810624-6 under name Erlando and/or
Norma Rodriguez, and Account No. 810480-4 under the account name Erlando T.
Rodriguez.
The spouses were engaged in the informal lending business. They had a discounting
arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees.
PEMSLA regularly granted loans to its members. It was PEMSLA’s policy not to approve
applications for loans of members with outstanding debts. Some PEMSLA officers devised
a scheme to obtain additional loans despite their outstanding loan accounts. They took out
loans in the names of unknowing members, without the knowledge or consent of the latter.
The PEMSLA checks issued for these loans were then given to the spouses for
rediscounting. The officers carried this out by forging the indorsement of the named
payees. In return, the spouses issued their personal checks (Rodriguez checks) in the
name of the members and delivered the checks to an officer of PEMSLA. The PEMSLA
checks, on the other hand, were deposited by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings
account without any indorsement from the named payees. This was through the facilitation
of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch.
November 1998 to February 1999, the spouses issued (69) checks, in the total amount of
P2,345,804.00. These were payable to (47) individual payees who were all members of
PEMSLA.
PNB found out about these fraudulent acts. To put a stop, PNB closed the current account
of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or
dishonored for the reason "Account Closed." The corresponding Rodriguez checks,
however, were deposited as usual to the PEMSLA savings account. The amounts were
duly debited from the Rodriguez account.
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Spouses Rodriguez filed a civil complaint for damages against PEMSLA, the Multi-Purpose
Cooperative of Philnabankers (MCP), and petitioner PNB. They sought to recover the value
of their checks.
ARGUMENTS The spouses contended that because PNB credited the checks to the PEMSLA account
even without indorsements, PNB violated its contractual obligation to them as depositors.
PNB paid the wrong payees, hence, it should bear the loss.
In its motion to dismiss, PNB argued that the claim for damages should come from the
payees of the checks, and not from spouses Rodriguez. Since there was no demand from
the said payees, the obligation should be considered as discharged. PNB further claimed it
is not liable for the checks which it paid to the PEMSLA account without any indorsement
from the payees. The bank contended that spouses Rodriguez, the makers, actually did not
intend for the named payees to receive the proceeds of the checks. Consequently, the
payees were considered as "fictitious payees" and the checks are bearer instruments
negotiable by mere delivery. The motion was denied.
LOWER RTC: in favor of spouses Rodriguez.

COURT PNB appealed to the CA on the ground that the disputed checks should be considered as
RULING payable to bearer and not to order.
CA: reversed RTC.

The CA concluded the checks were bearer instruments, thus they do not require
indorsement for negotiation. The payees in the checks were "fictitious payees" because
they were not the intended payees at all. However, CA reversed itself via an Amended
Decision, thereby ruling PNB liable to Sps Rodriuez. The award for damages was also
deemed appropriate in view of the failure of PNB to treat the Rodriguez account with the
highest degree of care considering the fiduciary nature of their relationship.
ISSUE/S
Whether the subject checks are payable to order or to bearer and who bears the loss?
SC RULING
The instrument is an order instrument and PNB is liable. As a rule, when the payee is
fictitious or not intended to be the true recipient of the proceeds, the check is considered as
a bearer instrument.
The distinction between bearer and order instruments lies in their manner of negotiation.
Under Section 30 of the NIL, an order instrument requires an indorsement from the payee
or holder before it may be validly negotiated. A bearer instrument, on the other hand, does
not require an indorsement to be validly negotiated. It is negotiable by mere delivery.
A check that is payable to a specified payee is an order instrument. However, under

Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be
considered as a bearer instrument if it is payable to the order of a fictitious or nonexisting
person, and such fact is known to the person making it so payable. Thus, checks issued to
"Prinsipe Abante" or "Si Malakas at si Maganda," who are well-known characters in
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Philippine mythology, are bearer instruments because the named payees are fictitious and
non-existent
A review of US jurisprudence yields that an actual, existing, and living payee may also be
"fictitious" if the maker of the check did not intend for the payee to in fact receive the
proceeds of the check. This usually occurs when the maker places a name of an existing
payee on the check for convenience or to cover up an illegal activity. Thus, a check made
expressly payable to a non-fictitious and existing person is not necessarily an order
instrument. If the payee is not the intended recipient of the proceeds of the check, the
payee is considered a "fictitious" payee and the check is a bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer
bears the loss. When faced with a check payable to a fictitious payee, it is treated as a
bearer instrument that can be negotiated by delivery. The underlying theory is that one
cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon.
And since the maker knew this limitation, he must have intended for the instrument to be
negotiated by mere delivery. Thus, in case of controversy, the drawer of the check will bear
the loss. This rule is justified for otherwise, it will be most convenient for the maker who
desires to escape payment of the check to always deny the validity of the indorsement. This
despite the fact that the fictitious payee was purposely named without any intention that the
payee should receive the proceeds of the check.
However, there is a commercial bad faith exception to the fictitious-payee rule. A showing
of commercial bad faith on the part of the drawee bank, or any transferee of the check for
that matter, will work to strip it of this defense. The exception will cause it to bear the loss.
Commercial bad faith is present if the transferee of the check acts dishonestly, and is a
party to the fraudulent scheme.
Rodriguez checks were payable to specified payees. It is unrefuted that the 69 checks were
payable to specific persons. Likewise, it is uncontroverted that the payees were actual,
existing, and living persons who were members of PEMSLA that had a rediscounting
arrangement with spouses Rodriguez.
For the fictitious-payee rule to be available as a defense, PNB must show that the makers
did not intend for the named payees to be part of the transaction involving the checks. At
most, the bank’s thesis shows that the payees did not have knowledge of the existence of
the checks. This lack of knowledge on the part of the payees, however, was not tantamount
to a lack of intention on the part of respondents-spouses that the payees would not receive
the checks’ proceeds. Considering that respondents-spouses were transacting with
PEMSLA and not the individual payees, it is understandable that they relied on the
information given by the officers of PEMSLA that the payees would be receiving the
checks. Verily, the subject checks are presumed order instruments. This is because, as
found by both lower courts, PNB failed to present sufficient evidence to defeat the claim of
respondents-spouses that the named payees were the intended recipients of the checks’
proceeds. The bank failed to satisfy a requisite condition of a fictitious-payee situation –
that the maker of the check intended for the payee to have no interest in the transaction.
Because of a failure to show that the payees were "fictitious" in its broader sense, the
fictitious-payee rule does not apply. Thus, the checks are to be deemed payable to order.
Consequently, the drawee bank bears the loss. A bank that regularly processes checks that
are neither payable to the customer nor duly indorsed by the payee is apparently grossly
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negligent in its operation. In a checking transaction, the drawee bank has the duty to verify
the genuineness of the signature of the drawer and to pay the check strictly in accordance
with the drawer’s instructions, i.e., to the named payee in the check. It should charge to the
drawer’s accounts only the payables authorized by the latter. Otherwise, the drawee will be
violating the instructions of the drawer and it shall be liable for the amount charged to the
drawer’s account.
In the case at bar, respondents-spouses were the bank’s depositors. The checks were
drawn against respondents-spouses’ accounts. PNB, as the drawee bank, had the
responsibility to ascertain the regularity of the indorsements, and the genuineness of the
signatures on the checks before accepting them for deposit. Lastly, PNB was obligated to
pay the checks in strict accordance with the instructions of the drawers. Petitioner
miserably failed to discharge this burden. The checks were presented to PNB for deposit by
a representative of PEMSLA absent any type of indorsement, forged or otherwise. The
facts clearly show that the bank did not pay the checks in strict accordance with the
instructions of the drawers, respondents-spouses. Instead, it paid the values of the checks
not to the named payees or their order, but to PEMSLA, a third party to the transaction
between the drawers and the payees.
Moreover, PNB was negligent in the selection and supervision of its employees.
NOTES A check is "a bill of exchange drawn on a bank payable on demand." It is either an order or
a bearer instrument. Sections 8 and 9 of the NIL states:
SEC. 8. When payable to order. – The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his order. It may be drawn payable to
the order of –
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being. Where the instrument is payable to order, the
payee must be named or otherwise indicated therein with reasonable certainty.
SEC. 9. When payable to bearer. – The instrument is payable to bearer –

(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such fact is
known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) Where the only or last indorsement is an indorsement in blank
SEC. 30. What constitutes negotiation. – An instrument is negotiated when it is transferred

from one person to another in such manner as to constitute the transferee the holder
thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated
by the indorsement of the holder completed by delivery.
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TOPIC MODULE
CASE #7
CASE TITLE Rodrigo Rivera v. Sps. Salvador and Violeta Chua GR NO 184458
Perez, J. DAT January 14, 2015

PONENTE
E
DOCTRINE
FACTS On February 24, 1995, having been friends for a very long time, Rivera obtained a loan from
Sps. Chua for P120,000. 3 years from the date of supposed payment, Rivera issued 2 checks
in favor of Sps. Chua drawn against Rivera’s current account with the Philippine Commercial
Bank. One check was for P25,000 and the other check with blank as to the payee and
amount. Upon presentment for payment, the two checks were dishonored for the reason
“account closed.”
As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00. The
Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail.
Because of Rivera’s unjustified refusal to pay, the Spouses Chua filed a suit against Rivera
before the MeTC Manila.
ARGUMENTS Rodrigo Rivera:
Rivera questioned the validity of the promissory note and argued further that even assuming
that the promissory note was valid, demand was therefore needed.
LOWER MeTC and RTC: Both trial courts found the Promissory Note as authentic and validly bore the
COURT signature of Rivera.
RULING
CA: Undaunted, Rivera appealed to the Court of Appeals which affirmed Rivera’s liability
under the Promissory Note
ISSUE/S Whether or not the promissory note was considered a valid negotiable instrument.
SC RULING No. The Promissory Note in this case is made out to specific persons, herein respondents,
the Spouses Chua, and not to order or to bearer, or to the order of the Spouses Chua as
payees. However, even if Rivera’s Promissory Note is not a negotiable instrument and
therefore outside the coverage of Section 70 of the NIL which provides that presentment for
payment is not necessary to charge the person liable on the instrument, Rivera is still liable
under the terms of the Promissory Note that he issued.
The Promissory Note is unequivocal about the date when the obligation falls due and
becomes demandable—31 December 1995. As of 1 January 1996, Rivera had already
incurred in delay when he failed to pay the amount of P120,000.00 due to the Spouses Chua
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on 31 December 1995 under the Promissory Note. Demand was no longer necessary since
Article 1169 of the Civil Code provides that the demand by the creditor shall not be necessary
in order that delay may exist when the obligation or the law expressly so declare;
NOTES
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TOPIC Interpretation of Negotiable Instruments MODULE

CASE #8 2
CASE TITLE Republic Planters Bank v. CA and Canlas GR NO 93073
DAT
PONENTE
Campos, Jr E December 21, 1992
DOCTRINE
Where an instrument containing the words “I promise to pay” is signed by 2 or more

persons, they are deemed to be jointly and severally liable thereon. The fact that a 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.
Where the instrument is wanting in any material particular, the person in possession has
prima facie authority to complete it by filling out the blanks. However, the instrument must
be filled up strictly in accordance with the authority given and within a reasonable time, so
that it may be enforced against any person who became a party thereto prior to its
completion.
FACTS
Shozo Yamaguchi and Private Respondent Fermin Canlas were the President/COO and
Treasurer, respectively, of Worldwide Garment Manufacturing, Inc. (WGM). They were both
authorized to apply for credit facilities with Petitioner Republic Planters Bank in the forms of
export advances and letters of credit/trust receipt accommodations. Petitioner issued 9
promissory notes 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…”
On the bottom-right margin of the promissory notes were the printed names and signatures
of Yamaguchi and Canlas, with the phrase “in his personal capacity” typewritten. At the
bottom of the promissory notes, the following was written:
“Please credit proceeds of this note to:

____ Savings Account ____ Current Amount
No. 1372-00257-6
Of WORLDWIDE GARMENT MFG. CORP.”
These entries were separated from the text of the notes with a bold line which ran
horizontally across the pages. The promissory notes had a rubber-stamped name of WGM
above the signatures of Yamaguchi and Canlas.
(WGM changed its corporate name to Pinch Manufacturing Corporation (PMC) in 1982.)
On February 5, 1982, Republic Planters Bank (Petitioner) filed a complaint for recovery of
sums of money, covered by 9 promissory notes with interest thereon. The complaint was
originally brought against WGM but was later amended to drop the latter as defendant and
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substitute PMC in its place. Only Fermin Canlas (Private Respondent) filed an Amended
Answer, wherein he denied having issued the promissory notes in question, since he was
not an officer of PMC but instead works for WGM. He also said that when he issued and
signed the promissory notes in question, they were still blank and had no typewritten
entries.
The trial court ruled that PMC, Canlas, and Yamaguchi were jointly and severally liable for
the sum of money claimed by Petitioner with 16% interest, plus attorney’s fees. On the
other hand, the CA ruled that Yamaguchi and Canlas are jointly and severally liable on the
promissory notes. However, PMC is not thereon, because the previous obligations incurred
by the company as WGM are now extinguished.
ARGUMENTS
Petitioner (Republic Planters Bank):
Canlas and Yamaguchi signed the promissory notes unconditionally, therefore, they should
be held solidarily liable with PMC for the payments
Respondent (Canlas):
a.He should not be held personally liable for authorized corporate acts
b. He is not an employee of PMC, since he was employed by WGM
c. The promissory notes were in blank and when he received and signed them
LOWER
COURT RTC: The trial court ruled that PMC, Canlas, and Yamaguchi were jointly and severally
RULING liable for the sum of money claimed by Petitioner at 16% interest, plus attorney’s fees.
CA: The trial court correctly ruled that Yamaguchi and Canlas are jointly and severally
liable on the promissory notes. However, PMC is not thereon, because the previous
obligations incurred by the company as WGM are now extinguished.
ISSUE/S
Whether or not Canlas is solidarily liable with PMC and Yamaguchi for the payment of the
promissory notes
SC RULING
(1) The lower courts correctly ruled that Canlas is solidarily liable on the promissory
notes bearing his signature, for the following reasons:
● Under the NIL, a person who writes his name on the face of a promissory
note is a marker and shall be held liable as such. Canlas cannot escape
liability.
● Where an instrument containing the words “I promise to pay” is signed by 2 or

more persons, they are deemed to be jointly and severally liable thereon. The
fact that a 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.
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● The phrase “in his personal capacity” does not affect Canlas’ liability, because
with or without this phrase, he is still liable as a co-maker of the notes.
● While the general rule is that duly authorized officers or directors of a

company bear no personal liability for acts done or contracts entered into by
the corporation, Section 20 of the NIL nonetheless provides that if the agent
signing a negotiable instrument does not expressly indicate that he is acting in
a representative capacity, then he is not excepted from liability.
(2) The CA erred in holding that an amendment in the Articles of Incorporation of WGM
effecting a change of corporate name extinguishes the personality of the original
corporation. A change in the corporate name does not make a new corporation, and
whether effected by special act or under a general law, the said change has no
effect on the identity of the corporation in terms of its property, rights, and liabilities.
(3) The promissory notes were not received by Canlas literally “in blank.” The
promissory notes in question were the basic printed form generally used by
commercial banking institutions, and were intentionally incomplete so that the client
may fill out the necessary information.
● Section 14 of the NIL provides that where the instrument is wanting in any
material particular, the person in possession has prima facie authority to
complete it by filling out the blanks.
NOTES
2F 2020-2021
TOPIC Negotiable and Non-Negotiable Instrument MODULE 3

CASE #1
CASE TITLE Salas v. Hon. Court of Appeals GR NO 76788
ssdsdsds
Fernan, C.J.
PONENTE DATE
January 22, 1990
DOCTRINE The instrument in order to be considered negotiable must contain the so-called "words of
negotiability — i.e., must be payable to 'order' or 'bearer.'"
FACTS
● Petitioner Juanita Salas bought a motor vehicle from the Violago Motor Sales Corporation
(VMS) for P58,138.20 as evidenced by a promissory note. This note was subsequently
endorsed to private respondent Filinvest Finance & Leasing Corporation (Filinvest) which
financed the purchase.
● Salas defaulted in her installments beginning May 21, 1980 allegedly due to a discrepancy
in the engine and chassis numbers of the vehicle delivered to her and those indicated in
the sales invoice, certificate of registration and deed of chattel mortgage, which fact she
discovered when the vehicle figured in an accident on May 9, 1980.
● This failure to pay prompted Filinvest to initiate a civil case for a sum of money against
Salas before the RTC of Pampanga.
ARGUMENT
S Petitioner: JUANITA SALAS
● Petitioner argues that in the light of the provision of the law on sales by description which
she alleges is applicable here, no contract ever existed between her and VMS and therefore
none had been assigned in favor of private respondent.
● She contends that it is not necessary, as opined by the appellate court, to implead VMS as
a party to the case before it can be made to answer for damages because VMS was earlier
sued by her for "breach of contract with damages" before the Regional Trial Court of
Olongapo City,
Respondents: HON. COURT OF APPEALS and FILINVEST FINANCE & LEASING

CORPORATION
● Filinvest in its comment, prays for the dismissal of the petition and counters that the issues
raised and the allegations adduced therein are a mere rehash of those presented and
already passed upon in the court below, and that the judgment in the "breach of contract"
suit cannot be invoked as an authority as the same is still pending.
LOWER
COURT RTC:
RULING
● Ordered Salas to pay Filinvest the sum of P28,414.00 with interest thereon at the rate of
14% from October 2, 1980 until the said sum is fully paid. The counterclaim of Salas was
dismissed.
● Both Salas and Filinvest appealed the aforesaid decision to the Court of Appeals.
● Imputing fraud, bad faith and misrepresentation against VMS for having delivered a
different vehicle to Salas, the latter prayed for a reversal of the trial court's decision so that
she may be absolved from the obligation under the contract.
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CA:
● CA rendered its decision ordering Salas to pay Filinvest the remaining balance of
P54,908.30 at 14% per annum from October 2, 1980 until full payment.
● Salas’ motion for reconsideration was denied; hence, the present recourse.
ISSUE/S
Whether or not the promissory note in question is a negotiable instrument which will bar
completely all the available defenses of the petitioner against private respondent.
SC RULING
● YES. The Supreme Court ruled that the questioned promissory note is a NEGOTIABLE
INSTRUMENT having complied with the requisites under the law as follows: [a] it is in
writing and signed by the maker Juanita Salas; [b] it contains an unconditional
promise to pay the amount of P58,138.20; [c] it is payable at a fixed or determinable
future time which is "P1,614.95 monthly for 36 months due and payable on the 21st day
of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable
to Violago Motor Sales Corporation, or order and as such, [e] the drawee is named or
indicated with certainty.
● It was negotiated by indorsement in writing on the instrument itself payable to the Order of
Filinvest Finance and Leasing Corporation and it is an indorsement of the entire instrument.
● Under the circumstances, there appears to be no question that Filinvest is a HOLDER IN
DUE COURSE, having taken the instrument under the following conditions: [a] it is
complete and regular upon its face; [b] it became the holder thereof before it was overdue,
and without notice that it had previously been dishonored; [c] it took the same in good faith
and for value; and [d] when it was negotiated to Filinvest, the latter had no notice of any
infirmity in the instrument or defect in the title of VMS Corporation.
● Accordingly, Filinvest holds the instrument free from any defect of title of prior parties, and
free from defenses available to prior parties among themselves, and may enforce payment
of the instrument for the full amount thereof. This being so, Salas cannot set up against
Filinvest the defense of nullity of the contract of sale between her and VMS.
● Even assuming that there was in fact deception made upon her in that the vehicle she
purchased was different from that actually delivered to her, this matter cannot be passed
upon this case, where the VMS was never impleaded as a party. Whatever issue is raised
or claim presented against VMS must be resolved in the "breach of contract" case.
NOTES
● Under Section 8 of the Negotiable Instruments Law, there are only two ways by which an
instrument may be made payable to order. There must always be a specified person named
in the instrument and the bill or note is to be paid to the person designated in the instrument
or to any person to whom he has indorsed and delivered the same. Without the words
"or order" or "to the order of", the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent purchaser thereof
will not enjoy the advantages of being a holder of a negotiable instrument, but will merely
"step into the shoes" of the person designated in the instrument and will thus be open to all
defenses available against the latter. (Consolidated Plywood Industries Inc. v. IFC Leasing
and Acceptance Corp)
2F 2020-2021
TOPIC MODULE 3
CASE #2
CASE TITLE SONNY LO vs KJS ECO-FORMWORK SYSTEM PHIL, INC. GR NO
149420
PONENTE YNARES-SANTIAGO, J. DATE October 8, 2003
DOCTRINE
FACTS
Lo, doing business under the name San’s Enterprises, ordered scaffolding equipments from
KJS worth P540,425.80. Lo paid a downpayment of P150,000 and the balance was to be paid
in 10 monthly installments.
KJS delivered the scaffoldings to Lo, who paid the first two installments. However, his business
encountered financial difficulties and he was unable to settle his obligation despite oral and
written demands.
Lo and KJS executed a Deed of Assignment, whereby Lo assigned to KJS his receivables in the
amount of P335,462.14 from Jomero Realty Corporation. The agreement also stipulated: “The
ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs,
executors, administrators, or assigns, shall and will at times hereafter, at the request of said
ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such further
acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to
recover whatever collectibles said ASSIGNOR has in accordance with the true intent and
meaning of these presents.”
When KJS tried to collect the said credit from Jomero, it refused to honor the Deed of
Assignment because it claimed that Lo was also indebted to it. KJS sent a letter to Lo
demanding payment but he refused claiming that his obligation had been extinguished when
they executed the Deed of Assignment.
KJS filed an action for recovery of a sum of money against Lo with the RTC, which dismissed
the complaint on the ground that the assignment of credit extinguished the obligation. However,
the CA held that the Deed of Assignment did not extinguish the obligation of Lo.
ARGUMENT
S Petitioner: During the trial, petitioner argued that his obligation was extinguished with the
execution of the Deed of Assignment of credit.
Respondent: Respondent, for its part, presented the testimony of its employee, Almeda
Bañaga, who testified that Jomero Realty refused to honor the assignment of credit because it
claimed that petitioner had an outstanding indebtedness to it.
LOWER RTC:
COURT RTC rendered a decision dismissing the complaint on the ground that the assignment of credit
RULING extinguished the obligation.
CA:
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ISSUE/S WON the Deed of Assignment extinguished Lo’s obligation.
SC RULING
NO, he failed to comply with his warranty. In dacion en pago as a special mode of payment,
the debtor offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one sense of the nature of sale – the
creditor is really buying the thing or property of the debtor, payment for which is to be charged
against the debtor’s debt.
The assignment of credit, which is in the nature of a sale of personal property, produced the
effects of a dation in payment, which may extinguish the obligation. However, as in any other
contract of sale, the vendor or assignor is bound by certain warranties. Paragraph 1 of Article
1628 of the Civil Code provides: The vendor in good faith shall be responsible for the existence
and legality of the credit at the time of the sale, unless it should have been sold as doubtful; but
not for the solvency of the debtor, unless it has been so expressly stipulated or unless the
insolvency was prior to the sale and of common knowledge.
Lo, as assignor, is bound to warrant the existence and legality of the credit at the time of the
sale or assignment. When Jomero claimed that it was no longer indebted to Lo since the latter
also had an unpaid obligation to it, it essentially meant that its obligation to Lo has been
extinguished by compensation. As a result, KJS alleged the non-existence of the credit and
asserted its claim to Lo’s warranty under the assignment. Lo was therefore required to make
good its warranty and pay the obligation.
Furthermore, Lo breached his obligation under the Deed of Assignment as he did not “execute
and do all such further acts and deeds as shall be reasonably necessary to effectually enable
said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in accordance with the
true intent and meaning of these presents.” By warranting the existence of the credit, Lo should
have ensured its performance in case it is found to be inexistent. He should be held liable to pay
to KJS the amount of his indebtedness
NOTES
2F 2020-2021
TOPIC MODULE 3
CASE #3
CASE TITLE GR NO
ASIA BREWERY, INC. and CHARLIE S. GO vs. EQUITABLE PCI BANK
(now BANCO DE ORO-EPCI, INC.) 190432
PONENTE SERENO, C.J DATE April 25, 2017
DOCTRINE
Delivery; when effectual; when presumed. SEC 16 NIL
FACTS
Petitioner: Asia Brewery, Inc. (ABI) is a corporation organized and existing under the laws of
the Philippines, while petitioner Charlie S. Go (Go) was, at the time of the filing of this Petition,
its assistant VP for finance.
Respondent:PCI Bank is a banking institution also organized and existing under the laws of the
Philippines
23 March 2004, petitioners filed a Complaint for payment, reimbursement, or restitution against
respondent before the RTC. On 7 May 2004, the latter filed its Answer in which it also raised
defense of lack of cause of action. RTC dismissed the Complaint for lack of cause of action,
and also denied respondent's counterclaims. Petitioners moved for reconsideration, but their
motion was denied. September 1996 to July 1998, 10 checks and 16 demand drafts
("instruments") were issued in the name of Charlie Go (total value of P3,785,257.38), bore the
annotation "endorsed by PCI Bank, Ayala Branch, All Prior Endorsement and/or Lack of
Endorsement Guaranteed."
None of the above checks and demand drafts set out reached payee, Charlie S. Go. All of the
above checks and demand drafts fell into the hands of a certain Raymond U. Keh (then a
Sales Accounting Manager of Asia Brewery, Inc.) who falsely pretending to be the payee (Go),
succeeded in opening accounts with PCI Bank in the name of Charlie Go and thereafter
deposited the said checks and demand drafts in said accounts and withdrew the proceeds
thereof to the damage and prejudice of plaintiff Asia Brewery, Inc. Raymond Keh was
convicted of theft and ordered to pay the value of the checks, but nothing was collected,
because he jumped bail and left the country.
ARGUMENT Petitioner (ABI, GO):Petitioners argue that the trial court seriously erred in dismissing their
S Complaint for lack of cause of action.
a. Associated Bank v. CA, in which this Court held "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."
Respondent (PCI): Interpreted parts of the Complaint as an admission that the instruments
had not been delivered to the payee,Go. It argued that the Complaint failed to state a cause of
action and that petitioners had no cause of action against it, because 1) the Complaint failed to
indicate that ABI was a party to any of the instruments; and 2) Go never became the holder or
owner of the instruments due to nondelivery and, hence, did not acquire any right or interest. 3)
the claims were only enforceable against the drawers of the checks and the purchasers of the
demand drafts, and not against it as a mere "presentor bank," because the nondelivery to Go
was analogous to payment to a wrong party.
2F 2020-2021
Cited Development Bank of Rizal v. Sima Wei: “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 xxx
Without the delivery of said checks to petitioner-payee, the former did not acquire any right or
interest therein and cannot therefore assert any cause of action, founded on said checks xxx
xxx xxx petitioner Bank has no privity with them. If at all, it is Sima Wei, the drawer, who would
have a cause of action against her co- respondents, if the allegations in the complaint are
found to be true.
LOWER RTC agreed with the respondent. It ruled that petitioners could not have any cause of action
COURT against respondent, because the instruments had never been delivered; the trial court found
RULING that the former exercised diligence in ascertaining the true identity of Charlie Go, although he
later turned out to be an impostor.
ISSUE/S
WON that even though the checks were not able to reach the payee (Go), the delivery to
payee is presumed? Is NIL Sec 16. applicable?
SC RULING
Petition is Granted. There was a delivery. Even a determination of whether there was "delivery"
in the legal sense necessitates a presentation of evidence. It was erroneous for the RTC to
have concluded that there was no delivery, just because the checks did not reach the payee. It
failed to consider Section 16 of the Negotiable Instruments Law, which envisions instances
when instruments may have been delivered to a person other than the payee. The provision
states: Sec. 16.Delivery; when effectual; when presumed. — Every contract on a negotiable
instrument is incomplete and revocable until delivery of the instrument for the purpose of giving
effect thereto. As between immediate parties and as regards a remote party other than a
holder in due course, the delivery, in order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in
such case, the delivery may be shown to have been conditional, or for a special purpose only,
and not for the purpose of transferring the property in the instrument. But where the instrument
is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so
as to make them liable to him is conclusively presumed. And where the instrument is no longer
in the possession of a party whose signature appears thereon, a valid and intentional delivery
by him is presumed until the contrary is proved.
Hence, in order to resolve whether the Complaint lacked a cause of action, respondent must
have presented evidence to dispute the presumption that the signatories validly and
intentionally delivered the instrument.In the case at bar, petitioners alleged in their Complaint
as follows:
1)They have a legal right to be paid for the value of the instruments. 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."
2)Respondent has a correlative obligation to pay, having guaranteed all prior endorsements.
3)Respondent refused to pay despite demand.

2F 2020-2021
It is of no moment that respondent denies that it has any obligation to pay. In determining the
presence of the elements, the inquiry is confined to the four corners of the complaint.
NOTES
2F 2020-2021
TOPIC MODULE
CASE #4
CASE TITLE RAUL SESBREÑO, petitioner, vs. HON. COURT OF APPEALS, GR NO 89252
DELTA MOTORS CORPORATION AND PILIPINAS BANK,
respondents.
Feliciano, J.
PONENTE DATE May 24, 1993
DOCTRINE
FACTS On 9 February 1981, Raul Sesbreno made a money market placement in the amount of
P300,000 with the Philippine Underwriters Finance Corporation (PhilFinance), with a term of 32
days. PhilFinance issued to Sesbreno the Certificate of Confirmation of Sale of a Delta Motor
Corporation Promissory Note (2731), the Certificate of Securities Delivery Receipt indicating the
sale of the note with notation that said security was in the custody of Pilipinas Bank, and
postdated checks drawn against the Insular Bank of Asia and America for P304,533.33 payable
on 13 March 1981.
The checks were dishonored for having been drawn against insufficient funds. Pilipinas Bank
never released the note, nor any instrument related thereto, to Sesbreno.
Sesbreno learned that the security was issued 10 April 1980, maturing on 6 April 1981, has a
face value of P2,300,833.33 with PhilFinance as payee and Delta Motors as maker, and was
stamped “non-negotiable” on its face.
As Sesbreno was unable to collect his investment and interest thereon, he filed an action for
damages against Delta Motors and Pilipinas Bank.
ARGUMENT Sesbreno:
S Petitioner also made a written demand on 14 July 19813 upon private respondent Delta for the
partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had
assigned to him said Note to the extent of P307,933.33.
Delta:
Delta, however, denied any liability to petitioner on the promissory note, and explained in turn
that it had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC
PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta.
2F 2020-2021
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the
Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the
SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC
LOWER RTC:
COURT
RULING As petitioner had failed to collect his investment and interest thereon, he filed on 28 September
1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21,
against private respondents Delta and Pilipinas. The trial court, in a decision dated 5 August
1987, dismissed the complaint and counterclaims for lack of merit and for lack of cause of
action, with costs against petitioner.
CA:
Court of Appeals denied the appeal and held:
Be that as it may, from the evidence on record, if there is anyone that appears liable for the
travails of plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:
This act of Philfinance in accepting the investment of plaintiff and charging it against DMC PN
No. 2731 when its entire face value was already obligated or earmarked for set-off or
compensation is difficult to comprehend and may have been motivated with bad faith.
Philfinance, therefore, is solely and legally obligated to return the investment of plaintiff,
together with its earnings, and to answer all the damages plaintiff has suffered incident thereto.
Unfortunately for plaintiff, Philfinance was not impleaded as one of the defendants in this case
at bar; hence, this Court is without jurisdiction to pronounce judgement against it.
WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby
affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
ISSUE/S
Whether or not non-negotiability of a promissory note prevents its assignment.
SC RULING Only an instrument qualifying as a negotiable instrument under the relevant statute may be
negotiated either by indorsement thereof coupled with delivery, or by delivery alone if it is in
bearer form.
A negotiable instrument, instead of being negotiated, may also be assigned or transferred. The
legal consequences of negotiation and assignment of the instrument are different.
A negotiable instrument may not be negotiated but may be assigned or transferred, absent an
express prohibition against assignment or transfer written in the face of the instrument.
Herein, there was no prohibition stipulated.
2F 2020-2021
The non-negotiability of the instrument doesn’t mean that it is non-assignable or
transferable. It may still be assigned or transferred in whole or in part, even without the consent
of the promissory note, since consent is not necessary for the validity of the assignment.
In assignment, the assignee is merely placed in the position of the

assignors and acquires the instrument subject to all the defenses that
might have been set up against the original payee.
NOTES
2F 2020-2021
TOPIC Transfer of Negotiable Instrument MODULE 3

CASE #5
CASE TITLE SAN MIGUEL CORPORATION VS PUZON GR NO 167567
Del Castillo, J.
PONENTE DATE September 22,
2010
DOCTRINE
Delivery as the term is used in Section 12 of the Negotiable Instruments Law means that the
party delivering did so for the purpose of giving effect thereto.·
Considering that the second element is that the thing taken belongs to another, it is relevant to
determine whether ownership of the subject check was transferred to petitioner. On this point the
Negotiable Instruments Law provides: Sec. 12. Antedated and postdated.·The instrument is not
invalid for the reason only that it is antedated or postdated, provided this is not done for an illegal
or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title
thereto as of the date of delivery. (Underscoring supplied.) Note however that delivery as the
term is used in the aforementioned provision means that the party delivering did so for the
purpose of giving effect thereto. Otherwise, it cannot be said that there has been delivery of the
negotiable instrument. Once there is delivery, the person to whom the instrument is delivered
gets the title to the instrument completely and irrevocably. If the subject check was given by
Puzon to SMC in payment of the obligation, the purpose of giving effect to the instrument is
evident thus title to or ownership of the check was transferred upon delivery. However, if the
check was not given as payment, there being no intent to give effect to the instrument, then
ownership of the check was not transferred to SMC.
FACTS Respondent Bartolome Puzon owner of Bartenmyk Enterprises, was a dealer of beer products
of petitioner San Miguel Corporation (SMC) for Parañaque City. Puzon purchased SMC
products on credit. To ensure payment and as a business practice, SMC required him to issue
postdated checks equivalent to the value of the products purchased on credit before the same
were released to him. Said checks were returned to Puzon when the transactions covered by
these checks were paid or settled in full.
On December 31, 2000, Puzon purchased products on credit amounting to P11,820,327 for
which he issued, and gave to SMC, Bank of the Philippine Islands (BPI) Check Nos. 27904 (for
P309,500.00) and 27903 (for P11,510,827.00) to cover the said transaction.
On January 23, 2001, Puzon, together with his accountant, visited the SMC Sales Office in
Parañaque City to reconcile his account with SMC. During that visit Puzon allegedly requested
to see BPI Check No. 17657. However, when he got hold of BPI Check No. 27903 which was
attached to a bond paper together with BPI Check No. 17657 he allegedly immediately left the
office with his accountant, bringing the checks with them.
SMC sent a letter to Puzon on March 6, 2001 demanding the return of the said checks. Puzon
ignored the demand hence SMC filed a complaint against him for theft with the City
Prosecutor’s Office of Parañaque City.
ARGUMENT Petitioner (San Miguel Corporation):
S
2F 2020-2021
SMC contends that Puzon was positively identified by its employees to have taken the subject
postdated checks. It also contends that ownership of the checks was transferred to it because
these were issued, not merely as security but were, in payment of Puzon’s purchases. SMC
points out that it has established more than sufficient probable cause to justify the indictment of
Puzon for the crime of Theft.
Respondent (Bartolome Puzon):

On the other hand, Puzon contends that SMC raises questions of fact that are beyond the
province of an appeal on certiorari. He also insists that there is no probable cause to charge
him with theft because the subject checks were issued only as security and he therefore
retained ownership of the same.
LOWER RULING OF THE PROSECUTOR AND THE SECRETARY OF THE DEPARTMENT OF

COURT JUSTICE:
RULING Relationship between [SMC] and [Puzon] appears to be one of credit or creditor-debtor
relationship. The problem lies in the reconciliation of accounts and the non- payment of beer
empties which cannot give rise to a criminal prosecution for theft. Thus, in her July 31, 2001
Resolution, the prosecutor recommended the dismissal of the case for lack of evidence. The
DOJ affirmed the decision of the prosecutor.
CA RULING: The CA found that the postdated checks were issued by Puzon merely as a
security for the payment of his purchases and that these were not intended to be encashed. It
thus concluded that SMC did not acquire ownership of the checks as it was duty bound to return
the same checks to Puzon after the transactions covering them were settled. The CA agreed
with the prosecutor that there was no theft, considering that a person cannot be charged with
theft for taking personal property that belongs to himself.
ISSUE/S Whether or not ownership of the checks was transferred upon delivery
SC RULING No. Ownership of the checks was not transferred upon delivery,
On this point the Negotiable Instruments Law provides:
Sec. 12. Antedated and postdated.·The instrument is not invalid for the reason only that it is
antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The
person to whom an instrument so dated is delivered acquires the title thereto as of the date of
delivery. (Underscoring supplied.)
Note, however, that delivery as the term is used in the aforementioned provision means
that the party delivering did so for the purpose of giving effect thereto. Otherwise, it
cannot be said that there has been delivery of the negotiable instrument. Once there is
delivery, the person to whom the instrument is delivered gets the title to the instrument
completely and irrevocably.
If the subject check was given by Puzon to SMC in payment of the obligation, the purpose of
giving effect to the instrument is evident thus title to or ownership of the check was transferred
upon delivery. However, if the check was not given as payment, there being no intent to give
effect to the instrument, then ownership of the check was not transferred to SMC.
The evidence proves that the check was accepted, not as payment, but in accordance with the
long-standing policy of SMC to require its dealers to issue postdated checks to cover its
receivables. The check was only meant to cover the transaction and in the meantime Puzon
2F 2020-2021
was to pay for the transaction by some other means other than the check. This being so, title to
the check did not transfer to SMC; it remained with Puzon.
NOTES
2F 2020-2021
TOPIC Transfer of Negotiable Instrument MODULE 3

CASE #6
CASE TITLE De La Victoria vs Burgos GR NO 111190
Bellosillo, J
PONENTE DATE
June 27, 1995
DOCTRINE 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
FACTS Respondent Raul Sesbreno filed a complaint for damages against Assistant City Fiscals
Bienvenido N. Mabanto, Jr and Dario D. Rama Jr, before the Regional Trial Court of Cebu City.
Judgment was rendered ordering the defendants to pay 11, 000 to the plaintiff, Sesbreno.
A notice of garnishment was served on petitioner Loreto de la Victoria as City Fiscal of Mandaue
City (where defendant Mabanto, Jr., was then detailed), directing 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, under penalty of law.
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.
ARGUMENT
S Petitioner (De la Victoria):
Petitioner reiterates his position that the salary checks were not owned by Mabanto, Jr.,
because they were not yet delivered to him, and that petitioner as garnishee has no legal
obligation to hold and deliver them to the trial court to be applied to Mabanto, Jr.'s judgment
debt. The thesis of petitioner is that the salary checks still formed part of public funds and
therefore beyond the reach of garnishment proceedings.
LOWER RTC (respondent, Hon Jose Burgos, RTC Judge): The trial Court ordered the petitioner to
COURT immediately comply with its order. It opined that the checks of Mabanto Jr. had already been
RULING released through petitioner by the Department of Justice duly signed by the officer concerned.
There was no sufficient reason for petitioner to hold the checks because they were no longer
government funds and presumably delivered to the payee, conformably with the last sentence
of Sec. 16 of the Negotiable Instruments Law.
ISSUE/S
Whether a check is still in the hands of the maker or its duly authorized representative is owned
by the payee before physical delivery to the latter
SC RULING
The Supreme Court ruled in favor of petitioner.
2F 2020-2021
Garnishment is considered as a species of attachment for reaching credits belonging to the
judgment debtor owing to him from a stranger to the litigation. Emphasis is laid on the phrase
"belonging to the judgment debtor" since it is the focal point in resolving the issues raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his
compensation in the form of checks from the Department of Justice through petitioner as City
Fiscal of Mandaue City and head of office. Under Sec. 16 of the Negotiable Instruments Law,
every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As ordinarily understood, delivery means the
transfer 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 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.
WHEREFORE, the petition is GRANTED.
NOTES
2F 2020-2021
TOPIC Delivery and privity among the parties MODULE 3

CASE #7
CASE TITLE GR NO
Development Bank of Rizal v. Wei 85419
Other respondents: Lee Kian Huat, Mary Cheng Uy, Samson Tung,
Asian Industrial Plastic Corporation And Producers Bank Of The
Philippines
Campos Jr., J.
9 March 1993
PONENTE DATE
DOCTRINE
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.
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.
FACTS
In consideration for a loan extended by petitioner Development Bank (“Bank”) to respondent Sima
Wei, the latter executed and delivered to the former a promissory note, engaging to pay the
petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at
32% per annum. Sima Wei made partial payments on the note, leaving a balance of
P1,032,450.02.
On November 18, 1983, Sima Wei issued two crossed checks payable to the petitioner Bank
drawn against China Banking Corporation, bearing respectively the serial numbers 384934, for
the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks were
allegedly issued in full settlement of the drawer's account evidenced by the promissory note.
These two checks were not delivered to the petitioner Bank 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 Bank's indorsement (forged or
otherwise) to the account of respondent Plastic Corporation, at the Balintawak branch, Caloocan
City, 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 petitioner Bank and bore no indorsement of the
latter. Hence, petitioner bank filed a complaint for a sum of money against the respondents named
above on two causes of action .
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ARGUMENT Respondent (Name):
S a. All of the Respondents, except for Lee Kian Hut, filed a Motion to dismiss for lack of cause of
action.
LOWER RTC:Granted the motion to dismiss

COURT
RULING CA:Granted the motion to dismiss.
ISSUE/S
Whether or not the Bank has an interest over the 2 checks drawn against China Banking
Corporation.
SC RULING
No. The bank has no interest over the 2 checks. The allegations of the petitioner Bank in the
original complaint show that the two (2) China Bank checks, numbered 384934 and 384935, were
not delivered to them. Without the delivery of said checks to petitioner Bank, the former 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.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the
promissory note, and the alternative defendants, including Sima Wei, on the two checks. On
appeal from the orders of dismissal of the Regional Trial Court, petitioner Bank alleged that its
cause of action was not based on collecting the sum of money evidenced by the negotiable
instruments stated but on quasi-delict - a claim for damages on the ground of fraudulent acts and
evident bad faith of the alternative respondents. This was clearly an attempt by the petitioner Bank
to change not only the theory of its case but the basis of his cause of action. It is well-settled that
a party cannot change his theory on appeal, as this would in effect deprive the other party of his
day in court.
Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed from
liability to petitioner Bank under the loan evidenced by the promissory note agreed to by her. Her
allegation that she has paid the balance of her loan with the two checks payable to petitioner Bank
has no merit for, as We have earlier explained, these checks were never delivered to petitioner
Bank. And even granting, without admitting, that there was delivery to petitioner Bank, the delivery
of checks in payment of an obligation does not constitute payment unless they are cashed or their
value is impaired through the fault of the creditor. None of these exceptions were alleged by
respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the
promissory note by some other cause, petitioner Bank has a right of action against her for the
balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with
them. Since petitioner Bank never received the checks on which it based its action against said
respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus,
anything which the respondents may have done with respect to said checks could not have
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prejudiced petitioner Bank. It had no right or interest in the checks which could have been violated
by said respondents. Petitioner Bank has therefore no cause of action against said respondents,
in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who would have a cause of
action against her co-respondents, if the allegations in the complaint are found to be true
NOTES
2F 2020-2021
TOPIC Indorsement MODULE 2
CASE #8acca 3
CASE TITLE BANK OF THE PHILIPPINE ISLANDS v. COURT OF G.R. NO. 136202
APPEALS
PONENTE Azcuna, J DATE

January 25, 2007
DOCTRINE A bank generally has a right of set-off over the deposits therein for the payment of any
withdrawals on the part of a depositor.
FACTS On December 5, 1991, A.A. Salazar and Engineering Services filed an action for a sum of
money with damages against BPI (Bank of the Philippine Islands) before the RTC of Pasig.
complaint was later amended by substituting the name of Annabelle A. Salazar as the real
party in interest in place of A.A. Salazar Construction and Engineering Services. Private
respondent Salazar prayed for the recovery of the amount of Php 267, 707.70, debited
from her account. BPI alleged that on August 1991, the amount was demanded from them
by Julio Templonuevo, stating that the 267,692.50, representing the aggregate value of 3
checks, which were allegedly payable to him, were deposited to Salazar’s account without
Templonuevo’s knowledge and endorsement.
Accepting Templonuevo’s claim as valid, BPI froze the Account of AA Salazar and
Construction instead of Salazar’s account where the checks were deposited, since it was
already closed by Salazar or had an insufficient balance.
Private respondent Salazar was advised to settle the matter with Templonuevo but they
did not arrive at any settlement. As it turned out, Salazar was not entitled to the funds
(represented by the checks). So, BPI decided to debit the amount the amount of
P267,707.70 from her and that was paid to Templonuevo by means of a cashier's check.
Templonuevo admitted being paid P267,707.70 and argued that it was to correct the
malicious deposit made by Salazar to her private account.
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a. the CA should not have presumed that Salazar was a transferee for value within the
contemplation of Section 49 of the Negotiable Instruments Law, as the latter applies only to
a holder defined under Section 191 of the same.
b. Salazar failed to adduce sufficient evidence to prove that her possession of the three
checks was lawful
c. the CA should have applied the Civil Code provisions on legal compensation because in
deducting the subject amount from Salazar's account, petitioner was merely rectifying the
undue payment
d. The debit of the amount from the account of A.A. Salazar Construction and Engineering
Services was proper because an unincorporated single proprietorship had no separate and
distinct personality from Salazar
LOWER RTC: RTC rendered in favor of Salazar. BPI was ordered to pay the amount of 267,707.70
COURT with 12% interest until amount is fully paid; and for actual, moral, exemplary damages as
RULING well as attorney’s fees and costs of suit.
CA: The CA affirmed the RTC decision and held that Salazar was entitled to the proceeds
of the 3 checks notwithstanding the lack of endorsement by the payee, concluding that
Salazar and Templonuevo had a previous agreement that the checks payable to JRT
Construction actually belonged to Salazar and would be deposited to her account.
ISSUE/S
Does a collecting bank, over the objections of its depositor, have the authority to withdraw
unilaterally from such depositor's account the amount it had previously paid upon certain
unendorsed order instruments deposited by the depositor to another account that she later
closed? (YES, but petitioner is still liable)
SC RULING
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The records do not support the finding made by the CA and the trial court that a prior
arrangement existed between Salazar and Templonuevo regarding the transfer of
ownership of the checks. This fact is crucial as Salazar's entitlement to the value of the
instruments is based on the assumption that she is a transferee within the contemplation of
Section 49 of the Negotiable Instruments Law.
Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee
or indorsee delivers a negotiable instrument for value without indorsing it. It bears stressing
that the above transaction is an equitable assignment and the transferee acquires the
instrument subject to defenses and equities available among prior parties. Thus, if the
transferor had legal title, the transferee acquires such title and, in addition, the right to have
the indorsement of the transferor and also the right, as holder of the legal title, to maintain
legal action against the maker or acceptor or other party liable to the transferor. The
underlying premise of this provision, however, is that a valid transfer of ownership
of the negotiable instrument in question has taken place.
Transferees in this situation do not enjoy the presumption of ownership in favor of holders
since they are neither payees nor indorsees of such instruments. Mere possession of a
negotiable instrument does not in itself conclusively establish either the right of the
possessor to receive payment, or of the right of one who has made payment to be
discharged from liability. Thus, something more than mere possession by persons who are
not payees or indorsers of the instrument is necessary to authorize payment to them in
the absence of any other facts from which the authority to receive payment may be inferred.
The presumption under Section 131(s) of the Rules of Court stating that a negotiable
instrument was given for a sufficient consideration will not inure to the benefit of Salazar
because the term "given" does not pertain merely to a transfer of physical possession of the
instrument. The phrase "given or indorsed" in the context of a negotiable instrument refers
to the manner in which such instrument may be negotiated. Negotiable instruments are
negotiated by "transfer to one person or another in such a manner as to constitute the
transferee the holder thereof. If payable to bearer it is negotiated by delivery. If payable to
order it is negotiated by the indorsement completed by delivery." The present case involves
checks payable to order. Not being a payee or indorsee of the checks, private respondent
Salazar could not be a holder thereof.
It is an exception to the general rule for a payee of an order instrument to transfer

the instrument without indorsement. Salazar failed to discharge this burden, and the
return of the check proceeds to Templonuevo was therefore warranted under the
circumstances despite the fact that Templonuevo may not have clearly demonstrated that
he never authorized Salazar to deposit the checks or to encash the same. Noteworthy also
is the fact that petitioner stamped on the back of the checks the words: "All prior
endorsements and/or lack of endorsements guaranteed," thereby making the assurance
that it had ascertained the genuineness of all prior endorsements. Having assumed the
liability of a general indorser, petitioner’s liability to the designated payee cannot be denied.
Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account
for the value of the checks it previously credited in her favor. It is of no moment that
the account debited by petitioner was different from the original account to which the
proceeds of the check were credited because both admittedly belonged to Salazar, the
2F 2020-2021
former being the account of the sole proprietorship which had no separate and distinct
personality from her, and the latter being her personal account.
A bank generally has a right of set-off over the deposits therein for the payment of any
withdrawals on the part of a depositor. The right of a collecting bank to debit a client's
account for the value of a dishonored check that has previously been credited has fairly
been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides
that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall
be governed by the provisions concerning simple loan."
Hence, the relationship between banks and depositors has been held to be that of creditor
and debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place.
While, however, it is conceded that petitioner had the right of set-off over the amount it
paid to Templonuevo against the deposit of Salazar, the issue of whether it acted
judiciously is an entirely different matter. As businesses affected with public interest, and
because of the nature of their functions, banks are under obligation to treat the accounts
of their depositors with meticulous care, always having in mind the fiduciary nature of their
relationship. In this regard, petitioner was clearly remiss in its duty to private
respondent Salazar as its depositor.
Upon the prompting of Templonuevo, and with full knowledge of the brewing dispute
between Salazar and Templonuevo, petitioner debited the account held in the name of the
sole proprietorship of Salazar without even serving due notice upon her. This ran contrary
to petitioner’s assurances to private respondent Salazar that the account would remain
untouched, pending the resolution of the controversy between her and Templonuevo. The
records further bear out the fact that respondent Salazar had issued several checks drawn
against the account of A.A. Salazar Construction and Engineering Services prior to any
notice of deduction being served. These checks, it must be emphasized, were subsequently
dishonored, thereby causing private respondent Salazar undue embarrassment and
inflicting damage to her standing in the business community. Under the circumstances, she
was clearly not given the opportunity to protect her interest when petitioner unilaterally
withdrew the above amount from her account without informing her that it had already done
so. Award for damages proper. Decision modified only insofar as the return of amount is
concerned.
2F 2020-2021
NOTES
2F 2020-2021
TOPIC Indorsement MODULE

CASE #9
CASE TITLE Metropol (Bacolod) Financing & Investment Corporation v Sambok GR NO L-39641
Motors Company and Ng Sambok Sons Motros Co., Ltd.
De Castro, J.
PONENTE DATE
February 28, 1983
DOCTRINE A general indorsement makes the indorser secondarily liable in the event of failure to pay by the
maker.
FACTS
● On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok
Sons Motors Co., Ltd., in the amount of P15, 939 payable in twelve (12) equal monthly installments,
beginning May 18, 1969, with interest at the rate of one percent per month. It is further provided
that in case on non-payment of any of the installments, the total princial sum then remaining unpaid
shall become due and payable with an additional interest equal to twenty-five percent of the total
amount due.
● On the same date, Sambok Motors Company, a sister company of Ng Sambok Sons Motors
Co., Ltd., and under the same management as the former, negotiated and indorsed the note in
favor of plaintiff Metropol Financing & Investment Corporation.
● The maker, Dr. Villaruel defaulted in the payment when they become due and so the plaintiff
presented the promissory note for payment to the maker. Dr. Villaruel failed to pay the promissory
note as demanded, hence plaintiff notified Sambok as indorsee of said note of the fact that the
same has been dishonored and demanded payment.
● Sambok failed to pay. Plaintiff filed a complaint for a collection of a sum of money before the
CFI of Iloilo. Sambok did not deny its liability but contended that it could not be obliged to pay until
after its co-defendant Dr. Vilalruel has been declared insolvent.
During the pendency of the case, defendant Dr. Villaruel died.
ARGUMENT Petitioner (Metropol (Bacolod) Financing & Investment Corporation):

S a. N/A
Respondent (Sambok Motors Company and Ng Sambok Sons Motors):

a) Trial court erred in not dismissing the complaint by finding Sambok Motors as assignor and
a qualified indorsee of the subject promissory note an din not holding it as as only secondarily
liable thereof
b) By adding the “with recourse” in the indorsement, it becomes a qualified indorser which
makes it free from payment of the amount to the holder in the circumstance that the said note is
dishonored by the maker on presentment
LOWER RTC:
COURT a) Ordered Sambok Motors Company to pay to the plaintiff the sum of P15,939 plus the legal
RULING rate of interest from Oct. 30, 1969
2F 2020-2021
b) Ordering same defendant to pay to plaintiff the sum equivalent to 25% of P15,939 plus
interest thereon until fully paid
ISSUE/S
Whether or not Sambok Motors Co. is a qualified indorser, thus it is not liable upon the failure of
payment of the maker
SC RULING
NO. The appeal is without merit. A qualified indorsement relieves the indorser of the general
obligation to pay if the instrument is dishonored but not of the liability arising from warranties on
the instrument as provided by section 65 of NIL. However, Sambok indorsed the note “with
recourse” (must be without to be qualified indorsement) and even waived the notice of demand,
dishonor, protest and presentment. The words added by Sambok confirm his obligation as general
indorser.
Recourse means resort to a person who is secondarily liable after the default of the person who is
primarily liable. Sambok by indorsing the note “with recourse” does not make itself a qualified
indorser but a general indorser who is secondarily liable, because by such indorsement, it agreed
that if Villaruel fails to pay the note, the holder can go after it. The effect of a general indorsement
makes the note indorsed without qualification. A person who indorses without qualification engages
that on due presentment, the note shall be accepted or paid, or both as the case maybe, and that
if it be dishonored, he will pay the amount thereof to the holder.
The decision of the lower court is affirmed.
NOTES
A qualified indorsement means that the indorser a mere assignor of the title to the instrument. It
may be made by adding to the indorser’s signature the words “without recourse” or any words of
similar import.
2F 2020-2021
TOPIC Indorsement MODULE

CASE #10 3
CASE TITLE Ty v. People GR NO 149275
Tinga, J: September 27,

PONENTE DATE 2004
DOCTRINE A restrictive indorsement confers upon the indorsee the right:

(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to
do so.
But all subsequent indorsees acquire only the title of the first indorsee under the restrictive
indorsement.
FACTS On June 5, 1992, Petitioner Vicky Ty executed a promissory note wherein she assumed
payment of the hospital bills of her mother and sister amounting to P1,075,592.95, made
payable in installments. To assure payment of the obligation, she drew several postdated
checks against Metrobank payable to the hospital. The seven (7) checks, each covering the
amount of ₱30,000.00, were all deposited on their due dates. But they were all dishonored by
the drawee bank and returned unpaid to the hospital due to insufficiency of funds, with the
"Account Closed" advice. Soon thereafter, the complainant hospital sent demand letters to Ty
by registered mail. As the demand letters of Manila Doctors Hospital were not heeded,
complainant filed the seven (7) Informations subject of the instant case.
ARGUMENT Petitioner Vicky Ty:

S Ty claimed that she issued the checks because of "an uncontrollable fear of a greater injury."
She averred that she was forced to issue the checks to obtain release for her mother whom the
hospital inhumanely and harshly treated and would not discharge unless the hospital bills are
paid.
Respondent People of the Philippines:

The law punishes the mere act of issuing a bouncing check, not the purpose for which it was
issued nor the terms and conditions relating to its issuance
LOWER RTC: Accused Vicky C. Ty, for her acts of issuing seven (7) checks in payment of a valid
COURT obligation, which turned unfounded on their respective dates of maturity, is found guilty of
RULING seven (7) counts of violations of Batas Pambansa Blg. 22, and is hereby sentenced to suffer
the penalty of imprisonment of SIX MONTHS per count or a total of forty-two (42) months.
CA: The appellate court affirmed the judgment of the trial court with modification. It set aside
the penalty of imprisonment and instead sentenced Ty "to pay a fine of sixty thousand pesos
(₱60,000.00) equivalent to double the amount of the check, in each case
ISSUE/S
2F 2020-2021
Whether or not knowledge of indosee (payee) of the insufficiency of funds in the account of
indorser is material in bringing an action against the indorser
SC RULING
No. Sec. 37 of the NIL provides that a restrictive indorsement confers upon the indorsee the
right (b) to bring any action thereon that the indorser could bring. Petitioner had sufficient
knowledge that the issuance of checks without funds may result in a violation of B.P. 22. She
even testified that her counsel advised her not to open a current account nor issue postdated
checks "because the moment I will not have funds it will be a big problem." Besides, apart from
petitioner’s bare assertion, the record is bereft of any evidence to corroborate and bolster her
claim that she was compelled or coerced to cooperate with and give in to the hospital’s
demands.
NOTES
2F 2020-2021
TOPIC Incomplete and Undelivered Instrument MODULE

CASE #11 3
CASE TITLE PATRIMONIO V. GUTIERREZ GR NO 187769
BRION, J. June 4, 2014

PONENTE DATE
DOCTRINE Section 14 of NIL applies to an incomplete but delivered instrument. Under this rule, if the maker
or drawer delivers a pre-signed blank paper to another person for the purpose of converting it into
a negotiable instrument, that person is deemed to have prima facie authority to fill it up. It merely
requires that the instrument be in the possession of a person other than the drawer or maker and
from such possession, together with the fact that the instrument is wanting in a material particular,
the law presumes agency to fill up the blanks.
FACTS The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a business venture
under the name of Slam Dunk Corporation (Slum Dunk), a production outfit that produced mini-
concerts and shows related to basketball. Petitioner was already a decorated professional
basketball player while Gutierrez was a well-known sports columnist.
In the course of their business, the petitioner pre-signed several checks to answer for the
expenses of Slam Dunk. Although signed, these checks had no payee’s name, date, or amount.
The blank checks were entrusted to Gutierrez with the specific instruction not to fill them out
without previous notification to and approval by the petitioner. According to the petitioner, the
arrangement was made so that he could verify the validity of the payment and make the proper
arrangements to fund the account.
In the middle of 1993, without the petitioner’s knowledge and consent, Gutierrez went to
Marasigan (the petitioner’s former teammate), to secure a loan in the amount of ₱200,000.00 on
the excuse that the petitioner needed the money for the construction of his house. After much
contemplation and considering his relationship with the petitioner and Gutierrez, Marasigan
acceded to Gutierrez’ request and gave him ₱200,000.00 sometime in February 1994. Gutierrez
simultaneously delivered to Marasigan one of the blank checks the petitioner pre-signed with
Pilipinas Bank, Greenhills Branch, Check No. 21001764 with the blank portions filled out with the
words "Cash" "Two Hundred Thousand Pesos Only", and the amount of "₱200,000.00". The upper
right portion of the check corresponding to the date was also filled out with the words "May 23,
1994" but the petitioner contended that the same was not written by Gutierrez.
On May 24, 1994, Marasigan deposited the check, but it was dishonored for the reason
"ACCOUNT CLOSED." It was later revealed that the petitioner's account with the bank had been
closed since May 28, 1993. Marasigan sought recovery from Gutierrez, to no avail. He thereafter
sent several demand letters to the petitioner asking for the payment of ₱200,000.00, but his
demands likewise went unheeded. Consequently, he filed a criminal case for violation of B.P. 22
against the petitioner.
On September 10, 1997, the petitioner filed before the Regional Trial Court (RTC) a Complaint for
Declaration of Nullity of Loan and Recovery of Damages against Gutierrez and co-respondent
Marasigan. He completely denied authorizing the loan or the check’s negotiation and asserted
that he was not privy to the parties’ loan agreement. Only Marasigan filed his answer to the
complaint. In the RTC’s order dated December 22, 1997, Gutierrez was declared in default.
ARGUMENT Petitioner (Patrimonio):

S
2F 2020-2021
a. There was no loan between him and Marasigan since he never authorized the borrowing
of money nor the check’s negotiation to the latter.
b. Under Article 1878 of the Civil Code, a special power of attorney is necessary for an
individual to make a loan or borrow money on behalf of another.
c. The loan transaction was between Gutierrez and Marasigan, with his check being used
only as a security.
d. The check had not been completely and strictly filled out in accordance with his authority
since the condition that the subject check can only be used provided there is prior approval
from him, was not complied with. (Module 3 Topic)
e. Even if the check was strictly filled up as instructed by the petitioner, Marasigan is still not
entitled to claim the check’s value as he was not a holder in due course.
f. By reason of the bad faith in the dealings between the respondents, he is entitled to claim
for damages.
Respondent (Gutierrez and Marasigan):
N/A
LOWER RTC: RTC ruled in favor of Marasigan. It found that the petitioner, in issuing the pre-signed blank
COURT checks, had the intention of issuing a negotiable instrument, albeit with specific instructions to
RULING Gutierrez not to negotiate or issue the check without his approval. While under Section 14 of the
NIL, Gutierrez had the prima facie authority to complete the checks by filling up the blanks therein,
the RTC ruled that he deliberately violated petitioner’s specific instructions and took advantage
of the trust reposed in him by the latter.
CA: CA affirmed the ruling of RTC. CA agreed with the petitioner that Marasigan is not a holder
in due course as he did not receive the check in good faith. The CA also concluded that the check
had been strictly filled out by Gutierrez in accordance with the petitioner’s authority. It held that
the loan may not be nullified since it is grounded on an obligation arising from law and ruled that
the petitioner is still liable to pay Marasigan the sum of ₱200,000.00.
ISSUE/S Whether or not respondent Gutierrez has completely filled out the subject check strictly under
the authority given by the petitioner.
SC RULING NO. Section 14 of NIL applies to an incomplete but delivered instrument. Under this rule, if the
maker or drawer delivers a pre-signed blank paper to another person for the purpose of converting
it into a negotiable instrument, that person is deemed to have prima facie authority to fill it up. It
merely requires that the instrument be in the possession of a person other than the drawer or
maker and from such possession, together with the fact that the instrument is wanting in a material
particular, the law presumes agency to fill up the blanks.
Gutierrez has exceeded the authority to fill up the blanks and use the check. To repeat, petitioner
gave Gutierrez pre-signed checks to be used in their business provided that he could only use
them upon his approval. His instruction could not be any clearer as Gutierrez’ authority was limited
to the use of the checks for the operation of their business, and on the condition that the petitioner’s
prior approval be first secured.
While under the law, Gutierrez had a prima facie authority to complete the check, such prima facie
authority does not extend to its use (i.e., subsequent transfer or negotiation) once the check is
completed. In other words, only the authority to complete the check is presumed. Further, the law
used the term "prima facie" to underscore the fact that the authority which the law accords to a
holder is a presumption juris tantum only; hence, subject to contrary proof. Thus, evidence that
there was no authority or that the authority granted has been exceeded may be presented by the
maker to avoid liability under the instrument.
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NOTES
2F 2020-2021
TOPIC Sec. 49. Delivery without endorsement of an order instrument MODULE 3

CASE #12
CASE TITLE BPI v. Court of Appeals GR NO 136202
J. AZCUNA
PONENTE DATE
January 25, 2007
DOCTRINE RIGHTS OF TRANSFEREES FOR VALUE

1. The transferee acquires only the rights of the transferor. This means that if a
defense is available against the transferor, that defense is also available against the
transferees
2. The transferee has also the right to require the transferor to indorse the
instrument
FACTS Petitioner BPI alleged that on August 31, 1991, Julio R. Templonuevo, third-party defendant and
herein also a private respondent, demanded from BPI the payment of the amount of P267,692.50
representing the aggregate value of three (3) checks, which were allegedly payable to him, but Commented [1]: Backstory: Salazar had in her
which were deposited with the petitioner bank to private respondent Salazar’s account (Account possession three crossed checks with an aggregate
No. 0203-1187-67) without his knowledge and corresponding endorsement. amount of P267,692.50. These checks were payable to
the order of JRT Construction and Trading which was
the name of Templonuevo’s business. Despite lack of
Accepting that Templonuevo’s claim was a valid one, petitioner BPI froze Account No. 0201- knowledge and endorsement of Templonuevo, Salazar
0588-48 of A.A. Salazar and Construction and Engineering Services, instead of Account No. was able to deposit the checks in her personal savings
0203-1187-67 where the checks were deposited, since this account was already closed by private account with BPI and encash the same. The three
checks were deposited on three different occasions
respondent Salazar or had an insufficient balance. over the span of eight months.
Salazar was advised to settle the matter with Templonuevo but they did not arrive at any Commented [2]: (1) Solid Bank Check No. CB766556
dated January 30, 1990 = P57,712.50;
settlement. Failure of any settlement between Templonuevo and Salazar, this prompted the
BPI to debit the amount of P267,707.70 from her Account No. 0201-0588-48 and give back the (2) Solid Bank Check No. CB898978 dated July 31,
money to Templonuevo through a cashier's check. The difference between the value of the 1990 = P55,180.00; and,
checks (P267,692.50) and the amount actually debited from her account (P267,707.70)
(3) Equitable Banking Corporation Check No. 32380638
represented bank charges in connection with the issuance of a cashier’s check to Templonuevo. dated August 28, 1990 = P154,800.00
A.A. Salazar Construction and Engineering Services filed an action for a sum of money with
damages against Bank of the Philippine Islands (BPI) before the RTC of Pasig City. The complaint
was later amended by substituting the name of Annabelle A. Salazar as the real party in interest
in place of A.A. Salazar Construction and Engineering Services. Private respondent Salazar
prayed for the recovery of the amount of P267,707.70 debited by petitioner BPI from her account.
She likewise prayed for damages and attorney’s fees.
ARGUMENT Petitioner (BPI):

S 1. There is no presumption in law that a check payable to order, when found in the
possession of a person who is neither a payee nor the indorsee thereof, has been
lawfully transferred for value. Hence, the CA should not have presumed that Salazar was a
transferee for value within the contemplation of Section 49 of the Negotiable Instruments Law,
as the latter applies only to a holder defined under Section 191 of the same.
2. Salazar failed to adduce sufficient evidence to prove that her possession of the three checks
was lawful despite her allegations that these checks were deposited pursuant to a prior internal
arrangement with Templonuevo and that petitioner was privy to the arrangement.
3. The CA should have applied the Civil Code provisions on legal compensation because in
deducting the subject amount from Salazar’s account, petitioner was merely rectifying the
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undue payment it made upon the checks and exercising its prerogative to alter or modify an
erroneous credit entry in the regular course of its business.
4. The debit of the amount from the account of A.A. Salazar Construction and Engineering
Services was proper even though the value of the checks had been originally credited to the
personal account of Salazar because A.A. Salazar Construction and Engineering Services, an
unincorporated single proprietorship, had no separate and distinct personality from Salazar.
5. Assuming the deduction from Salazar’s account was improper, the CA should not have
dismissed petitioner’s third-party complaint against Templonuevo because the latter would have
the legal duty to return to petitioner the proceeds of the checks which he previously received
from it.
6. There was no factual basis for the award of damages to Salazar.
Respondent (Salazar):
N/A
LOWER RTC:
COURT Trial court ruled in favor of Salazar ordering BPI to pay as follows:
RULING 1. The amount of P267,707.70 with 12% interest thereon from September 16, 1991 until the said
amount is fully paid;
2. The amount of P30,000.00 as and for actual damages;
3. The amount of P50,000.00 as and for moral damages;
4. The amount of P50,000.00 as and for exemplary damages;
5. The amount of P30,000.00 as and for attorney’s fees; and
6. Costs of suit.
CA:
Affirmed decision. Salazar was entitled to the proceeds of the three (3) checks notwithstanding
the lack of endorsement thereon by the payee. The CA concluded that Salazar and
Templonuevo had previously agreed that the checks payable to JRT Construction and Trading
actually belonged to Salazar and would be deposited to her account, with petitioner acquiescing
to the arrangement.
ISSUE/S 1. Did BPI have the authority to unilaterally withdraw from Salazar’s account the amount it
has previously paid upon certain unendorsed order instruments? - YES
2. Did BPI act judiciously in debiting Salazar’s account? - NO
SC RULING
1. Yes.
Records show that no prior arrangement existed between Salazar and Templonuevo regarding
the transfer of ownership of the checks. This fact is crucial as Salazar’s entitlement to the value
of the instruments is based on the assumption that she is a transferee within the contemplation
of Section 49 of the NIL.
Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee
or indorsee delivers a negotiable instrument for value without indorsing it, thus:
Transfer without indorsement; - Where the holder of an instrument payable

to his order transfers it for value without indorsing it, the transfer vests in the
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transferee such title as the transferor had therein, and the transferee
acquires in addition, the right to have the indorsement of the transferor. But
for the purpose of determining whether the transferee is a holder in due
course, the negotiation takes effect as of the time when the indorsement is
actually made.
It bears stressing that the above transaction is an equitable assignment and the transferee
acquires the instrument subject to defenses and equities available among prior parties. Thus, if
the transferor had legal title, the transferee acquires such title and, in addition, the right to have
the indorsement of the transferor and also the right, as holder of the legal title, to maintain legal
action against the maker or acceptor or other party liable to the transferor. The underlying premise
of this provision, however, is that a valid transfer of ownership of the negotiable instrument in
question has taken place.
Transferees in this situation do not enjoy the presumption of ownership in favor of holders since
they are neither payees nor endorsees of such instruments. Mere possession of a negotiable
instrument does not in itself conclusively establish either the right of the possessor to
receive payment, or of the right of one who has made payment to be discharged from
liability. Thus, something more than mere possession by persons who are not payees or
indorsers of the instrument is necessary to authorize payment to them in the absence of any other
facts from which the authority to receive payment may be inferred.
The CA and the trial court surmised that the subject checks belonged to private respondent
Salazar based on the pre-trial stipulation that Templonuevo incurred a one-year delay in
demanding reimbursement for the proceeds of the same. The delay of Templonuevo in asserting
ownership over the checks is not enough to prove that there has been a valid transfer of
ownership has taken place. It is not enough so as to estop Templonuevo from asserting
ownership over the checks especially considering that it was readily apparent on the face of the
instruments that these were crossed checks.
Salazar failed to discharge the burden of presumption of ownership in Templonuevo’s favor as

the designated payee. This is consistent with the principle that if instruments payable to
named payees or to their order have not been indorsed in blank, only such payees or
their indorsees can be holders and entitled to receive payment in their own right.
Negotiable instruments are negotiated by "transfer to one person or another in such a manner as
to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery. If
payable to order it is negotiated by the indorsement completed by delivery." The present case
involves checks payable to order. Not being a payee or indorsee of the checks, private
respondent Salazar could not be a holder thereof.
Thus, the return of the check proceeds to Templonuevo was therefore warranted. It is immaterial
that the account debited by BPI was different from the original account to which the proceeds of Commented [3]: Right of Set-Off
the check were credited because both belonged to Salazar anyway.
The right of set-off was explained in Associated Bank v. Tan:

A bank generally has a right of set-off over the deposits therein for the
payment of any withdrawals on the part of a depositor. The right of a collecting
bank to debit a client's account for the value of a dishonored check that has
previously been credited has fairly been established by jurisprudence. To
begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and
current deposits of money in banks and similar institutions shall be governed
by the provisions concerning simple loan."
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Hence, the relationship between banks and depositors has been held to be that of creditor and
debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place "when all
the requisites mentioned in Article 1279 are present. Commented [4]: (1) That each one of the obligors be
bound principally, and that he be at the same time a
principal creditor of the other;
2. No. (2) That both debts consist in a sum of money, or if the
As businesses affected with public interest, and because of the nature of their functions, banks things due are consumable, they be of the same kind,
are under obligation to treat the accounts of their depositors with meticulous care, always having and also of the same quality if the latter has been
in mind the fiduciary nature of their relationship. In this regard, BPI was clearly remiss in its stated;
duty to private respondent Salazar as its depositor. (3) That the two debts be due;
Solely upon the prompting of Templonuevo, BPI debited the account of Salazar without even (4) That they be liquidated and demandable;
serving due notice upon her. Consequently, having checks she issued which were dishonored
because she was not given prior notice of the deduction from her account caused Salazar undue (5) That over neither of them there be any retention or
controversy, commenced by third persons and
embarrassment and inflicted damage to her standing in the business community. Under the communicated in due time to the debtor.
circumstances, she was clearly not given the opportunity to protect her interest when BPI
unilaterally withdrew the above amount from her account without informing her that it had already
done so. As such, the award of damages must be sustained.
It must be emphasized that 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 taking and collection of a
check without the proper indorsement amount to a conversion of the check by the bank.
NOTES
State Investment House v. IAC: Effects of crossing a check
(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 definite purpose so that such holder must inquire if the check has been received
pursuant to that purpose.
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TOPIC NI as an evidence; Presumption of valid consideration MODULE

CASE #13 3
CASE TITLE Ubas Sr. V. Chan GR NO
215910
PERLAS-BERNABE, J
PONENTE DATE
Feb. 6, 2017
DOCTRINE The dishonored check served as an evidence of indebtedness and were presumed to
have been issued for a valid consideration.
FACTS
Petitioner Manuel C. Ubas, SR. filed a complaint for a Sum of Money against
respondent Wilson Chan. Petitioner alleged that respondent personally and
verbally entered into a contract with him for the delivery of construction materials
for the Macagtas Dam Project amounting to ₱l,500,000.00, which was, however, left
unpaid. He averred that respondent issued three (3) bank checks as payment but
it was dishonored upon presentment due to stop payment order. He demanded
from respondent the value of the dishonored checks, but to no avail. He
presented the dishonored checks and the demand letter addressed to respondent
Chan which clearly stated the serial numbers of the checks, including the dates
and amounts thereof as evidence. Respondent filed an Answer with Motion to
Dismiss on the ground that there is no contract that ever existed between him
and petitioner. He admitted to having issued the subject checks. However, he
claimed that they were not issued to petitioner, but to Engr. Merelos for purposes
of replenishing the project's revolving fund. Respondent also asserted that
petitioner was not among their suppliers of aggregates for the Macagtas Dam
project. RTC ruled in favor of petitioner finding that respondent failed to overcome
the disputable presumption that every party to an instrument acquired the same
for a valuable consideration under Section 24 of Act No. 2031,23 or the
Negotiable Instruments Law (NIL) and ordered respondent to pay. Upon appeal, CA
reversed and set aside RTC’s ruling. Hence, this Petition.
ARGUMENT Petitioner (Name):

S a.
b.
Respondent (Name):
a.
b.
LOWER RTC:
COURT RTC ruled that petitioner had a cause of action against respondent.
RULING
CA:
CA reversed and set aside the RTC's ruling, dismissing petitioner's complaint on the
ground of lack of cause of action.
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ISSUE/S
Whether or not the dishonored checks in the possession of Ubas served as an

evidence of indebtedness and are presumed to have been issued for a valid
consideration.
SC RULING
Yes. The dishonored check served as an evidence of indebtedness and were presumed
to have been issued for a valid consideration. Jurisprudence holds that "in a suit for a
recovery of sum of money, as in this case, the plaintiff-creditor [(petitioner in this case)]
has the burden of proof to show that defendant [(respondent in this case)] had not paid
[him] the amount of the contracted loan. However, it has also been long established
that where the plaintiff-creditor possesses and submits in evidence an instrument
showing the indebtedness, a presumption that the credit has not been satisfied arises in
[his] favor. Thus, the defendant is, in appropriate instances, required to overcome the
said presumption and present evidence to prove the fact of payment so that no
judgment will be entered against him." This presumption stems from Section 24 of the
NIL, which provides that “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.” Further, in Pacheco v. CA,40 the
Court has expressly recognized that a check "constitutes an evidence of indebtedness"
and is a veritable "proof of an obligation." In the case at bar, petitioner had presented
in evidence the three (3) dishonored checks which were undeniably signed by
respondent. It is presumed that the subject checks were issued for a valid
consideration, which therefore, dispensed with the necessity of any documentary
evidence to support petitioner's monetary claim. Unless otherwise rebutted, the legal
presumption of consideration under Section 24 of the NIL stands. As the holder of the
subject checks which are presumed to have been issued for a valuable consideration,
and having established his privity of contract with respondent, petitioner has
substantiated his cause of action by a preponderance of evidence. On the other hand,
respondent was not able to overcome the presumption of consideration. Further, as held
by the RTC, respondent’s contention that the checks were lost were overcome by
petitioner’s presentment of its demand letter which clearly stated the serial numbers of
the checks, including the dates and amounts thereof. Section 16 of the NIL provides
that when an instrument is no longer in the possession of the person who signed it
and it is complete in its terms, "a valid and intentional delivery by him is presumed
until the contrary is proved,". With the foregoing, the Court held that the dishonored
check served as an evidence of indebtedness and were presumed to have been issued
for a valid consideration.
NOTES
TOPIC Consideration MODULE 3

CASE #14
CASE TITLE Cely Yang vs Hon. Court of Appeals GR NO 138074
Quisimbing, J.:
PONENTE DATE
August 15, 2003
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DOCTRINE Every holder of a negotiable instrument is deemed prima facie a holder in due course.
FACTS Petitioner and private respondent Prem Chandiramani entered into an agreement whereby the
latter was to give Yang a PCIB manager’s check (4.2m) in exchange for two of Yang’s
manager’s check each in 2.087m, both payable to the order of respondent David. They further
agreed that Yang would secure from FEBTC a dollar draft of $200,000 payable to PCIB FCDU
which would exchange for another dollar draft in the same amount to be issued by Hang Seng
Bank Ltd. Of Hon Kong. Yang gave the checks to his associate (Liong) to be be delivered to
Chandiramini by Liong’s messenger, Ranigo. Ranigo was supposed to meet Chandiramani in
Phil. Trust Bank in Ayala Makati but he did not come. Ranigo allegedly lost the checks.
However, it appeared that the checks where not lost, Cahndiramani was able to get hold of said
instruments without delivering the exchange consideration and delivered it to Fernando David.
Yang requested a stop payment on the said instruments but it was lifted upon the presentation
of the instruments enabling the holder of said instruments to receive $200,000. Petitioner Yang
filed a complaint.
ARGUMENT Petitioner: Yang contends that private respondent is not a holder in due course because David
S failed to inquire about how the latter acquired possession of said checks. Given the failure, it
cannot be said that David was unaware of any defect or infirmity in the title of Chandiramani to
the checks at the time of negotiation. Argues that there is no showing that David gave any
consideration of value in exchange for the aforementioned checks.
Respondent: counters that the evidence on record shows when he received the checks, verified
their genuineness with his bank and only after said verification did he deposit them. Stresses
that he had no notice of previous dishonor or any infirmity.
LOWER RTC: Rendered in favor of Fernando David stating that the evidence shows that David was a
COURT holder in due course for the reason that the cashier’s checks were complete on their face when
RULING they were negotiated to him. They were not overdue and had no notice that said checks were
previously dishonored and he took it in good faith and for value.
CA: Affirmed.
ISSUE/S W/N the Court of appeals erred in holding respondent to be a holder in due course
SC RULING No, every holder of a negotiable instrument is deemed prima facie a holder in due course.
However, this presumption arises only in favor of a person who is a holder under Sec. 191. In
the present case, it is not disputed that David was the payee. Petitioner failed to substantiate the
allegations that David is not a holder in due course. The arguments that there was not any value
given for the checks and there is bad faith in failing to inquire from Chandiramani how he got the
checks is bereft of merit. The law creates a presumption in David’s favor that he gave valuable
consideration for the checks in question and the petitioner fails to point any circumstance which
should have put David on inquiry as to the why Chandiramani was in possession of said checks.
David was not privy to the transaction between petitioner and Chandiramani.
NOTES
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TOPIC Consideration MODULE

CASE #15
CASE TITLE Cayanan v. North Star International Travel Inc. GR NO 172594
Villarama, Jr., J
PONENTE DATE
October 05, 2011
DOCTRINE The issuance of a check, in the absence of evidence to the contrary, is presumed that the same
was issued for valuable consideration.
FACTS North Star International Travel Incorporated (North Star) is a corporation engaged in the travel
agency business while petitioner is the owner/general manager of JEAC International
Management and Contractor Services, a recruitment agency.
In 1994 (March 17 and 29), Virginia Balagtas, the General Manager of North Star, extended credits
to the petitioner for the plane tickets etc., the total indebtedness reached Php. 510,035.17.
And to cover the foregoing obligations, the petitioner issued five checks (in the amount of the
following: (1) 695,000; (2) 278,000); (3) 22,703; (4) 1.5M; (5) 35,000) to North Star. However,
upon presentation for payment the last two checks (4 & 5) were dishonored for insufficiency of
funds. While the other heck (1,2,3) were dishonored because of a stop payment order from the
petitioner.
North Star, through its counsel, wrote to the petitioner on September 14, 1994 informing him that
the checks he issued had been dishonored. North Star demanded payment, but petitioner failed
to settle his obligations. Hence, North Star instituted Criminal Case charging petitioner with
violation of Batas Pambansa Blg. 22, or the Bouncing Checks Law, before the Metropolitan Trial
Court (MeTC) of Makati City.
ARGUMENTS Petitioner Engr. Jose E. Cayanan:

Petitioner argues that the CA erred in holding him civilly liable to North Star for the value of the
checks since North Star did not give any valuable consideration for the checks. He insists that the
US$85,000 sent to View Sea Ventures was not sent for the account of North Star but for the
account of Virginia as her investment. He points out that said amount was taken from Virginia’s
personal dollar account in Citibank and not from North Star’s corporate account.
Respondent NORTH STAR INTERNATIONAL TRAVEL, INC.,:

Respondent North Star, for its part, counters that the petitioner is liable for the value of the five
subject checks as they were issued for value. Respondent insists that petitioner owes North Star
₱2,530,703 plus interest of ₱264,078.45, and that the ₱220,000 petitioner paid to North Star is
conclusive proof that the checks were issued for value.
LOWER MeTC: MeTC found petitioner guilty beyond reasonable doubt of violation of B.P. 22.
COURT
RULING RTC: It acquitted the petitioner of the criminal charges. The RTC also held that there is no
basis for the imposition of the civil liability on the petitioner.
CA: CA reversed the decision of the RTC insofar as the civil aspect is concerned and held
petitioner civilly liable for the value of the subject checks. The CA ruled that although Cayanan
was acquitted of the criminal charges, he may still be held civilly liable for the checks he issued
since he never denied having issued the five postdated checks which were dishonored.
ISSUE/S Whether or not the Check is for a valuable consideration.

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SC RULING Yes, the check issued was for value.
The SC held that upon issuance of a check, in the absence of evidence to the contrary, it is
presumed that the same was issued for valuable consideration. Under the Negotiable
Instruments Law, it is presumed that every party to an instrument acquires the same for a
consideration or for value. As petitioner alleged that there was no consideration for the issuance
of the subject checks, it devolved upon him to present convincing evidence to overthrow the
presumption and prove that the checks were in fact issued without valuable consideration. Sadly,
however, petitioner has not presented any credible evidence to rebut the presumption, as well as
North Star’s assertion, that the checks were issued as payment for the US$85,000 petitioner
owed.
The petitioner also claims that North Star did not give any valuable consideration for the checks
since the US$85,000 was taken from the personal dollar account of Virginia and not the corporate
funds of North Star. However, the subject checks, bearing petitioner’s signature, speak for
themselves. The fact that petitioner himself specifically named North Star as the payee of the
checks is an admission of his liability to North Star and not to Virginia Balagtas, who as manager
merely facilitated the transfer of funds. Indeed, it is highly inconceivable that an experienced
businessman like petitioner would issue various checks in sizable amounts to a payee if these are
without consideration.
Hence, having failed to fully settle the petitioner’s obligation under the checks, the appellate court
was correct in holding petitioner liable to pay the value of the five checks he issued in favor of
North Star.
NOTES Face of the Check (all five checks were the same on its face except for value and date):
Check No : 246822
Drawn Against : Republic Planters Bank
Amount : ₱695,000.00
Dated/Postdated : May 15, 1994
Payable to : North Star International Travel, Inc.
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TOPIC CONSIDERATION MODULE 2

CASE #16
CASE TITLE Vicky Ty vs People of the Philippines GR NO 149275
TINGA, J. SEPTEMBER 27,

PONENTE DATE 2004
DOCTRINE Valuable Consideration means an obligation to give, to do, or not to do in favor of the party who
makes the contract, such as the maker or indorser
FACTS
Vicky Ty’s mother Chua Lao So Un was confined at the Manila Doctors’ Hospital (hospital)
from 30 October 1990 until 4 June 1992. Being the patient’s daughter, Ty signed the
"Acknowledgment of Responsibility for Payment" in the Contract of Admission dated 30 October
1990. Ty’s sister was also confined at the hospital from 13 May 1991 until 2 May 1992. The total
hospitals bills of the 2 patients amounted to P1,075,592.95.
On 5 June 1992, Ty executed a promissory note wherein she assumed payment of the
obligation in installments. To assure payment of the obligation, she drew 7 postdated checks
against Metrobank payable to the hospital, each covering the amount of P30,000. They were all
dishonored by the drawee bank and returned unpaid to the hospital due to insufficiency of funds,
with the "Account Closed" advice. After the complainant sent demand letters and subsequently
unheeded, complainant filed 7 Informations for violation of B.P. 22
ARGUMENT Petitioner:
S a. She issued the checks because of "an uncontrollable fear of a greater injury." She averred that
she was forced to issue the checks to obtain release for her mother whom the hospital inhumanely
and harshly treated and would not discharge unless the hospital bills are paid. Fearing the worst
for her mother, and to comply with the demands of the hospital, Ty was compelled to sign a
promissory note, open an account with Metrobank and issue the checks to effect her mother’s
immediate discharge.
b.On appeal, She also argued that the trial court erred in finding her guilty when evidence showed
there was absence of valuable consideration for the issuance of the checks and the payee had
knowledge of the insufficiency of funds in the account
LOWER RTC:Guilty of 7 counts of violation of BP 22

COURT CA:Affirmed. Not convinced that there was no valuable consideration for the issuance of the
RULING checks as they were issued in payment of the hospital bills of Ty’s mother.
ISSUE/S
Whether the absence of valuable consideration or that the payee of the checks was fully aware
of the lack of funds in the account is material in the issuance of checks (consequently in the
prosecution of violations of BP 22)
SC RULING
As to the issue of consideration, it is presumed, upon issuance of the checks, in the absence
of evidence to the contrary, that the same was issued for valuable consideration. Section 24 of the
NIL creates a presumption that every party to an instrument acquired the same for a consideration
or for value. Ty has the burden to prove that the checks were issued without consideration in
order to overthrow the presumption.
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Valuable consideration means an obligation to give, to do, or not to do in favor of the party
who makes the contract, such as the maker or indorser. For the care given to her kin, Ty had a
legitimate obligation to pay the hospital by virtue of her relationship with them and by force of her
signature on her mother’s Contract of Admission acknowledging responsibility for payment, and
on the promissory note she executed in favor of the hospital.
B.P. 22 does not make any distinction as to whether the checks within its contemplation are
issued in payment of an obligation or to merely guarantee the obligation. The thrust of the law is
to prohibit the making of worthless checks and putting them into circulation. Knowledge of
insufficiency is legally presumed from the dishonor of the checks for insufficiency of funds.46 If
not rebutted, it suffices to sustain a conviction.
The knowledge of the payee of the insufficiency or lack of funds of the drawer with the drawee
bank is immaterial as deceit is not an essential element of an offense penalized by B.P. 22. The
gravamen of the offense is the issuance of a bad check, hence, malice and intent in the issuance
thereof is inconsequential.
The checks were issued to cover the receipt of an actual "account or for value." Substantial
evidence, as found by the trial court and Court of Appeals, has established that the checks were
issued in payment of the hospital bills of Ty’s mother
NOTES
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TOPIC CONSIDERATION MODULE

CASE #17
CASE TITLE DE LEON VS. RODRIGUEZ GR NO 202658
TINGA
PONENTE DATE
June 17, 2019
DOCTRINE
A valuable consideration in a contract is not limited to money, but refers to any obligation to give,
to do, or not to do in favor of the party who makes the contract.
FACTS
Respondent Carmencita L. Rodriguez filed a complaint for sum of money with damages against
petitioner Alejandro De Leon before Branch 208 of the Regional Trial Court (RTC) of
Mandaluyong City.
Respondent alleged that petitioner executed a promissory note dated November 25, 1998 in her
favor. Petitioner, however, failed to pay his obligation despite repeated demands by the
respondent.
In his answer with counterclaim, petitioner claimed that he purchased a house and lot from
Citibank, through its real estate arm, the Integrated Credit & Corporate Services. A year
after he completed the construction of a building, the petitioner was informed that the property
was actually owned by the respondent. Negotiations then ensued among the parties and
Citibank, but they did not reach any agreement. Subsequently, respondent filed an ejectment
case against petitioner, but prior to its resolution, petitioner allegedly vacated the property. The
property was eventually sold to a certain Atadero with the help of a petitioner. Petitioner admitted
the existence of the promissory note, but denied receiving any value for it. He explained that the
promissory note was executed to represent respondent’s share in the damages that may be
awarded to him in a case he filed against Citibank. Respondents testified that the petitioner
offered to buy the property after their meeting with Citibank fell through. Respondent initially
hesitated, but later agreed to sell the petitioner the property, but in addition, he must pay Pl
Million for the disturbance and anxiety the respondent suffered. This agreement allegedly
brought about the execution of the promissory note.
Petitioner admitted the existence of the promissory note, but denied receiving any value for it.
He
explained that the promissory note was executed to represent respondent’s share in the
damages that may be awarded to him in a case he filed against Citibank.
Respondents testified that the petitioner offered to buy the property after their meeting with
Citibank fell through. Respondent initially hesitated, but later agreed to sell petitioner the
property, but in addition, he must pay Pl Million for the disturbance and anxiety the respondent
suffered. This
agreement allegedly brought about the execution of the promissory note.
ARGUMENT Petitioner (Name):

S a.
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b.
Respondent (Name):
a.
b.
LOWER RTC:
COURT The RTC ruled in favor of the petitioners. The RTC noted the testimonies of both parties that
RULING respondent did not give any consideration to petitioner, and thus concluded that on this fact
alone, the promissory note was unenforceable.
The RTC held further that the promissory note was actually a contract between the parties
which was not, however, perfected because its enforceability was dependent on a suspensive
condition that petitioner will receive damages from Citibank, which did not happen.
Consequently, there was no obligation to speak of.
CA:
The CA ruled petitioner’s claim that the promissory note lacked consideration was not an
effective denial, but rather an admission of the existence of the promissory note.
ISSUE/S
Whether or not the petitioner is liable to respondent under the promissory note.
SC RULING
YES. Respondent mistakenly assumes that value or consideration only pertains to money. Value
refers to any consideration sufficient to support a simple contract such as an antecedent or pre-
existing debt.
Valuable consideration or value, in general terms, may be some right, interest, profit or benefit to
the party who makes the contract or some forbearance, detriment, loss or some responsibility to
act, or labor, or service given, suffered or undertaken by the other side. Even a benefit conferred
upon a third person, or, to reiterate, a detriment suffered by the promisee at the instance of the
promisor qualifies as sufficient consideration. Thus, respondent’s admission that she did not give
any money to petitioner is not tantamount to an admission that there was no valuable
consideration for the promissory note. In fact, respondent never asserted that the promissory
note was issued because she gave petitioner a sum of money.
Furthermore, the presumption both under the Negotiable Instruments Law, hat a promissory
note
is issued for a valuable consideration shall stand unless convincing evidence is presented to
show the contrary.
NOTES
Finally, we reiterate that absence or failure of consideration may only be raised as a defense
against a person who is not a holder in due course. Section 52 of the Negotiable Instruments
Law defines who is a holder in due course.
There is a prima facie presumption that every holder is a holder in due course and he who
claims otherwise has the burden of proving the same. In this case, petitioner did not contest the
genuineness and due execution of the promissory note. There is also no question that
respondent obtained it before it was overdue and without notice that it had been previously
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dishonored. She also had no notice of any infirmity in the instrument or defect in the title of the
petitioner who was negotiating it. As already established, respondent took the promissory note in
good faith and for value. Petitioner failed to rebut this fact or the presumption in favor of
respondent. All told, respondent is a holder in due course and consequently, petitioner cannot
invoke the supposed absence of consideration against her.

2F 2020-2021
TOPIC Holders in Due Course; Crossed-Checks MODULE 4

CASE #1
CASE TITLE Dino v. Judal-Loot GR NO 170913
PONENTE CARPIO, J DATE April 19, 2010
DOCTRINE
The act of crossing a check serves as a warning to the holder that the check has been issued
for a definite purpose so that the holder thereof must inquire if he has received the check
pursuant to that purpose; otherwise, he is not a holder in due course.
FACTS In December 1992, a syndicate, one of whose members posed as an owner of several parcels of
land situated in Canjulao, Lapu-lapu City, approached ROBERT DINO and induced him to lend the
group P3,000,000.00 to be secured by a real estate mortgage on the properties. A member of the
group, particularly a woman pretending to be a certain Vivencia Ompok Consing, even offered to
execute a Deed of Absolute Sale covering the properties, instead of the usual mortgage contract.
Enticed and convinced by the syndicate's offer, petitioner issued three Metrobank checks totaling
P3,000,000.00, one of which is postdated 13 February 1993 in the amount of P1,000,000.00 payable
to Vivencia Ompok Consing and/or Fe Lobitana.
Upon scrutinizing the documents involving the properties, petitioner discovered that the
documents covered rights over government properties. Realizing he had been deceived,
petitioner advised Metrobank to stop payment of his checks. However, only the payment of
P1,000,000.00 payable to Vivencia Ompok Consing and/or Fe Lobitana was ordered stopped. The
other two checks were already encashed by the payees.
Meanwhile, Lobitana negotiated and indorsed the Check to respondents, MARIA LUISA
JUDAL-LOOT, joined by her husband VICENTE LOOT, in exchange for cash in the sum of
P948,000.00, which respondents borrowed from Metrobank and charged against their credit line.
Before respondents accepted the check, they first inquired from the drawee bank, Metrobank,
Cebu-Mabolo Branch which is also their depositary bank, if the subject check was sufficiently funded,
to which Metrobank answered in the positive. However, when respondents deposited the check with
Metrobank, Cebu-Mabolo Branch, the same was dishonored by the drawee bank for reason
"PAYMENT STOPPED."
Respondents filed a collection suit against Dino and Lobitana before the trial court. In their Complaint,
respondents alleged, among other things, that they are holders in due course and for value of
Metrobank Check and that they had no prior information concerning the transaction between
defendants.
In his Answer, Dino denied respondents' allegations that "on the face of the subject check, no
condition or limitation was imposed" and that respondents are holders in due course and for value of
the check.
For her part, Lobitana denied the allegations in the complaint and basically claimed that the
transaction leading to the issuance of the subject check is a sale of a parcel of land by Vivencia
Ompok Consing to petitioner and that she was made a payee of the check only to facilitate its
discounting.

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LOWER RTC (Mandaue): ruled in favor of CA: affirmed the trial court's finding
COURT respondents - pointed out that petitioner's own admission
RULING - declared them due course holders of that respondents were never parties to the
the subject check, since there was no transaction among petitioner, Lobitana,
privity between respondents and Concordio Toring, Cecilia Villacarlos, and
defendants Consing, proved respondents' lack of
- ordered Dino and Lobitana to solidarily knowledge of any infirmity in the instrument
pay the face value of the check or defect in the title of the person negotiating
- Only Dino appealed it.
- Moreover, respondents verified from
Metrobank whether the check was
sufficiently funded before they accepted it.
- Therefore, respondents must be excluded
from the ambit of petitioner's stop payment
order.
● petitioner "was only exercising (although
incorrectly), what he perceived to be his
right to stop the payment of the check
which he rediscounted."
● Dino acted in good faith in ordering the
stoppage of payment of the subject check
and thus, he must not be made liable for
those amounts.
ISSUE/S 1. WON the Loots were holders in due course as to entitle them to collect the face value
of the check from its drawer or petitioner herein. - NO.
ARGUMENTS Petitioner (Robert Dino): Respondent (Loots):

a. raised the defense that the check is a a. issues not raised during the trial cannot be raised
crossed check for the first time on for the first time on appeal as it would be offensive
appeal to the elementary rules of fair play, justice and due
process
b. claimed that "for want or lack of the
prestation," he could validly stop the payment b.
of his check, and that by rediscounting
petitioner's check, respondents "took the risk
of what might happen on the check."
- He maintained that respondents are
not holders in due course of the
subject check, which is one of the
possible effects of crossing a check,
and as such, respondents could not
recover any liability on the check from
petitioner
SC RULING 1. NO.
Section 52 of the Negotiable Instruments Law defines a holder in due course, thus:

2F 2020-2021
A holder in due course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon 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;
(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 any infirmity in
the instrument or defect in the title of the person negotiating it.
In the case of a crossed check, as in this case, the following principles must additionally be
considered: A crossed check:
(a) may not be encashed but only deposited in the bank;
(b) may be negotiated only once — to one who has an account with a bank; and
(c) warns the holder that it has been issued for a definite purpose so that the
holder thereof must inquire if he has received the check pursuant to that purpose;
otherwise, he is not a holder in due course.
In this case, respondents had the duty to ascertain the indorser's, in this case Lobitana's, title to the
check or the nature of her possession. This, respondents failed to do. Respondents' verification
from Metrobank on the funding of the check does not amount to determination of Lobitana's
title to the check. Failing in this respect, respondents are guilty of gross negligence amounting
to legal absence of good faith, contrary to Section 52 (c) of the Negotiable Instruments Law.
Hence, respondents are not deemed holders in due course of the subject check.
Moreover, there is no question that the payees of the check, Lobitana or Consing, were not the ones
who presented the check for payment. Lobitana negotiated and indorsed the check to respondents in
exchange for P948,000.00. It was respondents who presented the subject check for payment;
however, the check was dishonored for reason "PAYMENT STOPPED." In other words, it was not
the payee who presented the check for payment; and thus, there was no proper presentment.
(read notes on State Invest Ruling) As a result, liability did not attach to the drawer. Accordingly, no
right of recourse is available to respondents against the drawer of the check, petitioner herein,
since respondents are not the proper party authorized to make presentment of the subject
check.
However, the fact that respondents are not holders in due course does not automatically mean
that they cannot recover on the check. The Negotiable Instruments Law does not provide that a
holder who is not a holder in due course may not in any case recover on the instrument. The only
disadvantage of a holder who is not in due course is that the negotiable instrument is subject
to defenses as if it were non-negotiable. Among such defenses is the absence or failure of
consideration, which petitioner sufficiently established in this case. Petitioner issued the subject check
supposedly for a loan in favor of Consing's group, who turned out to be a syndicate defrauding
gullible individuals. Since there is in fact no valid loan to speak of, there is no consideration for
the issuance of the check. Consequently, petitioner cannot be obliged to pay the face value of
the check. Respondents can collect from the immediate indorser, in this case Lobitana.
Significantly, Lobitana did not appeal the trial court's decision, finding her solidarily liable to pay,
among others, the face value of the subject check. Therefore, the trial court's judgment has long
become final and executory as to Lobitana.
NOTES State Investment House v. Intermediate Appellate Court:

Crossing a check is done by placing two parallel lines diagonally on the left
top portion of the check. The crossing may be:

2F 2020-2021
1. special wherein between the two parallel lines is written the name of a
bank or a business institution, in which case the drawee should pay
only with the intervention of that bank or company, or
2. general wherein between two parallel diagonal lines are written the words
"and Co." or none at all as in the case at bar, in which case the drawee
should not encash the same but merely accept the same for deposit.
The effect therefore of crossing a check relates to the mode of its presentment for
payment. Under Section 72 of the Negotiable Instruments Law, presentment for
payment to be sufficient must be made (a) by the holder, or by some person
authorized to receive payment on his behalf . . . As to who the holder or
authorized person will be depends on the instructions stated on the face of the
check.

2F 2020-2021
TOPIC Holder not in due course MODULE 4

CASE #2
CASE TITLE Cha Wan v Tan Kim GR NO
L-15380
PONENTE Bengzon DATE
September 30, 1960
DOCTRINE 1. The drawer in drawing the check engaged that on due presentment, the check would be paid, and
that if it be dishonored, he will pay the amount thereof to the holder. Wherefore, in the absence of
due presentment, the drawer did not become liable.
2. Where a check is crossed specially in favor of a certain bank, the check is generally deposited with
the bank mentioned in the crossing, so that the latter may take charge of the collection. If it is not
presented by said bank for payment, the drawee is liable to the true owner, in case of payment to
persons not entitled thereto.
3. NIL does not provide that a holder who is not a holder in due course, may not in any case, recover
on instrument. The only disadvantage of a holder who is not a holder in due course is that the
negotiable instrument is subject to defense as if it were non- negotiable.
FACTS This suit to collect 11 checks totalling P4,290.00 is here for decision because it involves no issue of
fact.
Such checks payable to "cash or bearer" and drawn by defendant Tan Kim (the other defendant is
her husband) upon the Equitable Banking Corporation, were all presented for payment by Chan Wan
to the drawee bank, but they "were all dishonored and returned to him unpaid due to insufficient funds
and/or causes attributable to the drawer."
LOWER CFI of MANILA CA:

COURT Court declined to order payment for two
RULING reasons:
1. Plaintiff, Chan Wan, failed to prove he
was a holder in due course
2. The checks, being crossed checks,
should not have been presented to the
drawee for "payment," but should
have been deposited instead with the
bank mentioned in the crossing
Inasmuch as Chan Wan did present them for

payment himself, the Court ruled that there
was no proper presentment, and the liability
did not attach to the drawer
ISSUE/S
WON the plaintiff Cha Wan is a holder in due course - NO
ARGUMENTS Petitioner (Chan Wan): Respondent (Tan Kim and Chen So):
a. Attorney of Chan Wan testified to identify a. Tan Kim declared that the check had been issued
checks plus letters of demand. Chan Wan did to two persons named Pinong and Muy for some
not take the witness stand.

2F 2020-2021
shoes the former had promised to make and "were
intended as mere receipts"
● Tan Kim admitted on cross-examination

either that the checks had been issued as
evidence of debts to Pinong and Muy, and/or
that they had been issued in payment of
shoes which Pinong had promised to make
for her.
○ Seeming to imply that Pinong had
failed to make the shoes, she
asserted Pinong had "promised to
pay the checks for me". Yet she did
not complete the idea, perhaps
because she was just answering
cross-questions, her main testimony
having referred merely to their
counter-claim.
SC RULING NO.
The NIL regulating the issuance of negotiable checks, the rights and the liabilities arising therefrom,
does not mention "crossed checks". Art. 541 of the Code of Commerce refers to such
instruments. The bills of Exchange Act of England of 1882, contains several provisions about them,
some of which are quoted in the margin. In Philippine National Bank vs. Zulueta, we applied some
provisions of said Bills of Exchange Act because the NIL, originating from England and codified in the
United States, permits resort thereto in matters not covered by it and local legislation.
Eight of the checks here in question bear across their face two parallel transverse lines
between which these words are written: non-negotiable — China Banking Corporation. These
checks have, therefore, been crossed specially to the China Banking Corporation, and should
have been presented for payment by China Banking, and not by Chan Wan.
The drawer in drawing the check engaged that "on due presentment, the check would be paid,
and that if it be dishonored . . . he will pay the amount thereof to the holder". In the absence of
due presentment, the drawer did not become liable.
It is found on the backs of the checks, endorsements which apparently show they had been deposited
with the China Banking Corporation and were, by the latter, presented to the drawee bank for
collection.
The following endorsement stated below appears on the checks, which are followed by the
endorsement of China Banking Corporation. All the crossed checks have the "clearance"
endorsement of China Banking Corporation:
a. “For deposit to the account of White House Shoe Supply with the China Banking Corporation.”
b. “Cleared through the clearing office of the Central Bank of the Philippines. All prior
endorsements and/or lack of endorsements guaranteed. China Banking Corporation.”
c. “For deposit to the credit of our account. Viuda e Hijos de Chua Chiong Pio. People's Shoe
Company.”
Through these circumstances, it showed the deposit of the checks with China Banking
Corporation and subsequent presentation by the latter through the clearing office; but as

2F 2020-2021
drawee had no funds, they were unpaid and returned, some of them stamped "account
closed". It is unknown on how Cha Wan got hold of the said checks but the Court found that he
got them after they had been returned, because he presented them in court with such "account
closed" stamps, without bothering to explain. He is not a holder in due course since he knew,
upon taking them up, that the checks had already been dishonored.
Simply because he was not a holder in due course Chan Wan could not recover on the checks. NIL
does not provide that a holder who is not a holder in due course, may not in any case, recover
on instrument. The only disadvantage of a holder who is not a holder in due course is that the
negotiable instrument is subject to defense as if it were non- negotiable.
In the case at bar, if it were true that the checks had been issued in payment for shoes that were
never made and delivered, Tan Kim would have a good defense as against a holder who is not a
holder in due course.
NOTES This case was returned to the lower court for additional evidence because of deficiency of important
details.

2F 2020-2021
TOPIC REQUISITES OF HOLDERS: Complete and Regular MODULE 4

CASE #3
CASE TITLE Bank of America NT & SA vs. Philippine Racing Club GR NO 150228
PONENTE Leonardo-De Castro, J. DATE July 30, 2009
DOCTRINE A check is not regular in its face where “On the blank space of each check reserved for the payee, the
following typewritten words appear: ‘ONE HUNDRED TEN THOUSAND PESOS ONLY’. Above the
same is the typewritten word, ‘CASH’. On the blank reserved for the amount , the same amount of
One Hundred Ten Thousand Pesos was indicated with the use of a check writer.” The
presence of these irregularities in the check should alert anybody who will take the same to be
cautious before taking them.
FACTS Philippine Racing Club, Inc. (PRCI) is a domestic corporation maintaining Current Account No.
58891-012 with the petitioner Bank of America NT & SA (BA), Paseo de Roxas Branch. The
authorized joint signatories with respect to said Current Account were plaintiff-appellee's President
(Antonia Reyes) and Vice President for Finance (Gregorio Reyes).
On or about the 2nd week of December 1988, the President and Vice President of PRCI, were
scheduled to go out of the country in connection with its business. In order not to disrupt operations in
their absence, they pre-signed several checks relating to Current Account no. 58891-012. These
checks were entrusted to the accountant with instruction to make use of the same as the need arose.
The internal management was, in the event there was need to make use of the checks, the
accountant would prepare the corresponding voucher and thereafter complete the entries on the
pre-signed checks.
December 16, 1988: Two checks of PRCI with the indicated value of P110,000.00 each were
presented to the petitioner bank for encashment. It is admitted that these 2 checks were among those
pre-signed by the respondent’s authorized signatories. The two checks had similar entries with similar
infirmities and irregularities:
On the blank space of each check reserved for the payee, the following typewritten words
appear: “ONE HUNDRED TEN THOUSAND PESOS ONLY”. Above the same is the typewritten
word, “CASH”. On the blank reserved for the amount , the same amount of One Hundred Ten
Thousand Pesos was indicated with the use of a check writer.
The petitioner bank, without verifying and/or confirming the legitimacy of the checks
considering the substantial amount involved and the obvious infirmity/defect of the checks on
the face, encashed the said checks. A verification process, even by telephone call to the PRCI office,
would have taken less than ten (10) minutes. But this was not done by BA. Investigation conducted by
PRCI yielded the fact that there was no transaction involving the respondent that called for the
payment of P220,000.00 to anyone. The checks appeared to have come into the hands of an
employee of PRCI who eventually completed without authority the entries on the pre-signed checks.
LOWER RTC: The trial court rendered a decision in CA: The Court of Appeals affirmed the trial court’s
COURT favor of PRCI, and ordered the BA to pay decision in toto.
RULING PRCI.

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ISSUE/S W/N the petitioner bank is liable for its failure to make a verification regarding the said
checks with the respondent. -YES
ARGUMENTS Petitioner (BA): Respondent (PRCI):
a. Petitioner insists that it merely fulfilled its a. A verification process, even by way of a
obligation as a drawee bank to a telephone call to the PRCI office, would have
drawer-client maintaining a checking account taken less than 10 minute, but this was not
with it under Section 126 and 185 of the NIL done by the petitioner bank.
which is to pay orders for checks bearing the
drawer-client’s genuine signatures. Pursuant
to said obligation, the drawee bank has the
duty to determine whether the signatures
appearing in the check are the drawer-client’s
or its duly authorized signatories. If the
signatures are genuine, the bank has the
unavoidable legal and contractual duty to
pay.
b. Petitioner maintains that there exists a duty

on the drawee bank to inquire from the
drawer before encashing a check only when
the check bears material alteration as
defined in Section 125 of the NIL. With
respect to the checks at issue, petitioner
points out that they do not contain any
material alteration.
c. Petitioner insists that pursuant to Sections

14 and 16 of the NIL, it could validly presume,
upon presentation of the checks, that the
party who filled up the blanks had authority
and that a valid and intentional delivery to the
party presenting the checks had taken place.
Hence, the sole blame should be shifted to
the respondent for its grossly negligent
practice of having its signatories pre-sign and
deliver the subject checks to its employees
(other than their signatories).
d. Petitioner asserts that it was not

duty-bound to verify with the respondent
since the amount below the typewritten
word "CASH", expressed in words, is the
very same amount indicated in figures by
means of a check writer on the amount
portion of the check. The amount stated in
words is, therefore, a mere reiteration of the
amount stated in figures. Petitioner
emphasizes that a reiteration of the
amount in words is merely a repetition and
that a repetition is not an alteration which
if present and material would have

2F 2020-2021
enjoined it to commence verification with
respondent.
SC RULING YES, the petitioner is liable for its failure to make a verification regarding the said checks with the
respondent in view of the misplacement of entries on the face of the checks.
There is no dispute that the signatures appearing on the subject checks were genuine signatures of
the respondent's authorized joint signatories; namely, Antonia Reyes and Gregorio Reyes. It was
apparently their practice to leave with the company accountant checks signed in blank to answer for
company obligations that might fall due during the signatories' absence. It is likewise admitted that
neither of the subject checks contains any material alteration or erasure.
However, on the blank space of each check reserved for the payee, the following typewritten words
appear: "ONE HUNDRED TEN THOUSAND PESOS ONLY". Above the same is the typewritten word,
"CASH". On the blank reserved for the amount, the same amount of One Hundred Ten Thousand
Pesos was indicated with the use of a check writer. The presence of these irregularities in each
check should have alerted the petitioner to be cautious before proceeding to encash them
which it did not do.
It is well-settled that banks are engaged in a business impressed with public interest, and it is
their duty to protect in return their many clients and depositors who transact with them. They
have the obligation to treat their client’s account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is
more than that of a good father of a family.
Although not in the strict sense “material alterations,” there were glaringly obvious irregularities on the
face of the check and the transaction as a whole in the:
1) the misplacement of the typewritten entries for the payee and the amount on the same blank
and the repetition of the amount using a check writer
2) It is highly uncommon for a corporation to make out checks payable to “CASH” for substantial
amounts such as in this case.
Clearly, someone made a mistake in filling up the checks and the repetition of the entries was
possibly an attempt to rectify the mistake. Also, if the check had been filled up by the person who
customarily accomplishes the checks of respondent, it should have occurred to the petitioner's
employees that it would be unlikely such mistakes would be made. All these circumstances should
have alerted the bank to the possibility that the holder or the person who is attempting to encash the
checks did not have proper title to the checks or did not have authority to fill up and encash the same.
As noted by the CA, petitioner could have made a simple phone call to its client to clarify the
irregularities and the loss to respondent due to the encashment of the stolen checks would have been
prevented.
In the case at bar, extraordinary diligence demands that petitioner should have ascertained from
respondent the authenticity of the subject checks or the accuracy of the entries therein not only
because of the presence of the highly irregular entries on the face of the checks but also of the
decidedly unusual circumstances surrounding their encashment. Respondent's witness testified
that for checks in amounts greater than P20,000.00 it is the company's practice to ensure that
the payee is indicated by name in the check. This was not rebutted by petitioner. Indeed, it is
highly uncommon for a corporation to make out checks payable to "CASH" for substantial amounts
such as in this case. If each irregular circumstance in this case were taken singly or isolated, the
bank’s employees might have been justified in ignoring them. However, the confluence of the
irregularities on the face of the checks and circumstances that depart from the usual banking practice

2F 2020-2021
of the respondent should have put the petitioner’s employees on guard that the checks were possibly
not issued by the respondent in due course of its business.
Petitioner's subtle sophistry cannot exculpate it from behavior that fell extremely short of the highest
degree of care and diligence required of it as a banking institution. Indeed, taking this with the
testimony of petitioner's operations manager that in case of an irregularity on the face of the
check (such as when blanks were not properly filled out) the bank may or may not call the client
depending on how busy the bank is on a particular day, we are even more convinced that
petitioner's safeguards to protect clients from check fraud are arbitrary and subjective. Every
client should be treated equally by a banking institution regardless of the amount of his deposits and
each client has the right to expect that every centavo he entrusts to a bank would be handled with the
same degree of care as the accounts of other clients. Perforce, we find that petitioner plainly failed to
adhere to the high standard of diligence expected of it as a banking institution.
Nevertheless, even if we assume that both parties were guilty of negligent acts that led to the loss,
the petitioner will still emerge as the party foremost liable in this case. In instances where both parties
are at fault, this Court has consistently applied the doctrine of last clear chance in order to assign
liability. In Westmont Bank v. Ong, we ruled:
. . . [I]t is petitioner [bank] which had the last clear chance to stop the fraudulent
encashment of the subject checks had it exercised due diligence and followed
the proper and regular banking procedures in clearing checks. As we had earlier
ruled, the one who had a last clear opportunity to avoid the impending
harm but failed to do so is chargeable with the consequences thereof.
In the case at bar, petitioner cannot evade responsibility for the loss by attributing negligence on the
part of respondent because, even if we concur that the latter was indeed negligent in pre-signing
blank checks, the former had the last clear chance to avoid the loss.
Following established jurisprudential precedents, we believe the allocation of sixty percent (60%) of
the actual damages involved in this case (represented by the amount of the checks with legal interest)
to petitioner is proper under the premises. Respondent should, in light of its contributory negligence in
pre-signing its checks, bear forty percent (40%) of its own loss.
NOTES

2F 2020-2021
TOPIC Holder in Due Course MODULE

CASE #4
CASE TITLE Vicente R. de Ocampo & Co. v. Anita Gatchalian, et al. GR NO G.R. No.
L-15126
PONENTE J. Labrador DATE November 30, 1961
DOCTRINE 1. Section 52 (c) provides that a holder in due course is one who takes the instrument "in good faith
and for value;"
2. Section 59, "that every holder is deemed prima facie to be holder in due course;" and
3. 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
4. Section 59, that every holder is deemed prima facie to be a holder in due course.
For there to be “lack of good faith,” it is not necessary to prove that the defendant knew the
exact fraud that was practiced – it is sufficient to show that defendant had notice that
something was wrong about his assignor’s acquisition of the title, although he had no notice
of the particular wrong that was committed. When the case has taken such shape that the plaintiff
is called upon to prove himself a holder in due course to be entitled to recover, he is required to
establish the conditions entitling him to standing as such, including good faith in taking the instrument.
It devolves upon him to disclose the facts and circumstances attending the transfer, from which good
or bad faith in the transaction may be inferred.
FACTS
September 8 1953: Anita Gatchailan (Gatchailan), who was then interested in looking for a car for the
use of her husband and the family, was shown and offered a car by Manuel Gonzales (Gonzales) and
Emil Fajardo (Fajardo), the latter being personally known to Gatchailan.
Gonzales represented to Gatchailan that he was duly authorized by the car’s owner, Ocampo Clinic,
to look for a buyer of the car and to negotiate for the sale. These facts were not known to Vicente de
Ocampo (Ocampo).
Gatchailan, satisfied with the car and its price, requested that Gonzales bring the car and its
registration to her so that her husband could see it. Gonzales replied that the car’s owner would not
give the certificate unless the prospective buyer showed readiness and willingness to buy the same –
he requested that Gatchailan give him a check to evidence good faith intention to purchase,
and that Gonzales would only keep the check and return it when he brings the certificate.
Ocampo was unaware of these facts.
Relying on the above, Gatchailan drew and issued a check, and Gonzales executed and issued a
receipt therefore.
When Gonzales failed to appear the next day, Gatchailan issued a “Stop Payment Order” on the
check, without previous notice to Ocampo, who was unknown to Gatchailan.
Anita Gatchailan and Hipolito did not personally know Manuel Gonzales prior to 1953, but Hipolito is
personally acquainted with Ocampo. Prior to 9 Sept., the sps. Gatchailan had no obligation or liability
with Ocampo Clinic for the hospitalization of the wife of Manuel Gonzales and neither or both of said
defendants had assumed, expressly or impliedly, with the Ocampo Clinic, the obligation of Manuel
Gonzales or his wife for the hospitalization of the latter;

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Gonzales delivered the check to Ocampo Clinic, in payment of fees and expenses arising from the
hospitalization of his wife.
Ocampo, in consideration of the fees for the hospitalization of Gonzales’ wife, accepted the check and
applied P441.75 thereof to payment of the hospitalization fees, and delivered to Gonzales the balance
on the amount of the P158.25.
The acts of acceptance of check and application of its proceeds were made without previous inquiry
by Ocampo with the Gatchalians.
Ocampo later filed a case for estafa against Gonzales with the City Fiscal of Manila for paying his
obligations with Ocampo and receiving the cash balance of the check, but the complaint was later
dropped.
LOWER RTC: CFI Manila sentenced the Gatchailans CA: affirmed the decision of the CFI
COURT to pay Ocampo the sum of P600, i.e., the
RULING value of the check, with legal interest until
paid, and costs of the suit.
ISSUE/S Whether or not Ocampo is holder in due course - NO
ARGUMENTS Petitioner (OCAMPO): Respondent (GATCHALIAN):

1. Ocampo is a holder in due course under 1. The check is not a negotiable instrument.
the Best Authority principle of the NIL, Gatchailan had no intention to transfer her
i.e., a payee may be a holder in due property in the instrument, as it was for
course; Sec. 191 defines a “holder” as safekeeping, thus there was no delivery as
the payee or indorsee of a bill or note, required by law. Assuming arguendo that
who is in possession of it, or the delivery was not for safekeeping, delivery was
bearer thereof, while Sec. 52 defines a conditional and the condition was not fulfilled.
“holder in due course” as a holder who 2. Ocampo is not a holder in due course. There
has the taken instrument under certain was no negotiation prior to Ocampo’s acquiring
1
conditions . Thus, Sec. 52’s use of the possession of the check.
word “holder” may be replaced by the ● A holder in due course presupposes a prior
Sec. 191 definition to read, “a holder in party from whose hands negotiated
due course is a payee or indorsee who is proceeded.
in possession,” etc. ● Ocampo is not a holder in due course
2. Assuming that it was never the intention because there were circumstances that
of Gatchailan to negotiate the instrument, brought suspicion about Gonzales’
intending instead that the purpose of possession and negotiation, which Ocampo
delivery was so that it could be in had the duty to inquire into the title, namely:
Gonzales’ safekeeping, as evidence of o Check was not a personal check of
good faith, nevertheless, it was not Gonzales, yet Ocampo never inquired
Ocampo’s fault that Gonzales delivered why Gonzales would use someone else’s
the check or negotiated it: the check was check to pay his debt.
payable to Ocampo, and was entrusted ▪ Furthermore, plaintiff had the
to Gonzales by Gatchailan, in effect, 'means of knowledge'
1
1. That it is complete and regular on its face.
2. That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact.
3. That he took it in good faith and for value.
4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

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delivery by the drawer (Gatchailan) to inasmuch as defendant
agent (Gonzales); when agent of the Hipolito Gatchalian is
drawer negotiated the check, negotiation personally acquainted with V.
took place through no fault of Ocampo, R. de Ocampo
unless it can be shown that Ocampo was
aware of the defect in the possession of o Anita Gatchialn is a complete stranger to
holder Gonzales. Manuel Gonzales and Ocampo.
o The check could not have been intended
to pay hospital fees (P441.75) since the
amount thereof was P600.
o It was necessary for Ocampo to give
Gonzales change – Ocampo should have
been more cautious in accepting a check
and disbursing cash as change.
o The check is payable to bearer. Any
person who holds it should have been
subjected to inquiries. Even in a bank,
checks are not cashed without inquiry
from the bearer.
SC RULING NO. Ocampo is not a holder in good faith. Ocampo failed in his duty in not finding out the
nature of the title and possession of Gonzales, amounting to absence of good faith, thus may
not be considered a holder of the check in good faith.
While the stipulation of facts expressly state that Ocampo was not aware of the circumstances under
which the check was delivered to Gonzales, we agree 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 — under all these circumstances, Ocampo should still have been put on
guard to inquire as to why Gonzales was in possession of the check and why he used it to pay
his wife’s account. It was Ocampo’s duty to ascertain from Gonzales the nature of the latter’s title to
the check, and 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. This is inconsonance with the:
● DOCTRINE: For there to be “lack of good faith,” it is not necessary to prove that
defendant knew the exact fraud that was practiced – it is sufficient to show that
defendant had notice that something was wrong about his assignor’s acquisition of the
title, although he had no notice of the particular wrong that was committed. (Paika v.
Perry)
o “Bad faith” means bad faith in the commercial sense – the failure to make further
inquiries and to shut their eyes deliberately to obvious facts. (Morris v. Muir)
● APPLICABLE LAW:
o Sec. 52 (c), NIL: a holder in due course is one who takes the instrument “in good faith and
for value;”

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o Sec. 52 (d), NIL: 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.”
o Sec 59, NIL: every holder is deemed prima facie to be a holder in due course.
● APPLIED:
o The prima facie presumption of a holder as a holder in due course does not apply
here because there was a defect in holder Gonzales’ title, since the instrument was not
payable to him or to bearer. Other circumstances – fact that drawer Gatchailan had no
account with Ocampo, that Gonzales did not tell Ocampo why the check was in his
possession or why he was using it for his account – showed that Gonzales’ title was
suspicious. It cannot be said that Ocampo acquired the check without knowledge of said
defect.
o The rule as it stands today – negligence on the part of the plaintiff, or suspicious
circumstances sufficient to put a prudent man on inquiry, will not of themselves prevent a
recovery, but are to be considered merely as evidence bearing on the question of bad
faith. Thus, when the case has taken such shape that the plaintiff is called upon to prove
himself a holder in due course to be entitled to recover, he is required to establish the
conditions entitling him to standing as such, including good faith in taking the instrument. It
devolves upon him to disclose the facts and circumstances attending the transfer, from
which good or bad faith in the transaction may be inferred.
In the case at bar as the payee acquired the check under circumstances which should have put it to
inquiry, why the holder had the check and used it to pay his own personal account, the duty devolved
upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The stipulation of
facts contains no statement of such good faith, hence we are forced to the conclusion that plaintiff
payee has not proved that it acquired the check in good faith and may not be deemed a holder in due
course thereof.
For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed, and
the defendants are absolved from the complaint. With costs against plaintiff-appellee.
NOTES ● A holder in due course is a holder who has taken the instrument under the following
conditions: a) that it is complete and regular upon its face; b) that he became the holder of it
before it was overdue, and without notice that it had been previously dishonored, if such was
the fact; 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 any infirmity in the instrument or defect in the title of the person
negotiating it.
● Where a holder’s title is defective or suspicious, it cannot be stated that the payee acquired
the check without the knowledge of such defect in holder’s title, and for this reason the
presumption that he is a holder in due course or that he acquired the instrument in good faith
does not exist. Where the payee acquired the check under circumstances which should have
put him on inquiry (i.e: why the holder had the check and used it to pay his own personal
account) the duty devolved upon him to prove that he actually acquired the check in good
faith.

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TOPIC Holders in Due Course: Presumption MODULE 4

CASE #5
CASE TITLE STATE INVESTMENT HOUSE, INC. v. COURT OF APPEALS and NORA GR NO 10163
MOULIC
PONENTE Bellosillo, J. DATE 11 January 1993
DOCTRINE Pursuant to Section 52 of the NIL, a prima facie presumption exists that the holder of a
negotiable instrument is a holder in due course. Consequently, the burden of proving that STATE
is not a holder in due course lies in the person who disputes the presumption.
FACTS
Nora Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission,
2 post-dated Equitable Banking Corporation checks in the amount of P50,000 each, one dated 30
August 1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks to
petitioner State Investment House, Inc. (STATE)
Moulic failed to sell the pieces of jewelry, so she returned them to Corazon before the maturity of the
checks. The checks, however, could no longer be retrieved as they had already been negotiated.
Consequently, before their maturity dates, Moulic withdrew her funds from the drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20
December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that
it be paid in cash instead, although MOULIC avers that no notice was given.
On 6 October 1983, State sued to recover the value of the checks plus attorney’s fees and expenses
of litigation.
Moulic contends that she incurred no obligation on the checks because the jewelry was never sold
and the checks were negotiated without her knowledge and consent. Moreover, she instituted a
Third-Party Complaint against Corazon, who later assumed full responsibility for the checks.
LOWER RTC: DISMISSED the Complaint as well as CA: AFFIRMED the decision of the RTC.
COURT the Third-Party Complaint, ordering STATE
RULING to pay Moulic P3,000 for attorney’s fees. The Notice of Dishonor to Moulic was made beyond
(May 26, 1988) the period prescribed by the NIL and that even if
STATE did serve such notice on Moulic within the
reglementary period, it would be of no consequence
as the checks should never have been presented for
payment. The sale of the jewelry was never effected.
The checks, thus, ceased to serve their purpose as
security for the jewelry.
ISSUE/S
Whether or not STATE is a holder of the checks in due course. -YES.
ARGUMENTS Petitioner (State Investment House, Inc.): Respondent (Court of Appeals and Nora Moulic):
a. Moulic avers she incurred no obligation on the
checks because the jewelry was never sold and the
checks were negotiated without her knowledge and
consent.

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b. there was failure or absence of consideration
c. The post-dated checks were merely issued as
security
d. The Court of Appeals also held that allowing
recovery on the checks would constitute unjust
enrichment on the part of STATE Investment House,
Inc.
e. STATE gave no notice of dishonor to Moulic.
SC RULING YES. Pursuant to Section 52 of the NIL, a prima facie presumption exists that the holder of a
negotiable instrument is a holder in due course. Consequently, the burden of proving that
STATE is not a holder in due course lies in the person who disputes the presumption. In this
regard, MOULIC failed.
The evidence clearly shows that:
(a) on their faces, the post-dated checks were complete and regular;
(b) STATE bought these checks from the payee, Corazon, before their due dates;
(c) STATE took these checks in good faith and for value, albeit at a discounted
price; and,
(d) STATE was never informed nor made aware that these checks were merely
issued to payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from
any defect of title of prior parties, and from defenses available to prior parties among themselves;
STATE may, thus, enforce full payment of the checks.
Moulic cannot set up against STATE the defense that there was failure or absence of consideration
as she may only do this if it was privy to the purpose for which they were issued and therefore is not a
holder in due course. Moreover, that the post-dated checks were merely issued as security is not a
ground for the discharge of the instrument as against a holder in due course since the only grounds
for such are those outlined in Section 119 of the NIL. (see notes)
Obviously, Moulic may only invoke paragraphs (c) and (d) of the aforementioned provision as
possible grounds for the discharge of the instrument but, the intentional cancellation contemplated
under paragraph (c) is that cancellation effected by destroying the instrument either by tearing it up,
burning it, or writing the word "cancelled" on the instrument. The act of destroying the instrument must
also be made by the holder of the instrument intentionally. Since Moulic failed to get back possession
of the post-dated checks, the intentional cancellation of the said checks is altogether impossible. On
the other hand, the acts which will discharge a simple contract for the payment of money under
paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what
these acts are. Again, none of the modes outlined therein is applicable in the instant case as
Sec. 119 contemplates of a situation where the holder of the instrument is the creditor while
its drawer is the debtor. In the present action, the payee, Corazon, was no longer Moulic’s creditor
at the time the jewelry was returned.
Moreover, the fact that STATE failed to give Notice of Dishonor to Moulic is of no moment. The need
for such is not absolute and is subject to exceptions under Sec. 114 of the NIL (see notes) Moulic did
not retrieve the checks when she returned the jewelry, but simply withdrew her funds from her
drawee bank and transferred them to another to protect herself. After withdrawing her funds, she
could not have expected her checks to be honored. Thus, she was responsible for the dishonor of her

2F 2020-2021
checks and there was no need to serve her Notice of Dishonor, which is simply bringing to the
knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a
specified instrument, upon proper proceedings taken, has not been accepted or has not been paid,
and that the party notified is expected to pay it. Further, she may not unilaterally discharge herself
from her liability by the mere expediency of withdrawing her funds from the drawee bank.
The NIL was enacted for the purpose of facilitating, not hindering or hampering transactions in
commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly.
The drawing and negotiation of a check have certain effects, aside from the transfer of title or the
incurring of liability in regard to the instrument by the transferor. The holder who takes the
negotiated paper makes a contract with the parties on the face of the instrument. There is an
implied representation that funds or credit are available for the payment of the instrument in
the bank upon which it is drawn. The withdrawal of the money from the drawee bank to avoid
liability on the checks cannot prejudice the rights of holders in due course. In herein case, such
withdrawal renders the drawer, Moulic, liable to STATE, a holder in due course of the checks.
In fine, Moulic, as drawer, is liable for the value of the checks she issued to STATE, the holder in due
course, without prejudice to any action for recompense she may pursue against the VICTORIANOs
as Third-Party Defendants who had already been declared as in default.
*Corazon, together with her husband, assumed full responsibility for the debt against STATE. Their
property mortgaged to STATE was extrajudicially foreclosed. However, the value of the property
foreclosed was not enough to cover the debt in full. Thus, STATE may proceed and is entitled to
claim the deficiency from Moulic. Such recovery of deficiency, although not discussed in Act No.
3135, as amended, said provision does not prohibit such recovery. *
NOTES SECTION 52 of Act. No. 2031 The Negotiable Instruments Law

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 upon its face; (b) That he
became the holder of it before it was overdue, and without notice that it was previously dishonored, if
such was the fact; (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 any infirmity in the instrument or defect in the title of the person negotiating
it.
SECTION 119 of Act. No. 2031 The Negotiable Instruments Law

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.
When notice need not be given to drawer. — Notice of dishonor is not required to be given to the
drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When
the drawee is a fictitious person or a person not having capacity to contract; (c) When the drawer is
the person to whom the instrument is presented for payment; (d) Where the drawer has no right to
expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer had
countermanded payment.

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TOPIC HOLDERS OF INSTRUMENTS MODULE
CASE #6
CASE TITLE BATAAN CIGAR AND CIGARETTE FACTORY, INC. vs THE COURT OF GR NO 93048
APPEALS and STATE INVESTMENT HOUSE, INC.
PONENTE NOCON, J DATE
DOCTRINE HOLDER IN DUE COURSE; REQUISITES. — The Negotiable Instruments Law states what
constitutes a holder in due course, thus: "Sec. 52 - A holder in due course is a holder who has taken
the instrument under the following conditions: (a) That it is complete and regular upon its face; (b)
That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact; (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 any infirmity in the instrument or defect in the title of the
person negotiating it."
NEGOTIABILITY NOT AFFECTED BY ITS BEING CROSSED. — According to commentators, the

negotiability of a check is not affected by its being crossed, whether specially or generally. It may
legally be negotiated from one person to another as long as the one who encashes the check with the
drawee bank is another bank, or if it is especially crossed, by the bank mentioned between the
parallel lines. This is especially true in England where the Negotiable Instrument Law originated.
EVERY HOLDER DEEMED PRIMA FACIE HOLDER IN DUE COURSE. — Section 59 of the NIL
further states that every holder is deemed prima facie a holder in due course. However, when it is
shown that the title of any person who has negotiated the instrument was defective, the burden is on
the holder to prove that he or some person under whom he claims, acquired the title as holder in due
course.
CHECK — A check is defined by law as a bill of exchange drawn on a bank payable on demand.
CROSSED CHECK; KINDS. — Crossed check is one where two parallel lines are drawn across its
face or across a corner thereof. It may crossed generally or specially. A check is crossed specially
when the name of a particular banker or a company is written between the parallel lines drawn.
It is crossed generally when only the words "and company" are written or nothing is written at
all between the parallel lines. It may be issued so that presentment can be made only by a bank.
Veritably the NIL does not mention "crossed checks," although Article 541 of the Code of Commerce
refers to such instruments.
EFFECTS OF CROSSING A CHECK. — Crossing of a check should have the following effects: (a)
the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only
once — to one who has an account with a bank; (c) and the act of crossing the check serves as
warning to the holder that the check has been issued for a definite purpose so that he must inquire if
he has received the check pursuant to that purpose, otherwise, he is not a holder in due course.
CROSSING OF CHECK SHOULD PUT HOLDER ON INQUIRY; EFFECT OF OMISSION

THEREOF. — It is then settled that crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorser's title to the check or the nature of his possession. Failing
in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good
faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, and as such the consensus of
authority is to the effect that the holder of the check is not a holder in due course.

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FACTS Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of
cigarettes, engaged one of its suppliers, King Tim Pua George (George King) to deliver 2,000 bales of
tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed
checks post dated sometime in March 1979 in the total amount of P820,000.00.
Relying on the supplier's representation that he would complete delivery within three months from
December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite
the supplier's failure to deliver in accordance with their earlier agreement. Again petitioner issued post
dated crossed checks in the total amount of P1,100,000.00, payable sometime in September 1979.
During these times, George King was simultaneously dealing with private respondent State
Investment House, Inc. (SIHI). On July 19, 1978, he sold at a discount check TCBT 551826 bearing
an amount of P164,000.00, post dated March 31, 1979, drawn by petitioner, naming George King as
payee to SIHI. On December 19 and 26, 1978, he again sold to respondent checks TCBT Nos.
608967 & 608968, both in the amount of P100,000.00, post dated September 15 & 30, 1979
respectively, drawn by petitioner in favor of George King.
In as much as George King failed to deliver the bales of tobacco leaf as agreed despite petitioner's
demand, BCCFI issued on March 30, 1979, a stop payment order on all checks payable to George
King, including check TCBT 551826. Subsequently, stop payment was also ordered on checks TCBT
Nos. 608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to
deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI
as party defendant.
LOWER RTC: The trial court pronounced SIHI as CA: The decision of the Regional Trial Court is
COURT having a valid claim being a holder in due affirmed by the Court of Appeals
RULING course. It further said that the non-inclusion of
King Tim Pua George as party defendant is
immaterial in this case, since he, as payee, is
not an indispensable party.
ISSUE/S Whether or not SIHI. a second indorser, a holder of crossed checks, is a holder in due course, to be
able to collect from the drawer, BCCFI. - NO.
ARGUMENTS Petitioner (BCCFI): Respondent (CA & SIHI):

a. It was not the payee who presented the a. SIHI is the proper party authorized to make
same for payment and therefore, there was presentment of the checks in question.|||
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 SIHI against the
drawer of the subject checks, considering that
SIHI is not the proper party authorized to
make the presentment of the checks in
question.
b. In the present case, BCCFI's defense in

stopping payment is as good to SIHI as it is to
George King. Because, really, the checks

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were issued with the intention that George
King would supply BCCFI with the bales of
tobacco leaf. There being failure of
consideration, SIHI is not a holder in due
course. Consequently, BCCFI cannot be
obliged to pay the checks.
SC RULING
NO. The Court ruled that the negotiability of a check is not affected by its being crossed, whether
specially or generally. It may legally be negotiated from one person to another as long as the one who
encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank
mentioned between the parallel lines. This is specially true in England where the NIL originated.
In the Philippine business setting, however, we used to be beset with bouncing checks, forging of
checks, and so forth that banks have become quite guarded in encashing checks, particularly those
which name a specific payee. Unless one is a valued client, a bank will not even accept second
indorsements on checks.
In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing
of a check should have the following effects:
(a) the check may not be encashed but only deposited in the bank;
(b) the check may be negotiated only once — to one who has an account with a
bank;
(c) and the act of crossing the check serves as warning to the holder that the
check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise, he is not a holder in due
course.
It is then settled that crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorser's title to the check or the nature of his possession.
Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of
good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, and as such the consensus of
authority is to the effect that the holder of the check is not a holder in due course.
In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King.
Because, really, the checks were issued with the intention that George King would supply BCCFI with
the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due
course. Consequently, BCCFI cannot be obliged to pay the checks.
The foregoing does not mean, however, that respondent could not recover from the checks. The only
disadvantage of a holder who is not a holder in due course is that the instrument is subject to
defenses as if it were non-negotiable. Hence, respondent can collect from the immediate indorser, in
this case, George King
NOTES

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TOPIC Holders of Instruments – Effect of Cross Checks MODULE 4

CASE #7
CASE TITLE STATE INVESTMENT HOUSE v. INTERMEDIATE APPELLATE COURT, GR NO 72764
ANITA PEÑA CHUA and HARRIS CHUA
PONENTE FERNAN, C.J.: DATE July 13, 1989
DOCTRINE Effects of crossing a check are: the check may not be encashed but only deposited in the bank; the
check may be negotiated only once to one who has an account with a bank; and the act of crossing
the check serves as a warning to the holder that the check has been issued for a definite purpose so
that he must inquire if he has received the check pursuant to that purpose, otherwise he is not a
holder in due course.
FACTS It appears that shortly before September 5, 1980, New Sikatuna Wood Industries, Inc. requested for a
loan from private respondent Harris Chua. The latter agreed to grant the same subject to the
condition that the former should wait until December 1980 when he would have the money. In view of
this agreement, private respondent-wife, Anita Pena Chua issued three (3) crossed checks payable to
New Sikatuna Wood Industries, Inc. all postdated December 22, 1980 as follows:
DRAWEEBANK CHECK 0 DATE AMOUNT

1_China, Ban ing corporaliOn 589053 oec . 22 . 1980 P98 ,750 .00
2 Intemalo11a1
Corporae Bank 0404:554.9 Dec 22. ·1980 102,313.00
3. Metropor.uan
. Bant:& mist co . 036512 oec . 22 . 1000 96 ,387 .00
The total value of the three (3) postdated checks amounted to P 299,450.00.
Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with herein petitioner
State Investment House, Inc. whereby for and in consideration of the sum of P1,047,402.91 under a
deed of sale, the former assigned and discounted with petitioner eleven (11) postdated checks
including the aforementioned three (3) postdated checks issued by herein private respondent-wife
Anita Peña Chua to New Sikatuna Wood Industries, Inc.
When the three checks issued by private respondent Anita Pena Chua 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 Anita
Peña to make good said checks, the latter failed to pay the same necessitating the former to file an
action for collection against the latter and her husband Harris Chua.
Private respondents-defendants filed a third party complaint against New Sikatuna Wood Industries,
Inc. for reimbursement and indemnification in the event that they beheld liable to petitioner-plaintiff.
For failure of a third party defendant to answer the third party complaint despite due service of
summons, the latter was declared in default.
LOWER RTC: IAC now CA:

COURT 1.) Main Case – In favor of the plaintiff (State Reversed to decision. Hence the appeal.
RULING Investment House) ordering the defendants to
pay jointly and severally to the plaintiff
2.) 3rd Party Complaint – New Sikatuna
Wood Industries, Inc. is ordered to pay third

2F 2020-2021
party plaintiffs Anita Pena Chua and Harris
Chua.
ISSUE/S Whether or not SIHI is a holder in due course as to entitle it to proceed against private respondents
for the amount stated in the dishonored checks. - NO
ARGUMENTS Petitioner (State Investment House): Respondent (Court of Appeals):
a. Petitioner submits that at the time of the
negotiation and endorsement of the checks in
question by New Sikatuna Wood Industries, it
had no knowledge of the transaction and/or
- 😊
a. The ruling itself, the one the appellate court held
(I highlighted it in yellow. )
Private Respondent (Chua Spouses):
SC RULING
arrangement made between the latter and
private respondents.
No, SIHI is not a holder in due course.

- 😊
a. Third party complaint above, (I highlighted in
green. )
Relying on the ruling in Ocampo v. Gatchalian, the Intermediate Appellate Court (now Court of
Appeals), correctly elucidated that the effects of crossing a check are:
1. the check may not be encashed but only deposited in the bank;
2. the check may be negotiated only once to one who has an account with a bank; and
3. the act of crossing the check serves as a warning to the holder that the check has been issued
for a definite purpose so that he must inquire if he has received the check pursuant to that
purpose, otherwise he is not a holder in due course.
Further, the appellate court said:
It results therefore that when appellee rediscounted the check knowing that it was a
crossed check he was knowingly violating the avowed intention of crossing the
check. Furthermore, his failure to inquire from the holder, party defendant New
Sikatuna Wood Industries, Inc., the purpose for which the three checks were
crossed despite the warning of the crossing, prevents him from being considered in
good faith and thus he is not a holder in due course. Being not a holder in due course,
plaintiff is subject to personal defenses, such as lack of consideration between
appellants and New Sikatuna Wood Industries. Note that under the facts the checks
were postdated and issued only as a loan to New Sikatuna Wood Industries, Inc. if and
when deposits were made to back up the checks. Such deposits were not made, hence
no loan was made, hence the three checks are without consideration (Sec. 28,
Negotiable Instruments Law).
Likewise New Sikatuna Wood Industries negotiated the three checks in breach of faith in violation of
Article 55, Negotiable Instruments Law, which is a personal defense available to the drawer of the
check. In addition, such instruments are mentioned in Section 541 of the Negotiable Instruments Law
as follows:
Sec. 541. The maker or any legal holder of a check shall be entitled to indicate therein
that it be paid to a certain banker or institution, which he shall do by writing across the
face the name of said banker or institution, or only the words "and company."
The payment made to a person other than the banker or institution shall not exempt the
person on whom it is drawn, if the payment was not correctly made.

2F 2020-2021
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, private respondent
wife, considering that petitioner is not the proper party authorized to make presentment of the
checks in question.
That the subject checks had been issued subject to the condition that private respondents on
due date would make the back up deposit for said checks but which condition apparently was
not made, thus resulting in the non-consummation of the loan intended to be granted by
private respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense
against petitioner who is not a holder in due course.
NOTES

2F 2020-2021
TOPIC Holder in Due Course MODULE

CASE #8
CASE TITLE Alvin Patrimonio vs. Napoleon Gutierrez and Octavio Marasigan III GR NO 187769
PONENTE Brion, J. DATE

June 4, 2014
DOCTRINE ● Sec. 52 — A holder in due course is a holder who has taken the instrument
under the following conditions:
(b) That he became the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was the fact;
(d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person
negotiating it.
● As ruled in De Ocampo vs. Gatchalian, 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 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 to bad faith.
FACTS
Alvin Patrimonio and Napoleon Gutierrez (respondent) entered into a business venture under the
name of Slam Dunk Corporation (Slam Dunk), a production outfit that produced a production outfit
that produced mini-concerts and shows related to basketball. Patrimonio was a professional
basketball player, while Gutierrez was a well-known sports columnist.
In the course of their business, Patrimonio pre-signed several checks to answer for Slam Dunk’s
expenses. Although signed, the checks had no payee’s name, date or amount.
The blank checks were entrusted to Gutierrez, with the specific instruction NOT to fill them out
WITHOUT Patrimonio’s previous notification and approval. According to Patrimonio, the
arrangement was made, so that he could verify the validity of the payment and make the proper
arrangements to fund the account
In the middle of 1993, WITHOUT Patrimonio’s knowledge and consent, Gutierrez went to
Marasigan (Patrimonio’s former teammate) to secure a loan in the amount of Php 200,000 on the
excuse that Patrimonio needed the money for the construction of his house. In addition to the
payment of the principal, Gutierrez assured Marasigan that he would be paid an interest of 5%
per month from March to May 1994.
After much contemplation and and taking into account his relationship with the Patrimonio and
Gutierrez, Marasigan acceded to Gutierrez' request and gave him Php 200,000.00 sometime in
February 1994. Gutierrez simultaneously delivered to Marasigan one of the blank checks that
Patrimonio pre-signed with Pilipinas Bank, with the blank portions filled out with the words
“Cash” “Two Hundred Thousand Pesos Only”, and the amount “Php 200,000.00”, but
Patrimonio contended that the same was not written by Gutierrez.

2F 2020-2021
Marasigan deposited the check, but it was dishonored for the reason "ACCOUNT CLOSED." It
was later revealed that Patrimonio's account with the bank had been closed since May 28, 1993.
Marasigan sought recovery from Gutierrez, but to no avail. He thereafter sent several demand letters
to Patrimonio asking for the payment of Php 200,000.00, but his demand letters were unheeded.
Consequently, he filed a criminal case for violation of B.P. 22 against Patrimonio.
Patrimonio filed before the RTC a Complaint for Declaration of Nullity of Loan and Recovery of
Damages against Gutierrez and co-respondent Marasigan. He completely denied authorizing the
loan or the check's negotiation, and asserted that he was not privy to the parties' loan agreement.
Only Marasigan filed his answer to the complaint. In the RTC's order dated December 22, 1997,
Gutierrez was declared in default.
LOWER RTC: RULED IN FAVOR OF MARASIGAN CA: AFFIRMED THE RTC RULINGS
COURT - It found that Patrimonio, in issuing the pre-signed -The CA agreed with Patrimonio that
RULING blank checks, had the intention of issuing a Marasigan is not a holder in due course
negotiable instrument, albeit with specific as he did not receive the check in good
instructions to Gutierrez not to negotiate or issue the faith.
check without his approval.
-The CA also concluded that the check had
-While under Section 14 of the Negotiable Instruments been strictly filled out by Gutierrez in
Law, Gutierrez had the prima facie authority to accordance with the Patrimonio's authority.
complete the checks by filling up the blanks therein, It held that the loan may not be nullified
the RTC ruled that he deliberately violated petitioner's since it is grounded on an obligation
specific instructions and took advantage of the trust arising from law and ruled that the
reposed in him by the latter. Patrimonio is still liable to pay Marasigan
the sum of Php 200,000.00.
-Declared Marasigan as a HOLDER IN DUE
COURSE
-Dismissed Patrimonio’s complaint for declaration of

nullity of the loan and Patrimonio was ordered to pay
Marasigan the face value of the check with a right to
claim reimbursement from Gutierrez.
ISSUE/S Whether or not Marasigan is a holder in due course. NO.
ARGUMENTS Petitioner (PATRIMONIO): Respondent (GUTIERREZ & Marasigan):

a. There was no loan between him and Marasigan a. Marasigan: submits that the petitioner's
since he never authorized the borrowing of money nor acts of pre-signing the blank checks and
the check's negotiation to the latter; releasing them to Gutierrez suffice to
- Marasigan is not a holder in due course. He establish that the petitioner had authorized
contended that when Marasigan received the Gutierrez to fill them out and contract the
check, he knew that the same was without a loan in his behalf.
date, and hence, incomplete.
b. Under Article 1878 of the Civil Code, a special
power of attorney is necessary for an individual to
make a loan or borrow money in behalf of another;
c. The loan transaction was between Gutierrez and
Marasigan, with his check being used only as a
security;
d. The check had not been completely and strictly
filled out in accordance with his authority since the

2F 2020-2021
condition that the subject check can only be used
provided there is prior approval from him, was not
complied with.
d. Even if the check was strictly filled up as
instructed by Patrimonio, Marasigan is still not
entitled to claim the check's value as he was not a
holder in due course; (Module 4 Topic)
SC RULING
NO. MARASIGAN IS NOT A HOLDER IN DUE COURSE.
The Negotiable Instruments Law (NIL) defines a holder in due course, thus:
Sec. 52 — A holder in due course is a holder who has taken the instrument under the following
conditions:
(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it. (emphasis supplied)
Section 52 (c) of the NIL states that a holder in due course is one who takes the instrument "in good
faith and for value." It also provides in Section 52 (d) that in order that one may be a holder in due
course, it is necessary that at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
Acquisition in good faith means taking without knowledge or notice of equities of any sort which could
be set up against a prior holder of the instrument. It means that he does not have any knowledge of
fact which would render it dishonest for him to take a negotiable paper. The absence of the defense,
when the instrument was taken, is the essential element of good faith.
In the present case, Marasigan's knowledge that the Patrimonio is not a party or a privy to the
contract of loan, and correspondingly had no obligation or liability to him, renders him
dishonest, hence, in bad faith. Since he knew that the underlying obligation was not actually for
the petitioner, the rule that a possessor of the instrument is prima facie a holder in due course is
inapplicable. As correctly noted by the CA, his inaction and failure to verify, despite knowledge
of that the petitioner was not a party to the loan, may be construed as gross negligence
amounting to bad faith.
Yet, it does not follow that simply because he is not a holder in due course, Marasigan is already
totally barred from recovery. The NIL does not provide that a holder who is not a holder in due
course may not in any case recover on the instrument. The only disadvantage of a holder who
is not in due course is that the negotiable instrument is subject to defenses as if it were
non-negotiable.
Notably, Gutierrez was only authorized to use the check for business expenses; thus, he exceeded
the authority when he used the check to pay the loan he supposedly contracted for the
construction of Patrimonio's house. This is a clear violation of Patrimonio's instruction to use
the checks for the expenses of Slam Dunk. It cannot therefore be validly concluded that the check
was completed strictly in accordance with the authority given by Patrimonio. Considering that
Marasigan is not a holder in due course, the petitioner can validly set up the personal defense
that the blanks were not filled up in accordance with the authority he gave. Consequently,

2F 2020-2021
Marasigan has no right to enforce payment against Patrimonio and the latter cannot be obliged to
pay the face value of the check.
NOTES

2F 2020-2021
TOPIC Persons who are liable/ Liability of Parties MODULE

CASE #1
CASE TITLE Bank of America NT & SA v. Associated Citizens Bank GR NO 141001
PONENTE Carpio, J; DATE May 21, 2009
DOCTRINE 1. The bank on which a check is drawn is under strict liability, based on the contract between
the bank and its customer, to pay the check only to the payee or the payee’s order. When the
drawee bank pays a person other than the payee named on the check, it does not comply
with the terms of the check and violates its duty. The drawee will be violating the instructions
of the drawer and shall be liable for the amount charged to the drawer’s account.
2. Check transactions 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.
FACTS
BA-Finance Corporation entered into a transaction with Miller Offset Press, Inc. through
the latter’s authorized representatives (Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan
Seng). BA-finance granted Miller a credit line facility through which the latter could assign or
discount its trade receivables with the former. The representatives executed a continuing
suretyship agreement with BA-Finance whereby they jointly and severally guaranteed the
full and prompt payment of any and all indebtedness which Miller may incur with BA-
finances.
Miller discounted and assigned several trade receivables to BA- Finance by executing Deeds
of Assignment in favor of the latter. In consideration of the assignment, BA- Finance issued
four checks payable to the “Order of Miller Offset Press, Inc.” with the notation “For
Payee’s Account only.” These checks were drawn against Bank of America.
The four checks were deposited by Ching Uy Seng (a.k.a. Robert Ching), then corporate
secretary of Miller, in account no. 989 in Associated Citizens Bank. Associated Bank
stamped the checks with the notation “all prior endorsements and/or lack of endorsements
guaranteed”, and sent them through clearing. The Bank of America, honored the checks and
paid the proceeds to Associated Bank as the collecting bank.
Miller failed to deliver to BA-Finance the proceeds of the assigned trade receivables.
BA-Finance, then, filed a complaint against Miller for collection of P731,329.63 which
BA-Finance allegedly paid in consideration of the assignment, plus interest at the rate of 16%
per annum and penalty charges.
LOWER RTC: CA: Affirmed with modifications

COURT 1. Bank of America to pay plaintiff BA - representatives should reimburse Associated
RULING Finance the value of the four checks Citizens Bank
2. Associated Citizens bank to reimburse
Bank of America

2F 2020-2021
ISSUE/S 1. W
hether or not the Bank of America is liable to pay BA-Finance – Yes
2. A
ssociated Bank liable to reimburse Bank of America – Yes
ARGUMENTS Petitioner (Bank of America): Respondent ():

● Bank of America denies liability for ● Miller, Uy Kiat Chung, and Uy Chung
paying the amount of the four checks Guan Seng denied that they received the
issued by BA-Finance to Miller, amount covered by the checks and that
alleging that it (Bank of America) they authorized their co-defendant Ching
relied on the stamps made by Uy Seng to transact business with
Associated Bank stating that "all prior BA-Finance on behalf of Miller
endorsement and/or lack of ● Bank of America denies liability for
endorsement guaranteed", through
which Associated Bank assumed paying the amount of the four checks
the liability of a general endorser issued by BA-Finance to Miller, alleging
under Section 66 of the Negotiable that it relied on the stamps made by
Instruments Law. Associated Bank.
● Bank of America contends that the
● Associated bank claims that Ching Uy
proximate cause of BA-Finance's
injury, if any, is the gross negligence
Seng being one of the corporate officers
of Associated Bank which allowed of Miller was duly authorized to act for
Ching Uy Seng (Robert Ching) to and on behalf of Miller
deposit the four checks issued to
Miller in the personal joint bank
account of Ching Uy Seng and Uy
Chung Guan Seng.
SC RULING 1. Yes. The bank on which a check is drawn, known as the drawee bank, is under strict
liability, based on the contract between the bank and its customer (drawer), to pay the check
only to the payee or the payee's order. When the drawee bank pays a person other than the
payee named on the check, it does not comply with the terms of the check and violates its
duty to charge the drawer's account only for properly payable items. Hence, in PNB vs
Rodriguez, a drawee should charge to the drawer's accounts only the payables authorized by
the latter; otherwise, the drawee will be violating the instructions of the drawer and shall be
liable for the amount charged to the drawer's account. Moreover, in Bataan Cigar v. Court of
Appeals, we enumerated the effects of crossing a check as follows: (a) the check may not be
encashed but only deposited in the bank; (b) the check may be negotiated only once — to
one who has an account with a bank; and (c) the act of crossing the check serves as a
warning to the holder that the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in
due course.
In this case, the four checks were drawn by BA-Finance and made payable to the order
of Miller offset Press. The checks were also crossed and issued for payee’s account
only. The drawer intended the check for deposit only by Miller Offset Press. Thus, when the
bank allowed a person other than Miller to present and deposit the checks in his own account
the Bank of America is deemed to have violated the instructions of the drawer and is liable
for the amount.

2F 2020-2021
2. Yes, accordingly, we hold that Associated Bank is liable for the amount of the four checks
and should reimburse the amount of the checks to Bank of America.
A collecting bank where a check is deposited, and which endorses the check upon
presentment with the drawee bank, is an endorser. Under Section 66 of the Negotiable
Instruments Law, an endorser warrants "that the instrument is genuine and in all
respects what it purports to be; that he has good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his endorsement valid
and subsisting". This Court has repeatedly held that in check transactions, 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.
When Associated Bank stamped the back of the four checks, it guaranteed that the bank had
for all intents and purposes treated the checks as negotiable instruments and accordingly
assumed the warrant of an endorser. They cannot deny liability on the checks. Also,
Associated Bank was also clearly negligent in disregarding established banking rules and
regulations by allowing the four checks to be presented by, and deposited in the personal
bank account of, a person who was not the payee named in the checks. The checks were
issued to the "Order of Miller Offset Press, Inc.," but were deposited, and paid by Associated
Bank, to the personal joint account of Ching Uy Seng (a.k.a. Robert Ching) and Uy Chung
Guan Seng. It could not have escaped Associated Bank's attention that the payee of the
checks is a corporation while the person who deposited the checks in his own account is an
individual. Verily, when the bank allowed its client to collect on crossed checks issued in the
name of another, the bank is guilty of negligence.
NOTES

2F 2020-2021
TOPIC Persons who are liable MODULE 5

CASE #2
CASE TITLE PNB v. Rodriguez GR NO G.R. No.
70325
1
PONENTE Reyes, R.T., J. DATE September 26, 2008
DOCTRINE In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the
loss. However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of
commercial bad faith on the part of the drawee bank, or any transferee of the check for that matter,
will work to strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith is
present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme.
FACTS Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National
Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking
accounts, namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the
account name Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current
Account No. 810480-4 under the account name Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line with their business, they had a
discounting arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA),
an association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue
Branch. The association maintained current and savings accounts with petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated
checks issued to members whenever the association was short of funds. As was customary, the
spouses would replace the postdated checks with their own checks issued in the name of the
members.
It was PEMSLA’s policy not to approve applications for loans of members with outstanding debts. To
subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their
outstanding loan accounts. They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to
the spouses for rediscounting. The officers carried this out by forging the indorsement of the named
payees in the checks.
In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members
and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were
deposited by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without
any indorsement from the named payees. This was an irregular procedure made possible through the
facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It
appears that this became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the
total amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were
all members of PEMSLA.
Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB
closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses
were returned or dishonored for the reason "Account Closed." The corresponding Rodriguez checks,
however, were deposited as usual to the PEMSLA savings account. The amounts were duly debited

2F 2020-2021
from the Rodriguez account. Thus, because the PEMSLA checks given as payment were returned,
spouses Rodriguez incurred losses from the rediscounting transactions.
LOWER RTC: CA:

COURT RTC denied PNB’s motion to dismiss. The CA reversed and set aside the RTC disposition. The
RULING CA concluded that the checks were obviously meant by
the spouses to be really paid to PEMSLA.
ISSUE/S Whether or not the disputed checks were payable to bearer or order making petitioner liable if it is
of the latter and respondent liable if it is the former. - IT IS PAYABLE TO ORDER
ARGUMENTS Petitioner (NAME): Respondent (NAME:

a. Philippine National Bank a. ERLANDO T. RODRIGUEZ and NORMA
- PNB argues anew that when RODRIGUEZ
the spouses Rodriguez issued - They argued, inter alia, that the
the disputed checks, they did checks on their faces were
not intend for the named unquestionably payable to order; and
payees to receive the that PNB committed a breach of
proceeds. Thus, they are contract when it paid the value of the
bearer instruments that could checks to PEMSLA without
be validly negotiated by mere indorsement from the payees. They
delivery. Further, testimonial also argued that their cause of action
and documentary evidence is not only against PEMSLA but also
presented during trial amply against PNB to recover the value of
proved that spouses Rodriguez the checks.
and the officers of PEMSLA
conspired with each other to
defraud the bank.
SC RULING The checks were payable to order, making petitioner liable for the losses.
As a rule, if the payee is fictitious or not intended to be the true recipient of the proceeds of the check it is
considered as a bearer instrument—according to Sections 8 and 9 of the Negotiable Instruments Law.
The distinction lies in the manner of their negotiation. An order instrument from the payee or holder
requires endorsement. A bearer instrument does not require endorsement—negotiable by mere delivery.
However, under Section 9 of the same law, a checks is payable to a specified payee may nevertheless be
considered as a bearer instrument if it is payable to the order of a fictitious or non-existing person, and
such fact is known to the person making it so payable.
According to US jurisprudence, an actual, existing and living payee may also be “fictitious” if the maker of
the check did not intend for the payee to receive the check. If such a case happens then the check is a
bearer instrument. In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer
bears the loss.
However, if there is showing of commercial bad faith on the part of the drawee bank, or any transferee of
the check for that matter, will work to strip it of this defense. PNB’s failure to show that the payees were
“fictitious”, the fictitious-payee rule does not apply making the instrument payable to order. Also, PNB was
remiss in its duty as the drawee bank since its employees were the one who crested the whole fraudulent
scheme.

2F 2020-2021
NOTES

2F 2020-2021
TOPIC Nature of Liability MODULE 5

CASE #3
CASE TITLE RCBC v. Odrada GR NO 219037
PONENTE CARPIO, J. DATE October 19, 2016
DOCTRINE
The drawee bank, as a result, has the unconditional obligation to pay a manager's check to a
holder in due course irrespective of any available personal defenses. However, while this
Court has consistently held that a manager's check is automatically accepted, a holder other
than a holder in due course is still subject to defenses.
FACTS In April 2002, respondent Noel M. Odrada (Odrada) sold a second hand Mitsubishi Montero
(Montero) to Teodoro L. Lim (Lim) for P1,510,000. Of the total consideration, P610,000 was
initially paid by Lim and the balance of P900,000 was financed by petitioner RCBC
Savings Bank (RCBC) through a car loan obtained by Lim. As a requisite for the approval of
the loan, RCBC required Lim to submit the original copies of the Certificate of Registration
(CR) and Official Receipt (OR) in his name. Unable to produce the Montero's OR and CR, Lim
requested RCBC to execute a letter addressed to Odrada informing the latter that his
application for a car loan had been approved.
On 5 April 2002, RCBC issued a letter that the balance of the loan would be delivered to
Odrada upon submission of the OR and CR. Following the letter and initial down payment,
Odrada executed a Deed of Absolute Sale on 9 April 2002 in favor of Lim and the latter
took possession of the Montero.
When RCBC received the documents, RCBC issued two manager's checks dated 12 April
2002 payable to Odrada for P900,000 and P13,500. After the issuance of the manager's
checks and their turnover to Odrada but prior to the checks' presentation, Lim notified
Odrada in a letter that there was an issue regarding the roadworthiness of the Montero and
asked to meet the latter at the RCBC for the inspection of the said vehicle. Lim was also
notified not to encash the manager's checks issued by RCBC.
Odrada did not go to the slated meeting and instead deposited the manager's checks
with International Exchange Bank (Ibank) on 16 April 2002 and redeposited them on 19 April
2002 but the checks were dishonored both times apparently upon Lim's instruction to RCBC.
Consequently, Odrada filed a collection suit against Lim and RCBC in the Regional Trial Court
of Makati.
LOWER RTC: ruled in favor of Odrada. CA: affirmed the trial court's decision
COURT 1. Odrada was the proper party to ask for - the two manager's checks, which were
RULING rescission complete and regular, reached the hands of
- it was not proper for Lim to Lim who deposited the same in his bank
exercise the right of rescission account with Ibank
since Odrada had already complied - RCBC admitted the existence of the payee
with the contract of sale by and his then capacity to endorse, and
delivering the Montero while Lim undertook that on due presentment the checks
remained delinquent in payment which were negotiable instruments would be
2. The defective condition of the accepted or paid, or both according to its tenor.
Montero was not a supervening event The appellate court held that the effective

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that would justify the dishonor of the delivery of the checks to Odrada made RCBC
manager's checks. liable for the checks.
- The trial court reasoned that a - Odrada was a holder in due course.
manager's check is equivalent to
cash and is really the bank's own
check.
- It may be treated as a promissory
note with the bank as maker.
Hence, the check becomes the
primary obligation of the bank
which issued it and constitutes a
written promise to pay on demand.
Being the party primarily liable, the
trial court ruled that RCBC was
liable to Odrada for the value of
the manager's checks.
3. Odrada suffered sleepless nights,
humiliation, and was constrained to hire
the services of a lawyer meriting the
award of damages.
ISSUE/S
Whether or not RCBC May Refuse to Pay Manager's Checks
(whether or not the drawee bank of a manager's check has the option of refusing payment by
interposing a personal defense of the purchaser of the manager's check who delivered the check to
a third party)
ARGUMENTS Petitioner (NAME): RCBC Respondent (NAME:Odrada

a. RCBC contended that the manager's N/A
checks were dishonored because Lim had
cancelled the loan.
b. claimed that the cancellation of the
loan was prior to the presentation of the
manager's checks
c. RCBC alleged that despite notice of the
defective condition of the Montero, which
constituted a failure of consideration,
Odrada still proceeded with presenting
the manager's checks
d. there was lack of consideration
SC RULING Yes, RCBC may refuse to Pay the manager's checks.
As a general rule, the drawee bank is not liable until it accepts. Prior to a bill's
acceptance, no contractual relation exists between the holder and the drawee. Acceptance,
therefore, creates a privity of contract between the holder and the drawee so much
so that the latter, once it accepts, becomes the party primarily liable on the
instrument. Accordingly, acceptance is the act which triggers the operation of the
liabilities of the drawee (acceptor) under Section 62 of the Negotiable Instruments
Law. Thus, once he accepts, the drawee admits the following:
(a) existence of the drawer;
(b) genuineness of the drawer's signature;
(c) capacity and authority of the drawer to draw the instrument; and
(d) existence of the payee and his then capacity to endorse.

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As can be gleaned in a long line of cases decided by this Court, a manager's check is
accepted by the bank upon its issuance. As compared to an ordinary bill of exchange
where acceptance occurs after the bill is presented to the drawee, the distinct feature of a
manager's check is that it is accepted in advance. Notably, the mere issuance of a
manager's check creates a privity of contract between the holder and the drawee bank, the
latter primarily binding itself to pay according to the tenor of its acceptance.
The drawee bank, as a result, has the unconditional obligation to pay a manager's
check to a holder in due course irrespective of any available personal defenses.
However, while this Court has consistently held that a manager's check is automatically
accepted, a holder other than a holder in due course is still subject to defenses.
The drawee bank of a manager's check may interpose personal defenses of the
purchaser of the manager's check if the holder is not a holder in due course. In
short, the purchaser of a manager's check may validly countermand payment to a
holder who is not a holder in due course. Accordingly, the drawee bank may refuse to
pay the manager's check by interposing a personal defense of the purchaser. Hence, the
resolution of the present case requires a determination of the status of Odrada as holder of
To be a holder in due course, the law requires that a party must have acquired the
instrument in good faith and for value.
Good faith means that the person taking the instrument has acted with due honesty
with regard to the rights of the parties liable on the instrument and that at the
time he took the instrument, the holder has no knowledge of any defect or infirmity
of the instrument. To constitute notice of an infirmity in the instrument or defect in the
title of the person negotiating the same, the person to whom it is negotiated must have had
actual knowledge of the infirmity or defect, or knowledge of such facts that his action in
taking the instrument would amount to bad faith.
Value, on the other hand, is defined as any consideration sufficient to support a

simple contract.anrobleslaw
In the present case, Odrada attempted to deposit the manager's checks on 16 April 2002, a
day after Lim had informed him that there was a serious problem with the Montero. Instead
of addressing the issue, Odrada decided to deposit the manager's checks. Odrada's actions
do not amount to good faith. Clearly, Odrada failed to make an inquiry even when the
circumstances strongly indicated that there arose, at the very least, a partial failure of
consideration due to the hidden defects of the Montero. Odrada's action in depositing the
manager's checks despite knowledge of the Montero's defects amounted to bad
faith. Moreover, when Odrada redeposited the manager's checks on 19 April 2002, he was
already formally notified by RCBC the previous day of the cancellation of Lim's auto loan
transaction. Hence, RCBC may refuse payment by interposing a personal defense of
Lim - that the title of Odrada had become defective when there arose a partial
failure or lack of consideration.
Section 58 of the Negotiable Instruments Law provides: "In the hands of any holder other
than a holder in due course, a negotiable instrument is subject to the same defenses as if it
were non-negotiable, x x x." Since Odrada was not a holder in due course, the instrument
becomes subject to personal defenses under the Negotiable Instruments Law. Hence, RCBC
may legally act on a countermand by Lim, the purchaser of the manager's checks.

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NOTES Jurisprudence defines a manager's check as a check drawn by the bank's manager
upon the bank itself and accepted in advance by the bank by the act of its issuance.
It is really the bank's own check and may be treated as a promissory note with the
bank as its maker. Consequently, upon its purchase, the check becomes the primary
obligation of the bank and constitutes its written promise to pay the holder upon
demand. It is similar to a cashier's check both as to effect and use in that the bank
represents that the check is drawn against sufficient funds.

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TOPIC Persons who are liable MODULE 4

CASE #4
CASE TITLE PNB v. Picornell GR NO
L-18751
PONENTE Romualdez, J. DATE
September 26, 1922
DOCTRINE The drawee, by accepting unconditionally the bill, becomes liable to the holder, and cannot allege
want of consideration between him and the drawer. The holder is a stranger as regards the
transaction between the drawer and the drawee, and if he has given value to the drawer and has no
knowledge of any equity between the drawer and the drawee, he is in the same situation as an
indorsee in good faith. Hence in an action brought by the holder against the acceptor it is no defense
that the merchandise sent by the drawer, and which constituted the consideration for the drawing of
the bill, is of inferior quality than was ordered by the drawee to such a degree that it is not worth the
value of the bill.
The drawer of the bill by drawing it warrants that it will be accepted on due presentment and paid in
due course; hence if it is not paid, he becomes liable for the payment of its value to the holder
FACTS
Bartolome Picornell, following instruction of Hyndman, Tavera & Ventura (HTV), bought in Cebu
1,735 bales of tobacco; that Picornell obtained from the branch of the National Bank in Cebu a sum of
P39,529,83, the value of the tobacco, together with his commission of 1 real per quintal, having, in
turn, drawn the following bill of exchange.
"No. 2-A CEBU, 28 Febrero, 1920. For P39,529.83
"At treinta (30) days sight please pay this first of exchange
(second unpaid) to the order of Philippine National Bank
treinta y nueve mil quinientos vientinueve pesos con
83/100. Value received.
"To Sres. HYNDMAN, TAVERA Y VENTURA,

"Calle Soler 26 y 28.
(Sgd.) "B. PICORNELL"
This instrument, along with the invoice and bill of lading were delivered to the National Bank with the
understanding that the bank should not deliver them to HTV except upon payment of the bill, which
condition was expressed by the well-known formula "D/P" (documents for [against] payment).
The invoice and bill of lading was delivered and accepted by HTV who proceeded to the examination
of the tobacco. HTV wrote to Picornell, notifying him that of the tobacco received, there was a certain
portion which was not used and was damaged. After a number of communications between Picornell
and HTV, HTV refused to pay the bill and instructed the bank to dispose and sell the tobacco.
The Bank sold the tobacco for the amount less of the bill it advanced. The bank demanded
payment for the said balance which Picornell and HTV refused to pay, hence this case.

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LOWER RTC:N/A CA: N/A
COURT
RULING
ISSUE/S Whether HTV and Picornell are liable to reimburse the bank on the bill it advanced to pay for
the tobacco.
ARGUMENTS Petitioner (PNB): Respondent (Picornell)

a. a.
b. b.
SC RULING
Yes, HTV cannot escape liability in view of section 28 of the Negotiable Instruments Law. The drawee
by acceptance becomes liable to the payee or his indorsee, and also to the drawer himself. But the
drawer and acceptor are the immediate parties to the consideration, and if the acceptance be without
consideration, the drawer cannot recover the acceptor. The payee holds a different relation; he is a
stranger to the transaction between the drawer and the acceptor, and is, therefore, in a legal sense a
remote party. In a suit by him against the acceptor, the question as to the consideration between the
drawer and the acceptor cannot be inquired into. The payee or holder gives value to the drawer, and
if he is ignorant of the equities between the drawer and the acceptor, he is in the position of a bona
fide indorsee. Hence, it is no defense to a suit against the acceptor of a draft which has been
discounted, and upon which money has been advanced by the plaintiff, that the draft was accepted or
the accommodation of the drawer.
As to Bartolome Picornell, he warranted, as drawer of the bill, that it would be accepted upon proper
presentment and paid in due course, and as it was not paid, he became liable to the payment of its
value to the holder thereof, which is the plaintiff bank. The fact that Picornell was a commission agent
of HTV, in the purchase of the tobacco, does not necessarily make him an agent of the company in its
obligations arising from the drawing of the bill by him. His acts in negotiating the bill constitute a
different contract from that made by his having purchased the tobacco on behalf of HTV.
Furthermore, he cannot exempt himself from responsibility by the fact of his having been a mere
agent of this company, because nothing to this effect was indicated or added to his signature on
signing the bill.
NOTES The bank was a holder in due course, and was such for value full and complete. The Hyndman, Tavera &
Ventura company cannot escape liability in view of section 28 of the Negotiable Instruments Law:
The drawee, the Hyndman, Tavera & Ventura company, or its successors, J. Pardo de Tavera, accepted the bill
and is primarily liable for the value of the negotiable instrument, while the drawer, Bartolome Picornell, is
secondarily liable.

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Upon the non-payment of the bill by the drawee-acceptor, the bank had the right of recourse, which it exercised
by selling the tobacco products, against the drawer.

2F 2020-2021
TOPIC Persons who are liable MODULE

CASE #5
CASE TITLE Sapiera v. CA GR NO 128927
PONENTE BELLOSILLO, J DATE September 14, 1999
DOCTRINE
Despite the conflicting versions of the parties, it is undisputed that the four (4) checks issued by de
Guzman were signed by petitioner at the back without any indication as to how she should be bound
thereby and, therefore, she is deemed to be an indorser thereof.
Sec. 66. Liability of general indorser.—Every indorser whoindorses without qualification, warrants to
all subsequent holdersin due course: (a) The matters and things mentioned insubdivisions (a), (b) and
(c) of the next preceding section; and (b)That the instrument is, at the time of the indorsement, valid
andsubsisting;
And, in addition, he engages that, on due presentment, it 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.
The dismissal of the criminal cases against petitioner did not erase her civil liability since the
dismissal was due to insufficiency of evidence and not from a declaration from the court that the fact
from which the civil action might arise did not exist. An accused acquitted of estafa may nevertheless
be held civilly liable where the facts established by the evidence so warrant.
FACTS
On several occasions Remedios Nota Sapiera, a sari-sari store owner, purchased from Monrico Mart
certain grocery items, mostly cigarettes, and paid with checks issued by one Arturo de Guzman: (a)
PCIB CheckNo. 157059 for P140,000.00; (b)PCIB Check No. 157073 for P28,000.00; (c) PCIB Check
No. 157057 for P42,150.00; and, d) Metrobank Check No. DAG—045104758 PA for P125,000.00.
These checks were signed at the back by the petitioner.
The checks were dishonoured for account closed. Ramon Sua informed Arturo de Guzman and
petitioner about the dishonor but both failed to pay the value of the checks. Hence, four (4) charges of
estafa were filed against the petitioner. On the other hand, De Guzman was charged with two (2)
counts of violation of B.P. Blg. 22. The cases were consolidated.
LOWER RTC: acquitted petitioner of all the charges CA: ordered petitioner to pay private respondent
COURT of estafa but did not rule on whether she P335,000.00 representing the aggregate face value
RULING could be held civilly liable for the checks she of the four (4) checks indorsed by petitioner plus
indorsed to private respondent. legal interest from the notice of dishonor
- The trial court found de Guzman guilty
of Violation of B.P. Blg. 22 on two (2) On motion for reconsideration, the Court noted that
counts and sentenced him to suffer Sua have already collected the amount
imprisonment and to pay private ofP125,000.00 from de Guzman. Thus, the Court of
respondent P167,150.00 as civil Appeals ruled that Sua could not recover twice on
indemnity the same checks. Since he had collected
P125,000.00 as civil indemnity from de guzman, this
amount should be deducted from the sum total of

2F 2020-2021
the civil indemnity due him arising from the estafa
cases against petitioner.
ISSUE/S
WON Court of Appeals committed reversible error in requiring petitioner to pay civil
indemnity to Sua after the trial court had acquitted her of the criminal charges.

a. Court of Appeals erred in holding petitioner a.
civilly liable to private respondent because b.
her acquittal by the trial court from charges of
estafa was absolute, the trial court having
declared in its decision that the fact from
which the civil liability might have arisen did
not exist.
SC RULING
No. Section 2, par. (b), of Rule 111 of the Rules of Court, as amended, specifically provides:
“Extinction of the penal action does not carry with it extinction of the civil, unless the extinction
proceeds from a declaration in a final judgment that the fact from which the civil might arise did not
exist.
Thus, the civil liability is not extinguished by acquittal where: (a) the acquittal is based on reasonable
doubt; (b) where the court expressly declares that the liability of the accused is not criminal but only
civil in nature; and, (c) where the civil liability is not derived from or based on the criminal act of which
the accused is acquitted.
Thus, under Art. 29 of the Civil Code—
When the accused in a criminal prosecution is acquitted on the ground that his guilt has not been
proved beyond reasonable doubt, a civil action for damages for the same act or omission may be
instituted. Such action requires only a preponderance of evidence. Upon motion of the defendant, the
court may require the plaintiff to file a bond to answer for damages in case the complaint should be
found to be malicious.
In a criminal case where the judgment of acquittal is based upon reasonable doubt, the court shall so
declare. In the absence of any declaration to that effect, it may be inferred from the text of the
decision whether or not acquittal is due to that ground.
From the evidence, the Court finds that accused Sapiera is the owner of a sari-sari store inside the
public market; that she sells can(ned) goods, candies and assorted grocery items; that she knows
accused Arturo de Guzman, a customer since February 1987; that de Guzman purchases from her
grocery items including cigarettes; that she knows Sua; that she has business dealings with him for 5
years; that her purchase orders were in clean sheets of paper; that she never pays in check; that
Ramon Sua asked her to sign subject checks as identification of the signature of Arturo de Guzman;
that she pays in cash; sometimes delayed by several days; that she signed the four (4) checks on the
reverse side; that she did not know the subject invoices; that de Guzman made the purchases and he
issued the checks; that the goods were delivered to de Guzman; that she was not informed of
dishonored checks; and that counsel for Ramon Sua informed de Guzman and told him to pay x x x x

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The prosecution failed to prove conspiracy.
Petitioner admitted having signed the four (4) checks in question on the reverse side. The evidence of
the prosecution shows that petitioner purchased goods from the grocery store of private respondent
as shown by the sales invoices issued by private respondent; that these purchases were paid with the
four (4) subject checks issued by de Guzman; that petitioner signed the same checks on the reverse
side; and when presented for payment, the checks were dishonoured by the drawee bank due to the
closure of the drawer’s account; and, petitioner was informed of the dishonor.
Despite the conflicting versions of the parties, it is undisputed that the four (4) checks issued by de
Guzman were signed by petitioner at the back without any indication as to how she should be bound
thereby and, therefore, she is deemed to be an indorser thereof.
The Negotiable Instruments Law clearly provides—

Sec. 17. Construction where instrument is ambiguous.—Where the language of the instrument is
ambiguous, or there are admissions therein, the following rules of construction apply: x x x x (f)
Where a signature is so placed upon the instrument that it is not clear in what capacity the person
making the same intended to sign, he is deemed an indorser. x x x x
Sec. 63. When person deemed indorser.—A person placing his signature upon an instrument
otherwise than as maker, drawer or acceptor, is deemed to be an indorser unless he clearly indicates
by appropriate words his intention to be bound in some other capacity.
Sec. 66. Liability of general indorser.—Every indorser who endorses without qualification, warrants to
all subsequent holdersin due course: (a) The matters and things mentioned in subdivisions (a), (b)
and (c) of the next preceding section; and (b)That the instrument is, at the time of the indorsement,
valid and subsisting;
And, in addition, he engages that, on due presentment, it 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
The dismissal of the criminal cases against petitioner did not erase her civil liability since the
dismissal was due to insufficiency of evidence and not from a declaration from the court that the fact
from which the civil action might arise did not exist. An accused acquitted of estafa may nevertheless
be held civilly liable where the facts established by the evidence so warrant.
The accused should be adjudged liable for the unpaid value of the checks signed by her in favor of
the complainant
NOTES

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TOPIC General Indorser MODULE

CASE #6
CASE TITLE Ang Tiong v. Ting GR NO L-26767
PONENTE Castro, J. DATE Feb. 22, 1968
DOCTRINE
FACTS On August 15, 1960 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, plus P500 attorney's fees. On March 6, 1962 the municipal court ruled for the plaintiff
against the two defendants.
Only Felipe Ang appealed to the CFI of Manila, which rendered judgment directing him to pay to the
plaintiff the sum of P4,000, with interest and of P400 as attorney's fees. Felipe Ang then elevated the
case to the CA, which certified it to this Court because the issues raised are purely of law.
The appellant imputes to the court a quo the errors, that it adjudged him a general indorser under the
Negotiable Instruments Law and that it held that he "cannot obtain his release from the contract of
suretyship or obtain security to protect himself against any proceedings on the part of the creditor and
against the danger of insolvency of the principal debtor," because he is "jointly and severally liable on
the instrument.
LOWER RTC: Rendered judgement directing Felipe CA: Certified it to the SC because the issues raised
COURT Ang to pay petitioner Ang Tiong. involved questions of law.
RULING
ISSUE/S Whether or not Felipe Ang is a general indorser and not an accommodation party.
ARGUMENTS Petitioner (NAME): N/A Respondent (NAME: N/A
SC RULING Note: Petitioner Ang Tiong is a holder in due course and for value.
YES. Nothing in the check in question indicates that the appellant is not a general indorser within the
purview of the Negotiable Instruments Law which makes "a person placing his signature upon an
instrument otherwise than as maker, drawer or acceptor" a general indorser. 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

2F 2020-2021
nevertheless liable. 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.
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 affect his liability to
the appellee, as the said remedy is a matter of concern exclusively between accommodation indorser
and accommodated party. The liability of the appellant remains primary and unconditional.
NOTES

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TOPIC MODULE
CASE #7
CASE TITLE People v. Maniego GR NO L-30910
PONENTE Narvasa, J DATE

February 27, 1987
DOCTRINE The holder or last indorsee of a negotiable instrument has the right to enforce payment for the full
amount thereof against all parties liable thereon. Among the parties liable is the indorser of such
instrument.
An indorser who indorses without qualification engages that, on due presentment, the instrument shall
be accepted or paid or both, according to its tenor, and that if the same is dishonored and the
necessary proceedings on dishonor have been duly taken, he/she will pay the amount thereof to the
holder or to any subsequent indorser who may be compelled to pay it.
FACTS
A criminal case was filed against Lt. Rizalino Ubay, Milagros Pamintuan, and Julia Maniego for the
crime of Malversation. Lt. Ubay was found guilty for the misappropriation of 66,434.50 PHP belonging
to the Government, and while Maniego was acquitted, she was still ordered to pay jointly and
severally with Ubay the amount of 57,434.50 PHP to the Government.
Ubay was the Disbursing Officer in the Office of the Chief of Finance, and he had custody and control
over public funds. He would accept checks drawn against the Philippine National Bank (PNB) and the
Bank of the Philippine Islands (BPI) from Pamintuan and Maniego, as drawer and indorser,
respectively. All 3 of the accused were fully aware that the checks were worthless and not covered by
funds in PNB and BPI, and they were dishonored by the said banks, to the damage and prejudice of
the Government.
Maniego sought for reconsideration of the judgment. The trial court denied her request to be absolved
from civil liability, but reduced her liability to 46,934,50 PHP. She appealed to the Court of Appeals
(CA) and ascribed the following errors to the trial court:
● The trial court erred in holding her civilly liable after she had been found not guilty of the crime
out of which the civil liability arises
● The trial court erred in holding her liable to indemnify the Government for the amount of the
checks
● The trial court erred in declaring her jointly and severally liable with Ubay
LOWER RTC: Denied Maniego’s request to be CA: Certified Maniego’s briefs and allowed her to
COURT absolved from civil liability, but lowered her bring her case before the Supreme Court, since she
RULING liability to 46,934.50 PHP. raised questions of law
ISSUE/S Can Maniego be held liable for the dishonor of the checks she indorsed?
ARGUMENTS Petitioner (People of the Philippines): Respondent (Maniego):

a. a. Contended that, as a mere indorser, she may not
b. be made liable on account of the dishonor of the
checks indorsed by her
b. Insisted that she cannot be held civilly liable since
she had already been acquitted of the crime alleged

2F 2020-2021
SC RULING Yes, Maniego may be held liable for the dishonor of the checks she indorsed. Under Section 57 of
the Negotiable Instruments Law (NIL), the holder or last indorsee of a negotiable instrument has
the right to enforce payment for the full amount thereof against all parties liable thereon. Among the
parties liable is the indorser of such instrument.
Also, according to Section 66 of the NIL, an indorser who indorses without qualification engages
that, on due presentment, the instrument shall be accepted or paid or both, according to its tenor, and
that if the same is dishonored and the necessary proceedings on dishonor have been duly taken,
he/she will pay the amount thereof to the holder or to any subsequent indorser who may be
compelled to pay it.
Maniego may also be deemed as an accommodation party based on the circumstances of this case.
And as such, she is liable on the instrument to a holder for value under Section 29 of the NIL.
Lastly, the trial court was correct in adjudging Maniego to be civilly liable in the same criminal action
in which she had been acquitted.
NOTES

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TOPIC Liability of general indorser MODULE

CASE #8
CASE TITLE Gonzales v. Rizal Commercial Banking Corporation (RCBC) GR NO 156294
PONENTE Garcia, J. DATE

November 29, 2006
DOCTRINE
Sec.66, NIL regarding the liabilities of a general endorser cannot be used by the party which
introduced a defect on the instrument. Sec.66 must be read in the light of the rule in equity requiring
that those who come to court should come with clean hands.
FACTS
Petitioner Melva Theresa Alviar Gonzales (Gonzales) was an employee of Rizal Commercial Banking
Corporation (RCBC) as New Accounts Clerk in the Retail Banking Department at its Head Office.
Dr. Don Zapanta (Dr. Zapanta) of the Ade Medical Group, drew a foreign check against the drawee
bank Wilshire Center Bank, N.A., of Los Angeles, California, U.S.A., payable to Gonzales’ mother,
defendant Eva Alviar (Alviar). Alviar then endorsed this check
Since RCBC gives special accommodations to its employees to receive the check’s value without
awaiting the clearing period, Gonzales presented the foreign check to Olivia Gomez (Gomez), the
RCBC’s Head of Retail Banking.
After examining this, Gomez requested Gonzales to endorse it which she did. Gomez then
acquiesced to the early encashment of the check and signed the check but indicated thereon
her authority of "up to P17,500.00 only".
Afterwards, Olivia Gomez directed Gonzales to present the check to RCBC employee Carlos Ramos
in which the latter signed it with an “ok” annotation.
After getting the said signatures Gonzales presented the check to Rolando Zornosa, Supervisor of
the Remittance section of the Foreign Department of the RCBC Head Office, who after scrutinizing
the entries and signatures, authorized its encashment. Gonzales then received its peso equivalent of
P155,270.85.
RCBC then tried to collect the amount of the check with the drawee bank by the latter through its
correspondent bank, the First Interstate Bank of California, on two occasions dishonored the check
because of "END. IRREG" or irregular indorsement. Insisting, RCBC again sent the check to the
drawee bank, but this time the check was returned due to "account closed".
Unable to collect, RCBC demanded from Gonzales the payment of the peso equivalent of the check
that she received. Gonzales settled the matter by agreeing that payment be made thru salary
deduction.
The deductions was implemented starting October 1987. On March 7, 1988 RCBC sent a demand
letter to Alviar for the payment of her obligation but this fell on deaf ears as RCBC did not receive any
response from Alviar.
Taking further action to collect, RCBC then conveyed the matter to its counsel, a letter was sent to
Gonzales reminding her of her liability as an indorser of the subject check and that for her to

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avoid litigation she has to fulfill her commitment to settle her obligation as assured in her said letter.
Gonzales resigned from RCBC and what had been deducted from her salary was only P12,822.20
covering ten months
RCBC filed a complaint for a sum of money against Eva Alviar, Melva Theresa Alviar-Gonzales and
the latter’s husband Gino Gonzales.
The spouses Gonzales fled an Answer with Counterclaim praying for the dismissal of the complaint
as well as payment of damages, attorney’s fees and litigation expenses.
LOWER RTC: CA:

COURT
RULING The RTC rendered a judgment ruling that Eva AFFIRMED the RTC judgment except for the award
Alviar, as principal debtor, and Melva Theresa of attorney’s fees.
Alviar-Gonzales, as guarantor, liable to
RCBC.
ISSUE/S Whether or not Gonzales is liable to the subsequent indorser despite of the defect introduced
by the latter which rendered the instrument dishonored.
ARGUMENTS Petitioner (NAME): MELVA THERESA Respondent (NAME): RCBC

ALVIAR GONZALES
Petitioner submitted that the CA erred:
a. In finding [petitioner], an accommodation
party to a check subsequently endorsed
partially, liable to RCBC as guarantor;
b. In finding that the signature of Gomez, an
RCBC employee, does not constitute as
an endorsement but only an inter-bank
Approval of signature necessary for the
encashment of the check;
c. In not finding RCBC liable on the
counterclaims of [the petitioner].
SC RULING
NO. The foreign drawee bank, Wilshire Center Bank N.A., refused to pay the bearer of this
dollar-check drawn by Don Zapanta because of the defect introduced by RCBC, through its
employee, Olivia Gomez. There is no doubt in the mind of the Court that a subsequent party which
caused the defect in the instrument cannot have any recourse against any of the prior
endorsers in good faith.
Under Sec. 66 of the NIL, the warranties for which Alviar and Gonzales are liable as general
endorsers in favor of subsequent endorsers extend only to the state of the instrument at the time of
their endorsements, specifically, that the instrument is genuine and in all respects what it purports to
be; that they have good title thereto; that all prior parties had capacity to contract; and that the
instrument, at the time of their endorsements, is valid and subsisting.
This provision, however, cannot be used by the party which introduced a defect on the
instrument, such as respondent RCBC in this case, which qualifiedly endorsed the same, to
hold prior endorsers liable on the instrument because it results in the absurd situation whereby a
subsequent party may render an instrument useless and inutile and let innocent parties bear the loss
while he himself gets away scot-free. It cannot be over-stressed that had it not been for the

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qualified endorsement (“up to P17,500 only) of Gomez, who is the employee of RCBC, there
would have been no reason for the dishonor of the check, and full payment by drawee bank
therefor would have taken place as a matter of course.
Section 66 of the Negotiable Instruments Law which further states that the general endorser
additionally 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
endorser who may be compelled to pay it, must be read in the light of the rule in equity requiring that
those who come to court should come with clean hands. The holder or subsequent endorser who
tries to claim under the instrument which had been dishonored for "irregular endorsement"
must not be the irregular endorser himself who gave cause for the dishonor.
Thus, RCBC, which caused the dishonor of the check upon presentment to the drawee bank,
through the qualified endorsement of its employee, Olivia Gomez, cannot hold prior
endorsers, Alviar and Gonzales in this case, liable on the instrument.
CA Decision is REVERSED and SET ASIDE and the Complaint in this case DISMISSED for lack of
merit. Petitioner's counterclaim is GRANTED, ordering the respondent RCBC to reimburse petitioner
the amount P12,822.20, with legal interest computed from the time of salary deduction up to actual
payment, and to pay petitioner the total amount of P60,000.00 as moral and exemplary damages, and
attorney's fees
NOTES

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TOPIC MODULE
CASE #9
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S

a. a.
b. b.
SC RULING
NOTES

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TOPIC ACCOMODATION PARTY MODULE

CASE #10
CASE TITLE ANG v. ASSOCIATED BANK GR NO 146511
PONENTE AZCUNA, J. DATE 5 SEPT, 2007
DOCTRINE Section 29 (NIL) defines an accommodation party as 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 gleaned from the text, an accommodation party is one who meets all the three requisites, viz:
(1) he must be a party to the instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not
receive value therefor; and (3) he must sign for the purpose of lending his name or credit to some other
person.An accommodation party 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 party/ies
thereto.The accommodation party is liable on the instrument to a holder for value even though the holder, at the
time of taking the instrument, knew him or her to be merely an accommodation party, as if the contract was not
for accommodation.
FACTS
On August 28, 1990, respondent Associated Bank (formerly Associated Banking Corporation and now known
as United Overseas Bank Philippines) filed a collection suit against Antonio Ang Eng Liong and petitioner
Tomas Ang for the two (2) promissory notes that they executed as principal debtor and co-maker, respectively.
In the Complaint, respondent Bank alleged that on October 3 and 9, 1978, the defendants obtained a loan of P
evidenced by a promissory note bearing PN-No. DVO-78-382, and P 50,000, 30,000, evidenced by a
promissory note bearing PNNo. DVO-78-390. As agreed, the loan would be payable, jointly and severally, on
January 31, 1979 and December 8, 1978, respectively.
In addition, subsequent amendments to the promissory notes as well as the disclosure statements stipulated
that the loan would earn 14% interest rate per annum, 2% service charge per annum, 1% penalty charge per
month from due date until fully paid, and attorney’s fees equivalent to 20% of the outstanding obligation.
Despite repeated demands for payment, the latest of which were on September 13, 1988 and September 9,
1986, on Antonio Ang Eng Liong and Tomas Ang, respectively, respondent Bank claimed that the defendants
failed and refused to settle their obligation, resulting in a total indebtedness of P 539,638.96 as of July 31, 1990.
In his Answer, Antonio Ang Eng Liong only admitted to have secured a loan amounting to P 80,000. He pleaded
though that the bank “be ordered to submit a more reasonable computation” considering that there had been
“no correct and reasonable statement of account” sent to him by the bank, which was allegedly collecting
excessive interest, penalty charges, and attorney’s fees despite knowledge that his business was destroyed by
fire, hence, he had no source of income for several years. For his part, petitioner Tomas Ang filed an Answer
with Counterclaim and Cross-claim. He interposed the affirmative defenses that: the bank is not the real party in
interest as it is not the holder of the promissory notes, much less a holder for value or a holder in due course;
the bank knew that he did not receive any valuable consideration for affixing his signatures on the notes but
merely lent his name as an accommodation party; he accepted the promissory notes in blank, with only the
printed provisions and the signature of Antonio Ang Eng Liong appearing therein.

LOWER RTC:Antonio Ang Eng Liong is in bad faith and CA: reversed and set aside the trial court's ruling.
COURT obstinate refusal despite several demands from Tomas Ang is accountable therefor in his capacity as an
RULING the bank,was ordered to pay the principal plus accommodation party. Citing Sec. 29 of the NIL, he is
interest and the overdue penalty charge. liable to the bank in spite of the latter's knowledge, at
the time of taking the notes, that he is only an
accommodation party. Moreover, as a co-maker who
agreed to be jointly and severally liable on the
promissory notes, Tomas Ang cannot validly set up the
defense that he did not receive any consideration
therefor as the fact that the loan was granted to the
principal debtor already constitutes a sufficient
consideration.

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ISSUE/S Whether or not Petitioner is liable to the obligation despite being a mere co-maker and
accommodation party
ARGUMENTS Petitioner ANG: Respondent ASSOCIATED BANK:

hat the above matters are very material to
a. T
the defenses of defendant Tomas Ang Bank countered that it is the real party in interest and
is the holder of the notes since the Associated Banking
- the bank is not a holder in due course Corporation and Associated Citizens Bank are its
when it accepted the [PNs] in blank.The predecessors-in-interest. The fact that Tomas Ang
real borrower is Antonio Ang Eng Liong never received any moneys in consideration of the two
which fact is known to the bank. (2) loans and that such was known to the bank are
immaterial because, as an accommodation maker, he is
- That the PAYEE not being a holder in considered as a solidary debtor who is primarily liable
due course and knowing that defendant for the payment of the promissory notes. Citing Section
Tomas Ang is merely an accommodation 29 of the Negotiable Instruments Law (NIL), the bank
party, the latter may raise against such posited that absence or failure of consideration is not a
payee or holder or successor-in-interest matter of defense; neither is the fact that the holder
(of the notes) PERSONAL and knew him to be only an accommodation party.
EQUITABLE DEFENSES such as FRAUD
in INDUCEMENT, DISCHARGE ON NOTE
SC RULING Yes. Notably, Section 29 of the NIL defines an accommodation party as 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 petitioner acknowledged it to be, the relation between an accommodation party and the accommodated
party is one of principal and surety – the accommodation party being the surety. from the beginning; As such,
he is deemed an original promisor and debtor he is considered in law as the same party as the debtor in relation
to whatever is adjudged touching the obligation of the latter since their liabilities are interwoven as to be
inseparable. Although a contract of suretyship is in essence accessory or collateral to a valid principal
obligation, the surety’s liability to the creditor is immediate, primary and absolute; he is directly and equally
bound with the principal. As an equivalent of a regular party to the undertaking, a surety becomes liable to the
debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations nor
does he receive any benefit therefrom.In the instant case, petitioner agreed to be “jointly and severally” liable
under the two promissory notes that he co-signed with Antonio Ang Eng Liong as the principal debtor. This
being so, it is completely immaterial if the bank would opt to proceed only against petitioner or Antonio Ang Eng
Liong or both of them since the law confers upon the creditor the prerogative to choose whether to enforce the
entire obligation against any one, some or all of the debtors. Nonetheless, petitioner, as an accommodation
party, may seek reimbursement from Antonio Ang Eng Liong, being the party accommodated.
Consequently, in issuing the two promissory notes, petitioner as accommodating party warranted to the holder
in due course that he would pay the same according to its tenor. value therefore It is no defense to state on his
part that he did not receive any because the phrase “without receiving value therefor” used in Sec. 29 of the NIL
means “without receiving value by virtue of the instrument” and not as it is apparently supposed to mean,
“without receiving payment for lending his name.” Stated differently, when a third person advances the face
value of the note to the accommodated party at the time of its creation, the consideration for the note as regards
its maker is the money advanced to the accommodated party. It is enough that value was given for the note at
the time of its creation. As in the instant case, a sum of money was received by virtue of the notes, hence, it is
immaterial so far as the bank is concerned whether one of the signers, particularly petitioner, has or has not
received anything in payment of the use of his name. Furthermore, since the liability of an accommodation party
remains not only primary but also unconditional to a holder for value, 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 does not release him because as far as a holder for value is
concerned, he is a solidary co-debtor.
NOTES

2F 2020-2021
TOPIC Accomodation Party MODULE
CASE #11
CASE TITLE FERNANDO MAULINI, ET AL., plaintiffs-appellees, GR NO L-8844
vs.
ANTONIO G. SERRANO, defendant-appellant.
PONENTE MORELAND, J. DATE December 16, 1914
DOCTRINE The learned trial court quoted that provision of the Negotiable Instruments Law which defines an
accommodation party as "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 the same to be only an accommodation party."
(Act No. 2031, sec. 29.)
We are of the opinion that the trial court misunderstood this definition. The accommodation to
which reference is made in the section quoted is not one to the person who takes the note — that
is, the payee or indorsee, but one to the maker or indorser of the note.
FACTS
This is an appeal from a judgment of the Court of First Instance of the city of Manila in favor of the plaintiff
(Maulini) for the sum of P3,000, with interest thereon at the rate of 1½ percent month from September 5,
1912, together with the costs.
The action was brought by the plaintiff (Maulini) upon the contract of indorsement alleged to have been
made in his favor by the defendant (Serrano) upon the following promissory note:
3,000. Due 5th of September, 1912.
We jointly and severally agree to pay to the order of Don Antonio G. Serrano on or before the 5th
day of September, 1912, the sum of three thousand pesos (P3,000) for value received for
commercial operations. Notice and protest renounced. If the sum herein mentioned is not
completely paid on the 5th day of September, 1912, this instrument will draw interest at the rate of
1½ per cent per month from the date when due until the date of its complete payment. The makers
hereof agree to pay the additional sum of P500 as attorney's fees in case of failure to pay the note.
Manila, June 5, 1912.
(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For Jose Padern, by F.
Moreno. Angel Gimenez.
The note was indorsed on the back as follows:
Pay note to the order of Don Fernando Maulini, value received. Manila, June 5, 1912. (Sgd.) A.G.
Serrano
1. The first question for resolution on this appeal is whether or not, under the Negotiable Instruments
Law, an indorser of a negotiable promissory note may, in an action brought by his indorsee, show,
by parol evidence, that the indorsement was wholly without consideration
2. and that, in making it, the indorser acted as agent for the indorsee, as a mere vehicle of
transfer of the naked title from the maker to the indorsee, for which he received no
consideration whatever.

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Real Facts are as follows:
It seems, according to the parol evidence provisionally admitted on the trial,
that the defendant (Serrano) was a broker doing business in the city of Manila and that part of his business
consisted in looking up and ascertaining persons who had money to loan as well as those who desired to
borrow money and, acting as a mediary, negotiate a loan between the two.
According to his custom in transactions of this kind, and the arrangement made in this particular case, the
broker obtained compensation for his services of the borrower, the lender paying nothing therefor.
Sometimes this was a certain percent of the sum loaned; at other times it was a part of the interest which
the borrower was to pay, the latter paying 1½ per cent and the broker ½ per cent.
According to the method usually followed in these transactions, and the procedure in this particular case,
the broker delivered the money personally to the borrower, took note in his own name and immediately
transferred it by indorsement to the lender. In the case at bar this was done at the special request of the
indorsee and simply as a favor to him, the latter stating to the broker that he did not wish his name to
appear on the books of the borrowing company as a lender of money and that he desired that the broker
take the note in his own name, immediately transferring to him title thereto by indorsement. This was done,
the note being at once transferred to the lender.
LOWER Learned Trial Court:

COURT
RULING RTC ruled:
1. Although it received parol evidence on
the subject provisionally, held, on the
final decision of the case, that such
evidence was not admissible to alter,
very, modify or contradict the terms of
the contract of indorsement, and,
therefore, refused to consider the
evidence thus provisionally received,
which tended to show that, by verbal
agreement between the indorser and
the indorsee, the indorser, in making the
indorsement, was acting as agent for
the indorsee, as a mere vehicle for the
transference of naked title, and that his
indorsement was wholly without
consideration.
2. The court also held that it was

immaterial whether there was a
consideration for the transfer or not, as
the indorser, under the evidence
offered, was an accommodation
indorser.
ISSUE/S
W/N Serrano was an accommodation party in reference to Sec 29 of NIL? No.
SC RULING According to the evidence referred to, there never was a moment when Serrano was the real owner of the
note. It was always the note of the indorsee, Maulini, he having furnished the money which was the

2F 2020-2021
consideration for the note directly to the maker and being the only person who had the slightest interest
therein, Serrano, the broker, acting solely as an agent, a vehicle by which the naked title to the note
passed fro the borrower to the lender. The only payment that the broker received was for his services in
negotiating the loan. He was paid absolutely nothing for becoming responsible as an indorser on the
paper, nor did the indorsee lose, pay or forego anything, or alter his position thereby.
Nor was the defendant an accommodation indorser. The learned trial court quoted that provision of the
Negotiable Instruments Law which defines an accommodation party as "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 the same
to be only an accommodation party." (Act No. 2031, sec. 29.)
We are of the opinion that the trial court misunderstood this definition. The accommodation to
which reference is made in the section quoted is not one to the person who takes the note — that
is, the payee or indorsee, but one to the maker or indorser of the note.
It is true that in the case at bar it was an accommodation to the plaintiff, in a popular sense, to have the
defendant indorse the note; but it was not the accommodation described in the law, but, rather, a
mere favor to him and one which in no way bound Serrano.
In cases of accommodation indorsement the indorser makes the indorsement for the accommodation of
the maker. Such an indorsement is generally for the purpose of better securing the payment of the note —
that is, he lend his name to the maker, not to the holder. Putting it in another way: An accommodation note
is one to which the accommodation party has put his name, without consideration, for the purpose of
accommodating some other party who is to use it and is expected to pay it. The credit given to the
accommodation part is sufficient consideration to bind the accommodation maker. Where, however, an
indorsement is made as a favor to the indorsee, who requests it, not the better to secure payment, but to
relieve himself from a distasteful situation, and where the only consideration for such indorsement passes
from the indorser to the indorsee, the situation does not present one creating an accommodation
indorsement, nor one where there is a consideration sufficient to sustain an action on the indorsement.
NOTES

2F 2020-2021
TOPIC Liability of Accommodation Party MODULE

CASE #12
CASE TITLE PNB vs MAZA GR NO 24224
PONENTE J, Malcolm. DATE November 3, 1925
DOCTRINE The accommodation party can claim no benefit as such, but he is liable according to the face of his
undertaking, the same as if he were himself financially interested in the transaction.
After making payment to the holder, the accommodation party may sue the accommodated party for
reimbursement, since the relation between them is in effect that of principal and surety, the
accommodation party being the surety.
FACTS The Philippine National Bank is suing Ramon Maza and Francisco Mecenas on 5 promissory notes
of ten thousand pesos (P10,000) each. Maza and Mecenas executed two of the promissory
notes on January 20, 1921, due three months after date. The three other notes due four months
after date were
executed by the same parties on January 21, 1921. One of the above-mentioned notes, typical of
the rest, reads as follows:
"P10,000.00ILOILO, I. F., Jan. 20, 1921

"A los tres meses de la fecha, pagaremos mancomu nada y solidariamente a la orden del Philippine
National Bank, Iloilo, Iloilo, I. F., Ia cantidad de diez mil (P10,000) pesos en el Philippine National
Bank.
"Iloilo, I. F. "Valor Recibido.
"No. 340 Pagadero el 4/20/21
(Fdos.)"RAMON MAZA
"FRANCISCO MECENAS"
The notes were not taken up by Maza and Mecenas at maturity. The obligations with accumulated
interest totaled P65,207.73 on September 22, 1924. To recover the amounts stated on the face of the
notes with back interest, action was begun by the Philippine National Bank in the Court of First
Instance of Iloilo against Ramon Maza and Francisco Mecenas.
[ Check the arguments of the Respondents ]
LOWER RTC: The trial judge CA:

COURT denied the motion. Judgment was rendered in
RULING favor of the plaintiff and against the
defendants jointly and severally.

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ISSUE/S Whether or not the defendants are liable
ARGUMENTS Petitioner: Respondents Maza and Macenas:

The special defense interposed by the defendants
was that the promissory notes were sent in blank to
them by Echaus with the request that they sign
them so that he, Echaus, might negotiate them with
the Philippine National Bank in case of need; that
the defendants have not negotiated the promissory
notes with the bank, nor have they received the
value thereof, or delivered them to the bank in
payment of any preexisting debt; and that it was
Enrique Echaus who negotiated the notes with the
bank and who is accordingly the real party in
interest and the party liable for the payment of the
notes. Defendants also moved that Echaus be
ordered included as one of the defendants.
[ In short, they were arguing that they are not

makers of the promissory note. And as such,
they do should not be liable ]
SC RULING Yes. They are liable.

The most plausible and reasonable stand for the defendants is that they are accommodation parties.
But as accommodation parties, the defendants having signed the instruments without receiving value
therefor and for the purpose of lending their names to some other person, are still liable on the
instruments. The law now is that the accommodation party can claim no benefit as such, but he is
liable according to the face of his undertaking, the same as if he were himself financially
interested in the transaction.
The defense is made to the action that the defendants never received the value of the promissory
notes. It is, of course, fundamental that an instrument given without consideration does not create any
obligation at law or in equity in favor of the payee.
However, to fasten liability upon an accommodation maker, it is not necessary that any consideration
should move to him. The consideration which supports the promise of the accommodation maker is
that parted with by the person taking the note and received by the person accommodated.
While perhaps unnecessary to this decision, it may properly be remarked that when the
accommodation parties make payment to the holder of the notes, they have the right to sue the

2F 2020-2021
accommodated party for reimbursement, since the relation between them is in effect that of
principal and sureties, the accommodation parties being the sureties.
NOTES

2F 2020-2021

CASE #13
CASE TITLE Town Savings and Loan Bank vs Court of Appeals, Spouses Miguel Hipolito GR NO 106011
and Alicia Hipolito
PONENTE Griño0 Aquino J DATE
June 17, 1993
DOCTRINE "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." (The Phil. Bank of Commerce vs. Aruego, 102 SCRA 530, 539, 540.)
In this case, there is no question that the private respondents signed the promissory note in order to enable
Pilarita H. Reyes, who is Miguel Hipolito's sister, to borrow the total sum of P1.4 million from TSLB. As
observed by both the trial court and the appellate court, the actual beneficiary of the loan was Pilarita H.
Reyes and no other. The Hipolitos accommodated her by signing a promissory note for half of the loan that
she applied for because TSLB may not lend any single borrower more than the authorized limit of its loan
portfolio. Under Section 29 of the Negotiable Instruments Law, the Hipolitos are liable to the bank on the
promissory note that they signed to accommodate Pilarita.
FACTS
The Hipolitos (Spouses Miguel and Alicia) applied were granted a loan in the amount of P700,000.00
with interest of 24% per annum for which they executed and delivered to Town Savings and Loan
Bank (TSLB) a promissory note with a maturity period of three years and an acceleration clause upon
default in the payment of any amortization, plus penalty of 36% and 10% attorney’s fees, if the note
were referred to an attorney for collection. The obligors were deemed to have defaulted for failure
to keep current their monthly payments on the account. Notices of past due accounts and demands
for payment were sent but ignored. At the time of the institution, the unpaid obligation amounted to
P1,114,983.40.
The Hipolitos denied being personally liable and alleged that the loan was for the account of Pilarita
H. Reyes, the sister of Miguel Hipolito, who was the real party-in-interest. The Hipolitos, not having
received any part of the loan, were mere guarantors for Pilarita. The allegedly signed the promissory
note because they were persuaded to do so by Joey Santos, President of TSLB. When they received
the demand letters, they confronted him by they were told that the Bank had to observe the
formality of sending notices and demand letters. The real purpose was only to pressure Pilarita to
comply with her undertaking.
LOWER RTC: CA:
COURT The Court of Appeals found the Hipolitos did not
RULING The Regional Trial Court of Malolos held the accommodate Pilarita but the TSLB, whose lending
spouses Hipolito, liable as accommodation authority was restricted by the size of its loan
parties in the promissory note. portfolio. The Hipolitos were relieved from any
liability to TSLB.
ISSUE/S Whether the Hipolitos are liable on the promissory note which they executed in favor of the
petitioner.

2F 2020-2021
ARGUMENTS Petitioner (NAME): Respondent: Court of Appeals
a. it was the bank's president who induced Miguel
b. Hipolito to sign the promissory note so that the
bank would not violate the Central Bank's
regulation limiting the amount that TSLB could lend
out
SC RULING Yes.
"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." (The Phil. Bank of Commerce vs. Aruego, 102 SCRA 530, 539, 540.)
In this case, there is no question that the private respondents signed the promissory note in order to
enable Pilarita H. Reyes, who is Miguel Hipolito's sister, to borrow the total sum of P1.4 million from
TSLB. As observed by both the trial court and the appellate court, the actual beneficiary of the loan
was Pilarita H. Reyes and no other. The Hipolitos accommodated her by signing a promissory note for
half of the loan that she applied for because TSLB may not lend any single borrower more than the
authorized limit of its loan portfolio. Under Section 29 of the Negotiable Instruments Law, the
Hipolitos are liable to the bank on the promissory note that they signed to accommodate Pilarita.
The Court is convinced that the intention of respondents Hipolito in signing the promissory note was
not so much to enable the Bank to grant a loan to Pilarita but for the latter to be able to obtain the
full amount of the loan that she needed at the time.
Unlike the Maulini case, there was no agreement here, written or verbal, that in signing the
promissory note, Miguel and Alicia Hipolito were acting as agents for the money lender, the Bank.
The consideration of the notes signed by the Hipolitos was received by them through Pilarita. They
acted as agents of Pilarita, not the bank. They signed the promissory note as a favor to Pilarita, to
help her raise the funds that she needed. It was PIlarita whom they accommodated, not the bank.
They signed the promissory note as a favor to Pilarita, to help her raise the funds that she needed. It
was Pilarita whom they accommodated, not the bank, contrary to the erroneous finding of the
appellate court.
NOTES Maulini vs Serrano (28 Phil 640) :

“Where, however, an indorsement is made as a favor to the indorsee, who requests it, not the better
to secure payment, but to relieve himself from a distasteful situation, and where the only
consideration for such indorsement passes from the indorser to the indorsee, the situation does not
present one creating an accommodation indorsement, nor one where there is a consideration
sufficient to sustain an action on the indorsement.”

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TOPIC MODULE
CASE #14
CASE TITLE PEOPLE v MANIEGO GR NO L-30910
PONENTE NARVASA, J.: DATE
DOCTRINE 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 acceptor ** unless he clearly indicates by appropriate 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."
FACTS
An information for malversation was filed against Lt. Rizalino Ubay, Milargros Pamintuan and Julia
Maniego.
In May, 1957 up to and including the month of August, 1957, Lt. RIZALINO M. Ubay, a duly appointed
officer in the Armed Forces of the Philippines in active duty, who, during the period specified above,
was designated as Disbursing Officer in the Office of the Chief of Finance, GHQ, Camp Murphy,
Quezon City, and as such was entrusted with and had under his custody and control public funds,
conspiring and confederating with co-accused, MILAGROS T. PAMINTUAN and JULIA T. MANIEGO,
in pursuance of their conspiracy, take, receive, and accept from his said co-accused several personal
checks drawn against the Philippine National Bank and the Bank of the Philippine Islands, of which
the accused, MILAGROS T. PAMINTUAN is the drawer and the accused, JULIA T. MANIEGO, is the
indorser, in the total amount of P66,434.50, cashing said checks and using for this purpose the public
funds entrusted to and placed under the custody and control of the said Lt. Rizalino M. Ubay, all the
said accused knowing fully well that the said checks are worthless and are not covered by funds in
the aforementioned banks, for which reason the same were dishonored and rejected by the said
banks when presented for encashment, to the damage and prejudice of the Republic of the
Philippines, in the amount of P66,434.50, Philippine currency.
Only Lt. Ubay and Mrs. Maniego were arraigned, Mrs. Pamintuan having apparently fled to the United
States in August, 1962. Both Ubay and Maniego entered a plea of not guilty.
After trial, judgment of acquittal was rendered by the Court of First Instance, but Maniego sought
reconsideration praying that she be absolved from civil liability or, at the very least, that her liability be
reduced to P46,934.50. The Trial Court declined to negate her civil liability, but did reduce the
amount thereof to P 46,934.50. She appealed to the Court of Appeals, like Ubay.
LOWER RTC: CA:

COURT Ruled that in the absence of evidence against Because, in the Appellate Court's view, Maniego's
RULING accused Julia T. Maniego, the Court hereby brief raised only questions of law, her appeal was
acquits her, but both she and Rizal T. Ubay later certified to this Court pursuant to Section 17, in
are hereby ordered to pay jointly and relation to Section 31, of the Judiciary Act, as

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severally the amount of P57,434.50 to the amended, and Section 3, Rule 50 of the Rules of
government Court.
ISSUE/S W/N Maniego is civilly liable
ARGUMENTS Petitioner (NAME): Respondent (Maniego):

a. Appellant's contention that as mere indorser, she
b. may not be made liable on account of the dishonor
of the checks indorsed by her, is likewise 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."
SC RULING
Yes. Contrary to her submission, Maniego's acquittal on reasonable doubt of the crime of
Malversation imputed to her and her two (2) co-accused did not operate to absolve her from civil
liability for reimbursement of the amount rightfully due to the Government as owner thereof. Her
liability therefor could properly be adjudged, as it was so adjudged, by the Trial Court on the basis of
the evidence before it, which adequately establishes that she was an indorser of several checks
drawn by her sister, which were dishonored after they had been exchanged with cash belonging to
the Government, then in the official custody of Lt. Ubay.
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 likewise 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 acceptor
** unless he clearly indicates by appropriate 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."
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."
One last word. The Trial Court acted correctly in adjudging Maniego to be civilly liable in the same
criminal action in which she had been acquitted of the felony of Malversation ascribed to her,
dispensing with the necessity of having a separate civil action subsequently instituted against her for
the purpose.
NOTES

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TOPIC Liability of Accommodation Party MODULE

CASE #15
CASE TITLE Aglibot v. Santia GR NO L-18594
5
PONENTE Reyes, J.: DATE
December 5, 2012
DOCTRINE Sec. 29. Liability of an accommodation party. — An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefore, and for the
holder for value notwithstanding such holder at the time of taking the instrument knew him to be only
an accommodation party.
FACTS Private respondent-complainant Engr. Ingersol L. Santia loaned the amount of P2,500,000.00 to
Pacific Lending & Capital Corporation (PLCC), through its Manager, petitioner Fideliza J. Aglibot. The
loan was evidenced by a Promissory Note dated July 1, 2003, issued by Aglibot on behalf of PLCC,
payable in one year subject to interest at 24% per annum. Allegedly as a guaranty or security for the
payment of the note, Aglibot also issued and delivered to Santia eleven (11) post-dated personal
checks drawn from her own demand account maintained at Metrobank, Camiling Branch. Aglibot is a
major stockholder of PLCC, with headquarters at 27 Casimiro Townhouse, Casimiro Avenue, Zapote,
Las Piñas, Metro Manila, where most of the stockholders also reside.
Upon presentment of the aforesaid checks for payment, they were dishonored by the bank for having
been drawn against insufficient funds or closed account. Santia thus demanded payment from PLCC
and Aglibot of the face value of the checks, but neither of them heeded his demand. Consequently,
eleven (11) Informations for violation of Batas Pambansa Bilang 22 (B.P. 22), corresponding to the
number of dishonored checks, were filed against Aglibot before the Municipal Trial Court in Cities
(MTCC), Dagupan City.
LOWER MTC: FIDELIZA J. AGLIBOT, is hereby CA: Acquittal in a criminal case will not bar a civil
COURT ACQUITTED of all counts of the crime of action in the following cases: (1) where the acquittal
RULING violation of the bouncing checks law on is based on reasonable doubt as only
reasonable doubt. However, Aglibot is preponderance of evidence is required in civil
ordered to pay the private complainant the cases; (2) where the court declared the accused’s
sum of ₱3,000,000.00 representing the total liability is not criminal but only civil in nature[;] and
face value of the eleven checks plus interest (3) where the civil liability does not arise from or is
of 12% per annum from the filing of the cases not based upon the criminal act of which the
on November 2, 2004 until fully paid, accused was acquitted.
attorney’s fees of ₱30,000.00 as well as the
cost of suit. Aglibot is still civilly liable.
RTC: The MTC ruling is reversed and set

aside and a new one is entered dismissing
the said civil aspect on the ground of failure to
fulfill, a condition precedent of exhausting all
means to collect from the principal debtor.
ISSUE/S Whether or not Aglibot is an accommodation party or a guaranteeing party?
ARGUMENTS Petitioner Aglibot: Respondent Santia:

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Santia maintains that Aglibot is not a guarantor but
Aglibot maintains that it was an error for the an accommodation party who is liable on the
appellate court to adjudge her personally instrument to a holder for value.
liable for issuing her own eleven (11)
post-dated checks to Santia, since she did so
on behalf of her employer, PLCC, the true
borrower and beneficiary of the loan. Still
maintaining that she was a mere guarantor of
the said debt of PLCC when she agreed to
issue her own checks, Aglibot insists that
Santia failed to exhaust all means to collect
the debt from PLCC, the principal debtor, and
therefore he cannot now be permitted to go
after her subsidiary liability.
SC RULING Aglibot is an accommodation party and therefore liable to Santia

The facts present a clear situation where Aglibot, as the manager of PLCC, agreed to accommodate
its loan to Santia by issuing her own post-dated checks in payment thereof. She is considered an
accommodation party under the Negotiable Instruments Law. Concerning the liability of an
accommodation party, Section 29 of the NIL law provides:
Sec. 29. Liability of an accommodation party. — An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefore, and for the
holder for value notwithstanding such holder at the time of taking the instrument knew him to be only
an accommodation party.
The mere fact, then, that Aglibot issued her own checks to Santia made her personally liable to the
latter on her checks without the need for Santia to first go after PLCC for the payment of its loan. It
would have been otherwise had it been shown that Aglibot was a mere guarantor, except that since
checks were issued ostensibly in payment for the loan, the provisions of the Negotiable Instruments
Law must take primacy in application.
NOTES

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TOPIC Liability of Accommodation Parties MODULE

CASE #16
CASE TITLE Gonzales v. Philippine Commercial and International Bank GR NO 180257
PONENTE Velasco, Jr DATE February 23, 2011
DOCTRINE The liability of an accommodation party is immediate, primary and absolute; he is directly and equally
bound with the principal.
FACTS PCIB granted a credit line to Gonzales through execution of Credit-On-Hand Loan Agreement
(COHLA), in which the aggregate amount of the accounts of Gonzales with PCIB served as collateral
for and his availment limit under the credit line. Gonzales drew from said credit line through the
issuance of the check.
Gonzales and his wife obtained a loan for PhP500,000. Subsequently, spouses Panlilio and Gonzales
obtained 2 additional loans from PCIB (PhP1,000,000 and PhP300,000). These 3 loans were covered
by 3 promissory notes. To secure the loans, a real estate mortgage (REM) over a parcel of land was
executed. The promissory notes specified the solidary liability of Gonzales and the spouses Panlilio
for payment of the loans. However, it was spouses Panlilio who received the loan proceeds of
PhP1,800,000. Monthly interest dues of the loans were paid by spouses Panlilio through automatic
debiting of their account with PCIB. But spouses Panlilio defaulted in the payment of periodic interest
dues from their PCIB account which apparently was not maintained with enough deposits.
In the meantime, Gonzales issued a check in favor of Unson for PhP250,000 drawn against the credit
line (COHLA). However, upon presentment for payment by Unson, it was dishonored by PCIB due to
termination by PCIB of the credit line under COHLA for unpaid periodic interest dues from the loans of
Gonzales and spouses Panlilio. PCIB likewise froze the FCD account of Gonzales.
LOWER RTC: Decision in favor of PCIB. Plaintiff is liable to pay CA: Dismissed Gonzales' appeal
COURT defendant Bank as principal under the promissory notes and affirmed in toto the RTC
RULING Decision.
a) Gonzales is solidarily liable with spouses Panlilio on the 3
promissory notes relative to the outstanding REM loan.
b) No fault in the termination by PCIB of the COHLA with
Gonzales and in freezing the latter's accounts to answer for the
past due PhP1,800,000 loan.
c) Dishonor of the check issued by Gonzales in favor of Unson
was proper considering that the credit line under COHLA had
already been terminated or revoked before presentment.
ISSUE/S Whether or not Gonzales is solidarily liable with the spouses Panlilio for the three promissory notes
ARGUMENTS Petitioner Eusebio Gonzales: Respondent PCIB:

a) Gonzales insisted that the check he issued had been fully PCIB stood its ground in freezing
funded, and demanded the return of the proceeds of his FCD Gonzales' accounts due to
as well as damages for the unjust dishonor of the check. outstanding dues of the loans.
b) PCIB knew that the actual borrowers were spouses Panlilio
and Gonzales never benefited from the proceeds of the loans,
which were serviced by the PCIB account of spouses Panlilio.

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SC RULING YES. The promissory notes covering the PhP1,800,000 loan show the following:
(1) Promissory Note BD-090-1766-95, dated October 30, 1995, for PhP500,000 was signed by
Gonzales and his wife, Jessica Gonzales;
(2) Promissory Note BD-090-2122-95, dated December 26, 1995, for PhP1,000,000 was signed by
Gonzales and the spouses Panlilio; and
(3) Promissory Note BD-090-011-96, dated January 3, 1996, for PhP300,000 was signed by
Gonzales and the spouses Panlilio.
Gonzales is liable for the loans covered by the above promissory notes. First, Gonzales admitted that
he is an accommodation party which PCIB did not dispute. In his testimony, Gonzales admitted that
he merely accommodated spouses Panlilio at the suggestion of Ocampo, who was then handling his
accounts, in order to facilitate the fast release of the loan. (See notes) Second, the records of PCIB
indeed bear out, and was admitted by Noceda, that the PhP1,800,000 loan proceeds went to the
spouses Panlilio. Third, as an accommodation party, Gonzales is solidarily liable with the
spouses Panlilio for the loans. Under Section 29 of NIL, an accommodation party is 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." An accommodation party is one who
meets all the three requisites, viz.: (1) he must be a party to the instrument, signing as maker, drawer,
acceptor, or indorser; (2) he must not receive value therefor; and (3) he must sign for the purpose of
lending his name or credit to some other person. An accommodation party 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 party/ies thereto. The accommodation party is
liable on the instrument to a holder for value even though the holder, at time of taking the instrument,
knew him or her to be merely an accommodation party, as if the contract was not for accommodation.
As petitioner acknowledged it to be, the relation between an accommodation party and the
accommodated party is one of principal and surety — the accommodation party being the
surety. As such, he is deemed an original promisor and debtor from the beginning; he is
considered in law as the same party as the debtor in relation to whatever is adjudged touching
the obligation of the latter since their liabilities are interwoven as to be inseparable. Although
a contract of suretyship is in essence accessory or collateral to a valid principal obligation,
the surety's liability to the creditor is immediate, primary and absolute; he is directly and
equally bound with the principal. As an equivalent of a regular party to the undertaking, a
surety becomes liable to the debt and duty of the principal obligor even without possessing a
direct or personal interest in the obligations nor does he receive any benefit therefrom. Thus,
the knowledge, acquiescence, or even demand by Ocampo for an accommodation by Gonzales in
order to extend the credit or loan of PhP1,800,000 to the spouses Panlilio does not exonerate
Gonzales from liability on the three promissory notes.
Fourth, solidary liability of Gonzales is clearly stipulated in the promissory notes "For value received,
the undersigned (the "BORROWER") jointly and severally promise to pay . . . ." In the instant case
Gonzales, as accommodation party, is immediately, equally, and absolutely bound with the spouses
Panlilio on the promissory notes which indubitably stipulated solidary liability for all the borrowers.

2F 2020-2021
TOPIC Accommodation Party MODULE
CASE #17
CASE TITLE SADAYA VS. SEVILLA GR NO L-17845
PONENTE SANCHEZ, J. DATE April 27, 2967
DOCTRINE A joint and several accommodation maker of a negotiable promissory note may demand from the
principal debtor reimbursement for the amount that he paid to the payee; and a joint and several
accommodation maker who pays on the said promissory note may directly demand reimbursement
from his co-accommodation maker without first directing his action against the principal debtor
provided that: (a) he made the payment by virtue of a judicial demand, or (b) a principal debtor is
insolvent.
FACTS In March 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya executed, jointly and severally, in
favor of the Bank of the Philippine Islands (BPI), or its order, a promissory note for Php 15,000.00
with interest at 8% per annum, payable on demand. The Php 15,000.00, proceeds of the promissory
note, was received from the bank by Varona alone. Victor Sevilla and Simeon Sadaya signed the
promissory note as co-makers only as a favor to Varona. Payments were made on account. As of
June 1950, the outstanding balance stood Php 4,850.00. No payment thereafter made. In October
1952, the bank collected from Sadaya the balance with interest totalled Php 5,416.12. Varona failed
to reimburse Sadaya despite repeated demands.
Victor Sevilla died and Francisco Sevilla was named administrator of the estate. Sadaya filed a
creditor's claim for the above sum of Php 5,746.12, plus attorneys fees in the sum of Php 1,500.00.
The administrator resisted the claim upon the averment that the deceased Victor Sevilla "did not
receive any amount as consideration for the promissory note," but signed it only "as surety for Oscar
Varona".
LOWER RTC: Decision in favor of Sadaya. CA: Reversed and set aside the order appealed
COURT from and to disapprove and disallow "appellee's
RULING The trial court admitted the claim of Sadaya claim of Php 5,746.12 against the intestate estate."
and directed the administrator to pay the
same from any available funds belonging to
the estate of the deceased Victor Sevilla.
ISSUE/S Whether or not Sadaya can claim against the estate of Sevilla as co-accomodation party when
Varona as principal debtor is not yet insolvent.
ARGUMENTS Petitioner (Sadaya) Respondent (Francisco Sevilla):

He insisted that deceased Victor Sevilla "did not
receive any amount as consideration for the
promissory note," but signed it only "as surety for
Oscar Varona"
SC RULING NO. Varona is bound by the obligation to reimburse Sadaya. A solidary accommodation maker —
who made payment — has the right to contribution, from his co-accommodation maker, in the
absence of agreement to the contrary between them, and subject to conditions imposed by law. This
right springs from an implied promise between the accommodation makers to share equally the
burdens that may ensue from their having consented to stamp their signatures on the promissory
note.

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For having lent their signatures to the principal debtor, they clearly placed themselves — in so far as
payment made by one may create liability on the other — in the category of mere joint grantors of the
former. This is as it should be. Not one of them benefited by the promissory note. They stand on the
same footing. In misfortune, their burdens should be equally spread.
Nothing extant in the Negotiable Instruments Law would define the right of one accommodation
maker to seek reimbursement from another. Thus, we must go to the Civil Code. The requisites
before one accommodation maker can seek reimbursement from a co-accommodation maker.
ART. 2073. When there are two or more guarantors of the same debtor and for the same debt,
the one among them who has paid may demand of each of the others the share which is
proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be borne by the others, including
the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment has been made in
virtue of a judicial demand or unless the principal debtor is insolvent.
A joint and several accommodation maker of a negotiable promissory note may demand from the
principal debtor reimbursement for the amount that he paid to the payee. A joint and several
accommodation maker who pays on the said promissory note may directly demand reimbursement
from his co-accommodation maker without first directing his action against the principal debtor
provided that: (a) he made the payment by virtue of a judicial demand, or -no judicial demand just
voluntarily; and (b) a principal debtor is insolvent. – Varona is not insolvent.
It was never shown that there was a judicial demand on Sadaya to pay the obligation and also, it was
never proven that Varona was insolvent. Thus, Sadaya cannot proceed against Sevilla for
reimbursement.
NOTES

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CASE #18
CASE TITLE Virata v. Ng Wee GR NO 220926,
221058,
221109,
221135
&
221218
PONENTE Velasco, Jr. DATE
July 5, 2017
DOCTRINE Accommodation party 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
party or parties thereto. Prescinding from the foregoing, an accommodation party is one who meets
all the following three requisites, viz: (1) he must be a party to the instrument, signing as maker,
drawer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he must sign for the
purpose of lending his name or credit to some other person.
FACTS
Wincorp extended a credit line to Power Merge and allowed the latter to make
drawdowns despite signs that would show Power Merge’s inability to pay. To secure the Credit Line
Agreement and the Amendment to Credit Line Agreement, Power Merge executed promissory notes
obliging itself to pay Wincorp, for itself or as agent for and on behalf of certain investors the amount of
the drawdowns with interest on the maturity of the promissory note. However, unknown to Ng Wee,
the promissory notes were rendered useless by the Side Agreements, simultaneously executed by
Ong and Reyes with the Credit Line Agreement and the Amendment to Credit Line Agreement, which
virtually exonerated Power Merge of its liability on the promissory notes.
ISSUE/S
Whether or not Vira is liable for the Promissory notes?
He merely executed the Promissory Notes on
behalf of Power Merge as an accommodation
for Wincorp, and that neither he nor Power
Merge received any pecuniary benefit from
the credit facility. He thus claims that he and
Power Merge cannot be held liable for the
Promissory Notes that were executed.
SC RULING
Yes. Virata is liable for the Promissory Notes even as an accommodation party.
On its face, the documentary evidence on record reveals that Power Merge actually received the
proceeds from the Credit Line Agreement. But even if We assume for the sake of argument that
Power Merge, through Virata, is as a mere accommodation party under the Promissory Notes, liability
would still attach to them in favor of the holder of the instrument for value.
In Gonzales v. Philippine Commercial and International Bank,127 the Court held that an
accommodation party 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
party or parties thereto. Prescinding from the foregoing, an accommodation party is one who meets

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all the following three requisites, viz: (1) he must be a party to the instrument, signing as maker,
drawer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he must sign for the
purpose of lending his name or credit to some other person.
The first element, that Power Merge, through Virata, executed the Promissory Notes as maker cannot
be disputed. Meanwhile, petitioners would have the Court hypothetically admit that they did not
receive the proceeds from the drawdowns, in satisfaction of the second requisite. And lastly, this was
allegedly done for the purpose of lending its name to conceal Wincorp's direct borrowing from its
clients.
In gratia argumenti that the above elements are established facts herein, liability will still attach to the
accommodation parties pursuant to Sec. 29 of the Negotiable Instruments Law. The provision states:
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
holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be
only an accommodation party. (emphasis added)
The basis for the liability under Section 29 is the underlying relation between the accommodated party
and the accommodation party, which is one of principal and surety. 129 In a contract of surety, a
person binds himself solidarily liable with the principal debtor of an obligation.130 But though a
suretyship agreement is, in essence, accessory or collateral to a valid principal obligation, the surety's
liability to the creditor is immediate, primary, and absolute. He is directly and equally bound with the
principal.
In a similar fashion, the accommodation party cum surety in a negotiable instrument is deemed an
original promisor and debtor from the beginning; he is considered in law as the same party as the
debtor in relation to whatever is adjudged touching the obligation of the latter since their liabilities are
so interwoven as to be inseparable. It is beyond cavil then that Power Merge and Virata can be held
liable for the amounts stated in the Promissory Notes. Consequently, they are also liable for the
assignment to Ng Wee of portions thereof as embodied in the Confirmation Advices.
NOTES
2F 2020-2021
TOPIC Accommodation Party MODULE

CASE #1
CASE TITLE Crisologo-Jose v Court of Appeals GR NO 80599
PONENTE Regalado,J. DATE September 15, 1989
DOCTRINE Section 29 of NIL does not apply to corporations which are accommodation parties because the issue
or indorsement of negotiable paper by a corporation without consideration and for accommodation of
another is ultra vires (beyond the powers).
FACTS
In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-
charge of marketing and sales; and the president of the said corporation was Atty. Benares.
On April 30, 1980, Atty. Benares, in accommodation of his clients, the spouses Jaime and
Clarita Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated June 14,
1980, in the amount of 45k payable to defendant Ernestina Crisologo-Jose. It was signed by
president Atty Benares, and the treasurer of the said corporation. Since the treasurer of
Mover Enterprises was not available, Atty. Benares prevailed upon the plaintiff, Santos, Jr.,
to sign the aforesaid check as an alternate signatory.
It appears that the check was issued to defendant Ernestina Crisologo-Jose in consideration
of the waiver or quitclaim by said defendant over a certain property which the GSIS agreed to
sell to the clients of Atty. Benares, the spouses Jaime and Clarita Ong, with the
understanding that upon approval by the GSIS of the compromise agreement with the
spouses Ong, the check will be encashed accordingly. The compromise agreement however,
was not approved and so another check was issued signed by the same parties. When
defendant deposited this replacement check with her account at Family Savings Bank,
Mayon Branch, it was dishonored for insufficiency of funds.
Defendant filed a criminal complaint for violation of BP 22 against Atty. Benares and plaintiff
Santos, Jr. During the preliminary investigation, Santos Jr tendered the cashier’s check to
plaintiff.
LOWER RTC: Art 1256 or consignation is not CA: REVERSED

COURT applicable to this case; dismissed plaintiff’s
RULING complaint.
ISSUE/S WON CA erred in holding that private respondent is an accommodation party under NIL and a
debtor of petitioner to the extent of the amount of said check
ARGUMENTS Petitioner (NAME): The accommodation Respondent (NAME:

party is Mover Enterprises, not Santos Jr. a.
who merely signed in representative capacity b.
SC RULING To be considered an accommodation party, a person must be (1) a party to the instrument, signing as
maker, drawer, acceptor or indorser (2) not receive value therefor and (3) sign for the purpose of
lending his name for the credit of some other person. It is not a valid defense that the accommodation
party did not receive any valuable consideration when he executed the instrument. Section 29 of NIL
does not apply to corporations which are accommodation parties because the issue or indorsement of
negotiable paper by a corporation without consideration and for accommodation of another is ultra
vires (beyond the powers). One who has taken the instrument with knowledge of the accommodation
nature thereof cannot recover against a corporation where it is only an accommodation party. If the
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form of the instrument, or the nature of the transaction, is such as to charge the indorsee with
knowledge that the issue or indorsement of the instrument by the corporation is for the
accommodation of another, he cannot recover against the corporation thereon. The president and
vice-president, have no power to execute for mere accommodation a negotiable instrument of the
corporation for their individual debts or transactions arising from or in relation to matters in which the
corporation has no legitimate concern. They will be personally liable to the consequences arising in
connection therewith.
On the issue of consignation, respondent Santos is an accommodation party and personally liable for
the value of the check. With the dishonor of the check, there was created a debtor-creditor
relationship, as between Atty. Benares and respondent Santos, on the one hand, and petitioner, on
the other. This circumstance enables respondent Santos to resort to an action of consignation where
his tender of payment had been refused by petitioner.
NOTES
2F 2020-2021
TOPIC Equitable Defense MODULE 6
CASE TITLE Green v. Lopez GR NO 11526
Carson, J. DAT
PONENTE
E January 2, 1917
DOCTRINE Equitable defenses can in no event defeat the right of the holders of a negotiable note by
indorsement and for valuable consideration, until and unless knowledge of the existence of
such equitable defenses is brought home to them, or until it appears that the holders had
such knowledge of the existence of defects in the instrument as to charge them with bad
faith in acquiring it under all the attendant circumstances.
FACTS: A negotiable note was issued by LOPEZ ET AL (maker) to a certain payee. After that,the
payee sold and indorsed the note to the present holders, GREEN ET AL. The note was
indorsed by the payee to the plaintiffs “for value received”.
LOPEZ ET AL refused to pay the note.
ARGUMEN Appellant: Lopez alleged that GREEN ET AL were not bona fide holders of the note by
TS indorsement, because they had knowledge of the existence of certain equitable defenses
which the makers were entitled to set up as against the payee of the noted, before they
acquired it by indorsement from the payee. According to Lopez, a person unknown to him
and representing himself to be an employee of Green, made inquiries as to the validity and
genuineness of the note and that he then and there explained the nature of his equitable
defenses as against the payee, and repudiated any obligation to meet the note.
Plaintiff: Green is entitled to the negotiable instrument since they were able to establish
competent evidence that the indorsement was made for a valuable consideration. Further,
Green stated that before purchasing the note he sent an employee to call upon the makers
of the note to inquire whether it was a good note which would be paid at maturity, and that
upon his return this employee stated that he had been informed by the makers of the note
that it was a good note duly executed by them and that it would be paid when due. Hence,
he had no knowledge of any equitable defenses.
LOWER The plaintiffs are entitled to the value of the note. The complaint alleged that the note
COURT was indorsed by the payee to the plaintiffs "for value received," and this allegation was
RULING conclusively established by the evidence adduced at the trial. We are of opinion that this
allegation was substantially equivalent to a formal allegation that the indorsement was
made for a valuable consideration, and that the truth of this allegation having been
established by the introduction of competent evidence establishing the fact that the
indorsement was made for a valuable consideration, hence, entitled to the same.
ISSUE/S Whether or not the appellant may not pay the plaintiff on the ground that they have
equitable defense.
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SC RULING No, the claim of appellant were either wholly false or he failed to make himself understood
resulting to the fact that no knowledge of the existence of equitable defenses was made
known to the plaintiff, the purchaser of the note.
Further, there was nothing on the face of the note to put the purchasers on notice of the
existence of such equitable defenses. It was entirely regular in form and came into their
possession in the usual course of business. Under these circumstances the burden of proof
was manifestly upon the makers of the note to establish the fact of knowledge of the
equitable defenses before they could be permitted to rely upon such defenses as against
the purchasers.
Equitable defenses of this nature can in no event defeat the right of the holders of a
negotiable note by indorsement and for valuable consideration, until and unless knowledge
of the existence of such equitable defenses is brought home to them, or until it appears that
the holders had such knowledge of the existence of defects in the instrument as to charge
them with bad faith in acquiring it under all the attendant circumstances.
The indorsement was made for a valuable consideration, the purchasers were clearly
entitled to
judgment for the face value of the note.
By the decisive weight of authority in this country, where negotiable

paper has been put in circulation, and there is no infirmity or
defense between the antecedent parties thereto, a purchaser of
such security is entitled to recover thereon, as against the maker,
the whole amount, irrespective of what he may have paid therefor.
(146 U. S., 327.)
NOTES
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TOPIC Absence or failure of consideration MODULE 6

CASE #3
CASE TITLE State Investment House v. CA and Nora Moulic GR NO 101163
PONENTE Bellosillo, J. : DATE

January 11, 1993
DOCTRINE MOULIC cannot set up against SIHI the defense that there was failure or absence of consideration.
MOULIC can only invoke this defense against SIHI if it was privy to the purpose for which they were
issued and therefore is not a holder in due course.|||
FACTS
● Nora Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on
commission, 2 post-dated Equitable Banking Corporation checks in the amount of P50,000 each, one
dated 30 August 1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks
to petitioner State Investment House, Inc. (SIHI)
● Moulic failed to sell the pieces of jewelry, so she returned them to Corazon before maturity of the
checks. The checks, however, could no longer be retrieved as they had already been negotiated.
Consequently, before their maturity dates, Moulic withdrew her funds from the drawee bank.
● Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20
December 1979, SIHI allegedly notified MOULIC of the dishonor of the checks and requested that it be
paid in cash instead, although MOULIC avers that no notice was given.
● On 6 October 1983, SIHI sued to recover the value of the checks plus attorney’s fees and expenses
of litigation.
Moulic instituted a Third-Party Complaint against Corazon, who later assumed full responsibility for
the checks.
LOWER
COURT RTC:DISMISSED the Complaint as well as CA: AFFIRMED the decision of the RTC.
RULING the Third-Party Complaint, ordering STATE to
pay Moulic P3,000 for attorney’s fees. (May The Notice of Dishonor to Moulic was made beyond
26, 1988) the period prescribed by the NIL and that even if
reglementary period, it would be of no consequence
as the checks should never have been presented
for payment. The sale of the jewelry was never
effected. The checks, thus, ceased to serve their
purpose as security for the jewelry.
ISSUE/S Whether or not petitioner is a holder in due course as to entitle it to proceed against private
respondents for the amount stated in the dishonored checks.
● Whether there was failure of consideration which may be invoked..
ARGUMENTS Respondent (CA and MOULIC)

Petitioner (State Investment House):
a. Moulic avers she incurred no obligation on the
checks because the jewelry was never sold and the
checks were negotiated without her knowledge and
consent.
b. there was failure or absence of consideration.

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c. The post-dated checks were merely issued as
security.
d. The Court of Appeals also held that allowing

recovery on the checks would constitute unjust
enrichment on the part of SIHI
e. SIHI gave no notice of dishonor to Moulic.

SC RULING YES. Pursuant to Section 52 of the NIL, a prima facie presumption exists that the holder of a
negotiable instrument is a holder in due course. Consequently, the burden of proving that
STATE is not a holder in due course lies in the person who disputes the presumption. In this
regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces, the post-dated checks were complete and regular;
(b) SIHI bought these checks from the payee, Corazon, before their due dates; 3 (c) SIHI took these
checks in good faith and for value, albeit at a discounted price; and, (d) SIHI was never informed nor
made aware that these checks were merely issued to payee as security and not for value.
SIHI isindeed a holder in due course. As such, it holds the instruments free from any defect of title of
prior parties, and from defenses available to prior parties among themselves; STATE may, therefore,
enforce full payment of the check ||
Moulic cannot set up against SIHI the defense that there was failure or absence of consideration
as she may only do this if it was privy to the purpose for which they were issued and therefore
is not a holder in due course. Moreover, that the post-dated checks were merely issued as security
is not a ground for the discharge of the instrument as against a holder in due course since the only
grounds for such are those outlined in Section 119 of the NIL.
Sec. 119 contemplates of a situation where the holder of the instrument is the creditor while its
drawer is the debtor. In the present action, the payee, Corazon, was no longer Moulic’s creditor at the
time the jewelry was returned.
The fact that SIHI failed to give Notice of Dishonor to Moulic is of no moment. The need for such
is not absolute and is subject to exceptions under Sec. 114 of the NIL. Moulic did not retrieve the checks
when she returned the jewelry, but simply withdrew her funds from her drawee bank and transferred
them to another to protect herself. After withdrawing her funds, she could not have expected her checks
to be honored. Thus, she was responsible for the dishonor of her checks and there was no need
to serve her Notice of Dishonor.
The holder who takes the negotiated paper makes a contract with the parties on the face of the
instrument. There is an implied representation that funds or credit are available for the payment
of the instrument in the bank upon which it is drawn. The withdrawal of the money from the drawee
bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In herein case,
such withdrawal renders the drawer, Moulic, liable to SIHI, a holder in due course of the checks,
without prejudice to any action for recompense sehe may pursue against Victoriano.
Corazon, together with her husband, assumed full responsibility for the debt against SIHI. Their
property mortgaged to SIHI was extrajudicially foreclosed. However, the value of the property
foreclosed was not enough to cover the debt in full. Thus, SIHI may proceed and is entitled to claim
the deficiency from Moulic. Such recovery of deficiency, although not discussed in Act No. 3135, as
amended, said provision does not prohibit such recovery
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NOTES
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.
When notice need not be given to drawer. — Notice of dishonor is not required to be given to the
drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When
the drawee is a fictitious person or a person not having capacity to contract; (c) When the drawer is
the person to whom the instrument is presented for payment; (d) Where the drawer has no right to
expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer had
countermanded payment.
2F 2020-2021
TOPIC Presumption of Consideration MODULE

CASE #4
CASE TITLE Ubas v. Chan GR NO 295190
PONENTE Perlas-Bernabe, J: DATE

February 06, 2017
DOCTRINE
Jurisprudence holds that "in a suit for a recovery of sum of money, as here, the plaintiff-creditor
[(petitioner in this case)] has the burden of proof to show that defendant [(respondent in this
case)] had not paid [him] the amount of the contracted loan.
However, it has also been long established that where the plaintiff-creditor possesses and
submits in evidence an instrument showing the indebtedness, a presumption that the credit
has not been satisfied arises in [his] favor. Thus, the defendant is, in appropriate instances,
required to overcome the said presumption and present evidence to prove the fact of payment
so that no judgment will be entered against him."
FACTS
Manuel Ubas filed a complaint for sum of money with application for writ of attachment against
Wilson Chan alleging that the latter, “doing business under the name and style of
UNIMASTER”, was indebted to him of 1,500,00php, representing the price of construction
materials purchased by respondent from petitioner for the construction of Macagtas Dam in
Northern Samar.
Ubas further claimed that the obligation has long become due and demandable and yet,
Chan unjustly refused to pay the same despite repeated demands. Petitioner averred that
respondent is guilty of fraud because the latter issued three bank checks, payable to “CASH”
in the amount of 500,000 each on January 31, 1998, March 13, 1998, and April 3, 1998,
respectively, which were dishonored due to a stop payment order. Petitioner’s evidence are
the dishonored checks which were in his possession and the demand letter he sent to the
respondent detailing the serial numbers of the checks that were issued by the latter.
Respondent filed an answer with motion to dismiss on the following grounds:

1. no cause of action, considering that the checks do not belong to him but to Unimaster
Conglomeration, Inc.,
2. there is no contract that ever existed between him and petitioner and if petitioner even
had a right of action at all, the complaint should not have been filed against him but
against Unimasters, a duly registered construction company which has a separate
juridical personality from him
3. Chan admitted to having issued subject checks but they were not issued to petitioner
but to a project engineer, named Engr. Merelos, who was in charge of negotiating the
supply for the said dam project and that the checks were issued for the replenishment
of the revolving fund.
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However, Engr. Morelos lost the subject checks causing Chan to issue a Stop Payment
Order
LOWER RTC: ruled that Ubas had a cause of action. CA: reversed and set aside the RTC’s ruling
COURT petitioner's demand letter— which clearly ● dismissing petitioner’s complaint on the
RULING stated the serial numbers of the checks, ground of lack of cause of action and ruled
including the that the respondent was not the proper party
dates and amounts thereof — was not ○ drawer of the subject checks was
disputed by respondent Unimasters, which, as a corporate
entity, has a separate and distinct
It did not lend credence to respondent's claim personality from respondents
that the subject checks were lost and only ● Also, that the subject checks cannot be
came into the possession of petitioner, validly used as proof of alleged transactions
considering the fact that petitioner mentioned between petitioner and respondent since
the details of the subject checks in the said from the face of these checks alone, it is
demand letter and, thus, would have readily apparent that they are not personal
incriminated himself had he actually stolen checks of Chan
them. ○ it can only serve as evidence of
transaction between Unimasters
Chan failed to overcome the disputable and petitioner petitioner's claim of
presumption that every party to an instrument unpaid deliveries had no merit, given
acquired the same for a valuable that not a single delivery receipt, trip
consideration under Section 24 of Negotiable ticket or similar document was
Instruments Law. presented to establish the delivery of
construction materials to respondent.
ISSUE/S
Whether the CA correctly ruled in dismissing the RTC’S decision for the parties’ lack of
cause of action

a. a.
b. b.
SC RULING
YES. The Court holds that the CA erred in dismissing petitioner’s complaint against respondent on the
ground of lack of cause of action.
Jurisprudence holds that "in a suit for a recovery of sum of money, as here, the plaintiff-creditor
[(petitioner in this case)] has the burden of proof to show that defendant [(respondent in this case)] had
not paid [him] the amount of the contracted loan. However, it has also been long established that where
the plaintiff-creditor possesses and submits in evidence an instrument showing the
indebtedness, a presumption that the credit has not been satisfied arises in [his] favor. Hence,
the defendant is required to overcome the said presumption and present evidence to prove the fact of
payment so that no judgment will be entered against him.
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This presumption stems from Section 24 of the NIL, which provides that “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.”
Further, in Pacheco v. CA, the Court has expressly recognized that a check "constitutes an
evidence of indebtedness" and is a veritable "proof of an obligation."
In the case at bar, petitioner had presented in evidence the three (3) dishonored checks which
were undeniably signed by the respondent. RTC correctly ruled, it is presumed that the subject
checks were issued for a valid consideration, which therefore, dispensed with the necessity of
any documentary evidence to support petitioner's monetary claim. Unless otherwise rebutted, the
legal presumption of consideration under Section 24 of the NIL stands. Verily, "the vital function of legal
presumption is to dispense with the need for proof." It is presumed that the subject checks were issued
for a valid consideration, which therefore, dispensed with the necessity of any documentary
evidence to support the petitioner's monetary claim.
As the holder of the subject checks which are presumed to have been issued for a valuable
consideration, and having established his privity of contract with respondent, petitioner has
substantiated his cause of action by a preponderance of evidence. On the other hand, respondent
was not able to overcome the presumption of consideration. Further, as held by the RTC,
respondent’s contention that the checks were lost were overcome by petitioner’s presentment
of its demand letter which clearly stated the serial numbers of the checks, including the dates
and amounts thereof. Section 16 of the NIL provides that when an instrument is no longer
in the possession of the person who signed it and it is complete in its terms, "a valid
and intentional delivery by him is presumed until the contrary is proved,".
With the foregoing, the Court held that the dishonored check served as an evidence of
indebtedness and were presumed to have been issued for a valid consideration.
NOTES
NIL 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.
2F 2020-2021
TOPIC Absence or Failure of Consideration MODULE

CASE #5
CASE TITLE STATE INVESTMENT HOUSE v. INTERMEDIATE APPELLATE COURT, GR NO 72764
ANITA PEÑA CHUA and HARRIS CHUA
PONENTE FERNAN, C.J. DATE July 13, 1989
DOCTRINE Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of
defense as against any person not a holder in due course; and partial failure of consideration
is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.
FACTS
It appears that shortly before September 5, 1980, New Sikatuna Wood Industries, Inc. requested for a
loan from private respondent Harris Chua. The latter agreed to grant the same subject to the condition
that the former should wait until December 1980 when he would have the money. In view of this
agreement, private respondent-wife, Anita Pena Chua issued three (3) crossed checks payable to New
Sikatuna Wood Industries, Inc. all postdated December 22, 1980 as follows:
DRAWEEBAK CHECK 0 DATE At.OU iT
1. ChinaBan Ing corpora110n 589053 Dec 22 1980 P98,750.00
2 In ema lonaI Corporae Ban 04045549 Dec 22 1980 102,313 00

3. Me ropo tan Bank& Trustco . 036512 Dec 22 1980 98,387.00
The total value of the three (3) postdated checks amounted to P 299,450.00.
Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with herein petitioner
State Investment House, Inc. whereby for and in consideration of the sum of P1,047,402.91 under a
deed of sale, the former assigned and discounted with petitioner eleven (11) postdated checks
including the aforementioned three (3) postdated checks issued by herein private respondent-wife
Anita Peña Chua to New Sikatuna Wood Industries, Inc.
When the three checks issued by private respondent Anita Pena Chua 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 Anita Peña to make
good said checks, the latter failed to pay the same necessitating the former to file an action for collection
against the latter and her husband Harris Chua.
Private respondents-defendants filed a third party complaint against New Sikatuna Wood Industries,
Inc. for reimbursement and indemnification in the event that they beheld liable to petitioner-plaintiff. For
failure of a third party defendant to answer the third party complaint despite due service of summons,
the latter was declared in default.
LOWER RTC: IAC now CA:

COURT 1.) Main Case – In favor of the plaintiff (State Reversed to decision. Hence the appeal
RULING Investment House) ordering the defendants to
pay jointly and severally to the plaintiff
2.) 3rd Party Complaint – New Sikatuna

Wood Industries, Inc. is ordered to pay third
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party plaintiffs Anita Pena Chua and Harris
Chua.
ISSUE/S
Whether or not SIHI is a holder in due course as to entitle it to proceed against private respondents
for the amount stated in the dishonored checks. - NO
ARGUMENTS Petitioner (State Investment House): Respondent (Court of Appeals):

a. Petitioner submits that at the time of the a. The ruling itself, the one the appellate court held
negotiation and endorsement of the checks in
question by New Sikatuna Wood Industries, it Private Respondent (Chua Spouses):
had no knowledge of the transaction a. Third party complaint above
and/or arrangement made between the
latter and private respondents.
SC RULING
No, SIHI is not a holder in due course.
Relying on the ruling in Ocampo v. Gatchalian, the Intermediate Appellate Court (now Court of
Appeals), correctly elucidated that the effects of crossing a check are:
1. the check may not be encashed but only deposited in the bank;
2. the check may be negotiated only once to one who has an account with a bank; and
3. the act of crossing the check serves as a warning to the holder that the check has been issued
for a definite purpose so that he must inquire if he has received the check pursuant to that
purpose, otherwise he is not a holder in due course.
Further, the appellate court said:
It results therefore that when appellee rediscounted the check knowing that it was a
crossed check he was knowingly violating the avowed intention of crossing the
check. Furthermore, his failure to inquire from the holder, party defendant New
Sikatuna Wood Industries, Inc., the purpose for which the three checks were
crossed despite the warning of the crossing, prevents him from being considered in
good faith and thus he is not a holder in due course. IBeing not a holder in due course,
~------------ ~
plaintiff is subject to personal defenses, such as lack of consideration between

appellants and New Sikatuna Wood Industries.I Note that under the facts theI checks
were postdated and issued only as a loan to New Sikatuna Wood Industries, Inc. if
and when deposits were made to back up the checks. Such deposits were not
made, hence no loan was made, hence the three checks are without consideration
(Sec. 28, Negotiable Instruments Law).
Likewise New Sikatuna Wood Industries negotiated the three checks in breach of faith in violation of
Article 55, Negotiable Instruments Law, which is a personal defense available to the drawer of the
check. In addition, such instruments are mentioned in Section 541 of the Negotiable Instruments Law
as follows:
Sec. 541. The maker or any legal holder of a check shall be entitled to indicate therein
that it be paid to a certain banker or institution, which he shall do by writing across the
face the name of said banker or institution, or only the words "and company."
The payment made to a person other than the banker or institution shall not exempt the
person on whom it is drawn, if the payment was not correctly made.
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
2F 2020-2021
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, private respondent wife,
considering that petitioner is not the proper party authorized to make presentment of the checks
in question.
That the subject checks had been issued subject to the condition that private respondents on
due date would make the back up deposit for said checks but which condition apparently was
not made, thus resulting in the non-consummation of the loan intended to be granted by private
respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense against
petitioner who is not a holder in due course.
NOTES
2F 2020-2021
TOPIC Absence or failure of consideration MODULE

CASE #6
CASE TITLE RCBC Savings Bank v Odrada GR NO 219037
PONENTE Carpio, J DATE

October 19, 2016
DOCTRINE The drawee bank of a manager's check may interpose personal defenses of the purchaser of the
manager's check if the holder is not a holder in due course. In short, the purchaser of a manager's
check may validly countermand payment to a holder who is not a holder in due course.
FACTS ● Respondent Odrada sold a second-hand Mitsubishi Montero to Lim for 1,510,000php. Of the
total consideration, 610,000 was initially paid by Lim and the balance of 900,000 was financed
by petitioner RCBC Savings Bank through a car loan obtained by Lim.
● As a requisite for the approval of the loan. RCBC required Lim to submit the original copies of
the Certificate of Registration and Official Receipt in his name, unable to produce such, Lim
requested RCBC to issue a letter addressed to Odrada informing the latter that his application
for a car loan had been approved. Odrada executed a deed of absolute sale in favor of Lim
and the latter took possession of the car.
● RCBC received the documents, so it issued two manager's checks dated 12 April 2002
payable to Odrada for 900,000 and 13,500 pesos.
● After the issuance of the manager's checks and their turnover to the respondent but prior to
the check's presentation, Lim notified Odrada in a letter dated April 15, 2002 that there was an
issue regarding the roadworthiness of the Montero.
● the letter contains that Lim is cancelling or want to exchange the one unit Montero sold to him
thru Mr. Shan Mendez because it did not match Odrada's representations the way Mendez
explained it to him. Lim also asked Odrada to meet him personally on April 17, 2002 to inspect
the vehicle and to kindly hold or do not encash the said checks issued to him by RCBC. The
following are Lim's contentions:
1. That the vehicle has not experienced collision but upon opening its engine cover, there
is a trace of a head-on collision (condenser is smashed, hood support were repaired)
2. The 4-wheel drive shift is not functioning
3. Mendez said the odometer has still an original mileage data but found to be tampered
4. Odranda represented that the vehicle is model 1998 but it is indicated in the front left
A-pillar inscribed at the identification plase as model 1997.
● Odrada did not go to the meeting and instead deposited the checks with International
Exchange Bank on April 16, 2002 and redeposited them on April 19, 2002 but it was
dishonored both time upon Lim's instruction to RCBC. Odrada then filed a collection suit
against Lim and RCBC in RTC Makati.
LOWER RTC: CA:
COURT ● Ruled in favor of Odrada. ● Affirmed the trial court's decision
RULING ● It was not proper for Lim to exercise ● It was held that when RCBC issued the
the right of rescission since Odrada manager's checks in favor of Odrada, RCBC
had already complied with the contract admitted the existence of the payee and his
of sale by delivering the Montero, then capacity to endorse, and undertook that
while Lim remained delinquent in on due presentment the check which were
payment. Lim was not the proper party negotiable instruments would be accepted or
entitled to rescind the contract paid, or both according to its tenor. The
because he was not ready, willing and effective delivery of the check to Odrada
able to comply with the contract of made RCBC liable for the checks
sale. ● It also ruled that Odrada was a holder in due
● It also ruled that the defective course, the defense of want of consideration
condition of the Montero was not a is not available against a holder in due
supervening event that would justify course.
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the dishonor of the manager's checks.
A manager's check is equivalent to
cash and is really the bank's own
check, treated as a promissory note
with the bank as a maker, the check
becomes the primary obligation of the
bank which issues it with a written
promise to pay on demand.
● RCBC was liable to Odrada for the
value of manager's checks.
ISSUE/S
WON drawee bank can still deny payment of a manager's check due to the personal defense of Lim
that a defective Montero was sold to Lim - YES
ARGUMENTS Petitioner (RCBC): Respondent (NAME:
a. The manager's checks were dishonored a.
because Lim had cancelled the loan which b.
was prior to the presentation of the manager's
checks
b. Despite notice of the defective condition of
the car, which constituted a failure of
consideration, Odrada still proceeded with
presenting the managers' checks and that
they also sent a formal notice of cancellation
of loan on April 18 2002 to both Odrada and
Lim
(LIM’s arguments)
a. Alleged that the cancellation of loan was
upon the discovery of the misrepresentation
by Odrada about the car's roadworthiness.
b. That the cancellation was not ex parte but
through a letter dated April 15 2002 which
was delivered to Odrada prior to the
presentation of the checks to RCBC
RCBC
SC RULING As a general rule, the drawee bank is not liable until it accepts. Acceptance, creates a privity of
contract between the holder and the drawee so much so that the latter once it accepts, becomes the
party primary liable on the instrument.
But a manager's check is accepted by the bank upon its issuance. As compared to an ordinary bill of
exchange where acceptance occurs after the bill is presented to the drawee, the distinct feature of a
manager's check is that it is accepted in advance. The mere issuance of a manager's check creates a
privity of contract between the holder and the drawee bank, the latter primarily binding itself to pay
according to the tenor of its acceptance. Therefore, the drawee bank has the unconditional obligation
to pay a manager's check to a holder in due course irrespective of any available personal defenses.
The drawee bank of a manager's check may interpose personal defenses of the purchaser of the
manager's check if the holder is not a holder in due course. In short, the purchaser of a manager's
check may validly countermand payment to a holder who is not a holder in due course.
However, in this case, SC ruled that CA gravely erred when it considered Odrada as a holder in due
course. Section 52 of the NIL defines a holder in due course as one who has taken the instrument
under the said conditions in the provision. Odrada attempted to deposit the manager's checks on 16
April 2002, a day after Lim had informed him that there was a serious problem with the Montero.
Instead of addressing the issue, Odrada decided to deposit the manager's checks. Odrada's actions
do not amount to good faith. Clearly, Odrada failed to make an inquiry even when the circumstances
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strongly indicated that there arose, at the very least, a partial failure of consideration due to the
hidden defects of the Montero. Odrada's action in depositing the manager's checks despite
knowledge of the Montero's defects amounted to bad faith. Moreover, when Odrada redeposited the
manager's checks on 19 April 2002, he was already formally notified by RCBC the previous day of
the cancellation of Lim's auto loan transaction. RCBC acted in good faith in stopping the payment of
Sec. 58 of NIL provides that in the hands of any holder other than a holder in due course, a
negotiable instrument is subject to the same defenses as if it were non-negotiable. Since Ordrada
was not a holder in due course, the instrument becomes subject to a personal defense under the NIL.
Hence, RCBC may legally act on a countermand by Lim, the purchaser of the manager's checks.
NOTES
● Definition of manager's check - a check drawn by the bank's manager upon the bank itself and
accepted in advance by the bank by the act of its issuance.
● RCBC alone filed a petition to the SC. The decision of CA became final and executory as to
Lim
● Lim's testimony involving the Montero's hidden defects was stricken off the record by the trial
court, Lim failed to prove the existence of the hidden defects and thus Lim remains liable to
Odrada for the purchase price of the Montero. Lim's failure to file an appeal from the decision
of the Court of Appeals made the decision of the appellate court final and executory as to Lim.
RCBC cannot be made liable because it acted in good faith in carrying out the stop payment
order of Lim who presented to RCBC the complaint letter to Odrada when Lim issued the stop
payment order.
● 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:
(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;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
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TOPIC Non-Delivery and Conditional Delivery of Complete Instruments MODULE 6

CASE #7
CASE TITLE Asia Brewery v. Equitable PCI Bank GR NO 190432
PONENTE Sereno, C.J. DATE April 25, 2017
DOCTRINE Presumption of Delivery: “Where the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is presumed until the delivery is
proved.” (Sec. 16 of NIL)
FACTS Within the period of September 1996 to July 1998, 10 checks and 16 demand drafts (“instruments”)
were issued in the name of Charlie Go, assistant vice president for finance of petitioner Asia Brewery,
Inc. (“ABI”) The instruments, with a total value of P3,785,257.38 bore the annotation “endorsed by
PCI Bank, Ayala Branch, All Prior Endorsement and/or Lack of Endorsement Guaranteed.” All the
demand drafts, except those issued by the Lucena City and Ozamis Branches of Allied Bank, were
crossed.
The petitioners narrate the following:

11) None of the above checks and demand drafts set out reached the payee, co-plaintiff Charlie S.
Go.
12) All of the above checks fell into the hands of a certain Raymond U. Keh, then a Sales Accounting
Manager of ABI who falsely, willfully, and maliciously pretending to be the Go, succeeded in opening
accounts with Equitable PCI Bank in the name of Charlie Go, and thereafter deposited the said
checks and demand drafts in said accounts and withdrew the proceeds thereof to the damage and
prejudice of plaintiff ABI.
LOWER RTC: CA:

COURT
RULING The petitioners could not have any cause of N/A
action against the respondent, because the
instruments had never been delivered; and
that the cause of action pertained to the
drawers of the checks and the purchasers of
the demand drafts.
- RTC dismissed the Complaint for lack
of cause of action prior to trial.
ISSUE/S Whether or no the trial court erred in dismissing the petitioners’ Complaint for lack of cause of action
ARGUMENTS Petitioner (Asia Brewery, Inc. and Charlie Respondent (Equitable PCI Bank):
S. Go):
1) Associated Bank vs. CA: “The 1) Paragraphs 10 and 11 of the Complaint are
possession of check on a forged or an admission that the instruments had not
unauthorized indorsement is wrongful, been delivered to the payee.
and when the money is collected on 2) The Complaint failed to state cause of
the bank, the bank can be held liable action.
for moneys had and received.” 3) Petitioners had no cause of action against it,
2) The fact that the instruments never because a) the Complaint failed to indicate
reached the payee did not mean that that ABI was a party to any of the
there was no delivery, because instruments; and b) Go never becamethe
delivery can be actual or constructive. holder or owner of the instruments due to
nondelivery and, hence, did not acquire any
right or interest.
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3) The defense of lack of delivery is 4) Claims were only enforceable against the
personal to the maker or drawer, and drawers of the checks and the purchasers of
that respondent was neither. the demand drafts, and not against it as a
4) All the instruments were crossed and mere “presentor bank,” because nondelivery
bore the annotation by the respondent to Go was analogous to payment to a wrong
that: “[A]ll prior endorsement and/or party.
lack of endorsement guaranteed.”
SC RULING YES, the trial court erred in dismissing the petitioners’ Complaint for lack of cause of action.
In this case, the trial court proceeded to rule in favor of the dismissal simply because it is believed
that the facts of another case were “on all fours with the instant controversy.” It was gravely
erroneous, and deeply alarming, for the RTC to have reached such a conclusion without first
establishing the facts of the case pending before it. It must be noted that the documents submitted to
it were mere photocopies that had yet to be examined, proved, authenticated, and admitted.
It was erroneous for the RTC to have concluded that there was no delivery, just because the checks
did not reach the payee. It failed to consider Section 16 of the Negotiable Instruments Law, which
envisions instances when instruments may have been delivered to a person other than the payee.
The provision states:
Sec. 16. Delivery; When Effectual; When Presumed. - x x x And where the instrument is no
longer in the possession of a party whose signature apears thereon, a valid and intentional
delivery by him is presumed until the contrary is proved/
In order to resolve whether the Complaint lacked a cause of action, the respondent must have
presented evidence to dispute the presumption that the signatories validly and intentionally
delivered the instrument.
The Court believes that it need not delve into the issue of whether the instruments have been
delivered, because it is a matter of defense that would have to be proven during the trial on the
merits.
The case was REMANDED to the RTC.
NOTES The case also discussed the difference between “lack of cause of action” and “failure to state cause
of action”.
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TOPIC Completion of Blanks MODULE

CASE #8
CASE TITLE Patrimonio v. Gutierrez GR NO 187769
PONENTE J. Brion DATE

June 4, 2014
DOCTRINE In order however that one who is not a holder in due course can enforce the instrument against a party
prior to the instrument’s completion, two requisites must exist:
1. that the blank must be filled strictly in accordance with the authority given; and
2. it must be filled up within a reasonable time.
If it was proven that the instrument had not been filled up strictly in accordance with the authority given
and within a reasonable time, the maker can set this up as a personal defense and avoid liability.
However, if the holder is a holder in due course, there is a conclusive presumption that authority to fill
it up had been given and that the same was not in excess of authority.
FACTS Patrimonio and Gutierrez entered into a business venture under the name of Slam Dunk Corporation
(Slum Dunk), a production outfit that produced mini-concerts and shows related to basketball.
In the course of their business, Patrimonio pre-signed blank checks to answer for the expenses of
Slam Dunk. Although signed, these checks had no payee’s name, date or amount. The blank checks
were entrusted to Gutierrez with the instruction not to fill them out without Patrimonio’s approval. This
arrangement was made so that he could verify the validity of the payment and make the proper
arrangements to fund the account.
Sometime in February 1994, without the petitioner’s knowledge and consent, Gutierrez asked to
secure a loan from Marasigan (the petitioner’s former teammate) worth ₱200,000.00 with an interest of
5% per month from March to May 1994 on the excuse that Patrimonio needed the money for the
construction of his house.
After much contemplation and taking into account his relationship with Patrimonio and Gutierrez,
Marasigan acceded to Gutierrez’ request and gave him ₱200,000.00. Gutierrez simultaneously
delivered to Marasigan one of the blank checks the petitioner pre-signed with Pilipinas Bank, with the
blank portions filled out with the words "Cash" "Two Hundred Thousand Pesos Only", and the amount
of "₱200,000.00". The upper right portion of the check corresponding to the date was also filled out with
the words "May 23, 1994" but the petitioner claimed that the same was not written by Gutierrez.
Thereafter, Marasigan deposited the check but it was dishonored for the reason "ACCOUNT CLOSED."
It was later revealed that the petitioner's account with the bank had been closed since May 28, 1993.
Marasigan sought recovery from Gutierrez then to Patrimonio by sending several demand letters
but to no avail. Consequently, he filed a criminal case for violation of B.P. 22 against the petitioner.
On September 10, 1997, Patrimonio filed before the RTC a Complaint for Declaration of Nullity of
Loan and Recovery of Damages against Gutierrez and co-respondent Marasigan. He denied
authorizing the loan or the check’s negotiation, and asserted that he was not privy to the parties’ loan
agreement.
LOWER RTC: ruled in favor of Marasigan CA: affirmed RTC Ruling, but premised on
COURT ● By issuing the pre-signed blank different findings
RULING checks, petitioner had the intention of ● Marasigan is not a holder in due course as
issuing a negotiable instrument, even he did not receive the check in good faith
with specific instructions to Gutierrez ● The check had been strictly filled out by
not to negotiate or issue the check Gutierrez in accordance with the petitioner’s
without his approval. authority.
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● Although Gutierrez had the prima ● Loan may not be nullified since it is
facie authority to complete the checks grounded on an obligation arising from law
by filling up the blanks therein (Sec. ● Petitioner is still liable to pay Marasigan the
14, NIL), he deliberately violated sum of ₱200,000.00.
petitioner’s specific instructions and
took advantage of petitioner’s trust on
him.
● Marasigan is a holder in due course
● Dismissed petitioner’s complaint for
declaration of nullity of the loan.
● Ordered the petitioner to pay
Marasigan the face value of the check
with a right to claim reimbursement
from Gutierrez.
ISSUE/S Whether or not Patrimonio is liable for the value of the check - NO
ARGUMENTS Petitioner (PATRIMONIO): Respondent (GUTIERREZ)

a. There was no loan between him and a.
Marasigan since he never authorized b.
the borrowing of money nor the
check’s negotiation to the latter;
b. Under Article 1878 of NCC, a special
power of attorney is necessary for an
individual to make a loan or borrow
money in behalf of another;
c. Loan transaction was between
Gutierrez and Marasigan, with his
check being used only as a security;
d. The check had not been completely
and strictly filled out in accordance
with his authority since the condition
that the subject check can only be
used provided there is prior approval
from him, was not complied with
e. Even if the check was strictly filled up
as instructed by the petitioner,
Marasigan is still not entitled to claim
the check’s value as he was not a
holder in due course
f. By reason of the bad faith in the
dealings between the respondents, he
is entitled to claim for damages.
SC RULING The answer is supplied by the applicable statutory provision found in Section 14 of the Negotiable
Instruments Law (NIL) which states:
Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any material particular, the
person in possession thereof has a prima facie authority to complete it by filling up the blanks therein.
And a signature on a blank paper delivered by the person making the signature in order that the paper
may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such
for any amount. In order, however, that any such instrument when completed may be enforced against
any person who became a party thereto prior to its completion, it must be filled up strictly in accordance
with the authority given and within a reasonable time. But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may
2F 2020-2021
enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable
time.
This provision applies to an incomplete but delivered instrument. Under this rule, if the maker or
drawer delivers a pre-signed blank paper to another person for the purpose of converting it into
a negotiable instrument, that person is deemed to have prima facie authority to fill it up. It merely
requires that the instrument be in the possession of a person other than the drawer or maker and from
such possession, together with the fact that the instrument is wanting in a material particular, the law
presumes agency to fill up the blanks.
In order however that one who is not a holder in due course can enforce the instrument against
a party prior to the instrument’s completion, two requisites must exist: (1) that the blank must
be filled strictly in accordance with the authority given; and (2) it must be filled up within a
reasonable time. If it was proven that the instrument had not been filled up strictly in accordance with
the authority given and within a reasonable time, the maker can set this up as a personal defense
and avoid liability. However, if the holder is a holder in due course, there is a conclusive presumption
that authority to fill it up had been given and that the same was not in excess of authority.
In the present case, the petitioner contends that there is no legal basis to hold him liable both under
the contract and loan and under the check because: first, the subject check was not completely filled
out strictly under the authority he has given and second, Marasigan was not a holder in due course.
NOTES
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TOPIC Fraud in Collateral Obligation MODULE 6

CASE #9
CASE TITLE EULALIO PRUDENCIO & ELISA PRUDENCIO vs. COURT OF APPEALS GR NO L-34539
PONENTE Gutierrez, Jr., J. DATE 14 July 1986
DOCTRINE A payee who receives a negotiable promissory note, in good faith, for value, before maturity, and
without any notice of any infirmity, from a holder, not the maker, to whom it was negotiated as a
completed instrument, is a holder in due course so as to preclude the defense of fraud and failure of
consideration between the maker and the holder to whom the instrument was delivered.
FACTS
Eulalio and Elisa Prudencio are registered owners of a parcel of land located in Sampaloc, Manila (TCT
35161). On October 7, 1954, this property was mortgaged to the Philippine National Bank to guarantee
a loan of P1,000.00 extended to Domingo Prudencio.
Sometime in 1955, Concepcion & Tamayo Construction Company had a pending contract with the
Bureau of Public Works for the construction of the municipal building in Puerto Princesa, Palawan,
amounting to P36,800 and, as said Company needed funds for the construction, Jose Toribio,
appellants' relative, and attorney-in-fact of the Company, approached the petitioners asking them to
mortgage their property to secure the loan of P10,000 which the Company was negotiating with the
PNB.
After some persuasion, appellants signed the 'Amendment of Real Estate Mortgage', mortgaging their
said property to the PNB to guaranty the loan of P10,000 extended to the Company. The terms and
conditions of the original mortgage for P1,000 were made integral part of the new mortgage for P10,000
and both documents were registered with the Register of Deeds of Manila. The promissory note
covering the loan of P10,000, maturing on April 27, 1956, was signed by Toribio and the appellants.
Appellants also signed the portion of the promissory note indicating that they are requesting the PNB
to issue the Check covering the loan to the Company. On the same date that the 'Amendment of Real
Estate' was executed, Toribio, in the same capacity as attorney-in-fact of the Company, executed also
the 'Deed of Assignment' assigning all payments to be made by the Bureau to the Company, on
account of the contract for the construction, in favor of the PNB.
This assignment of credit to the contrary notwithstanding, the Bureau, with approval of PNB,
conditioned however that they should be for labor and materials, made 3 payments to the
Company on account of the contract price amounting to P11,234.40. The Bureau's last request for
P5,000 on June 20, 1956, however, was denied by PNB since the loan was already overdue as of April
28, 1956, the remaining balance of the contract price should then be applied to the loan.
The Company abandoned the work, as a consequence of which on June 30, 1956, the Bureau
rescinded the construction contract and assumed the work of completing the building. Thereafter,
appellants wrote the PNB contending that since the PNB 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 a
cancellation of their mortgage contract.
Failing in their bid to have the real estate mortgage cancelled, appellants filed this action against the
PNB, the Company, Toribio, and the District Engineer of Puerto Princesa, Palawan, seeking the
cancellation of their real estate mortgage. (Note: Complaint was amended to exclude the Company as its life
as a partnership had already expired and, in lieu thereof, Ramon Concepcion and Manuel Tamayo, partners of
the defunct Company, were impleaded in their private capacity as defendants.)
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LOWER RTC: Denied the prayer in the complaint CA: Affirmed the trial court's decision in toto
COURT that the petitioners be absolved from their
RULING obligation under the mortgage contract As accommodation makers, the petitioners' liability is
and that the said mortgage be released or that of solidary co-makers and that since the
cancelled. amounts released to the construction company were
used and spent for the successful accomplishment of
The petitioners were ordered to pay jointly the work constructed for, the authorization made by
and severally with their co-makers the PNB of partial payments to the construction
Concepcion and Tamayo the sum of company, who was also one of the solidary debtors,
P11,900.19 with interest at the rate of 6% per cannot constitute a valid defense on the part of the
annum from the date of the filing of the other solidary debtors. Moreover, those who
complaint on June 27, 1959 until fully paid rendered services and furnished materials in the
and P1,000 attorney's fees. construction are preferred creditors and have a lien
on the price of the contract.
If the judgment was not satisfied within 90
days from its receipt, the mortgaged PNB had no obligation whatsoever to notify the
properties together with all the improvements petitioners of its authorizing the 3 payments in favor
thereon belonging to the petitioners would be of the Company because aside from the fact that the
sold at public auction and applied to the petitioners were not parties to the deed of
judgment debt. assignment, there was no stipulation in said deed
making it obligatory on the part of PNB to notify the
petitioners everytime it authorizes payment to the
Company. It ruled that the petitioners cannot ask to
be released from the real estate mortgage
ISSUE/S
A. Whether or not petitioners’ liability is only that of mere sureties instead of solidary co-debtors. -
NO.
B. Whether or not PNB can be considered a holder for value under Section 29 of the NIL such that
petitioners are 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. -NO.
ARGUMENTS Petitioner: Eulalio Prudencio & Elisa Respondent: Court of Appeals, Philippine
Prudencio National Bank, Ramon Concepcion, Manuel
a. As accommodation makers, the nature of Tamayo, Jose Toribio, & The District Engineer of
their liability is only that of mere sureties Puerto Princesa
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.
b. When 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, thus, the real estate mortgage
executed by them should have been
cancelled.
c. PNB is an immediate party and, therefore,

not a holder in due course and stands on no
better footing than a mere assignee
SC RULING
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A. NO. In Philippine Bank of Commerce v. Aruego, 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 does not release him because as far
as a holder for value is concerned, he is a solidary co- debtor.
There is 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, they 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. (hence, the importance
of resolving the second issue)
B. NO. A holder for value under Section 29 of the NIL is one who must meet all the
requirements of a holder in due course under Section 52 of the same law except notice
of want of consideration. If he does not qualify as a holder in due course then he holds
the instrument subject to the same defenses as if it were non-negotiable (Section 58,
NIL).
In those cases where a payee was considered a holder in due course, such payee either
acquired the note from another holder or has not directly dealt with the maker thereof. A payee
who receives a negotiable promissory note, in good faith, for value, before maturity, and without
any notice of any infirmity, from a holder to whom it was negotiated as a completed instrument,
is a holder in due course so as to preclude the defense of fraud and failure of consideration
between the maker and the holder to whom the instrument was delivered.
In the instant case, PNB, the payee, was not only an immediate party or in privy to the
promissory note, that is, it had dealt directly with the petitioners knowing fully well that
the latter only signed as accommodation makers, but more importantly, it was the Deed
of Assignment executed by the Company in favor of PNB which principally moved the
petitioners to sign the promissory note also in favor of PNB. Petitioners were made to
believe, and on that belief, entered into the agreement that no other conditions would alter the
terms thereof and yet, PNB altered the same. The Deed of Assignment specifically provided
that Toribio, on behalf of the Company, "have assigned, transferred and conveyed and by these
presents, do assign, transfer and convey unto the said PNB, its successors and assigns all
payments to be received from the Bureau of Public Works on account of contract for the
construction of the Puerto Princesa Municipal Building in Palawan, involving the amount of P
36,000" and that "This assignment shall be irrevocable and subject to the terms and conditions
of the promissory note and or any other kind of documents which the PNB have required or may
require the assignor to execute to evidence the above-mentioned obligation." Under the terms
of the Deed, it is clear that there are no further conditions which could possibly alter the
agreement without the consent of the petitioners such as the grant of greater priority to
obligations other than the payment of the loan due to the PNB and part of which loan
was guaranteed by the petitioners in the amount of P10,000.
This, notwithstanding, PNB approved the Bureau's release of 3 payments directly to the
Company instead of paying the same to the Bank. This approval was in violation of the Deed of
Assignment and without any notice to the petitioners who stood to lose their property once the
promissory note falls due without the same having been paid because the PNB, in effect, waived
payments of the first 3 releases. From the foregoing circumstances, PNB cannot be regarded
as having acted in good faith which is also one of the requisites of a holder in due course
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under Section 52 of the NIL. The PNB knew that the promissory note which it took from the
accommodation makers was signed by the latter because of full reliance on the Deed of
Assignment, which PNB had no intention to comply with strictly. Worse, the third payment to
the Company in the amount of P4,293.60 was approved by PNB although the promissory note
was almost a month overdue, an act which is clearly detrimental to the petitioners.
Thus, PNB is not a holder in due course and petitioners can validly set up their personal defense
of release from the real estate mortgage against PNB. The latter, in authorizing the third
payment to the Company after the promissory note became due, in effect, extended the term of
the payment of the note without the consent of the accommodation makers who stand as
sureties to the accommodated party and to all other parties who are not holders in due course
or who do not derive their right from the same, including PNB. When the Bank violated the deed
of assignment, it prejudiced itself because its very violation was the reason why it was not paid
on time in its capacity as creditor in the promissory note. It would be unfair to make the
petitioners now answer for the debt or to foreclose on their property.
NOTES WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the decision
of the trial court is hereby REVERSED and SET ASIDE and a new one entered absolving the
petitioners from liability on the promissory note and under the mortgage contract. PNB is ordered to
release the real estate mortgage constituted on the property of the petitioners and to pay the amount
of P3,000 as attorney's fees.
2F 2020-2021
TOPIC DEFENSES - MATERIAL ALTERATION / PRESCRIPTION MODULE 6

CASE #10
CASE TITLE BENJAMIN EVANGELISTA vs. SCREENEX, INC. GR NO
211564
PONENTE SERENO, C.J. DATE November 20, 2017
DOCTRINE
A check is discharged by any other act which will discharge a simple contract for the payment
of money.
In BP 22 cases, the action for the corresponding civil obligation is deemed instituted with the criminal
action. The criminal action for violation necessarily includes the corresponding civil action, and no
reservation to file such civil action separately shall be allowed or recognized.
Section 119 of the NIL, however, states that a negotiable instrument like a check may be discharged
by any other act which will discharge a simple contract for the payment of money, to wit:
Sec. 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.
(Emphasis supplied)
A check therefore is subject to prescription of actions upon a written contract. Article 1144 of the Civil
Code provides:
Article 1144. The following actions must be brought within ten years from the time the right of action
accrues:
1) Upon a written contract;

2) Upon an obligation created by law;
3) Upon a judgment.
Art. 1249 of the Civil Code specifically provides that checks should be presented for payment within a
reasonable period after their issuance, to wit:
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.
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In the meantime, the action derived from the original obligation shall be held in the abeyance. This rule
is similarly stated in the Negotiable Instruments Law as follows:
Sec. 186. Within what time a check must be presented. — A check must be presented for payment
within a reasonable time after its issue or the drawer will be discharged from liability thereon to
the extent of the loss caused by the delay.
FACTS
Sometime in 1991, [Evangelista] obtained a loan from respondent Screenex, Inc. which issued two (2)
checks to [Evangelista]. The first check was UCPB Check No. 275345 for P1,000,000 and the other
one is China Banking Corporation. There were also vouchers of Screenex that were signed by the
accused evidencing that he received the 2 checks in acceptance of the loan granted to him.
As security for the payment of the loan, [Evangelista] gave two (2) open-dated checks, both pay to the
order of Screenex, Inc. From the time the checks were issued by [Evangelista], they were held in safe
keeping together with the other documents and papers of the company by Philip Gotuaco, Sr., father-
in-law of respondent Alexander Yu, until the former's death on 19 November 2004.
Before the checks were deposited, there was a personal demand from the family for [Evangelista] to
settle the loan and likewise a demand letter sent by the family lawyer.
On 25 August 2005, petitioner was charged with violation of Batas Pambansa ( BP) Blg. 22 filed with
the Metropolitan Trial Court (MeTC) of Makati City, Branch 61.
LOWER MeTC: The MeTC found that the prosecution CA: The CA denied the petition. It held that (1) the
COURT had indeed proved the first two elements of reckoning time for the prescriptive period began
RULING cases involving violation of BP 22: i.e., the when the instrument was issued and the
accused makes, draws or issues any check to corresponding check returned by the bank to its
apply to account or for value, and the check is depositor; (2) the issue of prescription was raised for
subsequently dishonored by the drawee bank the first time on appeal with the RTC; (3) the writing
for insufficiency of funds or credit; or the check of the date on the check cannot be considered as an
would have been dishonored for the same alteration, as the checks were undated, so there was
reason had not the drawer, without any valid nothing to change to begin with; (4) the loan
reason, ordered the bank to stop payment. obligation was never denied by petitioner, who
The trial court pointed out, though, that the claimed that it was settled in 1992, but failed to show
prosecution failed to prove the third element; any proof of payment.
i.e., at the time of the issuance of the check to
the payee, the latter did not have sufficient
funds in, or credit with, the drawee bank for
payment of the check in full upon its
presentment. In the instant case, the court
held that while prosecution witness Alexander
G. Yu declared that the lawyer had sent a
demand letter to Evangelista, Yu failed to
prove that the letter had actually been received
by addressee. Because there was no way to
determine when the five-day period should
start to toll, there was a failure to establish
prima facie evidence of knowledge of the
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insufficiency of funds on the part of
Evangelista. Hence, the court acquitted him of
the criminal charges.
Ruling on the civil aspect of the cases, the

court held that while Evangelista admitted to
having issued and delivered the checks to
Gotuaco and to having fully paid the amounts
indicated therein, no evidence of payment was
presented. It further held that the creditor's
possession of the instrument of credit was
sufficient evidence that the debt claimed had
not yet been paid. In the end, Evangelista was
declared liable for the corresponding civil
obligation.
RTC: RTC ruled that the checks should be

taken as evidence of Evangelista's
indebtedness to Gotuaco, such that even if the
criminal aspect of the charge had not been
established, the obligation subsisted. Also, the
alleged payment by Evangelista was an
affirmative defense that he had the burden of
proving, but that he failed to discharge.
ISSUE/S
a. Whether or not the writing of the date on the check cannot be considered as an alteration.
b. Whether or not civil liability attributable to Evangelista had been extinguished and/or was
barred by prescription.
ARGUMENTS Petitioner (NAME): Respondent (NAME):

a. He further alleged that witness Yu was not a. Yu claimed that he had testified on the basis of
competent to testify on the loan transaction; his personal dealings with his father-in-law, whom
that the insertion of the date on the checks Evangelista dealt with in obtaining the loan. He
without the knowledge of the accused was an further claimed that during the trial, petitioner
alteration that avoided the checks; and that the never raised the competence of the witness as an
obligation had been extinguished by issue.
prescription. b. Moreover, Yu argued that prescription set in from
the accrual of the obligation; hence, while the loan
was transacted in 1991, the demand was made in
February 2005, which was within the 10-year
prescriptive period.
c. Yu also argued that while Evangelista claimed
under oath that the loan had been paid in 1992, he
was not able to present any proof of payment.
d. Meanwhile, Yu insisted that the material alteration
invoked by Evangelista was unavailing, since the
checks were undated; hence, nothing had been
altered.
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SC RULING
The Supreme Court ruled in favor of petitioner, finding that the delivery of the checks, despite the
subsequent failure to encash them within a period of 10 years or more, had the effect of payment.
Petitioner is considered discharged from his obligation to pay and can no longer be pronounced civilly
liable for the amounts indicated thereon.
Barring any extrajudicial or judicial demand that may toll the 10-year prescription period and any
evidence which may indicate any other time when the obligation to pay is due, the cause of action
based on a check is reckoned from the date indicated on the check.
If the check is undated, however, as in the present petition, the cause of action is reckoned from the
date of the issuance of the check. This is so because regardless of the omission of the date indicated
on the check, Section 17 of the Negotiable Instruments Law instructs that an undated check is
presumed dated as of the time of its issuance.
While the space for the date on a check may also be filled, it must, however, be filled up strictly in
accordance with the authority given and within a reasonable time. Assuming that Yu had authority to
insert the dates in the checks, the fact that he did so after a lapse of more than 10 years from their
issuance certainly cannot qualify as changes made within a reasonable time.
Given the foregoing, the cause of action on the checks has become stale, hence, time-barred. No
written extrajudicial or judicial demand was shown to have been made within 10 years which could
have tolled the period. Prescription has indeed set in.
It is a settled rule that the creditor's possession of the evidence of debt is proof that the debt has not
been discharged by payment. It is likewise an established tenet that a negotiable instrument is only a
substitute for money and not money, and the delivery of such an instrument does not, by itself, operate
as payment.
However, payment is deemed effected and the obligation for which the check was given as conditional
payment is treated discharged, if a period of 10 years or more has elapsed from the date indicated on
the check until the date of encashment or presentment for payment. The failure to encash the checks
within a reasonable time after issue, or more than 10 years in this instance, not only results in the
checks becoming stale but also in the obligation to pay being deemed fulfilled by operation of law.
NOTES
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TOPIC Prescription - Distinguished from Stale Checks. MODULE

CASE #11
CASE TITLE The International Corporate Bank v. Sps. Gueco GR NO 141968
PONENTE KAPUNAN, J.: DATE February 12, 2001
DOCTRINE 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.
FACTS The respondent Gueco Spouses obtained a loan from petitioner International Corporate Bank (now
Union Bank of the Philippines) to purchase a car - a Nissan Sentra 1600 4DR, 1989 Model. 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.
The Spouses defaulted in payment of installments. Consequently, the Bank filed on August 7, 1995 a
civil action docketed as Civil Case No. 658-95 for "Sum of Money with Prayer for a Writ of Replevin"
before the Metropolitan Trial Court of Pasay City, Branch 45. On August 25, 1995, 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 P184,000.00 which represents the unpaid balance for the car loan. After some negotiations and
computation, the amount was lowered to P154,000.00, However, as a result of the non-payment of the
reduced amount on that date, the car was detained inside the bank's compound.
On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative Support, Auto
Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted in the further reduction
of the outstanding loan to P150,000.00. On August 29, 1995, Dr. Gueco delivered a manager's check
in amount of P150,000.00 but the car was not released because of his refusal to sign the Joint Motion
to Dismiss.
In the meeting of August 29, 1995, respondent Dr. Gueco delivered a manager's check representing
the reduced amount of P150,000.00. Said check was given to Mr. Rivera, a representative of
respondent bank. However, since Dr. Gueco refused to sign the joint motion to dismiss, he was made
to execute a statement to the effect that he was withholding the payment of the check. Subsequently,
in a letter addressed to Ms. Desi Tomas, vice president of the bank, dated September 4, 1995, Dr.
Gueco instructed the bank to disregard the 'hold order" letter and demanded the immediate release of
his car, to which the former replied that the condition of signing the joint motion to dismiss must be
satisfied and that they had kept the check which could be claimed by Dr. Gueco anytime.
After several demand letters and meetings with bank representatives, the respondents Gueco spouses
initiated a civil action for damages before the Metropolitan Trial Court of Quezon City, Branch 33.
LOWER MetC: CA:

COURT Dismissed the complaint for lack of merit Petition denied, and the ruling of the RTC was
RULING affirmed in toto.
RTC:
Reversed the decision of the MeTC, 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
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the joint motion to dismiss as a condition sine
qua non for the effectivity of the compromise.
Furthermore, the RTC ordered the petitioner to

return immediately the subject car to the
appellants in good working condition. Appellee
may deposit the Manager's 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 Manager's Check over which appellants
have no control.
ISSUE/S Whether or not the Court of Appeals erred in holding that the petitioner return the subject car to the
respondents, without making any provision for the issuance of the new manager's/cashier's check by
the respondents in favor of the petitioner in lieu of the original cashier's check that already became
stale.
ARGUMENTS Petitioner (International Corporate Bank Respondent (Sps. Gueco):
(now Union Bank of the Philippines)): Respondents would make us hold that petitioner
Petitioner, however, insisted that the joint should return the car or its value and that the latter,
motion to dismiss is standard operating because of its own negligence, should suffer the loss
procedure in their bank to effect a occasioned by the fact that the check had become
compromise and to preclude future filing of stale. It is their position that delivery of the manager's
claims, counterclaims or suits for damages. 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.
Yes, 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
SC RULING 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 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 bank's 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
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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 manager's 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 the joint motion to dismiss. We see no bad faith or negligence in this
position taken by the Bank.
NOTES
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TOPIC Material Alteration MODULE

CASE #12
CASE TITLE Philippine National Bank vs. Court of Appeals, Capitol City Development GR NO 107508
Bank, Philippine Bank of Communications, and F. Abante Marketing
PONENTE Kapunan, J. DATE
April 25, 1996
DOCTRINE ● 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 changes 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.
● Justice Jose C. Vitug opines that "an innocent alteration (generally, changes on items other
than those require to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a
stranger) will not avoid the instrument, but the holder may enforce it only according to its original
tenor.
● In this case, 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.
● The check's serial number is not the sole indication of its origin. As succinctly found by the Court
of Appeals, the name of the government agency which issued the subject check was
prominently printed therein. The check's issuer was therefore sufficiently identified, rendering
the referral to the serial number redundant and inconsequential.
● PNB, thus cannot refuse to accept the check in question on the ground that the serial number
was altered, the same being an immaterial or innocent one.
FACTS
● A check in the amount of Php 97,650.00 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 Philippine National Bank (PNB), herein petitioner.
● 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 PNB for clearing.
● PNB cleared the check as good, and thereafter, PBCom credited Capitol’s account for the
amount stated in the check. Thereafter, PBCom credited Capitol’s account for the amount
stated in the check.
● However, PNB returned the check to PBCom and debited PBCom’s account for the amount
covered by the check, the reason being that there was a “material alteration” of the check
number.
● As Capitol’s collecting agent, PBCom debited Capitol’s account for the same amount, and
subsequently sent the check back to PNB. However, PNB returned the check to PBCom.
● Capitol could not, in turn, debit F. Abante Marketing's 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 PNB.
● Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial Court
of Manila against PBCom which, in turn, filed a third-party complaint against PNB for
reimbursement/indemnity with respect to the claims of Capitol. PNB, on its part, filed a fourth-
party complaint against F. Abante Marketing.
LOWER RTC: CA: MODIFIED
COURT •PBCom is ordered to re-credit or reimburse •Exempted PBCom from liability to Capitol and
RULING plaintiff Capitol in the amount of Php ordered PNB to honor the check for Php 97, 650.00,
97,650.00, plus interest of 12 percent thereto with interest as declared by the trial court; and pay
2F 2020-2021
from October 19, 1981 until the amount is Capitol the attorney’s fees of Php 10,000.00. After
fully paid; the check shall have been honored by PNB,
PBCom shall re-credit Capitol’s account with it with
•On PBCom’s third-party complaint, PNB is the amount.
ordered to reimburse and indemnify PBCom
for whatever amount PBCom pays to Capitol;
•On PNB’s fourth-party complaint, F. Abante

Marketing is ordered to reimburse and
indemnify PNB for whatever amount that PNB
pays to PBCom.
•PBCom is also ordered to pay Capitol

attorney’s fees in the amount of Php
10,000.00, but PBCom is entitled to
reimbursement/indemnity from PNB; and
PNB to be reimbursed or indemnified by F.
Abante Marketing for the same amount.
ISSUE/S
Whether or not an alteration of the serial number of a check is a material alteration under the
ARGUMENTS Petitioner (PNB): Respondent (COURT OF APPEALS, CAPITOL

a. Anchors its position on Section 125 of the CITY DEVELOPMENT BANK, PHILIPPINE BANK
Negotiable Instruments Law (Act No. 2031) OF COMMUNICATIONS, AND F. ABANTE
which provides that: MARKETING):
SECTION 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;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment
is to be made;
(f) 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.
b. PNB contended that there is no hard and

fast rule in the interpretation of the aforequoted
provision of the Negotiable Instruments Law.
Additionally, PNB maintained that under
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Section 125(f), any change that alters the
effect of the instrument is a material alteration.
c. Besides being a Negotiable Instrument

itself, a TCAA check, by its very nature is the
medium of exchange of government
instrumentalities or agencies. And as (a)
safety measure, every government office o(r)
agency (is) assigned TCAA checks bearing
different number series. It is through the serial
numbers that (a) TCAA Check is determined
to have been issued by a particular office or
agency of the government.
SC RULING
NO. An alteration of the serial number of a check is NOT a material alteration under the
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 changes 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.
According to Justice Jose Vitug, in his book entitled "Pandect of Commercial Law and
Jurisprudence," he opines that "an innocent alteration (generally, changes on items other than those
required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not
avoid the instrument, but the holder may enforce it only according to its original tenor.”
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.
Moreover, the check's serial number is not the sole indication of its origin. As succinctly found by the
Court of Appeals, the name of the government agency which issued the subject check was prominently
printed therein. The check's issuer was therefore insufficiently identified, rendering the referral to the
serial number redundant and inconsequential. The Court quoted the findings of the Court of Appeals,
which provided:
“If the purpose of the serial number is merely to identify the issuing government office or agency, its
alteration in this case had no material effect whatsoever on the integrity of the check. The identity of
the issuing government office or agency was not changed thereby and the amount of the check was
not charged against the account of another government office or agency which had no liability under
the check. The owner and issuer of the check is boldly and clearly printed on its face, second line from
the top: "MINISTRY OF EDUCATION AND CULTURE," and below the name of the payee are the
rubber-stamped words: "Ministry of Educ. & Culture." These words are not alleged to have been falsely
or fraudulently intercalated into the check. The ownership of the check is established without the
necessity of recourse to the serial number. Neither is there any proof that the amount of the check was
erroneously charged against the account of a government office or agency other than the Ministry of
Education and Culture. Hence, the alteration in the number of the check did not affect or
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change the liability of the Ministry of Education and Culture under the check and, therefore, is
immaterial. The genuineness of the amount and the signatures therein of then Deputy Minister of
Education Hermenegildo C. Dumlao and of the resident Auditor, Penomio C. Alvarez are not
challenged. Neither is the authenticity of the different codes appearing therein questioned.”
Therefore, PNB cannot refuse to accept the check in question on the ground that the serial
number was altered, the same being an IMMATERIAL OR INNOCENT ONE.
NOTES Here are some examples of MATERIAL AND IMMATERIAL ALTERATIONS:
A. Material Alterations:
(1) Substituting the words "or bearer" for "order."
(2) Writing "protest waived" above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: "Iron County Bank, Crystal Falls, Mich. Aug. 5, 1901. Pay
to G.L. or order $9 fifty cents CTR." The insertion of the figure 5 before the figure 9, the instrument
being otherwise unchanged.
(5) Adding the words "with interest" with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is thereby curtailed or
extended.
(7) An instrument was payable "First Nat'l Bank" the plaintiff added the word "Marion."
(8) Plaintiff, without consent of the defendant, struck out the name of the defendant as payee and
inserted the name of the maker of the original note.
(9) Striking out the name of the payee and substituting that of the person who actually discounted the
note.
(10) Substituting the address of the maker for the name of a co-maker.
B. Immaterial Alterations:
(1) Changing "I promise to pay" to "We promise to pay", where there are two makers.
(2) Adding the word "annual" after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of the actual delivery where the makers of a note gave it with the date in blank,
"July . . ."
(5) An alteration of the marginal figures of a note where the sum stated in words in the body remained
unchanged.
(6) The insertion of the legal rate of interest where the note had a provision for "interest at . . . per
cent."
(7) A printed form of promissory note had on the margin the printed words, "Extended to . . ." The
holder on or after maturity wrote in the blank space the words "May 1, 1913," as a reference
memorandum of a promise made by him to the principal maker at the time the words were written to
extend the time of payment.
(8) Where there was a blank for the place of payment, filling in the blank with the place desired.
(9) Adding to an indorsee's name the abbreviation "Cash" when it had been agreed that the draft
should be discounted by the trust company of which the indorsee was cashier.
(10) The indorsement of a note by a stranger after its delivery to the payee at the time the note was
negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal maker, without the consent of
the surety co-maker.
2F 2020-2021
TOPIC MODULE
CASE #13
CASE TITLE Montinola v. PNB GR NO L-2861
PONENTE Montemayor, J.: DATE

February 26, 1951
DOCTRINE
FACTS April and May 1942, Ubaldo Laya the Provincial Treasurer of Misamis Oriental was an ex officio agent
of the PNB. Mariano V. Ramos worked under him as assistant agent in the bank branch. In that year,
the currency being used in Mindanao before being occupied by the Japanese was the emergency
currency. Ramos was inducted into the US Armed Forces as disbursing officer of an army division.
He went to the neighboring province Lanao to procure a cash advance in the amount of P800,000 for
the use of the USAFFE in Cagayan. The treasurer of Lanao did not have that amount in cash so he
gave Ramos P300,000 in emergency notes and a check for P500,000. Ramos, then, went to Laya to
encash the check for P500,000 but Laya did not have enough cash to cover the check so gave
Ramos P400,000 in emergency notes and a check for P100,000 drawn on the PNB. Ramos had no
opportunity to cash the check because in the evening of the same day the Japanese forces entered
the Capital of Misamis and the USAFFE surrendered. Ramos was made a prisoner of war. About the
last days of December 1944, Ramos allegedly indorse to Montinola which is now subject of the
controversy.
Montinola claims that Ramos offered to sell him the check to buy foodstuffs and medicine. To be sure
if it was genuine and negotiable, he went to see the president of PNB who told him that it was
negotiable. He then finally agreed to the sale of the check for P850,000 Japanese Military notes,
payable in installments and that of this amount P450,000 was paid to Ramos in Japanese Military
notes and the balance of P400,000 was paid in medical supplies. He claims that upon payment of the
full price, Ramos duly indorsed the check to him.
Ramos in turn claims that the agreement between himself and Montinola regarding the transfer of the
check was that he was selling only P30,000 of the check and for his reason, at the back of the
document he wrote “pay to the order of Montinola P30,000 only. The balance to be deposited in the
Philippine National Bank to the credit of M.V. Ramos.” He further said that in exchange for this
assignment, Montinola would pay him P90,000 in Japanese notes but only game him two checks of
P20,000 and P25,000. This was corroborated by Atty Simeone Ramos.
Upon showing the evidence, the said indorsement described by Ramos does not now appear at the
back of the check. (Please read the description in the case)
ISSUE/S W/N Montinola can claim against the check?
SC RULING No, the words “Agent, Phil. National Bank” now appearing in the dilapidated check was added after it
was issued to Ramos. The photostatic copy which is supposed to be a faithful and accurate
reproduction of the check bore discrepancies on the check presented by Montinola as evidence.
Montinola took said instrument when it was long overdue.
The insertion of the words "Agent, Phil. National Bank" which converts the bank from a mere drawee to a
drawer and therefore changes its liability, constitutes a material alteration of the instrument without the
consent of the parties liable thereon, and so discharges the instrument. (Section 124 of the Negotiable
Instruments Law). The check was not legally negotiated within the meaning of the Negotiable Instruments
Law. Section 32 of the same law provides that "the indorsement must be an indorsement of the entire
instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, .
. . (as in this case) does not operate as a negotiation of the instrument." Montinola may therefore not be
regarded as an indorsee. At most he may be regarded as a mere assignee of the P30,000 sold to him by
Ramos, in which case, as such assignee, he is subject to all defenses available to the drawer Provincial
Treasurer of Misamis Oriental and against Ramos. Neither can Montinola be considered as a holder in
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due course because section 52 of said law defines a holder in due course as a holder who has taken the
instrument under certain conditions, one of which is that he became the holder before it was overdue.
When Montinola received the check, it was long overdue. And, Montinola is not even a holder because
section 191 of the same law defines holder as the payee or indorsee of a bill or note and Montinola is not
a payee. Neither is he an indorsee for as already stated, at most he can be considered only as assignee.
Neither could it be said that he took it in good faith
NOTES
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TOPIC Alteration in Checks MODULE

CASE #14
CASE TITLE International Corporate Bank vs. CA GR NO 129910
PONENTE Carpio, J. DATE September 5, 2006
DOCTRINE 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.
Alterations of the serial numbers do not constitute material alterations on the checks.
FACTS
The case originated from an action for collection of a sum of money filed on 16 March 1982 by the
International Corporate Bank, Inc. ("petitioner") against the Philippine National Bank ("respondent").
The case was raffled to the then Court of First Instance (CFI) of Manila, Branch 6. The complaint was
amended on 19 March 1982. The case was eventually re-raffled to the Regional Trial Court of Manila,
Branch 52 ("trial court").
The Ministry of Education and Culture issued 15 checks drawn against PNB which the petitioner
accepted for deposit on various dates. The checks were deposited on different dates.
After 24 hours from submission of the checks to respondent for clearing, petitioner paid the value of
the checks and allowed the withdrawals of the deposits. However, on 14 October 1981, respondent
returned all the checks to the petitioner without clearing them on the ground that they were materially
altered. Thus, petitioner instituted an action for collection of sums of money against respondent to
recover the value of the checks.
The trial court ruled that the respondent is expected to use reasonable business practices in accepting
and paying the checks presented to it. Thus, respondent cannot be faulted for the delay in clearing the
checks considering the ingenuity in which the alterations were effected. The trial court observed that
there was no attempt from petitioner to verify the status of the checks before petitioner paid the value
of the checks or allowed withdrawal of the deposits. According to the trial court, petitioner, as collecting
bank, could have inquired by telephone from respondent, as drawee bank, about the status of the
checks before paying their value. Since the immediate cause of petitioner’s loss was the lack of caution
of its personnel, the trial court held that petitioner is not entitled to recover the value of the checks from
respondent.
The Court of Appeals held that checks that have been materially altered shall be returned within 24
hours after discovery of the alteration. However, the Court of Appeals ruled that even if the drawee
bank returns a check with material alterations after discovery of the alteration, the return would not
relieve the drawee bank from any liability for its failure to return the checks within the 24-hour clearing
period.
LOWER RTC: CA:

COURT PREMISES CONSIDERED, the decision appealed
RULING WHEREFORE, judgment is hereby rendered from is hereby REVERSED and the defendant-
dismissing both the complaint and the appellee Philippine National Bank is declared liable
counterclaim. for the value of the fifteen checks
ISSUE/S Whether or not the alteration of the checks’ serial number was material to the negotiability.
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a. International Corporate Bank, Inc. a. Court of Appeals
b. Philippine National Bank
SC RULING
NO. The Supreme Court held that 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. It was said that 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.
The check’s serial number is not the sole indication of its origin. As succinctly found by the Court of
Appeals, the name of the government agency which issued the subject check was prominently printed
therein. The check’s issuer was therefore sufficiently identified, rendering the referral to the serial
number redundant and inconsequential.
Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was
altered, the same being an immaterial or innocent one.
Likewise, in the present case the alterations of the serial numbers do not constitute material alterations
on the checks. Incidentally, we agree with the petitioner’s observation that the check in the PNB case
appears to belong to the same batch of checks as in the present case. The check in the PNB case was
also issued by the Ministry of Education and Culture. It was also drawn against PNB, respondent in this
case.
NOTES
2F 2020-2021
TOPIC Material Alteration MODULE

CASE #15
CASE TITLE Far East Bank and Trust Company v. Gold Palace Jewellery Company GR NO G.R. No.
168274
PONENTE NACHURA, J.: DATE August 20, 2008
DOCTRINE Indeed, banking institutions can readily protect themselves against liability on altered instruments either by
qualifying their acceptance or certification, or by relying on forgery insurance and special paper which will make
alterations obvious. This is not to mention, but we state nevertheless for emphasis, that the drawee bank, in most
cases, is in a better position, compared to the holder, to verify with the drawer the matters stated in the instrument
The subsequent payment by the drawee bank and the collection of the amount by the collecting bank closed the
transaction insofar as the drawee and the holder of the check or his agent are concerned, converted the check
into a mere voucher, and, as already discussed, foreclosed the recovery by the drawee of the amount paid
FACTS A foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery Co.'s (Gold
Palace's) store at SM-North EDSA several pieces of jewelry valued at P258,000.00. In payment of the same, he
offered Foreign Draft No. M-069670 issued by the United Overseas Bank (Malaysia) BHD Medan Pasar, Kuala
Lumpur Branch (UOB), addressed to the Land Bank of the Philippines, Manila (LBP), and payable to the
respondent company for P380,000.00.
Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace, inquired from
petitioner Far East Bank & Trust Company's (Far East's) SM North EDSA Branch, its neighbor mall tenant, the
nature of the draft. The teller informed her that the same was similar to a manager's check, but advised her not
to release the pieces of jewelry until the draft had been cleared. Following the bank's advice, Yang issued Cash
Invoice No. 1609 to the foreigner, asked him to come back, and informed him that the pieces of jewelry would
be released when the draft had already been cleared. Respondent Julie Yang-Go, the manager of Gold Palace,
consequently deposited the draft in the company's account with the aforementioned Far East branch.
When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the latter cleared
the same-UOB's account with LBP was debited, and Gold Palace's account with Far East was credited with the
amount stated in the draft.
After around three weeks, LBP informed Far East that the amount in Foreign Draft No. M-069670 had been
materially altered from P300.00 to P380,000.00 and that it was returning the same. It is noted at this point that
the material alteration was discovered by UOB after LBP had informed it that its funds were being depleted
following the encashment of the subject draft. Intending to debit the amount from respondent's account, Far
East subsequently refunded the P380,000.00 earlier paid by LBP.
Gold Palace, in the meantime, had already utilized portions of the amount. Thus, as the outstanding balance of
its account was already inadequate, Far East was able to debit only P168,053.36, but this was done without a
prior written notice to the account holder. Far East only notified by phone the representatives of the respondent
company.
On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or the difference
between the amount in the materially altered draft and the amount debited from the respondent company's
account. Because Gold Palace did not heed the demand, Far East consequently instituted Civil Case No. 99-
296 for sum of money and damages before the Regional Trial Court (RTC), Branch 64 of Makati City.
LOWER RTC: ordered Gold Palace to pay the former CA: reversed the ruling of the trial court and awarded
COURT P211,946.64 as actual damages and P50,000.00 respondents' counterclaim.
RULING as attorney's fees. The trial court ruled that, on the
basis of its warranties as a general indorser, Gold
Palace was liable to Far East.
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ISSUE/S Whether or not it was proper for Far East to have debited the money paid by the drawee bank
from respondent company's account.
ARGUMENTS Petitioner (NAME):Far East Bank and Trust Respondent (NAME: Gold Palace Jewellery
Company Company
N/A denied the material allegations in the complaint and
interposed as a defense that the complaint states no
cause of action-the subject foreign draft having been
cleared and the respondent not being the party who
made the material alteration.
SC RULING
No, it was not proper.
Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his acceptance. This provision applies with
equal force in case the drawee pays a bill without having previously accepted it. His actual payment of the
amount in the check implies not only his assent to the order of the drawer and a recognition of his
corresponding obligation to pay the aforementioned sum, but also, his clear compliance with that obligation.
Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay. The
payment of a check includes its acceptance.
Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and forwarded
the amount thereof to the collecting bank. The latter then credited to Gold Palace's account the payment it
received. Following the plain language of the law, the drawee, by the said payment, recognized and complied
with its obligation to pay in accordance with the tenor of his acceptance. The tenor of the acceptance is
determined by the terms of the bill as it is when the drawee accepts. Stated simply, LBP was liable on its
payment of the check according to the tenor of the check at the time of payment, which was the raised amount.
Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due course
holder. We note at this point that Gold Palace was not a participant in the alteration of the draft, was not
negligent, and was a holder in due course-it received the draft complete and regular on its face, before it
became overdue and without notice of any dishonor, in good faith and for value, and absent any knowledge of
any infirmity in the instrument or defect in the title of the person negotiating it. Having relied on the drawee
bank's clearance and payment of the draft and not being negligent (it delivered the purchased jewelry only
when the draft was cleared and paid), respondent is amply protected by the said Section 62. Commercial policy
favors the protection of any one who, in due course, changes his position on the faith of the drawee bank's
clearance and payment of a check or draft.
This construction and application of the law gives effect to the plain language of the NIL and is in line with the
sound principle that where one of two innocent parties must suffer a loss, the law will leave the loss where it
finds it. It further reasserts the usefulness, stability and currency of negotiable paper without seriously
endangering accepted banking practices. Indeed, banking institutions can readily protect themselves against
liability on altered instruments either by qualifying their acceptance or certification, or by relying on forgery
insurance and special paper which will make alterations obvious. This is not to mention, but we state
nevertheless for emphasis, that the drawee bank, in most cases, is in a better position, compared to the holder,
to verify with the drawer the matters stated in the instrument. As we have observed in this case, were it not for
LBP's communication with the drawer that its account in the Philippines was being depleted after the subject
foreign draft had been encashed, then, the alteration would not have been discovered. What we cannot
understand is why LBP, having the most convenient means to correspond with UOB, did not first verify the
amount of the draft before it cleared and paid the same. Gold Palace, on the other hand, had no facility to
ascertain with the drawer, UOB Malaysia, the true amount in the draft. It was left with no option but to rely on
the representations of LBP that the draft was good.
Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting
agent, Far East, should not have debited the money paid by the drawee bank from respondent
company's account. When Gold Palace deposited the check with Far East, the latter, under the terms of the
deposit and the provisions of the NIL, became an agent of the former for the collection of the amount in the
2F 2020-2021
draft. The subsequent payment by the drawee bank and the collection of the amount by the collecting bank
closed the transaction insofar as the drawee and the holder of the check or his agent are concerned, converted
the check into a mere voucher, and, as already discussed, foreclosed the recovery by the drawee of the amount
paid. This closure of the transaction is a matter of course; otherwise, uncertainty in commercial transactions,
delay and annoyance will arise if a bank at some future time will call on the payee for the return of the money
paid to him on the check.
Far East could not debit the account of Gold Palace and it must return what it had erroneously taken. Far East's
remedy under the law is not against Gold Palace but against the drawee-bank or the person responsible for the
alteration. That, however, is another issue which we do not find necessary to discuss in this case.
NOTES
2F 2020-2021
TOPIC Material Alterations MODULE

CASE #16
CASE TITLE Areza vs Express Savings Bank GR NO
176697
PONENTE Perez J. DATE
September 10, 2014
DOCTRINE In case the negotiable instrument is altered before acceptance, the acceptor/drawee despite the
tenor of his acceptance is liable only to the extent of the bill prior to alteration. This view appears to
be in consonance with Section 124 of the Negotiable Instruments Law which states that a material alteration
avoids an instrument except as against an assenting party and subsequent indorsers, but a holder in due
course may enforce payment according to its original tenor.
Thus, 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. If the drawee 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. The drawee,
however, still has recourse to recover its loss. It may pass the liability back to the collecting bank which is
what the drawee bank exactly did in this case.
FACTS
Petitioners Cesar V. Areza and Lolita B. Areza maintained two bank deposits with respondent Express
Savings Bank’s Biñan branch. They were engaged in the business of “buy and sell” of brand new and
second-hand motor vehicles. They received an order from a certain Gerry Mambuay for the purchase of a
second-hand Mitsubishi Pajero and a brand-new Honda CRV.
The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs Office (PVAO) checks
payable to different payees and drawn against the Philippine Veterans Bank (drawee), each valued at Two
Hundred Thousand Pesos (₱200,000.00) for a total of One Million Eight Hundred Thousand Pesos
(₱1,800,000.00).
Petitioners deposited the said checks in their savings account with Express Savings Bank which, in turn,
deposited the checks with its depositary bank, Equitable-PCI Bank. Equitable-PCI Bank presented the
checks to the drawee, the Philippine Veterans Bank, which honored the checks. Petitioners were informed
that the checks they deposited with Express Savings were honored. The entire amount of ₱1,800,000.00
was credited to petitioners’ savings account. Petitioners then released the two cars to the buyer.
Two months later, the subject checks were returned by PVAO to the drawee on the ground that the amount
on the face of the checks was altered from the original amount of ₱4,000.00 to ₱200,000.00. The drawee
returned the checks to Equitable-PCI Bank by way of Special Clearing Receipts. Equitable-PCI Bank, in
turn, debited the deposit account of Express Savings in the amount of ₱1,800,000.00.
Express Savings then closed the Special Savings Account of the petitioners with a balance of ₱1,179,659.69
and transferred said amount to their savings account. Express Savings then withdrew the amount of
₱1,800,000.00 representing the returned checks from petitioners’ savings account.
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LOWER RTC: CA:
COURT
RULING
ISSUE/S
Whether Express Savings had the right to debit the amount of ₱1,800,000.00 from the petitioners’ accounts
and whether the bank’s act of debiting was done without the petitioners’ knowledge.
ARGUMENTS Petitioner (Cesar and Lolita Areza): Respondent (Express Savings Bank Inc.):
SC RULING
NO.
In case the negotiable instrument is altered before acceptance, the acceptor/drawee despite the
tenor of his acceptance is liable only to the extent of the bill prior to alteration. This view appears to
be in consonance with Section 124 of the Negotiable Instruments Law which states that a material alteration
avoids an instrument except as against an assenting party and subsequent indorsers, but a holder in due
course may enforce payment according to its original tenor.
Thus, 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. If the drawee 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. The drawee,
however, still has recourse to recover its loss. It may pass the liability back to the collecting bank which is
what the drawee bank exactly did in this case. It debited the account of Equitable-PCI Bank for the altered
amount of the checks.
When petitioners deposited the check with Express Savings Bank, they were designating the latter as the
collecting bank. A collecting bank is defined as any bank handling an item for collection except the bank on
which the check is drawn. After receiving the deposit, under its own rules, Express Savings shall credit the
amount in petitioners’ account or infuse value thereon only after the drawee bank shall have paid the amount
of the check or the check has been cleared for deposit.
Express Savings and Equitable-PCI Bank are both depositary and collecting banks. A depositary/collecting
bank where a check is deposited, and which endorses the check upon presentment with the drawee bank,
is an endorser. Under Section 66 of the Negotiable Instruments Law, an endorser warrants “that the
instrument is genuine and in all respects what it purports to be; that he has good title to it; that all
prior parties had capacity to contract; and that the instrument is at the time of his endorsement valid
and subsisting.” It has been repeatedly held that in check transactions, the depositary/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.
If any of the warranties made by the depositary/collecting bank turns out to be false, then the drawee bank
may recover from it up to the amount of the check.
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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 and the law holds it to a high standard of conduct. As
collecting banks, Express Savings and Equitable-PCI Bank are both liable for the amount of the materially
altered checks. Since Equitable-PCI Bank is not a party to this case and Express Savings allowed its account
with Equitable PCI Bank to be debited, it has the option to seek recourse against the latter in another forum.
NOTES Section 63 of Act No. 2031 or the Negotiable Instruments Law provides that the acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his acceptance. The acceptor is a drawee
who accepts the bill.
A depositary/collecting bank where a check is deposited, and which endorses the check upon
presentment with the drawee bank, is an endorser. Under Section 66 of the Negotiable
Instruments Law, an endorser warrants “that the instrument is genuine and in all respects what
it purports to be; that he has good title to it; that all prior parties had capacity to contract; and
that the instrument is at the time of his endorsement valid and subsisting.”
It is well-settled that the relationship of the depositors and the Bank or similar institution is that
of creditor-debtor. Article 1980 of the New Civil Code provides that fixed, savings and current
deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loans. The bank is the debtor and the depositor is the creditor. The depositor
lends the bank money and the bank agrees to pay the depositor on demand. The savings
deposit agreement between the bank and the depositor is the contract that determines the
rights and obligations of the parties.
2F 2020-2021
TOPIC Defenses MODULE

CASE #17
CASE TITLE METROBANK v. CABILZO GR NO
154469
PONENTE CHICO-NAZARIO, J DATE
DOCTRINE Bank on which the check is drawn, known as the drawee bank, is under strict liability to pay to the order of the
payee in accordance with the drawer’s instructions as reflected on the face and by the terms of the check.
Payment made under materially altered instrument is not payment done in accordance with the instruction of the
drawer. 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. 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. Neither can it point its finger at the collecting bank, in order to evade liability. The corollary liability on
the basis of endorsement of collecting bank, if any, is separate and independent from the liability of Metrobank to
Cabilzo.
FACTS
Renato D. Cabilzo (Cabilzo) issued a Metrobank Check No. 985988, payable to “CASH” and postdated on 24
November 1994 in the amount of P1,000.00. The check was paid by Cabilzo to a certain Mr. Marquez, as his
sales commission.
Subsequently, the check was presented to Westmont Bank for payment. The latter indorsed the check to
Metrobank who cleared the check for encashment. Later, Cabilzo’s representative was at Metrobank Pasong
Tamo Branch to make some transaction when he was asked by a bank personnel if Cabilzo had issued a check
in the amount of P91,000.00 to which the former replied in the negative. On the afternoon of the same date,
Cabilzo himself called Metrobank to reiterate that he did not issue such check and requested that the questioned
check be returned to him for verification, to which Metrobank complied.
Cabilzo discovered that Metrobank Check No. 985988 which he issued on 12 November 1994 in the amount of
P1,000.00 was altered to P91,000.00 and the date 24 November 1994 was changed to 14 November 1994.
He demanded that Metrobank re-credit the amount of P91,000.00 to his account. Metrobank, however, refused
reasoning that it has to refer the matter first to its Legal Division for appropriate action. Cabilzo, thru counsel,
finally sent a letter demand to Metrobank for the payment of P90,000.00, which is the difference from the original
amount, but to no avail.Consequently, Cabilzo instituted a civil action for damages against Metrobank before the
RTC of Manila.
Metrobank filed a Third-Party Complaint against Westmont Bank on account of its unqualified indorsement
stamped at the dorsal side of the check which the former relied upon in clearing what turned out to be a materially
altered check. Motion to Dismiss the Third-Party Complaint was then filed by Westmont bank because another
case involving the same cause of action was pending before a different court. The said case arose from an action
for reimbursement filed by Metrobank before the Arbitration Committee of the PCHC against Westmont Bank,
and now the subject of a Petition for Review before the RTC of Manila
LOWER RTC: The trial court granted the Motion to CA: Affirmed with modification the Decision of the court,
COURT Dismiss the Third-Party Complaint on the ground similarly finding Metrobank liable for the amount of the
RULING of litis pendentia. As regards the original check, without prejudice, however, to the outcome of the
complaint, it rendered a Decision in favor of case between Metrobank and Westmont Bank which was
Cabilzo and thereby ordered Metrobank to pay the pending before another tribunal.
sum of P90,000.00, the amount of the check.
ISSUE/S
WON honorable court of appeals gravely erred in holding Metrobank, as drawee bank, liable for the alterations
on the subject check bearing the authentic signature of the drawer.
ARGUMENTS Petitioner Metrobank Respondent (NAME:

a. it examined the genuineness and the a.
authenticity of the drawer’s signature b.
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appearing thereon and the technical entries
on the check including the amount in figures
and in words to determine if there were
alterations, erasures, superimpositions or
intercalations thereon, but none was noted
b. as a collecting bank and the last indorser,
Westmont Bank should be held liable for the
value of the check. Westmont Bank indorsed
the check as the an unqualified indorser, by
virtue of which it assumed the liability of a
general indorser, and thus, among others,
warranted that the instrument is genuine and
in all respect what it purports to be.
c. Cabilzo was partly responsible in leaving
spaces on the check, which, made the
fraudulent insertion of the amount and figures
thereon, possible. Thus, Metrobank
demanded from Cabilzo, for payment in the
amount of P100,000.00 which represents the
cost of litigation.
SC RULING NNo. 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 required to be stated under Section 1 of NIL. Also pertinent is Section 125 on what constitutes
material alteration.
In the case at bar, the check was altered so that the amount was increased from P1,000.00 to
P91,000.00 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.
Under Section 124, 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.
Evidently, 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. 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.
Metrobank cannot lightly impute that Cabilzo was negligent and is therefore prevented from asserting
his rights under the doctrine of equitable estoppel when the facts on record are bare of evidence to
support such conclusion. The doctrine of equitable estoppel states that when one of the two innocent
persons, each guiltless of any intentional or moral wrong, must suffer a loss, it must be borne by the
one whose erroneous conduct, either by omission or commission, was the cause of injury.
Metrobank’s reliance on this dictum, is misplaced.
We never fail to stress the remarkable significance of a banking institution to commercial

transactions, in particular, and to the country’s economy in general. In every case, the depositor
expects the bank to treat his account with the utmost fidelity. Bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their
2F 2020-2021
relationship. Metrobank was remiss in that duty and violated that relationship. As observed by the
Court of Appeals, there are material alterations on the check that are visible to the naked eye.
The number “1” in the date is clearly imposed on a white figure in the shape of the number “2.” The
appellant’s employees who examined the said check should have likewise been put on guard as to
why at the end of the amount in words, i.e., after the word “ONLY”, there are 4 asterisks, while at the
beginning of the line or before said phrase, there is none, even as 4 asterisks have been placed
before and after the word “CASH” in the space for payee. In addition, the 4 asterisks before the words
“ONE THOUSAND PESOS ONLY” have noticeably been erased with typing correction paper, leaving
white marks, over which the word “NINETY” was superimposed. The same can be said of the
numeral “9” in the amount “91,000,” which is superimposed over a whitish mark, obviously an
erasure, in lieu of the asterisk which was deleted to insert the said figure. The appellant’s employees
should have again noticed why only 2 asterisks were placed before the amount in figures, while 3
asterisks were placed after such amount. The word “NINETY” is also typed differently and with a
lighter ink, when compared with the words “ONE THOUSAND PESOS ONLY.” The letters of the word
“NINETY” are likewise a little bigger when compared with the letters of the words “ONE THOUSAND
PESOS ONLY.
Metrobank failed to detect the above alterations. This negligence was exacerbated by the fact that, as
found by the trial court, the check in question was examined by the cash custodian whose functions
do not include the examinations of checks indorsed for payment against drawer’s accounts.
Obviously, the employee allowed by Metrobank to examine the check was not versed and competent
to handle such duty.
Bank on which the check is drawn, known as the drawee bank, is under strict liability to pay to the
order of the payee in accordance with the drawer’s instructions as reflected on the face and by the
terms of the check. Payment made under materially altered instrument is not payment done in
accordance with the instruction of the drawer. 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. 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. Neither can it point its
finger at the collecting bank, in order to evade liability. The corollary liability on the basis of
endorsement of collecting bank, if any, is separate and independent from the liability of Metrobank to
Cabilzo.
What is even more deplorable is that, having been informed of the alteration, Metrobank did not
immediately recredit the amount that was erroneously debited from Cabilzo’s account but permitted a
full blown litigation to push through, to the prejudice of its client. Records are bare of evidence to
prove that Cabilzo was negligent. We find no justifiable reason therefore why Metrobank did not
immediately reimburse his account.
NOTES
2F 2020-2021
TOPIC Unauthorized Signature MODULE

2F 2020-2021
CASE #18
CASE TITLE Metrobank v. BA Finance GR NO 179952
PONENTE Carpio Morales, J. DATE Dec. 4, 2009
DOCTRINE Where an instrument is payable to the order of two or more payees or indorsees who are not
partners, all must indorse unless the one indorsing has authority to indorse for the others.
FACTS Lamberto Bitanga obtained from respondent BA Finance Corporation ₱329,280 loan and to secure
such, he mortgaged his car to respondent BA Finance. The mortgage contained a stipulation “The
MORTGAGOR agrees that he/it will cause the property herein mortgaged to be insured against loss or
damage by accident, theft and fire for a period of one year..”
Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co. The car was stolen.
On Bitanga’s claim, Malayan Insurance issued a check payable to the order of "B.A. Finance
Corporation and Lamberto Bitanga" for ₱224,500, drawn against China Bank. The check was crossed
with the notation "For Deposit Payees’ Account Only."
Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his
account with Asianbank, now merged with petitioner Metrobank. Bitanga subsequently withdrew the
entire proceeds of the check. Bitanga’s loan became due and demandable but he failed to settle it.
BA Finance eventually learned of the loss of the car and of Malayan Insurance’s issuance of a crossed
check payable to it and Bitanga, and of Bitanga’s depositing it in his account at Asianbank and
withdrawing the entire proceeds thereof. BA Finance thereupon demanded the payment of the value
of the check from Asianbank but to no avail, prompting it to file a complaint before the Regional Trial
Court (RTC) of Makati for sum of money and damages against Asianbank and Bitanga,
In its Answer, Asianbank alleged that BA Finance instituted the complaint in bad faith to coerce it into
paying the whole amount of the check. In addition, Asianbank filed a cross-claim against Bitanga,
alleging that he fraudulently induced its personnel to release to him the full amount of the check and
was subsequently unreachable. Lastly, Asianbank filed a third-party complaint against Malayan
Insurance,alleging that Malayan Insurance was grossly negligent in issuing the check payable to both
Bitanga and BA Finance and delivering it to Bitanga without the consent of BA Finance.
LOWER RTC: CA:
COURT Makati RTC held that Malayan Insurance
RULING cannot be faulted for negligence for issuing the
check payable to both BA Finance and
Bitanga. The trial court, holding that Asianbank
was negligent in allowing Bitanga to deposit
the check to his account and to withdraw the
proceeds thereof, without his co-payee BA
Finance having either indorsed it or authorized
him to indorse it in its behalf,found Asianbank
and Bitanga jointly and severally liable to BA
Finance
ISSUE/S 1. Whether BA Finance has a cause of action against Metrobank even if the subject check had
not been delivered to BA Finance by the issuer itself?
2. Whether or not Metrobank liable to BA Finance for the full value of the check, under the
Negotiable Instruments Law?
ARGUMENTS N/A
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SC RULING 1. YES. Section 41 of the Negotiable Instruments Law provides:
Where an instrument is payable to the order of two or more payees or indorsees who are not partners,
all must indorse unless the one indorsing has authority to indorse for the others.
Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the
proceeds thereof, despite the absence of authority of Bitangas co-payee BA Finance to endorse it on
its behalf. Petitioners argument that since there was neither forgery, nor unauthorized indorsement
because Bitanga was a co-payee in the subject check, the dictum in Associated Bank v. CA does not
apply in the present case fails. The payment of an instrument over a missing indorsement is the
equivalent of payment on a forged indorsement or an unauthorized indorsement in itself in the case of
joint payees. Accordingly, one who credits the proceeds of a check to the account of the indorsing
payee is liable in conversion to the non-indorsing payee for the entire amount of the check.
2. YES. Section 68 of the Negotiable Instruments Law instructs that joint payees who indorse
are deemed to indorse jointly and severally. When the maker dishonors the instrument, the holder
thereof can turn to those secondarily liable the indorser for recovery.
A collecting bank, Asianbank in this case, where a check is deposited and which indorses the check
upon presentment with the drawee bank, is an indorser. his is because in indorsing a check to the
drawee bank, a collecting bank stamps the back of the check with the phrase all prior endorsements
and/or lack of endorsement guaranteed and, for all intents and purposes, treats the check as a
negotiable instrument, hence, assumes the warranty of an indorser.
Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the duty to
ascertain the genuineness of all prior indorsements 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 prior indorsements.
NOTES
2F 2020-2021
TOPIC MODULE
CASE #19
CASE TITLE Philippine National Bank (PNB) v. Court of Appeals GR NO L-26001
PONENTE Concepcion, C.J. DATE

October 29, 1968
DOCTRINE
Section 62 of the Negotiable Instruments Law (NIL) provides: “The acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his acceptance, and admits: (a) The
existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the
instrument; and (b) The existence of the payee and his then capacity to indorse.” The prevailing view
is that the same rule applies in the case of a drawee who pays a bill of exchange without having
previously accepted it.
“Acceptance” and “payment” are different within the purview of the NIL, since the former is “a promise
to perform an act” while the latter is the “actual performance” thereof. In the case of checks,
“acceptance” is not required under the NIL, since checks are payable on demand.
FACTS
In January 1962, one Augusto Lim deposited with Philippine Commercial and Industrial Bank (PCIB)
a Government Service Insurance System (GSIS) check into his current account (GSIS Check No.
645915-B) in the sum of 57,415 PHP, drawn against PNB. The check was forwarded to PNB through
the Central Bank for clearing on the same day. PNB did not return the check but retained it and paid
its amount to PCIB, then debited it against GSIS’s account with PNB. By the end of that same month,
GSIS demanded the sum to be returned to it on the ground that the signature of its officers on the
check were forged, so PNB re-credited the sum to GSIS’s account. Thereafter, PNB demanded the
return of the amount from PCIB, but the latter refused. This prompted PNB to file the present action
against PCIB.
The following facts are not disputed:

● The signatures of the General Manager and the Auditor of GSIS on the check were forged
● The payee on the checks were one Mariano Pulido, who indorsed the same to Manuel Go,
who thereafter indorsed the same to Augusto Lim, the aforementioned depositor
● “All prior indorsements and/or lack of indorsement guaranteed, PCIB Padre Faura Branch”
was stamped on the back of the check
● More than 2 months prior to the depositing of the check (or in November 1961), GSIS had
already sent a Notice to PNB that the subject check had been lost and requested a Stop
Payment Order, which PNB acknowledged
The Court of First Instance (CFI) of Manila dismissed the case, and such dismissal was affirmed by
the Court of Appeals (CA). Hence, PNB came before the Supreme Court (SC) to have the case
reviewed on certiorari.
LOWER
COURT CFI: Dismissed the case, as the PCIB was CA: Affirmed the decision of the CFI.
RULING not guilty of negligence and that its guarantee
extends only to the validity of the
indorsements therein and not the validity of
the signatures of the drawers
ISSUE/S
PNB assigned the following errors to the lower courts:
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1. Not finding PCIB guilty of negligence
2. Not finding that the indorsements on the check were forged
3. Not finding PCIB liable to PNB by virtue of the former’s warranty on the back of the check
4. Not holding that “clearing” is not “acceptance” under the NIL
5. In not finding that, since the check had not been accepted by PNB yet, it is still entitled to
reimbursement therefor
6. In denying PNB’s right to recover from PCIB
ARGUMENTS Petitioner (PNB): Respondent (CA):

a. a.
b. b.
SC RULING
The SC affirmed the ruling of the lower courts.
As to whether the CA erred in not finding the indorsements on the check to be forged: Only the
signatures of the drawers were proved to be forged, but not the signatures of the indorsers. The
burden to prove the invalidity of the indorsers’ signatures is upon PNB. Absent any proof that such
signatures were indeed forged, they are deemed to be valid.
As to whether the CA erred in not finding PCIB liable to PNB despite the warranty on the back of the
check: The question of whether or not the indorsements were falsified is immaterial to PNB’s liability
as a drawee, or to its right to recover from PCIB, because the indorsement of an intermediate bank
does not guarantee the signature of the drawer. Such guarantee of PCIB only extends to the
indorsements.
As to whether the CA erred in holding that “clearing” is not “acceptance” under the NIL, and in finding
that the check had not been accepted by PNB yet: It must be noted that, in general, “acceptance” is
not required for checks under the NIL, since checks are payable on demand. “Acceptance” and
“payment” are different within the purview of the NIL, since the former is “a promise to perform an act”
while the latter is the “actual performance” thereof.
As to whether the CA erred in not finding PCIB negligent and in denying PNB’s right to recover from
PCIB: Even assuming that PCIB was negligent, it is undeniable that PNB was also negligent because
it had already received a Notice from GSIS that the check in question had been lost 2 months prior to
the depositing thereof. Emphasis must also be given to the fact that PNB did not return the check to
PCIB anymore, which, in regular bank practice, implied that PNB considered the check good and
honored it. It was only after such implication that PCIB allowed the sum to be deposited to Augusto
Lim’s account. It is a well-settled rule that when 1 of 2 innocent persons must suffer by the wrongful
act of a third person, the loss must be borne by the one whose negligence was the proximate cause
of the loss or who put it into the power of the third person to perpetrate the wrong. In this case, PNB’s
negligence was the proximate cause of the loss.
Lastly, it must be noted that Section 62 of the NIL provides: “The acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his acceptance, and admits: (a) The
existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the
instrument; and (b) The existence of the payee and his then capacity to indorse.” The prevailing view
is that the same rule applies in the case of a drawee who pays a bill of exchange without having
previously accepted it.
NOTES
2F 2020-2021
2F 2020-2021
TOPIC Forgery in checks MODULE

CASE #20
CASE TITLE Republic v. Ebrada GR NO L-40796
PONENTE Martin, J. DATE

July 31, 1975
DOCTRINE
It is only the negotiation predicated on the forged instrument that should be declared inoperative. The
negotiation of the check in question between the parties after the immediate parties to the forgery
should be considered valid and enforceable, barring any claim of forgery.
FACTS
On January 15, 1963,the Treasury of the Philippines (Bureau of Treasury) issued a check payable to
the order of one Lorenzo Martin (Martin), in the sum of P1,246.08, and drawn on the petitioner
Republic Bank (Bank). Through a series of indorsement, the check was acquired by respondent
Mauricia Ebrada (Ebrada).
Ebrada encashed the check with Republic Bank, where she received the proceeds thereof. The Bank
was later advised by the Bureau of Treasury that the alleged indorsement by the payee, "Martin
Lorenzo" was a forgery since he had allegedly died as of July 14, 1952 – 11 years before the
check was issued.
Bureau of Treasury then requested the Republic Bank to refund the sum encashed. To recover what it
had refunded to the Bureau, the Bank made demands upon Ebrada to account for the sum but Ebrada
refused to do so. So plaintiff Bank sued Ebrada before the City Court of Manila.
In Ebrada’s defense (arguments), she alleged that she was a holder in due course of the check in
question, or at the very least has acquired her rights from a holder in due course and therefore entitled
to the proceeds thereof. She also alleged that the Bank has no cause of action against her; that it is in
estoppel, or so negligent as not to be entitled to recover anything from her.
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 Adelaida Dmoniguez, for the purpose of encashment. Immediately after Ebrada received
the cash proceeds from the Bank, she immediately turned over the said amount to the third-party
defendant and fourth-party plaintiff Adelaida Dominguez, who in turn handed the said amount to the
fourth-party defendant Jutina Tinio.
LOWER CFI OF MANILA: CA:

COURT Rendered judgment for the plaintiff Bank N/A
RULING against defendant Ebrada; for Third-Party
plaintiff against Third-Party defendant,
Adelaida Dominguez, and for Fourth-Party
plaintiff against Fourth-Party defendant,
Justina Tinio.
On appeal, the City Court ordered Ebrada to

pay Republic Bank the amount of P1,246.08.
with interest.
ISSUE/S
Whether or not Republic Bank can recover from Edrada who was the last indorser of the
check bearing the forged indorsement.
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ARGUMENTS Plaintiff-appellee: REPUBLIC BANK Defendant-appellant: MAURICIA T. EBRADA
Ebrada presses that the lower court erred: "In

ordering the appellant to pay the appellee the face
value of the subject check after finding that the
drawer issued the subject check to a person already
deceased for 11-1/2 years and that the appellant did
not benefit from encashing said check."
SC RULING
YES. Bank should suffer the loss when it paid the amount of the check in question to Ebrada, BUT it
has the remedy to recover from the Ebrada the amount it paid. It is not the Bank’s duty to ascertain
whether the signatures of the payee or indorsers are genuine or not. This is because the indorser is
supposed to warrant to the drawee that the signatures of the payee and previous indorsers are
genuine, warranty not extending only to holders in due course.
Section 65 of the NIL: Every person negotiating an instrument by delivery or by qualified indorsement,
warrants that the instrument is genuine and in all respects what it purports to be and that she has good
title to it and 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.
In this case, Ebrada was the last indorser of the said check. As such, she was supposed to have
warranted that she has good title to said check.
It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a
forgery because he was already dead almost 11 years before the check in question was issued by the
Bureau of Treasury. Under Section 23 of the NIL where the signature on a negotiable instrument if
forged, the negotiation of the check is without force or effect. BUT where a check has several
indorsements on it, it is only the negotiation based on the forged or unauthorized signature
which is inoperative. It is only the negotiation predicated on the forged indorsement that should
be declared inoperative and negotiation of others, who did not know of the forgery, should be
considered valid and enforceable, barring any claim of forgery.
Applying this principle in this case, this means that the negotiation of the check in question from
Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the second indorser, should be
declared of no effect, but the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida
Dominguez, the third indorser, and from Adelaida Dominguez to the defendant-appellant who did
not know of the forgery, should be considered valid and enforceable, barring any claim of forgery.
Ebrada immediately turning over to Adelaida Dominguez the case, who in turn handed the amount to
Justina Tinio on the same date would not exempt her from liability because by doing so, she acted as
an accommodation party in the check for which she is also liable under Section 29 of NIL.
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs
against defendant-appellant.
NOTES
2F 2020-2021
TOPIC Forgery in Checks MODULE

CASE #21
CASE TITLE Jai Alai Corporation of the Philippines v. BPI GR NO L-29432
PONENTE CASTRO, J. DATE

August 6, 1975
DOCTRINE
Section 23 of the Negotiable Instruments Law (Act 2031) states that 3 —
"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."
FACTS
Ten checks with a total face value of P8,030.58 were deposited by the petitioner in its current account
with the respondent bank.
All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a sales
agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon deposit, temporarily
credited to the petitioner's account in accordance with the clause printed on the deposit slips issued
by the respondent which reads:
"Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received for
deposit, is provisional only, until such time as the proceeds thereof, in current funds or solvent credits,
shall have been actually received by the Bank and the latter reserves to itself the right to charge back
the item to the account of its depositor, at any time before that event, regardless of whether or not the
item itself can be returned."
After Ramirez had resigned from the Inter-Island Gas and after the checks had been submitted to
inter-bank clearing, the Inter-Island Gas discovered that all the indorsements made on the checks
purportedly by its cashiers, Santiago Amplayo and Vicenta Mucor (who were merely authorized to
deposit checks issued payable to the said company) as well as the rubber stamp impression thereon
reading "Inter-Island Gas Service, Inc.," were forgeries. In due time, the Inter-Island Gas advised the
petitioner, the respondent, the drawers and the drawee-banks of the said checks about the forgeries,
and filed a criminal complaint against Ramirez with the Office of the City Fiscal of Manila.
The respondent's cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas, called up the
petitioner's cashier, Manuel Garcia, and advised the latter that in view of the circumstances he would
debit the value of the checks against the petitioner's account as soon as they were returned by the
respective drawee-banks.
Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded
reimbursement to their respective accounts from the drawee-banks, which in turn demanded from the
respondent, as collecting bank, the return of the amounts they had paid on account thereof. When the
drawee-banks returned the checks to the respondent, the latter paid their value which the former in
turn paid to the Inter-Island Gas. The respondent, for its part, debited the petitioner's current account
and forwarded to the latter the checks containing the forged indorsements, which the petitioner,
however, refused to accept.
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LOWER RTC: CA:
COURT
RULING The petitioner then filed a complaint against
the respondent with the Court of First
Instance of Manila, which was however
dismissed by the trial court after due trial, and
as well by the Court of Appeals, on appeal.
ISSUE/S (a) Whether the respondent had the right to debit the petitioner's current account in the amount
corresponding to the total value of the checks in question after more than three months had elapsed
from the date their value was credited to the petitioner's account
(b) Whether the respondent is estopped from claiming that the amount of P8,030.58, representing
the total value of the checks with the forged indorsements, had not been properly credited to the
petitioner's account, since the same had already been paid by the drawee-banks and received in
due course by the respondent; and

a. a.
b. b.
SC RULING
The respondent acted within legal bounds when it debited the petitioner's account. When the
petitioner deposited the checks with the respondent, the nature of the relationship created at that
stage was one of agency, that is, the bank was to collect from the drawees of the checks the
corresponding proceeds. It is true that the respondent had already collected the proceeds of the
checks when it debited the petitioner's account, so that following the rule in Gullas vs. Philippine
National Bank 2 it might be argued that the relationship between the parties had become that of
creditor and debtor as to preclude the respondent from using the petitioner's funds to make payments
not authorized by the latter. It is our view nonetheless that no creditor-debtor relationship was created
between the parties.
"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 under the foregoing provision, a forged signature in a negotiable instrument is wholly
inoperative and no right to discharge it or enforce its payment can be acquired through or under the
forged signature except against a party who cannot invoke the forgery, it stands to reason, upon the
facts of record, that the respondent, as a collecting bank which indorsed the checks to the drawee-
banks for clearing, should be liable to the latter for reimbursement, for, as found by the court a quo
and by the appellate court, the indorsements on the checks had been forged prior to their delivery to
the petitioner. In legal contemplation, therefore, the payments made by the drawee-banks to the
respondent on account of the said checks were ineffective; and, such being the case, the relationship
of creditor and debtor between the petitioner and the respondent had not been validly effected, the
checks not having been properly and legitimately converted into cash.
NOTES
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2F 2020-2021
TOPIC FORGERIES IN CHECKS MODULE

CASE #22
CASE TITLE BDO v. EQUITABLE PCI GR NO 74917
PONENTE GANCAYCO, J: DATE

JAN 20, 1988
DOCTRINE
Every indorser who indorsee 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 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.
FACTS
1983, BDO through its Visa Card Department, drew six crossed Manager's check (total of P45,982.23) and
payable to certain member establishments of Visa Card. Subsequently, the Checks were deposited with the
Equitable to the credit of its depositor Aida Trencio. All prior and/or lack of endorsement guaranteed the
defendant sent the checks for clearing through the Philippine Clearing House Corporation (PCHC).
Accordingly, BDO paid the Checks; BDO discovered that the endorsements at the back of the Checks a
were forged and/or unauthorized. Pursuant to the PCHC Clearing Rules, BDO presented the Checks directly
to the Equitable for t claiming for reimbursement. However, Equitable refused hence, this case.
BDO: Files Complaint, prays f to require the payment of P45,982.23 with interest at the rate of 12% per
annum from the date of the complaint plus attorney's fees in the amount of P10,000.00 as well as the cost
of the suit.
LOWER PCHC BOARD: ALL PRIOR RTC: In favor of Equitable. PCHC makes no distinction
COURT ENDORSEMENTS AND/OR LACK OF as to the character or nature of the checks subject to
RULING ENDORSEMENTS GUARANTEED. Without its jurisdiction. The provisions quoted above simply
such warranty, BDO would not have paid on the refer to check(s). In presenting the Checks for clearing
checks. Since the warranty is false the defendant and for payment, the defendant made an express
is liable for any damage arising out of the falsity guarantee on the validity of "all prior endorsements."
of its representation. Thus, stamped at the back of the checks are the
defendant's clear warranty;
The principle of estoppel, prevents the defendant
from denying liability for any damage sustained Regarding the said instruments the court agrees to the
by the plaintiff which, relying upon an action or PCHC Board
declaration of the defendant, paid on the Checks.
The same principle of estoppel effectively
prevents the defendant from denying the
existence of the Checks.
ISSUE/S Whether the defendant (equitable) should be held under the warranties stamped at the back
of the check.
ARGUMENTS Petitioner BDO: PCHC has no jurisdiction Respondent Equitable: The defendant refused to
because the Clearing House Rules and accept such direct presentation of and to reimburse
Regulations of PCHC cover only checks that are the plaintiff for the value of the Checks.
genuinely negotiable, citing the primary purpose
of the PCHC in the Articles of Incorporation “in
clearing checks and other clearing items as
defined in existing and in future Central Bank of
2F 2020-2021
the Philippines circulars xxx in pursuance to the
provisions of Section 107 of R.A. 265”.
BDO argues the term check should be

interpreted as one that fits the articles of
incorporation of the PCHC, Petitioner alleges
that with the cancellation of the printed words "or
bearer from the face of the check, it becomes
non-negotiable so the PCHC has no jurisdiction
over the case.
SC RULING THE COURT APPROVES PCHC’s DECISION. A bank cannot escape the liability of an endorser of a
check and which may turn out to be a forged endorsement. Whenever any bank treats the signature at the
back of the checks as endorsements and thus logically guarantees the same as such there can be no doubt
said bank has considered the checks as negotiable. Apropos the matter of forgery in endorsements, this
Court has succinctly emphasized 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.
Where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to
deny the genuineness of the drawers signature and his capacity to issue the instrument.If a drawee
bank pays a forged check which was previously accepted or certified by the said bank, it can not
recover from a holder who did not participate in the forgery and did not have actual notice thereof.
The payment of a check does not include or imply its acceptance in the sense that this word is used
in Section 62 of the Negotiable Instruments Act.
We hold that while the drawer generally owes no duty of diligence to the collecting bank, 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 and the law holds it to a high standard
of conduct. And although the subject checks are non-negotiable the responsibility of petitioner as
indorser thereof remains.To countenance a repudiation by the petitioner of its obligation would be
contrary to equity and would deal a negative blow to the whole banking system of this country.
PCHC decision states:
“II. Payments To Persons Other Than The Payees Are Not Valid And Give Rise To An ObligationTo
Return Amounts Received xxx
III. Having Violated Its Warranty On Validity Of All Endorsements, Collecting Bank Cannot Deny liability
To Those Who Relied On Its Warranty
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has
proven to be false and inaccurate, the defendant is liable for any damage arising out of the falsity of its
representation.
The principle of estoppel effectively prevents the defendant from denying liability for any damages sustained
by the plaintiff which, relying upon an action or declaration of the defendant, paid on the Checks. The same
principle of estoppel effectively prevents the defendant from denying the existence of the Checks.
Whether the Checks have been issued for valuable considerations or not is of no serious moment to this
case. These Checks have been made the subject of contracts of endorsement wherein the defendant made
expressed warranties to induce payment by the drawer of the Checks; and the defendant cannot now refuse
liability for breach of warranty as a consequence of such forged endorsements. The defendant has falsely
2F 2020-2021
warranted in favor of plaintiff the validity of all endorsements and the genuineness of the cheeks in all
respects what they purport to be.
The damage that will result if judgment is not rendered for the plaintiff is irreparable. The collecting bank has
privity with the depositor who is the principal culprit in this case. The defendant knows the depositor; her
address and her history, Depositor is defendant's client. It has taken a risk on its depositor when it allowed
her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the payees, the defendant is guilty.”
NOTES
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TOPIC Forgery in Checks MODULE 6

CASE #23
CASE TITLE METROPOLITAN BANK & TRUST COMPANY, petitioner, GR NO 88866
vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION,
INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA
CASTILLO, respondents.
PONENTE CRUZ, J DATE September 15, 1989
DOCTRINE
"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."
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be
established by clear, positive and convincing evidence.
FACTS
The Metropolitan Bank and Trust Co. (Metrobank) is a commercial bank with branches throughout the
Philippines and even abroad. Golden Savings and Loan Association (GSLA), with the private
respondents, Lucia, Magno and Gloria all named Castillo, as its principal officers, has a savings
account with Metrobank.
Eduardo Gomez (Gomez) opened an account with GSLA and deposited over a period of 2 months 38
treasury warrants. Six of these were directly payable to Gomez while the others appeared to have
been indorsed by their respective payees, followed by Gomez as second indorser.
On various dates (3 instances), all these warrants were subsequently indorsed by Gloria Castillo as
Cashier of GSLA and deposited to its savings account in the Metrobank, sent to its principal office for
clearing, and which was later forwarded to the Bureau of Treasury (BoT) for special clearing.
Gloria went to Metrobank and repeatedly asked whether the warrants had been cleared. Accordingly,
Gomez was meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over
Gloria's repeated inquiries and also as an accommodation for a "valued client," the Metrobank finally
decided to allow GSLA to withdraw from the proceeds of the warrants, and GSLA subsequently
allowed Gomez to make withdrawals from his own account.
32 of the warrants had been dishonored because of alleged forgery of the signatures of the general
manager and the auditor of the drawer corporation, prompting Metrobank to inform GSLA of said
dishonor and demanded the refund by GSLA of the amount it had previously withdrawn, to make up
the deficit in its account. Having been rejected, Metrobank sued GSLA contending that by indorsing
the warrants in general, Golden Savings assumed that they were "genuine and in all respects what
they purport to be," in accordance with Section 66 of the Negotiable Instruments Law.
LOWER RTC: CA:

COURT Metrobank then sued Golden Savings On appeal to the respondent court, the
RULING in the Regional Trial Court of Mindoro. decision was affirmed, prompting
After trial, judgment was rendered in Metrobank to file this petition for review
favor of Golden Savings
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ISSUE/S W/N the forgery me be presumed in dishonoring the checks?
ARGUMENTS Metrobank Golden Savings
1. Respondent Court of Appeals erred The belated notification and by allowing the
in disregarding and failing to apply the withdrawal in 3 separate dates is an implied
clear contractual terms and conditions clearance to the treasury warrants
on the deposit slips allowing
Metrobank to charge back any amount
erroneously credited.
(a) Metrobank's right to charge back is

not limited to instances where the
checks or treasury warrants are forged
or unauthorized.
SC RULING
From the above undisputed facts, it would appear to the Court that Metrobank was indeed
negligent in giving Golden Savings the impression that the treasury warrants had been
cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof
from his account with it. Without such assurance, Golden Savings would not have allowed
the withdrawals; with such assurance, there was no reason not to allow the withdrawal.
The argument of Metrobank that Golden Savings should have exercised more care in
checking the personal circumstances of Gomez before accepting his deposit does not hold
water. There was no question of Gomez's identity or of the genuineness of his signature as
checked by Golden Savings.
In fact, the treasury warrants were dishonored allegedly because of the forgery of the
signatures of the drawers, not of Gomez as payee or indorser.
Under the circumstances, it is clear that Golden Savings acted with due care and diligence
and cannot be faulted for the withdrawals it allowed Gomez to make.
The belated notification aggravated the petitioner's earlier negligence in giving express or at
least implied clearance to the treasury warrants and allowing payments therefrom to Golden
Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the
forgery of the signatures of the general manager and the auditor of the drawer corporation,
has not been established. This was the finding of the lower courts which we see no reason to
disturb. And as we said in MWSS v. Court of Appeals:
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be
established by clear, positive and convincing evidence. This was not done in the
present case.
A no less important consideration is the circumstance that the treasury warrants in question
are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they are payable from a
particular fund, to wit, Fund 501.
NOTES
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CASE #24
CASE TITLE GEMPESAW VS CA GR NO 92244
PONENTE Campos, Jr., J. DATE February 9, 1993
DOCTRINE Negotiable Instruments Law; Checks; Forged Indorsements; Effect of drawer's negligence.
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 the forged indorsement. In other words, he is precluded from using forgery as a
basis for his claim for recrediting of his account.
FACTS Petitioner Gempesaw owns and operates four grocery stores located in Caloocan City. Petitioner
maintains a checking with the Caloocan City Branch of the respondent drawee Bank (Philippine
Bank of Communications [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 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.
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.Most of
the aforementioned checks were for amounts in excess of her actual obligations to the
various payees as shown in their corresponding invoices. Practically, all the checks issued and
honored by the respondent drawee Bank were crossed checks.
Aside from the daily notice given to the petitioner by the respondent drawee Bank, the latter also
furnished her with a monthly statement of her bank transactions, attaching thereto all the cancelled
checks she had issued and which were debited against her current account. It was only after the
lapse of more than two (2) years that petitioner found out about the fraudulent manipulations
of her bookkeeper.
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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. Ernest L. Boon was a very close friend of Alfredo Y. Romero,
Sixtythree (63) out of the eighty-two (82) checks were deposited in the Account of Alfredo Y.
Romero. The rest of the checks were deposited in the account of Benito Lam at the Elcano branch
of the respondent drawee Bank. About thirty (30) of the payees whose names were specifically
written on the checks testified that they did not receive nor even see the subject checks and that the
indorsements appearing at the back of the checks were not theirs.
LOWER RTC: The Regional Trial Court of Caloocan CA: the Court of Appeals in a decision rendered on
COURT City, which tried the case, rendered a February 22,1990, affirmed the decision of the RTC
RULING decision on November 17, 1987 dismissing on two grounds, namely (1) that the plaintiffs
the complaint as well as the respondent (petitioner herein) gross negligence in issuing the
drawee Bank's counterclaim. checks was the proximate cause of the loss and (2)
assuming that the bank was also negligent, the loss
must nevertheless be borne by the party whose
negligence was the proximate cause of the loss.
ISSUE/S WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE RESULTING INJURY TO
THE DRAWEE BANK, AND THE DRAWER IS PRECLUDED FROM SETTING UP THE FORGERY
OR WANT OF AUTHORITY.
ARGUMENTS Petitioner (Gempesaw): Respondent (CA/PBCOM):
1. She is entitled for a refund for the Petitioner is not entitled for the amount issued in the
reason that her signature was forged checks for the reason that the proximate cause of
2. Drawee bank should not have the loss is her negligence
honored the checks because they
were crossed checks.
SC RULING
No. It was established that the signatures of the payees as first indorsers were forged. The record
fails to show the identity of the party who made the forged signatures. The checks were then indorsed
for the second time with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the
latter's accounts as earlier noted. The second indorsements were all genuine signatures of the
alleged holders. All the eighty-two (82) checks bearing the forged indorsements of the payees and the
genuine second indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit.
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.
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 the amounts of the checks she signed against the invoices
attached thereto. Furthermore, although she regularly received her bank statements, she apparently
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did not carefully examine the same nor the check stubs and the returned checks, and did not
compare them with the sales 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 time she notified the
respondent drawee bank.
On the crossed check argument

Issuing a crossed check imposes no legal obligation on the drawee not to honor such a check. It is
more of a warning to the holder that the check cannot be presented to the drawee bank for payment
in cash. Instead, the check can only be deposited with the payee's bank which in turn must present it
for payment against the drawee bank in the course of normal banking transactions between banks.
The crossed check cannot be presented for payment but it can only be deposited and the drawee
bank may only pay to another bank in the payee's or indorser's account.
NOTES
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CASE #25
CASE TITLE Associated Bank vs Court of Appeals GR NO 107382
PONENTE Romero, J DATE

January 31, 1996
DOCTRINE 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.
FACTS
After the books of the account of the Provincial Treasurer of the Province of Tarlac were post- audited
by the Provincial Auditor, it was discovered that the Concepcion Emergency Hospital did not receive
the several allotment checks drawn by the Province.
The Provincial Treasurer requested the manager of the Philippine National Bank (PNB) to return all of
its cleared checks issued from 1977 to 1980, thus it was learned that 30 checks amounting to
203,300 were encashed by Fausto Pangilinan, with the Associated Bank acting as the collecting
bank.
Faustino Pangilinan, administrative officer and cashier of the payee hospital up until his retirement on
February 28, 1978, collected questioned checks from the office of the Provincial Treasurer.
Pangilinan sought to encash the first check with Associated Bank. However, the manager of the
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 of the second check as well as for 28 other checks of various amounts
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, PNB manager demanded
reimbursement from 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
LOWER RTC: CA:

COURT Affirmed the decision of the RTC
RULING Ruled in favor of Province of Tarlac and
against defendant PNB ordering the latter to
pay 203, 300. Associated Bank is ordered to
reimburse to PNB 203, 300
ISSUE/S Whether it is the drawer, drawee bank or collecting bank who must bear the loss in case of forged
endorsements
ARGUMENTS Petitioner Associated Bank : Respondent PNB:

Drawee bank, PNB, must solely and Contends that respondent court erred in exempting
ultimately bear the loss. Associated Bank also the Province of Tarlac from liability when, in fact, the
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claims that since PNB already cleared and latter was negligent because it delivered and
paid the value of the forged checks in released the questioned checks to Fausto
question, it is now estopped from asserting Pangilinan who was then already retired as the
the defense that Associated Bank guaranteed hospital’s cashier and administrative officer
prior indorsements. The drawee bank has the
primary duty to verify the genuineness of
payee’s indorsement before paying the
check.
SC RULING
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. Section 23 does not avoid the instrument but only the
forged signature. Thus, a forged indorsement does not operate as the payee's indorsement. 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."
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. 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.
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 payee's or holder's indorsement, the collecting bank is held liable, without
prejudice to the latter proceeding against the forger. 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.
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.
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 (dated January 17, 1978), all the checks were issued and released after
Pangilinan's retirement on February 28, 1978. After nearly three years, the Treasurer's 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 which
should have alerted employees in the Treasurer's office of the fraud being committed.
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.
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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 hospital's 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 payee's indorsement.
NOTES
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TOPIC FORGERY IN CHECKS MODULE

CASE #26
CASE TITLE WESTMONT BANK v. EUGENE ONG GR NO
PONENTE QUISUMBING DATE JANUARY 30, 2002
DOCTRINE
FACTS
Respondent Eugene Ong maintained a current account with petitioner, Westmont Bank. Sometime in
May 1976, he sold certain shares of stocks through Island Securities Corporation. To pay Ong, Island
Securities purchased 2 Pacific Banking Corporation manager’s 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 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.
LOWER RTC: CA: affirmed in toto

COURT
RULING
judgment for the plaintiff and dismissed
defendant’s counterclaims
ISSUE/S
(1) whether or not respondent Ong has a cause of action against petitioner Westmont Bank
ARGUMENTS WESTMONT BANK: ONG:
a. Ong had no right or cause of action a. collecting bank or last endorser generally
because he never had possession of suffers the loss because it has the duty to
the checks nor did he authorize ascertain the genuineness of all prior
anybody endorsements.
b. check is not a legal tender under 1249 b.
of the NCC
SC RULING
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.
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Since the signature of the payee, in the case at bar, was forged to make it appear that he had made an
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 payee’s 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 payee’s
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.
Petitioner’s claim that since there was no delivery yet and respondent has never acquired possession of the
checks, respondent’s 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 shortcut, 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 of whether the check was
delivered to the payee or not.
Considering the circumstances in this case, in our view, petitioner could not escape liability for its negligent
acts. Admittedly, respondent Eugene Ong at the time the fraudulent transaction took place was a depositor
of petitioner bank. Banks are engaged in a business impressed with public interest, and it is their duty to
protect in return their many clients and depositors who transact business with them.They have the obligation
to treat their client’s account meticulously and with the highest degree of care, considering the fiduciary
nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of
a family.26 In the present case, petitioner was held to be grossly negligent in performing its duties.
NOTES
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CASE #27
CASE TITLE ALLIED BANKING CORP. v LIM SIO WAN GR NO 133179
PONENTE Velasco, J: DATE March 27, 2008
DOCTRINE The warranty “that the instrument is genuine and in all respects what it purports to be” covers all the
defects in the instrument affecting the validity thereof, including a forged indorsement. Thus, the last
indorser will be liable for the amount indicated in the negotiable instrument even if a previous
indorsement was forged. We held in a line of cases that “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 itself, and ultimately should be held liable therefor.” However, this
general rule is subject to exceptions. One such exception is when the issuance of the check itself was
attended with negligence.
FACTS On September 21, 1983, Filipinas Cement Corporation (FCC) had deposited a money market
placement for respondent Producers Bank which was received and acknowledged in a letter. The
placement matured on October 25, 1983 and was rolled-over until December 5, 1983. FCC
demanded payment of the proceeds of the placement the same day. Before FCC’s demand, on
November 14, 1983, Lim Sio Wan deposited with petitioner Allied Banking Corporation (Allied) a
money market placement of P 1,152,597.35 for a term of 31 days to mature on December 15, 1983.
On December 5, 1983, a person claiming to be Lim Sio Wan called up Allied, and instructed the latter
to pre-terminate Lim Sio Wan’s money market placement, to issue a managers check representing
the proceeds of the placement, and to give the check to one Deborah Dee Santos who would pick up
the check. The manager’s check was issued in the name of Lim Sio Wan, as payee. The check was
cross-checked For Payees Account Only and given to Santos. Thereafter, the said managers check
was deposited in the account of FCC at respondent Metropolitan Bank and Trust Co. (Metrobank),
with the forged signature of Lim Sio Wan as indorser. In short, the Allied check was deposited in
FCC’s account in Metrobank purportingly representing the proceeds of FCC’s money market
placement proceeds. To clear the check and in compliance with the requirements of the Philippine
Clearing House Corporation (PCHC) Rules and Regulations, Metrobank stamped a guaranty on the
check, which reads: All prior endorsements and/or lack of endorsement guaranteed. The check was
sent to Allied through the PCHC. Upon the presentment of the check, Allied funded the check even
without checking the authenticity of Lim Sio Wans purported indorsement. Thus, the amount on the
face of the check was credited to the account of FCC. On the date of maturity of her money market
placement, Lim Sio Wan tried to withdraw the same and was informed that she called to preterminate
it a few days earlier. She denied giving any instructions and receiving the proceeds thereof. She
desisted from further complaints when she was assured by the bank manager that her money would
be recovered. However, upon subsequent demand Allied refused to pay Lim Sio Wan. Thus she filed
with the RTC a Complaint against Allied to recover the proceeds of her money market placement.
Allied filed a third party complaint against Metrobank and Santos. The trial and appellate court
ordered Allied to pay sixty (60%) percent Metrobank forty (40%) of the amount of plus 12% interest
per annum.
LOWER RTC: The judgment is rendered as follows: CA: The Court of Appeals modified the decision of
COURT the RTC and rendered as follows:
RULING 1. Ordering defendant Allied Banking Ordering and sentencing defendant-appellant Allied
Corporation to pay plaintiff the amount of Banking Corporation to pay sixty (60%) percent and
P1,158,648.49 plus 12% interest per annum defendant-appellee Metropolitan Bank and Trust
from March 16, 1984 until fully paid; Company forty (40%) of the amount of
P1,158,648.49 plus 12% interest per annum from
2. Ordering defendant Allied Bank to pay March 16, 1984 until fully paid. The moral damages,
plaintiff the amount of P100,000.00 by way of attorney's fees and costs of suit adjudged shall
moral damages; likewise be paid by defendant-appellant Allied
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Banking Corporation and defendant-appellee
3. Ordering defendant Allied Bank to pay Metropolitan Bank and Trust Company in the same
plaintiff the amount of P173,792.20 by way of proportion of 60-40. Except as thus modified, the
attorney's fees; and, decision appealed from is AFFIRMED.
4. Ordering defendant Allied Bank to pay the

costs of suit.
Defendant Allied Bank's cross-claim against

defendant Metrobank is DISMISSED.
Likewise defendant Metrobank's third-party

complaint as against Filipinas Cement
Corporation is DISMISSED.
Filipinas Cement Corporation's fourth-party

complaint against Producer's Bank is also
DISMISSED.
ISSUE/S
Is petitioner’s liability to the extent of 60% of amount adjudged demandable and Metrobank to the
extent of 40% as guarantor of all endorsement on the check, it being the collecting bank?
ARGUMENTS Petitioner (ALLIED BANK): Respondent (LIM SIO WAN):

a. Allied refused to pay Lim Sio Wan, claiming Lim Sio Wan, as creditor of the bank for her money
that the latter had authorized the pre- market placement, is entitled to payment upon her
termination of the placement and its request, or upon maturity of the placement, or until
subsequent release to Santos the bank is released from its obligation as debtor.
Until any such event, the obligation of Allied to Lim
Sio Wan remains unextinguished.
SC RULING
Yes, the 60:40 ratio of the liabilities of Allied and Metrobank must be upheld.
Section 66 in relation to Sec. 65 of the Negotiable Instruments Law provides:
Section 66. Liability of general indorser. 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 section;
and
b) That the instrument is at the time of his indorsement valid and subsisting;
And in addition, he engages that on due presentment, it 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
Section 65. Warranty where negotiation by delivery, so forth. Every person negotiating an instrument
by delivery or by a qualified indorsement, warrants:
a) That the instrument is genuine and in all respects what it purports to be;
b) That he has a good title of it;
c) That all prior parties had capacity to contract;
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d) That he has no knowledge of any fact which would impair the validity of the instrument or render
it valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the
immediate transferee.
The provisions of subdivision (c) of this section do not apply to persons negotiating public or
corporation securities, other than bills and notes.
As provided in Section 66 in relation to Sec. 65 of the Negotiable Instruments Law, the warranty “that
the instrument is genuine and in all respects what it purports to be” covers all the defects in the
instrument affecting the validity thereof, including a forged indorsement. Thus, the last indorser will
be liable for the amount indicated in the negotiable instrument even if a previous indorsement was
forged. We held in a line of cases that “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 itself, and ultimately should be held liable therefor.” However, this general rule is
subject to exceptions. One such exception is when the issuance of the check itself was attended with
negligence.
In the instant case, Allied was negligent in issuing the manager’s check and in transmitting it to
Santos without even a written authorization The liability of Allied, however, is concurrent with that of
Metrobank as the last indorser of the check. Given the relative participation of Allied and Metrobank
to the instant case, both banks cannot be adjudged as equally liable. Hence, the 60:40 ratio of the
liabilities of Allied and Metrobank must be upheld.
NOTES
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CASE #28
CASE TITLE Samsung Construction Co. Phil. v. Far East Bank and Trust Company GR NO 129015
PONENTE TINGA, J DATE August 13, 2004
FACTS Petitioner Samsung Construction, while based in Binan, Laguna, maintained a current account with
defendant FEBTC at the latter’s Bel-Air Makati Branch. The sole signatory to the petitioner's account
was Jong Kyu Lee, its Project Manager, while the checks remained in the custody of the company’s
accountant, Kyu Yong Lee.
A certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the bank’s branch in
Makati. The check, payable to cash and drawn against Samsung Construction’s current account, was
in the amount of Php 999,500.00. The bank teller first checked the balance of Samsung Construction’s
account. After ascertaining there were enough funds, she compared the signature appearing on the
check with the specimen signature of Jong. After comparing the signatures, the bank teller was satisfied
with the authenticity of the signature. As it was bank policy that two bank branch officers approve checks
exceeding 100,000 for payment or encashment, the bank teller forwarded the check to the branch
Senior Assistant. The latter likewise counter checked the signatures and forwarded it to another bank
officer who then noticed that the assistant accountant of Samsung Construction was also in the bank.
The bank officer showed it to the assistant accountant of Samsung, who vouched for the genuineness
of Jong’s signature. Satisfied, Syfu (bank officer) authorized the bank’s encashment of the check to
Gonzaga.
The following day, the accountant (Kyu) examined the balance and discovered that a check had been
encashed. Aware that he had not prepared such a check for Jong’s signature, he perused the
checkbook and found that the last blank check was missing. Jong learned of the encashment and
realized that his signature had been forged. The Bank Manager told Jong that he would be reimbursed
for the amount of the check. Jong proceeded to the police station and consulted with his lawyers. A
criminal case for qualified theft was filed against Sempio.
Petitioner demanded that FEBTC credit to it the amount of P999,500.00 with interest. FEBTC replied
that it was still conducting an investigation. Unsatisfied, petitioner filed a complaint for violation of
Section 23 of the Negotiable Instruments Law.
LOWER RTC: RTC held that CA: Reversed RTC Decision and absolved FEBTC from any liability. The
COURT Jong’s signature on contradictory findings of the NBI and the PNP created doubt as to whether
RULING the check was forged there was forgery. Moreover, assuming there was forgery, it occurred due to
and accordingly the negligence of Samsung Construction, imputing blame on the accountant
directed the bank to Kyu for lack of care and prudence in keeping the checks, which if observed
pay or credit back to would have prevented Sempio from gaining access thereto. CA invoked the
Samsung ruling in PNB v. National City Bank of New York that, if a loss, which must be
Construction’s borne by one or two innocent persons, can be traced to the neglect or fault of
account the amount. either, such loss would be borne by the negligent party, even if innocent of
intentional fraud.
ISSUE/S WON Samsung Construction was precluded from setting up the defense of forgery under Section 23
of the Negotiable Instruments Law
ARGUMENTS Petitioner Samsung Corporation:
CA had seriously misapprehended the facts when it overturned the RTC’s finding of forgery. It also
contends that the appellate court erred in finding that it had been negligent in safekeeping the check,
and in applying the equity principle enunciated in PNB v. National City Bank of New York
Respondent Far East Bank and Trust Company

SC RULING
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NO. We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the
defense of forgery if it is guilty of negligence. Yet, we are unable to conclude that Samsung Construction
was guilty of negligence in this case. The appellate court failed to explain precisely how the Korean
accountant was negligent or how more care and prudence on his part would have prevented the forgery.
The bare fact that the forgery was committed by an employee of the party whose signature was forged
cannot necessarily imply that such party’s negligence was the cause for the forgery. Employers do not
possess the preternatural gift of cognition as to the evil that may lurk within the hearts and minds of
their employees.
Admittedly, the record does not clearly establish what measures Samsung Construction employed to
safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the checks inside a “safety
box,” and no contrary version was presented by FEBTC. However, such testimony cannot prove that
the checks were indeed kept in a safety box, as Jong’s testimony on that point is hearsay, since Kyu,
and not Jong, would have the personal knowledge as to how the checks were kept. Still, in the absence
of evidence to the contrary, we can conclude that there was no negligence on Samsung Construction’s
part. The presumption remains that every person takes ordinary care of his concerns, and that the
ordinary course of business has been followed. Negligence is not presumed, but must be proven by
him who alleges it. While the complaint was lodged at the instance of Samsung Construction, the matter
it had to prove was the claim it had alleged — whether the check was forged. It cannot be required as
well to prove that it was not negligent, because the legal presumption remains that ordinary care was
employed.
The general rule is to the effect that a forged signature is “wholly inoperative,” and payment
made “through or under such signature” is ineffectual or does not discharge the instrument. If
payment is made, the drawee cannot charge it to the drawer’s account. The traditional
justification for the result is that the drawee is in a superior position to detect a forgery because
he has the maker’s signature and is expected to know and compare it. The rule has a healthy
cautionary effect on banks by encouraging care in the comparison of the signatures against
those on the signature cards they have on file. Moreover, the very opportunity of the drawee to
insure and to distribute the cost among its customers who use checks makes the drawee an
ideal party to spread the risk to insurance.
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against which he has the
privilege of drawing checks in the ordinary course of business, the relationship between the
bank and the depositor is that of debtor and creditor. So far as the legal relationship between
the two is concerned, the situation is the same as though the bank had borrowed money from
the depositor, agreeing to repay it on demand, or had bought goods from the depositor,
agreeing to pay for them on demand. The bank owes the depositor money in the same sense
that any debtor owes money to his creditor. Added to this, in the case of bank and depositor,
there is, of course, the bank’s obligation to pay checks drawn by the depositor in proper form
and presented in due course. When the bank receives the deposit, it impliedly agrees to pay
only upon the depositor’s order. When the bank pays a check, on which the depositor’s
signature is a forgery, it has failed to comply with its contract in this respect. Therefore, the
bank is held liable.
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The fact that the forgery is a clever one is immaterial. The forged signature may so closely
resemble the genuine as to defy detection by the depositor himself. And yet, if a bank pays
the check, it is paying out its own money and not the depositor’s.
The forgery may be committed by a trusted employee or confidential agent. The bank still
must bear the loss. Even in a case where the forged check was drawn by the depositor’s
partner, the loss was placed upon the bank.
This rule of liability can be stated briefly in these words: “A bank is bound to know its
depositors’ signature.” The rule is variously expressed in the many decisions in which the
question has been considered. But they all sum up to the proposition that a bank must know
the signatures of those whose general deposits it carries.
The general rule remains that the drawee who has paid upon the forged signature bears the
loss. The exception to this rule arises only when negligence can be traced on the part of the
drawer whose signature was forged, and the need arises to weigh the comparative negligence
between the drawer and the drawee to determine who should bear the burden of loss. The Court
finds no basis to conclude that Samsung Construction was negligent in the safekeeping of its
checks. For one, the settled rule is that the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will free the bank from liability to him,
where a clerk of the depositor or other persons, taking advantage of the opportunity, abstract
some of the check blanks, forges the depositor’s signature and collect on the checks from the
bank. And for another, in point of fact Samsung Construction was not negligent at all since it
reported the forgery almost immediately upon discovery.
The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
The fact that the check was made out in the amount of nearly one million pesos is unusual enough to
require a higher degree of caution on the part of the bank. In this case, not only did the amount in the
check nearly total one million pesos, it was also payable to cash. That latter circumstance should have
aroused the suspicion of the bank, as it is not ordinary business practice for a check for such large
amount to be made payable to cash or to bearer, instead of to the order of a specified person. Moreover,
the check was presented for payment by one Roberto Gonzaga, who was not designated as the payee
of the check, and who did not carry with him any written proof that he was authorized by Samsung
Construction to encash the check. Gonzaga, a stranger to FEBTC, was not even an employee of
Samsung Construction. These circumstances are already suspicious if taken independently, much
more so if they are evaluated in concurrence. Given the shadiness attending Gonzaga’s presentment
of the check, it was not sufficient for FEBTC to have merely complied with its internal procedures, but
mandatory that all earnest efforts be undertaken to ensure the validity of the check, and of the authority
of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact Jong
over the phone to verify the check. She added that calling the issuer or drawer of the check to verify
the same was not part of the standard procedure of the bank, but an “extra effort.” Even assuming that
such personal verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC still
paid out the check despite the absence of any proof of verification from the drawer. Instead, the bank
seems to have relied heavily on the say-so of Sempio, who was present at the bank at the time the
check was presented. FEBTC alleges that Sempio was well-known to the bank officers, as he had
regularly transacted with the bank in behalf of Samsung Construction. It was even claimed that
everytime FEBTC would contact Jong about problems with his account, Jong would hand the phone
over to Sempio. However, the only proof of such allegations is the testimony of Gemma Velez, who
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also testified that she did not know Sempio personally, and had met Sempio for the first time only on
the day the check was encashed. In fact, Velez had to inquire with the other officers of the bank as to
whether Sempio was actually known to the employees of the bank. Obviously, Velez had no personal
knowledge as to the past relationship between FEBTC and Sempio, and any averments of her to that
effect should be deemed hearsay evidence. Interestingly, FEBTC did not present as a witness any
other employee of their Bel-Air branch, including those who supposedly had transacted with Sempio
before. Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of
Samsung Construction, the irregular circumstances attending the presentment of the forged check
should have put the bank on the highest degree of alert. Given the circumstances, extraordinary
diligence dictates that FEBTC should have ascertained from Jong personally that the signature in the
questionable check was his.
Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still
recover from the bank as long as he or she is not precluded from setting up the defense of forgery.
After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the
payment of a check can arise out of a forged signature. Since the drawer, Samsung Construction, is
not precluded by negligence from setting up the forgery, the general rule should apply. Consequently,
if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the
amount so paid to the account of the depositor. A bank is liable, irrespective of its good faith, in paying
a forged check.
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TOPIC Forgery in Checks MODULE 6

CASE #29
CASE TITLE Bank of America NT & SA v. Associated Citizens Bank GR NO 141001
PONENTE CARPIO, J. DATE May 21, 2009
DOCTRINE The bank on which a check is drawn, known as the drawee bank, is under strict liability, based on the
contract between the bank and its customer (drawer), to pay the check only to the payee or the payee’s
order. The drawer’s instructions are reflected on the face and by the terms of the check. When the
drawee bank pays a person other than the payee named on the check, it does not comply with the
terms of the check and violates its duty to charge the drawer’s account only for properly payable items.
A collecting bank where a check is deposited, and which endorses the check upon presentment with
the drawee bank, is an endorser. Under Section 66 of the NIL, an endorser warrants “that the instrument
is genuine and in all respects what it purports to be; that he has good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his endorsement valid and subsisting.”
FACTS BA-Finance Corporation (BA-Finance) entered into a transaction with Miller Offset Press, Inc. (Miller)
through the latter's authorized representatives (Uy Kiat Chung, Ching Uy Seng and Uy Chung Guan
Seng). BA-Finance granted Miller a credit line facility through which Miller could assign or discount its
trade receivables with BA-Finance.
Miller discounted and assigned several trade receivables to BA-Finance which the latter issued four
checks payable to the “Order of Miller Offset Press, Inc.” with the notation “For Payee’s Account Only”.
The checks totalling Php 741,227.78 were drawn against Bank of America.
The four checks were deposited by Ching Uy Seng in a joint bank account in Associated Citizens Bank
(Associated Bank) which is under the names of Ching Uy Seng and Uy Chung Guan Seng. Associated
Bank stamped the checks with the notation “all prior endorsements and/or lack of endorsements
guaranteed,” and sent them through clearing. Later, the drawee bank, Bank of America, honored the
checks and paid the proceeds to the Associated Bank as the collecting bank.
Miller, then, failed to deliver to BA-Finance the proceeds of the assigned trade receivables. Thus, BA-
Finance filed a complaint against Miller, its authorized representatives, and Bank of America for
allegedly allowing encashment and collection of checks by persons other than the named payee.
Bank of America filed a complaint against Associated Bank for having received the four checks.
Associated Bank argued that Ching Uy Seng, being one of the corporate officers of Miller, it was
assumed that he is duly authorized to act on behalf of Miller.
LOWER RTC: Judgment is rendered against defendant CA: Affirmed the decision of RTC with modifications.
COURT Bank of America.
RULING 1. Bank of America to pay BA-Finance the value of
1. Bank of America to pay BA-Finance the the four checks;
value of the four checks; and 2. Associated Bank to reimburse Bank of America;
2. Associated Bank to reimburse Bank of and
America. 3. Defendants Ching Uy Seng and/or Uy Chung
Guan Seng are also ordered to pay Associated
Bank the aforesaid value.
ISSUE/S 1. Whether or not the drawee bank, Bank of America, can be held liable to pay the four checks to
BA-Finance.
2. Whether or not the collecting bank, Associated Bank, can be held liable to reimburse the four
checks to the drawee bank, Bank of America.
ARGUMENTS Petitioner (Bank of America, NT & SA):
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a. Bank of America alleged that it relied on Respondents (Associated Citizens Bank, BA-
the stamps made by Associated Bank Finance Corporation, Miller Offset Press, Inc.,
stating that "all prior endorsement and/or and its representatives):
lack of endorsement guaranteed," through a. Miller, Uy Kiat Chung and Uy Chung Seng
which Associated Bank assumed the denied that they received the amount covered
liability of a general endorser under Section by the four checks and that they authorized
66 of the NIL. Ching Uy Seng to transact business with BA-
b. It also contends that the proximate cause of Finance on behalf of Miller.
BA-Finance’s injury, if any, is the gross b. Uy Kiat Chung and Uy Chung Seng also denied
negligence of Associated Bank which having signed the agreement with BA-Finance.
allowed Ching Uy Seng to deposit the four
checks issued to Miller in the personal joint
bank account of Ching Uy Seng and Uy
Chung Guan Seng.
SC RULING 1. YES. See doctrine. It was ruled in Philippine National Bank v. Rodriguez that a drawee should
charge to the drawer’s accounts only the payables authorized by the latter; otherwise, the drawee
will be violating the instructions of the drawer and shall be liable for the amount charged to the
drawer’s account.
In this case, the four checks drawn by BA-Finance are made payable to “Order of Miller Offset
Press, Inc.” with a notation “For Payee’s Account Only”. Clearly, the drawer intended the check for
deposit only by Miller Offset Press, Inc. in the latter’s bank account. Thus, when a person other
than Miller presented and deposited the checks in his own personal account, like when Ching Uy
Seng deposited in a joint bank account with Uy Chung Seng, the drawee bank paid the value of
the checks and charged BA-Finance’s account, therefore the drawee Bank of America is deemed
to have violated the instructions of the drawer. Hence, Bank of America should be held liable to
the value of the deposited checks.
2. YES. See doctrine. In the case at bar, when Associated Bank stamped the back of the four checks
with the phrase "all prior endorsements and/or lack of endorsement guaranteed," that bank had
for all intents and purposes treated the checks as negotiable instruments and, accordingly,
assumed the warranty of an endorser. Being so, Associated Bank cannot deny liability on the
checks. Associated Bank was also clearly negligent in disregarding established banking rules and
regulations by allowing the four checks to be presented by, and deposited in the personal bank
account of, a person who was not the payee named in the checks. Therefore, Associated Bank should
be held liable to reimburse the value of the deposited checks.
NOTES
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TOPIC FORGERY IN CHECKS MODULE

CASE #30
CASE TITLE Samsung Construction Company Philippines, Inc. v. Far East Bank and Trust GR NO 129015,
Company and Court of Appeals
PONENTE TINGA, J. DATE 13 August 2004
DOCTRINE The drawer whose signature was forged may still recover from the bank as long as he or she is not
precluded from setting up the defense of forgery.
Consequently, if a bank pays a forged check, it must be considered as paying out of its funds and
cannot charge the amount so paid to the account of the depositor. A bank is liable, irrespective of its
good faith, in paying a forged check.
The bare fact that the forgery was committed by an employee of the party whose signature was forged
can not necessarily imply that such party’s negligence was the cause of the forgery in the absence of
some circumstances raising estoppel against the drawer.
FACTS Plaintiff Samsung Construction Company Philippines, Inc. (“Samsung Construction”), maintained a
current account with defendant Far East Bank and Trust Company (“FEBTC”). The sole signatory to
Samsung Construction’s account was Jong Kyu Lee (“Jong”), its Project Manager, while the checks
remained in the custody of the company’s accountant, Kyu Yong Lee (“Kyu”).
A certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the bank. The
check, payable to cash and drawn against Samsung Construction’s current account, was in the
amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank teller
observed the bank’s policy in encashing checks. Satisfied with the genuineness of the signature of
Jong, the bank authorized the encashment of the check to Gonzaga.
The following day, Kyu, examined the balance of the bank account and discovered that a check in the
amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been
encashed. Aware that he had not prepared such a check for Jong’s signature, Kyu perused the
checkbook and found that the last blank check was missing. He reported the matter to Jong, who
then proceeded to the bank. Jong learned of the encashment of the check, and realized that his
signature had been forged. The Bank Manager reputedly told Jong that he would be reimbursed for
the amount of the check.
Samsung Construction, through counsel, demanded that FEBTC credit to it the said amount with
interest. In response, FEBTC said that it was still conducting an investigation on the matter.
Unsatisfied, Samsung Construction filed a Complaint for violation of Section 23 of the Negotiable
Instruments Law, and prayed for the payment of the amount debited as a result of the questioned
check plus interest, and attorney’s fees.
During the trial, both parties presented their respective expert witnesses:
● Samsung presented NBI Document Examiner Roda Flores.
● FEBTC presented PNP Crime Laboratory document Examiner Rosario Perez
LOWER RTC: rendered judgment in favor of CA: reversed the RTC and absolved FEBTC from
COURT Samsung, holding FEBTC liable. It gave any liability.
RULING more credence to the testimony of NBI - The contradictory findings of NBI and PNP
Examiner Flores. created doubt as to whether there was
forgery.
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- Assuming there was forgery, it was due to
the negligence of Samsung.
- As held in PNB v. National City Bank of NY,
as between 2 innocent persons,loss would
be borne by the negligent party.
Samsung – filed a petition for certiorari under rule

45 to SC
ISSUE/S 1. Whether Samsung Construction was precluded from setting up the defense of forgery
under Section 23 of the Negotiable Instruments Law. -NO
2. Whether FEBTC is bound to credit the said amount to Samsung Construction’s Account. -
YES

a. a.
b. b.
SC RULING The check in this case is forged.

(The details of the forgery are not really important to the lesson. The Court just needed to answer this
issue before the other issues can be resolved.)
● The testimony of the NBI Examiner was more credible because even the
testimony of the PNP Examiner reveals that there are a lot of differences in the questioned
signature as compared to the standard signature specimen. The PNP Examiner tried to
excuse the “differences” by asserting that there were mere “variations”, but such a
conclusion was not supported by sufficient cogent reasons.
○ The most telling difference between the question and genuine signatures examined by
the PNP is in the final upward stroke in the signature, or “the point to the short stroke
of the terminal in the capital letter “L”. The difference was glaring, yet the PNP
Examiners brushed this off as a mere variation
● The NBI Examiner testified that there is a free rapid continuous execution or stroke as shown
by the tampering terminal stroke of the signatures whereas the questioned signature is a
hesitating slow drawn execution stroke.
● The Court also compared the qualifications of the NBI Examiner to that of the PNP Examiner.
The NBI Examiner was more experienced (15 years) and had examined more than
50,000-55,000 questioned documents, as opposed to the PNP Examiner who admitted to
having examined only around 500 documents
1. No, Samsung Construction is not precluded to set up the defense of Forgery.
The general rule is to the effect that a forged signature is wholly inoperative, and payment made
through or under such signature is ineffectual or does not discharge the instrument. If
payment is made, the drawee cannot charge it to the drawer’s account. The traditional
justification for the result is that the drawee is in a superior position to detect a forgery because
he has the maker's signature and is expected to know and compare it.
Under Sec 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the
party whose signature is forged. Such liability attaches even if the bank exerts due diligence
and care in preventing such faulty discharge. Although the Court recognized that Sec 23 bars a
party from setting up the defense of forgery if it is guilty of negligence, it was unable to conclude that
Samsung was guilty of negligence.
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The bare fact that the forgery was committed by an employee of the party whose signature was
forged cannot necessarily imply that such party’s negligence was the cause for the forgery.
Admittedly, the record does not establish what measures Samsung employed to safeguard its blank
checks. Jong did testify that his accountant, Kyu, kept the checks inside a “safety box,” and no
contrary version was presented by FEBTC. However, such a statement was considered hearsay. The
presumption remains that every person takes ordinary care of his concerns, and that the ordinary
course of business has been followed. Negligence is not presumed, but must be proven by him who
alleges it.
In the absence of evidence to the contrary, the court concluded that there was no negligence, the
presumption being that every person takes ordinary care of his concerns.The CA Decision
extensively discussed the FEBTC’s efforts in establishing that there is no negligence on its part in the
acceptance and payment of the forged check. However, the degree of diligence exercised by
the bank would be irrelevant if the drawer is not precluded from setting up the defense of forgery
Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of forgery if it
is guilty of negligence.
The drawee who has paid upon the forged signature is held to bear the loss, because he has
been negligent in failing to recognize that the handwriting is not that of his customer. But it
follows obviously that if the payee, holder, or presenter of the forged paper has himself been in
default, if he has himself been guilty of a negligence prior to that of the banker, or if by any act of his
own he has at all contributed to induce the banker’s negligence, then he may lose his right to cast the
loss upon the banker. Yet, we are unable to conclude that Samsung Construction was guilty of
negligence in this case.
2. Yes, FEBTC is liable in paying a forged check.
As provided in Sec.23 of the Negotiable Instruments Law, the general rule is that a forged signature is
wholly inoperative, and payment made through or under such signature is ineffectual or does not
discharge the instrument. If payment is made, the drawee cannot charge it to the drawer’s account.
The traditional justification for the result is that the drawee is in a superior position to detect a
forgery because he has the maker’s signature and is expected to know and compare it.
● The fact that the check was made out in the amount of nearly 1M is unusual enough to
require a higher degree of caution on the part of the bank. FEBTC confirmed this
through its own internal procedures. As the amount increases, the number of officers
who need to approve it also increases.
Banks are engaged in a business impressed with public interest, and it is their duty to protect in return
their many clients and depositors who transact business with them. They have the obligation to treat
their client’s account meticulously and with the highest degree of care, considering the fiduciary
nature of their relationship. The diligence required of banks, therefore, is more than that of a
good father of a family.
● Not only did the amount nearly total 1M, it was payable to cash. This should have aroused
suspicion of the banks, as it is not ordinary business practice for a check for such large
amount to be made payable to case or to bearer, instead of to the order of a specified person.
● Gonzaga did not carry any written proof that he was authorized by Samsung toencash the
check
● FEBTC Senior Assistant Cashier admitted that the bank tried, but failed, tocontact Jong over
the phone to verify. The bank just heavily relied on the say-soof Sempio. FEBTC Accountant
Velez even admitted that she did not personallyknow Sempio, and had met Sempio for the 1st
time only on the day the checkwas enchased.
Since the drawer, Samsung Construction, is not precluded by negligence from setting up the forgery,
the general rule should apply. Consequently, if a bank pays a forged check, it must be considered
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as paying out of its funds and cannot charge the amount so paid to the account of the depositor. A
bank is liable, irrespective of its good faith, in paying a forged check.
NOTES
2F 2020-2021
TOPIC MODULE
CASE #32
CASE TITLE Land Bank of the Philippines v. Kho GR NO 205839
PONENTE BRION, J. DATE

June 19, 2017
DOCTRINE
The business of banking is imbued with public interest; it is an industry where the general
public’s trust and confidence in the system is of paramount importance. Consequently, banks are
expected to exert the highest degree of, if not the utmost, diligence. Banks hold themselves out to the
public as experts in determining the genuineness of checks and corresponding signatures thereon.
FACTS
Narciso Kho, sole proprietor of United Oil Petroleum, entered into a verbal agreement to purchase
lubricants from Red Orange International Trading represented by Rudel Medel. Upon Red Orange’s
insistence it would only accept a Land Bank manager’s check, Kho opened an account with the
Araneta Branch and was accompanied by Medel. Kho purchased Land Bank Manager’s Check No.
07410 amounting to P 25 million, payable to Red Orange. The check, post dated January 2, 2006,
was prepared by Acting Operations Supervisor Macarandan and Document Examiner Benitez. Kho
requested a photocopy of the check to show Red Orange he possessed the funds for the transaction
and was given one by Manager Flores. Kho gave the photocopy to Medel.
On January 2, 2006, Kho picked up check no. 07410 and P 25 million was debited from his account.
However, the deal between him and Red Orange did not push through. A BPI employee called
LandBank Araneta to inform them that Red Orange deposited said check for payment, which
Manager Flores confirmed they had issued to Kho. The Central Clearing Department of Land Bank’s
Head office faxed a copy of the deposited check for the officers of the Araneta branch to examine.
The officers thought it matched the check purchased by Kho before confirming the deposited check.
Kho had never negotiated the check, which remained in his possession. The check with BPI was later
found to be spurious. Kho demanded cancellation of the manager’s check and the release of his
remaining funds at about P 995 000, escalating to a final demand letter; but, this was not complied
with. Kho then filed a Complaint for Specific Performance against Land Bank, represented by
Manager Flores and OIC Cruz whom Kho impleaded in their personal capacity. The Regional Trial
Court dismissed the complaint, finding that Kho was precluded from asserting forgery for his failure to
exercise ordinary care in sending Medel a photocopy of the check and not informing Land Bank of the
transaction not pushing through. The Court of Appeals set aside the lower court’s decision for the
investigation was still ongoing.
ISSUE/S
Whether, as the RTC held and contrary to the CA’s decision, Kho is precluded from asserting
forgery of check no. 07410 because his negligence substantially contributed to his loss.
SC RULING
No, Kho is not precluded from asserting forgery, for even in the cases of Gempesaw v. Court of
Appeals and Associated Bank v. Court of Appeals, the impleaded banks shared liability with the
negligent drawers for failing to exercise utmost diligence.
In this case, Land Bank went beyond such negligence because Land Bank’s clearing of the
counterfeit check that was the proximate cause of Kho’s loss. A proximate cause is that which, in
natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury,
and without which the result would not have occurred. As a bank, Land Bank is expected to exert the
highest degree of if not utmost diligence to treat their depositor’s account with care in light of their
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fiduciary relationship. Land Bank’s officers cleared the counterfeit of the very same check they issued
and had their officers sign. When their Central Clearing Division forwarded the check for inspection,
they had every opportunity to recognize the forgery of their signatures and the falsity of the check but
failed to do so. This failure to diligently check the genuineness of the subject check, especially when
the real one had been with Khow, is the proximate cause for Kho’s loss.
NOTES
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TOPIC Simplification of the proceedings for Recovery, Liability of the MODULE

Collecting Bank CASE #33
CASE TITLE BDO UNIBANK, INC. V. ENGR. SELWYN LAO GR NO 227005
PONENTE MENDOZA, J. DATE June 19, 2017
DOCTRINE
FACTS On March 9, 1999, respondent Engineer Selwyn S. Lao filed before the RTC a complaint for
collection of sum of money against Equitable Banking Corporation, now petitioner Banco de Oro
Unibank (BDO), Everlink Pacific Ventures, Inc., and Wu Hsieh a.k.a. George Wu. Lao alleged that he
entered into a transaction with Everlink, through its authorized representative Wu, under which,
Everlink would supply him with "HCG sanitary wares"; and that for the down payment, he issued 2
Equitable crossed checks payable to Everlink: Check No. 0127-2422494 and Check No. 0127-
242250, in the amounts of ₱273,300.00 and ₱336,500.00, respectively.
Lao further averred that when the checks were encashed, he contacted Everlink for the immediate
delivery of the sanitary wares, but the latter failed to perform its obligation. Later, Lao learned that the
checks were deposited in two different bank accounts at respondent International Exchange Bank,
now respondent Union Bank of the Philippines. He was later informed that the two bank accounts
belonged to Wu and a company named New Wave Plastic (New Wave), represented by a Willy
Antiporda. Consequently, Lao was prompted to file a complaint against Everlink and Wu for their
failure to comply with their obligation and against BDO for allowing the encashment of the 2 checks.
He later withdrew his complaint against Everlink.
In its answer, BDO asserted that it had no obligation to ascertain the owner of the account/s to which
the checks were deposited because the instruction to deposit the said checks to the payee's account
only was directed to the payee and the collecting bank, which in this case was Union Bank; that as
the drawee bank, its obligations consist in examining the genuineness of the signatures appearing on
the checks, and paying the same if there were sufficient funds in the account under which the checks
were drawn; and that the subject checks were properly negotiated and paid in accordance with the
instruction of Lao in crossing them as they were deposited to the account of the payee Ever link with
Union Bank, which then presented them for payment with BDO.
On August 24, 2001, Lao filed an Amended Complaint, wherein he impleaded Union Bank as
additional defendant for allowing the deposit of the crossed checks in two bank accounts other than
the payee's, in violation of its obligation to deposit the same only to the payee's account. Union Bank
argued that Check No. 0127-242249 was deposited in the account of Everlink; that Check No. 0127-
242250 was validly negotiated by Everlink to New Wave; that Check No. 0127-242250 was presented
for payment to BDO, and the proceeds thereof were credited to New Wave's account; that it was
under no obligation to deposit the checks only in the account of Everlink because there was nothing
on the checks which would indicate such restriction; and that a crossed check continues to be
negotiable, the only limitation being that it should be presented for payment by a bank.
LOWER RTC: The RTC absolved BDO from any CA: The CA affirmed, with modification, the ruling of
COURT liability, but ordered Union Bank to pay Lao the R TC. It ordered BDO to pay Lao the amount of
RULING the amount of ₱336,500.00, representing the ₱336,500.00, with legal interest from the time of
value of Check No. 0127-242250; ₱50,000.00 filing of the complaint until its full satisfaction. The
as moral damages; ₱l00,000.00 as exemplary appellate court further directed Union Bank to
damages; and ₱50,000.00 as attorney's fees. reimburse BDO the aforementioned amount. It
It, however, found that Check No. 0127- concurred with the RTC that Union Bank was liable
242250 was irregularly deposited and because of its negligence and its guarantee on the
encashed because it was not issued for the validity of all prior endorsements or lack of it. With
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account of Everlink, the payee, but for the regard to BDO's liability, the CA explained that it
account of New Wave. The trial court noted violated its duty to charge to the drawer's account
further that Check No. 0127-242250 was not only those authorized by the latter when it paid the
even endorsed by Everlink to New Wave. value of Check No. 0127-242250.
Thus, it opined that Union Bank was negligent
in allowing the deposit and encashment of the
said check without proper endorsement. The
RTC wrote that considering that the subject
check was a crossed check, Union Bank
failed to take reasonable steps in order to
determine the validity of the representations
made by Antiporda. In the end, it adjudged
that BDO could not be held liable because of
Union Bank's warranty when it stamped on
the check that "all prior endorsement and/or
lack of endorsement guaranteed.”
ISSUE/S 1) Whether or not a collecting bank assumes responsibility for a crossed check as a general
endorser in accordance with Section 66 of the Negotiable Instruments Law; (2) Whether or not the
party which did not exercise the required diligence is the cause of the loss and bears the damages.
ARGUMENTS Petitioner (BDO) Respondent (CA)
SC RULING The liability of the collecting bank is anchored on its guarantees as the last endorser of the check.
Under Section 66 of the Negotiable Instruments Law, an endorser warrants "that the instrument is
genuine and in all respects what it purports to be; that he has good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his endorsement valid and subsisting." It
has been repeatedly held that in check transactions, the collecting bank 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. If any of the
warranties made by the collecting bank turns out to be false, then the drawee bank may recover from
it up to the amount of the check.
In the present case, BDO paid the value of Check No. 0127-242250 to Union Bank, which, in turn,
credited the amount to New Wave's account. The payment by BDO was in violation of Lao's
instruction because the same was not issued in favor of Everlink, the payee named in the check. It
must be pointed out that the subject check was not even endorsed by Everlink to New Wave. Clearly,
BDO violated its duty to charge to Lao's account only those payables authorized by him.
Nevertheless, even with such clear violation by BDO of its duty, the loss would have ultimately
pertained to Union Bank. By stamping at the back of the subject check the phrase "all prior
endorsements and/or lack of it guaranteed," Union Bank had, for all intents and purposes treated the
check as a negotiable instrument and, accordingly, assumed the warranty of an endorser. Without
such warranty, BDO would not have paid the proceeds of the check. Thus, Union Bank cannot now
deny liability after the aforesaid warranty turned out to be false. Union Bank was clearly negligent
when it allowed the check to be presented by, and deposited in the account of New Wave, despite
knowledge that it was not the payee named therein. Further, it could not have escaped its attention
that the subject checks were crossed checks.
A crossed check is one where two parallel lines are drawn across its face or across the comer
thereof. A check may be crossed generally or specially. A check is crossed especially when the name
of a particular banker or company is written between the parallel lines drawn. It is crossed generally
when only the words "and company" are written at all between the parallel lines. Jurisprudence
dictates 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 definite purpose so that he must inquire if he has received the check
2F 2020-2021
pursuant to that purpose. The effects of crossing a check, thus, relate to the mode of payment,
meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the payee
named therein.
It is undisputed that Check No. 0127-242250 had been crossed generally as nothing was written
between the parallel lines appearing on the face of the instrument. This indicated that Lao, the
drawer, had intended the same for deposit only to the account of Everlink, the payee named therein.
Despite this clear intention, however, Union Bank negligently allowed the deposit of the proceeds of
the said check in the account of New Wave.
Conclusion. The aggrieved party may be allowed to recover directly from the person which caused
the loss when circumstances warrant. In Associated Bank v. Court of Appeals, the person who
suffered the loss as a result of the unauthorized encashment of crossed checks was allowed to
recover the loss directly from the negligent bank despite the latter's contention of lack of privity of
contract. The Court said: 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. We approve such direct action in the case at
bar.
The finality of the July 9, 2012 RTC Decision as to BDO, which absolved it from any liability,
necessarily means that it could not be prejudiced or adversely affected by the decision rendered in
the appeal. It is elementary in this jurisdiction that a person cannot be bound by a decision wherein it
was not a party. A contrary finding would violate BDO's constitutional right to due· process. Needless
to state, the appellate court erred in ordering BDO to pay the amount of the subject check because
the latter was not made a party in the appeal, and the issue as to its liability or lack thereof, was not
raised on appeal.
To summarize, Lao, the drawer of the subject check, has a right of action against BDO for its failure
to comply with its duty as the drawee bank. BDO, in turn, would have a right of action against Union
Bank because of the falsity of its warranties as the collecting bank. Considering, however, that BDO
was not made a party in the appeal, it could no longer be held liable to Lao. Thus, following
Associated Bank, the proceedings for recovery must be simplified and Lao should be allowed to
recover directly from Union Bank. WHEREFORE, the petition is GRANTED
NOTES In cases of unauthorized payment of checks to a person other than the payee named therein, the
drawee bank may be held liable to the drawer. The drawee bank, in turn, may seek reimbursement
from the collecting bank for the amount of the check. This rule on the sequence of recovery in case of
unauthorized check transactions had already been deeply embedded in jurisprudence.
The liability of the drawee bank is based on its contract with the drawer and its duty to charge to the
latter's accounts only those payables authorized by him. A drawee bank is under strict liability to pay
the check only to the payee or to the payee's order. When the drawee bank pays a person other than
the payee named in the check, it does not comply with the terms of the check and violates its duty to
charge the drawer's account only for properly payable items.
TOPIC Unathorized Payment of Valid Checks MODULE

CASE #34
CASE TITLE Metropolitan Bank and Trust Company v Junnel’s Marketing Corporation GR NO 235511
PONENTE Velasco, Jr., J. DATE June 20, 2018
DOCTRINE
FACTS
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Responden JMC is a domestic corporation engaged in the business of selling wines and liquors. It
has an account with Metrobank from which it draws checks to pay its different suppliers. Among
JMC’s suppliers are Jardine and Premiere. During an audit of its financial records in 2001, JMC
discovered an anomaly involving 11 checks it had issued to the orders of Jardine and Premiere on
various dates between October 1998 to May 1999. As it was, the subject checks had already been
charged against JMC's current account but were, for some reason, not covered by any official receipt
from Jardine or Premiere. The subject checks were all crossed checks amounting to P1,481,292.00.
Upon examination, the checks were revealed to be deposited with Bankcom.
Respondent Delizo, a former accountant of JMC, executed a handwritten letter addressed to Nelvia
Yusi, President of JMC. In the said letter, Delizo confessed that, during her time as an accountant for
JMC, she stole several company checks drawn against JMC's current account. She professed that
the said checks were never given to the named payees but were forwarded by her to one Lita Bituin
(Bituin). Delizo further admitted that she, Bituin and an unknown bank manager colluded to cause the
deposit and encashing of the stolen checks and shared in the proceeds thereof.
JMC filed a complaint for sum of money against Delizo, Bankcom and Metrobank. JMC prayed that
they be solidarily liable
LOWER RTC: Bankcom and Metrobank both liable on CA: AFFIRMED

COURT a ⅔ and ⅓ ratio respectively and absolved
RULING Delizo from any liabilty.
ISSUE/S WON Bankcom and Metrobank should be held liable

a. a.
b. b.
SC RULING YES, the banks are sequentially liable. Metrobank is liable to return to JMC the entire amount of the
subject checks plus interest and Bankcom is liable to reimburse Metrobank the same amount plus
interest. In cases involving the unauthorized payment of valid checks,the drawee bank becomes
liable to the drawer for the amount of the checks but the drawee bank, in turn, can seek
reimbursement from the collecting bank. The rationale of this rule on sequence of recovery lies in the
very basis and nature of the liability of a drawee bank and a collecting bank in said cases.
The liability of the drawee bank is based on its contract with the drawer and its duty to charge to the
latter's accounts only those payables authorized by him. A drawee bank is under strict liability to pay
the check only to the payee or to the payee's order. When the drawee bank pays a person other than
the payee named in the check, it does not comply with the terms of the check and violates its duty to
charge the drawer's account only for properly payable items.
On the other hand, the liability of the collecting bank is anchored on its guarantees as the last
endorser of the check. Under Section 66 of the Negotiable Instruments Law, an endorser warrants
"that the instrument is genuine and in all respects what it purports to be; that he has good title to it;
that all prior parties had capacity to contract; and that the instrument is at the time of his endorsement
valid and subsisting.
It has been repeatedly held that in check transactions, the collecting bank 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. If any of the
warranties made by the collecting bank turns out to be false, then the drawee bank may recover from
it up to the amount of the check.
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NOTES
TOPIC Presentment; Stale Manager’s Check MODULE
CASE #1
CASE International Corporate Bank v. Spouses Gueco GR 141968
TITLE NO
PONENTE Kapunan, J: DATE

February 12, 2001
DOCTRINE Failure to present for payment within a reasonable time will result in the discharge
of the drawer only to the extent of the loss caused by the delay.
FACTS The respondents Gueco Spouses obtained a loan from petitioner International Corporate
Bank (now Union Bank of the Philippines) to purchase a car — a Nissan Sentra 1600 4DR,
1989 Model. 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.
Unable to pay the monthly amortizations amounting to P184,000.00, the bank sued for
collection. Thru negotiations, the amount due was reduced to P154,000.00. Still the
spouses did not pay the reduced amount, hence, the car was detained inside the bank's
compound. The amount to be paid was reduced again to P150,000. Hence, on August 29,
1995, Dr. Gueco delivered a manager's check in the amount of P150,000.00 but the car
was not released because of his refusal to sign the Joint Motion to Dismiss.
The respondents claim that they 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
initiated a civil action for damages before the MTC-QC. The MTC dismissed the case for
lack of merit.
After sometime, the check had become stale as it was never encashed.
LOWER RTC: ordered to return immediately the CA: Affirmed.

COURT subject car to the appellants in good
RULING working condition; Appellee may
deposit the Manager's 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 Manager's Check, over
which appellants have no control. It
also ruled that there is fraud hence,
respondents are entitled to damages.
ISSUE/S
Whether or not respondents are still liable to the petitioner for the stale checks.
ARGUMEN Petitioner (NAME): Respondent (Sps. Gueco): The delivery of
TS the manager's check produced the effect of
payment and, thus, petitioner was negligent in
opting not to deposit or use said check; hence,
should suffer the loss occasioned by the fact
that the check had become stale.
SC [It should be noted that the SC reversed the ruling of RTC and CA as to the issue of fraud and
RULING award of damages. Please see Module 6 for its ruling on fraud]
Yes. 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 NIL, 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.
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 and theory behind the use of
a check points to its immediate use and payability.
In the case at the 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. 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 in 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 manager's 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 the joint motion to
dismiss. We see no bad faith or negligence in this position taken by.
NOTES
TOPIC Presentment for Payment; Reasonable time MODULE
CASE #2
CASE TITLE FAR EAST REALTY INVESTMENT VS CA GR NO
a L-
36549
PONENTE Paras, J. DATE
OCTOBER 5, 1988
DOCTRINE Where the instrument is not payable on demand, presentment must be made on the day it falls
due. Where it is payable on demand, presentment must be made within a reasonable time after
issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if
made within a reasonable time after the last negotiation thereof.
FACTS Private respondents asked the petitioner to extend an accommodation loan in the sum of
P4,500.00 because of their business needs. Respondents delivered to the petitioner a check for
P4,500.00, drawn by Dy Hian Tat, and signed by them at the back of said check, with the
assurance that after one month from September 13, 1960, the said check would be redeemed by
them by paying cash in the sum of P4,500.00, or the said check can be presented for payment
on or immediately after one month. Petitioner agreed and extended an accommodation loan
The aforesaid check was presented for payment to the China Banking Corporation, but said
check bounced and was not cashed by said bank, for the reason that the current account of the
drawer thereof had already been closed. Petitioner demanded payment from the private but the
latter failed and refused to pay notwithstanding repeated demands.Thereafter, petitioner filed an
action for the collection and payment of P4,500.00 representing the face value of the unpaid and
dishonored check.
LOWER RTC: The Lower Court ruled in favor of the CA: Reversed. The check was not given as
COURT petitioner collateral to guarantee a loan secured since the
RULING check passed through other hands before
reaching the petitioner and the said check was
not presented within a reasonable time.
ISSUE/S 1. Whether or not presentment for payment can be dispensed with
2. Whether or not presentment for payment and notice of dishonor of the questioned check
were made within reasonable time
ARGUMENTS Petitioner: Respondent:
Petitioner argues that presentment for Both private respondents raised the defense that
payment and notice of dishonor are not both have been wholly discharged by delay in
necessary as when funds are insufficient to presentment of the check for payment.
meet a check, thus the drawer is liable,
whether such presentment and notice be
totally omitted or merely delayed.
SC RULING
1. No. Where the instrument is not payable on demand, presentment must be made on the day it
falls due. Where it is payable on demand, presentment must be made within a reasonable time
after issue, except that in the case of a bill of exchange, presentment for payment will be
sufficient if made within a reasonable time after the last negotiation thereof (Section 71,
Negotiable Instruments Law).
2. No. It is obvious in this case that presentment and notice of dishonor were not made within a
reasonable time.
“Reasonable time” has been defined as so much time as is necessary under the circumstances
for a reasonable prudent and diligent man to do, conveniently, what the contract or duty requires
should be done, having a regard for the rights, and possibility of loss, if any, to the other party
Notice may be given as soon as the instrument is dishonored; and unless delay is excused must
be given within the time fixed by the law (Section 102, Negotiable Instruments Law).
In the instant case, the check in question was issued on September 13, 1960, but was presented
to the drawee bank only on March 5, 1964, and dishonored on the same date. After dishonor by
the drawee bank, a formal notice of dishonor was made by the petitioner through a letter dated
April 27, 1968. Under these circumstances, the petitioner undoubtedly failed to exercise
prudence and diligence on what he ought to do al. required by law. The petitioner likewise failed
to show any justification for the unreasonable delay.
No hard and fast demarcation line can be drawn between what may be considered as a
reasonable or an unreasonable time, because “reasonable time” depends upon the peculiar facts
and circumstances in each case
NOTES
TOPIC Waiver of Presentment for Payment MODULE
CASE #3
CASE TITLE Ansaldo vs. Court of Appeals GR NO 47696
PONENTE Narvasa, J. DATE 29 August 1989
DOCTRINE Negotiable Instruments Law itself says that presentment for payment is not necessary in order to charge
the person primarily liable.
In an assignment of credit, the consent of the debtor is not necessary to make him liable to the assignee
(adverting to Articles 1625, 1626 and 1627 of the Civil Code), what the law requires being notice to the
debtor and not consent of the latter.
FACTS
Transoceanic Factors Corporation (hereafter TFC) executed six (6) promissory notes in favor of
Philippine Commercial & Industrial Bank (hereafter, PCIB). The notes were signed for the firm by its
president, A.S. Moreno, over a span of some three (3) months, for an aggregate amount of P
150,000.00, exclusive of interest.
TFC in its turn extended two (2) loans at interest of 14 % per annum: one to Jose Ma. Ansaldo, in the
sum of P 28,967.39, another, to Teofilo Reyes, Jr., in the amount of P 26,000.00. Each obligation was
evidenced by a negotiable promissory note in which, among other things, each promissor waived
"demand, presentment, protest and notice of protest and non-payment" (of the note).
TFC paid to PCIB on account of its obligation to the latter in the total amount of P 150,000.00, as above
stated only P 78,504.43, leaving a balance of P 71,495.57, exclusive of interest. TFC also endorsed to
PCIB "for value," the promissory notes of Ansaldo and Reyes.
Alleging that despite the obligations having matured, and notwithstanding repeated demands for
payment thereof, TFC as well as Ansaldo and Reyes had failed to pay, PCIB subsequently filed suit in
the Court of First Instance of Manila to enforce said prestations in accordance with the terms of the
corresponding, written agreements.
LOWER RTC: CA:
COURT
RULING Ruled in favor of PCIB: Court rendered judgment in due course, affirming
1. TFC "to pay the plaintiff (PCIB) the that of the Trial Court.
sum of P 71,495.57, with interest at the
rate of 10 % per annum from June 1, Held, as regards to Ansaldo’s contention:
1966 until full payment, plus the further 1. neither Ansaldo nor Reyes could complain
sum of 10 % of the amount due for and against the assignment, "for whether
as attorney's fees;" assigned or not, their obligations were not
2. Ansaldo "to pay the plaintiff the sum of changed nor enlarged; of course if they
P 28,967.39 under the promissory note before notice of assignment, had paid unto
Exhibit G, with interest at the rate of 14 Transoceanic, they should not be prejudiced
% per annum, from December 29, either, such payments made previous to
1964 until full payment minus the sum notice under the law, and in justice, should
of P 3,011.42 previously paid by him to unto them be credited; as indeed, trial Judge
defendant (TFC) Transoceanic;" and credited Ansaldo with his payments made of
3. Reyes "to pay the plaintiff the sum of P P 3,011.42 previous to notice unto him.
26,000.00 under the promissory note 2. that it was the assignee (PCIB), instead of the
Exhibit H, with interest at the rate of 12 creditor-assignor (TFC), which notified
% per annum from August 2, 1965 until Ansaldo of the assignment is of no moment
full payment." "irrespective of who notified him, . . . what is
The CFI ruled further: important is that he be notified;
1. in an assignment of credit, the consent 3. that the assignment of Ansaldo's credit was
of the debtor is not necessary to make made "after it had become long overdue," is
him liable to the assignee (adverting to also inconsequential, since this would not
Articles 1625, 1626 and 1627 of the "mean that Ansaldo's obligation had thereby
Civil Code), what the law requires disappeared . . . , for the Negotiable
being notice to the debtor and not Instruments Law itself says that presentment
consent of the latter; for payment is not necessary in order to
2. the evidence sufficiently established charge the person primarily liable .
that Ansaldo had received notice of the
assignment of his promissory note.
ISSUE/S
Whether or not the failure of PCIB to exhibit to Ansaldo his promissory note, invoking Section
74 of the Negotiable Instruments Law to the effect that "(t)he instrument must be exhibited to
the person from whom payment is demanded, and when it is paid must be delivered up to the
party paying it" renders the exculpation of liability of the plaintiff.
SC RULING
YES. In any case, it is on its face a petty issue, for (1) if, according to him, such an exhibition was needful to
give him an opportunity to determine the genuineness of the instrument,this was rendered unnecessary not
only by his omission to contest it, but also by his admission of the authenticity of the note implicit from his
averment that he had made substantial payments thereon; and (2) he had, moreover expressly waived
"demand, presentment, protest and notice of protest and non-payment" of the note.
NOTES Read thoroughly the contentions of Ansaldo before the court a quo as the decision of the Supreme
Court was merely based on how the RTC and CA rendered in favor of PCIB.
TOPIC MODULE
CASE #4
CASE TITLE Far East Bank & Trust Company v. Querimit GR NO 148582
PONENTE MENDOZA, J. DATE January 16, 2002
DOCTRINE
FACTS Estrella O. Querimit worked as internal auditor of the Philippine Savings Bank (PSB) for 19 years,
from 1963 to 1992.
On November 24, 1986, she opened a dollar savings account in petitioner’s Harrison Plaza branch,
for which she was issued four (4) Certificates of Deposit (Nos. 79028, 79029, 79030, and 79031),
each certificate representing the amount of $15,000.00, or a total amount of $60,000.00. The
certificates were to mature in 60 days, on January 23, 1987, and were payable to bearer at 4.5%
interest per annum. The certificates bore the word accrued, which meant that if they were not
presented for encashment or pre-terminated prior to maturity, the money deposited with accrued
interest would be rolled over by the bank and annual interest would accumulate automatically. The
petitioner bank’s manager assured the respondent that her deposit would be renewed and earn
interest upon maturity even without the surrender of the certificates if these were not indorsed and
withdrawn. Respondent kept her dollars in the bank so that they would earn interest and so that
she could use the fund after she retired.
In 1989, respondent accompanied her husband Dominador Querimit to the United States for
medical treatment. She used her savings in the Bank of the Philippine Islands (BPI) to pay for the
trip and for her husband's medical expenses. In January 1993, her husband died and Estrella
returned to the Philippines. She went to petitioner FEBTC to withdraw her deposit but, to her
dismay, she was told that her husband had withdrawn the money in deposit. Through counsel, the
respondent sent a demand letter to petitioner FEBTC. In another letter, respondent reiterated her
request for updating and payment of the certificates of deposit, including interest earned. As
petitioner FEBTC refused respondents demands, the latter filed a complaint, joining in the action
Edgardo F. Blanco, Branch Manager of FEBTC Harrison Plaza Branch, and Octavio Espiritu,
FEBTC President.
Petitioner FEBTC alleged that it had given respondent’s late husband Dominador an
accommodation to allow him to withdraw Estrellas deposit. Petitioner presented certified true
copies of documents showing that payment had been made, to wit:
1. Four FEBTC Harrison Plaza Branch Dollar Demand Drafts Nos. 886694903, 886694904,
886694905 and 886694906 for US$15,110.96 each, allegedly issued by petitioner to
respondents husband Dominador after payment on the certificates of deposit;
2. A letter of Alicia de Bustos, branch cashier of FEBTC at Harrison Plaza, dated January 23,
1987, which was sent to Citibank, N.A., Citibank Center, Paseo de Roxas, Makati, Metro
Manila, informing the latter that FEBTC had issued the four drafts and requesting Citibank
New York to debit from petitioners account $60,443.84, the aggregate value of the four
drafts;
3. Citicorp Remittance Service: Daily Summary and Payment Report dated January 23, 1987;
4. Debit Ticket dated January 23, 1987, showing the debit of US$60,443.84 or its equivalent
at the time of P1,240,912.04 from the FEBTC Harrison Plaza Branch;16 and
5. An Interbranch Transaction Ticket Register or Credit Ticket dated January 23, 1987
showing that US$60,443.84 or P1,240,912.04 was credited to petitioners International
Operation Division (IOD).
LOWER RTC: rendered judgment for respondent, CA: affirmed RTC decision with modification
COURT ordering FEBTC to - FEBTC failed to prove that the certificates
RULING 1. allow Querimit to withdraw her U.S.$ of deposit had been paid out of its funds,
Time Deposit of $60,000.00 plus since the evidence by the [respondent]
accrued interests; stands unrebutted that the subject
2. Pay: certificates of deposit until now remain
a. moral damages = unindorsed, undelivered and
P50,000.00; unwithdrawn by [her].
b. exemplary damages = - individual defendants, Edgardo F. Blanco,
P50,000.00; FEBTC-Harrison Plaza Branch Manager,
c. attorneys fees = and Octavio Espiritu, FEBTC President,
P100,000.00 plus could not be held solidarily liable with the
P10,000.00 per appearance FEBTC because the latter has a
of counsel; and personality separate from its officers and
3. pay the costs of the suit stockholders
ISSUE/S
Whether the subject certificates of deposit have already been paid by petitioner. -NO.
ARGUMENTS Petitioner (FEBTC): contends that Respondent (Estrella O. Querimit):

1. NOT liable to respondent for the value of
the 4 Certificates of Deposit, including the
interest thereon as well as moral and
exemplary damages, attorneys and
appearance fees
2. The aggregate value - both principal and
interest earned at maturity - of the 4
certificates of deposit was already paid to or
withdrawn at maturity by the late
Dominador Querimit who was the
respondents deceased husband.
3. Respondent is guilty of laches since the
4 certificates of deposit were all issued on
24 November 1986 but she attempted to
withdraw their aggregate value on 29 July
1996 only on or after the lapse of more than
nine (9) years and eight (8) months.
4. Respondent is not liable to petitioner for
attorneys fees.
SC RULING NO.
FEBTC failed to prove that it had already paid Estrella Querimit, the bearer and lawful holder of
the subject certificates of deposit. The finding of the trial court on this point, as affirmed by the
Court of Appeals, is that petitioner did not pay either respondent Estrella or her husband the
amounts evidenced by the subject certificates of deposit. The finding of respondent court which
shows that the subject certificates of deposit are still in the possession of Estrella Querimit and
have not been indorsed or delivered to petitioner FEBTC is substantiated by the record and should
therefore stand.
A certificate of deposit is defined as a written acknowledgment by a bank or banker of the

receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor,
to the order of the depositor, or to some other person or his order, whereby the relation of debtor
and creditor between the bank and the depositor is created.
● The principles governing other types of bank deposits are applicable to certificates of
deposit, as are the rules governing promissory notes when they contain an unconditional
promise to pay a sum certain of money absolutely.
● The principle that payment, in order to discharge a debt, must be made to someone
authorized to receive it is applicable to the payment of certificates of deposit. Thus, a
bank will be protected in making payment to the holder of a certificate indorsed by the
payee, unless it has notice of the invalidity of the indorsement or the holders want of title.
● A bank acts at its peril when it pays deposits evidenced by a certificate of deposit, without
its production and surrender after proper indorsement.
● As a rule, one who pleads payment has the burden of proving it. Even where the plaintiff
must allege non-payment, the general rule is that the burden rests on the defendant to
prove payment, rather than on the plaintiff to prove payment. The debtor has the burden
of showing with legal certainty that the obligation has been discharged by payment.
●
In this case, the certificates of deposit were clearly marked payable to bearer, which means, to
[t]he person in possession of an instrument, document of title or security payable to bearer or
indorsed in blank. Petitioner should not have paid the respondent’s husband or any third party
without requiring the surrender of the certificates of deposit.
Petitioner claims that it did not demand the surrender of the subject certificates of deposit since
respondent’s husband, Dominador Querimit, was one of the bank’s senior managers. But even
long after respondent’s husband had allegedly been paid respondent’s deposit and before his
retirement from service, the FEBTC never required him to deliver the certificates of deposit in
question. Moreover, the accommodation given to the respondent's husband was made in violation
of the bank’s policies and procedures.
FEBTC thus failed to exercise that degree of diligence required by the nature of its business.
Because the business of banks is impressed with public interest, the degree of diligence required
of banks is more than that of a good father of the family or of an ordinary business firm. The
fiduciary nature of their relationship with their depositors requires them to treat the accounts of
their clients with the highest degree of care. A bank is under obligation to treat the accounts of its
depositors with meticulous care whether such accounts consist only of a few hundred pesos or of
millions of pesos. Responsibility arising from negligence in the performance of every kind of
obligation is demandable. Petitioner failed to prove payment of the subject certificates of deposit
issued to the respondent and, therefore, remains liable for the value of the dollar deposits indicated
thereon with accrued interest.
NOTES
On the issue of laches
The equitable principle of laches is not sufficient to defeat the rights of respondent over the
subject certificates of deposit.
Laches is the failure or neglect, for an unreasonable 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 to assert it either has
abandoned it or declined to assert it.
There is no absolute rule as to what constitutes laches or staleness of demand; each case is to
be determined according to its particular circumstances. The question of laches is addressed to
the sound discretion of the court and, being an equitable doctrine, its application is controlled by
equitable considerations.
In this case, it would be unjust to allow the doctrine of laches to defeat the right of respondent to
recover her savings which she deposited with the petitioner. She did not withdraw her deposit
even after the maturity date of the certificates of deposit precisely because she wanted to set it
aside for her retirement. She relied on the bank's assurance, as reflected on the face of the
instruments themselves, that interest would accrue or accumulate annually even after their
maturity.
TOPIC Date of Presentment of Check MODULE
CASE #5
CASE TITLE WONG v CA GR NO 11785
PONENTE QUISUMBING, J DATE February 2, 2001
DOCTRINE A check must be presented for payment within a reasonable time after its issue or the drawer will
be discharged from liability thereon to the extent of the loss caused by the delay.
FACTS ● This case is for review on certiorari of CA's decision which affirmed the RTC of Cebu City,
convicting petitioner on three counts of BP 22 violations.
● Petitioner Wong was an agent of Limtong Press. Inc. (LPI), a manufacturer of calendars.
LPI would print sample calendars, then give them to agents to present to customers. The
agents would get the purchase orders of customers and forward them to LPI. After
printing the calendars, LPI would ship the calendars directly to the customers. Then, the
agents would come around to collect payments.
● However, petitioner had a history of unremitted collections, which he duly acknowledged
in a confirmation receipt he co-signed with his wife. Hence, his customers were required
to issue postdated checks before LPI would accept their purchase orders.
● December 1985: Wong issued six postdated checks totaling P18,025.00, all dated
December 30, 1985 and drawn payable to the order of LPI which were initially intended to
guarantee the calendar orders of customers who failed to issue post-dated checks. But,
LPI refused to accept the checks as guarantees because it was against the company
policy to accept personal checks from agents.
● LPI and Wong agreed to apply the said checks to the payment of petitioner's unremitted
collections for 1984 amounting to P18,077.07. LPI waived the P52.07 difference. Before
the maturity of the checks, petitioner prevailed upon LPI not to deposit the checks and
promised to replace them within 30 days. However, the petitioner reneged on his promise.
● June 5, 1986: LPI deposited checks with Rizal Commercial Banking Corporation (RCBC).
The checks were returned for the reason “account closed.” The dishonor of the checks
was evidenced by the RCBC return slip.
● June 20, 1986: complainant through counsel notified the petitioner of the dishonor.
Petitioner failed to make arrangements for payment within five (5) banking days.
● November 6, 1987: petitioner was charged with three (3) counts of violation of B.P. Blg.
22 under three separate Informations for the three checks amounting to P5,500.00,
P3,375.00, and P6,410.00. Petitioner was similarly charged in criminal case.
LOWER RTC: CA:
COURT ● Court finds the petitioner guilty of ● affirmed the trial court's decision
RULING violation of BP 22 in three counts.
● ruled that the checks were in
payment for unremitted collections,
and not as guarantee.
ISSUE/S whether or not the prosecution was able to establish beyond reasonable doubt all the elements
of the offense penalized under B.P. Blg. 22. - YES
- petitioner issued the six (6) checks to - refused to accept the personal checks of the
guarantee the 1985 calendar bookings of petitioner since it was against company policy to
his customers. According to the petitioner, accept personal checks from agents. Hence, he
he issued the checks not as payment for and petitioner simply agreed to use the checks to
any obligation, but to guarantee the orders pay petitioner’s unremitted collections to LPI
of his customers. - A few days before maturity of the checks, Wong
- the face value of the six (6) postdated requested him to defer the deposit of said checks
checks tallied with the total amount of the for lack of funds. Wong promised to replace them
calendar orders of the six (6) customers within thirty days, but failed to do so.
- these customers had already paid their
respective orders, petitioner claimed LPI did
not return the said checks to him
SC RULING YES.
Elements of B.P. Blg. 22

(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 such 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 contends that the first element does not exist because the checks were not issued to
apply for account or for value and that he issued it not as payment for any obligation, but to
guarantee the orders of his customers. RTC and CA ruled that the checks were in payment for
unremitted collections and not as guarantee. Petitioner's argument has no legal basis because
BP 22 punishes the issuance of a bouncing check and not the purpose for which it was issued.
Petitioner argued that since the complainant deposited the checks 157 days after the maturity
date, the presumption of knowledge of lack of funds under BP 22 should not apply to him and
that he should not be expected to keep his bank account active and funded beyond the ninety-
day period. Contrary to this, nowhere in the said provisions does the law require a maker to
maintain funds in his bank account for only 90 days. The clear import of the law is to establish a
prima facie presumption of knowledge of such insufficiency of funds. That the check must be
deposited within 90 days is simply one of the conditions for the prima facie presumption of
knowledge of lack of funds to arise. It is not an element of the offense nor does it discharge the
petitioner from his duty to maintain sufficient funds in the account within a reasonable time.
Under Sec. 186 of NIL, a check must be presented for payment within a reasonable time after its
issue or the drawer will be discharged from liability thereon to the extent of the loss caused by
the delay. By current baking practice, a check becomes stale after more than 6 months or 180
days after the date of check. Therefore, said checks cannot be considered stale. Only the
presumption of knowledge of insufficiency of funds was lost, but such knowledge could still be
proven by direct or circumstantial evidence. As found by the trial court, the complainant did not
deposit checks because of the reassurance of the petitioner that he would issue new checks.
Upon his failure to do so, LPI was constrained to deposit said checks. After the checks were
dishonored, the petitioner was duly notified of such fact but failed to make arrangements for full
payment within five banking days thereof. Therefore, there is sufficient evidence that petitioner
had knowledge of the insufficiency of his funds in or credit with the drawee bank at the time of
issuance of the checks.
NOTES Section 2 of B.P. Blg. 22 provides:
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.
TOPIC Acceptance MODULE
CASE #6
CASE TITLE McGuire Sumacad vs. Province of Samar, et al. GR NO L-8155
PONENTE Paras, J. DATE October 23, 1956
DOCTRINE The request by PNB as drawee, from the Bureau of Posts for photostatic copies of the check and
the subsequent requirement by it for its presentation to the provincial treasurer and the provincial
auditor for certification, amounted to an implied acceptance of the bank which thereby assumed
the obligation of paying the check and holding sufficient deposit of the drawer for the purpose.
FACTS In May 1942, a check was issued by the Province of Samar to Paulino M. Santos for the sum of
P25,000.00, drawn against the Philippine National Bank Cebu. The payee negotiated the check
with James McGuire. In 1946, McGuire presented the check to the municipal treasurer of
Borongan for payment, but the latter was not able or did not choose to pay the same.
On April 25, 1950, the Philippine National Bank requested the Bureau of Posts to furnish it with
photostatic copies of the check which were duly received by the bank on May 12, 1950. As of this
date, the province of Samar still had a deposit of P84,287.47 in the PNB. On May 14, 1950, the
latter requested James McGuire to present the check to the provincial treasurer and the
provincial auditor for certification in accordance with the circular issued by the Secretary of
Finance.
Before the check could be certified by the authorities concerned, the province of Samar, on
September 4, 1951, withdrew from its account, leaving a balance insufficient for the amount of
the check. In the meantime, Janes McGuire transferred his rights to the check to the herein
plaintiffs who, unable to cash it, filed in the Court of First Instance the present complaint.
LOWER RTC: rendered a decision sentencing the CA: N/A

COURT defendants to pay jointly and severally the
RULING plaintiffs
ISSUE/S Whether or not PNB has accepted the check
ARGUMENTS Petitioner (VIOLET MCGUIRE Respondent (THE PROVINCE OF SAMAR, ET

SUMACAD, ET AL): AL., and the PHILIPPINE NATIONAL BANK):
N/A The position of the appellant bank is that

1) it did not issue the check and was merely
called upon to pay the same upon being
presented for encashment if and when
funds for the purpose were available
2) that it could not have paid said check
because it was never presented to it with
the required certification under the circular
of the Secretary of Finance
3) The appellant bank cannot be held
solidarily liable, the Province of Samar
being the drawee of the check and
therefore primarily liable to pay the same.
SC RULING
YES. In view of the fact that as early as May 12, 1950, upon its own request, it was furnished
with photostatic copies of the check in question; and on May 14, 19650, it went to the trouble of
requiring James McGuire to present the check to the provincial treasurer and provincial auditor
for necessary certification, PNB voluntarily assumed the obligation of holding so much of the
deposit of the Province of Samar as would be sufficient to cover the amount of the check, or
before allowing the withdrawal that exhausted said deposit, of making the necessary inquiry on
the matter. In our opinion, an implied acceptance of the check by the appellant bank was thereby
created.
Even so, appellant’s resulting obligation is merely subsidiary, the province of Samar being
primarily liable to pay the check.
NOTES
There are some questionable parts of this decision, you might want to read it. It’s just 2 pages
long— 3 pages with the dissenting opinion.
TOPIC MODULE
CASE #7
CASE TITLE BANK OF THE PHILIPPINE ISLAND v. GR NO G.R. No.
SPOUSES REYNALDO AND VICTORIA ROYECA 176664
PONENTE NACHURA, J. DATE July 21, 2008
DOCTRINE Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. 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. Mere delivery of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the payment by commercial document
is actually realized.
FACTS
● On August 23, 1993, spouses Reynaldo and Victoria Royeca executed and delivered to
Toyota Shaw, Inc. a Promissory Note for ₱577,008.00 payable in 48 equal monthly
installments of ₱12,021.00, with a maturity date of August 18, 1997. The Promissory Note
provides for a penalty of 3% for every month or fraction of a month that an installment
remains unpaid.
● To secure the payment of said Promissory Note, respondents executed a Chattel Mortgage
in favor of Toyota over a certain motor vehicle, described as follows:
Make and Type 1993 Toyota Corolla 1.3 XL
Motor No. 2E-2649879
Serial No. EE100-9512571
Color D.B. Gray Met.
● Toyota, with notice to respondents, executed a Deed of Assignment transferring all its
rights, title, and interest in the Chattel Mortgage to Far East Bank and Trust Company
(FEBTC).
● Claiming that the respondents failed to pay four (4) monthly amortizations from May 18,
1997 to August 18, 1997, FEBTC sent a formal demand to respondents on March 14, 2000
asking for the payment thereof, plus penalty. The respondents refused to pay and argued
that they had already paid their obligation to FEBTC.
● On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the
respondents with MeTC Manila praying for the delivery of the vehicle, with an alternative
prayer for the payment of ₱48,084.00 plus interest and/or late payment charges at the rate
of 36% per annum from May 18, 1997 until fully paid. The complaint was later amended to
substitute BPI as plaintiff when it merged with and absorbed FEBTC.
● In their Answer, respondents alleged that on May 20, 1997, they delivered to the Auto
Financing Department of FEBTC eight postdated checks in different amounts totaling
₱97,281.78. They further averred that they did not receive any notice from the drawee
banks or from FEBTC that these checks were dishonored. Considering this and the fact
that the checks were issued three years ago, they believed in good faith that their obligation
had already been fully paid.
● During trial, Mr. Vicente Magpusao testified that he was the Account Analyst of FEBTC
since its merger with BPI. He admitted that they had received the eight checks from the
respondents. However, two of these checks (Landbank Check No. 0610947 and FEBTC
Check No. 17A00-11551P) amounting to ₱23,692.00 were dishonored. He recalled that the
remaining two checks were not deposited anymore due to the previous dishonor of the two
checks. After deducting these payments, the total outstanding balance of the obligation was
₱48,084.00, which represented the last four monthly installments.
● MeTC dismissed the case for lack of cause of action.
● On appeal, RTC set aside the MeTC Decision and ordered the respondents to pay jointly
and severally the amount claimed by the petitioner
● RTC denied respondents’ motion for reconsideration. The respondents elevated the case
to the CA and obtained a favorable judgment when CA reinstated MeTC’s Decision.
LOWER RTC: set aside the MeTC Decision and CA: reinstated MeTC’s Decision and held that the
COURT ordered the respondents to pay jointly and respondents introduced sufficient evidence of
RULING severally the amount claimed by the payment, as opposed to the petitioner, which failed
petitioner. to produce evidence that the checks were in fact
● respondents failed to discharge this dishonored.
burden because they did not ● petitioner could have easily presented the
introduce evidence of payment, dishonored checks or the advice of
considering that mere delivery of dishonor and required respondents to
checks does not constitute payment. replace the dishonored checks but none
was presented.
● it is absurd for a bank, such as petitioner,
to demand payment of a failed amortization
only after three years from the due date
ISSUE/S Whether or not tender of checks constitutes payment
ARGUMENTS Petitioner (BPI): Respondent (Spouses Royeca):

● insists that the respondents did not ● postulates that they have established
sufficiently prove the alleged payment of the amount being claimed by
payment. the petitioner and, unless the petitioner
● under the law and existing proves that the checks have been
jurisprudence, delivery of checks dishonored, they should not be made liable
does not constitute payment. This to pay the obligation again.
principle stands despite the fact that
there was no notice of dishonor of the
two checks and the demand to pay
was made three years after default.
SC RULING No, tender of checks does not constitute payment.
● Settled is the rule that payment must be made in legal tender. A check is not legal
tender and, therefore, cannot constitute a valid tender of payment. 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. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not extinguished and
remains suspended until the payment by commercial document is actually realized.
● Respondents therefore had to present proof, not only that they delivered the checks to the
petitioner, but also that the checks were encashed. The respondents failed to do so. Had
the checks been actually encashed, the respondents could have easily produced the
cancelled checks as evidence to prove the same. Instead, they merely averred that they
believed in good faith that the checks were encashed because they were not notified of the
dishonor of the checks and three years had already lapsed since they issued the checks.
● Because of failure of the respondents to present sufficient proof of payment, it was no
longer necessary for the petitioner to prove non-payment, particularly proof that the checks
were dishonored. The burden of evidence is shifted only if the party upon whom it is lodged
was able to adduce preponderant evidence to prove its claim.
● To stress, the obligation to prove that the checks were not dishonored, but were in
fact encashed, fell upon the respondents who would benefit from such fact. That
payment was effected through the eight checks was the respondents’ affirmative allegation
that they had to establish with legal certainty. If the petitioner were seeking to enforce
liability upon the check, the burden to prove that a notice of dishonor was properly given
would have devolved upon it. The fact is that the petitioner’s cause of action was based on
the original obligation as evidenced by the Promissory Note and the Chattel Mortgage, and
not on the checks issued in payment thereof.
● Petitioner, as payee, did not have a legal obligation to inform the respondents of the
dishonor of the checks. A notice of dishonor is required only to preserve the right of the
payee to recover on the check. It preserves the liability of the drawer and the indorsers on
the check. Otherwise, if the payee fails to give notice to them, they are discharged from
their liability thereon, and the payee is precluded from enforcing payment on the check.
The respondents, therefore, cannot fault the petitioner for not notifying them of the non-
payment of the checks because whatever rights were transgressed by such omission
belonged only to the petitioner.
● Evidence at hand preponderates in favor of the petitioner. The petitioner’s possession
of the documents pertaining to the obligation strongly buttresses its claim that the obligation
has not been extinguished. The creditor’s possession of the evidence of debt is proof that
the debt has not been discharged by payment. A promissory note in the hands of the
creditor is a proof of indebtedness rather than proof of payment. In an action for replevin
by a mortgagee, it is prima facie evidence that the promissory note has not been paid.
Likewise, an uncanceled mortgage in the possession of the mortgagee gives rise to the
presumption that the mortgage debt is unpaid.
NOTES ● As a general rule, one who pleads payment has the burden of proving it. Even where the
plaintiff must allege non-payment, the general rule is that the burden rests on the defendant
to prove payment, rather than on the plaintiff to prove non-payment. The debtor has the
burden of showing with legal certainty that the obligation has been discharged by payment.
● When the existence of a debt is fully established by the evidence contained in the record,
the burden of proving that it has been extinguished by payment devolves upon the debtor
who offers such a defense to the claim of the creditor. Where the debtor introduces some
evidence of payment, the burden of going forward with the evidence shifts to the creditor,
who is then under a duty of producing some evidence to show non-payment
● Reasonable banking practice and prudence dictates that, when a check given to a creditor
bank in payment of an obligation is dishonored, the bank should immediately return it to the
debtor and demand its replacement or payment lest it causes any prejudice to the drawer.
TOPIC Effect of Absence of Notice on Separate Contract MODULE 7
CASE #8
CASE TITLE PRODUCERS BANK OF THE PHILIPPINES v. EXCELSA INDUSTRIES, GR NO 152071
INC.
PONENTE Tinga, J. DATE 8 May 2009
DOCTRINE
Where the drawer also executed a separate letter of undertaking in consideration for the bank's
negotiation of its sight drafts, the drawer can still be made liable under the letter of undertaking
even if he is discharged due to the bank's failure to protest the non-acceptance of the drafts as it
is a separate contract from the sight draft. The liability of the drawer under the letter of undertaking
is direct and primary. It is independent from his liability under the sight draft. Liability subsists on it
even if the sight draft was dishonored for non-acceptance or non-payment.
● Excelsa Industries, Inc. is a manufacturer and exporter of fuel products, particularly

charcoal briquettes, as an alternative fuel source. In January 1987, respondent applied for
a packing credit line or a credit export advance, supported by Letter of Credit No.
M3411610NS2970, with Producers Bank of the Philippines
❖ Kwang Ju Bank, Ltd. of Seoul, Korea issued the letter of credit through its
correspondent bank, Bank of the Philippine Islands, in the amount of US$23,000 for
the account of Shin Sung Commercial Co., Ltd., located in Seoul, Korea. T.L. World
FACTS Development Corporation was the original beneficiary of the letter of credit.
❖ In December 1986, for value received, T.L. World transferred to respondent all its
rights and obligations under the said letter of credit.
● Petitioner approved respondent's application for a packing credit line in the amount of
P300,000, of which about P96,000 in principal remained outstanding. Respondent
executed the corresponding promissory notes evidencing the indebtedness.
● Prior to the application for the packing credit line, respondent had obtained a loan from
petitioner in the form of a bill discounted and secured credit accommodation in the amount
of P200,000, of which P110,000 was outstanding at the time of the approval of the packing
credit line. The loan was secured by a real estate mortgage over respondent's properties.
● In March 1987, respondent presented for negotiation to petitioner drafts drawn under the
letter of credit and the corresponding export documents in consideration for its drawings in
the amounts of US$5,739.76 and US$4,585.79. Petitioner purchased the drafts and export
documents by paying respondent the peso equivalent of the drawings. The purchase was
subject to the conditions laid down in two separate undertakings by respondent
dated 17 March 1987 and 10 April 1987.
● In April 1987, Kwang Ju Bank, Ltd. notified petitioner through cable that the Korean buyer
refused to pay respondent's export documents on account of typographical discrepancies.
● Upon learning about the Korean importer's non-payment, respondent sent petitioner a
letter, informing the latter that respondent had brought the matter before the Korea Trade
Court and it was ready to liquidate its past due account with petitioner. In a letter, Kwang
Ju Bank, Ltd. informed petitioner that it would be returning the export documents on account
of the non-acceptance by the importer.
● Petitioner demanded from respondent the payment of the peso equivalent of the export
documents, plus interest and other charges, and also of the other due and unpaid loans.
❖ Due to respondent's failure to heed the demand, petitioner moved for the
extrajudicial foreclosure on the real estate mortgage over respondent's properties.
❖ Per petitioner's computation, aside from charges for attorney's fees and sheriff's
fees, respondent had a total due and demandable obligation of P573,225.60,
including interest, in 6 different accounts.
● The total approved bid price, including attorney's and sheriff fees, was pegged at
P752,074.63. At the public auction, the Sheriff of Antipolo, Rizal issued a Certificate of Sale
in favor of petitioner as the highest bidder which was registered on 24 March 1988.
● In June 1989, petitioner executed an affidavit of consolidation over the foreclosed

properties after respondent failed to redeem the same. As a result, the Register of Deeds
of Marikina issued new certificates of title in the name of petitioner.
● In November 1989, respondent instituted an action for the annulment of the extrajudicial
foreclosure with prayer for preliminary injunction and damages against petitioner and the
Register of Deeds of Marikina (Civil Case No. 1587-A).
❖ The complaint prayed, among others, that the defendants be enjoined from causing
the transfer of ownership over the foreclosed properties from respondent to
petitioner.
❖ In April 1990, petitioner filed a petition for the issuance of a writ of possession (LR
Case No. 90-787).
❖ The RTC ordered the consolidation of both cases
LOWER RTC: UPHELD the validity of the CA: REVERSED the decision of the RTC
COURT extrajudicial foreclosure and ORDERED
RULING the issuance of a writ of possession in -Respondent should not be faulted for the dishonor
favor of petitioner (18 December 1997). of the drafts and export documents because the
obligation to collect the export proceeds from
-Petitioner, whose obligation consisted only Kwang Ju Bank, Ltd. devolved upon petitioner.
of receiving, not collecting, the export Petitioner was respondent's agent, being the only
proceeds for the purpose of converting into entity authorized under Central Bank Circular No.
Philippine currency and remitting the same 491 to collect directly from the importer the export
to respondent, cannot be considered as proceeds on respondent's behalf and converting
respondent's agent. the same to Philippine currency for remittance to
respondent.
-Petitioner cannot be presumed to have
received the export proceeds, considering -Respondent was not authorized and even
that respondent executed undertakings powerless to collect from the importer and it
warranting that the drafts and appeared that respondent was left at the mercy of
accompanying documents were genuine petitioner, which kept the export documents during
and accurately represented the facts the time that respondent attempted to collect
stated therein and would be accepted payment from the Korean importer.
and paid in accordance with their tenor.
-Petitioner's negligence is the cause of the refusal
by the Korean buyer to pay the export proceeds as
petitioner had a hand in preparing and scrutinizing
the export documents and petitioner failed to
advise respondent about the warning from Kwang
Ju Bank, Ltd. that the export documents would be
returned if no explanation regarding the
discrepancies would be made.
ISSUE/S
Whether or not the respondent should be held liable for the dishonor of the draft and export
documents. –YES.
ARGUMENTS Petitioner: Producers Bank of the Respondent: Excelsa Industries, Inc.

Philippines
The CA erred in finding petitioner as
respondent's agent, which was liable for the
discrepancies in the export documents, in
invalidating the foreclosure sale and in
declaring that respondent was not estopped
from questioning the foreclosure sale.
SC RULING
YES. In the two undertakings executed by respondent as a condition for the negotiation of
the drafts, respondent held itself liable if the drafts were not accepted. The two undertakings
signed by respondent are similarly-worded and contained respondent's express warranties (see
notes).
In Velasquez v. Solidbank Corporation, where the drawer therein also executed a separate letter
of undertaking in consideration for the bank's negotiation of its sight drafts, the drawer can still be
made liable under the letter of undertaking even if he is discharged due to the bank's failure to
protest the non-acceptance of the drafts. It bears stressing that it is a separate contract from the
sight draft. The liability of petitioner under the letter of undertaking is direct and primary. It
is independent from his liability under the sight draft. Liability subsists on it even if the
sight draft was dishonored for non-acceptance or non-payment.
Respondent agreed to purchase the draft and credit petitioner its value upon the undertaking that
he will reimburse the amount in case the sight draft is dishonored. The bank would certainly not
have agreed to grant petitioner an advance export payment were it not for the letter of undertaking.
The consideration for the letter of undertaking was petitioner's promise to pay respondent the value
of the sight draft if it was dishonored for any reason by the Bank of Seoul.
Thus, notwithstanding petitioner's alleged failure to comply with the requirements of notice
of dishonor and protest under Sections 89 and 152, respectively, of the NIL, respondent
may not escape its liability under the separate undertakings, where respondent promised
to pay on demand the full amount of the drafts.
The Court adopts and approves the aforequoted findings by the RTC, the same being fully
supported by the evidence on record.
NOTES
“In consideration of your negotiating the above described draft(s), we hereby warrant that the said draft(s)
and accompanying documents thereon are valid, genuine and accurately represent the facts stated
therein, and that such draft(s) will be accepted and paid in accordance with its/their tenor. We further
undertake and agree, jointly and severally, to defend and hold you free and harmless from any and all
actions, claims and demands whatsoever, and to pay on demand all damages actual or compensatory
including attorney's fees, costs and other awards or be adjudged to pay, in case of suit, which you may suffer
arising from, by reason, or on account of your negotiating the above draft(s) because of the following
discrepancies or reasons or any other discrepancy or reason whatever.
We hereby undertake to pay on demand the full amount of the above draft(s) or any unpaid balance
thereof, the Philippine peso equivalent converted at the prevailing selling rate (or selling rate prevailing at
the date you negotiate our draft, whichever is higher) allowed by the Central Bank with interest at the rate
prevailing today from the date of negotiation, plus all charges and expenses whatsoever incurred in
connection therewith. You shall neither be obliged to contest or dispute any refusal to accept or to pay the
whole or any part of the above draft(s), nor proceed in any way against the drawee, the issuing bank or any
endorser thereof, before making a demand on us for the payment of the whole or any unpaid balance of the
draft(s).”
TOPIC Notice Of Dishonor MODULE
CASE #9
CASE TITLE Marlo L. Velasquez v. Solidbank Corporation GR NO 157309
PONENTE Reyes, R.T., J DATE March 28, 2008
DOCTRINE
PARTIES may not impugn the effectivity of a contract, aJer much benefit has been gained to the
prejudice of another. They are bound by the obliga#ons they expressly set out to do.
FACTS
The case arose out of a business transaction for the sale of dried sea cucumber for export to
South Korea between Wilderness Trading, as seller, and Goldwell Trading of Pusan, South
Korea, as buyer. To facilitate payment of the products, Goldwell Trading opened a letter of credit
in favor of Wilderness Trading with the Bank of Seoul, Pusan, Korea.
Petitioner applied for credit accommodation with respondent bank for preshipment financing. The
credit accommodation was granted. Petitioner was successful in his first two export transactions
both drawn on the letter of credit. The third export shipment, however, yielded a different result.
Petitioner submitted to respondent the necessary documents for his third shipment. Wanting to
be paid the value of the shipment in advance, petitioner negotiated for a documentary sight draft
to be drawn on the letter of credit, chargeable to the account of Bank of Seoul.
As a condition for the issuance of the sight draft, petitioner executed a letter of undertaking in
favor of respondent. Under the terms of the letter of undertaking, petitioner promised that the
draft will be accepted and paid by Bank of Seoul according to its tenor. Petitioner also held
himself liable if the sight draft was not accepted.
By virtue of the letter of undertaking, respondent advanced the value of the shipment, less bank
charges, to petitioner. Respondent then sent all the documents pertinent to the export transaction
to the Bank of Seoul.
Respondent failed to collect on the sight draft as it was dishonored by nonacceptance by the
Bank of Seoul. The reasons given for the dishonor were late shipment, forged inspection
certificate, and absence of countersignature of the negotiating bank on the inspection certificate.
Goldwell Trading likewise issued a stop payment order on the sight draft because most of the
bags of dried sea cucumber exported by petitioner contained soil.
Due to the dishonor of the sight draft and the stop payment order, respondent demanded
restitution of the sum advanced. Petitioner failed to heed the demand. Respondent filed a
complaint for recovery of sum of money with the RTC in Cebu City.
LOWER RTC: CA:

COURT The lower court rendered judgment in favor CA affirmed with modification the RTC decision.
RULING of respondent, ordering the defendant:
(1) to pay the plaintiff the principal sum In ruling against petitioner, the CA opined:
of P1,495, 115.16 plus interest at ● The fact that said draft was dishonored
20% per annum counted from and not paid by the Bank of Seoul-Korea,
February 22, 1993 up to the time the (sic) it is incumbent upon defendant-
entire amount shall have been fully appellant Velasquez to comply with his
paid; obligation under the Letter of Undertaking.
(2) to pay attorney's fees equivalent to He cannot be allowed to impugn the
10% of the total amount due the contract of undertaking he entered into by
plaintiff; and saying that it was a superfluous
(3) to pay the costs. document, and therefore, not binding on
him.
RTC is not convinced with the defendant's ○ The contract of undertaking is the
argument that because of plaintiff's failure law between them, and must be
to protest the dishonor of the sight draft, his enforced accordingly. This is in
liability is extinguished because his liability accord with Article 1159 of the
remains under the letter of undertaking New Civil Code, which provides
which he signed and without which plaintiff that "obligations arising from
would not have advanced or credited to him contracts have the force of law
the amount. between the contracting parties
and should be complied with in
good faith." And parties to a
contract are bound to the
fulfillment of what has expressly
been stipulated therein, regardless
of the fact that it turn (sic) out to be
financially disadvantageous.
○ The fact that Defendant-appellant
benefited from the advance
payment made by Plaintiff
appellee, (sic) it is incumbent upon
him to return what he received
because the purpose of the
advance payment was not attained
and/or realized, as the sight draft
was not paid accordingly,
otherwise, it will result to unjust
enrichment on the part of
Defendant-appellant at the
expense of Plaintiff-appellee, in
violation of Articles 19 and 22 of
the New Civil Code. The doctrine
of unjust enrichment and
restitution simply means that "the
exercise of a right ends when the
right disappears, and it disappears
when it is abused, especially to the
prejudice of others."
ISSUE/S Whether or not petitioner should be held liable to respondent under the sight draft.

a. Petitioner alleged that his liability under a. Respondent counters that petitioner's liability
the sight draft was extinguished when the springs from the letter of undertaking,
respondent failed to protest its non- independently of the sight draft. It would not have
acceptance, as required under the NIL. advanced the amount without the letter of
undertaking.
b. Petitioner also alleged that the letter of
undertaking is not binding because it is a b. According to the respondent, the letter of
superfluous document, and that he did not undertaking is an independent agreement and not
violate any of the provisions of the leWer of merely an accessory contract. To permit
credit.
petitioner to escape liability under the letter of
c. Petitioner argues that he cannot be held undertaking would result in unjust enrichment.
liable under either the sight draft or the
letter of undertaking. He claims that the
failure of respondent to protest the dishonor
of the sight draft under Section 152 of the
NIL discharged him from liability under the
negotiable instrument. It is also contended
that his liability under the letter of
undertaking is that of a mere guarantor; that
the letter of undertaking is only an
accessory contract to the sight draft. Since
he was discharged from liability under the
sight draft, he cannot be held liable under
the letter of undertaking.
SC RULING
No. Petitioner is not liable under the sight draft but he is liable under his letter of undertaking;
liability under the letter of undertaking was not extinguished by non-protest of the dishonor of the
sight draft.
Petitioner's liability under the letter of undertaking is independent from his liability under the sight
draft. He may be held liable under either the sight draft or the letter of undertaking or both.
Admittedly, petitioner was discharged from liability under the sight draft when respondent failed
to protest it for non-acceptance by the Bank of Seoul. A sight draft made payable outside the
Philippines is a foreign bill of exchange. When a foreign bill is dishonored by non-acceptance or
non-payment, protest is necessary to hold the drawer and indorsers liable. Verily, respondent's
failure to protest the non-acceptance of the sight draft resulted in the discharge of petitioner from
liability under the instrument.
Petitioner, however, can still be made liable under the letter of undertaking. It bears stressing that
it is a separate contract from the sight draft. The liability of petitioner under the letter of
undertaking is direct and primary. It is independent from his liability under the sight draft. Liability
subsists on it even if the sight draft was dishonored for non-acceptance or non-payment.
Petitioner cannot be both the primary debtor and the guarantor of his own debt. This is
inconsistent with the very purpose of a guarantee which is for the creditor to proceed against a
third person if the debtor defaults in his obligation. Certainly, to accept such an argument would
make a mockery of commercial transactions.
Petitioner bound himself liable to respondent under the letter of undertaking if the sight draft is
not accepted. He also warranted that the sight draft is genuine; will be paid by the issuing bank in
accordance with its tenor; and that he will be held liable for the full amount of the draft upon
demand, without necessity of proceeding against the drawee bank. Petitioner breached his
undertaking when the Bank of Seoul dishonored the sight draft and Goldwell Trading ordered a
stop payment order on it for discrepancies in the export documents.
NOTES Section 152 of the NIL is explicit:

Section 152. In what cases protest necessary. — Where a foreign bill appearing on its face to
be such is dishonored by non-acceptance, it must be duly protested for non-acceptance, and
where such a bill which has not been previously dishonored by non-acceptance, is dishonored by
nonpayment, it must be duly protested for non-payment. If it is not so protested, the drawer and
indorsers are discharged. Where a bill does not appear on its face to be a foreign bill, protest
thereof in case of dishonor is unnecessary.
TOPIC Notice of Dishonor – Delay in Giving Notice. MODULE
CASE #10
CASE Far Eastern Shipping Company v. The Honorable Court of Appeals GR L-
TITLE NO 36549
PONENTE PARAS, J. DATE October 5, 1988
DOCTRINE "Reasonable time" has been defined as so much time as is necessary under the
circumstances for a reasonable prudent and diligent man to do, conveniently, what
the contract or duty requires should be done, having a regard for the rights, and
possibility of loss, if any, to the other party.
FACTS
In its complaint dated May 9, 1968, filed with the City Court of Manila, (Civil Case No.
170859) against the private respondents for the collection and payment of P4,500.00
representing the face value of an unpaid and dishonored check.
The petitioner alleged, among others, that on September 13, 1960, the private respondents
approached the petitioner at its office in Manila and asked the latter to extend to them an
accommodation loan in the sum of P4,500.00, Philippine Currency, which they needed in
their business, and which they promised to pay, jointly and severally, in one-month time.
They proposed to pay the petitioner interest thereon at the rate of 14% per annum, as in
fact they delivered to the petitioner the China Banking Corporation Check No. VN-915564,
dated September 13, 1960, for P4,500.00, drawn by Dy Hian Tat, and signed by them at
the back of said check, with the assurance that after one month from September 13, 1960,
the said check would be redeemed by them by paying cash in the sum of P4,500.00, or
the said check can be presented for payment on or immediately after one month and said
bank would honor the same.
In order to accommodate the private respondents, the petitioner agreed and actually
extended to the private respondents an accommodation loan in the sum of P4,500.00
under the aforesaid conditions proposed by the private respondents, which amount was
delivered to the latter.
On March 5, 1964, the aforesaid check was presented for payment to the China Banking
Corporation, but said check bounced and was not cashed by said bank, for the reason that
the current account of the drawer thereof had already been closed.
Subsequently, the petitioner demanded from the private respondents the payment of their
aforesaid loan obligation, but the latter failed and refused to pay notwithstanding repeated
demands therefor.
LOWER MTC: CA:

COURT
RULING Decision in favor of petitioner, ordering Reversed the decision of the RTC, finding that
the defendants to pay the plaintiff, jointly the questioned check was not given as
and severally the sum of Php4,500. collateral to guarantee a loan secured by the
three private respondents who allegedly came
as a group to the Far East Realty Investment,
RTC: Inc., on September 13, 1960, but passed
through other hands before reaching the
Affirmed the decision petitioner and the said check was not
presented within a reasonable time and after
its issuance.
ISSUE/S Whether or not presentment for payment and notice of dishonor of the questioned check
were made within reasonable time.
ARGUMEN Petitioner (NAME): Respondent (NAME):
TS Denied the allegations in the complaint, no
Alleged in the complaint above. material information.
SC No, under Section 71 of the Negotiable Instruments Law, where the instrument
RULING is not payable on demand, presentment must be made on the day it fags due. Where
it is payable on demand, presentment must be made within a reasonable time after
issue, except that in the case of a bill of exchange, presentment for payment will be
sufficient if made within a reasonable time after the last negotiation thereof.
Under Section 102 of the Negotiable Instrument law, notice may be given as
soon as the instrument is dishonored; and unless delay is excused must be given
within the time fixed by the law.
No hard and fast demarcation line can be drawn between what may be considered
as a reasonable or an unreasonable time, because "reasonable time" depends upon
the peculiar facts and circumstances in each case.
It is obvious in this case that presentment and notice of dishonor were not made
within a reasonable time.
"Reasonable time" has been defined as so much time as is necessary under the
circumstances for a reasonable prudent and diligent man to do, conveniently, what
the contract or duty requires should be done, having a regard for the rights, and
possibility of loss, if any, to the other party.
In the instant case, the check in question was issued on September 13, 1960, but was
presented to the drawee bank only on March 5, 1964, and dishonored on the same date.
After dishonor by the drawee bank, a formal notice of dishonor was made by the
petitioner through a letter dated April 27, 1968. Under these circumstances, the petitioner
undoubtedly failed to exercise prudence and diligence on what he ought to do al.
required by law. The petitioner likewise failed to show any justification for the
unreasonable delay.
NOTES
TOPIC Notice of Dishonor MODULE
CASE #11
CASE TITLE State Investment House vs. CA GR NO 101163
PONENTE Bellosillo, J. DATE

January 11, 1963
DOCTRINE The fact that STATE failed to give Notice of Dishonor is of no moment. The need for such notice
is not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law. Indeed,
Moulic's actuations leave much to be desired. She did not retrieve the checks when she returned
the jewelry. She simply withdrew her funds from her drawee bank and transferred them to another
to protect herself. After withdrawing her funds, she could not have expected her checks to be
honored. In other words, she was responsible for the dishonor of her checks, hence, there was no
need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or
indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon
proper proceedings taken, has not been accepted or has not been paid, and that the party notified
is expected to pay it (Martin v. Browns, 75 Ala. 442)
FACTS
● Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of
jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation
checks in the amount of Fifty Thousand Pesos (P50,000.00) each.
● Victoriano negotiated the checks to petitioner State Investment House, Inc. (STATE).
● Moulic failed to sell the pieces of jewelry, so she returned them to Victoriano before maturity
of the checks.
● The checks, however, could no longer be retrieved as they had already been negotiated.
Consequently, before their maturity dates, Moulic withdrew her funds from the drawee
bank.
● Upon presentment for payment, the checks were dishonored for insufficiency of funds.
STATE allegedly notified Moulic of the dishonor of the checks and requested that it be paid
in cash instead, although Moulic avers that no such notice was given her.
● STATE sued to recover the value of the checks plus attorney’s fees and expenses of
litigation. On the other hand, Moulic contends that she incurred no obligation on the checks
because the jewelry was never sold and the checks were negotiated without her knowledge
● Moulic also instituted a third-party complaint against Victoriano, who later assumed full
responsibility for the checks.
LOWER RTC: DISMISSED THE COMPLAINT AND CA: AFFIRMED THE TRIAL COURT
COURT THE THIRD-PARTY COMPLAINT
RULING The CA affirmed the trial court on the ground that
Ordered STATE to pay Moulic Php 3,000 the Notice of Dishonor to Moulic was made beyond
for attorney’s fees. the period prescribed by the NIL, and that even if
reglementary period, it would be of no
consequence as the checks should never have
been presented for payment. The sale of the
jewelry was never effected; the checks, therefore,
ceased to serve their purpose as security for the
jewelry.
ISSUE/S 1. Whether or not STATE was a holder of the checks in due course.
2. Whether or not the Notice of Dishonor should be served to Moulic.
ARGUMENTS Petitioner (STATE): Respondent (Court of Appeals and Moulic):

● There was failure or absence of
consideration
SC RULING
1. YES. A prima facie presumption exists that the holder of a negotiable instrument is a
holder in due course. Consequently, the burden of proving that STATE is not a holder in
due course lies in the person who disputes the presumption. In this regard, Moulic failed.
The evidence clearly shows that:

(a) On their faces the post-dated checks were complete and regular;
(b) Petitioner bought these checks from the payee, Corazon Victoriano, before
their due dates;
(c) Petitioner took these checks in good faith and for value, albeit at a
discounted price; and,
(d) Petitioner was never informed nor made aware that these checks were merely issued
to payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments
free from any defect of title of prior parties, and from defenses available to prior parties
among themselves; STATE may, therefore, enforce full payment of the checks.
2. NO. There was no need to serve the Notice of Dishonor to Moulic. It was found that she did
not retrieve the checks when she returned the jewelry. She simply withdrew her funds from
her drawee bank and transferred them to another to protect herself. After withdrawing her
funds, she could not have expected her checks to be honored. In other words, she was
responsible for the dishonor of her checks, hence, there was no need to serve her Notice
of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the
instrument, either verbally or by writing, the fact that a specified instrument, upon proper
proceedings taken, has not been accepted or has not been paid, and that the party notified
is expected to pay it.
In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating,
not hindering or hampering transactions in commercial paper. Thus, the said statute
should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order
to meet the necessities in a single case.
The drawing and negotiation of a check have certain effects aside from the transfer of title
or the incurring of liability in regard to the instrument by the transferor. The holder who takes the
negotiated paper makes a contract with the parties on the face of the instrument. There is an
implied representation that funds or credit are available for the payment of the instrument
in the bank upon which it is drawn.
Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checks
cannot prejudice the rights of holders in due course. In the instant case, such withdrawal renders
the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds
with the drawee bank to meet her obligation on the checks, so that Notice of Dishonor
would be futile.
NOTES
SECTION 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:
(b) That he became the holder of it before it was overdue, and without notice that it was
previously dishonored, if such was the fact;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it.
SECTION 114. When notice need not be given to drawer. — Notice of dishonor is not required to
be given to the drawer in the following cases: (a) Where the drawer and the drawee are the same
person; (b) When the drawee is a fictitious person or a person not having capacity to contract; (c)
When the drawer is the person to whom the instrument is presented for payment; (d) Where the
drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e)
Where the drawer had countermanded payment.
TOPIC MODULE
CASE #12
CASE TITLE Great Asian Sales Center Corporation and Tan Chong Lin vs Court of GR NO 105774
Appeals and Bancasia Finance and Investment Corporation
PONENTE Carpio, J.; DATE April 25, 2002
DOCTRINE 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.
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. (“Arsenio” for brevity) to secure a loan
from Bancasia in an amount not to exceed P1.0 million. The board resolution also authorized
Arsenio to sign all papers, documents or promissory notes necessary to secure the loan.. On
February 10, 1982, 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
P2.0 million. The second board resolution also designated Arsenio as the authorized signatory to
sign all instruments, documents and checks necessary to secure the discounting line.On March
4, 1981, Tan Chong Lin signed a Surety Agreement in favor of Bancasia to guarantee, solidarily,
the debts of Great Asian to Bancasia. On January 29, 1982, Tan Chong Lin 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 (“Deeds of Assignment” for
brevity), assigning to Bancasia fifteen (15) postdated checks. Nine of the checks 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.
All these four checks were dishonored. 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 referred the matter to its lawyer, Atty. Eladia Reyes, who sent
by registered mail to Tan Chong Lin a letters dated March 18, 1982 and June 16, 1982 , notifying
him of the dishonored checks and demanding payment from him. Neither Great Asian nor Tan
Chong Lin paid Bancasia the dishonored checks. Great Asian filed with the then Court of First
Instance of Manila a petition for insolvency, verified under oath by its Corporate Secretary, Mario
Tan. Attached to the verified petition was a “Schedule and Inventory of Liabilities and Creditors of
Great Asian Sales Center Corporation,” listing Bancasia as one of the creditors of Great Asian in
the amount of P1,243,632.00. On June 23, 1982, 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. In its answer, Great Asian
denied the material allegations of the complaint claiming it was unfounded, malicious, baseless,
and unlawfully instituted since there was already a pending insolvency proceedings, although
Great Asian subsequently withdrew its petition for voluntary. insolvency. Great Asian further
raised the alleged lack of authority of Arsenio to sign the Deeds of Assignment as well as the
absence of consideration and consent of all the parties to the Surety Agreements signed by Tan
Chong Lin.
LOWER RTC: CA:
COURT
RULING
ISSUE/S
Whether Tan Chong Lin is liable to Great Asian under the Surety Agreements.
SC RULING Tan Chong Lin, the President of Great Asian, is being sued in his personal capacity based
on the Surety Agreements he signed wherein he solidarily held himself liable with Great
Asian for the payment of its debts to Bancasia. Indisputably, Tan Chong Lin unconditionally
bound himself to pay Bancasia, solidarily with Great Asian, if the drawers of the checks fail
to pay on due date. The condition on which Tan Chong Lin’s obligation hinged had
happened. As surety, Tan Chong Lin automatically became liable for the entire obligation
to the same extent as Great Asian. Tan Chong Lin maintains that these warranties in the
Deeds of Assignment materially altered his obligations under the Surety Agreements, and
therefore he is released from any liability to Bancasia. Under Article 1215 of the Civil
Code, what releases a solidary debtor is a “novation, compensation, confusion or
remission of the debt” made by the creditor with any of the solidary debtors. These
warranties, however, are the usual warranties made by one who discounts receivables
with a financing company or bank. The Surety Agreements, written on the letter head of
“Bancasia Finance & Investment Corporation,” uniformly state that “Great Asian Sales
Center has obtained and/or desires to obtain loans, verdrafts, discounts and/or other forms
of credits from” Bancasia. Tan Chong Lin was clearly on notice that he was holding himself
as surety of Great Asian which was discounting postdated checks issued by its buyers of
goods and merchandise. Moreover, Tan Chong Lin, as President of Great Asian, cannot
feign ignorance of Great Asian’s business activities or discounting transactions with
Bancasia. Thus, the warranties do not increase or enlarge the risks of Tan Chong Lin under
the Surety Agreements. There is, moreover, no novation of the debt of Great Asian that
would warrant release of the surety. The PRINCIPAL should fail to pay at maturity any of
the obligations or amounts due to the CREDITOR, or if for any reason the PRINCIPAL fails
to promptly respond to and comply with any other lawful demand made by the CREDITOR,
or if for any reason whatsoever any obligation of the PRINCIPAL in favor of any person or
entity should be considered as defaulted, then both the PRINCIPAL and the SURETY/IES
shall be considered in default under the terms of this Agreement. The SURETY/IES
agree/s to pay jointly and severally with the PRINCIPAL, all outstanding obligations of the
CREDITOR, whether due or not due, and whether owing to the PRINCIPAL in its personal
capacity or as agent of any person, endorsee, assignee or transferee.
NOTES
TOPIC Notice of dishonor MODULE
CASE #13
CASE TITLE LOPEZ vs. PEOPLE OF THE PHILIPPINES GR NO 166810
PONENTE Leonardo-De castro, J. DATE June 26, 2008
DOCTRINE
Notice whether written or verbal was a surplusage and totally unnecessary considering that almost two
(2) months before the issuance of the check, petitioner’s current account was already closed. Under
these circumstances, the notice of dishonor would have served no useful purpose as no deposit could
be made in a closed bank account.
Sec. 114 – When notice need not be given to drawer. –Notice of dishonor is not required to be given to
the drawer in either of the following cases:
d. Where the drawer has no right to expect or require that the drawee or acceptor will honor the check.
FACTS
This is a petition for review on certiorari from the decision affirming an earlier decision of the Regional
Trial Court (RTC), Branch 53, Sorsogon, Sorsogon, which found petitioner guilty beyond reasonable
doubt of the crime of Estafa.
The accused make, draw, and issue to apply on account and/or for value received a DBP Check No.
0859279 payable to EFREN R. ABLES in the amount of PHP 20,000.00, knowing fully well that at the
time of issue, accused did not have sufficient fund and/or his account is already closed with the drawee
bank and that upon presentment of the check for payment on May 27, 1998, the same was dishonored
and/or refused payment by the drawee bank for the reason that the account of the said accused is
already closed and/or without sufficient fund and despite repeated demands after receipt of notice of
said dishonor and thereafter made by Efren R. Ables, accused refused and still refuses to pay the latter,
to his damage and prejudice in the aforementioned amount of P20,000.00.
When arraigned on April 13, 1999, petitioner pleaded "Not Guilty" to the offense charged. During the
trial on the merits, the prosecution presented the testimonies of private complainant Efren R. Ables and
Valentin Luzuriaga, a bank teller of the Development Bank of the Philippines (DBP). The prosecution
presented Exhibits "A" to "E" with submarkings consisting of the check issued by the petitioner, the
demand letter sent by private complainant to petitioner and bank records to show that the said check
was dishonored as the account was closed even before the said check was issued. All of the aforesaid
exhibits were admitted by the trial court in its Order dated August 27, 2001. On the other hand, petitioner
did not present any witness but only offered his documentary evidence, consisting of: Exh. 1- the said
demand letter of the private complainant; Exh. 1-A - stamp "Return to Sender" on the envelope of Exh.
1; Exh. 2 - the Transcript of Stenographic Notes (TSN of the Hearing on December 20, 1999); Exh. 2-
a, page 9 of the said TSN; and Exh. 2-b, the No. 5 question and answer in Exh. 2
LOWER RTC: trial court convicted the accused CA: CA affirmed in toto the decision of the trial
COURT (herein petitioner) of the crime of estafa court in this case
RULING
ISSUE/S Whether or not the CA erred in not applying the provisions of the negotiable instruments law.
ARGUMENTS Petitioner (NAME): Jude Joby Lopez Respondent (NAME): People of the
Philippines
SC RULING
NO. The receipt by the drawer of the notice of dishonor is not an element of the offense. The
presumption only dispenses with the presentation of evidence of deceit if such notification is received
and the drawer of the check failed to deposit the amount necessary to cover his check within three (3)
days from receipt of the notice of dishonor of the check. The presumption indulged in by law does not
preclude the presentation of other evidence to prove deceit. It is not disputed by petitioner that, as found
by the CA, respondent Ables "called" up petitioner to inform him of the dishonor of the check. Moreover,
when petitioner issued the check in question on March 23, 1998, he knew that his current account with
the DBP was a closed account as early as January 27, 1998.
Petitioner disclaim employing deceit by asserting that respondent knew that petitioner had no funds
with the bank, as he was so informed by the petitioner himself at the time of the issuance of the check
(Appellant’s Brief, CA-G.R. No. 27057). Assuming that petitioner did so, petitioner could not escape
culpability because he was not in a position to make good the check at any time since his current
account was already closed. This fact petitioner failed to disclose to respondent.
The absence of proof as to receipt of the written notice of dishonor notwithstanding, the evidence shows
that petitioner had actual notice of the dishonor of the check because he was verbally notified by the
respondent and notice whether written or verbal was a surplusage and totally unnecessary considering
that almost two (2) months before the issuance of the check, petitioner’s current account was already
closed. Under these circumstances, the notice of dishonor would have served no useful purpose as no
deposit could be made in a closed bank account.
Pertinently, Section 114(d) of the Negotiable Instruments Law provides:
Sec. 114 – When notice need not be given to drawer. –Notice of dishonor is not required to be given to
the drawer in either of the following cases:
d. Where the drawer has no right to expect or require that the drawee or acceptor will honor the check.
Since petitioner’s bank account was already closed even before the issuance of the subject check, he
had no right to expect or require the drawee bank to honor his check. By virtue of the aforequoted
provision of law, petitioner is not entitled to be given a notice of dishonor.
NOTES
CASE #14
CASE TITLE ASIAN BANKING CORPORATION, plaintiff-appellee, GR NO G.R. No.
vs. L-19051
JUAN JAVIER, limited copartnership, defendant-appellant.
PONENTE AVANCEÑA, J.: DATE April 4, 1923
DOCTRINE the indorsers are not liable unless they are notified that the document was dishonored. Then, under
the general principle of the law of procedure, it will be incumbent upon the plaintiff, who seeks to
enforce the defendant's liability upon these checks as indorser, to establish said liability by proving
that notice was given to the defendant within the time, and in the manner, required by the law that the
checks in question had been dishonored. If these facts are not proven, the plaintiff has not sufficiently
established the defendant's liability.
FACTS
● Salvador B. Chaves drew a check on the Philippine National Bank for P11,000 in favor of La
Insular, a concern doing business in this city. This check was indorsed by the limited partners
of La Insular, and then deposited by Salvador B. Chaves in his current account with the
plaintiff, Asia Banking Corporation.
● Salvador B. Chaves drew another check for P18,785.30 on the Philippine National Bank, in
favor of the aforesaid La Insular. This check was also indorsed by the limited partners of La
Insular, and was likewise deposited by Salvador B. Chaves in his current account with the
plaintiff, Asia Banking Corporation.
● The amount represented by both checks was used by Salvador B. Chaves after they were
deposited in the plaintiff bank, by drawing checks on the plaintiff. Subsequently these checks
were presented by the plaintiff to the Philippine National Bank for payment, but the latter
refused to pay on the ground that the drawer, Salvador B. Chaves, had no funds therein.
● The plaintiff now brings this action against the defendant, as indorser, for the payment of the
value of both checks.
LOWER RTC: sentenced the defendant to pay the CA: n/a

COURT plaintiff P11,000, upon the check of May
RULING 10, 1920, with interest thereon at 9 per
cent per annum from July 10, 1920, and
P18,778.34 on the check of June 25, 1920,
with interest thereon at 9 per cent per
annum from August 5, 1920
ISSUE/S
Whether or not defendant shall be liable on the amount of the checks
ARGUMENTS Petitioner (NAME): ASIAN BANKING Respondent (NAME):JUAN JAVIER

CORPORATION, His liability as indorser of the checks in question
n/a was extinguished
SC RULING
No, Defendant is absolved from the complaint because the liability of the defendant never arose.
Section 89 of the Negotiable Instruments Law (Act No. 2031) provides that, when a negotiable
instrument is dishonored for non-acceptance or non-payment, notice thereof must be given to the
drawer and each of the indorsers, and those who are not notified shall be discharged from liability,
except where this act provides otherwise. According to this, the indorsers are not liable unless they
are notified that the document was dishonored. Then, under the general principle of the law of
procedure, it will be incumbent upon the plaintiff, who seeks to enforce the defendant's liability upon
these checks as indorser, to establish said liability by proving that notice was given to the defendant
within the time, and in the manner, required by the law that the checks in question had been
dishonored. If these facts are not proven, the plaintiff has not sufficiently established the defendant's
liability.
There is no proof in the record tending to show that plaintiff gave any notice whatsoever to the
defendant that the checks in question had been dishonored, and there it has not established its cause
of action.
NOTES
CASE #15
CASE TITLE Gullas vs Philippine National Bank (PNB) GR NO L-43191
PONENTE Malcolm J. DATE

November 13, 1935
DOCTRINE Notice is not necessary to a maker because the right is based on the doctrine that the relationship is
that of creditor and debtor. However this may be, as to an indorser the situation is different, and
notice should actually have been given to him in order that he might protect his interests.
FACTS
On August 2, 1933, the Treasurer of the United States for the United States Veterans Bureau issued a
Warrant in the amount of $361, payable to the order of Francisco Sabectoria Bacos. Paulino Gullas
and Pedro Lopez signed as endorsers of this check. Thereupon it was cashed by the Philippine National
Bank. Subsequently, the treasury warrant was dishonored by the Insular Treasurer.
The bank on learning of the dishonor of the treasury warrant sent notices by mail to Atty. Gullas but
these were not delivered to him at that time because he was in Manila.
PNB in their letter, informed the petitioner the outstanding balance on his account was applied to
the part payment of the dishonored check. Upon the petitioner's return, he received the notice of
dishonor and immediately paid the unpaid balance of the warrant. As a consequence of these,
petitioner was inconvenienced when his insurance was not paid due to lack of funds and was
widely publicized in his area to his embarrassment.
LOWER RTC: N/A CA: N/A

COURT
RULING
ISSUE/S
Whether PNB has the right to apply the petitioner's deposit to his debt to the bank.
ARGUMENTS Petitioner (Paulino Gullas): Respondent (Philippine National Bank):
SC RULING NO.
As a general rule, a bank has a right to set off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. The Civil Code (Article 1195) provides that
compensation shall take place when two persons are reciprocally creditor and debtor of each other.
In this connection, it has been held that the relation existing between a depositor and a bank is
that of creditor and debtor.
Philippine National Bank had, with respect to the deposit of Gullas, a right of set off. It is undeniable
that prior to the mailing of notice of dishonor, and without waiting for any action by Gullas, the bank
made use of the money standing in his account to make good for the treasury warrant.
Gullas was merely an indorser and had issued in good faith. As to an indorser, the situation is
different and notice should actually have been given to him in order that he might protect his
interests. The action of the bank was prejudicial to Gullas.
NOTES
PNB’s Letter contained:
“In the bank's letter of August 21, 1933, addressed to Messrs. Paulino Gulla and Pedro Lopez, they
were informed that the United States Treasury warrant No. 20175 in the name of Francisco Sabectoria
Bacos for $361 or P722, the payment for which had been received has been returned by our Manila
office with the notation that the payment of his check has been stopped by the Insular Treasurer. "In
view of this therefore we have applied the outstanding balances of your current accounts with us to the
part payment of the foregoing check", namely, Mr. Paulino Gullas P509. On the return of Attorney Gullas
to Cebu on August 31, 1933, notice of dishonor was received and the unpaid balance of the United
States Treasury warrant was immediately paid by him.”
It has been held that notice of dishonor is necessary in order to charge an indorser and that the right
of action against him does not accrue until the notice is given.
CASE #16
CASE TITLE NYCO SALES CORP v. BA FINANCE CORP GR NO
71694
PONENTE PARAS, J DATE
August 16, 1991
DOCTRINE The dishonor of an assigned check simply stresses its liability and the failure to give a notice of
dishonor will not discharge it from such liability.
FACTS
Petitioner is engaged in selling construction materials.Sometime in 1978, the brothers Santiago
and Renato Fernandez (the Fernandezes), both acting in behalf of Sanshell Corporation,
approached Rufino Yao (president and general manager of petitioner) for credit accommodation.
They requested Nyco Sales to grant Sanshell discounting privileges which Nyco had with BA
Finance.
Yao agreed, hence, the Fernandezes went to Yao to discount Sanshell’s post-dated BPI check No.
499648 dated February 17, 1979 for the amount of P60,000.00. The said check was payable to
Nyco. Following the discounting process agreed upon, Nyco, thru Yao, endorsed the check in favor
of BA Finance. Thereafter, BA Finance issued a check payable to Nyco which endorsed it in favor
of Sanshell. Sanshell then made use of and/or negotiated the check.
Accompanying the exchange of checks was a Deed of Assignment executed by Nyco in favor of
BA Finance with the conformity of Sanshell. Under the said Deed, the subject of the discounting
was the aforecited check. At the back thereof and of every deed of assignment was the Continuing
Suretyship Agreement whereby the Fernandezes unconditionally guaranteed to BA Finance the
full, faithful and prompt payment and discharge of any and all indebtedness of Nyco.
The BPI check, however, was dishonored upon presentment for payment. BA Finance immediately
reported to Fernandezes who issued a Security Bank and Trust Company check as replacement,
which was again dishonored. Despite repeated demands, Nyco and the Fernandezes failed to
settle the obligation.
BA finance filed an action.
LOWER RTC: ruled in favor of BA Finance. As to CA: Upheld BA Finance

COURT the would-be litigant Sanshell Construction
RULING and Development Corporation, defendant
Nyco Sales Corporation did not properly
implead said corporation which should have
been by way of a third-party complaint
instead of a mere cross-claim.
ISSUE/S
1. Whether or not the assignor is liable to its assignee for its dishonored checks.
2. WON there has been a novation, warranting Nyco’s discharge from liability, upon the BA
Finance’s acceptance of SBTC check as replacement to BPI Check.
3. WON Nyco Sales may be held liable for the alleged unauthorized acts of its President
and Manager, Yao.
ARGUMENTS Petitioner (Nyco Sales Corp): Respondent (NAME):
1. that it was actually discharged of its

liability over the SBTC check when
BA Finance failed to give it a notice
of dishonor;
2. that there was novation when BA
Finance accepted the SBTC check
in replacement of the BPI check;
and
3. that it cannot be held liable for its
President’s unauthorized acts.
SC RULING
1. YES. An assignment of credit is the process of transferring the right of the assignor to the
assignee, who would then be allowed to proceed against the debtor. It may be done either
gratuitously or onerously, in which case, the assignment has an effect similar to that of a
sale.
According to Article 1628 of the Civil Code, the assignor-vendor warrants both the
credit itself (its existence and legality) and the person of the debtor (his solvency), if
so stipulated, as in the case at bar. Consequently, if there be any breach of the above
warranties, the assignor-vendor should be held answerable therefor.
Nyco executed a deed of assignment in favor of BA Finance with Sanshell Corporation

as the debtor-obligor. BA Finance is actually enforcing said deed and the check
covered thereby is merely an incidental or collateral matter. This particular check
merely evidenced the credit which was actually assigned to BA Finance. Thus, the
designation is immaterial as it could be any other check. It is utterly misplaced to say that
Nyco is being held liable for both the BPI and the SBTC checks. It is only what is
represented by the said checks that Nyco is being asked to pay.
Nyco’s pretension that it had not been notified of the fact of dishonor is belied not
only by the formal demand letter but also by the findings of the trial court that Rufino
Yao of Nyco and the Fernandez Brothers of Sanshell had frequent contacts before,
during and after the dishonor. More importantly, it fails to realize that for as long as
the credit remains outstanding, it shall continue to be liable to BA Finance as its
assignor. The dishonor of an assigned check simply stresses its liability and the
failure to give a notice of dishonor will not discharge it from such liability. This is
because the cause of action stems from the breach of the warranties embodied in the
Deed of Assignment, and not from the dishonoring of the check alone.
2. No. There are only two ways which indicate the presence of novation. First, novation must
be explicitly stated and declared in unequivocal terms as novation is never presumed.
Secondly, the old and the new obligations must be incompatible on every point. The test of
incompatibility is whether or not the two obligations can stand together, each one having its
independent existence.
There was no express agreement that BA Finance’s acceptance of the SBTC check will
discharge Nyco from liability. Neither is there incompatibility because both checks were
given precisely to terminate a single obligation arising from Nyco’s sale of credit to BA
Finance.
3. Yes. Its corporate By-Laws clearly provide for the powers of its President, which include, inter
alia, executing contracts and agreements, borrowing money, signing, indorsing and
delivering checks, all in behalf of the corporation. Furthermore, the appellate court correctly
adopted the lower court’s observation that there was already a previous transaction of
discounting of checks involving the same personalities wherein any enabling resolution from
Nyco was dispensed with and yet BA Finance was able to collect from Nyco and Sanshell
was able to discharge its own undertakings. Such effectively places Nyco under estoppel in
pais which arises when one, by his acts, representations or admissions, or by his silence
when he ought to speak out, intentionally or through culpable negligence, induces another
to believe certain facts to exist and such other rightfully relies and acts on such belief, so
that he will be prejudiced if the former is permitted to deny the existence of such fact
NOTES
TOPIC MODULE
CASE #17
CASE TITLE Velasquez v. Solidbank Corporation GR NO 157309
PONENTE Reyes, R.T., J, DATE March 28, 2008
DOCTRINE Petitioner’s liability under the letter of undertaking is clear. He is liable to respondent if the sight
draft is not accepted by the Bank of Seoul. Mere non-acceptance of the sight draft is sufficient for
liability to attach. Here, the sight draft was dishonored for non-acceptance. The non-acceptance
of the sight draft triggered petitioner’s liability under the letter of undertaking.
FACTS Petitioner is engaged in the export business operating under the name Wilderness Trading.
Respondent is a domestic banking corporation organized under Philippine laws. The case arose
out of a business transaction for the sale of dried sea cucumber for export to South Korea between
Wilderness Trading, as seller, and Goldwell Trading of Pusan, South Korea, as buyer. To facilitate
payment of the products, Goldwell Trading opened a letter of credit in favor of Wilderness Trading
in the amount of US$87,500.00 with the Bank of Seoul, Pusan, Korea. On November 12, 1992,
petitioner applied for credit accommodation with respondent bank for pre-shipment financing. The
credit accommodation was granted. Petitioner was successful in his first two export transactions
both drawn on the letter of credit. The third export shipment, however, yielded a different result.
On February 22, 1993, petitioner submitted to respondent the necessary documents for his third
shipment. Wanting to be paid the value of the shipment in advance, petitioner negotiated for a
documentary sight draft to be drawn on the letter of credit, chargeable to the account of Bank of
Seoul. The sight draft represented the value of the shipment in the amount of US$59,640.00. As a
condition for the issuance of the sight draft, petitioner executed a letter of undertaking in favor of
respondent. Respondent failed to collect on the sight draft as it was dishonored by non-acceptance
by the Bank of Seoul. The reasons given for the dishonor were late shipment, forged inspection
certificate, and absence of countersignature of the negotiating bank on the inspection certificate.
Goldwell Trading likewise issued a stop payment order on the sight draft because most of the bags
of dried sea cucumber exported by petitioner contained soil.
LOWER RTC: Ruled in favor of Respondent. CA: Affirmed RTC judgment ruling in favor of
COURT respondent
RULING This court is not convinced with the
defendant’s argument that because of
plaintiff’s failure to protest the dishonor of the
sight draft, his liability is extinguished
because his liability remains under the letter
of undertaking which he signed and without
which plaintiff would not have advanced or
credited to him the amount.
ISSUE/S Whether or not petitioner is liable for sight draft.
SC RULING No. Admittedly, petitioner was discharged from liability under the sight draft when respondent failed
to protest it for non-acceptance by the Bank of Seoul. A sight draft made payable outside the
Philippines is a foreign bill of exchange. When a foreign bill is dishonored by non-acceptance or
non-payment, protest is necessary to hold the drawer and indorsers liable. Verily, respondents
failure to protest the non-acceptance of the sight draft resulted in the discharge of petitioner from
liability under the instrument.
Petitioner, however, can still be made liable under the letter of undertaking. It bears stressing that
it is a separate contract from the sight draft. The liability of petitioner under the letter of undertaking
is direct and primary. It is independent from his liability under the sight draft. Liability subsists on it
even if the sight draft was dishonored for nonacceptance or non-payment.
Respondent need not prove that petitioner violated the provisions of the letter of credit in order to
be held liable under the letter of undertaking. Parties are bound to fulfill what has been expressly
stipulated in the contract. Petitioners liability under the letter of undertaking is clear. He is liable to
respondent if the sight draft is not accepted by the Bank of Seoul. Mere non-acceptance of the
sight draft is sufficient for liability to attach. Here, the sight draft was dishonored for non-
acceptance. The non-acceptance of the sight draft triggered petitioners liability under the letter of
undertaking.
NOTES Section 152. In what cases protest necessary. Where a foreign bill appearing on its face to be such
is dishonored by non-acceptance, it must be duly protested for non-acceptance, and where such
a bill which has not been previously dishonored by non-acceptance, is dishonored by non-payment,
it must be duly protested for non-payment. If it is not so protested, the drawer and indorsers are
discharged. Where a bill does not appear on its face to be a foreign bill, protest thereof in case of
dishonor is unnecessary.
TOPIC MODULE
CASE #18
CASE TITLE Producers Bank of the Philippines v. Excelsa Industries, Inc. GR NO 152071
PONENTE Tinga, J DATE

May 8, 2009
DOCTRINE
“Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-
acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser
and any drawer or indorser to whom such notice is not given is discharged.” (NIL, Section 89)
“Where a foreign bill appearing on its face to be such is dishonored by non-acceptance, it must be
duly protested for non-acceptance, and where such a bill which has not previously been dishonored
by non-acceptance, is dishonored by non-payment, it must be duly protested for non-payment. If
it is not so protested, the drawer and indorsers are discharged. Where a bill does not appear on
its face to be a foreign bill, protest thereof in case of dishonor is unnecessary.” (NIL, Section 152)
FACTS
Excelsa Industries, Inc. (Excelsa) is engaged in the manufacturing and exporting of fuel products,
particularly charcoal briquettes, as an alternative fuel source.
Excelsa obtained a 200,000-Peso loan from the Producers Bank of the Philippines (PBP) sometime
in 1986, secured by a Real Estate Mortgage.
A year later, Excelsa applied for a credit export advance with PBP, and at the time the same was
approved, P110,000 of the Excelsa’s 200,000-Peso loan was outstanding. The credit export
advance was supported by a Letter of Credit issued by Excelsa’s Korean buyers.
The export documents contained the following undertakings of Excelsa:

● “In consideration of your negotiating the above described draft(s), we hereby warrant that
the said draft(s) and accompanying documents thereon are valid, genuine and accurately
represent the facts stated therein, and that such draft(s) will be accepted and paid in
accordance with its/their tenor…”
● “We hereby undertake to pay on demand the full amount of the above draft(s) or any unpaid
balance thereof, the Philippine perso equivalent converted at the prevailing selling rate (or
selling rate prevailing at the date you negotiate our draft, whichever is higher)”
Kwang Ju Bank, Ltd. (KJB) notified PBP through cable that the Korean buyer refused to pay
respondent’s export documents because of typographical discrepancies. KJB later returned the
export documents to PBP. Consequently, PBP demanded payment from Excelsa for the amount
of the export documents and its other unpaid loans. Excelsa failed to pay despite repeated
demands, which prompted PBP to move for the extrajudicial foreclosure of the real estate mortgage
over Excelsa’s properties.
The Regional Trial Court (RTC) upheld the validity of the extrajudicial foreclosure and rendered a
Decision ordering for the issuance of a Writ of Possession in favor of PBP. On appeal, however,
the Court of Appeals (CA) reversed the RTC’s Decision, hence, this petition.
LOWER RTC: The extrajudicial foreclosure was valid CA: Reversed the Decision of the RTC.
COURT and the issuance of a Writ of Possession in
RULING favor of PBP is ordered.
ISSUE/S
Did the foreclosure of the real estate mortgage have the effect of discharging the
instrument? YES.
Can PBP hold Excelsa liable on the export documents? YES
SC RULING
As to the first issue: The Court adopts and approves the findings by the RTC, the same being fully
supported by the evidence on record. Excelsa is estopped from questioning the foreclosure and is
guilty of laches. PBP made demands against the Excelsa for the payment outstanding loans and
advances as early as July 1997 and Excelsa acknowledged such outstanding loans and advances
to the committed to liquidate the same. For failure of the Excelsa to pay its obligations on maturity,
PBP had the right to foreclose the mortgage. The certificate of sale was annotated on March 24,
1988 and there being no redemption made by the Excelsa, title to the said properties were
consolidated in the name of PBP in July 1989. Undeniably, the subject foreclosure was done in
accordance with the prescribed rules.
As to the second issue: Notwithstanding PBP’s alleged failure to comply with the requirements of
Notice of Dishonor and Protest under Sections 89 and 152 of the Negotiable Instruments Law,
Excelsa may not escape its liability under the separate undertakings, where respondent promised
to pay on demand the full amount of the drafts.
NOTES
TOPIC Discharge of instrument; Novation MODULE 8
CASE #1
CASE TITLE Salazar v. J.Y. Brothers Marketing Corporation GR NO 171998.
PONENTE Peralta, J. DATE October 20, 2010
DOCTRINE
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.
FACTS
J.Y. Brothers Marketing (J.Y. Bros.) is a corporation engaged in the business of selling sugar,
rice and other commodities.
On October 15, 1996, Anamer Salazar (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. Salazar with Calleja and Kallos bought from J. Y. Bros. 300
cavans of rice worth P214,000.00.
As payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential Bank Check No. 067481
dated October 15, 1996 issued by Nena Jaucian Timario in the amount of P214,000.00 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 crossed Solid Bank Check No. PA365704 dated October 29, 1996 again issued by
Nena Jaucian Timario in the amount of P214,000.00 but which, just the same, bounced due to
insufficient funds.
When despite the demand letter dated February 27, 1997, Salazar failed to settle the amount
due J.Y. Bros., the latter charged Salazar and Timario with the crime of estafa before the RTC of
Legaspi City (Criminal Case).
Criminal Case: Salazar is acquitted of the crime of estafa but is ordered to pay J.Y. Bros. P214,000
for the cost of the cavans of rice (because he filed demurrer to evidence and was granted).
Filed an MR on the civil aspect where the SC granted such where it set aside and nullified the
order and directed RTC to set criminal case for continuation of trial for the reception of evidence.
LOWER RTC: DISMISSED the civil aspect of the CA: REVERSED the ruling and ordered Salazar
COURT estafa case on the ground of novation. The liable for the amount of P214,000. The CA found that
RULING substitution of a non-negotiable Solid Bank Salazar indorsed the Prudential Bank check, which was
check for a negotiable Prudential Bank later replaced by a Solid Bank check issued by Timario,
check was an essential change which had also indorsed by Salazar as payment for the 300 cavans
the effect of discharging from the obligation of rice bought from J.Y Bros.
whoever may be the endorser of the
The CA, applying Sections 63, 66 and 29 of the NIL,
negotiable check. found that Salazar 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/S
Whether the issuance of the Solid Bank check in replacement of the dishonored Prudential
Bank check amounts to novation that discharged the latter instrument.
ARGUMENTS Petitioner: ANAMER SALAZAR Respondent: J.Y. BROTHERS MARKETING

CORPORATION
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.
Petitioner also contends that the acceptance

of the Solid Bank check, a non-negotiable
check being a crossed check, which
replaced the dishonored Prudential Bank
check, a negotiable check, is a new
obligation in lieu of the old obligation arising
from the issuance of the Prudential Bank
check, since there was an essential change
in the circumstance of each check.
SC RULING
NO. The issuance of the Solid Bank check in replacement of the dishonored Prudential Bank
check did not amount to novation that discharged the latter instrument.
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.
Novation is done by the substitution or change of the obligation by a subsequent one which
extinguishes the first, either by changing the object or principal conditions, or by substituting the
person of the debtor, or by subrogating a third person in the rights of the creditor.
There are only two ways which indicate the presence of novation and thereby produce the effect
of extinguishing an obligation by another which substitutes the same. First, novation must
be explicitly stated and declared in unequivocal terms as novation is never presumed
(extinctive novation). Secondly, the old and the new obligations must be incompatible on
every point (implied novation). The test of incompatibility is whether or not the two obligations
can stand together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first.
In this case, respondents 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 P 214,000.00 as payment for the 300 bags of rice. As we said,
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
petitioners recognition of the existing obligation to respondent to pay P 214,000.00 subject of the
replaced Prudential Bank check.
Moreover, respondents 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 P214,000.00, 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 P214,000.00. It would appear that respondent accepted the Solid Bank check to give
petitioner the chance to pay her obligation.
Among the different types of checks issued by a drawer is the crossed check. The Negotiable
Instruments Law is silent with respect to crossed checks, although the Code of Commerce makes
reference to such instruments. We have taken judicial 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 could not
be converted into cash. Thus, the effect of crossing a check relates to the mode of payment,
meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the
payee named therein. The change in the mode of paying the obligation was not a change in
any of the objects or principal condition of the contract for novation to take place.
Considering that when the Solid Bank check, which replaced the Prudential Bank check, was
presented for payment, the same was again dishonored; thus, the obligation which was secured
by the Prudential Bank check was not extinguished and the Prudential Bank check was not
discharged. Thus, we found no reversible error committed by the CA in holding petitioner liable
as an accommodation indorser for the payment of the dishonored Prudential Bank check.
NOTES
TOPIC MODULE 8
CASE #2
CASE TITLE SPS ABELLA v SPS ABELLA GR NO G.R.
No.
21953
4
PONENTE DATE
November 25,
2019.
DOCTRINE
FACTS
Zoilo J. Abella (Zoilo) extended a loan of P800,000.00 to his nephew's wife, Grace
Abella (Grace), in October 2002 which was paid in installments. In September 2005,
to cover the outstanding balance of P300,000.00, Grace issued three post-dated
checks in the same amount of P100,000.00.
The first check, Equitable-PCI Bank Check No. 0000152255 dated September 30,
2005, was encashed by Zoilo. The second check, Equitable-PCI Bank Check No.
0000152256 dated November 30, 2005, was exchanged with cash by Grace. The
third check, Equitable-PCI Bank Check No. 0000152257 dated January 30, 2006,
is the subject of the present controversy.
Zoilo and his spouse, Gregoria Abella (petitioners), claimed that the amount of
P100,000.00 remained unpaid despite follow ups, even if they had returned
possession of the third check to Grace. Claiming full payment of the loan, Grace
refused to pay, which led to the filing of the Complaint for Collection of Sum of
Money and Damages from which this petition originated.
During trial, Grace and her spouse, Alden Abella (respondents), contended that the
last check was also exchanged with cash personally given to Zoilo.
Finding that petitioners failed to establish their claim by preponderant evidence, the
First Municipal Circuit Trial Court (MCTC) of New Washington and Batan, New
Washington, Aklan, dismissed petitioners' complaint.
LOWER RTC: CA:

COURT
RULING
ISSUE/S

Petitioners have the burden of proof but failed to
establish the subsistence of the obligation by a
preponderance of evidence due to inconsistencies
in their testimonies. Petitioners' testimonial
evidence yielded conflicting answers on the date
when the second check was exchanged for cash, as
to whether it was paid in March or February. While
petitioners contend that the trial and appellate courts
belabored the inconsistencies as to when the
second check was paid, although the dispute only
involves the third check, the inconsistencies render
petitioners' claim of an existing obligation doubtful
as it was possible to confuse the payments of the
second and third checks. While old age might
explain the inconsistencies, petitioners failed to
adduce further evidence to support their assertion
that respondents did not also exchange the third
check with cash.
Petitioners point out that their assertion on

respondents' failure to make good the last check
was consistent throughout the proceedings.
However, the check itself or any written agreement
would have been the best evidence in this case. "A
check constitutes an evidence of indebtedness and
is a veritable proof of an obligation."
On the other hand, the inconsistency between

respondents' statements in their Answer with Motion
to Dismiss and their testimony does not necessarily
belie respondents' claim of payment. Respondents'
Answer referred only to one check, although there
were actually three checks issued, because it was
in response to the Complaint which referred only to
one post-dated Equitable PCI Bank check issued in
September 2005. In fact, it was only during trial
when it was discovered that there were three checks
involved and that the third check is the subject of the
present controversy. Petitioners cannot shift the
blame to respondents for a confusion that they
caused.
SC RULING
"Once the existence of an indebtedness is duly established by evidence, the burden

of showing with legal certainty that the obligation has been discharged by payment
rests on the debtor." Thus, while it is true that "one who pleads payment has
the burden of proving it," the burden of showing the discharge of the
obligation by the debtor only arises once the existence of indebtedness is
duly established by evidence. Here, petitioners failed to show that
respondents are still indebted to them.
At any rate, respondents have possession of the check in question. Thus, the courts
a quo properly relied on Section 119 (e) of the Negotiable Instruments Law.
Pursuant to the said section, respondents' possession of the subject check
bolstered the fact of full satisfaction of their loan obligation.
Section 119 (e) of the Negotiable Instruments Law provides that a negotiable
instrument like a check may be discharged by any other act which will
discharge a simple contract for the payment of money, such as when the
principal debtor becomes the holder of the instrument at or after maturity in
his own right. In order that there will be discharge under subsection (e), the
reacquisition must be: (1) by the principal debtor; (2) in his own right; and (3)
at or after the date of maturity.
First, it is undisputed from the records that respondents, as the debtors in the
present case, reacquired the third check. Second, the reacquisition by respondents
was clearly in their own right and not in a representative capacity, such as being an
agent of another or as a pledge from the petitioners who, in fact, freely gave it to
them. Third, the maturity date of the check was on January 30, 2006 and the
reacquisition was made after the said date.
NOTES
TOPIC Checks MODULE 9
CASE #1
CASE TITLE SPOUSES GEORGE and LIBRADA P. MORAN, GR NO 105836
vs.COURT OF APPEALS and CITYTRUST BANKING CORP.
PONENTE Regalado, J: DATE Mar. 7, 1994
DOCTRINE A bank is under no obligation to make part payment on a check, up to only the amount of the drawer's
funds, where the check is drawn for an amount larger than what the drawer has on deposit. Such a
practice of paying checks in part has never existed. Upon partial payment, the check holder could not
be called upon to surrender the check, and the bank would be without a voucher affording a certain
means of showing the payment. The rule is based on commercial convenience, and any rule that would
work such manifest inconvenience should not be recognized. A check is intended not only to transfer a
right to the amount named in it, but to serve the further purpose of affording evidence for the bank of
the payment of such amount when the check is taken up
FACTS
Petitioner Sps. Moran owns the Wack-Wack Petron station at Shaw Blvd. They regularly purchased
bulk fuel from Petrophil Corp. paid by personal checks upon delivery.
Spouses has three joint accounts with Citytrust Banking Corp.(Shaw Blvd. Branch), where they are
valued clients. As a special privilege, the bank allowed them to maintain a zero balance in their current
account. Transfers from Saving Account No. 1037002387 to their current account could be made only
with their prior authorization, but they gave written authority to Citytrust to automatically transfer funds
from their Savings Account No. 1037001372 to their Current Account No. 37-00066-7 at any time
whenever the funds in their current account were insufficient to meet withdrawals from said current
account. Such arrangement for automatic transfer of funds was called a pre-authorized transfer (PAT)
agreement.
Dec.12, 1983: Librada Moran drew a check (Citytrust No. 041960) for P50,576.00 payable to Petrophil
Corp.The next day, Librada, issued another check (Citytrust No. 041962) in the amount of P56,090.00
in favor of the same Corp. (Total -P106,666.00). Dec. 14, 1983: Petrophil deposited the two checks to
its account PNB Pandacan Branch, the collecting bank. In turn, PNB presented them for clearing with
the Philippine Clearing House Corp. on the same day. The records show that Current Account No. 37-
00066-7 had a zero balance, while Savings Acct No. 1037001372 (covered by the PAT) had an
available balance of P26,104.30 and Savings Acct No. 1037002387 had an available balance of
P43,268.39.
Dec. 15, 1983, George Moran went to the bank, to personally oversee their daily transactions with the
bank. He deposited in their Savings Account No. 1037002387 the amounts of P10,874.58 and
P6,754.25, and in Savings Account No. 1037001372 the amounts of P5,900.00, P35,100.00 and
30.00.The amount of P40,000.00 was then transferred by him from Saving Account No. 1037002387
to their current account by means of a pro forma withdrawal form (a debit memorandum), which was
provided by the bank, authorizing the latter to make the necessary transfer. At the same time, the
amount of P66,666.00 was transferred from Savings Account No. 1037001372 to the same current
account through the pre-authorized transfer (PAT) agreement.
George Moran was informed by Librada, that Petrophil refused to deliver their orders on a credit basis
because the two checks they had previously issued were dishonored upon presentment for payment.
(due to "insufficiency of funds.") The non-delivery of gasoline forced them to temporarily stop business.
Petrophil cancelled their credit accommodation, forcing them to pay for their purchases in cash. George
Moran, furiously, demanded an explanation from Raul Diaz, the branch manager. He talked to a certain
bank officer, who allegedly told him that Amy Belen Ragodo, the customer service officer, had
committed a "grave error".
Diaz went to the Moran residence to get the signatures of the petitioners on an application for a
manager's check so that the dishonored checks would be redeemed. Diaz then went to Petrophil to
personally present the checks in payment for the two dishonored checks. By chance, around May 1984,
George learned from the credit manager of Petrophil, that the latter received from Citytrust, (through
Diaz), a letter, notifying them that the two checks were "inadvertently dishonored ... due to operational
error." Six months after, petitioner’s counsel wrote to Citytrust claiming that the bank's dishonor of the
checks caused them besmirched business reputation, hence they were contemplating the filing of
actions unless the bank issued a certification and paid them P1,000,000.00 as moral damages. The
Bank did not heed the demands. Petitioners filed a complaint for damages.
LOWER RTC: After trial, a decision dated October 9, CA: On appeal, the Court of Appeals rendered
COURT 1989 was rendered by the trial court judgment in CA-G.R. CV No. 25009 on October 9,
RULING dismissing both the complaint and the 1989 affirming the decision of the trial court.
counterclaim.
ISSUE/S whether or not petitioners had sufficient funds in their accounts when the bank dishonored the checks
in question.
ARGUMENTS Petitioner (Sps. Moran): the transfers were Respondent (NAME):
sufficient to cover the two checks,thus
such fact should have prevented the
dishonor of the checks.
SC RULING AFFIRMS the dismissal of the lower courts.
The transfers were not sufficient to cover the checks, thus the dishonor.
Petrophil Corp. presented these two (2) checks for clearing with PNB Pandacan on December 14, 1983.
What would happen with these checks drawn with PNB on December 14, 1983?
So these checks will now be presented by PNB with the Philippine Clearing House on December 14, and then the Philippine
Clearing House will process it until midnight of December 14. Citytrust will send a clearing representative to the Philippine
Clearing House at around 2:00 o'clock in the morning of December 15 and then get the checks. The checks will now be
processed at the Citytrust Computer at around 3:00 o'clock in the morning of December 14 (sic)but it will be processed for
balance of Citytrust as of December 14 because for one, we have not opened on December 15 at 3:00 o'clock. Under the
clearing house rules, we are supposed to process it on the date it was presented for clearing.
On December 14, 1983, when PNB, Pandacan presented the checks for collection, the available
balance for Savings Account No. 1037001372, was only P26,104.30 while Current Account No. 37-
0006-7 had no available balance. It was only on December 15, 1983 at around ten o'clock in the morning
that the necessary funds were deposited, which unfortunately was too late to prevent the dishonor of
the checks.
The spouses alone were at fault. A drawer must remember his responsibilities every time he issues a
check. He must personally keep track of his available balance in the bank and not rely on the bank to
notify him of the necessity to fund certain check she previously issued. A check, as distinguished from
an ordinary bill of exchange, is supposed to be drawn against a previous deposit of funds for it is
ordinarily intended for immediately payment. Moreover, between the time of the issuance of said checks
on December 12 and 13 and the time of their presentment on December 14, petitioners had, at the very
least, twenty-four hours to replenish their balance in the bank.
When the transfer from both savings accounts to the current account were made, they were done in
the hope that the checks may be retrieved, thus preventing their dishonor. Unfortunately, respondent
bank did not succeed in effectuating its good intentions. The transfers were made to preserve its
relations with petitioners whom it knew were valued clients, hence it wanted to prevent the dishonor of
their checks, if the same was at all possible. Although not admitting fault, it tried its best to make sure
that the checks would not bounce. That theory that the checks having already been dishonored, there
was no necessity to put into effect the pre-authorized transfer agreement is incorrect.
If ever petitioners on previous occasions were given notices every time a check was presented for
clearing and payment and there were no adequate funds in their accounts, these were, at most, mere
accommodations on the part of respondent bank.
NOTES
Check- a bill of exchange drawn on a bank payable on demand, A check is a written order addressed
to a bank or persons carrying on the business of banking, by a party having money in their hands,
requesting them to pay on presentment, to a person named therein or to bearer or order, a named sum
of money.
Nature of the Relationship between parties-Fixed savings and current deposits of money in banks shall
be governed by the law on simple loan. The relationship between the bank and the depositor is that
of a debtor and creditor. In the contract of deposit between the banker and its depositor, the banker
agrees to pay checks drawn by the depositor as long as that said depositor has money in the hands of
the bank. If the bank possesses funds of a depositor, it is bound to honor his checks to the extent of
the amount of his deposits. The failure of a bank to pay the check of a merchant, when the deposit is
sufficient, entitles the drawer to substantial damages without any proof of actual damages. To recover,
the depositor must show he had sufficient funds to meet his demand.
CASE #2
CASE TITLE PRUDENTIAL BANK, Petitioner, v. CHONNEY LIM, Respondent. GR NO 136371
PONENTE Tinga, J. DATE November 11, 2005
DOCTRINE In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether
such account consists only of a few hundred pesos or of millions. The bank must record every
single transaction accurately, down to the last centavo, and as promptly as possible. This has to
be done if the account is to reflect at any given time the amount of money the depositor can
dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A
blunder on the part of the bank, such as the dishonor of a check without good reason, can cause
the depositor not a little embarrassment if not also financial loss and perhaps even civil and
criminal litigation.
FACTS Chonney Lim (respondent), the owner of Rikes Boutique located at Session Road, Baguio City,
maintained two (2) accounts with Prudential Bank (the bank), namely: Savings Account No.
11264 and Checking Account No. 1262. He availed of the bank's automatic transfer system
wherein the funds from his savings account could be transferred to his checking account in case
the balance of the latter account was insufficient to cover the checks he issued.
On 14 March 1988, respondent deposited the amount of P34,000.00 with his savings account.
According to respondent, the following day, 15 March 1988, he deposited an equal amount with
the same savings account. The matter is the crux of contention between the parties, as the bank
has steadfastly denied having received the latter deposit from respondent.
On 24 May 1988, respondent issued a check against his current account in favor of the
Paluwagan ng Bayan Savings Bank (Paluwagan) in the sum of P2,830.00 in payment of his loan
with the said bank. On 25 May 1988, respondent drew another check against his checking
account to the order of Teodulo Crisologo in the amount of P10,000.00 as payment for a
business transaction with the latter.
The bank, however, dishonored both checks, claiming that respondent did not have sufficient
funds in his account with the bank. Upon learning that the first check paid to Paluwagan had
been dishonored, respondent wrote a letter5 to the bank on 27 May 1988, asking it to recheck its
records.
On 30 May 1988, the bank's manager, Tolentino Opiniano (Opiniano), sent a reply letter,6
offering, as an excuse for the dishonor of said check, the inadvertent earlier posting to
respondent's account of a postdated check.7 While Opiniano apologized for respondent's
inconvenience, he made no commitment to honor this first check.8
When the second dishonored check came to respondent's knowledge, he immediately wrote a
letter9 to the bank, protesting the dishonor of the check. Opiniano sent a reply10 stating that as
per records, a deposit slip dated 15 March 1988 for P34,000.00 was received for deposit to
Savings Account No. 11264 on 14 March 1988.
Respondent denied having made only one deposit, insisting that he made two deposits of
P34,000.00 each, one on 14 March and the other on 15 March. As proof, respondent presented
the two separate deposit slips covering the transactions, the first bearing the date 14 March
1988 while the second, the date 15 March 1988.
After the bank had conducted a thorough investigation, on 10 June 1988, Opiniano informed
respondent that two deposits were made on 14 March 1988, one for P34,000.00 and the other
for P1,000.00; and that two other deposits were made on 15 March 1988: P4,900.00 and
P2,900.00. He maintained that although the deposit slip bearing the amount of P34,000.00 is
dated 15 March 1988, it was actually received the day before or on 14 March 1988.
Thus, the bank's position is that only one deposit of P34,000.00 was made by respondent on 14
and 15 March 1988.
Respondent filed a Complaint before the RTC, Baguio City for the recovery of P34,000.00
representing his actual deposit and P300.00 as penalty charge, plus damages.
LOWER RTC: CA:

COURT RTC rendered its Decision holding that Affirmed the decision of the trial court with
RULING respondent made two deposits of P34,000.00 modification as to the award of moral damages,
apiece. RTC ordered the bank to pay the reducing it to P10,000.00. The testimony of the
following amounts: P34,000, representing the bank teller, coupled with the fact that the two
unposted deposit, with legal interest; P600.00, deposit slips listed different denominations of
representing the service charges unjustifiably
money totaling P34,000.00 per deposit slip, led
imposed on respondent, with legal interest;
the appellate court to conclude that there were
P50,000.00 as moral damages; P25,000.00 as
exemplary damages; and P10,000.00 as
indeed two deposits of P34,000.00 each, one
attorney's fees, plus costs of suit. made on 14 March and the other on 15 March
1988.
ISSUE/S
1. Whether or not the plaintiff made only one (1) or two (2) deposits of P34,000.00 the
first on March 14 and the second on March 15, 1988? 2 Deposits
2. Is CA wrong in modifying the award of moral damages from 50,000 to 10,000? YES
SC RULING
1. We find no justification to deviate from the factual findings of the trial court and the
appellate court. The bank has utterly failed to convince us that the assailed findings are
devoid of basis or are not supported by substantial evidence.
from the evidence extant in the record, particularly the admissions of teller Merlita Susan Caasi,
the plaintiff has established his claim of having made two (2) deposits of P34,000.00. Thus, Caasi
admitted that she impressed her rubber stamp, "Teller 2" and "duplicate" on both the Exhibits "B" and
"C" which are plaintiff's file copies of two separate and different deposit slips for P34,000.00 each.
An examination of the deposit slips dated 14 March and 15 March 1988 reveals that while the
slips each cover deposits in the amount of P34,000.00, they list down different denominations
however. Evidently, the slips were not prepared simultaneously or concurrently. This fact militates
against the bank's claim that one deposit slip is simply the duplicate of the other.
Article 1172 of the Civil Code ordains that responsibility arising from negligence in the
performance of an obligation is demandable. The failure of the bank's employees to credit the
amount of P34,000.00 to respondent's savings account, resulting as it did in the dishonor of
respondent's checks, constitutes actionable negligence in law.
1. From another perspective, the negligence of the bank constitutes a breach of duty to
its client. It is worthy of note that the banking industry is impressed with public interest.
As such, it must observe a high degree of diligence and observe lofty standards of
integrity and performance. By the nature of its functions, a bank is under obligation to
treat the accounts of its depositors with meticulous care and always to have in mind the
fiduciary nature of its relationship with them
The banking system is an indispensable institution in the modern world and plays a vital role in
the economic life of every civilized nation.
In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must record
every single transaction accurately, down to the last centavo, and as promptly as possible. This
has to be done if the account is to reflect at any given time the amount of money the depositor
can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he
directs. A blunder on the part of the bank, such as the dishonor of a check without good reason,
can cause the depositor not a little embarrassment if not also financial loss and perhaps even
civil and criminal litigation.
The action for damages hinges on the resolution of whether respondent has sufficient funds in
his account when the checks were dishonored. Both the trial and appellate courts ruled that had
the bank credited the P34,000.00 deposit made by respondent on 15 March 1988, the checks
would not have been dishonored. Likewise, both courts found that moral damages were in
order.
Needless to say, the bank's wrongful act caused injury to respondent. Credit is very important to
businessmen, and its loss or impairment needs to be recognized and compensated.
Under the circumstances of this case, we find that the award of moral damages is proper but the
amount must be reverted back to P50,000.00 as ordered by the RTC, said court being in a better
position to assess the amount of damages to be imposed on the negligent bank.
Furthermore, we sustain the award of exemplary damages. Such damages are imposed by way
of example or correction for the public good, in addition to the moral, temperate, liquidated or
compensatory damages. In view of the bank's negligence to record the deposit, the grant of exemplary
damages is thus justified.
WHEREFORE, the petition is denied. The Decision of the RTC dated 27 August 1991 in Civil Case No.
1467-R is AFFIRMED IN FULL.
NOTES
TOPIC Liability of the Drawer for Wrongfully Dishonoring and MODULE 9
Honoring a Check CASE #3
CASE TITLE PNB vs PUJOL GR NO
126152
PONENTE BELLOSILLO, J. DATE
Sept. 28, 1999
DOCTRINE Responsibility arising from negligence in the performance of every kind of obligation is
demandable. While petitioner’s negligence in this case may not have been attended with
malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and
humiliation to private respondent Lily S. Pujol for which she is entitled to recover
reasonable moral damages.
FACTS
Pujol opened with petitioner PNB, an account denominated as “Combo Account,” a
combination of Savings Account and Current Account in private respondent’s business
name “Pujol Trading,” under which checks drawn against private respondent’s checking
account could be charged against her Savings Account should the funds in her
Current Account be insufficient to cover the value of her checks. Hence, private
respondent was issued by petitioner a passbook on the front cover of which was
typewritten the words “Combo Deposit Plan.”
On 23 October 1990, private respondent issued a check in the amount of P30,000.00 in

favor of her daughter-in-law, Dr. Charisse M. Pujol. When issued and presented for
payment, private respondent had sufficient funds in her Savings Account. However,
petitioner dishonored her check allegedly for insufficiency of funds and debited her
account with P250.00 as penalty charge.
On 24 October 1990, private respondent issued another check in the amount of

P30,000.00 in favor of her daughter, Ms. Venus P. De Ocampo. When issued and
presented for payment petitioner had sufficient funds in her Savings Account. But, this
notwithstanding, petitioner dishonored her check for insufficiency of funds and debited
her account with P250.00 as penalty charge. On 4 November 1990, after realizing its
mistake, petitioner accepted and honored the second check for P30,000.00 and re-
credited to private respondent’s account the P250.00 previously debited as penalty.
Private respondent Lily S. Pujol filed with the Regional Trial Court of Pasig City a complaint
for moral and exemplary damages against petitioner for dishonoring her checks despite
sufficiency of her funds in the bank.
LOWER RTC: Rendered a decision ordering CA: The Court of Appeals affirmed in toto the
COURT petitioner to pay private respondent decision of the trial court.
RULING Pujol moral damages of P100,000.00
and attorney’s fees of P20,000.00. It
found that private respondent suffered
mental anguish and besmirched
reputation as a result of the dishonor of
her checks, and that being a former
member of the judiciary who was
expected to be the embodiment of
integrity and good behavior, she was
subjected to embarrassment due to the
erroneous dishonor of her checks by
petitioner.
ISSUE/S Whether or not petitioner was estopped from denying the existence of a “Combo
Account” and the fact that it was operational at the time of the issuance of the checks
because respondent Pujol was issued a Savings Account passbook bearing the printed
words “Combo Deposit Plan”
ARGUMENTS Petitioner (PNB): Respondent (NAME):

Justifies the dishonor of the two (2)
checks by claiming that at the time of
their issuance private respondent
Pujol’s account was not yet operational
due to lack of documentary
requirements, to wit: (a) Certificate of
Business Registration; (b) Permit to
Operate Business; (c) ID Card; and, (d)
Combination Agreement.
Petitioner further alleged that despite
the non-compliance with such
requirements petitioner placed the sign
“Combo Flag” on respondent Pujol’s
account out of courtesy and generosity.
Petitioner also admitted that it later

honored private respondent’s second
check, debited the amount stated
therein from her account and re-credited
the amount of P250.00 initially charged
as penalty.
SC RULING Yes. The petitioner is estopped.
There was also no question that the Savings Account passbook of respondent Pujol contained
the printed words “Combo Deposit Plan” without qualification or condition that it would take effect
only after submission of certain requirements. Although petitioner presented evidence before the
trial court to prove that the arrangement was not yet operational at the time respondent Pujol
issued the two (2) checks, it failed to prove that she had actual knowledge that it was not
yet operational at the time she issued the checks considering that the passbook in her
Savings Account already indicated the words “Combo Deposit Plan.” Hence, respondent Pujol
had justifiable reason to believe, based on the description in her passbook, that her accounts
were effectively covered by the arrangement during the issuance of the checks. Either by its own
deliberate act, or its negligence in causing the “Combo Deposit Plan” to be placed in the
passbook, petitioner is considered estopped to deny the existence of and perfection of the
combination deposit agreement with respondent Pujol.
Liability of the Drawer for Wrongfully Dishonoring and Honoring a Check

Responsibility arising from negligence in the performance of every kind of obligation is
demandable. While petitioner’s negligence in this case may not have been attended with malice
and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to private
respondent Lily S. Pujol for which she is entitled to recover reasonable moral damages.
NOTES Estoppel in pais or equitable estoppel arises when one, by his acts, representations or
admissions, or by his silence when he ought to speak out, intentionally or through
culpable negligence, induces another to believe certain facts to exist and such other
rightfully relies and acts on such belief so that he will be prejudiced if the former is
permitted to deny the existence of such facts.
TOPIC MODULE 9
CASE #4
CASE TITLE Citytrust Banking Corporation (BPI) vs Cruz GR NO
157049
PONENTE Bersamin, J DATE
August 11, 2010
DOCTRINE The petitioner, being a banking institution, had the direct obligation to supervise very closely the
employees handling its depositors' accounts, and should always be mindful of the fiduciary nature of its
relationship with the depositors.
FACTS
Respondent, Carlos Romulo N, Cruz an architect and businessman, maintained savings and checking
accounts at the petitioner’s Loyola Heights Branch. The savings account was considered closed due to the
oversight committed by one of the bank’s tellers. The closure resulted in the extreme embarrassment of
the respondent, for checks that he has issued could not be honored although his savings account was
sufficiently funded and the accounts were maintained under the petitioner’s check-o-matic arrangement
(whereby the current account was maintained at zero balance and the funds from the savings account
were automatically transferred to the current account to cover checks issued by the depositor like the
respondent). Thus, respondent sued petitioner in the RTC to claim damages from the petitioner.
LOWER RTC: ruled in favor of respondent. RTC found CA: affirmed RTC. The fiduciary relationship and the
COURT that the petitioner had failed to properly extent of diligence that is to be expected from a
RULING supervise its teller; and that the petitioner’s banking institution, like herein appellant Citytrust, in
negligence had made the respondent suffer handling the accounts of its depositors cannot be
serious anxiety, embarrassment and relaxed behind the shadow of an employee whether
humiliation entitling him to damages or not he/she is new on the job. The negligence of
the petitioner's personnel was the proximate cause
that had set in motion the events leading to the
damage caused to the respondent
ISSUE/S Whether the petitioner is liable for the acts of its teller
ARGUMENTS Petitioner (Citytrust Banking Respondent (Carlos Romulo Cruz):

Corporation (BPI)):
There were decisive fact situations showing
excusable negligence and good faith” that did
not justify the moral and exemplary damages
and attoryey’s fees.
SC RULING
Unquestionably, the petitioner, being a banking institution, had the direct obligation to supervise very
closely the employees handling its depositors' accounts, and should always be mindful of the fiduciary
nature of its relationship with the depositors. Such relationship required it and its employees to record
accurately every single transaction, and as promptly as possible, considering that the depositors'
accounts should always reflect the amounts of money the depositors could dispose of as they saw fit,
confident that, as a bank, it would deliver the amounts to whomever they directed. If it fell short of that
obligation, it should bear the responsibility for the consequences to the depositors, who, like the
respondent, suffered particular embarrassment and disturbed peace of mind from the negligence in the
handling of the accounts.
It is never overemphasized that the public always relies on a bank's profession of diligence and
meticulousness in rendering irreproachable service. Its failure to exercise diligence and meticulousness
warranted its liability for exemplary damages and for reasonable attorney's fees.
NOTES
TOPIC MODULE 9
CASE #5
CASE TITLE CITIBANK v DINOPOL GR NO
G.R. No.
188412
PONENTE MENDOZA DATE

NOV 22 2010
DOCTRINE
FACTS
Sometime in December 1996, Atty. Ernesto Dinopol availed of Citibank’s "Ready Credit Checkbooks"
advertised offer. After approving his application, Citibank granted Atty. Dinopol a credit line limit of
₱30,000.00. For said reason, Atty. Dinopol received from Citibank a check booklet consisting of several
checks with a letter stating that the account was "ready to use." Later, Citibank billed Atty. Dinopol
twice, in the sum of ₱1,545.00 representing Ready Credit Documentary Stamp and Annual Membership
Fee and ₱1,629.21 for interest and charges as well as late payment charges. Atty. Dinopol paid said
interests and charges on February 26, 1997.
In March 6, 1997, Atty. Dinopol then issued a check using his credit checkbook account with Citibank
in the amount of ₱30,000.00 in favor of one Dr. Marietta M. Geonzon for investment in her restaurant.
When the check was deposited, it was dishonored for the reason, "Drawn Against Insufficient Funds"
or "DAIF." Humiliated by the dishonor and the demand notice he received from Dr. Geonzon, Atty.
Dinopol filed a civil action for damages against Citibank before the RTC. Atty. Dinopol alleged that said
bank was grossly negligent and acted in bad faith in dishonoring his check. In defense, Citibank averred
that it was completely justified in dishonoring Atty. Dinopol’s check because the account did not have
sufficient funds at the time it was issued.
LOWER RTC: The RTC ruled in favor of the plaintiff CA: affirmed the RTC decision but modified the
COURT amount of moral and exemplary damages
RULING
ISSUE/S
W/N CA ERRED IN RULING THAT PETITIONER CITIBANK IS LIABLE TO DINOPOL FOR
DAMAGES
Citibank claims that after Dinopol settled his Citibank should have acted in good faith and in a
balance on Feb 26, he was sent another manner deserving of the trust of its customers.
statement of account charging him an
additional amount of ₱58.33 and since it He also contends that the dishonor of the check due
remained unpaid, it was automatically billed to the non-payment of the penalty charges and
as an availment against his Ready Credit interests of ₱58.33 was uncalled for. The payment
Facility. As a result,the subject check had to of said amount was not yet due on March 6, 1997
be returned due to "DAIF." when the check was issued and even on March 12,
1997 when it was dishonored.
Citibank asserts that the dishonor of the
subject check was due to Atty. Dinopol’s
failure to timely settle his outstanding
obligations despite receipt of his statements
of account. I
SC RULING
Citibank was at fault when it dishonored the subject check. First, Citibank claims that, as a matter of
standard operating procedure, it sent to Atty. Dinopol the Citibank Ready Credit Customer Guidebook
upon the approval of his Ready Credit Account application and so, he was aware of the terms and
conditions stated therein. Yet, except for its bare allegation, no other substantial proof was presented
by Citibank that the guidebook was indeed sent to Atty. Dinopol. In fact, its witness, Hernando, admitted
that the subject handbook was not at all delivered to him.1avvphi1
Second, when Atty. Dinopol issued the subject check for the full amount of ₱30,000.00 and Citibank
dishonored it because of insufficiency of funds by ₱58.33 representing the amount charged on his credit
line for penalties and charges, the said amount was not yet overdue. Contrary to Citibank’s insistence,
Atty. Dinopol was definitely not yet a delinquent account holder. More importantly, Citibank failed to
consider the fact that Atty. Dinopol issued the check on March 6, 1997 after paying the full amount of
₱1,629.21 and clearing with the bank if he could issue a check in the amount of ₱30,000.00. Citibank
did not even refute the allegation that it gave Atty. Dinopol the go-signal to issue such a check.
With respect to damages, the Court is in agreement with the CA in awarding moral and exemplary
damages. However, the Court cannot sanction the modification by the CA, under the circumstances
attending the case. It is of the considered view that the award of the RTC would suffice subject, of
course, to the payment of legal interest.
The award of moral damages should be granted in reasonable amounts depending on the facts and
circumstances of the case.Moral damages are meant to compensate the claimant for any physical
suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation and similar injuries unjustly caused.
As to the award of exemplary damages, the law allows it by way of example for the public good. The
business of banking is impressed with public interest and great reliance is made on the bank’s sworn
profession of diligence and meticulousness in giving irreproachable service.Thus, the Court affirms the
award as a way of setting an example for the public good. In addition, it also provided for attorney’s
fees. Both are subject to legal interest.
In any event, Citibank should have been more cautious in dealing with its clients since its business is
imbued with public interest. Banks must always act in good faith and must win the confidence of clients
and people in general. It is irrelevant whether the client is a lawyer or not.
NOTES
CASE #6
CASE TITLE Bank of America NT & SA v. Philippine Racing Club GR NO 150228
PONENTE Leonardo De-Castro, J DATE

July 30, 2009
DOCTRINE It is well-settled that banks are engaged in a business impressed with public interest, and it is
their duty to protect in return their many clients and depositors who transact business with them.
They have the obligation to treat their client's account meticulously and with the highest degree
of care, considering the fiduciary nature of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a family.
FACTS
Respondent Philippine Racing Club Inc. (PRCI) is a domestic corporation which maintains
several accounts with different banks in the Metro Manila area. Among the accounts maintained
was a current account with Bank of America NT & SA (BA). The authorized signatories are the
President and the Vice President for finance of the corporation, respectively. On or about the 2nd
week of December 1988, the President and Vice President of plaintiff-appellee corporation were
scheduled to go out of the country in connection with the corporation's business. In order not to
disrupt operations in their absence, they pre-signed several checks relating to Current Account. It
turned out that on December 16, 1988, a John Doe presented two (2) checks amounting to Php
110,000.00 each to BA for encashment, which the two (2) checks had similar entries with similar
infirmities and irregularities. Under the line for the payee, the upper line has a typewritten word
“CASH” and the lower line has a type written word “ONE HUNDRED TEN THOUSAND PESOS
ONLY.” Despite the highly irregular entries on the face of the checks BA encashed said checks.
LOWER RTC: CA:

COURT The RTC ordered Bank of America to pay The CA affirmed said decision in toto in its July
RULING respondent PRCI the value of the two (2) 16, 2001 Decision. Petitioner's Motion for
checks, plus damages and attorney’s fees. Reconsideration of the CA Decision was
subsequently denied on September 28, 2001.
ISSUE/S Whether or not petitioner bank is obligated to verify said checks to respondent and is held liable.

Petitioner BA insists that it merely fulfilled Despite the highly irregular entries on the face of
its obligation under law and contract when it the checks, defendant-appellant bank, without as
encashed the aforesaid checks. The much as verifying and/or confirming the
genuine signatures of the client's duly legitimacy of the checks considering the
authorized signatories affixed on the checks substantial amount involved and the obvious
signify the order for payment. Furthermore, infirmity/defect of the checks on their faces,
petitioner maintains that there exists a duty encashed said checks. A verification process,
on the drawee bank to inquire from the even by was of a telephone call to PRCI office,
drawer before encashing a check only would have taken less than ten (10) minutes. But
when the check bears a material alteration. this was not done by BA.
SC RULING Yes. Extraordinary diligence demands that petitioner bank should have ascertained from
respondent the authenticity of the subject checks or the accuracy of the entries therein not only
because of the presence of highly irregular entries on the face of the checks but also of the
decidedly unusual circumstances surrounding their encashment. Petitioner's contention would
have been correct if the subject checks were correctly and properly filled out by the thief and
presented to the bank in good order. In that instance, there would be nothing to give notice to the
bank of any infirmity in the title of the holder of the checks and it could validly presume that there
was proper delivery to the holder. The bank could not be faulted if it encashed the checks under
those circumstances. However, the undisputed facts plainly show that there were circumstances
that should have alerted the bank to the likelihood that the checks were not properly delivered to
the person who encashed the same. In all, we see no reason to depart from the finding in the
assailed CA Decision that the subject checks are properly characterized as incomplete and
undelivered instruments thus making Section 1520 of the NIL applicable in this case
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC MODULE
CASE #1
CASE TITLE GR NO
PONENTE DATE
DOCTRINE
FACTS
LOWER RTC: CA:

COURT
RULING
ISSUE/S
SC RULING
NOTES
TOPIC Nature of Proceedings in FRIA MODULE
CASE #1
CASE TITLE Allied Banking Corp. v. Equitable PCI Bank, Inc. GR NO 191939
PONENTE MARTIRES, J. DATE March 14, 2018
DOCTRINE The rehabilitation proceedings shall be deemed to have commenced from the date of filing of the
petition, which is also termed the commencement date. Effects of such commencement order shall
retroact to the date that the petition was filed, and renders void any attempt to collect on or enforce
a claim against the debtor or to set off any debt by the debtor's creditors, after the commencement
date.
The inherent purpose of rehabilitation is to find ways and means to minimize the expenses of the
distressed corporation during the rehabilitation period by providing the best possible framework for
the corporation to gradually regain or achieve a sustainable operating form.
The immediate effectivity of the stay order means that the RTC, through an order commencing
rehabilitation and staying claims against the debtor, acknowledges that the debtor requires
rehabilitation immediately and therefore it can not only prohibit but also nullify acts made after its
effectivity, when such acts are violative of the stay order, to prevent any irreparable detriment to
the debtor's successful restoration.
FACTS Equitable PCI Bank, Inc. (EPCIB), as creditor, filed a petition for corporate rehabilitation of its
debtor SCP with the RTC. EPCIB alleged that due to the onslaught of 1997 Asian Financial Crisis,
SCP began experiencing a downward trend in its financial condition which prompted various banks
and financial institutions to grant it with term loan facilities and working capital lines; that SCP failed
to make timely payments on its term loan facilities; that SCP also defaulted on its loan obligations
under the December 2002 Omnibus Agreement, where lending banks and other financial
institutions agreed to reschedule and restructure SCP's payments on the principal loan and
interest, reinstate its working capital lines and establish a new trade financing line; and that the
petition for corporate rehabilitation is grounded on Section 1, Rule 4 of the Interim Rules of
Corporate Rehabilitation, which provides that "any debtor who foresees the impossibility of meeting
its debts when they respectively fall due, or any creditor or creditors holding at least twenty-five
percent (25%) of the debtor's total liabilities, may petition the proper Regional Trial Court to have
the debtor placed under rehabilitation."
Apart from the foregoing agreements, Allied Banking Corporation (ABC) granted SCP with a
revolving credit facility denominated as a letter of credit/trust receipt line in the amount of P100M,
which SCP availed of to finance the importation of its raw materials. Pursuant to this arrangement,
SCP executed a trust receipt, which authorizes ABC to charge SCP's account in its possession
under instances specified in paragraph 9 thereof.
On 12 September 2006, the RTC granted EPCIB's petition. On 15 September 2006, petitioner
applied remaining proceeds of SCP's Current Account to its obligations under the TR.
SCP filed a motion alleging that petitioner violated the rehabilitation court's stay order when it
applied the proceeds of its current account to the payment of obligations covered by the stay order.
ABC filed an opposition, contending that SCP's obligations with it had become due and
demandable, rendering legal compensation valid and proper; that petitioner did not violate the stay
order, as it had no notice of its issuance at the time of the legal compensation; and that petitioner
cannot be legally compelled to extend credit to SCP against its will.
LOWER RTC: Granting EPCIB's petition. Staying all CA: Affirmed RTC decision. CA ruled that RTC's
COURT claims against SCP, by all other stay order was effective from the date of its
RULING corporations, persons or entities insofar as issuance on 12 September 2006, on the basis of
they may be affected by the present Section 11, Rule 4, and Section 5, Rule 3, of the
proceedings. Steel Corporationis prohibited Interim Rules of Corporate Rehabilitation; thus,
from selling, encumbering, transferring or ABC was bound to comply with it on said date. The
disposing in any manner of its assets and CA also ruled that the subject account was already
properties except in ordinary course of its under custodia legis by virtue of the stay order,
business and as may be approved by rendering ABC's unilateral application of the
Rehabilitation Receiver. The suppliers of proceeds in the subject account improper. On the
goods or services of Steel Corporation are issue of impairment of contractual rights, the CA
prohibited from withholding supply of goods held that no impairment exists because no
and services in ordinary course of business changes were made in the amount or rate of SCP's
for as long as it is able to make payment for debt to ABC. Only the enforcement of the latter's
services and goods supplied after the claims is being stayed or suspended.
issuance of this Order.
ISSUE/S 1. Whether the rehabilitation court can reverse or invalidate acts that are inconsistent with its
stay order and are made after its issuance but prior to its publication
2. Whether Rehabilitation Rules may be applied to resolve the present petition when the subject
petition was filed under the Interim Rules
3. Whether the immediate effectivity of the stay order is inconsistent with the publication
requirement under the Rules, such that the rehabilitation court cannot invalidate acts made after
its issuance but prior to its publication
ARGUMENTS Petitioner: Allied Banking Corp (ABC) Respondent (NAME): Equitable PCI Bank, Inc.
SCP's obligations with it had become due Petitioner violated the rehabilitation court's stay
and demandable, rendering legal order when it applied the proceeds of its current
compensation valid and proper; that account to the payment of obligations covered by
petitioner did not violate the stay order, as it the stay order.
had no notice of its issuance at the time of
the legal compensation; and that petitioner
cannot be legally compelled to extend credit
to SCP against its will
SC RULING 1. Yes. The Rehabilitation Rules provides that the court shall issue a commencement order once
it finds the petition for rehabilitation sufficient in form and substance. This commencement order
primarily contains: a declaration that the debtor is under rehabilitation, the appointment of a
rehabilitation receiver, a directive for all creditors to file their verified notices of claim, and an order
staying claims against the debtor. The rehabilitation proceedings shall be deemed to have
commenced from the date of filing of the petition, which is also termed the commencement date.
Effects of such commencement order shall retroact to the date that the petition was filed, and
renders void any attempt to collect on or enforce a claim against the debtor or to set off any debt
by the debtor's creditors, after the commencement date.
The order issued by RTC on 12 September 2006, which effectively initiated rehabilitation
proceedings and included a suspension of all claims against SCP, is akin to the commencement
order under the Rehabilitation Rules. Clearly, therefore, if the Rehabilitation Rules were to be
applied, the directive of the rehabilitation court restoring SCP's current account and crediting back
the offset amount is valid and proper, since the offsetting was made on 15 September 2006, after
the commencement date on 11 September 2006, when petition for rehabilitation was filed.
2. Yes. Section 2, Rule 1 of the Rehabilitation Rules governs rehabilitation cases already pending,
except when its application would not prove feasible or would work injustice. The above provision
is consistent with the mandate under R.A. No. 10142 which states that all further proceedings in
insolvency, suspension of payments and rehabilitation cases then pending, except to the extent
that in the opinion of the court their application would not be feasible or would work injustice, in
which event the procedures set forth in prior laws and regulations shall apply.
The soundness of upholding the retroactive effect of a commencement order is easily discernible.
Rehabilitation proceedings seek to give insolvent debtors the opportunity to reorganize their affairs
and to efficiently and equitably distribute its remaining assets. Rehabilitation proceedings in our
jurisdiction have equitable and rehabilitative purposes. On the one hand, they attempt to provide
for the efficient and equitable distribution of an insolvent debtor's remaining assets to its creditors;
and on the other, to provide debtors with a "fresh start" by relieving them of the weight of their
outstanding debts and permitting them to reorganize their affairs. The purpose of rehabilitation
proceedings is to enable the company to gain a new lease on life and thereby allow creditors to be
paid their claims from its earnings. The filing of a petition for the rehabilitation of a debtor, when
the court finds that it is sufficient in form and substance, is both (1) an acknowledgment that the
debtor is presently financially distressed; and (2) an attempt to conserve and administer its assets
in the hope that it will eventually return to its former state of successful financial operation and
liquidity. The inherent purpose of rehabilitation is to find ways and means to minimize the expenses
of the distressed corporation during the rehabilitation period by providing the best possible
framework for the corporation to gradually regain or achieve a sustainable operating form.
Even if the retroactive effect under the Rehabilitation Rules is inapplicable to the case at bar, the
Interim Rules expressly provides that the stay order is effective upon its issuance. Under Sec. 11,
the stay order shall be effective from the date of its issuance until the dismissal of the petition or
the termination of the rehabilitation proceedings.
3. No. The immediate effectivity of the stay order means that the RTC, through an order
commencing rehabilitation and staying claims against the debtor, acknowledges that the debtor
requires rehabilitation immediately and therefore it can not only prohibit but also nullify acts made
after its effectivity, when such acts are violative of the stay order, to prevent any irreparable
detriment to the debtor's successful restoration.
The publication requirement only means that all affected persons must, to satisfy the requirements
of due process, be notified that as of a particular date, the debtor in question requires rehabilitation
and should temporarily be exempt from paying its obligations, unless allowed by the court. Once
due notice is made, the rehabilitation court may nullify actions inconsistent with the stay order but
which may have been taken prior to publication, precisely because prior to publication, creditors
may not yet be aware that they are to desist from pursuing claims against the insolvent debtor.
Again, the immediate effectivity of the stay order can be traced to the purpose of rehabilitation:
once the necessity of rehabilitating the debtor is recognized, through a petition duly granted, it is
imperative that the necessary steps to preserve its assets are taken at the earliest possible time.
It is thus apparent that the RTC properly invalidated petitioner's action made on 15 September
2006, after the subject order was issued.
NOTES
TOPIC Persons covered BY FRIA MODULE
CASE #2
CASE TITLE Metropolitan Bank & Trust Company (MBTC) v. Fortuna Paper Mill & GR NO 190800
Packaging Corporation
PONENTE Reyes, A., Jr., J. DATE November 7, 2018
DOCTRINE A corporation with debts that have already matured may still file a petition for corporate
rehabilitation under the Interim Rules.
This Court need not distinguish whether the claim has already matured or not. What is essential in
case of rehabilitation is the inability of the debtor corporation to pay its dues as they fall due. In the
case herein, accepting MBTC's proposition that debtor companies already in default are
unqualified to file a petition for corporate rehabilitation not only contradicts the purpose of the law,
as stated, but also advocates a limiting bar that is not found under the pertinent provisions. A better
and more sound interpretation adheres to the very purpose of corporate rehabilitation, which is to
allow the debtor-corporation to be restored "to a position of successful operation and solvency, if
it is shown that its continuance of operation is economically feasible and its creditors can recover
by way of the present value of payments projected in the plan.
FACTS MBTC is a domestic banking corporation organized and existing under the laws of the Republic of
the Philippines, and who extended various credit accommodations and loan facilities to Fortuna.
Fortuna, before the closure of its business and cessation of its operations in 2006, was organized
to manufacture special and craft papers from, waste and scrap materials, and which it used to sell
its products principally to manufacturers of corrugated boxes, cement paper bags, and other
stationary paper products.
The credit accommodations and loan facilities extended by MBTC to Fortuna principally amounted
to Php 259,981,915.33. In order to secure these obligations, Fortuna mortgaged to MBTC its real
and movable properties as well as several pieces of realty owned by several sister companies.
Fortuna eventually ended up defaulting on its obligations to MBTC and failed to pay said
indebtedness along with the interests and penalties despite repeated demands on the part of
MBTC.
Around this same period, Meralco filed a criminal complaint against Fortuna for pilferage of
electricity and cut off the latter's electrical supply. Though Fortuna and Meralco eventually
executed a compromise agreement that resulted in the reconnection of Fortuna's power supply,
due to alleged dire financial straits and labor problems, Fortuna subsequently and for the second
time defaulted in its payments. This led Meralco to once again disconnect Fortuna's supply of
electricity, a turn of events which persisted up until the time the petition was filed.
Instead of paying the overdue obligations to MBTC, Fortuna filed on June 21, 2007 a Rehabilitation
Petition with the RTC of Malabon, Branch 74. Attached therein was Fortuna's proposed
Rehabilitation Plan, which consisted mainly of (i) the resumption and continuance of its business,
to be made possible by the entry of a supposed investor and a debt moratorium on principal
interest, and (ii) entry into the business condominium development.
Finding the Rehabilitation Petition sufficient in form and substance, on June 27, 2007, the RTC
issued a Stay Order setting the initial hearing involving the Rehabilitation Petition on August 6,
2007 and directing all of Fortuna's creditors and other interested parties to file their verified
comments/opposition. The court likewise ordered for the appointment of a rehabilitation receiver
pursuant to Rule 4, Section 6 of the Interim Rules. On July 13, 2007, Atty. Teston accepted his
appointment as rehabilitation receiver.
On August 6, 2007, MBTC filed its Comment/Opposition to the Rehabilitation Petition and prayed
for its dismissal based on the following grounds: (1) Fortuna was not qualified for corporate
rehabilitation under Section 1 of Rule 4 of the Interim Rules; (2) the petition was fatally defective
for non-compliance with the minimum requirements of Section 5 of Rule 4 of the Interim Rules; and
(3) the petition was filed solely for the purpose of unjustly delaying the payment of its debt
obligations.
Despite opposition, the Rehabilitation Petition was given due course in an Order dated September
20, 2007. The RTC thus referred the same to Atty. Teston for the latter's evaluation and
recommendations.
After reviewing the same, Atty. Teston submitted a Rehabilitation Receiver's Report and
Comments to the Rehabilitation Plan (Receiver's Report), the said report recommending that the
proposed Rehabilitation Plan be adopted, but subject to timelines and benchmarks.
LOWER RTC: Issued an order approving the CA: Found that the rehabilitation was feasible and
COURT Rehabilitation Plan. he trial court found the the opposition of the petitioning creditors was
RULING proposed Rehabilitation Plan feasible and manifestly unreasonable
viable and noted Fortuna's effort to improve
its financial standing by establishing a new
business of realty development in Malabon
City.
ISSUE/S Whether or not the CA erred in affirming the Rehabilitation Plan approved by the RTC.
ARGUMENTS Petitioner (MBTC): Respondent (Fortuna Paper Mill & Packaging

● CA is mistaken, and anchors its Corporation):
contentions on the belief that Fortuna ● Fortuna argues that cursory reading of the
is not qualified to file a petition for Interim Rules reveals that MBTC's reading
rehabilitation under the Interim of the same is legally untenable and
Rules. restrictive, and that the salient provision
● MBTC argues that a corporation may merely indicates the minimum conditions
petition that it be placed under for a debtor to be able to file a
rehabilitation only if it is in the Rehabilitation Petition.
financial condition of a debtor who ● Fortuna points out the lower courts have
foresees the majority of its debts and already determined that the Rehabilitation
its failure to meet them. Plan is feasible, and that MBTC's
● Notwithstanding the question of objections to the same is akin to
eligibility of Fortuna, the CA substituting the latter's judgment over that
overlooked the many glaring and of the court, in derogation of Section 23,
patent deficiencies of Fortuna's Rule 4 of the Interim Rules.
Rehabilitation Plan, which include
the alleged absence of material
financial commitments to support it.
SC RULING YES. The case was dismissed for being moot and academic. The rationale behind corporate
rehabilitation must be upheld at all times and must not be allowed to be abused and misused by
corporations whose aim is solely to thwart the enforcement of legal rights by a creditor, in this case,
the Rehabilitation Plan which absolutely lacks feasibility and the lack of any abuse appurtenant to
the provisions therein. Perhaps the best indicator that the Rehabilitation Plan was doomed to fail
from the start was the very proclamation of the trial court declaring it as such and thus terminating
the rehabilitation proceedings, a belated yet crucial development which rendered the issues in this
case moot and academic.
Fortuna is qualified to file for corporate rehabilitation. Section 1, Rule 4 of the Interim Rules on the
Procedure on Corporate Rehabilitation provides for the qualifications of a corporation to file a
petition for corporate rehabilitation, to wit:
Sec. 1. Who May Petition. — Any debtor who foresees the impossibility of meeting its
debts when they respectively fall due, or any creditor or creditors holding at least twenty-
five percent (25%) of the debtor's total liabilities, may petition the proper Regional Trial
Court to have the debtor placed under rehabilitation. (Emphasis Supplied)
A plain reading of the provision shows that the Interim Rules does not make any distinction
between a corporation which is already in debt and a corporation which foresees the possibility of
debt, or which would eventually yet surely fall into the same, but may at present be free from any
financial liability. Thus, since the statute is clear and free from ambiguity, it must be given its literal
meaning and applied without attempted interpretation.
In this case, Fortuna maintains a status of solvency, having more assets than its liabilities with a
Php71,000,000.00 margin. However, even hypothetically granting that Fortuna is already in a state
of insolvency, the Court finds that is not precluded from filing its Rehabilitation Petition to facilitate
its restoration to its former business stability. Fortuna is seeking a fresh start to lift itself from its
present financial predicament. Thus, the foreseen viable rehabilitation of Fortuna would be more
advantageous to the business community and its creditors rather than proceed with its liquidation
which may possibly lead to its eventual corporate death.
There is no compliance with the minimum requirements under Section 5 of Rule 4 of the Interim
Rules. Despite this Court's finding that Fortuna may petition for court rehabilitation, being qualified
to do does not mean that such a petition will automatically be validated. Here, the Court disagrees
with the finding of the lower courts that the Rehabilitation Plan is one that is economically feasible.
The Rehabilitation Plan is primarily premised on speculative investments and the lack of material
financial commitments. It is clear from a perusal of the Rehabilitation Plan that the process is
heavily, if not completely predicated on speculative business proposals as well as the contingent
entry of the potential foreign investor, Polycity. It is emphasized that the entry of Polycity is wholly
predicated on conditions imposed on Fortuna by the former.
NOTES In Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation, the Court
underscored that despite the insolvency of a corporation, it cannot be hindered to file a petition for
corporate rehabilitation. To conclude otherwise will defeat its purpose of restoring a corporation to
its former position of successful operation and solvency.
TOPIC Rehabilitation MODULE
CASE #3
CASE TITLE PHILIPPINE BANK OF COMMUNICATIONS VS. BASIC GR NO 215910
POLYPRINTERS AND PACKAGING CORPORATION
PONENTE PERLAS-BERNABE, J DATE
Feb. 6, 2017
DOCTRINE The purpose of rehabilitation proceedings is to enable the company to gain a new lease
on life and thereby allow creditors to be paid their claims from its earnings. Consequently,
the basic issues in rehabilitation proceedings concern the viability and desirability of
continuing the business operations of the petitioning corporation. The determination of
such issues was to be carried out by the court-appointed rehabilitation receiver.
FACTS
Basic Polyprinters, along with the eight other corporations belonging to the Limtong Group
of Companies filed a joint petition for suspension of payments with approval of the
proposed rehabilitation in the RTC. The RTC issued a stay order, and eventually
approved the rehabilitation plan, but the CA reversed the RTC and directed the
petitioning corporations to file their individual petitions for suspension of payments and
rehabilitation in the appropriate courts. Accordingly, Basic Polyprinters brought its individual
petition, averring therein that: (a) its business since incorporation had been very viable
and financially profitable; (b) it had obtained loans from various banks, and had owed
accounts payable to various creditors; (c) the Asian currency crisis, devaluation of the
Philippine peso, and the current state of affairs of the Philippine economy; (d) its
operations would be hampered and would render rehabilitation difficult should its creditors
enforce their claims through legal actions, including foreclosure proceedings; (e) included
in its overall Rehabilitation Program was the full payment of its outstanding loans in favor
of petitioner PBCOM and other banks.
ISSUE/S
Whether or not liquidity is an issue in a petition for rehabilitation
SC RULING
No. Under the Interim Rules, rehabilitation is the process of restoring “the debtor to a
position of successful operation and solvency, if it is shown that its continuance of
operation is economically feasible and its creditors can recover by way of the present
value of payments projected in the plan more if the corporation continues as a going
concern that if it is immediately liquidated.” It contemplates a continuance of corporate life
and activities in an effort to restore and reinstate the corporation to its former position of
successful operation and solvency. Two-pronged purpose of rehabilitation proceedings 1.
Equitable purpose: To efficiently and equitably distribute the assets of the insolvent debtor
to its creditors; and 2. Rehabilitative purpose: To provide the debtor with a fresh start On
the one hand, they attempt to provide for the efficient and equitable distribution of an
insolvent debtor’s remaining assets to its creditors; and on the other, to provide debtors
with a “fresh start” by relieving them of the weight of their outstanding debts and
permitting them to reorganize their affairs. The purpose of rehabilitation proceedings is to
enable the company to gain a new lease on life and thereby allow creditors to be paid
their claims from its earnings. Consequently, the basic issues in rehabilitation proceedings
concern the viability and desirability of continuing the business operations of the
petitioning corporation. The determination of such issues was to be carried out by the
court-appointed rehabilitation receiver. Moreover, Republic Act No. 10142 (FRIA of 2010),
a law that is applicable hereto, has defined a corporate debtor as a corporation duly
organized and existing under Philippine laws that has become insolvent. The term
insolvent is defined in said law as “the financial condition of a debtor that is generally
unable to pay its or his liabilities as they fall due in the ordinary course of business or
has liabilities that are greater than its or his assets.” As such, the contention that
rehabilitation becomes inappropriate because of the perceived insolvency of Basic
Polyprinters was incorrect.
NOTES
TOPIC Rehabilitation Plan MODULE
CASE #4
CASE TITLE San Jose Timber Corporation (SJTC) and Casilayan Softwood GR NO 162196
Development Corporation (CSDC) V. Securities And Exchange
Commission, Tierra Factor Corporation and other creditors of SJTC and
CSDC
PONENTE MENDOZA, J. DATE February 27, 2012
DOCTRINE An indispensable requirement in the rehabilitation of a distressed corporation is the rehabilitation

plan. Section 5 of the Interim Rules of Procedure on Corporate Rehabilitation provides the
requisites thereof: SEC. 5. Rehabilitation Plan. -- The rehabilitation plan shall include (a) the
desired business targets or goals and the duration and coverage of the rehabilitation; (b) the terms
and conditions of such rehabilitation which shall include the manner of its implementation, giving
due regard to the interests of secured creditors; (c) the material financial commitments to support
the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may include
conversion of the debts or any portion thereof to equity, restructuring of the debts, dacion en pago,
or sale of assets or of the controlling interest; (e) a liquidation analysis that estimates the proportion
of the claims that the creditors and shareholders would receive if the debtor's properties were
liquidated; and (f) such other relevant information
FACTS Petitioner CSDC is a corporation duly organized and existing under and by virtue of the laws of the
Republic of the Philippines and the controlling stockholder and creditor of petitioner SJTC, being
the owner of more than 99% of its outstanding capital stock. Petitioner SJTC is primarily engaged
in the operation of a logging concession with a base camp in Pabanog, Wright, Western Samar,
under and by virtue of a Timber License Agreement (TLA) No. 118 issued by the DENR. The TLA
was to expire in 2007.
On February 8, 1989, the DENR issued a Moratorium Order (MO) suspending all logging
operations in the island of Samar effective February 1989 up to May 30, 1989. As a consequence,
SJTC was constrained to cease operations effective February 8, 1989, despite the fact that the
expiration of the period set forth in the MO was still up to May 30, 1989. The cessation of its
operations caused SJTC to lose all its income. Thus, on August 7, 1990, SJTC and CSDC filed
with the SEC a petition for the appointment of a rehabilitation receiver and for suspension of
payments entitled, "In Re: Petition for the Appointment of a Rehabilitation Receiver for SJTC
Timber Corporation and For Suspension of Payments," which was docketed as SEC Case No.
3843. After due hearing, the SEC Hearing Panel granted the appointment of a rehabilitation
receiver and suspension of payments with the condition that SJTC would "resuscitate its operations
and properly service its liabilities in accordance with the duly approved schedule to be submitted
by the Rehabilitation Receiver" within a 1 year period.
Meanwhile, on March 4, 1996, prior to the expiration of the waiting period to commence
rehabilitation, the petitioners filed their Motion For Settlement of Claims Against Petitioner San
Jose dated February 21, 1996. Considering that the lifting of the logging moratorium in Samar did
not appear to be close to fulfillment at that juncture, the petitioners offered to either (1) pay the
claims of the creditor in full provided they await the rehabilitation of SJTC; or (2) immediately settle
the claims of the creditors by paying them 30% of their substantiated claims.
However, with barely a week before the lapse of this deadline, the precondition for the
commencement of the rehabilitation as set forth in the proposed rehabilitation plan, i.e., the lifting
of the logging moratorium in the place where the timber concession is located either by the
enactment of a selective logging law or the administrative cessation of the moratorium, does not
appear to be close to fulfillment soon. The claimants thus face the uninviting prospect of seeing
petitioner San Jose being dissolved and its few remaining assets, worth no more than P15 Million,
being fought over by supposed creditors whose combined claim exceeds P54 Million. Even if these
assets are prorated among the creditors, each one of them will get less than 25% of his claim. In
its Order dated July 30, 1996, the SEC granted the motion for settlement of claims subject to certain
conditions xxx. Petitioners are hereby directed to furnish the creditors of this Order at their own
expense.
On March 8, 2004, the petitioners filed this petition for review before this Court on the ground that
the CA erred in affirming the dissolution of SJTC when the vast majority of the creditors had agreed
to await the rehabilitation of SJTC. Meanwhile, during the pendency of the petition before the Court,
the DENR issued an Order dated August 15, 2005, allowing SJTC to resume operations and
extending the term of the TLA up to 2021. The dispositive portion of the Order reads:
WHEREFORE, in light of the foregoing, the Moratorium Order dated 8 February 1998 is hereby
recognized as having lapsed on 30 May 1989. San Jose Timber Corporation is hereby allowed to
pursue its rights and activities under its TLA No. 118 until 30 June 2007, with an extension of the
period of said TLA equivalent to the time that elapsed from 31 May 1989 until promulgation of this
Order.
Consequently, on October 14, 2005, the petitioners filed their Supplemental Petition with the Court
citing the August 15, 2005 DENR Order praying for the reversal of the CA decision and the remand
of the case to the SEC for the immediate approval and implementation of the rehabilitation plan. It
is clear from the uncontested figures relative to the total assets and liabilities of SJTC that each
creditor will get less than 30% of the value of its claim. The reason for this is that dividing SJTC’s
total assets in the amount of ₱14,405,868 by its total liabilities in the amount of ₱53,519,650 will
yield a factor of only .27, which corresponds to 27%.
LOWER SEC: On May 6, 2002, however, the SEC CA: The May 6, 2002 Decision of the SEC was
COURT En Banc motu proprio handed down its affirmed by the CA in its September 22, 2003
RULING decision terminating the rehabilitation Decision.
proceedings and dismissing the petition
for rehabilitation. The SEC opined that
SJTC could no longer be rehabilitated
because the logging moratorium/ban, which
was crucial for its rehabilitation, had not
been lifted.
ISSUE/S Whether or not the CA erred in affirming the decision of the SEC
ARGUMENTS Petitioner (SJTC): SJTC replies that Respondent (SEC): The SEC agrees that its
notwithstanding the sale of its machineries primary basis in dismissing the petition for the
and equipment, the rehabilitation of SJTC appointment of a rehabilitation receiver and
remains viable and feasible. As stated in its suspension of payment has been lost because of
petition for certiorari in the CA, SJTC’s the DENR’s Order dated August 15, 2005 lifting
corporate affiliates have undertaken to the logging moratorium and allowing SJTC to
infuse the necessary capital to jump-start its continue its logging operations under TLA No. 118.
operations as soon as the logging ban would
be lifted. Despite the same, it is of the position that SJTC’s
rehabilitation is no longer feasible and viable
Conditions have dramatically changed with because it has already disposed of its properties
the August 15, 2005 Order of DENR such as various machineries and equipment and
categorically holding that the logging other valuable assets which are indispensable to
moratorium had already lapsed and that, its logging operations. In other words, SJTC can
accordingly, SJTC could resume operations no longer continue its logging operations because
immediately. The DENR extended the TLA it now lacks the necessary tools and equipment to
by the period equivalent to the time that pursue its business operations.
elapsed from May 31, 1989 until the
promulgation of the said order. The TLA will, In sum, notwithstanding the lifting of the logging
thus, subsist for another fourteen (14) years, moratorium, the SEC avers that SJTC can no
or up to 2021. The sole impediment to the longer be revived and restored to its former
rehabilitation of SJTC has, thus, been successful operation and solvency given the
removed. foregoing considerations.
Based on the Adjusted Rehabilitation Plan The SEC also avers that as to the inaction of the
(ARP), SJTC will need ₱70 million pesos to creditors of SJTC, it cannot be construed as an
fully operate the logging operations in 1989. acquiescence to await its full rehabilitation. What
Under the ARP, SJTC would be able to appears on record is that some of SJTC’s creditors
complete the set-up for its commercial manifested their desire that SJTC be liquidated
operations within nine (9) months from now so that their claims against it may be finally
resumption. During that period, SJTC would settled.
hire personnel, purchase new equipment,
rehabilitate the roads, buildings and other
infrastructure necessary for the commercial
operations.
Based on these projections, SJTC would be

able to generate gross revenue in the
amount of at least ₱342 million on the first
year of commercial production, or within 18
months from the date of the resumption of
operation.
The remaining unpaid liabilities to the

creditors, excluding corporate affiliates who
agreed to be paid last, was estimated to be
no more than ₱11 million. As of December
1991, the unpaid claims of creditors
excluding that of the petitioners’ corporate
affiliates amounted to ₱14,369,531.27.
Subsequently, the petitioners settled the
claims of 22 creditors who opted to be paid
30% of their claims instead of waiting for the
rehabilitation of SJTC. The aggregate value
of the settled claims was ₱3,110,885.
Under the proposed ARP, SJTC would be

able to pay its creditors, except its corporate
affiliates, in full within 18 months from the
time it would resume operation. This is an
improvement from the old rehabilitation plan
which provided payment to the creditors,
excluding the affiliates, within 24 months
from resumption of operations.
SC RULING Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. The purpose
of rehabilitation proceedings is to enable the company to gain a new lease on life and thereby allow
creditors to be paid their claims from its earnings. The rehabilitation of a financially distressed
corporation benefits its employees, creditors, stockholders and, in a larger sense, the general
public.
Under the Rules of Procedure on Corporate Rehabilitation, "rehabilitation" is defined as the

restoration of the debtor to a position of successful operation and solvency, if it is shown that its
continuance of operation is economically feasible and its creditors can recover by way of the
present value of payments projected in the plan, more if the corporation continues as a going
concern than if it is immediately liquidated.
An indispensable requirement in the rehabilitation of a distressed corporation is the rehabilitation

plan. Section 5 of the Interim Rules of Procedure on Corporate Rehabilitation provides the
requisites thereof:
SEC. 5. Rehabilitation Plan. -- The rehabilitation plan shall include (a) the desired business targets or goals
and the duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which
shall include the manner of its implementation, giving due regard to the interests of secured creditors; (c) the
material financial commitments to support the rehabilitation plan; (d) the means for the execution of the
rehabilitation plan, which may include conversion of the debts or any portion thereof to equity, restructuring
of the debts, dacion en pago, or sale of assets or of the controlling interest; (e) a liquidation analysis that
estimates the proportion of the claims that the creditors and shareholders would receive if the debtor's
properties were liquidated; and (f) such other relevant information to enable a reasonable investor to make
an informed decision on the feasibility of the rehabilitation plan.
"A successful rehabilitation usually depends on two factors: (1) a positive change in the business
fortunes of the debtor, and (2) the willingness of the creditors and shareholders to arrive at a
compromise agreement on repayment burdens, extent of dilution, etc. The debtor must
demonstrate by convincing and compelling evidence that these circumstances exist or are likely to
exist by the time the debtor submits his ‘revised or substitute rehabilitation plan for the final
approval of the court.’"
Given the high standards that the Rules require, mere unsupported assertions by the debtor that
"the parties are close to an agreement" or that "business is expected to pick up in the next several
quarters" are not sufficient. Circumstances that might demonstrate in a convincing and compelling
manner that the debtor could successfully be rehabilitated include the following:
A. The business fortunes of the debtor have actually improved since the petition was filed;
B. The general circumstances and forecast for the sector in which the debtor is operating
supports the likelihood that the debtor's business will revive;
C. The debtor has taken concrete steps to improve its operating efficiency;
D. The debtor has obtained legally binding investment commitments from parties contingent
on the approval of a rehabilitation plan;
E. The debtor has successfully addressed other factors that would increase the risk that the
debtor's rehabilitation plan would fail;
F. The majority of the secured and unsecured creditors have expressly demonstrated a
preference that the debtor be rehabilitated rather than liquidated and are willing to
compromise on their claims to reach that result;
G. The debtor's shareholders have expressed a willingness to dilute their equity in connection
with a debt equity swap.
Both the SEC and the CA had reasonable basis in deciding to terminate the rehabilitation
proceedings of SJTC because of the lack of certainty that the logging ban would, in fact, be lifted.
It is clear from the records that the proposed rehabilitation plan of the petitioners would depend
entirely on the lifting of the logging ban either by the lifting of the moratorium on logging activities
in Samar issued by the DENR, or by the enactment of a law on selective logging. Such lifting of
the logging ban is indispensable to the rehabilitation of SJTC. If it would not be lifted, the company
would have no source of income or revenues and no investor or creditor would come in to lend a
hand in its resuscitation.
At the time of the promulgation of the CA decision, there was no certainty that the moratorium on
logging activities in Samar would be lifted or a law on selective logging was forthcoming. There
being no assurance, the CA was correct in sustaining the decision of the SEC to terminate the
rehabilitation proceedings to protect the interest of all concerned, particularly the investors and the
creditors. To have resolved otherwise would have been prejudicial to these entities as they would
be made to wait indefinitely for something the likelihood of which was quite remote.
On August 15, 2005, however, an event supervened. With the lifting of the logging moratorium in
Samar, an indispensable element for the possible rehabilitation of SJTC has been made a reality.
Considering the extension granted by the DENR, the TLA of SJTC will expire on 2021, or 9 years
from now. It appears from the proposed Adjusted Rehabilitation Plan, that SJTC would only need
a period of 24 months from the lifting of the logging moratorium within which to liquidate all of its
liabilities, except those of its affiliates.
The petitioners have claimed that as of December 31, 1988, the concession’s virgin forest cover
was 37,800 hectares, with commercial timber estimated at 2.25 million cubic meters. Since the
logging operations of SJTC had been stopped in 1989, the petitioners believe that the quantity of
commercial timber has grown considerably. Thus, there is more than sufficient quantity of
commercial timber to pay the obligations of SJTC to the creditors and to realize a reasonable return
of investment.
The Court is of the considered view that SJTC should be given a second chance to recover and
pay off its creditors. Thus, SJTC’s rehabilitation appears highly feasible and the proceedings
thereon should be revived. It should, therefore, be given an opportunity to be heard by the SEC to
determine if it could maintain its corporate existence. For said reason, the case should be
remanded to the SEC so that it could factor in the aforecited figures and claims of SJTC and assess
whether or not SJTC could still recover. It appears from the figures that SJTC can generate
sufficient income to pay all its obligations to all its creditors except, as the petitioners pledged, its
corporate affiliates who allegedly represent more than 66% of the liabilities. WHEREFORE, the
September 22, 2003 Decision of the Court of Appeals and its January 29, 2004 Resolution are
REVERSED and SET ASIDE. The case is hereby REMANDED to the SEC for further evaluation
and appropriate action.
NOTES
TOPIC Voluntary Rehabilitation; Cram Down Rule MODULE
CASE #5
CASE TITLE BPI v Sarabia Manor Hotel Corporation GR NO 175844
PONENTE DATE July 29, 2013
DOCTRINE Section 23, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation56 (Interim Rules) states
that a rehabilitation plan may be approved even over the opposition of the creditors holding a
majority of the corporation’s total liabilities if there is a showing that rehabilitation is feasible and
the opposition of the creditors is manifestly unreasonable. Also known as the cram down rule,
this provision is necessary to curb the majority creditors’ natural tendency to dictate their own
terms and conditions to the rehabilitation, absent due regard to the greater long-term benefit of
all stakeholders. Otherwise stated, it forces the creditors to accept the terms and conditions of
the rehabilitation plan, preferring long-term viability over immediate but incomplete recovery.
FACTS
Sarabia is a corporation engaged in the leasing, managing and/or operating hotels, restaurants,
barber shops, beauty parlors, sauna and steam baths, massage parlors and such other
businesses incident to or necessary in the management or operation of hotels.
Sarabia obtained a P150,000,000.00 special loan package from Far East Bank and Trust
Company (FEBTC) in order to finance the construction of a five-storey hotel building (New
Building) for the purpose of expanding its hotel business. An additional P20,000,000.00 stand-by
credit line was approved by FEBTC in the same year. The debts were secured by real estate
mortgages over several parcels of land and a comprehensive surety agreement. By virtue of a
merger, BPI assumed all of FEBTC’s rights against Sarabia.
Because of various cash flow problems, Sarabia filed for a Petition for corporate rehabilitation
(rehabilitation petition) with prayer for the issuance of a stay order before the RTC as it foresaw
the impossibility to meet its maturing obligations to its creditors when they fall due.
In its proposed rehabilitation plan,17 Sarabia sought for the restructuring of all its outstanding
loans, submitting that the interest payments on the same be pegged at a uniform escalating rate
of: (a) 7% per annum (p.a.) for the years 2002 to 2005; (b) 8% p.a. for the years 2006 to 2010;
(c) 10% p.a. for the years 2011 to 2013; (d) 12% p.a. for the years 2014 to 2015; and (e) 14%
p.a. for the year 2018. Likewise, Sarabia sought to make annual payments on the principal loans
starting in 2004, also in escalating amounts depending on cash flow. Further, it proposed that it
should pay off its outstanding obligations to the government and its suppliers on their respective
due dates, for the sake of its day to day operations.
RTC issued Stay Order. BPI filed its opposition.
The recommendations of the Receiver (Liberty B. Valderrama) are:
(1) Restructure the loans with Sarabia’s creditors, namely, BPI, Imperial Appliance, Rural Bank of
Pavia, and Barcelo Gestion Hotelera, S.L. (Barcelo), under the following terms and conditions:
(a) the total outstanding balance as of December 31, 2002 shall be recomputed, with the interest
for the years 2001 and 2002 capitalized and treated as part of the principal; (b) waive all
penalties; (c) extend the payment period to seventeen (17) years, i.e., from 2003 to 2019, with a
two-year grace period in principal payment; (d) fix the interest rate at 6.75% p.a. plus 10% value
added tax on interest for the entire term of the restructured loans;22 (e) the interest and principal
based on the amortization schedule shall be payable annually at the last banking day of each
year; and (f) any deficiency shall be paid personally by Sarabia’s stockholders in the event it fails
to generate enough cash flow; on the other hand, any excess funds generated at the end of the
year shall be paid to the creditors to accelerate the debt servicing;
(2) Pay Sarabia’s outstanding payables with its suppliers and the government so as not to disrupt
hotel operations;
(3) Convert the Advances from stockholders amounting to P18,748,306.00 to stockholder’s

equity and other advances amounting to P42,688,734.00 as of the December 31, 2002 tentative
financial statements to Deferred Credits; the said conversion should increase stockholders’
equity to P268,545,731.00 and bring the debt to equity ratio to 0.85:1;
(4) Require Sarabia’s stockholders to pay its payables to the hotel recorded as Accounts
Receivable – Trade, amounting to P285,612.17 as of December 31, 2001, and its remaining
receivables after such date;
(5) No compensation or cash dividends shall be paid to the stockholders during the rehabilitation
period, except those who are directly employed by the hotel as a full time officer, employee or
consultant covered by a valid contract and for a reasonable fee;
(6) All capital expenditures which are over and above what is provided in the case flow of the
rehabilitation plan which will materially affect Sarabia’s cash position but which are deemed
necessary in order to maintain the hotel’s competitiveness in the industry shall be subject to the
RTC’s approval prior to its implementation;
(7) Terminate the management contract with Barcelo, thereby saving an estimated
P25,830,997.00 in management fees, over and above the salaries and benefits of certain
managerial employees;
(8) Appoint a new management team which would be required to submit a comprehensive
business plan to support the generation of the target revenue as reported in the rehabilitation
plan;
(9) Open a debt servicing account and transfer all excess funds thereto, which in no case should
be less than P500,000.00 at the end of the month; the funds will be drawn payable to the
creditors only based on the amortization schedule; and
(10) Release the surety obligations of Sarabia’s stockholders, considering the adequate
collaterals and securities covered by the rehabilitation plan and the continuing mortgages over
Sarabia’s properties.
LOWER RTC: IN FAVOR OF SARABIA. CA: AFFIRMED

COURT The rehabilitation plan was realistic,
RULING practical and viable. Sarabia was able to
comply with its obligations to its employees
and suppliers.
ISSUE/S Whether or not the CA correctly affirmed Sarabia’s rehabilitation plan as approved by the RTC,
with the modification on the reinstatement of the surety obligations of Sarabia’s stockholders
ARGUMENTS Petitioner (BPI): Respondent (Sarabia):

The approved rehabilitation plan did not Sarabia essentially maintains that: (a) the present
give due regard to its interests as a secured petition improperly raises questions of fact;(b) the
creditor in view of the imposition of a fixed approved rehabilitation plan takes into
interest rate of 6.75% p.a. and the extended consideration all the interests of the parties and
loan repayment period. It likewise avers the terms and conditions stated therein are more
reasonable than what BPI proposes;and (c) BPI’s
that Sarabia’s misrepresentations in its allegations of misrepresentation are mere
rehabilitation petition remain unresolved. desperation moves to convince the Court to
overturn the rulings of the courts a quo.
SC RULING YES.
Rehabilitation shall be undertaken when it is shown that the continued operation of the
corporation is economically more feasible and its creditors can recover, by way of the present
value of payments projected in the plan, more, if the corporation continues as a going concern
than if it is immediately liquidated.
Section 23, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation56 (Interim Rules) states
that a rehabilitation plan may be approved even over the opposition of the creditors holding a
majority of the corporation’s total liabilities if there is a showing that rehabilitation is feasible and
the opposition of the creditors is manifestly unreasonable. Also known as the cram down rule,
this provision is necessary to curb the majority creditors’ natural tendency to dictate their own
terms and conditions to the rehabilitation, absent due regard to the greater long-term benefit of
all stakeholders. Otherwise stated, it forces the creditors to accept the terms and conditions of
the rehabilitation plan, preferring long-term viability over immediate but incomplete recovery.
On the feasibility of Sarabia’s rehabilitation, the Court finds that (1) Sarabia’s financial history
shows that it has the inherent capacity to generate funds to repay its loan obligations if applied
through the proper financial framework (2) Sarabia’s projected revenues shall have a steady
year-on-year growth from the time that it applied for rehabilitation until the end of its rehabilitation
plan in 2018, albeit with decreasing growth rates (growth rate is at 26% in 2003, 5% in 2004-
2007, 3% in 2008-2018). Sarabia has the ability to have sustainable profits over a long period of
time and (3) the interests of Sarabia’s creditors are well protected.
On the dismissal of BPI’s opposition, it must be pointed out that oppositions which push for high
interests rates are generally frowned upon in rehabilitation proceedings given that the inherent
purpose of a rehabilitation is to find ways and means to minimize the expenses of the distressed
corporation during the rehabilitation period. BPI’s proposed escalating interest rates remain
hinged on the theoretical assumption of future fluctuations in the market, this notwithstanding the
fact that its interests as a secured creditor remain well-preserved.
NOTES
TOPIC Litis Pendentia between a Rehabilitation Case and Civil Case MODULE
for Rescission of Sale CASE #6
CASE TITLE Far East Bank and Trust Co. v. Union Bank of the Philippines GR NO 196637
PONENTE Gesmundo, J., DATE

June 3, 2019
DOCTRINE Rehabilitation proceedings are summary in nature; they do not include adjudication of claims that
require full trial on the merits.
FACTS
On September 16, 1997, the EYCO Group of Companies (EYCO) and its controlling stockholders,
namely Eulogio O. Yutingco, Caroline Yutingco-Yao and Theresa T. Lao (the Yutingcos) filed with
the Securities and Exchange Commission (SEC) a "Petition for the Declaration of Suspension
of Payments, Formation and Appointment of Rehabilitation Receiver/Committee, Approval
of Rehabilitation Plan with Alternative Prayer for Liquidation and Dissolution of
Corporations" SEC Case No. 09-97-5764).
On September 19, 1997, a consortium of EYCO's creditors(Consortium) composed of 22 domestic

banks, including Union Bank, convened for the purpose of deciding their options in the event that
EYCO and its co- petitioners in said case would invoke the provisions of Presidential Decree (PD)
No. 902-A, as amended. However, Union Bank, without notifying the members of the Consortium,
decided to break away from the group by suing EYCO and the Yutingcos in the regular courts.
Among the several suits commenced by Union Bank was a Civil Case 6647 filed in the RTC of
Pasig City on September 26, 1997.
In its Complaint, Union Bank alleged that Spouses Yutingco were its debtors by virtue of a
Continuing Surety Agreement dated September 12, 1996 to secure credit accommodations
amounting to P110,000,000.00 granted to NIKON which they owned. Upon investigation, Union
Bank confirmed that majority of NIKON's assets were used to purchase real estate
properties through EYCO, purposely to shield NIKON from answering for its debts. EYCO
owned condominium units and parking spaces in Tektite Tower and the Strata 200 Building
Condominium Project. On September 15, 1997, these properties were sold to herein petitioner,
Far East Bank and Trust Company (FEBTC).
Union Bank claimed that the sale of the properties was fraudulent and done in bad faith to
prevent them from being levied upon since the total purchase price for the Strata 200
condominium units was P32,000,000.00, which was grossly inadequate considering that they were
situated in a prime area of Pasig City. In furtherance of its conspiracy with the Spouses Yutingco
and NIKON, FEBTC supposedly authorized the purchase of various golf club shares and two more
units and parking spaces in the same condominium buildings, assets of EYCO and NIKON
registered in their respective names. It is clear that EYCO, in collusion with the Spouses Yutingco
and FEBTC, intended to transfer all or nearly all of its properties because of its insolvency or great
embarrassment Anancially. FEBTC, being a vendee in fraud of creditors, was deemed an implied
trustee of the properties and should hold them for the benefit of those who are entitled thereto.
Union Bank, as unpaid creditor of the true owner of the property, is entitled to nullify the sale in
favor of FEBTC.
SEC Case No. 09-97-5764
On September 19, 1997, SEC issued an order enjoining the disposition of the debtor corporations'
properties in any manner except in the ordinary course of business and payment outside of
legitimate business expenses during the pendency of the proceedings and suspending all actions,
claims and proceedings against EYCO until further orders from the SEC.
In an Omnibus Order dated October 27, 1 997, the SEC Hearing Panel directed the creation of a
Management Committee (MANCOM). Union Bank filed a petition for certiorari in the CA (CA-G.R.
SP No. 45774) assailing the September 19, 1997 Order declaring the suspension of payments for
EYCO and directing the creation of the MANCOM. Union Bank contended that these issuances
were premature and would render the motion to dismiss filed before the RTC, in Civil Case No.
66477, as moot. The steering committee of the Consortium composed of the Philippine National
Bank, FEBTC, Allied Bank, Traders Royal Bank, Philippine Commercial International Bank, Bank
of Commerce and Westmont Bank, were allowed to intervene by the CA. However, in the same
decision of the CA, the petition filed by Union Bank was dismissed for failure to exhaust
administrative remedies and forum shopping, prompting the latter to seek recourse in this
Court (G.R. No.131729). On May 19, 1998, this Court promulgated its Decision in Union Bank of
the Philippines v. Court of Appeals, et al., holding that the SEC's jurisdiction on matters of
suspension of payments is confined only to those initiated by corporations, partnerships or
associations. Consequently, the SEC exceeded its jurisdiction in declaring the Spouses Yutingco
together with EYCO under suspension of payments. Thus, the proper remedy was not to dismiss
the entire petition for suspension of payments but to dismiss it only as against the party upon whom
the tribunal or court cannot acquire jurisdiction. Accordingly, this Court ordered the SEC "to drop
from the petition for suspension of payments filed before it the names of Eulogio O. Yutingco,
Caroline Yutingco-Yao and Theresa T. Lao without prejudice to their filing a separate petition in
the RTC.
On December 18, 1998, the SEC issued an Order adopting the Unsolicited Rehabilitation
Proposal submitted by Strategies and Alliances Corporation (SAC) which was granted a period of
six months within which to complete the groundwork for the effective implementation of the early
"all-debt payment plan." SAC plan proposed to settle and extinguish all financial obligations of
EYCO to its creditors, secured and unsecured, amounting to P5.2 Billion-P4 Billion by banks and
P1 .2 Billion by non-banks. The repayment of principal and interest were guaranteed to be paid in
cash by the Republic of the Philippines through HIGC. The SEC Order further barred all
creditors from pursuing their respective claims until further orders.
The Consortium appealed the December 18, 1998 Order to the SEC En Banc. On September 1
4, 1999, the SEC EnBanc rendered its Decision finding the SAC plan not viable and feasible
for the rehabilitation of EYCO. Accordingly, the SAC plan and suspension of payment
proceedings were ordered terminated, the committees created dissolved and discharged. The
SEC further ordered the dissolution and liquidation of the petitioning corporations.
Subsequently, a Liquidator was appointed pursuant to the provisions of the Rules of Procedure on
Corporate Rehabilitation.
On October 10, 2000, the SEC issued an Order directing all creditors claiming against EYCO to
file their formal claims with the Liquidator. It likewise declared that all such claims shall be deemed
barred if not filed within 30 days after publication of the said order in two newspapers of general
circulation in the Philippines.
Due to disagreement on Liquidator's fee, a Liquidation Committee was formed to assume the
duties of the Liquidator originally appointed by the SEC. On May 31 , 2001, the said committee
was dissolved and the SEC finally appointed Atty. Danilo L. Concepcion (Atty. Concepcion)as
Liquidator pursuant to the provisions of the Rules of Procedure on Corporate Recovery. In
March 2002, Atty. Concepcion submitted a proposed Liquidation Plan. Finding the said
Liquidation Plan meritorious, the SEC approved it on April 11 , 2002.
CIVIL CASE 6647 (filed by union bank against Yutingco)
The Spouses Yutingco and FEBTC filed a Motion to Dismiss on the ground of pendency of the
proceedings in the SEC which had acquired prior jurisdiction over the subject matter of the case.
And on the ground of Union Bank's failure to implead NIKON, which are indispensable parties and
that since the complaint was for rescission of a contract of sale, it should have expressly alleged
that Union Bank had no other legal means to collect its credits. Thus, the complaint failed to state
a cause of action. Further, Union Bank had no legal personality to sue for the enforcement of the
rights and interests of the creditors as this is vested in the rehabilitation receiver. In view of the
pending SEC proceedings, Union Bank had an available remedy by participating therein.
In its Opposition, Union Bank asserted that litis pendentia is not applicable in this case as it is not
a party to the SEC proceedings for suspension of payments. Also, there is no identity of causes of
action since the present case is founded on Union Bank's right to effect retention lien on the
properties of EYCO pursuant to the provisions of the continuing surety agreement executed by the
Spouses Yutingco. On the matter of jurisdiction, Union Bank contended that the court has the
exclusive authority to hear Civil Case No. 66477.
LOWER RTC: RTC granted the motions to dismiss CA: CA granted Union Bank's appeal and
COURT on the ground of litis pendentia. Union Bank reversed the assailed orders of the RTC. CA
RULING as one of the creditors of defendants is a ruled that there was identity of parties between
compulsory party in the Petition for the CIVIL CASE 6647 and SEC Case No. 09-97-
Declaration ofSuspension of Payments,filed 5764 and no identity of rights asserted since civil
by defendants with the SEC on September case 6647 was for the rescission of sale and
16, 1997 or before the institution of instant reversion of the NIKON’s asset from FEBTC to
case on October 1 6, 1 997. By filing a Yutingco or NIKON.
motion to dismiss the petition, plaintiff made
itself a party to the case and voluntarily
submitted to the jurisdiction of the SEC.
ISSUE/S
Whether or not the Civil Case 6647 should be dismissed on the ground of litis pendentia.
ARGUMENTS Petitioner : Respondent:
The issue in the SEC case is precisely the respondent maintains that there is no identity of
settlement of EYCO's obligations to its parties considering that this Court in Union Bank of
creditors, which include herein respondent the Phils. v. Court of Appeals has ordered that the
Union Bank. Here, Union Bank also seeks to Spouses Yutingco be dropped as "party-
collect from the distressed corporations of defendants" in the SEC case due to lack of
EYCO. The CA failed to consider the well- jurisdiction over their persons. Petitioner's
settled rule that all questions involving argument that NIKON are indispensable parties in
properties of an insolvent are properly Civil Case No. 66477 is unavailing, inasmuch as
cognizable by the insolvency court to the the creditor has the right to proceed against the
exclusion of all other courts. Civil Case surety independent of the debtor. Here, the
No. 66477 is necessarily related to, and thus Continuing Surety Agreement executed by the
precluded by, the SEC Case which has Spouses Yutingco in favor of Union Bank,
exclusive jurisdiction "to decide all questions unequivocally provides that the former bind
concerning the title or right of possession" themselves solidarily with their principal (NIKON).
over the properties of the distressed Neither is there identity in causes of action
corporation. considering that it is the fraudulent conveyance of
properties by the Spouses Yutingco through
EYCO properties in favor of FEBTC that caused
Union Bank's cause of action to accrue.
SC RULING We deny the petition.
Litis pendentia as a ground for the dismissal of a civil action contemplates a situation wherein
another action is pending between the same parties for the same cause of action, such that the
second action becomes unnecessary and vexatious. For litis pendentia to exist, the following
requisites or elements must concur: (a) identity of parties, or at least such parties who represent
the same interests in both actions; (b) identity of rights asserted and relief prayed for, the relief
being founded on the same facts; and (c) identity with respect to the two (2) preceding particulars
in the two (2) cases is such that any judgment that may be rendered in the pending case, regardless
of which party is successful, would amount to res judicata in the other case.
In this case, the first requisite, there is no identity of parties considering that the Yutingcos were
ordered dropped from SEC Case No. 09-97-5764 pursuant to Union Bank of the Phils. v. Court
ofAppeals which was decided in 1998. This Court ruled therein that the SEC cannot acquire
jurisdiction over an individual filing a petition for suspension of payments together with a corporate
entity.
The second requisite is likewise absent. In Civil Case No. 66477, Union Bank sought to rescind
the sale of certain properties of EYCO to petitioner, on the theory that the Yutingcos/EYCO
colluded with petitioner to divert the assets of NIKON to purchase real properties under the name
of EYCO. On the other hand, SEC Case No. 09-97-5764 was initiated by EYCO seeking a
declaration of suspension of payments under the provisions of P.D. No. 902-A. While it is true that
EYCO's creditors have been directed to file its claims under existing contracts with the debtor-
corporations — the ultimate objective being the equitable distribution of earnings from the business
under rehabilitation — the validity of the sale to petitioner of EYCO's properties is the principal
issue in Civil Case No. 66477.
The third element is also lacking. Any judgment or final disposition by the SEC on the claims
against the debtor-corporations will not fully resolve the issues before the trial court (i.e., validity of
the sale of EYCO properties in favor of petitioner, real ownership of the properties and
damages).Rehabilitation proceedings are summary in nature; they do not include
adjudication of claims that require full trial on the merits.
Conversely, the trial court's decision annulling the contract of sale in favor of petitioner will not in
any way determine the viability of rehabilitation plan for EYCO, nor provide an equitable distribution
of the assets of the debtor-corporations. It bears stressing that the properties subject of Civil Case
No. 66477 were never included in the properties of EYCO placed in the custody of the MANCOM
and eventually the Liquidator, for distribution to all claimants and creditors
Further, under Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act [FRIA] of
201 0), among those exempted from the coverage of a Stay Order are actions filed against
sureties or persons solidarily liable with the debtor. Petitioner nonetheless contends that the
matter of interests and rights of the creditors of the debtor-corporations are vested on the
management committee created pursuant to P.D. 902-A. With the appointment of a MANCOM, the
proper party to file the action for rescission of the sale of EYCO properties to petitioner is clearly
the rehabilitation receiver appointed by SEC. Union Bank thus has no legal personality to institute
Civil Case No. 66477 involving the assets of the debtor-corporations under rehabilitation.
However, the applicable law on the suspension of actions for claims against corporations is P.D.
No. 902-A, which was in force at the time EYCO filed its petition for suspension of payments with
the SEC. In RCBC v. IAC, et al., the Court held that once a management committee, rehabilitation
receiver, board or body is appointed pursuant to P.D. 902-A, all actions for claims against a
distressed corporation pending before any court, tribunal, board or body shall be suspended
accordingly.
Thus, while the motions to dismiss Civil Case No. 66477 should have been denied by the trial
court, said case should have also been suspended in view of the creation of the MANCOM on
October 27, 1997.
While developments in SEC Case No. 09-97-5764 were taking place, R.A. No. 8799 was passed
by Congress, transferring all those cases enumerated in Sec. 5 of P.D. No. 902-A to the
regional trial courts. However, upon the effectivity of R.A. No. 8799, SEC Case No. 09-97-5764
was no longer pending. The SEC finally disposed of the said case when it rendered on September
14, 1999 the decision disapproving the petition for suspension of payments, terminating the
proposed rehabilitation plan, and ordering the dissolution and liquidation of the petitioning
corporation.
We hold that with the termination of suspension of payment proceedings in SEC Case No.
09-97-5764 on September 14, 1999, there is no more legal hindrance to the continuation of
Civil Case No. 66477.
WHEREFORE, the petition is DENIED. The November 15, 2010 Decision and April 19, 201 1
Resolution of the Court of Appeals in CA-G.R. CV No. 86172 are hereby AFFIRMED.
NOTES
TOPIC RES JUDICATA; STAY ORDER MODULE
CASE #7
CASE TITLE Pryce Corporation v. China Banking Corp GR NO 172302
PONENTE LEONEN, J. DATE FEBRUARY 18,

2014
DOCTRINE ● The elements for res judicata to apply are as follows: (a) the former judgment was final;
(b) the court that rendered it had jurisdiction over the subject matter and the parties; (c)
the judgment was based on the merits; and (d) between the first and the second actions,
there was an identity of parties, subject matters, and causes of action.
FACTS
The present case originated from a petition for corporate rehabilitation filed by petitioner Pryce
Corporation on July 9, 2004. The rehabilitation court found the petition sufficient in form and
substance and issued a stay order on July 13, 2004 appointing Gener Mendoza as rehabilitation
receiver.
On September 13, 2004, the rehab court directed the receiver to evaluate and give
recommendations on Pryce’s proposed rehab plan. However, the receiver submitted an amended
rehabilitation plan which the court approved in the January 17, 2005 order. In its disposition, the
court found petitioner Pryce Corporation "eligible to be placed in a state of corporate rehabilitation.
The portion also identified the assets to to be held and disposed and liabilities to be paid and
liquidated.
China Banking corporation (China Bank) elevated the case to the CA 7th division (CA 7th)
questioning the rehabilitation plan as it impaired the obligations of contracts. Bank of the Philippine
Islands (BPI), another creditor of Pryce, filed a separate petition with the CA assailing the same
order by the rehabilitation court.
On July 28, 2005, CA 7th Division granted China Banking Corporation’s petition and reversed and
set aside the stay order and approval of rehabilitation plan.
With respect to BPI’s appeal, the CA 1st division (CA 1st) granted its petition initially and set
aside the January 17, 2005 order. On reconsideration, the CA set aside its original decision and
dismissed the complaint. BPI elevated it to the SC 1st division (SC 1st) but denied the petition and
reconsideration with finality (BPI vs Pryce Corp GR 180316).
Pryce appealed to the SC assailing the July 28, 2005 decision of CA 7th granting China
Bank’s petition. SC 1st denied the petition of Pryce and affirmed decision of CA 7th.
Both Pryce and China Bank filed a motion for reconsideration (1st motion). June 16, 2008 SC 1st
ruled with finality the separate motion for reconsideration by the parties
Pryce filed a 2nd motion for reconsideration (2nd motion) before SC 1st praying that decision
of CA 1st be set aside. CA 1st referred the case to the En Banc En Consulta (SC En Banc).
After filing separate motion for reconsideration and it being denied with finality, Pryce and
China Bank filed a joint manifestation and motion to suspend proceedings as they wanted to work
out a mutually acceptable agreement, however despite being given 2 months, no agreement was
filed by the parties. SC En Banc now rules on the case
LOWER RTC: See facts of the case CA: See facts of the case
COURT
RULING
ISSUE/S 1. Whether the issue on the validity of the rehabilitation courts orders is now res judicata
2. Whether the Rule 4, Section 6 of the Interim Rules of Procedure on Corporate
Rehabilitation does not require the rehabilitation court to hold a hearing before issuing a
stay order
ARGUMENTS Petitioner (PRYCE): Respondent (CHINA BANKING CORP):
● Pryce Corporation submits that the
ruling in BPI v. Pryce
Corporation docketed as G.R. No.
180316 contradicts the present case,
and it has rendered the issue on the
validity and regularity of the
rehabilitation court orders as res
judicata.
● Petitioner Pryce Corporation argues
that the serious situation test has
effectively been abandoned by the
"sufficiency in form and substance
test" under the Interim Rules
SC RULING
1.
YES. BPI v. Pryce Corporation, the Court of Appeals set aside initially the January 17, 2005 order
of the rehabilitation court . On reconsideration, the court set aside its original decision and
dismissed the petition. On appeal, this court denied the petition filed by BPI with finality. An entry
of judgment was made for BPI v. Pryce Corporation on June 2, 2008. In effect, this court
upheld the January 17, 2005 order of the rehabilitation court.
In the present case, respondent China Banking Corporation and BPI are creditors of petitioner
Pryce Corporation and are both questioning the rehabilitation court's approval of the amended
rehabilitation plan. Thus, there is substantial identity of parties since they are litigating for the same
matter and in the same capacity as creditors of petitioner Pryce Corporation
Since the January 17, 2005 order approving the amended rehabilitation plan was affirmed and
made final in G.R. No. 180316, this plan binds all creditors, including respondent China Banking
Corporation.
In any case, the Interim Rules or the rules in effect at the time the petition for corporate
rehabilitation was filed in 2004 adopts the cram-down principle which "consists of two things: (i)
approval despite opposition and (ii) binding effect of the approved plan (see Interim Rules).
Thus, the January 17, 2005 order approving the amended rehabilitation plan, now final and
executory resulting from the resolution of BPI v. Pryce Corporation docketed as G.R. No. 180316,
binds all creditors including respondent China Banking Corporation.
While the CA decision in BPI vs Pryce only mentioned the January 17, 2005 decision approving
the amended rehabilitation plan, the affirmation necessarily included the earlier order directing the
receiver to evaluate the rehabilitation plan proposed by Pryce.
2.
Section 6 of the Interim Rules states explicitly that "[i]f the court 8nds the petition to be sufficient in
form and substance, it shall, not later than five (5) days from the filing of the petition, issue an Order
(a) appointing a Rehabilitation Receiver and fixing his bond; (b) staying enforcement of all claims.
Compliant with the rules, the July 13, 2004 stay order was issued not later than five (5) days from
the filing of the petition on July 9, 2004 after the rehabilitation court found the petition sufficient in
form and substance.
The stay order and appointment of a rehabilitation receiver dated July 13, 2004 is an "extraordinary,
preliminary, ex parte remedy. It is an interlocutory order defined as one that "does not 8nally
dispose of the case, and does not end the Court's task of adjudicating the parties' contentions and
determining their rights and liabilities as regards each other, but obviously indicates that other
things remain to be done by the Court Thus, it is not covered by the requirement under the
Constitution that a decision must include a discussion of the facts and laws on which it is
based.
Neither does the Interim Rules require a hearing before the issuance of a stay order. What it
requires is an initial hearing before it can give due course to or dismiss a petition. Thus, the trial
court has ample discretion to call a hearing when it is not confident that the allegations in the
petition are sufficient in form and substance, for so long as this hearing is held within the five (5)-
day period from the 8ling of the petition — the period within which a stay order may issue as
provided in the Interim Rules.
NOTES
● The elements for res judicata to apply are as follows: (a) the former judgment was final;
(b) the court that rendered it had jurisdiction over the subject matter and the parties; (c)
the judgment was based on the merits; and (d) between the first and the second actions,
there was an identity of parties, subject matters, and causes of action.
● Substantial identity of parties exists "when there is a community of interest between a
party in the first case and a party in the second case, even if the latter was not impleaded
in the first case.
● The Interim Rules allows:
○ the rehabilitation court to "approve a rehabilitation plan even over the opposition
of creditors holding a majority of the total liabilities of the debtor if, in its judgment,
the rehabilitation of the debtor is feasible and the opposition of the creditors is
manifestly unreasonable.
○ upon approval by the court, the rehabilitation plan and its provisions "shall be
binding upon the debtor and all persons who may be affected by it, including the
creditors, whether or not such persons have participated in the proceedings or
opposed the plan or whether or not their claims have been scheduled.
TOPIC Suspension of Proceedings over Creditors MODULE
CASE #8
CASE TITLE PHILIPPINE ISLANDS CORPORATION FOR TOURISM GR NO
DEVELOPMENT, INC., vs. VICTORIAS MILLING COMPANY, INC., 167674
PONENTE Quisumbing, J. DATE
17 June 2008
DOCTRINE
The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an
advantage or preference over another and to protect and preserve the rights of party litigants
as well as the interest of the investing public or creditors. Such suspension is intended to give
enough breathing space for the management committee or rehabilitation receiver to make the
business viable again, without having to divert attention and resources to litigations in various
fora. The suspension would enable the management committee or rehabilitation receiver to
effectively exercise its/his powers free from any judicial or extra-judicial interference that might
unduly hinder or prevent the "rescue" of the debtor company.
FACTS
Petitioner Philipppine Islands Corp. for Tourism and Dev’l (PICTD) filed for a collection of money
with a writ of preliminary attachment against VMC. PICTD alleged that VMC obtained loans form
CICM Missionaries, Inc. in the amount or 3.2 million pesos and the Congregation of the Most Holy
Redeemer in the amount of 1.2 million pesos. Both loans were assigned to PICTD by way of deed
of assignment.
Meanwhile, on July 4, 1997, VMC filed a petition before the SEC to declare itself in a state of
suspension of payments, alleging that although it has sufficient property to cover all of its
debts, it foresees its inability to pay them when they become due because of financial
difficulties. VMC sought the appointment of a management committee that would oversee the
implementation of its proposed rehabilitation plan so that it can continue its operations and
thus enable it to meet its obligations and satisfy its liabilities.
Sometime in 1997, the SEC ordered the suspension of all actions or claims against VMC pending
before any court, tribunal, office, board, body and/or commission. Pursuant to said order, VMC
filed before the RTC an urgent motion to suspend proceedings. The RTC, granted VMC's motion
and suspended proceedings in the civil case.
PICTD filed before the SEC a motion to lift the suspension of proceedings. Thereafter, the SEC
granted the petition ruling that PICTD is merely a general creditor who was able to seize the
property of the debtor through an attachment issued before judgment and did not have a prior
security agreement with VMC that will ripen into a creditor's right in case of default. Thus, its claim
against VMC could not take precedence over the secured creditors.
LOWER RTC: CA:

COURT
RULING The CA affirmed the SEC’s decision.
ISSUE/S Whether or not the proceedings of the complaint for collection of a sum of money filed by PICTD
against VMC before the RTC of Makati City should be excluded from the SEC Order suspending
all actions or claims against VMC pending before any court, tribunal, office, board, body and/or
commission.
ARGUMENTS Petitioner (NAME): PICTD Respondent (NAME): VMC

PICTD argues that the Court of Appeals VMC counters that pursuant to P.D. No. 1799, all
erred when it ruled that the order of claims for actions against a corporation declared
suspension suspends all actions or claims to be in a status of suspension of payments and
against VMC without qualification as to under a management committee are suspended.
whether the claim is secured or unsecured.
VMC also argues that PICTD's effort to distinguish
itself as a secured creditor exempt from the order
of suspension of proceedings will not help its
cause since P.D. No. 902-A makes no distinction
and the Order dated July 8, 1997 of the SEC
suspending all actions is explicit.
SC RULING
YES. Section 6(c) of P.D. No. 902-A as amended by P.D. No. 1799, enumerating the powers of
the SEC provides:
SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall

possess the following powers:
c) To appoint one or more receivers of the property, real and personal, which is the subject of
the action pending before the Commission whenever necessary in order to preserve the rights
of the parties-litigants and/or protect the interest of the investing public and creditors: … all
actions for claims against corporations, partnerships or associations under
management or receivership pending before any court, tribunal, board or body shall be
suspended accordingly.
The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an
advantage or preference over another and to protect and preserve the rights of party litigants as
well as the interest of the investing public or creditors. Such suspension is intended to give enough
breathing space for the management committee or rehabilitation receiver to make the business
viable again, without having to divert attention and resources to litigations in various fora. The
suspension would enable the management committee or rehabilitation receiver to effectively
exercise its/his powers free from any judicial or extra-judicial interference that might unduly hinder
or prevent the "rescue" of the debtor company.
To allow such other action to continue would only add to the burden of the management committee
or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims
against the corporation instead of being directed toward its restructuring and rehabilitation.
NOTES
TOPIC MODULE
CASE #9
CASE TITLE Bureau of Internal Revenue v. Lepanto Ceramics GR NO
224764
PONENTE DATE April 24, 2017
DOCTRINE
FACTS
Lepanto Ceramics, Inc. (LCI), a corporation duly organized and existing under Philippine Laws with
principal office address in Calamba City, Laguna, filed a petition for corporate rehabilitation under
RA 10142, otherwise known as the “Financial Rehabilitation and Insolvency Act (FRIA) of 2010,”
docketed before the RTC of Calamba City, Branch 34, the designated Special Commercial Court
in Laguna (Rehabilitation Court). Essentially, LCI alleged that due to the financial difficulties it has
been experiencing dating back to the Asian financial crisis, it had entered into a state of insolvency
considering its inability to pay its obligations as they become due and that its total liabilities
amounting to ₱4,213 ,682, 715. 00 far exceeds its total assets worth ₱1,112,723,941.00. Notably,
LCI admitted in the annexes attached to the aforesaid Petition its tax liabilities to the national
government in the amount of at least ₱6,355,368.00.
On January 13, 2012, the Rehabilitation Court issued a Commencement Order, which, inter alia:
(a) declared LCI to be under corporate rehabilitation;
(b) suspended all actions or proceedings, in court or otherwise, for the enforcement of claims
against LCI;
(c) prohibited LCI from making any payment of its liabilities outstanding as of even date,
except as may be provided under RA 10142; and
(d) directed the BIR to file and serve on LCI its comment or opposition to the petition, or its
claims against LCI.
Accordingly, the Commencement Order was published in a newspaper of general circulation and
the same, together with the petition for corporate rehabilitation, were personally served upon LCI’s
creditors, including the BIR.
Despite the foregoing, Misajon, et al., acting as Assistant Commissioner, Group Supervisor, and
Examiner, respectively, of the BIR’s Large Taxpayers Service, sent LCI a notice of informal
conference dated May 27, 2013, informing the latter of its deficiency internal tax liabilities for the
Fiscal Year ending June 30, 2010. In response, LCI’s court-appointed receiver, Roberto L.
Mendoza, sent BIR a letter-reply, reminding the latter of the pendency of LCI’s corporate
rehabilitation proceedings, as well as the issuance of a Commencement Order in connection
therewith. Undaunted, the BIR sent LCI a Formal Letter of Demand dated May 9, 2014, requiring
LCI to pay deficiency taxes in the amount of P567,519,348.39.
A petition for indirect contempt of court was filed by LCI against petitioners for defying the Order.
In their defense, petitioners insist that the issue has already become moot and academic because,
in the meantime, LCI had already been declared rehabilitated. Also, petitioners argue that their
acts do not amount to a defiance of the Commencement Order as it was done merely to toll the
prescriptive period in collecting deficiency taxes, that their acts of sending a Notice of Informal
Conference and Formal Letter of Demand do not amount to a "legal action or other recourse"
against LCI outside of the rehabilitation proceedings and that the indirect contempt proceedings
interferes with the exercise of their functions to collect taxes due to the government.
LOWER RTC: CA:
COURT RTC Br. 35 found Misajon, et al. guilty of
RULING indirect contempt and, accordingly, ordered
them to pay a fine of ₱5,000.00 each.
ISSUE/S
1. Whether or not the petitioners are guilty of indirect contempt for issuing a notice of informal
conference despite the fact that they simply wanted to toll the prescriptive period and considering
the lifeblood doctrine. - YES
2. Whether or not the BIR can collect the deficiency taxes while rehabilitation proceedings are
ongoing. - NO
ARGUMENTS Petitioner (BUREAU OF INTERNAL Respondent (LEPANTO CERAMICS, INC.):

REVENUE, ASSISTANT COMMISSIONER
ALFREDO V. MISAJON, GROUP
SUPERVISOR ROLANDO M. BALBIDO,
and EXAMINER REYNANTE DP.
MARTIREZ):
a. RTC Br. 35 had no jurisdiction to cite
them in contempt as it is only the
Rehabilitation Court, being the one that
issued the Commencement Order, which
has the authority to determine whether or
not such Order was defied;
b. the instant petition had already been

mooted by the Rehabilitation Court's
Order15 dated August 28, 2014 which
declared LCI to have been successfully
rehabilitated resulting in the termination of
the corporate rehabilitation proceedings;
c. their acts do not amount to a defiance of

the Commencement Order as it was done
merely to toll the prescriptive period in
collecting deficiency taxes, and thus,
sanctioned by the Rules of Procedure of the
FRIA;
d. their acts of sending a Notice of Informal

Conference and Formal Letter of Demand
do not amount to a "legal action or other
recourse" against LCI outside of the
rehabilitation proceedings; and
e. the indirect contempt proceedings

interferes with the exercise of their
functions to collect taxes due to the
govemment.
SC RULING
1. Yes, they are guilty of indirect contempt.
According to RA 10142, upon the issuance of a commencement order, the distressed corporation
shall be temporarily immune from the enforcement of all claims against it, including all claims of
the government, whether national or local, including taxes, tariffs and customs duties.
To clarify, however, creditors of the distressed corporation are not without remedy as they may
still submit their claims to the rehabilitation court for proper consideration so that they may
participate in the proceedings, keeping in mind the general policy of the law.
Petitioners' act of issuing a notice of informal conference and later a formal letter of demand, all
despite the written reminder by LCI regarding the pendency of the rehab proceeding, is in clear
defiance of the Commencement Order.
As aptly put by the RTC Br. 35, they could have easily tolled the running of such prescriptive
period, and at the same time, perform their functions as officers of the BIR, without defying the
Commencement Order and without violating the laudable purpose of RA 10142 by simply
ventilating their claim before the Rehabilitation Court.
2. No.
Verily, the inherent purpose of rehabilitation is to find ways and means to minimize the expenses
of the distressed corporation during the rehabilitation period by providing the best possible
framework for the corporation to gradually regain or achieve a sustainable operating form. “[It]
enable[s] the company to gain a new lease in life and thereby allow creditors to be paid [t]heir
claims from its earnings. Thus, rehabilitation shall be undertaken when it is shown that the
continued operation of the corporation is economically more feasible and its creditors can recover,
by way of the present value of payments projected in the plan, more, if the corporation continues
as a going concern than if it is immediately liquidated.
In order to achieve such objectives, Section 16 of RA 10142 provides, inter alia, that upon the
issuance of a Commencement Order – which includes a Stay or Suspension Order – all actions or
proceedings, in court or otherwise, for the enforcement of “claims” against the distressed company
shall be suspended. Under the same law, claim “shall refer to all claims or demands of whatever
nature or character against the debtor or its property, whether for money or otherwise, liquidated
or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but
not limited to;
(1) all claims of the government, whether national or local, including taxes, tariffs and
customs duties; and
(2) claims against directors and officers of the debtor arising from acts done in the discharge of
their functions falling within the scope of their authority: Provided, That, this inclusion does not
prohibit the creditors or third parties from filing cases against the directors and officers acting in
their personal capacities.”
In the case at bar, it is undisputed that LCI filed a petition for corporate rehabilitation. Finding the
same to be sufficient in form and substance, the Rehabilitation Court issued a Commencement
Order dated January 13, 2012 which, inter alia:
(a) declared LCI to be under corporate rehabilitation;
(b) suspended all actions or proceedings, in court or otherwise, for the enforcement of claims
against LCI;
(c) prohibited LCI from making any payment of its outstanding liabilities as of even date, except
as may be provided under RA 10142; and
(d) directed the BIR to file and serve on LCI its comment or opposition to the petition, or its
claims against LCI.
It is likewise undisputed that the BIR – personally and by publication – was notified of the
rehabilitation proceedings involving LCI and the issuance of the Commencement Order related
thereto.
Despite the foregoing, the BIR, through Misajon, et al., still opted to send LCI:
(a) a notice of informal conference31 dated May 27, 2013, informing the latter of its deficiency
internal tax liabilities for the Fiscal Year ending June 30, 2010; and
(b) a Formal Letter of Demand32 dated May 9, 2014, requiring LCI to pay deficiency taxes in
the amount of P567,5 l 9,348.39, notwithstanding the written reminder coming from LCI’s
court-appointed receiver of the pendency of rehabilitation proceedings concerning LCI and
the issuance of a commencement order. Notably, the acts of sending a notice of informal
conference and a Formal Letter of Demand are part and parcel of the entire process for the
assessment and collection of deficiency taxes from a delinquent taxpayer,33 – an action or
proceeding for the enforcement of a claim which should have been suspended pursuant to
the Commencement Order. Unmistakably, Misajon, et al. ‘s foregoing acts are in clear
defiance of the Commencement Order.
Petitioners’ insistence that:

(a) Misajon, et al. only performed such acts to toll the prescriptive period for the collection of
deficiency taxes; and
(b) (b) to cite them in indirect contempt would unduly interfere with their function of collecting
taxes due to the government, cannot be given any credence.
As aptly put by the RTC Br. 35, they could have easily tolled the running of such prescriptive period,
and at the same time, perform their functions as officers of the BIR, without defying the
Commencement Order and without violating the laudable purpose of RA 10142 by simply
ventilating their claim before the Rehabilitation Court.34 After all, they were adequately notified of
the LCI’s corporate rehabilitation and the issuance of the corresponding Commencement Order.
In sum, it was improper for Misajon, et al. to collect, or even attempt to collect, deficiency taxes
from LCI outside of the rehabilitation proceedings concerning the latter, and in the process, willfully
disregard the Commencement Order lawfully issued by the Rehabilitation Court. Hence, the RTC
Br. 35 correctly cited them for indirect contempt.
NOTES
Section 4 (gg) of RA 10142 states:
● (gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful
operation and solvency, if it is shown that its continuance of operation is economically
feasible and its creditors can recover by way of the present value of payments projected in
the plan, more if the debtor continues as a going concern than if it is immediately liquidated.
“[C]ase law has defined corporate rehabilitation as an attempt to conserve and administer the
assets of an insolvent corporation in the hope of its eventual return from financial stress to
solvency. It contemplates the continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and liquidity."
TOPIC MODULE
CASE #10
CASE TITLE Situs Development Corp. Asiatrust Bank GR NO 180036
PONENTE SERENO, CJ DATE January 16, 2013
DOCTRINE (This case stemmed from a decision from 25 July 2012 Decision2 in the case involving
petitioners herein, Situs Development Corporation, Daily Supermarket, Inc. and Color
Lithographic Press, Inc. - see and read first 2012 case in the notes)
FACTS
For resolution is the Motion for Reconsideration1 of our 25 July 2012 Decision2 in the case
involving petitioners herein, Situs Development Corporation, Daily Supermarket, Inc. and Color
Lithographic Press, Inc.
Most of the arguments raised by petitioners are too insubstantial to merit our consideration or are
merely rehashed from their previous pleadings and have already been passed upon by this Court.
However, certain issues merit a brief discussion, to wit:
1. That the properties belonging to petitioner corporations majority stockholders may be

included in the rehabilitation plan pursuant to Metropolitan Bank and Trust Company v.
ASB Holdings, Inc. (the Metrobank Case);
2. That the subject properties should be included in the ambit of the Stay Order by virtue of
the provisions of the Financial Rehabilitation and Insolvency Act of 2010 (FRIA), which
should be given a retroactive effect; and
3. That Allied Bank and Metro Bank were not the owners of the mortgaged properties when
the Stay Order was issued by the rehabilitation court.
LOWER RTC: CA:

COURT
RULING
ISSUE/S
ARGUMENTS Petitioner (SITUS DEV. CORPORATION, Respondent (ASIATRUST BANK, ALLIED

DAILY SUPERMARKET, INC. and BANKING CORPORATION, METROPOLITAN
COLOR LITHOGRAPH PRESS, INC.): BANK AND TRUST COMPANY and CAMERON
GRANVILLE II ASSET MANAGEMENT, INC.
("CAMERON")):
SC RULING
On the first issue, petitioners incorrectly argue that the properties belonging to their majority
stockholders may be included in the rehabilitation plan, because these properties were mortgaged
to secure petitioners loans. In support of their argument, they cite a footnote appearing in the
Metrobank Case, which states:
In their petition for rehabilitation, the corporations comprising the ASB Group of
Companies alleged that their allied companies have joined in the said petition
because they executed mortgages and/or pledges over their real and personal
properties to secure the obligations of petitioner ASB Group of Companies. Further,
(they) agreed to contribute, to the extent allowed by law, some of their specified
properties and assets to help rehabilitate petitioner ASB Group of Companies.
(Rollo, pp. 119-120)
A reading of the footnote shows that it is not a ruling on the propriety of the joinder of parties;
rather, it is a statement of the fact that the afore-quoted allegation was made in the petition for
rehabilitation in that case.
On the second issue, petitioners argue that the trial court was correct in including the subject
properties in the ambit of the Stay Order. Under the FRIA, the Stay Order may now cover third-
party or accommodation mortgages, in which the "mortgage is necessary for the rehabilitation of
the debtor as determined by the court upon recommendation by the rehabilitation receiver."5 The
FRIA likewise provides that its provisions may be applicable to further proceedings in pending
cases, except to the extent that, in the opinion of the court, their application would not be feasible
or would work injustice.
Sec. 146 of the FRIA, which makes it applicable to "all further proceedings in insolvency,
suspension of payments and rehabilitation cases x x x except to the extent that in the opinion of
the court their application would not be feasible or would work injustice," still presupposes a
prospective application. The wording of the law clearly shows that it is applicable to all further
proceedings. In no way could it be made retrospectively applicable to the Stay Order issued by the
rehabilitation court back in 2002.
At the time of the issuance of the Stay Order, the rules in force were the 2000 Interim Rules of
Procedure on Corporate Rehabilitation (the "Interim Rules"). Under those rules, one of the effects
of a Stay Order is the stay of the "enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against the debtor, its guarantors and
sureties not solidarily liable with the debtor."7 Nowhere in the Interim Rules is the rehabilitation
court authorized to suspend foreclosure proceedings against properties of third-party mortgagors.
In fact, we have expressly ruled in Pacific Wide Realty and Development Corp. v. Puerto Azul
Land, Inc.8 that the issuance of a Stay Order cannot suspend the foreclosure of accommodation
mortgages. Whether or not the properties subject of the third-party mortgage are used by the
debtor corporation or are necessary for its operation is of no moment, as the Interim Rules do not
make a distinction. To repeat, when the Stay Order was issued, the rehabilitation court was only
empowered to suspend claims against the debtor, its guarantors, and sureties not solidarily liable
with the debtor. Thus, it was beyond the jurisdiction of the rehabilitation court to suspend
foreclosure proceedings against properties of third-party mortgagors.
The third issue, therefore, is immaterial. Whether or not respondent banks had acquired
ownership of the subject properties at the time of the issuance of the Stay Order, the same
conclusion will still be reached. The subject properties will still fall outside the ambit of the Stay
Order issued by the rehabilitation court.
Since the subject properties are beyond the reach of the Stay Order, and since foreclosure and
consolidation of title may no longer be stalled, petitioners rehabilitation plan is no longer feasible.
We therefore affirm our earlier finding that the dismissal of the Petition for the Declaration of State
of Suspension of Payments with Approval of Proposed Rehabilitation Plan is in order.
WHEREFORE, the Court resolves to DENY WITH FINALITY the instant Motion for
Reconsideration for lack of merit. No further pleadings shall be entertained. Let entry of judgment
be made in due course.
NOTES 2012 Case
Facts: Tony Chua, started COLOR and ventured into real estate development/leasing by
organizing SITUS in order to build a shopping mall complex known as Metrolane Complex
(COMPLEX). To finance the construction of the COMPLEX, SITUS, COLOR and Tony Chua and
his wife Siok Lu Chua, obtained several loan from:
(1) ALLIED secured by real estate mortgages over two lots
(2) ASIATRUST secured by a real estate mortgage and
(3) Global Banking Corporation, now METROBANK secured a real estate mortgaged.
The Chua Family expanded into retail merchandising and organized Daily Supermarket
Inc.(DAILY). All three (3) corporations have interlocking directors and are all housed in the
COMPLEX. The Chua family also resides in the COMPLEX, while the other units are being leased
to tenants SITUS, COLOR AND DAILY obtain additional loans from ALLIED, ASIATRUST AND
METROBANK and their real estate mortgages were updated and or amended.
Spouses Chua likewise executed five (5) Continuing Guarantee Comprehensive Surety in favor of
ALLIED to guarantee the payment of the loans of SITUS AND DAILY but they failed to pay their
obligations as they fell due, despite demands. Extra judicial foreclosure was obtained by some of
the respondents. The petitioners raised arguments that are too substantial to merit the courts
consideration and some are merely rehashed from previous proceedings. One of the contentions
raised was the properties belonging to the petitioners corporations majority stockholders may be
included in the rehabilitation plan. The properties should be included in the ambit of the Stay Order
and Allied and Metro Bank were not the owners of the mortgaged properties when the Stay Order
was issued by the rehabilitation court.
Issue: Whether the properties belonging to the majority stockholders may be included in
the rehabilitation plan as inventory of assets of the petitioner corporations.
SC Ruling: NO. In this case, the parcels of land mortgaged to respondent banks are owned not
by petitioners, but by spouses Chua. Applying the doctrine of separate juridical personality, these
properties cannot be considered as part of the corporate assets. Even if spouses Chua are the
majority stockholders in petitioner corporations, they own these properties in their individual
capacities. Thus, the parcels of land in question cannot be included in the inventory of assets of
petitioner corporations.
The fact that these properties were mortgaged to secure corporate debts is of no moment. A
mortgage is an accessory undertaking to secure the fulfillment of a principal obligation. In a third-
party mortgage, the mortgaged property stands as security for the loan obtained by the principal
debtor; but until the mortgaged property is foreclosed, ownership thereof remains with the third-
party mortgagor.
Here, the properties owned by spouses Chua were mortgaged as security for the debts contracted
by petitioner corporations. However, ownership of these properties remained with the spouses
notwithstanding the fact that these were mortgaged to secure corporate debts. We have ruled that
“when a debtor mortgages his property, he merely subjects it to a lien but ownership thereof is not
parted with.”
This leads to no other conclusion than that, notwithstanding the mortgage, the real properties in
question belong to spouses Chua; hence, these properties should not be considered as assets of
petitioner corporations.
TOPIC MODULE 10
CASE #11
CASE TITLE Yngson, Jr. vs. Philippine National Bank GR NO 171132
PONENTE Villarama, Jr., J DATE August 15, 2012
DOCTRINE
The creditor-mortgagee has the right to foreclose the mortgage over a specific real property
whether or not the debtor-mortgagor is under solvency or liquidation proceedings. The right to
foreclose such mortgage is merely suspended upon the issuance of a stay order by the trial
court. However, the creditor-mortgagee may exercise his right to foreclose the mortgage upon
the termination of the rehabilitation proceedings or upon the lifting of the stay order.
FACTS Between 1991 and 1993, ARCAM applied for and was granted a loan by PNB. To secure a loan,
ARCAM executed a Real Estate Mortgage over a parcel of land and a Chattel Mortgage over
various personal properties consisting of machinery, generators, field transportation and heavy
equipment. ARCAM, however, defaulted on its obligations to PNB. Thus, PNB initiated
extrajudicial foreclosure proceedings.
On December 7, 1993, ARCAM filed before the SEC a Petition for Suspension of Payments,
Appointment of a MAnagement or Rehabilitation Committee, and Approval of Rehabilitation Plan,
with application for issuance of a temporary restraining order (TRO) and writ of preliminary
injunction. The SEC issued a TRO and subsequently writ of preliminary injunction, enjoining
PNB and the Sheriff from proceeding with the foreclosure sale of the mortgaged properties.
On February 9, 2000, the SEC ruled that ARCAM can no longer be rehabilitated. SEC decreed
that ARCAM be dissolved and placed under liquidation. Atty. Manuel D. Yngson, Jr. & Associates
was appointed as Liquidator for ARCAM. With this development, PNB revived the foreclosure
case and requested the RTC Clerk of Court to reschedule the sale at public auction of the
mortgaged properties.
Contending that foreclosure during liquidation was improper, the petitioner filed with the SEC a
Motion for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction to
enjoin the foreclosure sale of ARCAM’s assets. A TRO was issued, but said TRO lapsed without
any writ of preliminary injunction being issued. Consequently on July 28, 2000, PNB resumed the
proceedings for the extrajudicial foreclosure sale of the mortgaged properties. PNB emerged as
the highest winning bidder.
On November 16, 2000, petitioner filed with the SEC a motion to nullify the auction sale.
LOWER
COURT SEC: Denied the petitioner’s motion to CA: Dismissed the petition on the ground that the
RULING nullify the auction sale. It held that PNB was petitioner failed to attach material portions of the
not legally barred from foreclosing on the record and other documents relevant to the
mortgages. petition as required in Rule 46, Section 3 of the
1997 Rules of Civil Procedure, as amended.
ISSUE/S
W/N PNB, as a secured creditor, can foreclose on the mortgaged properties of a corporation
under liquidation without the knowledge and prior approval of the liquidator or the SEC
ARGUMENTS Petitioner (MANUEL D. YNGSON, JR., in Respondent (PHILIPPINE NATIONAL BANK):

his capacity as the Liquidator of ARCAM
& Company, Inc.):
a. Neither P.D. No. 902-A nor the SEC rules
a. All actions against companies which prohibits secured creditors from
are under liquidation are suspended foreclosing on their mortgages to satisfy
because liquidation is a continuation the mortgagor’s debt after the termination
of the petition for suspension of the rehabilitation proceedings and
proceedings. during liquidation proceedings.
b. The prohibition against foreclosure
subsisted during liquidation because
payment of all of ARCAM’s
obligations was proscribed except
those authorized by SEC.
c. The mortgaged assets should be
included in the liquidation and the
proceeds shared with the unsecured
creditors.
SC RULING YES. If rehabilitation is no longer feasible and the assets of the corporation are finally liquidated,
secure creditors shall enjoy preference over unsecured creditors, subject only to the provisions of
the Civil Code on concurrence and preference of credits. Creditors of secure obligations may
pursue their security interest or lien, or they may choose to abandon the preference and prove
their credits as ordinary claims.
Moreover, Section 2248 of the Civil Code provides:

“Those credits which enjoy preference in relation to specific real property or real rights, exclude
all others to the extent of the value of the immovable or real right which the preference refers.”
The creditor-mortgagee has the right to foreclose the mortgage over a specific real property
whether or not the debtor-mortgagor is under solvency or liquidation proceedings. The right to
foreclose such mortgage is merely suspended upon the issuance of a stay order by the trial
court. However, the creditor-mortgagee may exercise his right to foreclose the mortgage upon
the termination of the rehabilitation proceedings or upon the lifting of the stay order.
Further, under FRIA of 2012, the right of the secured creditor to enforce his lien during liquidation
proceedings is retained. In this case, PNB elected to maintain its rights under the security or lien;
hence, its right to foreclose the mortgaged properties should be respected.
NOTES
TOPIC Stay Order; Exceptions to the Stay Order MODULE
CASE #12
CASE TITLE TRADE AND INVESTMENT DEVELOPMENT CORPORATION OF THE GR NO
PHILIPPINES ALSO KNOWN AS PHILIPPINE EXPORT-IMPORT CREDIT 233850
AGENCY v. PHILIPPINE VETERANS BANK
PONENTE J. Caguioa DATE July 1, 2019
DOCTRINE Section 18(c) of the FRIA explicitly states that a stay order shall not apply "to the enforcement
of claims against sureties and other persons solidarily liable with the debtor, and third party
or accommodation mortgagors as well as issuers of letters of credit.
FACTS The instant case stems from a Complaint for Specific Performance (Complaint) filed on September
22, 2016 before the RTC by respondent PVB against petitioner TIDCORP.
Respondent PVB alleged in the complaint that on November 23, 2011, PVB, and other banking
institutions (Series A Noteholders), entered into a Five-Year Floating Rate Note Facility Agreement
(NFA) with debtor Philippine Phosphate Fertilizer Corporation (PhilPhos), a PEZA registered
domestic corporation situated in Leyte, up to the aggregate amount of P5 billion. Under the said
NFA, respondent PVB committed the amount of P1 billion. To secure payment of the Series A
Notes, petitioner TIDCORP, with the express conformity of PhilPhos, executed a Guarantee
Agreement dated November 23, 2011 (Guarantee Agreement) whereby petitioner TIDCORP
agreed to guarantee the payment of the guaranty obligation to the extent of 90% of the outstanding
Series A Notes, including interest, on a rolling successive three-month period commencing on the
first drawdown date and ending on the maturity date of the Series A Notes.
On November 8, 2013, due to the damage brought by typhoon Yolanda to PhilPhos' manufacturing
facilities, it failed to resume its operations.
Thus, on September 17, 2015, PhilPhos filed a Petition for Voluntary Rehabilitation under the
Financial Rehabilitation and Insolvency Act of 20107 (FRIA) before RTC Ormoc City (Rehabilitation
Court). On September 22, 2015, the Rehabilitation Court issued a Commencement Order, which
included a Stay Order.
On November 5, 2015, or 45 days as provided in the Guarantee Agreement, PVB filed its Notice
of Claim with petitioner TIDCORP, which received the same on November 6, 2015. However,
petitioner TIDCORP declined to give due course to respondent PVB's Notice of Claim, invoking
the Stay Order issued by the Rehabilitation Court. Despite several demands by PVB, petitioner
TIDCORP maintained its position to deny PVB's claim due to the said Stay Order.
PVB asserted in its complaint that "[t]o secure the payment of the Series A Notes, [petitioner]
TIDCORP, with the express conformity of PhilPhos, executed a Guarantee Agreement with the
Series A Noteholders (except CBC) x x x, whereby, among others, it: (a) agreed to guarantee
payment to the Series A Noteholders to the extent of Ninety (90%) Percent of the Series A Notes
and interest; and (b) waived the benefit of excussion, x x x."
Petitioner TIDCORP argued that RTC cannot validly try the case because of the Rehabilitation
Court's Stay Order, which enjoined the enforcement of all claims, actions and proceedings against
PhilPhos. Because of this, PVB filed Motion for Summary Judgment which the RTC subsequently
granted. It held that there was no genuine issue as to any material fact posed by petitioner
TIDCORP with respect to its liability under the Guarantee Agreement, except as to the amount of
damages. Thus, the RTC found that PVB was entitled to a judgment in its favor as a matter of law.
LOWER RTC: Petitioner TIDCORP should be made CA: N/A
COURT liable under the Guarantee Agreement.
RULING
As made manifest in the pleadings,
supporting affidavits, and admissions on
record, there was no genuine issue as to any
material fact posed by petitioner TIDCORP
with respect to its liability under the
Guarantee Agreement, except as to the
amount of damages. Thus, the RTC found
that respondent PVB was entitled to a
judgment in its favor as a matter of law.
ISSUE/S 1. Whether the liability of TIDCORP is merely subsidiary (guarantor) or solidary (surety)
2. Whether or not the Stay Order of the Rehabilitation Court applies to TIDCORP - NO
ARGUMENTS Petitioner TIDCORP: Respondent PVB:
SC RULING 1. The liability of TIDCORP is solidary (surety). Under a normal contract of guarantee, the
guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case
the latter should fail to do so. The guarantor who pays for a debtor, in turn, must be
indemnified by the latter. However, the guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor and resorted to all the legal
remedies against the debtor. This is what is otherwise known as the benefit of excussion.
Conversely, if this benefit of excussion is waived, the guarantor can be directly compelled
by the creditor to pay the entire debt even without the exhaustion of the debtor's properties.
However, the Guarantee Agreement unequivocally states that TIDCORP waived its
right of excussion under Article 2058 of the Civil Code and that, consequently, the
Series A Noteholders can claim under the Guarantee Agreement DIRECTLY against
petitioner TIDCORP without having to exhaust all the properties of PhilPhos and
without need of any prior recourse against PhilPhos.
In the instant case, petitioner TIDCORP had expressly renounced the benefit of
excussion and made itself directly and principally liable without any qualification to the
Series A Noteholders and without the need of any prior recourse to PhilPhos. In effect, the
nature of the guarantee obligation assumed by petitioner TIDCORP under the
Guarantee Agreement was transformed into a suretyship. This is the case because the
defining characteristic that distinguishes a guarantee from a suretyship is that in the latter,
the obligor promises to pay the principal's debt if the principal will not pay, while in the
former, the obligor agrees that the creditor, after proceeding against the principal and
exhausting all of the principal's properties, may proceed against the obligor.
2. The making of claims against sureties and other persons solidarily liable with the debtor is
not barred by a stay order.
First, it must be noted that the Stay Order relied upon by petitioner TIDCORP merely
ordered the staying and suspension of enforcement of all claims and proceedings
against the petitioner PhilPhos and not against all the other persons or entities
solidarily liable with the debtor.
Second, Section 18(c) of the FRIA explicitly states that a stay order shall not apply "to
the enforcement of claims against sureties and other persons solidarily liable with
the debtor, and third party or accommodation mortgagors as well as issuers of
letters of credit, x x x."
In addition, under Rule 4, Section 6 of A.M. No. 00-8-10-SC or the Interim Rules of
Procedure on Corporate Rehabilitation, a stay order has the effect of staying
enforcement only with respect to claims made against the debtor, its guarantors and
persons not solidarily liable with the debtor:
Section 6. Stay Order.— If the court finds the petition to be sufficient in form and
substance, it shall, not later than five (5) working days from the filing of the petition, issue
an order: (a) appointing a rehabilitation receiver and fixing his bond; (b) staying
enforcement of all claims, whether for money or otherwise and whether such enforcement
is by court action or otherwise, against the debtor, its guarantors and persons not solidarity
liable with the debtor x x x.
Hence, in accordance with the Guarantee Agreement, which states that respondent
PVB can claim DIRECTLY from petitioner TIDCORP without the former having to exhaust
all the properties of and without need of prior recourse to PhilPhos, in accordance with
Section 18(c) of the FRIA, the issuance of the Stay Order by the Rehabilitation Court clearly
did not prevent the RTC from acquiring jurisdiction over respondent PVB's Complaint, as
correctly held by the RTC in the assailed Order.
NOTES
TOPIC Stay Order: Suspended Claims MODULE 10
CASE #13
PACIFIC WIDE REALTY AND DEVELOPMENT CORPORATION v. GR
CASE TITLE
PUERTO AZUL LAND, INC. NOS 178768
180893
PONENTE Nachura, J. DATE 25 November 2009
DOCTRINE
The Interim Rules of Procedure on Corporate Rehabilitation is silent on the enforcement of claims
specifically against the properties of accommodation mortgagors. It only covers the suspension,
during the pendency of the rehabilitation, of the enforcement of all claims against the debtor, its
guarantors and sureties not solidarily liable with the mortgagor.
Furthermore, the newly adopted Rules of Procedure on Corporate Rehabilitation has a specific
provision for this special arrangement among a debtor, its creditor and its accommodation
mortgagor. Section 7(b), Rule 3 of the said Rules explicitly allows the foreclosure by a creditor of
a property not belonging to a debtor under corporate rehabilitation.
FACTS G.R. No. 180893
● Puerto Azul Land, Inc. (PALI) is the owner and developer of the Puerto Azul Complex in
Ternate, Cavite. Its business involves the development of Puerto Azul into a satellite city
with residential areas, resort, tourism and retail commercial centers with recreational areas.
➔ In order to finance its operations, it obtained loans from various banks, the principal
amount of which is P640,225,324.
➔ PALI and its accommodation mortgagors, i.e., Ternate Development Corporation
(TDC), Ternate Utilities, Inc. (TUI), and Mrs. Trinidad Diaz-Enriquez, secured the
loans.
● PALI started to have problems when the Philippine Stock Exchange rejected the listing of
its shares in its initial public offering, sending a bad signal to the real estate market. It
resulted in potential investors and real estate buyers shying away from the business
venture.
➔ The situation was aggravated by the 1997 Asian financial crisis and the decline of
the real estate market.
➔ Consequently, PALI was unable to keep up with the payment of its obligations,
both current and those that were about to fall due.
● One of its creditors, Export and Industry Bank (EIB), substituted by Pacific Wide Realty
and Development Corporation (PWRDC), filed foreclosure proceedings on PALI's
mortgaged properties.
● PALI then filed a petition for suspension of payments and rehabilitation, accompanied by a
proposed rehabilitation plan and 3 nominees for the appointment of a rehabilitation receiver.
● RTC issued a Stay Order and appointed Patrick Caoile as rehabilitation receiver who later
on filed his rehabilitation report and recommendation, proposing that PALI should be
rehabilitated rather than be dissolved and liquidated.
● In December 2005, the RTC approved PALI's petition for suspension of payments and
rehabilitation. Finding the terms of the rehabilitation plan and the qualifications of the
appointed rehabilitation receiver unacceptable, EIB filed with the CA a petition for review,
which the appellate court dismissed.
G.R. No. 178768

● In March 2005, EIB filed an urgent motion to order PALI and/or the mortgagor
TUI/rehabilitation receiver to pay all the taxes due on TCT No. 133164.
➔ EIB claimed that the property covered by said TCT, registered in TUI’s name, was
one of the properties used to secure PALI's loan from EIB which was subject to a
public auction by the Treasurer's Office of Pasay City for non-payment of realty
taxes.
➔ Hence, EIB prayed that PALI or TUI be ordered to pay the realty taxes due on TCT
No. 133164.
● PALI opposed the motion, arguing that the rehabilitation court’s stay order stopped the
enforcement of all claims, whether for money or otherwise, against a debtor, its guarantors,
and its sureties not solidarily liable to the debtor; thus, TCT No. 133164 was covered by
the stay order
LOWER RTC OF MANILA: Modified the Stay Order CA: Reversed the RTC’s decision
COURT by excluding TCT No. 133614
RULING The properties covered by TCT No. 133164 are
TCT No. 133614, mortgaged with creditor subject to and covered by the Stay Order.
movant EIB, is now excluded from the said Accordingly, Sheriff Virgilio Villar is ordered to
Order. As such, EIB may settle the realty cease and desist from enforcing the Amended
taxes of third party mortgagor with the local Notice of Sheriff's Sale and from conducting the
government of Pasay City. In return, and to sale at public auction of the parcels of land covered
adequately protect the creditor movant EIB, by TCT No. 133164 on March 20, 2007 or at any
the latter may foreclose on TCT No. 133614. time thereafter.
ISSUE/S
A. Whether or not the terms of the rehabilitation plan are unreasonable and in violation of the
non-impairment clause. -NO.
B. Whether or not the rehabilitation court erred when it allowed the foreclosure of the
accommodation mortgagee's property and excluded the same from the coverage of the
stay order. -NO.
ARGUMENTS Petitioner: Pacific Wide Realty and Respondent: Puerto Azul Land, Inc. (PALI)
Development Corporation (PWRDC)
The rehabilitation plan is unreasonable and

results in the impairment of the obligations of
contract.
PWRDC contests the following stipulations

in PALI's rehabilitation plan: 50% reduction
of the principal obligation; condonation of the
accrued and substantial interests and
penalty charges; repayment over a period of
10 years, with minimal interest of 2% for the
first 5 years and 5% for the next 5 years until
fully paid, and only upon availability of cash
flow for debt service.
SC RULING
A. NO, there is nothing onerous in the terms of PALI's rehabilitation plan. The
restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover, the
restructuring of the debts of PALI would not be prejudicial to the interest of PWRDC as a
secured creditor.
The Interim Rules on Corporate Rehabilitation provides for means of execution of the
rehabilitation plan, which may include, among others, the conversion of the debts or any
portion thereof to equity, restructuring of the debts, dacion en pago, or sale of assets or of
the controlling interest.
There is also no violation of the impairment clause as this case does not involve a law or
an executive issuance declaring the modification of the contract among debtor PALI, its
creditors and its accommodation mortgagors.
B. NO, the Interim Rules of Procedure on Corporate Rehabilitation is silent on the

enforcement of claims specifically against the properties of accommodation
mortgagors. It only covers the suspension, during the pendency of the rehabilitation,
of the enforcement of all claims against the debtor, its guarantors and sureties not
solidarily liable with the mortgagor.
Furthermore, the newly adopted Rules of Procedure on Corporate Rehabilitation has a

specific provision for this special arrangement among a debtor, its creditor and its
accommodation mortgagor. Section 7(b), Rule 3 of the said Rules explicitly allows the
foreclosure by a creditor of a property not belonging to a debtor under corporate
rehabilitation. (see notes)
In excluding the property from the coverage of the stay order and allow PWRDC to foreclose
on the mortgage and settle the realty tax delinquency of the property with Pasay City, the
rehabilitation court used as justification Section 12, Rule 4 of the Interim Rules on Corporate
Rehabilitation. (see notes)
The property covered by TCT No. 133164, owned by TUI, was mortgaged to PWRDC by
TUI, as an accommodation mortgagor of PALI, by virtue of the Mortgage Trust Indenture
(MTI). Under Section 4.04 thereof, the mortgagors and the borrower guaranteed to pay and
discharge on time all taxes, assessments and governmental charges levied or assessed
on the collateral and immediately surrender to the trustee copies of the official receipts for
such payments.
The court found that PALI violated the terms of the MTI by failing to take reasonable steps
to protect the security given to PWRDC as TUI, being the owner of TCT No. 133614, is the
one liable to pay the realty taxes to the local government of Pasay City. However, neither
TUI nor PALI has the intention of paying the real property taxes on TCT No. 133614, which
inaction will naturally result in the auctioning of the subject land to the prejudice and damage
of creditor movant being the mortgagee thereof.
NOTES
● Under the Rules of Procedure on Corporate Rehabilitation, "rehabilitation" is defined as the
restoration of the debtor to a position of successful operation and solvency, if it is shown that its
continuance of operation is economically feasible and its creditors can recover by way of the present
value of payments projected in the plan, more if the corporation continues as a going concern than
if it is immediately liquidated.
● An indispensable requirement in the rehabilitation of a distressed corporation is the rehabilitation

plan, and Section 5 of the Interim Rules of Procedure on Corporate Rehabilitation provides the
requisites thereof.
● The court may approve a rehabilitation plan even over the opposition of creditors holding a majority
of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and
the opposition of the creditors is manifestly unreasonable. The rehabilitation plan, once approved, is
binding upon the debtor and all persons who may be affected by it, including the creditors, whether
or not such persons have participated in the proceedings or have opposed the plan or whether or
not their claims have been scheduled.
● The governing law concerning rehabilitation and suspension of actions for claims against
corporations is PD 902-A, as amended. Section 6(c) of P.D. No. 902-A mandates that, upon
appointment of a management committee, rehabilitation receiver, board, or body, all actions for
claims against a corporation pending before any court, tribunal or board shall ipso jure be suspended
in whatever stage such actions may be found. The justification for the suspension of actions or claims
pending rehabilitation proceedings is to enable the management committee or rehabilitation receiver
to effectively exercise its/his powers free from any judicial or extrajudicial interference that might
unduly hinder or prevent the "rescue" of the debtor company.
Section 5 of the Interim Rules of Procedure on Corporate Rehabilitation

Rehabilitation Plan. - The rehabilitation plan shall include (a) the desired business targets or goals and the
duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which shall
include the manner of its implementation, giving due regard to the interests of secured creditors; (c) the
material financial commitments to support the rehabilitation plan; (d) the means for the execution of the
rehabilitation plan, which may include conversion of the debts or any portion thereof to equity, restructuring
of the debts, dacion en pago, or sale of assets or of the controlling interest; (e) a liquidation analysis that
estimates the proportion of the claims that the creditors and shareholders would receive if the debtor's
properties were liquidated; and (f) such other relevant information to enable a reasonable investor to make
an informed decision on the feasibility of the rehabilitation plan.
Section 12 Rule 4 of the Interim Rules on Corporate Rehabilitation

Relief from, Modification, or Termination of Stay Order. - The court may, on motion or motu proprio,
terminate, modify, or set conditions for the continuance of the stay order, or relieve a claim from the coverage
thereof upon showing that (a) any of the allegations in the petition, or any of the contents of any attachment,
or the verification thereof has ceased to be true; (b) a creditor does not have adequate protection over
property securing its claim; or (c) the debtor's secured obligation is more than the fair market value of the
property subject of the stay and such property is not necessary for the rehabilitation of the debtor.
For purposes of this section, the creditor shall lack adequate protection if it can be shown that:
a. the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured;
b. the debtor fails or refuses to take commercially reasonable steps to maintain the property; or
c. the property has depreciated to an extent that the creditor is undersecured.
Upon showing of a lack of adequate protection, the court shall order the rehabilitation receiver to (a) make
arrangements to provide for the insurance or maintenance of the property, or (b) to make payments or
otherwise provide additional or replacement security such that the obligation is fully secured. If such
arrangements are not feasible, the court shall modify the stay order to allow the secured creditor lacking
adequate protection to enforce its claim against the debtor; Provided, however, that the court may deny the
creditor the remedies in this paragraph if such remedies would prevent the continuation of the debtor as a
going concern or otherwise prevent the approval and implementation of a rehabilitation plan.
Section 7(b) Rule 3 of the Rules of Procedure on Corporate Rehabilitation

Stay Order.—(b) staying enforcement of all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the debtor, its guarantors and persons not solidarily
liable with the debtor; provided, that the stay order shall not cover claims against letters of credit and similar
security arrangements issued by a third party to secure the payment of the debtor's obligations; provided,
further, that the stay order shall not cover foreclosure by a creditor of property not belonging to a debtor
under corporate rehabilitation; provided, however, that where the owner of such property sought to be
foreclosed is also a guarantor or one who is not solidarily liable, said owner shall be entitled to the benefit of
excussion as such guarantor.
TOPIC FRIA MODULE 10
CASE #14
CASE TITLE GR NO
PATRICIA CABRIETO DELA TORRE, represented by BENIGNO T. 221932
CABRIETO, JR. vs. PRIMETOWN PROPERTY GROUP, INC.
PONENTE DATE February 14, 2018

PERALTA, J.
DOCTRINE
Corporate rehabilitation contemplates a continuance of corporate life and activities in an effort to restore
and reinstate the corporation to its former position of successful operation and solvency, the purpose being
to enable the company to gain a new lease on life and allow its creditors to be paid their claims out of its
earnings. An essential function of corporate rehabilitation is the Stay Order which is a mechanism of
suspension of all actions and claims against the distressed corporation upon the due appointment of a
management committee or rehabilitation receiver.
Rehabilitation proceedings are summary and non-adversarial in nature, and do not

contemplate adjudication of claims that must be threshed out in ordinary court proceedings. Adversarial
proceedings similar to that in ordinary courts are inconsistent with the commercial nature of a rehabilitation
case. The latter must be resolved quickly and expeditiously for the sake of the corporate debtor, its creditors
and other interested parties. Thus, the Interim Rules "incorporate the concept of prohibited pleadings,
affidavit evidence in lieu of oral testimony, clarificatory hearings instead of the traditional approach of
receiving evidence, and the grant of authority to the court to decide the case, or any incident, on the basis of
affidavits and documentary evidence.
FACTS
Respondent Primetown Property Group, Inc. is primarily engaged in holding, owning and developing
real estate. Among its projects are the Century Citadel Inn, Makati, Makati Prime Century Tower and Makati
Prime City. It, likewise, expanded its real estate business in Cebu City where it constructed two (2) condotel
projects. However, the ascent of respondent was arrested and its shares were brought down by the Asian
financial crisis in 1997. It experienced financial difficulties due to the devaluation of the Philippine peso, the
increase in interest rates and lack of access to adequate credit. Thus, in 2003, respondent filed a petition for
corporate rehabilitation with prayer for suspension of payments and actions with the Regional Trial Court
(RTC) of Makati City, and was raffled off to Branch 138. On August 15, 2003, the rehabilitation court issued
a Stay Order.
LOWER RTC: Regional Trial Court issued an Order CA: CA overturned the decision of RTC. CA found that
COURT granting petitioner's motion for intervention as when the Stay Order was issued, the rehabilitation court
RULING follows: is empowered to suspend all claims against respondent
whether monetary or otherwise which includes
The court, after a cursory of the records, petitioner's action or claim to execute a certificate of title
finds the intervention to have been filed on time in her favor. Moreso, when respondent countered that
petitioner was not entitled to her prayer as she had not
as there will only be an additional requirement
yet fully paid the contract price; and that the RTC has
and that is leave of court, which was here granted no jurisdiction for the enforcement of the contract of sale
to the intervenor. Dismissal on the ground of involving a condominium unit since the exclusive
belated filing is, therefore, unwarranted. All jurisdiction lies with the HLURB.
things considered, the Court finds clear and
convincing proof that intervenor had fully paid for
Unit 3306 of the Makati Prime Citadel
Condominium and, therefore, is entitled to the
grant of relief.
WHEREFORE, order is hereby issued

directing petitioner Primetown Properties
Group, Inc. (1) to execute the
corresponding deed of absolute sale
covering Unit 3306 of the Makati Prime
Citadel Condominium in favor of
intervenor Patricia Cabrieto-Dela Torre;
(2) to deliver the copy of the Owner's
Duplicate of Condominium Certificate of
Title No. 25161, together with all the
pertinent documents needed to effect
registration of the deed of sale and
issuance a new title in the name of
intervenor; and (3) to immediately
transfer possession of the subject Unit
3306 to said intervenor Patricia Cabrieto-
Dela Torre.
ISSUE/S
Whether or not while respondent is undergoing rehabilitation, the enforcement of all claims against it
stayed.; hence, the execution of a deed of absolute sale is a claim of this character as to be covered
and suspended under the Stay Order.
ARGUMENTS Petitioner (NAME): PATRICIA CABRIETO Respondent (NAME): PRIMETOWN PROPERTY

DELA TORRE, represented by BENIGNO T. GROUP, INC.
CABRIETO, JR.
SC RULING
NO. The Supreme Court upheld the CA ruling. The rehabilitation court is empowered to suspend all claims
against respondent whether monetary or otherwise which includes petitioner's action or claim to execute a
certificate of title in her favor. Moreso, when respondent countered that petitioner was not entitled to her
prayer as she had not yet fully paid the contract price; and that the RTC has no jurisdiction for the
enforcement of the contract of sale involving a condominium unit since the exclusive jurisdiction lies with the
HLURB.
When the RTC issued the Stay Order which suspended all claims against respondent, without
distinction, petitioner's prayer for the execution of a deed of sale is a claim covered by the Stay Order issued
by the RTC. In fact, the parties' contentions already require a full-blown trial on the merits which must be
decided in a separate action and not by the rehabilitation court.
NOTES
Sec. 6. Stay Order. — If the court finds the petition to be sufficient in form and substance, it shall, not later
than five (5) days from the filing of the petition, issue an Order (a) appointing a Rehabilitation Receiver and
fixing his bond; (b) staying enforcement of all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily
liable with the debtor; (c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any
manner any of its properties except in the ordinary course of business; (d) prohibiting the debtor from making
any payment of its liabilities outstanding as at the date of filing of the petition; (e) prohibiting the debtor's
suppliers of goods or services from withholding supply of goods and services in the ordinary course of
business for as long as the debtor makes payments for the services and goods supplied after the issuance
of the stay order; (f) directing the payment in full of all administrative expenses incurred after the issuance of
the stay order; (g) fixing the initial hearing on the petition not earlier than forty five (45) days but not later
than sixty (60) days from the filing thereof; (h) directing the petitioner to publish the Order in a newspaper of
general of general circulation in the Philippines once a week for two (2) consecutive weeks; (i) directing all
creditors and all interested parties (including the Securities and Exchange Commission) to file and serve on
the debtor a verified comment on or opposition to the petition, with supporting affidavits and documents, not
later than ten (10) days before the date of the initial hearing and putting them on notice that their failure to
do so will bar them from participating in the proceedings; and (j) directing the creditors and interested parties
to secure from the court copies of the petition and its annexes within such time as to enable themselves to
file their comment on or opposition to the petition and to prepare for the initial hearing of the petition.
TOPIC MODULE
CASE #15
CASE TITLE Allied Banking Corp. v. Equitable GR NO 191939
PONENTE DATE March 14, 2018
DOCTRINE
FACTS On 11 September 2006, Equitable PCI Bank, Inc. (EPCIB), as creditor, filed a petition for the
corporate rehabilitation of its debtor Steel Corporation of the Philippines (SCP) with the RTC.
EPCIB alleged, among others, that due to the onslaught of the 1997 Asian Financial Crisis, SCP
began experiencing a downward trend in its financial condition which prompted various banks and
financial institutions to grant it with term loan facilities and working capital lines; that SCP failed to
make timely payments on its term loan facilities; that SCP also defaulted on its loan obligations
under the December 2002 Omnibus Agreement, where lending banks and other financial
institutions agreed to reschedule and restructure SCP's payments on the principal loan and
interest, reinstate its working capital lines and establish a new trade financing line; and that the
petition for corporate rehabilitation is grounded on Section 1, Rule 4 of the Interim Rules of
Corporate Rehabilitation, which provides that "any debtor who foresees the impossibility of meeting
its debts when they respectively fall due, or any creditor or creditors holding at least twenty-five
percent (25%) of the debtor's total liabilities, may petition the proper Regional Trial Court to have
the debtor placed under rehabilitation."
Apart from the foregoing agreements, Allied Banking Corporation (ABC) granted SCP with a
revolving credit facility denominated as a letter of credit/trust receipt line in the amount of P100
million, which SCP availed of to finance the importation of its raw materials. Pursuant to this
arrangement, SCP executed a trust receipt (TR), which authorizes ABC to charge SCP's account
in its possession under instances specified in paragraph 9 thereof, viz:
In the event of any bankruptcy, insolvency, suspension of payment, or failure, or assignment for the
benefit of creditors, on my/our part, or of the non-fulfillment of any obligation, or of the non-payment at
maturity of any acceptance specified hereon or under any credit issued by the ALLIED BANKING
CORPORATION for my/our account, or of the non-payment of any indebtedness on my/our part to the
said bank, all obligations, acceptances, indebtedness, and liabilities whatsoever shall thereupon (with or
without notice) mature and become due and payable. The ALLIED BANKING CORPORATION is hereby
constituted my/our attorney-in-fact, with authority to examine my/our books and records, to charge
my/our account or to sell any other property of mine/ours in its possession, and to liquidate any or all of
my/our obligations under this Trust Receipt.
The rehabilitation petition was filed by EPCIB under A.M. No. 00-8-10-SC dated 21 November
2000, or the 2000 Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules).
On 27 August 2013, however, the Court enacted A.M. No. 12-12-11-SC, or the Financial
Rehabilitation Rules of Procedure (Rehabilitation Rules), which amended and revised the Interim
Rules and the subsequent 2008 Rules of Procedure on Corporate Rehabilitation (2008 Rules), in
order to incorporate the significant changes brought about by Republic Act No. 10142 (R.A. No.
10142), otherwise known as the Financial Rehabilitation and Insolvency Act of 2010 (FRIA).
LOWER RTC: In Favor of EPCIP, wherein RTC CA: Affirmed the decision of the RTC.
COURT ordered ABC to restore SCP's current
RULING
account and to credit back the amount
previously set off.
ISSUE/S Whether or not the Rehabilitation Rules be applied to resolve the present petition, when the
subject petition for rehabilitation was filed under the Interim Rules.
ARGUMENTS Petitioner (ABC): Respondent (EPCIP):

ABC contends that it was deprived of its Mentioned in the facts, 2nd paragraph. :)
right to due process when the RTC
ordered ABC to restore SCP's current
account and to credit back the amount
previously set off. ABC asserts that it was
not yet bound by the 12 September 2006
stay order when it made the setoff on 15
September 2006 because jurisdiction over
it had not yet been acquired by the
rehabilitation court; the stay order was
only published on 16 September 2006.
SC RULING Yes, Section 2, Rule 1 of the Rehabilitation Rules governs rehabilitation cases already pending,
except when its application would not prove feasible or would work injustice, to wit:
SEC. 2. SCOPE. - These Rules shall apply to petitions for rehabilitation of corporations,
partnerships, and sole proprietorships, filed pursuant to Republic Act No. 10142, otherwise known
as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010.
These Rules shall similarly govern all further proceedings in suspension of payments and
rehabilitation cases already pending, except to the extent that, in the opinion of the court, its
application would not be feasible or would work injustice, in which event the procedures
originally applicable shall continue to govern.
The above provision is consistent with the mandate under R.A. No. 10142, viz:
SEC. 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation Cases. - This
Act shall govern all petitions filed after it has taken effect. All further proceedings in insolvency,
suspension of payments and rehabilitation cases then pending, except to the extent that in the
opinion of the court their application would not be feasible or would work injustice, in which
event the procedures set forth in prior laws and regulations shall apply.
The soundness of upholding the retroactive effect of a commencement order is easily discernible.
Even if the retroactive effect under the Rehabilitation Rules is inapplicable to the case at bar, the
Interim Rules expressly provides that the stay order is effective upon its issuance, viz:
Sec. 11. Period of the Stay Order. - The stay order shall be effective from the date of its issuance
until the dismissal of the petition or the termination of the rehabilitation proceedings.
The foregoing provision finds support in Section 5, Rule 3, of the Interim Rules, to wit:
Sec. 5. Executory Nature of Orders. - Any order issued by the court under these Rules is
immediately executory. A petition for review or an appeal therefrom shall not stay the execution of the
order unless restrained or enjoined by the appellate court. The review of any order or decision of the
court or an appeal therefrom shall be in accordance with the Rules of Court: Provided, however, that the
reliefs ordered by the trial or appellate courts shall take into account the need for resolution of
proceedings in a just, equitable, and speedy manner.
From the above provisions, a stay order issued by the court in a corporate rehabilitation proceeding
is effective from the date of its issuance until the dismissal of the petition or the termination of the
rehabilitation proceedings. In fact, it is immediately executory.
In the case at bar, there is no doubt that the rehabilitation court correctly held that the appellant is
bound by the September 12, 2006 Stay Order as of the date of its issuance, the same being
immediately executory and effective without any further act, event, or condition being necessary
to compel compliance therewith as expressly provided in Sec. 11, Rule IV and Sec. 5, Rule III of
the Interim Rules of Procedure on Corporate Rehabilitation.
NOTES
TOPIC Rehabilitation Plan MODULE
CASE #16
CASE TITLE China Banking Corporation vs. ASB Holdings, Inc. GR NO 172192
PONENTE Reyes, R.T., J. DATE

December 23, 2008
DOCTRINE
Secured creditors like China Bank, in this case, may accept or refuse the dacion en pago
arrangements in the rehabilitation plan, thus the principle of mutuality of contracts was not
violated.
FACTS ● In 1999, respondent ASB Development Corporation applied for and was granted a credit
line by petitioner China Bank in the principal amount of P35,000,000.00.
● The loan was secured by a real estate mortgage constituted over two contiguous lots in
Grace Park, Caloocan City.
● In 2000, respondent ASB Realty Corporation, an affiliate of ASB Development, obtained
an omnibus credit line from petitioner China Bank in the amount of P265,000,000.00.
The loan was secured by two real estate mortgages:

(1) Over two parcels of land situated at Salcedo, Legaspi Villlage, Makati City; and
(2) Over a parcel of land located at Constellation Street, Bel-Air Village, Makati City
● Respondent corporations defaulted in the payment of the agreed loan amortizations,
interest, and other charges. Demands to pay were left unheeded.
● ASB Development Corporation and its affiliates, including ASB Realty, ASB Holdings,
ASB Land, ASB Finance, Makati Hope Christian School, Bel-Air Holdings, Winchester
Trading, VYL Development, Gerick Holdings and Neighborhood Holdings, filed before the
SEC a petition for rehabilitation with prayer for suspension of actions and proceedings.
● The following are the salient features of the rehabilitation proposal:

a. Servicing and eventual full repayment of all debts and liabilities, focusing on debt
restructure and possible liquidation through dacion en pago, transfer and assignment, or
outright sale of assets, in order to lighten the debt burden of petitioner Group of
Companies;
b. Forming of strategic alliances with third party investors, including joint ventures and
similar arrangements;
c. Contributing specified properties from petitioner ASB Allied Companies;
d. Streamlining the operations of petitioner ASB Group of Companies, and the effective
management of its revenues and funds towards the strengthening of its financial and
business positions; and
e. Stabilizing the operations of petitioner Group of Companies, and preparing it to take

advantage of future opportunities for growth and development.
LOWER Hearing Panel of the SEC Securities CA:
COURT Investigation and Clearing Department:
RULING ● DISMISSED China Bank’s petition for lack
● FOUND the petition for rehabilitation of merit.
sufficient in form and substance, ❖ The assailed rehabilitation plan
issued a 60-day Suspension Order: does not violate the principle of
mutuality of contracts.
(a) Suspended all actions for claims against ❖ The provisions of said plan
the ASB Group of Companies pending or still recognize the secured creditors'
to be filed with any court, office, board, body, right to refuse or reject the dacion
or tribunal; en pago arrangements proposed
(b) Enjoined the ASB Group of Companies therein.
from disposing of their properties in any ❖ No cogent reason was found to
manner, except in the ordinary course of disturb or reverse the findings of
business, and from paying their liabilities the lower tribunals regarding the
outstanding as of the date of the Cling of the valuation of respondents' assets
petition; and and viability of the rehabilitation
(c) Appointed Atty. Monico V. Jacob as plan.
interim receiver of the ASB Group of
Companies ● Ruled that the SEC CORRECTLY
UPHELD the order of the Hearing Panel
SEC RULING: approving the ASB Group’s Rehabilitation
•APPROVED the ASB Rehabilitation Plan. Plan
SEC EN BANC RULING:

•DENIED WITH FINALITY China Bank’s
Appeal.
ISSUE/S
1. Whether or not the ASB Rehabilitation Plan violates the principle of mutuality of contracts,
curtails a party’s freedom to contract.
2. Whether or not the ASB Rehabilitation Plan presents a true, accurate, and independently
verified picture of respondents-debtors’ respective financial conditions.
ARGUMENTS Petitioner (China Banking Corporation): Respondent (ASB Holdings, Inc. et al):
● The SEC order compelling the bank Respondents contended that while they have
to surrender its present collateral sufficient capitalization, the company will be hard-
and accept certain properties pressed to service its obligations in favor of China
located in Pasig City and Parañaque Banking Corporation its other creditors due to:
City as payment of the obligations ● A glut in the real estate market;
due it violates the constitutional ● The depreciation of the currency; and
proscription against impairment of ● Decreased investor confidence in the
contracts. Philippine economy.
● It was likewise argued that the value
of the properties being offered by
ASB via dacion en pago is
insufficient to cover the amount of
its outstanding loans; and that the
preference conferred by law to the
bank as a secured creditor has been
rendered illusory.
SC RULING
1. NO. In intruding into corporate affairs, the State must, at all times, promote wider
and more meaningful equitable distribution of wealth and protect investments and
the public. The approval of the SEC of Respondent Corporations’ Rehabilitation plan is a
step towards that direction.
The terms of the rehabilitation plan unveil that secured creditors like China Bank may refuse or
reject the dacion en pago arrangements stated in it. It cannot be implemented without China
Bank's consent.
Further, the approval of the plan and the appointment of a receiver merely suspend actions
and claims that may be raised against respondent bank. They do not, in any manner, obliterate
China Bank's status as a preferred secured creditor.
2. YES. As held by the CA, it found no reason to disturb the findings of the lower tribunals on
the valuation of respondents' assets. It is a basic principle of law that courts will not interfere
in matters which are addressed to the sound discretion or judgment of government
agencies entrusted with the regulation of activities coming under the special technical
knowledge and training of such agencies. (Olaguer vs. Domingo).
WHEREFORE, the petition is DENIED and the appealed Court of Appeals Decision
AFFIRMED.
NOTES
● Questions on the viability of the plan should likewise be laid to rest. As the CA aptly
observed, majority of respondents' obligations to creditor banks had already been paid as
early as two years upon the approval of the plan.
● As explained in the case of Bank of the Philippine Islands v. Securities and Exchange
Commission, dacion en pago is a special mode of payment where the debtor offers another
thing to the creditor who accepts it as equivalent of payment of an outstanding debt.
● The undertaking really partakes in a sense of the nature of sale, that is, the creditor is
really buying the thing or property of the debtor, the payment for which is to be charged
against the debtor's debt. As such, the essential elements of a contract of sale, namely;
consent, object certain, and cause or consideration must be present. Being a form of
contract, the dacion en pago agreement cannot be perfected without the consent of the
parties involved.
TOPIC MODULE
CASE #17
CASE TITLE Land Bank of the Philippines v Polillo Paradise Island GR NO
211537
PONENTE Reyes, J. Jr., J.: DATE
Dec 10, 2019
DOCTRINE
FACTS The respondent obtained a P5 Million short term loan line with the petitioner in 200. As a security
o thereof, two parcels of land were used. The said loan was used as additional working capital of
its hotel business. February 13, 2001, petitioner approved the request of respondent for the
conversion of its STLL into a 5-year term loan and also an additional P1.2 Million STLL was
granted. Respondent failed to pay its loan. Thus on June 24, 2011, petitioner filed a petition for
extrajudicial foreclosure of the mortgaged properties which were sold and petitioner was the
highest bidder. A certificate of sale was issued and registered before the registry of deeds on
August 22, 2011. The respondent failed to redeem said properties within the redemption period,
petitioner consolidated its title over the subject properties (November 19, 2012).
Respondent filed a petition for corporate rehabilitation on August 12, 2012; asserting that its
financial viability was greatly affected as the Province of Quezon was devastated by the typhoon
and flood resulting in the cancellation of functions and decline in room occupancy; and by the
global crisis in 2008. RTC denied the petition for lack of merit. On October 12, 2012, respondent
filed an amended petition for corporate rehabilitation invoking the application of FRIA, this was
granted by the RTC. The said RTC ordered the (1) suspension of all actions or proceedings for
the enforcement of claims against the debtor; (2) Suspension of all actions to enforce any
judgment attachment or other provisional remedies against the debtor; (3) Prohibiting the debtor
from selling encumbering, transferring or disposing in any manner any of its properties except in
the ordinary course of business; and (4) Prohibiting the debtor from making any payment of its
liabilities outstanding as of the commencement date except as may be provided herein.
Petitioner filed its opposition on the amended petition.
LOWER RTC: Denied. RTC explained that when CA:
COURT such consolidation took place after the
RULING date of the filing of the amended petition
the same and the proceedings before it
are void for being violative of the FRIA.
ISSUE/S Whether or not the commencement order issued by the RTC has the effect of rendering void the
foreclosure sale of the subject properties and the effects thereof.
ARGUMENTS Petitioner LBP: disputed the date of Respondent Polillo: insisted that the
filing of the petition for corporate consolidation of ownership in the name of
rehabilitation is not on August 17, 2012, petitioner violated the FRIA because the date
but on August 22, 2012 as the petition of the filing of the petition for corporate
itself bore such mark. Moreover, it rehabilitation on August 17, 2012, the
alleged that the reckoning period is on reckoning point of the effects of the
October 18, 2012 which is the date of the commencement order, precedes such
filing of the amended petition for consolidation.
corporate rehabilitation.
SC RULING No. The FRIA provides that the effects of the Commencement Order shall be reckoned from the
date of the filing of the petition for corporate rehabilitation, be it voluntary or involuntary. The
determination of the date of the filing of the petition is relevant in ascertaining the extent of the
legal effects of a commencement order. The commencement date is October 18, 2012 when the
respondent’s petition was granted by the RTC. The certificate of sale was issued and registered
on August 22, 2011, the last day of the redemption period is on August 22, 2012. The purchaser
in an extrajudicial foreclosure of real property becomes the absolute owner of the property if no
redemption is made within one year, the consolidation of ownership in the name of the buyer and
the issuance of the new certificate of title merly entitles him to possession thereof as a matter of
right. Hence in this case, the ownership of the subject properties was vested upon the petitioner
on August 22, 2012. Notably, such period precedes the filing of the petition for corporate
rehabilitation on October 18, 2012. Petitioner is no longer considered as respondent’s creditor.
NOTES
TOPIC Section 4, FRIA (Definition of rehabilitation) MODULE
CASE #18
CASE TITLE La Savoie Development Corp. vs. Buenavista Properties, Inc. GR NO
200934
-35
PONENTE Jardeleza, J. DATE June 19, 2019
DOCTRINE
FACTS Spouses Frisco and Amelia San Juan, and Spouses Felipe and Blesilda Buencamino
(collectively, the landowners), through their attorney-in-fact Delfin Cruz, Jr., entered into a Joint
Venture Agreement (JVA) with La Savoie Development Corporation (petitioner) over three
parcels of land (the properties) located at San Rafael, Bulacan. Under the JVA, petitioner
undertook to completely develop the properties into a commercial and residential subdivision on
or before May 5, 1995. If petitioner fails to do so within the schedule, it shall pay the landowners
a penalty of ₱10,000.00 a day until completion of the project. Subsequently, the landowners sold
the properties to Josephine Conde, who later assigned all her rights and interest therein to
Buenavista Properties, Inc. (respondent). Unfortunately, petitioner did not finish the project on
time. Thus, it executed an Addendum to the JVA with respondent, extending the completion of
the project until May 5, 1997. However, petitioner still failed to meet the deadline.
Respondent filed a complaint for termination of contract and recovery of property with damages
against petitioner. Petitioner failed to appear during pre-trial, and was declared in default.
Meanwhile, due to the 1997 Asian financial crisis, petitioner anticipated its inability to pay its
obligations as they fall due; thus, on April 25, 2003, it filed a petition for rehabilitation before the
Regional Trial Court of Makati (Makati RTC). Makati RTC issued an Order (Stay Order), staying
the enforcement of all claims, whether for money or otherwise, and whether such enforcement is
by court action or otherwise, against petitioner. It appointed Rito C. Manzana as rehabilitation
receiver. Subsequently, petitioner filed a manifestation where it informed the court that a Stay
Order was issued by the Makati RTC, and that respondent was included as one of the creditors
in the petition for rehabilitation. It accordingly asked the QC RTC to suspend its proceedings.
However, RTC already rendered a Decision.
Makati RTC lifted the Stay Order and dismissed the petition for rehabilitation. On appeal, the CA,
in its Decision, reversed the Makati RTC. It remanded the case to the trial court for further
proceedings. Thereafter, the case was transferred to the Rehabilitation Court. On September 21,
2006, the Rehabilitation Court appointed Anna Liza M. Ang-Co as petitioner's new rehabilitation
receiver. The QC RTC issued a writ of execution to Deputy Sheriff Reynaldo Madolaria (Sheriff
Madolaria). In turn, petitioner filed before the Rehabilitation Court an extremely urgent motion for
the issuance of an order to prohibit deputy Sheriff Madolaria of the QC RTC from enforcing the
writ of execution.
The Rehabilitation Court directed Sheriff Madolaria to: (a) stop the execution of the QC RTC
Decision; (b) return and restore the ejected residents of the subject property; and (c) lift the
notices of garnishment and notices of levy upon personal as well as real properties of petitioner.
In the interim, petitioner entered into separate Compromise Agreements with two of its creditors -
Home Guaranty Corporation (HGC) and Planters Development Bank. The Rehabilitation Court
approved the agreements over the opposition of respondent. Petitioner filed an Amended
Revised Rehabilitation Plan (ARRP), proposing the condonation of all past due interest, penalties
and other surcharge, dacion en pago arrangement to settle obligation with HGC, including
respondent's claim against petitioner.
LOWER RTC: CA:

COURT
RULING
ISSUE/S Whether or not CA erred in annulling the June 30, 2008 Resolution of the Rehabilitation Court
insofar as it reduced by half the amount of penalty adjudged in the QC RTC Decision.
ARGUMENTS Petitioner (La Savoie Development Corp.): Respondent (Buenavista Properties, Inc.):
SC RULING
No. The Supreme Court rejected respondent's contention that the Rehabilitation Court cannot
exercise its cram-down power to approve a rehabilitation plan over the opposition of a creditor.
Since the QC RTC Decision did not attain finality, there is no legal impediment to reduce the
penalties under the ARRP. Republic Act No. 10142 or the Financial Rehabilitation and
Insolvency Act of 2010 (FRIA) defines "rehabilitation" as the restoration of the debtor to a
condition of successful operation and solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover by way of the present value of payments
projected in the plan, more if the debtor continues as a going concern than if it is immediately
liquidated (Section 4, FRIA).
The Rehabilitation Court issued a Stay Order on June 4, 2003 or during the pendency of Civil
Case No. Q-98-33682 before the QC RTC. The effect of the Stay Order is to ipso jure suspend
the proceedings in the QC RTC at whatever stage the action may be. The Stay Order
notwithstanding, the QC RTC proceeded with the case and rendered judgment. The judgment
became final and executory on July 31, 2007. Respondent relies on this alleged finality to prevent
us from looking into the effect of the Stay Order on the QC RTC Decision. Respondent's attempt
fails.
SC have already held that a court-approved rehabilitation plan may include a reduction of liability.
Further, it is more in keeping with the spirit of rehabilitation that courts are given the leeway to
decide how distressed corporations can best and fairly address their financial issues.
Necessarily, a business in the red and about to incur tremendous losses may not be able to pay
all its creditors. Rather than leave it to the strongest or most resourceful amongst all of them, the
state steps in to equitably distribute the corporation's limited resources.
Here, sans the QC RTC Decision, the basis for the penalty award of ₱10,000.00 per day of delay
is the JVA between petitioner and respondent. The Rehabilitation Court after hearing all of the
evidence on the financial status of petitioner, reduced it to ₱5,000.00 per day, finding the
₱10,000.00 per day penalty unreasonable and unconscionable. SC sees nothing in the record
that persuades us to depart from their factual finding of the Rehabilitation Court. They also
concur with the Rehabilitation Court that the penalty must be computed from the time of judicial
demand or filing of the suit before the QC RTC on March 3, 1998 up to the date of the issuance
of the Stay Order on June 4, 2003
NOTES
TOPIC Claims covered by stay order MODULE
CASE #19
CASE TITLE BUSTOS v. MILLIANS SHOE, INC. GR NO G.R. No.
185024
PONENTE SERENO, C.J.: DATE
April 24, 2017
DOCTRINE
In rehabilitation proceedings, claims of creditors are limited to demands of whatever nature or
character against a debtor or its property, whether for money or otherwise. In several cases, we
have already held that stay orders should only cover those claims directed against corporations or
their properties, against their guarantors, or their sureties who are not solidarily liable with them, to
the exclusion of accommodation mortgagors. To repeat, properties merely owned by stockholders
cannot be included in the inventory of assets of a corporation under rehabilitation.
FACTS
Spouses Fernando and Amelia Cruz owned a 464-square-meter lot covered by Transfer Certificate of
Title (TCT) No. N-126668.4 On 6 January 2004, the City Government of Marikina levied the property
for nonpayment of real estate taxes. The Notice of Levy was annotated on the title on 8 January
2004. On 14 October 2004, the City Treasurer of Marikina auctioned off the property, with petitioner
Joselito Hernand M. Bustos emerging as the winning bidder.
Meanwhile, notices of lis pendens were annotated on TCT No. N-126668 on 9 February 2005. These
markings indicated that SEC Corp. Case No. 036-04, which was filed before the RTC and involved
the rehabilitation proceedings for MSI, covered the subject property and included it in the Stay Order
issued by the RTC dated 25 October 2004.7
On 26 September 2006, petitioner moved for the exclusion of the subject property from the Stay
Order.
LOWER RTC: The RTC denied the entreaty of CA: CA brushed aside the claim that the
COURT petitioner. It ruled that because the period suspension orders undermined the power to
RULING of redemption up to 15 October 2005 had tax. As regards petitioner's main contention, the
not yet lapsed at the time of the issuance CA ruled the Cruz Spouses were still the owners
of the Stay Order on 25 October 2004, the of the land at the time of the issuance of the
ownership thereof had not yet been stay order. The said parcel of land which
transferred to petitioner. secured several mortgage liens for the account
of MSI remains to be an asset of the Cruz
Spouses, who are the stockholders and/or
officers of MSI, a close corporation. Incidentally,
as an exception to the general rule, in a close
corporation, the stockholders and/or officers
usually manage the business of the corporation
and are subject to all liabilities of directors, i.e.
personally liable for corporate debts and
obligations. Thus, the Cruz Spouses being
stockholders of MSI are personally liable for the
latter's debt and obligations.
ISSUE/S whether the CA correctly considered the properties of Spouses Cruz answerable for the obligations
of MSI
ARGUMENTS Petitioner (NAME): Bustos Respondent (NAME): MSI, Spouses Cruz
He claimed that the lot belonged to Spouses Cruz are stockholders of a close
Spouses Cruz who were mere corporation(MSI) who, as such, are liable for its
stockholders and officers of MSL He debts.
further argued that since he had won the
bidding of the property on 14 October
2004, or before the annotation of the title
on 9 February 2005, the auctioned
property could no longer be part of the
Stay Order.
SC RULING NO. In finding the subject property answerable for the obligations of MSI, the CA characterized
respondent spouses as stockholders of a close corporation who, as such, are liable for its debts. This
conclusion is baseless.
To be considered a close corporation, an entity must abide by the requirements laid out in Section 96
of the Corporation Code.
Here, neither the CA nor the RTC showed its basis for finding that MSI is a close corporation. The
courts a quo did not at all refer to the Articles of Incorporation of MSI. The Petition submitted by
respondent in the rehabilitation proceedings before the RTC did not even include those Articles of
Incorporation among its attachments.
In effect, the CA and the RTC deemed MSI a close corporation based on the allegation of Spouses
Cruz that it was so. However, mere allegation is not evidence and is not equivalent to proof. For this
reason alone, the CA rulings should be set aside.
Situs Development Corp. v. Asiatrust Bank is analogous to the case at bar. We held therein that the
parcels of land mortgaged to creditor banks were owned not by the corporation but by the spouses
who were its stockholders. Applying the doctrine of separate juridical personality, we ruled that the
parcels of land of the spouses could not be considered part of the corporate assets that could be
subjected to rehabilitation proceedings.
In rehabilitation proceedings, claims of creditors are limited to demands of whatever nature or

character against a debtor or its property, whether for money or otherwise. In several cases, we have
already held that stay orders should only cover those claims directed against corporations or their
properties, against their guarantors, or their sureties who are not solidarily liable with them, to the
exclusion of accommodation mortgagors. To repeat, properties merely owned by stockholders cannot
be included in the inventory of assets of a corporation under rehabilitation.
Given that the true owner the subject property is not the corporation, petitioner cannot be considered
a creditor of MSI but a holder of a claim against respondent spouses.
Rule 4, Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation, directs creditors of
the debtor to file an opposition to petitions for rehabilitation within 10 days before the initial hearing of
rehabilitation proceedings. Since petitioner does not hold any claim over the properties owned by
MSI, the time-bar rule does not apply to him.
NOTES
TOPIC FRIA; Claim MODULE
CASE #20
CASE TITLE Sps. Sobrejuanite vs. ASB Development Corporation GR NO 165675
PONENTE DATE
Sept. 30, 2005
DOCTRINE “That upon appointment of a management committee, rehabilitation receiver, board or
body, pursuant to this Decree, all actions for claims against corporations, partnerships
or associations under management or receivership pending before any court, tribunal,
board or body shall be suspended accordingly”
(see NOTES for definition of claim)
FACTS
● Spouses Eduardo and Fidela Sobrejuanite filed a Complaint for rescission

of contract, refund of payments and damages, against ASB Development
Corporation (ASBDC) before the Housing and Land Use Regulatory Board
(HLURB).
● Sobrejuanite alleged that they entered into a Contract to Sell with ASBDC
over a condominium unit and a parking space in the BSA Twin Tower-B
Condominium, Mandaluyong City. They averred that despite full payment
and demands, ASBDC failed to deliver the property on or before December
1999 as agreed. They prayed for the rescission of the contract; refund of
payments amounting to P2,674,637.10; payment of moral and exemplary
damages, attorney’s fees, litigation expenses, appearance fee and costs
of the suit.
● ASBDC filed a motion to dismiss or suspend proceedings in view of the approval

by the Securities and Exchange Commission (SEC) on April 26, 2001 of the
rehabilitation plan of ASB Group of Companies, which includes ASBDC, and the
appointment of a rehabilitation receiver. The HLURB arbiter however denied the
motion and ordered the continuation of the proceedings.
LOWER HLURB: CA:

COURT The HLURB Board of Commissioners [3] Approval by the SEC of the rehabilitation plan
RULING affirmed the ruling of the arbiter that the and the appointment of the receiver caused
approval of the rehabilitation plan and the suspension of the HLURB proceedings.
the appointment of a rehabilitation The appellate court noted that
receiver by the SEC did not have the Sobrejuanite's complaint for rescission
effect of suspending the proceedings and damages is a claim under the
before the HLURB. The board held that contemplation of Presidential Decree (PD) No.
the HLURB could properly take 902-A or the SEC Reorganization Act and
cognizance of the case since whatever A.M. No. 00-8-10-SC or the Interim Rules of
monetary award that may be granted by Procedure on Corporate Rehabilitation,
it will be ultimately filed as a claim before because it sought to enforce a pecuniary
the rehabilitation receiver. The board demand. Therefore, jurisdiction lies with the
also found that ASBDC failed to deliver SEC and not HLURB. It also ruled that ASBDC
the property to Sobrejuanite within the was obliged to deliver the property in
prescribed period. December 1999 but its financial reverses
warranted the extension of the period.
ISSUE/S
Whether the SEC’s approval of the corporate rehabilitation plan has the effect of
suspending the proceeding before HLURB.
ARGUMENTS Petitioner (Spouses Eduardo and Fidela Respondent (ASBDC):

Sobrejuanite):
SC RULING
Yes. Section 6(c) of PD No. 902-A empowers the SEC, to wit:
c) To appoint one or more receivers of the property, real and personal, which is the
subject of the action pending before the Commission whenever necessary in order to
preserve the rights of the parties-litigants and/or protect the interest of the investing public
and creditors: … Provided, finally, That upon appointment of a management committee,
rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims against
corporations, partnerships or associations under management or receivership pending
before any court, tribunal, board or body shall be suspended accordingly.
The purpose for the suspension of the proceedings is to prevent a creditor from obtaining
an advantage or preference over another and to protect and preserve the rights of party
litigants as well as the interest of the investing public or creditors Such suspension is
intended to give enough breathing space for the management committee or rehabilitation
receiver to make the business viable again, without having to divert attention and
resources to litigations in various fora.
The suspension would enable the management committee or rehabilitation receiver to

effectively exercise its/his powers free from any judicial or extrajudicial interference that
might unduly hinder or prevent the “rescue” of the debtor company.
To allow such other action to continue would only add to the burden of the management
committee or rehabilitation receiver, whose time, effort and resources would be wasted in
defending claims against the corporation instead of being directed toward its restructuring
and rehabilitation.
NOTES CLAIM- The interim rules define a claim as referring to all claims or demands, of whatever
nature or character against a debtor or its property, whether for money or otherwise. The
definition is all-encompassing as it refers to all actions whether for money or otherwise. There
are no distinctions or exemptions.
TOPIC FRIA MODULE
CASE #21
CASE TITLE Negros Navigation v. CA GR NO
PONENTE Nachura, J. DATE

Dec 10,
2008
DOCTRINE The Manila RTC acting as a rehabilitation court merely suspended the proceedings in the
admiralty case in the Cebu RTC. It did not divest the Cebu RTC of its jurisdiction over the
maritime claims of THI against NNC. The preferred maritime lien of THI can still be
enforced upon the termination of the rehabilitation proceedings, or if it such be
unsuccessful, upon the dissolution of the corporation.
FACTS Before us are two consolidated cases filed by petitioners Negros Navigation Co., Inc. (NNC) and
Tsuneishi Heavy Industries (Cebu), Inc. (THI), respectively.
Negros Navigation Corp (NNC) is a shipping company engaged in transporting through

shipping vessels, passengers and cargoes in the country. It engaged the services of Tsuneishi
Heavy Industries (THI), is engaged in of shipbuilding and repair, for repair of its vessel.
THI filed a case for sum of money and damages with prayer for issuance of writ of
attachment against NNC before RTC of Cebu based on the unpaid services or repairman’s lien.
The RTC granted the writ after holding that NNC committed fraud in contracting the debt or in
incurring the obligation.
On March 12, 2004, Sheriff Pinar levied on one of the vessels of NNC, the M/V St. Peter
the Apostle. On March 29, NNC filed a Petition for Corporate Rehabilitation with Prayer for
Suspension of Payments (due to Asian Currency Crisis and devaluation of peso) with the
RTC of Manila and the same was granted resulting to issuance of Stay Order
Thereafter, NNC filed a Manifestation and Motion to Suspend Proceedings and to Lift
Preliminary Attachment with the Cebu RTC. Meanwhile, THI filed an amended complaint
impleading the other vessels of NNC as co-defendants in the suit praying for the
attachment of properties of NNC and/or arrest of the vessels. The amended complaint was
admitted and the vessels were ordered to be arrested in the in rem aspect of the case
NNC’s Rehabilitation Receiver filed with the Manila RTC a Motion for the clarification of
the stay order. It sought to confirm whether the claim sought to be enforced by THI against
the vessels of NNC is covered by the stay order. The RTC clarified:
The Interim Rules of Procedure on Corporate Rehabilitation does not distinguish the kind
of claims covered, whether in rem or in personam, due or not due. Hence, when the law
does not distinguish, courts ought not to distinguish. So the stay order applies to all
CLAIMS.
By virtue thereof, NNC filed a Motion to Suspend Proceedings and to Lift the Writ of
Attachment and Arrest Orders. However, the CA issued a resolution which provided that
a TRO valid for 60 days shall be issued to restrain the implementation of the Stay Order
issued by Manila RTC. Subsequently, it issued a decision denying the petition of THI to
annul and enjoin the Stay and Clarification Orders of RTC.
LOWER RTC: granted Petition for Corporate CA: Issued a TRO on the Stay Order but
COURT Rehabilitation with Prayer for Suspension of subsequently denied petition of THI to annul
RULING Payments and issued Stay and and enjoin the Stay and Clarification Orders
Clarification Order of RTC.
ISSUE/S
1. WON the Stay Orders impaired the efficacy of maritime liens of THI against
NNC’s vessels.
2. WON RTC in issuing the Stay Order divested the admiralty courts of jurisdiction
over maritime case.
ARGUMENTS Petitioner (NNC): Respondent (THI):
1. maritime liens against the vessels of
NNC were impaired by the issuance of
the stay order
2. Manila RTC, acting as rehabilitation
court, was erroneous considering that
maritime liens cannot be enforced,
divested, and otherwise affected or
dealt with except by an admiralty court
in an admiralty proceeding in rem
3. mere suspension of the in rem
proceedings in the admiralty case
prejudiced its substantive rights
SC RULING 1. NO. Rehabilitation contemplates continuance of corporate life and activities in an
effort to restore and reinstate the corporation to its former position of successful
operation and solvency.The purpose of rehabilitation proceedings is precisely to
enable the company to gain a new lease on life and thereby allow creditors to be
paid their claims from its earnings.
The governing law concerning rehabilitation and suspension of actions for claims
against corporations is PD 902-A, as amended. Republic Act No. 8799 (RA 8799),
otherwise known as The Securities Regulation Code, amended Section 5 of PD
902-A, thereby transferring to the Regional Trial Courts the jurisdiction of the
Securities and Exchange Commission (SEC).
PD 902-A mandates that upon appointment of a management committee,

rehabilitation receiver, board or body, all actions for claims against corporations,
partnerships or associations under management or receivership pending before
any court, tribunal, board or body shall be suspended. PD 902-A does not make
any distinction as to what claims are covered by the suspension of actions for claims
against corporations under rehabilitation. No exception is made therein in favor of
maritime claims. Thus, since the law does not make any exemptions or distinctions,
neither should we.
The justification for the suspension of actions or claims, without distinction, pending
rehabilitation proceedings is to enable the management committee or rehabilitation
receiver to effectively exercise its/his powers free from any judicial or extra-judicial
interference that might unduly hinder or prevent the "rescue" of the debtor company.
To allow such other actions to continue would only add to the burden of the
management committee or rehabilitation receiver, whose time, effort and resources
would be wasted in defending claims against the corporation instead of being
directed toward its restructuring and rehabilitation.
THI holds a preferred maritime lien over NNC’s assets by virtue of THI’s unpaid
services. The issuance of the stay order by the rehabilitation court does not impair
or in any way diminish THI’s preferred status as a creditor of NNC. The enforcement
of its claim through court action was merely suspended to give way to the speedy
and effective rehabilitation of the distressed shipping company. Upon termination
of the rehabilitation proceedings or in the event of the bankruptcy and consequent
dissolution of the company, THI can still enforce its preferred claim upon NNC
PD 902-A was designed not only to salvage an ailing corporation but also to protect the
interest of investors, creditors and the general public. When a distressed company is
placed under rehabilitation, the appointment of a management committee follows to avoid
collusion between the previous management and creditors it might favor, to the prejudice
of the other creditors. The stay order is effective on all creditors of the corporation without
distinction, whether secured or unsecured. All assets of a corporation under rehabilitation
receivership are held in trust for the equal benefit of all creditors to preclude one from
obtaining an advantage or preference over another by the expediency of attachment,
execution or otherwise. As between the creditors, the key phrase is equality in equity. Once
the corporation threatened by bankruptcy is taken over by a receiver, all the creditors ought
to stand on equal footing. Not any one of them should be paid ahead of the others. This is
precisely the reason for suspending all pending claims against the corporation under
receivership.
2. NO. True enough, a maritime lien is not affected by bankruptcy or reorganization.

However, in the instant case, we are not dealing with bankruptcy or reorganization;
rather, we are confronted with NNC’s rehabilitation. The Manila RTC acting as a
rehabilitation court merely suspended the proceedings in the admiralty case in the
Cebu RTC. It did not divest the Cebu RTC of its jurisdiction over the maritime claims
of THI against NNC. The preferred maritime lien of THI can still be enforced upon
the termination of the rehabilitation proceedings, or if it such be unsuccessful, upon
the dissolution of the corporation.
NOTES
TOPIC FRIA MODULE
CASE #22
CASE TITLE Juanito Garcia vs. PAL GR NO 164856
PONENTE Carpio Morales, J. DATE January 20, 2009
DOCTRINE It is settled that upon appointment by the SEC of a rehabilitation receiver, all actions for claims
before any court, tribunal or board against the corporation shall ipso jure be suspended
FACTS The case stemmed from the administrative charge filed by PAL against its employees-herein
petitioners after they were allegedly caught in the act of sniffing shabu when a team of company
security personnel and law enforcers raided the PAL Technical Center’s Toolroom. After due
notice, PAL dismissed petitioners prompting them to file a complaint for illegal dismissal and
damages which was resolved by the Labor Arbiter in their favor, thus ordering PAL to comply with
the reinstatement aspect of the decision.
Prior to the promulgation of the Labor Arbiter’s decision, the Securities and Exchange Commission
(SEC) placed PAL which was suffering from severe financial losses, under an Interim Rehabilitation
Receiver, who was subsequently replaced by a Permanent Rehabilitation Receiver on June 7,
1999.
From the Labor Arbiter’s decision, PAL appealed to the NLRC which reversed said decision and
dismissed petitioners’ complaint for lack of merit. Subsequently, the Labor Arbiter issued a Writ of
Execution (Writ) respecting the reinstatement aspect the Decision, and issued a Notice of
Garnishment. Respondent thereupon moved to quash the Writ and to lift the Notice while
petitioners moved to release the garnished amount.
The NLRC affirmed the validity of the Writ and the Notice issued by the Labor Arbiter but
suspended and referred the action to the Rehabilitation Receiver for appropriate action.
Respondent elevated the matter to the appellate court on two grounds, essentially espousing that:
(1) a subsequent finding of a valid dismissal removes the basis for implementing the reinstatement
aspect of a labor arbiter’s decision (the first ground), and (2) the impossibility to comply with the
reinstatement order due to corporate rehabilitation provides a reasonable justification for the failure
to exercise the options under Article 223 of the Labor Code.
By Decision of August 29, 2007, this Court PARTIALLY GRANTED the present petition and
effectively reinstated the NLRC Resolutions insofar as it suspended the proceedings. Since
petitioners’ claim against PAL is a money claim for their wages during the pendency of PAL’s
appeal to the NLRC, the same should have been suspended pending the rehabilitation
proceedings.
LOWER RTC CA:
COURT
RULING
ISSUE/S Whether or not PAL may still exercise its reinstatement order under the circumstances.
SC RULING NO. The Court sustains the appellate court’s finding that the peculiar predicament of a corporate
rehabilitation rendered it impossible for respondent to exercise its option under the circumstances.
After the labor arbiter’s decision is reversed by a higher tribunal, the employee may be barred from
collecting the accrued wages, if it is shown that the delay in enforcing the reinstatement pending
appeal was without fault on the part of the employer.
The test is two-fold: (1) there must be actual delay or the fact that the order of reinstatement
pending appeal was not executed prior to its reversal; and (2) the delay must not be due to the
employer’s unjustified act or omission. If the delay is due to the employer’s unjustified refusal, the
employer may still be required to pay the salaries notwithstanding the reversal of the Labor Arbiter’s
decision.
It is apparent that there was inaction on the part of respondent to reinstate them, but whether such
omission was justified depends on the onset of the exigency of corporate rehabilitation.
It is settled that upon appointment by the SEC of a rehabilitation receiver, all actions for claims
before any court, tribunal or board against the corporation shall ipso jure be suspended. As stated
early on, during the pendency of petitioners’ complaint before the Labor Arbiter, the SEC placed
respondent under an Interim Rehabilitation Receiver. After the Labor Arbiter rendered his decision,
the SEC replaced the Interim Rehabilitation Receiver with a Permanent Rehabilitation Receiver.
While reinstatement pending appeal aims to avert the continuing threat or danger to the survival
or even the life of the dismissed employee and his family, it does not contemplate the period when
the employer-corporation itself is similarly in a judicially monitored state of being resuscitated in
order to survive. The parallelism between a judicial order of corporation rehabilitation as a
justification for the non-exercise of its options, on the one hand, and a claim of actual and imminent
substantial losses as ground for retrenchment, on the other hand, stops at the red line on the
financial statements.
In sum, the obligation to pay the employee’s salaries upon the employer’s failure to exercise the
alternative options under Article 223 of the Labor Code is not a hard and fast rule, considering the
inherent constraints of corporate rehabilitation.
NOTES
TOPIC MODULE
CASE #23
CASE TITLE Metropolitan Waterworks and Sewerage System (MWSS) v. Daway GR NO 160732
PONENTE Azcuna DATE

June 21, 2004
DOCTRINE
In Feati Bank & Trust Co. v. CA, the concept of guarantee vis-à-vis the concept of an
irrevocable letter of credit are inconsistent with each other. In contracts of guarantee, the
guarantor's obligation is merely collateral and it arises only upon the default of the person
primarily liable. On the other hand, in an irrevocable letter of credit, the bank undertakes a
primary obligation. Letter of credit is defined as an engagement by a bank or other person made
at the request of a customer that the issuer shall honor drafts or other demands of payment upon
compliance with the conditions specified in the credit. They 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. What distinguishes letters of credit
from other accessory contracts, is the engagement of the issuing bank to pay the seller once the
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.
FACTS
In 1997, by virtue of a Concession Agreement, 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. Maynilad undertook to pay the corresponding
concession fees which, among other things, consisted of payments of petitioner's mostly foreign
loans. Maynilad was required under the contract 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 banks, led by Citicorp International Ltd. (Citicorp), for the
issuance of an Irrevocable Standby Letter of Credit in the amount of US$120,000,000 in favor of
MWSS for the full and prompt performance of Maynilad's obligations.
Maynilad requested MWSS for a mechanism by which it hoped to recover the losses it had
allegedly incurred and would be incurring as a result of the depreciation of the Philippine Peso
against the US Dollar. Failing to get what it desired, Maynilad issued a Force Majeure Notice and
unilaterally suspended the payment of the concession fees. In an effort to salvage the
Concession Agreement, the parties entered into a MOA wherein Maynilad was allowed to
recover foreign exchange losses under a formula agreed upon between them.
Maynilad again filed another Force Majeure Notice, and, since MWSS did not agree with the
terms of said Notice, the matter was referred to the Appeals Panel for arbitration. The parties
agreed to resolve the issues through an amendment of the Concession Agreement known as
Amendment No. 1.
As part of the agreement, Maynilad committed to infuse the amount of UD$80.0 million as
additional funding support from its stockholders; resume payment of the concession fees; and
mutually seek the dismissal of the cases pending.l.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination,
claiming that MWSS failed to comply with its obligations under the Concession Agreement and
Amendment No. 1. Maynilad filed a Notice of Early Termination of the concession, which was
challenged by MWSS. This matter was eventually brought before the Appeals Panel by MWSS.
The Appeals Panel ruled that there was no Event of Termination as defined under Art. 10.2 (ii) or
10.3 (iii) of the Concession Agreement, hence, Maynilad should pay the concession fees that had
fallen due. The Award of the Appeals panel became final, so MWSS submitted a written notice to
Citicorp that it was drawing on the Irrevocable Standby Letter of Credit and thereby demanded
payment in the amount of US$98,923,640.15. Prior to this, however, Maynilad had filed on
November 13, 2003, a petition for rehabilitation before the RTC, which resulted in the issuance of
the Stay Order of November 17, 2003 and the disputed Order of November 27, 2003.
LOWER RTC: CA:

COURT
RULING
ISSUE/S
Whether the rehabilitation court, acted in excess of its authority or jurisdiction when it enjoined
MWSS from seeking the payment of the concession fees from the banks that issued the
Irrevocable Standby Letter of Credit in its favor and for the account of Maynilad
ARGUMENTS
Petitioner (MWSS): Respondent (Maynilad):
● Maintains that the US$120 Million ● The jurisdiction of public respondent
Standby Letter of Credit and extends not only to the assets of Maynilad
Performance Bond are not property but also over persons and assets of "all
of the estate of the debtor Maynilad, those affected by the proceedings upon
hence, not subject to the in rem publication of the notice of
rehabilitation jurisdiction of the RTC commencement”
● A call on the Standby Letter of ● The obligations under the Standby Letter
Credit cannot also be considered a of Credit are not solidary and are not
claim falling under the purview of exempt from the coverage of the stay
the stay order order
SC RULING
YES. The court should not have enjoined MWSS from seeking the payment of the concession
fees from the banks that issued the Irrevocable Standby Letter of Credit.
The claim is not one against the debtor but against an entity that Maynilad has procured to
answer for its non-performance of certain terms and conditions of the Concession Agreement,
particularly the payment of concession fees.
Sec. 6(b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against
guarantors and sureties, but only those claims against guarantors and sureties who are not
solidarily liable with the debtor. Maynilad's claim that the banks are not solidarily liable with the
debtor does not find support in jurisprudence.
The prohibition under Sec. 6(b) of Rule 4 of the Interim Rules does not apply to MWSS, since the
prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose
obligations are not solidary with the debtor. The participating banks' obligation are solidary with
Maynilad, in that it is a primary, direct, definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the debtor's assets. These are the same characteristics of
a surety or solidary obligor. Being solidary, the claims against them can be pursued separately
from and independently of the rehabilitation case.
As held in Traders Royal Bank v. CA, the property of the surety cannot be taken into custody by
the rehabilitation receiver (SEC) and said surety can be sued separately to enforce his liability as
surety for the debts or obligations of the debtor. The debts or obligations for which a surety may
be liable include future debts, an amount which may not be known at the time the surety is given.
Except when a letter of credit specifically stipulates otherwise, 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.
NOTES
TOPIC Corporate Rehabilitation; Receivership; Derivative Suit MODULE
CASE #24
CASE TITLE Alfredo Villamor, Jr. v. John Umale GR NO
172843 &
172881
PONENTE Leonen, J. DATE
September 24, 2014
DOCTRINE
A corporation may be placed under receivership, or management committees may be created to
preserve properties involved in a suit and to protect the rights of the parties under the control and
supervision of the court. Management committees and receivers are appointed when the
corporation is in imminent danger of "(1) [dissipation, loss, wastage or destruction of assets or
other properties; and (2) paralysation of its business operations that may be prejudicial to' the
interest of the minority stockholders, parties-litigants, or the general public.”
FACTS
MC Home Depot occupied a prime property (Rockland area) in Pasig which was part of the area
owned by Mid-Pasig Development Corporation. Pasig Printing Corporation (PPC) obtained an
option to lease portions of Mid-Pasig’s property, including the Rockland area.
Thereafter, PPC’s Board of Directors (BOD) issued a resolution waiving all its rights,
interests, and participation in the option to lease contract in favor of the law firm of Atty.
Villamor. PPC received no consideration for this waiver in favor of Villamor’s law firm. PPC,
represented by Atty. Villamor, entered into a memorandum of agreement (MOA) with MC Home
Depot who would continue to occupy the area for 4 years, renewable for another 4 years, at a
monthly rental of P4,500,000.00 plus goodwill of P18,000,000.00.
In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks. The
checks were given to Atty. Villamor who did not turn these or the equivalent amount over
to PPC, upon encashment. Hernando Balmores, stockholder and director of PPC, wrote a letter
addressed to PPC’s BOD informing them that Atty. Villamor should be made to deliver to PPC and
account for the checks or their equivalent value.
Due to the alleged inaction of the BOD, Balmores filed with the RTC an intra-corporate controversy
complaint against petitioners for their alleged devices or schemes amounting to fraud or
misrepresentation. He alleged that because of petitioners’ actions, PPC’s assets were not
only in imminent danger, but have actually been dissipated, lost, wasted and destroyed. He
prayed that a receiver be appointed from his list of nominees and that the petitioners be prohibited
from selling, encumbering, transferring or disposing any of PPC’s properties, including the MC
Home Depot checks and their proceeds.
LOWER RTC: DENIED Balmores’ prayer for the CA: REVERSED the trial court’s decision and
COURT appointment of a receiver or the creation issued a new order placing PPC under
RULING of a management committee. receivership and creating an interim
management committee.
PPC’s entitlement to the checks was
doubtful as the resolution issued by PPC’s The waiver of PPC’s rights in favor of Villamor’s
BOD waiving its rights to the option to lease law firm without any consideration and its inaction
contract must be accorded prima facie on Villamor’s failure to turn over the proceeds of
validity. rental payments to PPC warrant the creation of a
management committee. The circumstances
The trial court also noted that there was a resulted in the imminent danger of loss, waste, or
pending case filed by one Leonardo Umale dissipation of PPC's assets.
against Villamor, involving the same checks.
Umale was also claiming ownership of the Also, the case filed by Balmores was a derivative
checks. This, according to the trial court, suit because there were allegations of fraud by
weakened respondent Balmores' claim that PPC’s directors.
the checks were properties of PPC.
There was "no clear and positive showing of

dissipation, loss, wastage, or destruction of
[PPC's] assets . . . [that was] prejudicial to
the interest of the minority stockholders,
parties-litigants or the general public." In
facts, PPC was earning substantial rental
income from its other sub-lessees
ISSUE/S
1. Whether or not Balmores’ action is a derivative suit.
2. Whether or not the appointment of a management committee and the placing of
PPC under receivership are proper.
3. Whether or not the Court of Appeals had jurisdiction to appoint the receiver or
management committee.
ARGUMENTS Petitioners (NAME): ALFREDO L. Respondent (NAME): JOHN S. UMALE, in

VILLAMOR, JR., RODIVAL E. REYES, substitution of HERNANDO F. BALMORES,
HANS M. PALMA and DOROTEO M.
PANGILINAN Respondent Balmores stated that the ". . . very
practice of waiving assets and income for no
PPC's directors argued that the Court of consideration can in fact lead, not only to the
Appeals erred in characterizing respondent paralyzation of business, but to the complete loss
Balmores' suit as a derivative suit because or cessation of business of PPC[.] It is precisely
of his failure to implead PPC as party in the because of this fraudulent practice that a
case. receiver/management committee must be
appointed to protect the assets of PPC from further
The directors further argued that the fraudulent acts, devices and schemes."
requirements for the appointment of a
receiver or management committee
under Rule 9 of the Interim Rules were
not satisfied. The directors pointed out that
respondent Balmores failed to prove that the
assets of the corporation were in imminent
danger of being dissipated.
According to the directors, assuming that a

receiver or management committee may be
appointed in the case, it is the Regional Trial
Court only and not the Court of Appeals that
must appoint them.
Villamor also argued that the Court of

Appeals' order to place PPC under
receivership and to appoint a management
committee does not endanger PPC's assets
because the MC Home Depot checks were
not the only assets of PPC. Therefore, it
would not affect the operation of PPC or
result in its paralysation.
SC RULING
1. NO. The Court held that respondent action in the trial court is not a derivative suit. A
derivative suit is an action filed by stockholders to enforce a corporate action. It is an
exception to the general rule that the corporation's power to sue is exercised only by the
board of directors or trustees.
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies

(Interim Rules) provides the five (5) requisites 63 for filing derivative suits:
SECTION 1. Derivative action. — A stockholder or member may bring an action in the

name of a corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the
action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws,
laws or rules governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
The fifth requisite for filing derivative suits, while not included in the enumeration, is implied
in the first paragraph of Rule 8, Section 1 of the Interim Rules: the action brought by the
stockholder or member must be in the name of the corporation or association.
In derivative suits, the real party in interest is the corporation, and the suing
stockholder is a mere nominal party and the judgment must be made binding upon
the corporation in order that the corporation may get the benefit of the suit and may
not bring a subsequent suit against the same defendants for the same cause of
action. In other words, the corporation must be joined as party because it is its cause of
action that is being litigated and because judgment must be a res judicata against it.
In this case, Balmores failed to satisfy all the requisites of a derivative suit. Balmores failed
to exhaust all available remedies to obtain the reliefs he prayed for. Notwithstanding
the fact that though he tried to communicate with PPC's directors about the checks in
Villamor's possession before he filed an action with the trial court, respondent was not
able to show that this comprised all the remedies available under the articles of
incorporation, by laws, laws, or rules governing PPC.
An allegation that appraisal rights were not available for the acts complained of is
another requisite for filing derivative suit. Under Section 82 of the Corporation Code
provides that the stockholder may exercise the right if he or she voted against the proposed
corporate action and if he made a written demand for payment on the corporation within
thirty (30) days after the date of voting. Therefore, the non-derivative character of
respondent action was gleaned from his allegations in the trial court complaint. In the
complaint, he described the nature of his action as an action under Rule 1, Section
l(a)(l) of the Interim Rules, and not an action under Rule 1, Section l(a)(4) of the
Interim Rules, which refers to derivative suits.
Rule 1, Section 1 (a)(1) of the Interim Rules refers to acts of the board, associates, and
officers, amounting to fraud or misrepresentation, which may be detrimental to the interest
of the stockholders. This is different from a derivative suit.
Moreover, Respondent did not bring the action for the benefit of the corporation. Instead,
he was alleging that the acts of PPC's directors, specifically the waiver of rights in favor of
Villamor's law firm and their failure to take back the MC Home Depot checks from Villamor,
were detrimental to his individual interest as a stockholder. In filing an action, therefore, his
intention was to vindicate his individual interest and not PPC's or a group of stockholders'.
Therefore, the essence of a derivative suit is that it must be filed on behalf of the corporation
2. NO. The Court held that a management committee was not proper.
A corporation may be placed under receivership, or management committees may be

created to preserve properties involved in a suit and to protect the rights of the parties under
the control and supervision of the court. Management committees and receivers are
appointed when the corporation is in imminent danger of "(1) [dissipation, loss, wastage
or destruction of assets or other properties; and (2) paralysation of its business
operations that may be prejudicial to' the interest of the minority stockholders,
parties-litigants, or the general public.” Applicants for the appointment of a receiver or
management committee need to establish the confluence of these two requisites
This is because appointed receivers and management committees will immediately

take over the management of the corporation and will have the management powers
specified in law. This may have a negative effect on the operations and affairs of the
corporation with third parties, as persons who are more familiar with its operations are
necessarily dislodged from their positions in favor of appointees who are strangers to the
corporation's operations and affairs.
In this case, PPC waived its rights, without any consideration in favor of Villamor. The
checks were already in Villamor's possession. Some of the checks may have already been
encashed. This court takes judicial notice that the goodwill money of P18,000,000.00 and
the rental payments of P4,500,000.00 every month are not meager amounts only to be
waived without any consideration. It is, therefore, enough to constitute loss or
dissipation of assets under the Interim Rules. Respondent Balmores, however, failed
to show that there was an imminent danger of paralysis of PPC's business
operations. Apparently, PPC was earning substantial amounts from its other sub-lessees.
Respondent Balmores did not prove otherwise. He, therefore, failed to show at least one
of the requisites for appointment of a receiver or management committee.
3. NO. The Court held that the Court of Appeals had no jurisdiction to appoint the receiver or
management committee. The Court of Appeals has no power to appoint a receiver or
management committee. The RTC has original and exclusive jurisdiction to hear and
decide intra-corporate controversies, including incidents of such controversies.
These incidents include applications for the appointment of receivers or management
committees. "The receiver and members of the management committee are considered
officers of the court and shall be under its control and supervision." They are required to
report to the court on the status of the corporation within sixty (60) days from their
appointment and every three (3) months after.
In this case, respondent Balmores filed his petition for certiorari with the Court of
Appeal while there was still a pending action in the trial court. No less than the Court
of Appeals stated that it allowed respondent Balmores' petition under Rule 65 because the
order or resolution in question was an interlocutory one. This means that jurisdiction over
the main case was still lodged with the trial court. The court making the appointment
controls and supervises the appointed receiver or management committee. Thus, the
Court of Appeals' appointment of a management committee would result in an
absurd scenario wherein while the main case is still pending before the trial court,
the receiver or management committee reports to the Court of Appeals.
NOTES
TOPIC CORPORATE REHABILITATION MODULE
CASE #25
CASE TITLE Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Inc. GR NO
G.R. No. 177382 177382
PONENTE LEONEN, J. DATE

February 17, 2016
DOCTRINE
Creditors are indispensable parties to a rehabilitation case, even if a rehabilitation case is
non-adversarial. A corporate rehabilitation case cannot be decided without the creditors’
participation. The court’s role is to balance the interests of the corporation, the creditors
and the general public, Impleading creditors as respondents on appeal will give them the
opportunity to present their legal arguments before the appellate court. The courts will not
be able to balance these interests if the creditors are not parties to a case. Ruling on
petitioner’s appeal in the absence of its creditors will not result in judgment that is effective,
complete, and equitable.
FACTS
Viva Shipping Lines filed a petition for Corporate Rehabilitation before the RTC of Lucena City.
The RTC initially denied the Petition for failure to comply with the requirements in Rule 4, Sections
2 and 3 of the Interim Rules of Procedure on Corporate Rehabilitation. Thereafter, Viva Shipping
Lines filed an amended petition.
In the amended petition, Viva Shipping Lines claimed to own and operate 19 maritime
vessels and Ocean Palace Mall, a shopping mall in downtorn Lucena City. Viva Shipping Lines
also declared its total properties’ assessed value at about P45, 172, 790.00. However, these
allegations were contrary to the attached documents in the Amended Petition.
One of the attachements, the Property Inventory List, showed that Viva Shipping Lines
owned only two (2) maritime vessels: M/V Viva Peñafrancia V and M/V Marian Queen. The list also
stated that the fair market value of all of Viva Shipping Lines’ assets amounted to P447, 860,
000.00, P400 million more than what was alleged in its amended petition. Some of the properties
listed in the Property Inventory List were already marked as “encumbered” by its creditors; hence,
only P147, 630, 000.00 of real property and its vessels were marked as free assets.
According to Viva Shipping Lines, the devaluation of the Philippine peso, increased
competition, and mismanagement of its businesses made it difficult to pay its debts as they became
due. It also stated that “almost all vessels were rendered unserviceable either because of age and
deterioration that can no longer compete with modern made vessels owned by other operators.”
In its Company Rehabilitation Plan, Viva Shipping Lines enumerated possible sources of
funding such as the sale of old vessels and commercial lots of its sister company, Sto. Doming
Shipping Lines. It also proposed the conversion of the Ocean Palace Mall into a hotel, the
acquisition of two (2) new vessels for shipping operation, and the “re-operation” of an oil mill in
Quezon.
LOWER RTC: The Regional Trial Court found that CA: The Court of Appeals dismissed Viva
COURT Viva Shipping Lines' assets all appeared Shipping Lines' Petition for Review in the
RULING to be non-performing. Further, it noted Resolution dated January 5, 2007. It found
that Viva Shipping Lines failed to show that Viva Shipping Lines failed to comply with
any evidence of consent to sell real procedural requirements under Rule 43. The
properties belonging to its sister Court of Appeals ruled that due to the failure
company. of Viva Shipping Lines to implead its creditors
as respondents, "there are no respondents
who may be required to �le a comment on the
Aggrieved, Viva Shipping Lines filed a petition, pursuant to Section 8 of Rule 43."
Petition for Review under Rule 43 of the
Rules of Court before the Court of
Appeals. It only impleaded Hon. Adolfo V.
Encomienda, the Presiding Judge of the
trial court that rendered the assailed
decision. It did not implead any of its
creditors, but served copies of the
Petition on counsels for Metrobank,
Keppel Philippines Marine, Inc., Pilipinas
Shell, City of Batangas, Province of
Quezon, and City of Lucena. Viva
Shipping Lines neither impleaded nor
served a copy of the Petition on its former
employees or their counsels.
ISSUE/S
Whether or not the Corporate Rehabilitation is proper.

Viva Shipping Lines, Inc. Keppel Philippines Mining, Inc.
SC RULING
NO. The first rule breached by petitioner is failure to implead all the indispensable parties.
Petitioner did not even interpose reasons why it should be excused from compliance with the rule
to “state the full names of the parties to the case, without impleading the court as respondents.”
Petitioner did exactly the opposite. It failed to state the full names of its creditors as respondents.
Instead, it impleaded the Presiding Judge of the originating court.
Creditors are indispensable parties to a rehabilitation case, even if a rehabilitation case

is non-adversarial. A corporate rehabilitation case cannot be decided without the creditors’
participation. The court’s role is to balance the interests of the corporation, the creditors and the
general public, Impleading creditors as respondents on appeal will give them the opportunity to
present their legal arguments before the appellate court. The courts will not be able to balance
these interests if the creditors are not parties to a case. Ruling on petitioner’s appeal in the absence
of its creditors will not result in judgment that is effective, complete, and equitable.
The Regional Trial Court correctly dismissed petitioner’s rehabilitation plan. It found that
petitioner’s assets are non-performing. Petitioner admitted this in its amended petition when it
stated that its vessels were no longer serviceable. In the case of Wonder Book Corp., a
rehabilitation plan is infeasible if the assets are nearly fully or fully depreciated. This reduces the
probability that rehabilitation may restore and reinstate petitioner to its former position of successful
operation and solvency.
Petitioner’s rehabilitation plan should have shown that petitioner has enough serviceable
assets to be able to continue its business. Yet, the plan showed that the source of funding would
be to sell petitioner’s old vessels. Disposing of the assets constituting petitioner’s main business
cannot result in rehabilitation. A business primarily engaged as a shipping line cannot operate
without its ships. On the other hand, the plan to purchase new vessels sacrifices the corporation’s
cash flow. This is contrary to the goal of corporate rehabilitation, which is to allow present value
recovery for creditors. The plan to buy new vessels after selling the two vessels it currently owns
is neither sound nor workable as a business plan.
NOTES
TOPIC MODULE
CASE #26
CASE TITLE BPI FAMILY SAVINGS BANK v. ST. MICHAEL’S MEDICAL CENTER GR NO 205469
PONENTE Perlas-Bernabe, J. DATE Mar. 25,2015
DOCTRINE
Restoration is the central idea behind the remedy of corporate rehabilitation. To “restore” means “to bring back to or put
back into a former or original state.”Corporate rehabilitation contemplates a continuance of corporate life and activities
in an effort to restore and reinstate the corporation to its former position of successful operation and solvency,
the purpose being to enable the company to gain a new lease on life and allow its creditors to be paid their
claims out of its earnings.
Section 4.Republic Act No. 10142” (FRIA), which provides: xxx (gg) Rehabilitation shall refer to the restoration of the
debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more
if the debtor continues as a going concern than if it is immediately liquidated.In other words, rehabilitation assumes
that the corporation has been operational but for some reasons like economic crisis or mismanagement had
become distressed or insolvent,Thus, the basic issues in rehabilitation proceedings concern the viability and
desirability of continuing the business operations of the distressed corporation, all with a view of effectively restoring it
to a state of solvency or to its former healthy financial condition through the adoption of a rehabilitation plan.
FACTS
Spouses Virgilio and Yolanda Rodil are the owners of St. Michael Hospital, a 5-storey secondary level hospital
with a vision to upgrade St. Michael Hospital into a modern, well-equipped and full service tertiary 11-storey
hospital, Sps. Rodil purchased two (2) parcels of land adjoining their property. On May 22, 2003, SMMCI was
incorporated, with which entity they planned to eventually consolidate St. Michael Hospital.
In May 2004, construction of a new hospital building on the adjoining properties commenced estimated to cost
at least P100,000,000.00. To finance the costs of construction, SMMCI applied for a loan with BPI Family
Savings Bank, Inc. which gave a credit line of up to P35,000,000.00,secured by a mortgage over (3) parcels of
land SMMCI was able to draw the aggregate amount of P23,700,000.00,with interest at the rate of 10.25% per
annum (p.a.) and a late payment charge of 3% per month accruing on the overdue amount, for which Sps.
Rodil, who agreed to be co-borrowers on the loan, executed and signed a Promissory Note.
Having suffered financial losses due to problems with the first building contractor, Sps. Rodil temporarily
deferred the original construction plans instead, engaged the services of another contractor for the remaining
works. The lack of funds for the finishing works of the 3 floors, however, kept the new building from
functioning and, in turn, hampered the plans for the physical transfer of St. Michael Hospital’s operations to
SMMCI.
Although the finishing works were later resumed SMMCI was still neither operational nor earning revenues.
Hence, it was only able to pay the interest on its BPI Family loan, from the income of St. Michael Hospital. BPI
Family demanded immediate payment of the entire loan obligation filed a petition for extrajudicial foreclosure
properties covered by the mortgage. SMMCI filed a Petition for Corporate with prayer for the issuance of a
Stay Order. As of date, only two (2) floors of the new building are functional, in which some of the operations
of St. Michael had already been transferred.
Sps. Rodil continued to shoulder the costs of equipment and machinery amounting to P20,000,000.00, to build
up the hospital’s capabilities. However, SMMCI was neither operational nor earning revenues, it could only pay
interest on the BPI Family loan, using St. Michael Hospital’s income, over a two-year period.While St. Michael
Hospital – whose operations were to be eventually absorbed by SMMCI – was operating profitably, it was
saddled with the burden of paying the loan obligation of SMMCI and Sps. Rodil to BPI Family, which it cannot
service together with its current obligations to other persons and/or entities. SMMCI declared that it intends to
conclude pending negotiations for investments offered by a group of medical doctors whose capital infusion
shall be used.
LOWER RTC: Grants the Rehabilitation, Issues CA: AFFIRMS RTC’s approval of the rehab
COURT Stay Order plan.
RULING Rehab is viable according to experts but
changes to restructure the loan, improve
the facilities and abandoning the 11-storey
plan
ISSUE/S Whether the RTC is right to declare that the creditor need not be consulted prior to the approval
of the plan.
ARGUMENTS Petitioner: BPI FAMILY Respondent : St. Michael’s
The approval of the rehabilitation plan Rehab is feasible, the rehab plan did not impair
violated its rights as an unpaid creditor/ the contract since the properties were not
mortgagee and that the same was directed to be released to which BPI is entitled,
submitted without prior consultation with consultation is not mandatory
creditors.
SC RULING The Rehabilitation Petition is DISMISSED. No Stay Order shall be issued.
1 In this case, it cannot be said that the petitioning corporation, SMMCI, had been in a position of successful operation
and solvency at the time the Rehabilitation Petition was filed on August 11, 2010. While it had indeed “commenced
business” through the preparatory act of opening a credit line with BPI Family to finance the construction of a new
hospital building for its future operations, SMMCI itself admits that it has not formally operated nor earned any income
since its incorporation. This simply means that there exists no viable business concern to be restored. Perforce, the
remedy of corporate rehabilitation is improper, thus rendering the dispositions of the courts a quo infirm.
2 SMMCI has not even operated yet. St. Michael, although operational, it has a distinct and separate personality than
SMMCI. SMMCI stands as the sole petitioning debtor in this case, its rehabilitation should have been primarily
examined from the lens of its own financial history. There was no sufficient evidence to show that the SMMCI and St.
Michael’s merger was already been agreed upon.
3 The Plan was not able to comply with the fundamental requisite in Sec18 Rule 3 of the Rules that “c) the material
financial commitments to support the rehab plan xxx e) a liquidation analysis setting out for each creditor that the
present value of the payments it would receive under the plan is more than that which would receive if the assets of
the debtor were sold by a liquidator within a six-month period from the estimated date of filing of the petition
While the Court recognizes the financial predicaments of upstart corporations under the prevailing economic
climate, it must nonetheless remain forthright in limiting the remedy of rehabilitation only to meritorious
cases. Hence, the remedy must be accorded only after a judicious regard of all stakeholders’ interests; it is
not a one-sided tool that may be graciously invoked to escape every position of distress.
In this case, not only has the petitioning debtor failed to show that it has formally began its operations which
would warrant restoration, but also it has failed to show compliance with the key requirements under the
Rules, the purpose of which are vital in determining the propriety of rehabilitation.
NOTES
TOPIC Rehabilitation MODULE
CASE #27
CASE TITLE METROPOLITAN BANK AND TRUST COMPANY, Petitioner, v. LIBERTY GR NO 84317
CORRUGATED BOXES MANUFACTURING CORPORATION, Respondent.
PONENTE Leonen, J. DATE January 25, 2017
DOCTRINE A corporation with debts that have already matured may still file a petition for rehabilitation under the
Interim Rules of Procedure on Corporation Rehabilitation.
FACTS
Respondent Liberty is a domestic corporation that produces corrugated packaging

boxes. It obtained various credit accommodations and loan facilities from petitioner
Metrobank amounting to 19,940,000.00. To secure its loans, Liberty mortgaged to
Metrobank 12 lots. Liberty defaulted on the loans. Thus, Liberty filed a Petition for
corporate rehabilitation before RTC. Liberty claimed that it could not meet its obligations
to Metrobank because of the Asian Financial Crisis, which resulted in a drastic decline in
demand for its goods, and the serious sickness of its Founder and President, Ki Kiao
Koc. Liberty's rehabilitation plan consisted of:
(a) a debt moratorium;
(b) renewal of marketing efforts;
(c) resumption of operations; and
(d) entry into condominium development, a new business.
LOWER RTC: CA:

COURT The Regional Trial Court, finding the
RULING Petition sufficient in form and The Court of Appeals affirmed the
substance, issued a Stay Order Regional Trial Court's finding that debtor
and set an initial hearing for the Petition. corporations couldstill avail themselves of
the remedy of rehabilitation under the
Metrobank filed its opposition,
argued that Liberty was not qualified Interim Rules of Procedure on Corporate
for corporate rehabilitation; that Rehabilitation (Interim Rules) even if they
Liberty's Petition for rehabilitation and were already in default.
rehabilitation plan were defective; and It held that even insolvent corporations
that rehabilitation was not feasible. could still file a petition for rehabilitation.
It also claimed that Liberty filed the
Petition solely to avoid its obligations to The Court of Appeals stressed that the
the bank. purpose of rehabilitation proceedings is to
The Regional Trial Court gave due enable the distressed company to gain a new
course to the Petition and referred the lease on life and to allow the creditors to be
rehabilitation plan to the Rehabilitation paid their claims. It held that the approval of
Receiver. Rehabilitation Receiver the Regional Trial Court was precisely "'to
Rafael Chris F. Teston recommended effect a feasible and viable rehabilitation' of
the approval of the plan, provided that ailing corporations" as required by
Liberty would initiate construction on the Presidential Decree No. 902-A. Metrobank
property in Valenzuela within 12 months moved for reconsideration, but the Motion
from approval. was denied
In its Order, the Regional Trial Court ..
approved the rehabilitation plan. Hence, this Petition was filed
The trial court found that Liberty was
capable of being rehabilitated and that
the rehabilitation plan was feasible and
viable.
ISSUE/S
Whether respondent, as a debtor in default, is qualified to file a petition for rehabilitation
under Presidential Decree No. 902-A and Rule 4, Section 1 of the Interim Rules
1. Petitioner argues that 1. On the other hand, respondent insists on
respondent can no longer file a its qualification to seek rehabilitation. It argues
petition for corporate rehabilitation. that petitioner's reading of Rule 4, Section 1 of
It claims that Rule 4, Section 1 of the Interim Rules is restrictive, merely indicating
the Interim Rules restricts the kind the minimum conditions for a debtor to be able to
of debtor who can file petitions for file a petition for rehabilitation.
corporate rehabilitation.29 Petitioner 2. Under Section 6, a stay order, which may
assume that cases have been filed to collect on
insists that the phrase "who
matured debts, may be granted.
foresees the impossibility of meeting
3. Respondent argues that the Court of
its debts when they respectively fall Appeals' finding that the rehabilitation plan is
due" must be construed plainly to feasible is well-grounded and in keeping with
mean that an element of foresight is Rule 4, Section 23 of the Interim Rules. The
required.30 Because foresight is Rehabilitation Receiver deemed the rehabilitation
required, the debts of the plan viable The Petition also listed the
corporation should not have receivables, clearly due for collection, in its
matured. annexes.
2. Petitioner also argues that 4. Respondent further contends that contrary
the Regional Trial Court's approval to petitioner's arguments, the rehabilitation plan
of the rehabilitation plan is contrary contains material financial commitments. When
to Rule 4, Section 23 of the Interim the Interim Rules speak of "material financial
Rules.32 Under the provision, the commitments to support the rehabilitation plan," it
court may approve the rehabilitation does not mean that the commitment must come
from outside sources. The corporation's showing
plan over the opposition of the
that the rehabilitation plan can find sufficient
creditors only when two (2)
funding should be sufficient.
elements concur: (a) when the court
finds that the rehabilitation of the
debtor is feasible; and (b) when the
opposition of the creditors is
"manifestly unreasonable."33
Petitioner claims that the Regional
Trial Court did not declare the
manifest unreasonableness of
petitioner's opposition.
3. Petitioner likewise argues
that respondent's Petition for
rehabilitation and the attached
inventory of accounts receivable
failed to disclose the maturity dates
of the accounts.35 This failure
renders the Petition defective under
Rule 4, Section 2(d) of the Interim
Rules.
4. Petitioner further claims that
the rehabilitation plan lacked
material financial commitments
required under Rule 4, Section 5 of
the Interim Rules.37 The
rehabilitation plan did not claim that
new money would be invested in the
corporation
SC RULING
Yes. A corporation that may seek corporate rehabilitation is characterized not by its debt
but by its capacity to pay this debt.
Rule 4, Section 1 of the Interim Rules provides:
SECTION 1.
Who May Petition.
Any debtor who foresees the impossibility of meeting its debts when they respectively
fall due, or any creditor or creditors holding at least twenty-five percent (25%) of the
debtor's total liabilities, may petition the proper Regional Trial Court to have the debtor
placed under rehabilitation.
Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation

reiterates the purpose of rehabilitation, which is to provide meritorious corporations
an opportunity for recovery: Under the Interim Rules, rehabilitation is the process of
restoring "the debtor to a position of successful operation and solvency, if it is shown that
its continuance of operation is economically feasible and its creditors can recover by way
of the present value of payments projected in the plan more if the corporation continues
as a going concern that if it is immediately liquidated." It contemplates a continuance of
corporate life and activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency.
As stated by the Court of Appeals in

Philippine Bank of Communications, rehabilitation is in line with the State's objective to
promote a wider and more meaningful equitable distribution of wealth. In line with this
objective, the Interim Rules provide for a liberal construction of its provisions:
SECTION 2.
Construction
These Rules shall be liberally construed to carry out the objectives of Sections 5(d),
6(c) and 6(d) of Presidential Decree No. 902-A, as amended, and to assist the parties in
obtaining a just, expeditious, and inexpensive determination of cases. Where applicable,
the Rules of Court shall apply suppletorily to proceedings under these Rules. To adopt
petitioner's interpretation would undermine the purpose of the Interim Rules. There is no
reason why corporations with debts that may have already matured should not be
given the opportunity to recover and pay their debtors in an orderly fashion. The
opportunity to rehabilitate the affairs of an economic entity, regardless of the status of its
debts, redounds to the benefit of its creditors, owners, and to the economy in general.
Rehabilitation, rather than collection of debts from a company already near
bankruptcy, is a better use of judicial rewards.
A.M. No. 08-8-10-SC further describes the remedy initiated by a petition for rehabilitation:
A petition for rehabilitation, the procedure for which is provided in the Interim Rules of
Procedure on Corporate Recovery, should be considered as a special proceeding. It is
one that seeks to establish the status of a party or a particular fact. As provided in
section 1, Rule 4 of the Interim Rules on Corporate Recovery, the status or fact sought to
be established is the inability of the corporate debtor to pay its debts when they fall due
so that a rehabilitation plan, containing the formula for the successful recovery of the
corporation, may be approved in the end. It does not seek a relief from an injury caused
by another party. Thus, the condition that triggers rehabilitation proceedings is not
the maturation of a corporation's debts but the inability of the debtor to pay these.
In this case, the phrase "any debtor who foresees the impossibility of meeting its debts
when they respectively fall due" in Rule 4, Section 1 of the Interim Rules need not refer
to a specific period or point in time when the debts mature. It may refer to the debtor
corporation's general realization that it will not be able to fulfill its obligations, a
realization that may come before default. Construing the phrase "when they
respectively fall due" to mean that the debtor must already be in default defeats
the clear purpose of the lawmakers.
It unjustly limits rehabilitation to corporations with matured obligations.
NOTES
TOPIC Preference of Credit MODULE
CASE #1
CASE TITLE Pacific Farms, Inc. vs Esguerra GR NO L-21783
PONENTE Castro, J.: DATE November 29, 1969
DOCTRINE Preference of credits; Rule in preference of credits applies only where debtor cannot pay
his debts in full;
The case before us does not involve a question of preference of credits and is not one where two
or more creditors have separate and distinct claims against the same debtor who has insufficient
property. Indeed, it is a matter of necessity and logic that the question of preference should arise
only where the debtor cannot pay his debts in full.
FACTS On several occasions from October 1, 1956 to March 2, 1957 the Company sold and delivered lumber
and construction materials to the Insular Farms, Inc. which the latter used in the construction of the
aforementioned six buildings at its compound in Bolinao, Pangasinan, of the total procurement price of
P15,000, the sum of P4,710.18 has not been paid by Insular Farms, Inc.
Consequently, the Company instituted civil case D. 775 with the Court of First Instance of Pangasinan to
recover the said unpaid balance from the Insular Farms, Inc. The trial court rendered judgment sustaining
the Company's claim. The judgment debtor did not appeal; so the corresponding writ of execution was
issued.
The defendant sheriff levied upon the six buildings. On January 30, 1962 the Pacific Farms, Inc. filed a
third-party claim, subscribed by its corporate president, asserting ownership over the levied buildings which
it had acquired from the Insular Farms, Inc. by virtue of a deed of absolute sale executed on March 21,
1958, about seven months before the Company filed the above-mentioned action (civil case D- 775).
Shielded by an indemnity bond of P7,120 put up by the Company and the Cosmopolitan Insurance
Company, Inc., the sheriff proceeded with the announce public auction on February 12, 1962 and
sold the levied buildings to the Company for P6,110,78
Asserting absolute and exclusive ownership of the buildings in question, the Pacific Farms, Inc. filed a
complaint on May 14, 1962 against the Company and the sheriff with the court a quo, praying that
judgment be rendered, (a) declaring null and void the levy and judicial sale of the six buildings, and (b)
adjudging the defendants jointly and severally liable to the plaintiff in the sum of P2,000 by way of actual
damages and for such amount as the court may deem proper and just to impose by way of exemplary
damages and for costs of the suit.
LOWER RTC: rendered judgment annulling the levy of CA:

COURT January 16, 1962 and the certificate of sale of
RULING February 12, 1962. The court, however, denied
the plaintiff's claim for actual and exemplary
damages on the ground that it was not
"prepared to find that there was gross
negligence or bad faith on the part of any of the
defendants."
ISSUE/S Whether or not The lower court, likewise, erred in holding that the doctrine laid down in De Barretto, et
al. vs. Villanueva, et al. (G.R. No, L-14938, December 29, 1962) is applicable to the facts of this case as
found by said court
ARGUMENTS Respondent (Esguerra):

Petitioner (Pacific Firms): asserts the
ownership over the levied buildings which it had
acquired from the Insular Farms, Inc hence
argues that the same should be excused from
the execution.
SC RULING Yes. The RTC erred in holding the doctrine applicable in this case.
In ruling against the appellant below, the trial court relied mainly on the resolution (on the motion
for reconsideration) promulgated on December 29, 1962 by this Court in De Barretto, et al. vs,
Villanueva, et al., L-14938 (6 SCRA 928).
The said case, however, is inapplicable because it concerned not one but two or more preferred
creditors who, pursuant to articles 2242 and 2249 of the Civil Code, must necessarily be
convened and the nature and extent of their respective claims ascertained. Thus, we held that
before there can be a pro rata payment of credits entitled to preference as to the same specific
real property, there must first be some proceeding where the claims of all the preferred creditors
may be bindingly adjudicated, such as insolvency, the settlement of a decedent's estate under
Rule 87 of the Rules of Court, or liquidation proceedings of similar import.
But the case before us does not involve a question of preference of credits, and is not one where
two or more creditors have separate and distinct claims against the same debtor who has
insufficient property. Indeed, it is a matter of necessity and logic that the question of preference
should arise only where the debtor cannot pay his debts in full.
NOTES
TOPIC Right of Secured Creditors MODULE
CASE #2
CASE TITLE Yngson Jr vs Phillippine National Bank GR NO 171132
PONENTE Villarama, Jr DATE

August 15, 2012
DOCTRINE Under RA 10142(FRIA), the right of a secured creditor to enforce his lien during liquidation
proceedings is retained. Sec 114 of the said law thus provides:
Sec 114: Right of Secured Creditors- The Liquidation Order shall not affect the right of a secured
creditor to enforce his lien in accordance with applicable contract or law. A secured creditor may:
(b) maintain his right under his security or lien
In this case, PNB elected to maintain its rights under the security or lien; hence, its right to
foreclose the mortgaged properties should be respected.
FACTS ARCAM & Company, Inc (ARCAM) is engaged in the operation of a sugar mill in Pampanga. PNB
granted a loan to ARCAM which is secured by a Real Estate mortgage and Chattel Mortage.
ARCAM defaulted in its obligations thus PNB initiated extrajudicial foreclosure proceedings.
ARCAM filed before the SEC a petition for suspension of payments, appointment of a
management or rehabilitation committee and approval of rehabilitation plan, as well as an
issuance of a TRO and writ of preliminary injunction. The SEC issued a TRO and writ of
preliminary injunction, enjoining PNB and the Sheriff of RTC of Guagua Pampanga from
proceeding with the foreclosure sale of the mortgaged properties.
SEC ruled that ARCAM can no longer be rehabilitated, thus the SEC decreed that ARCAM be
dissolved and placed for liquidation, appointing Atty. Manuel D Yngson Jr & Associate as
Liquidator for ARCAM. PNB revived its proceedings for the extrajudicial foreclosure sale of the
mortgaged properties, wherein PNB emerged as the highest winning bidder, and a certificate of
sale was issued in its favor.
Petitioner filed with the SEC a motion to nullify the auction sale. Petitioner claims that all actions
against companies which are under liquidation, like ARCAM, are suspended because liquidation
is a continuation of the petition for suspension proceedings. Petitioner argues that the
prohibition against foreclosure subsisted during liquidation because payment of all of ARCAM’s
obligations was proscribed except for those authorized by the Commission. Moreover petitioner
asserted that the mortgaged assets should be included in the liquidation and the proceeds
shared with the unsecured creditors
LOWER SEC: denied petitioner's motion to nullify CA: denied petitioner’s motion for
COURT the auction sale. PNB is not legally barred reconsideration
RULING from foreclosing the mortgages
ISSUE/S whether PNB, as a secured creditor, can foreclose on the mortgaged properties of a corporation
under liquidation without the knowledge and prior approval of the liquidator or the SEC.
ARGUMENTS Petitioner (Manuel D. Yngson Respondent (PNB):
(liquidator): neither PD 902-A nor the SEC rules prohibits
secured creditors from foreclosing on their
1-SEC erred in allowing PNB to foreclose
the mortgage without first allowing the
mortgages to satisfy the mortgagor’s debt after
ARCAM liquidator to make a determination the termination of the rehabilitation proceedings
of the liens over the ARCAM real and during liquidation proceedings.
properties, since aside from PNB, some
ARCAM workers may also give legal lien
over the said property as regards their
claim for unpaid wages
2-Even if PNB was the sole and only lien

holder, it cannot foreclose unless the
liquidator agrees to such or that the SEC
gave gave PNB prior permission to institute
the separate foreclosure proceedings
SC RULING The SEC did not err in ruling that PNB was not barred from foreclosing on the mortgages.
In the case of Consuelo Metal Corporation vs Planters Development Bank, the court has already
settled the above question and upheld the right of the secured creditor to foreclose the
mortgages in its favor during the liquidation of a debtor corporation.
Under RA 10142(FRIA), the right of a secured creditor to enforce his lien during liquidation
proceedings is retained. Sec 114 of the said law thus provides:
Sec 114: Right of Secured Creditors- The Liquidation Order shall not affect the right of a secured
creditor to enforce his lien in accordance with applicable contract or law. A secured creditor may:
(b) maintain his right under his security or lien
In this case, PNB elected to maintain its rights under the security or lien; hence, its right to
foreclose the mortgaged properties should be respected.
As to petitioner’s argument on the right of first preference as regards unpaid wages, a distinction
should be made between a preference of credit and a liend. A preference applied only to claims
which do not attach to specific properties. A lien creates a charge on a particular property. The
right of first preference as regards unpaid wages recognized by Article 11 of the Labor Code,
does not constitute a lien on the property of the insolvent debtor in favor of workers.
COnsequently, the right of first preference for unpaid wages may not be invoked in this case to
nullify the foreclosure sales conducted pursuant to PNB’s right as secured creditor to enforce its
lien on specific properties of its debtor, ARCAM.
NOTES
TOPIC FRIA- ORDINARY PREFERRED CREDITS-LABOR CLAIMS MODULE
CASE #3
CASE TITLE DEVELOPMENT BANK OF THE PHILS v. SEC OF LABOR GR NO 79351
PONENTE Cortes, J DATE

Nov, 28, 1989
DOCTRINE
FACTS
Petitioner DBP seeks the nullification of the USec of Labor and Employment’s order affirming the decision which
directed the DBP to deliver the properties of Riverside Mills Corp to the MOLE (now DOLE) for proper disposition in
the Labor Case involving illegal dismissal, unfair labor practice, and illegal deductions from salaries and violation of
the minimum wage law which was filed against RMC.
On July 3, 1985, a decision was rendered by Director Severo M. Pucan of the NCR-MOLE, ordering RMC to pay
private respondents backwages and separation benefits. A corresponding writ of execution was issued on October
22, 1985 directing the sheriff to collect the amount of P1,256,678.76 from RMC and, in case of failure to collect, to
execute the writ by selling the goods and chattel of RMC not exempt from execution or, in case of insufficiency
thereof, the real or immovable properties of RMC.
However, in 1986, the writ of execution was returned unserved and unsatisfied, with the information that the
company premises of RMC had been padlocked and foreclosed by petitioner. It appears that petitioner had
instituted extra-judicial foreclosure proceedings as early as 1983 on the properties and other assets of RMC as a
result of the latter's failure to meet its obligations on the loans it secured from petitioner.
Consequently, private respondents filed with the MOLE a "Motion for Delivery of Properties of the [RMC] in the
Possession of the [DBP] to the [MOLE] for Proper Disposition," stating that pursuant to Article 110 of the Labor
Code, they enjoy first preference over the mortgaged properties of RMC for the satisfaction of the judgment
rendered in their favor notwithstanding the foreclosure of the same by petitioner as mortgage creditor. Petitioner
opposed.
In an order signed by Officer-in-Charge Romeo A. Young and dated December 11, 1986, private respondents' motion
was granted based on the finding that Article 110 of the Labor Code and the ruling laid down in PCIB v. NAMAWU-
MIF. Petitioner then filed its MR on December 24,1986 contending that Article 110 of the Labor Code finds no
application in the case at bar. In an order dated July 29, 1987, the MR was denied for lack of merit by USec dela
Serna. Hence, petitioner filed this special civil action for certiorari with prayer for the issuance of a writ of
preliminary injunction.
ISSUE/S
W/N Article 110 of the Labor Code was correctly applied

a. The properties sought to be a. Article 110 of the Labor Code applies
delivered have ceased to belong to because terms "bankruptcy" or "liquidation"
RMC in view of the fact that are broad enough to cover a situation
petitioner had foreclosed on the where there is a cessation of the operation
mortgage, and the properties have of the employer's business
been sold and delivered to third B. PCIB v. NAMAWU-MIF support the conclusion
parties; that private respondents still enjoyed a
b. The requisite condition for the preferential lien for the payment of their
application of Article 110 of the backwages and separation benefits over the
Labor Code is not present since no properties of RMC which were foreclosed by
bankruptcy or insolvency DBP.
proceedings over RMC properties
and assets have been undertaken
SC RULING NO. Respondents contend that the terms "bankruptcy" or "liquidation" are broad enough to cover a situation
where there is a cessation of the operation of the employer's business as in the case at bar. However, this very same
contention was struck down as unmeritorious in the case of DBP v Santos involving a group of RMC employees
which sought to enforce its preference of credit Article 110 against DBP over certain RMC real properties. In that
case, the Court laid down the ruling that Article 110 of the Labor Code, which cannot be viewed in isolation of, and
must always be reckoned with the provisions of the Civil Code on concurrence and preference of credits, may not be
invoked by employees or workers of RMC like private respondents herein, in the absence of a formal declaration of
bankruptcy or a judicial liquidation order of RMC.
The rationale for making the application of Article 110 of the Labor Code contingent upon the institution of
bankruptcy or judicial liquidation proceedings against the employer is premised upon the very nature of a
preferential right of credit. A preference of credit bestows upon the preferred creditor an advantage of having his
credit satisfied first ahead of other claims which may be established against the debtor. Indubitably, the preferential
right of credit attains significance only after the properties of the debtor have been inventoried and liquidated, and
the claims held by his various creditors have been established.
In this jurisdiction, bankruptcy, insolvency and general judicial liquidation proceedings provide the only proper
venue for the enforcement of a creditor's preferential right such as that established in Article 110 of the Labor Code,
for these are in rem proceedings binding against the whole world where all persons having any interest in the assets
of the debtor are given the opportunity to establish their respective credits.
Secondly, the Order directing petitioner to deliver the properties it had foreclosed from RMC violates the basic rule
that the power of a court or tribunal in the execution of its judgment extends only over properties unquestionably
belonging to the judgment debtor.
It appears on record, and remains undisputed that petitioner had extra-judicially foreclosed the subject properties
from RMC as early as 1983 and purchased the same at public auction, and that RMC had failed to exercise its right
to redeem. Thus, when Officer-in-Charge Young issued on the order which directed the delivery of these properties
to the MOLE, RMC had ceased to be the absolute owner thereof. Consequently, the order was directed against
properties which no longer belonged to the judgment debtor RMC.
However, respondents, in citing the case of PCIB v. NAMAWU-MIF [supra], argue that by virtue of Article 110 of the
Labor Code, an "automatic first lien" was created in favor of private respondents on RMC properties—a "lien" which
predated the foreclosure of the subject properties by petitioner, and remained vested on these properties even
after its sale to petitioner and other parties.
There is no merit to this contention. It proceeds from a misconception which must be corrected. What Article 110 of
the Labor Code establishes is not a lien, but a preference of credit in favor of employees. This simply means that
during bankruptcy, insolvency or liquidation proceedings involving the existing properties of the employer, the
employees have the advantage of having their unpaid wages satisfied ahead of certain claims which may be proved
therein.
WHEREFORE, considering the foregoing, the present petition is hereby GRANTED.
NOTES
TOPIC Preference of Credits MODULE
CASE #4
CASE TITLE Development Bank of the Philippines v. National Labor Relations GR NO 86227
Commission
PONENTE Vitug, J DATE January 19, 1994
DOCTRINE
A preference applies only to claims which do not attach to specific properties. A lien creates a
charge on a particular property. The right of first preference as regards unpaid wages recognized
by Article 110 does not constitute a lien on the property of the insolvent debtor in favor of
workers. It is but a preference of credit in their favor, a preference in application.
FACTS Private respondents Malayang Samahan ng mga Mangagawa sa Atlas Textile Development
Corporation were employees of ATLAS, a textile firm, which hypothecated its certain assets to
DBP. After ATLAS defaulted in its obligations, DBP foreclosed on the mortgage in March 1985.
The latter acquired the mortgaged assets by virtue of the foreclosure sale.
Private respondents filed their aforementioned claim, on 30 October 1985, against both ATLAS
and DBP. The Labor Arbiter ruled for the private respondents. On appeal by DBP, the decision
was sustained by the NLRC.
Hence the present petition.
LOWER RTC: N/A CA: N/A

COURT
RULING
ISSUE/S Whether the employees claim for wage differentials, "illegal" salary deductions, separation pay,
and similar money claims have preference over the mortgage claim
ARGUMENTS Petitioner (DBP): Respondent (Samahan ng mga Mangagawa sa

The petitioner contends that it is an error on Atlas Textile Development Corporation):
the part of the public respondent to consider Respondents contend that their money claims
the workers' preference under Article 110 of have preference over the mortgage lien.
the Labor Code over that of DBP's mortgage
lien.
SC RULING
No. Because of its impact on the entire system of credit, Article 110 of the labor Code cannot be
viewed in isolation but must be read in relation to the Civil Code scheme on classification and
preference of credits. In the event of insolvency, a principal objective should be to effect an
equitable distribution of the insolvent's property among his creditors. To accomplish this there
must first be some proceeding where notice to all of the insolvent's creditors may be given and
where the claims of preferred creditors may be bindingly adjudicated.
Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean
"absolute preference," the same should be given only prospective effect in line with the cardinal
rule that laws have no retroactive effect, unless the contrary is provided (Article 4, Civil Code).
Thereby, any infringement on the constitutional guarantee on non-impairment of the obligation of
contracts (Section 10, Article III, 1987 Constitution) is also avoided. In point of fact, DBP's mortgage
credit antedated by several years the amendatory law, RA No. 6715. To give Article 110 retroactive
effect would be to wipe out the mortgage in DBP's favor and expose it to a risk which is sought to
protect itself against by requiring a collateral in the form of real property.
In fine, the right of preference given to workers under Article 110 of the Labor Code cannot exist
in any effective way prior to the time of its presentation in distribution proceedings. It will find
application when, in proceedings such as insolvency, such unpaid wages shall be paid in full before
the "claims of the Government and other creditors" may be paid. But, for an orderly settlement of
a debtor's assets, all creditors must be convened, their claims ascertained and inventoried, and
thereafter the preferences determined in the course of judicial proceedings which have for their
object the subjection of the property of the debtor of the payment of his debts and other lawful
obligations. Thereby, an orderly determination of preference of creditors' claims is assured. The
adjudication made will be binding on all parties-in-interest, since those proceedings are proceeding
in rem; and the legal scheme of classification, concurrence and preference of credits in the Civil
Code, the Insolvency Law, and the Labor Code is preserved in harmony.
NOTES
TOPIC Applicability of Concurrence and Preference of Credits MODULE
CASE #5
CASE TITLE Associated Labor Unions v. Court of Appeals GR NO 156882
PONENTE VELASCO, JR., J DATE October 31, 2008
DOCTRINE Concurrence and preference of credits properly come into play only in cases of insolvency. Since
there is no bankruptcy or insolvency proceeding to speak of, much less a liquidation of the assets
of DWUT, the Union cannot look to said statutory provisions for support. There is a lack of showing
that there are no other assets to answer its obligations. DWUT may have liquidity problems
hampering its ability to meet its judicially-imposed obligations. The school, however, appears to
have other properties it can and in fact did use to settle its obligations
FACTS ● Petitioners Associated Labor Unions and Divine Word University Employees Union-ALU
(Union) represented the Union members which prevailed in a labor case resulting in Divine
Word University of Tacloban (DWUT) owing petitioners over a hundred million pesos for
unpaid benefits.
● The Roman Catholic Archbishop of Palo, Leyte (RCAP) is a corporation sole which sold to
Societas Verbum Dei (SVD) or the Society of the Divine Word 13 parcels of land on the
condition that the lands and properties shall be used for educational purposes and for the
maintenance and further development of the institution known as the ST. PAUL'S COLLEGE.
Properties and all improvements and any land, buildings or equipment which shall have been
later acquired by ST. PAUL'S COLLEGE and which are in direct and actual use by the College
shall be turned over to the ownership and possession of the Roman Catholic Bishop of Palo
in case there is or are circumstances which will be beyond the control of contracting parties
forcing the abandonment of educational and religious work of the Society of the Divine Word
with no hope for its resumption in the foreseeable future.
● SVD was able to secure the corresponding transfer certificates of title (TCTs) over the subject
lots, but the deed conditions, restrictions, and reversionary right of the RCAP were not
annotated on the new titles.
● Due to labor unrest, DWUT, run by the SVD, and petitioners engaged in a protracted legal
battle which resulted to DWUT's liability to petitioners to amount to approximately PhP200M.
● RCAP filed a petition. RCAP prayed for an order directing Registry of Deeds to register the
Deed of Sale and annotate on the corresponding SVD titles the conditions, restrictions, and a
reversionary interest of the RCAP stipulated in the deed.
● DWUT issued notices to petitioners' members, advising them of the decision of the DWUT
Board of Trustees to close the university and, thus, to consider themselves dismissed effective
at the close of business hours of June 15, 1995.
● Prompted by the closure of DWUT and the resulting termination of its members' services, the
Union filed a complaint against DWUT, its Board of Trustees, and the RCAP for Unfair Labor
Practice, Illegal Dismissal, and Damages. The Union alleged that the sale of the subject
properties over which the DWUT is located was incomplete due to the adverted conditions,
restrictions, and a reversionary right of the RCAP over the subject properties. RCAP did not,
despite the sale, sever its employment relations with DWUT which, thus, rendered the RCAP
solidarily liable with DWUT for the payment of the benefits of the Union members.
● Petitioners filed their Motion to Intervene, asserting their legal interest over the subject
properties, such interest, emanating from a judgment lien over the subject properties based
on the Entry of Final Judgment. And relying on Article 110 of the Labor Code in relation to
Arts. 2242, 2243, and 2244 of the Civil Code on concurrence and preference of credits, they
asserted preferential rights over the subject properties now owned by and registered under
the name of the SVD.
LOWER RTC: Dismissing the petition. RTC held that CA: Reversed orders of the RTC and directed the
COURT it has no jurisdiction over the case for annotation of encumbrances on the TCTs of the
RULING annotation owing to what it considered as subject properties to show the restrictions on use
and reversionary interest of the RCAP. RCAP was
petitioners' right to a judgment lien referred
to earlier. Trial court deemed as moot the not barred by laches from asserting his legal right
resolution of RCAP's formal offer of to cause the annotation of the pertinent
evidence and petitioners' motion to paragraphs of the deed of sale on the TCTs
intervene. denied the motion for
covering the subject properties. Despite the lapse
reconsideration on the ground of laches, of 37 years, the annotation would not be
noting that it took the RCAP 37 years after inequitable or prejudicial to any party since the
the execution of the deed of sale before SVD, under whose name the TCTs of the subject
taking judicial action to assert his rights properties were issued, did not interpose any
objection to the annotation.
ISSUE/S 1. Whether or not the Union correctly relied on Article 110 of LC in relation to some provisions
of the NCC on concurrence and preference of credits.
2. Whether or not laches has set in to bar the RCAP's cause of action.
ARGUMENTS Petitioner: ASSOCIATED LABOR Respondent (NAME): CA, ROMAN CATHOLIC
UNIONS (ALU) and DIVINE WORD ARCHBISHOP OF PALO, LEYTE, and DIVINE
UNIVERSITY EMPLOYEES UNION-ALU WORD UNIVERSITY OF TACLOBAN
(DWUEU-ALU)
RCAP argues that petitioners have not sufficiently
Petitioners argue that the appellate court shown that they will be prejudiced by the
erred in not affirming and applying the annotation of his interest over the subject
equitable remedy of laches. They assert that properties. The RCAP contends: First, the SVD
due to the adjudged substantial liabilities of and DWUT, the parties who could be so
DWUT, the subject properties over which prejudiced, have not opposed the annotation.
DWUT stands must be used. Considering Second, petitioners have not shown that the SVD
that no annotations were made on the TCTs and DWUT have no other properties to answer for
covering the subject properties and the adjudicated liabilities in G.R. No. 91915. In
considering too the resultant judgment lien fact, the February 24, 1997 MOA executed by the
attaching on them, the desired annotation is Union, DWUT, represented by the SVD, and the
clearly prejudicial and inequitable both for RCAP envisioned a final settlement of petitioners'
the DWUT and petitioners, for how, claim without involving the subject properties.
petitioners wonder, could the school pay its Third, the judgment lien issue is immaterial since
adjudged obligations without the substantial there is as yet no levy on execution over the
assets composed of the subject properties? subject properties. Besides, the preference of
credit asserted in connection with the perceived
Petitioners contend further that the instant
lien is only applicable where there is an insolvency
case for annotation was pursued only after
proceeding and payment of debts have to be
they have filed notices of lis pendens over
equitably distributed among the creditors. And
the subject properties for the ultimate
fourth, the CA can, on appeal, rule on the issue of
satisfaction of their adjudicated monetary
the Union's personality since an appeal opens the
claims against DWUT. Clearly, the RCAP is
case de novo and the appellate court has
trying to move the subject properties out of
discretion to rule on issues which it deems are
reach of petitioners through the requested
necessary for the proper adjudication of the case,
annotation. Principle of laches has attached
like the matter of personality which the appellate
and the annotation of the encumbrance or
court resolved motu proprio and not upon the
reversionary right of the RCAP is properly
instance of the RCAP.
barred.
|
SC RULING 1. NO. A judgment lien over the subject properties has not legally attached and that Art. 110
of the Labor Code, in relation to Arts. 2242, 2243, and 2244 of the Civil Code on concurrence
and preference of credits, does not cover the subject properties. Art. 110 of the Labor Code
applies only to cases of bankruptcy and liquidation. The articles of the Civil Code on
concurrence and preference of credits properly come into play only in cases of insolvency.
Since there is no bankruptcy or insolvency proceeding to speak of, much less a liquidation
of the assets of DWUT, the Union cannot look to said statutory provisions for support.
There is an utter lack of showing that DWUT has no other assets to answer its obligations. DWUT
may have liquidity problems hampering its ability to meet its judicially-imposed obligations. The
school, however, appears to have other properties it can and in fact did use to settle its obligations
as shown in the MOA between DWUT, the Union, and RCAP. A scrutiny of the MOA readily shows
that the subject properties were not included in the assets or properties earmarked to settle
DWUT's obligations.
2. Laches is inapplicable to the instant case. "Laches" means "the failure or neglect, for an
unreasonable and unexplained length of time, to do that which — by the exercise of due diligence
— could or should have been done earlier." Verily, laches serves to deprive a party guilty of it of
any judicial remedies. Its elements are: (1) conduct on the part of the defendant, or of one under
whom the defendant claims, giving rise to the situation which the complaint seeks a remedy; (2)
delay in asserting the complainant's rights, the complainant having had knowledge or notice of the
defendant's conduct as having been afforded an opportunity to institute a suit; (3) lack of knowledge
or notice on the part of the defendant that the complainant would assert the right in which the
defendant bases the suit; and (4) injury or prejudice to the defendant in the event relief is accorded
to the complainant, or the suit is not held barred.
Of the foregoing elements, the fourth and most important element, that is, injury or prejudice to the
defendant in the event relief is accorded to the complainant or the suit is not held barred, is not
present under the premises. As the CA aptly observed, no prejudice can result from the annotation
pleaded by the RCAP since the SVD, the property purchaser in the October 1, 1958 transaction,
did not oppose the annotation of the conditions, restrictions, and a reversionary right of the RCAP
over the subject properties, as evidenced by a manifestation the DWUT filed before the trial court.
More so, no prejudice can befall the Union for no judgment lien has attached or been imposed over
the subject properties and, as earlier explained, there is no showing that the subject properties are
the only properties the DWUT has or that its other assets and properties are insufficient to meet
its obligations. Thus, failing to show any actual interest over the subject properties that need judicial
protection, the Union will not suffer any damage with the annotation on SVD's titles of the
conditions, restrictions, and a reversionary interest of the RCAP.
NOTES
TOPIC Rules on Concurrence and Preference of Credit MODULE
CASE #6
CASE TITLE Strategic Alliance Development Corporation v. Radstock Securities, Ltd GR NO 178158
PONENTE Carpio, J. DATE December 4, 2009
DOCTRINE
FACTS Construction Development Corporation of the Philippines (CDCP) was incorporated in 1966. It was
granted a franchise to construct, operate and maintain toll facilities in the North and South Luzon
Tollways and Metro Manila Expressway. CDCP Mining Corporation, an affiliate of CDCP, obtained
loans from Marubeni Corporation of Japan. A CDCP official issued letters of guarantee for the
loans although there was no CDCP Board Resolution authorizing the issuance of such letters of
guarantee.
CDCP Mining secured the Marubeni loans when CDCP and CDCP Mining were still privately
owned and managed. Later on, CDCP’s name was changed to Philippine National Construction
Corporation (PNCC) in order to reflect that the Government already owned 90.3% of PNCC and
only 9.70% is under private ownership.
Meanwhile, the Marubeni loans to CDCP Mining remained unpaid. PNCC Board passed Board
Resolutions admitting PNCC’s liability to Marubeni. Previously, for two decades the PNCC Board
consistently refused to admit any liability for the Marubeni loans.
Later, Marubeni assigned its entire credit to Radstock Securities Limited (Radstock), a foreign
corporation. Radstock immediately sent a notice and demand letter to PNCC. PNCC and Radstock
entered into a Compromise Agreement. Under this agreement, PNCC shall pay Radstock the
reduced amount of P6,185,000,000.00 from P17,040,843,968.00. To satisfy its reduced obligation,
PNCC undertakes to: (1) "assign to a third party assignee to be designated by Radstock all its
rights and interests" to the listed real properties of PNCC; (2) issue to Radstock or its assignee
common shares of the capital stock of PNCC; and (3) assign to Radstock or its assignee 50% of
PNCC’s 6% share, for the next 27 years, in the gross toll revenues of the Manila North Tollways
Corporation.
PNCC and Radstock submitted the Compromise Agreement to this Court for approval. The COA
recommended approval of the Compromise Agreement. The CA approved the Compromise
Agreement.
LOWER RTC: CA: Approved the Compromise Agreement

COURT
RULING
ISSUE/S Whether or not the Compromise Agreement between PNCC Board and Radstock is valid
ARGUMENTS Petitioner (Strategic Alliance Respondent (Radstock and PNCC):

Development Corporation):
● alleged that it has a claim against
PNCC as a bidder of the National
Government’s shares, receivables,
securities and interests in PNCC.
SC RULING
NO. The PNCC Board has no power to compromise the ₱6.185 billion amount. Further, Radstock
is a private corporation incorporated in the British Virgin Islands. Its office address is at Suite 14021
Duddell Street, Central Hongkong. As a foreign corporation, with unknown owners whose
nationalities are also unknown, Radstock is not qualified to own land in the Philippines pursuant to
Section 7, in relation to Section 3, Article XII of the Constitution.
Consequently, Radstock is also disqualified to own the rights to ownership of lands in the
Philippines. Contrary to the OGCC’s claim, Radstock cannot own the rights to ownership of any
land in the Philippines because Radstock cannot lawfully own the land itself. Otherwise, there will
be a blatant circumvention of the Constitution, which prohibits a foreign private corporation from
owning land in the Philippines. In addition, Radstock cannot transfer the rights to ownership of land
in the Philippines if it cannot own the land itself. It is basic that an assignor or seller cannot assign
or sell something he does not own at the time the ownership, or the rights to the ownership, are to
be transferred to the assignee or buyer.
NOTES
TOPIC Preference of Liability MODULE
CASE #7
CASE TITLE Republic vs. Peralta GR NO
215910
PONENTE PERLAS-BERNABE, J DATE
Feb. 6, 2017
DOCTRINE
FACTS
The Republic of the Philippines seeks the review on certiorari on the order of the Court
of First Instance of Manila in the voluntary insolvency case of Quality Tobacco
Corporation (the Insolvent). In the voluntary insolvency proceedings commenced in May
1977 by Quality Tobacco Corporation (the "Insolvent"), the following claims of creditors
were filed: (i) (ii) (iii) (iv) P2,806,729.92, by the USTC Association of Employees and
workers UnionPTGWO USTC as separation pay for their members. This amount plus an
additional sum of P280,672.99 as attorney's fees had been awarded by the National
Labor Relations Commission in NLRC Case No. RB-IV-9775-77. P53,805.05 by the
Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas ("FOITAF), as
separation pay for their members, an amount similarly awarded by the NLRC in the
same NLRC Case. P1,085,188.22 by the Bureau of Internal Revenue for mtobacco
inspection fees covering the period 1 October 1967 to 28 February 1973; P276,161.00 by
the Bureau of Customs for customs duties and taxes payable on various importations by
the Insolvent. These obligations appear to be secured by surety bonds. Some of these
imported items are apparently still in customs custody so far as the record before this
Court goes. The trial court held that the claims of the labor unions (i.e. USTC
Association of Employees and Federacion de la IndustriaTabaquera y OtrosTrabajadores
de Filipinas) for separation pay of their respective members embodied in final awards of
the National Labor Relations Commission were to be preferred over the claims of the
Bureau of Customs and Bureau of Internal Revenue for customs duties and inspection
fees relying on Article 110 of the Labor Code. Said Article 110 reads, “Worker
preference in case of bankruptcy—In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first preference as regards wages due them
for services rendered during the period prior to the bankruptcy or liquidation, any
provision of law to the contrary notwithstanding. Union paid wages shall be paid in full
before other creditors may establish any claim to a share in the assets of the employer.”
ISSUE/S
Whether or not separation pays are preferred liabilities over taxes in insolvency
cases
SC RULING
The Supreme Court ruled on the negative. Article 110 of the Labor Code, in determining
the reach of its terms, cannot be viewed in isolation. Rather, Article 110 must be read in
relation to the provisions of the Civil Code concerning the classification, concurrence and
preference of credits, which provisions find particular application in insolvency proceedings
where the claims of all creditors, preferred or non-preferred, may be adjudicated in a
binding manner. Articles 2241 and 2242 jointly with Articles 2246 to 2249, all of the Civil
Code, establish a two-tier order of preference. The first tier includes only taxes, duties
and fees due on specific movable or immovable property. All other special preferred
credits stand on the same second tier to be satisfied, paripassu and pro rata, out of any
residual value of the specific property to which such other credits relate. Under Section
1204 of the Tariff and Customs Code, the liability of an importer for duties, taxes and
fees and other charges attaching on importation constitute a personal debt due from the
importer to the government which can be discharged only by payment in full of all duties,
taxes, fees and other charges legally accruing. It also constitutes a lien upon the
articles imported which may be enforced while such articles are in the custody or subject
to the control of the government. Clearly, the claim of the Bureau of Customs for
unpaid customs duties and taxes enjoys the status of a specially preferred credit under
Article 2241, No. 1, of the Civil Code only in respect of the articles importation of which
by the Insolvent resulted in the assessment of the unpaid taxes and duties, and which
are still in the custody or subject to the control of the Bureau of Customs. The goods
imported on one occasion are not subject to a lien for customs duties and taxes
assessed upon other importations though also effected by the Insolvent. Customs duties
and taxes which remain unsatisfied after levy upon the imported articles on which such
duties and taxes are due, would have to be paid out of the Insolvent's "free property" in
accordance with the order of preference embodied in Article 2244 of the Civil Code.
Such unsatisfied customs duties and taxes would fall within Article 2244, No. 9, of the
Civil Code and hence would be ninth in priority. With respect the claims for tobacco
inspection fees, under Section 315 of the National Internal Revenue Code ("old Tax
Code"), later reenacted in Identical terms as Section 301 of the Tax Code of 1977, an
unpaid "internal revenue tax," together with related interest, penalties and costs,
constitutes a lien in favor of the Government from the time an assessment therefor is
made and until paid, "upon all property and rights to property belonging to the taxpayer."
The claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees
constitutes a claim for unpaid internal revenue taxes which gives rise to a tax lien upon
all the properties and assets, movable and immovable, of the Insolvent as taxpayer.
Clearly, under Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the Civil Code, this
tax claim must be given preference over any other claim of any other creditor, in respect
of any and all properties of the Insolvent. Article 110 of the Labor Code did not sweep
away the overriding preference accorded under the scheme of the Civil Code to tax
claims of the government or any subdivision thereof which constitute a lien upon
properties of the Insolvent. It is frequently said that taxes are the very lifeblood of
government. The effective collection of taxes is a task of highest importance for the
sovereign. It is critical indeed for its own survival. It follows that language of a much
higher degree of specificity than that exhibited in Article 110 of the Labor Code is
necessary to set aside the intent and purpose of the legislator that shines through the
precisely crafted provisions of the Civil Code. It cannot be assumed that the legislative
authority, by using in Article 110 the words "first preference" and "any provision of law to
the contrary notwithstanding" intended to disrupt the elaborate and symmetrical structure
set up in the Civil Code. Neither can it be assumed casually that Article 110 intended to
subsume the sovereign itself within the term "other creditors" in stating that "unpaid
wages shall be paid in full before other creditors may establish any claim to a share in
the assets of employer." Insistent considerations of public policy prevent us from giving to
"other creditors" a linguistically unlimited scope that would embrace the universe of
creditors save only unpaid employees. Bearing in mind the overriding precedence given to
taxes, duties and fees by the Civil Code and the fact that the Labor Code does not
impress any lien on the property of an employer, the use of the phrase "first preference"
in Article 110 indicates that what Article 110 intended to modify is the order of
preference found in Article 2244, which order relates, as we have seen, to property of
the Insolvent that is not burdened with the liens or encumbrances created or recognized
by Articles 2241 and 2242. Article 110 of the Labor Code establishes "first preference"
for services rendered "during the period prior to the bankruptcy or liquidation," a period
not limited to the year immediately prior to the bankruptcy or liquidation. Thus, very
substantial effect may be given to the provisions of Article 110 without grievously
distorting the framework established in the Civil Code by holding, that Article 110 of the
Labor Code has modified Article 2244 of the Civil Code in two respects: (a) firstly, by
removing the one year limitation found in Article 2244, number 2; and (b) secondly, by
moving up claims for unpaid wages of laborers or workers of the Insolvent from second
priority to first priority in the order of preference established I by Article 2244
NOTES
TOPIC Worker Preference; Preference of Credit MODULE
CASE #8
CASE TITLE Development Bank of the Philippines V. National Labor Relations GR NO 82763-
Commission, Labor Arbiter Isabel P. Ortiguerra, and Labor Alliance For 64
National Development
PONENTE MELENCIO-HERRERA, J DATE March 19, 1990
DOCTRINE A preference of credit bestows upon the preferred creditor an advantage of having his credit
satisfied first ahead of other claims which may be established against the debtor. Logically, it
becomes material only when the properties and assets of the debtors are insufficient to pay his
debts in full; for if the debtor is amply able to pay his various creditors in full, how can the necessity
exist to determine which of his creditors shall be paid first or whether they shall be paid out of the
proceeds of the sale the debtor's specific property? Indubitably, the preferential right of credit
attains significance only after the properties of the debtor have been inventoried and liquidated,
and the claims held by his various creditors have been established.
FACTS The complainants in the two cases filed below were former employees of Lirag Textile Mills, Inc.
(LIRAG, for short). LIRAG was a mortgage debtor of DBP. Private respondent Labor Alliance for
National Development (LAND) was the bargaining representative of the more or less 800 former
rank and file employees of LIRAG. Around September 1981, LIRAG started terminating the
services of its employees on the ground of retrenchment. By December of the said year there were
already 180 regular employees separated from the service. LIRAG has since ceased operations
presumably due to financial reverses.
In February 1982, Joselito Albay, one of the employees dismissed in September 1981, filed a
complaint before the National Labor Relations Commission (NLRC) against LIRAG for illegal
dismissal. On 1 March 1982, LAND, on behalf of 180 dismissed members, also filed a Complaint
against LIRAG seeking separation pay, 13th month pay, gratuity pay, sick leave and vacation leave
pay and emergency allowance. These two cases were consolidated and jointly heard by the NLRC.
In a Decision, dated 30 July 1982, Labor Arbiter Apolinar L. Sevilla ordered LIRAG to pay the
individual complainants. The NLRC (Third Division) affirmed the same on 28 March 1982. That
judgment became final and executory.
On 15 April 1983, a Writ of Execution was issued. On the same day, DBP extrajudicially foreclosed
the mortgaged properties for failure of LIRAG to pay its mortgage obligation. As the only bidder at
the foreclosure sale, DBP acquired said mortgaged properties for P31,346,462.90. Since DBP was
the sole mortgagee, no actual payment was made, the amount of the bid having been merely
credited in partial satisfaction of LIRAG's indebtedness. By reason of said foreclosure, the Writ of
Execution issued in favor of the complainants remained unsatisfied. On 7 December 1984, LAND
filed a "Motion for Writ of Execution and Garnishment" of the proceeds of the foreclosure sale. On
12 February 1986, and over the opposition of DBP, Labor Arbiter Sevilla granted the Writ of
Garnishment and directed DBP to remit to the NLRC the sum of P6,292,380 out of the proceeds
of the foreclosed properties of LIRAG sold at public auction in order to satisfy the judgment
previously rendered.
By virtue of Proclamation Nos. 50 and 50-A, the Asset Privatization Trust (APT) became the
transferee of the DBP foreclosed assets of LIRAG. By virtue of that transfer, we deemed APT
impleaded as a party-petitioner and gave it time within which to file its pleading. It is true that DBP
was not an original party and that it was ordered impleaded only after the Writs of Execution were
not satisfied because the properties levied upon on execution had been foreclosed extrajudicially
by it. DBP had to be impleaded, however, for the proper satisfaction of a final judgment. Being an
incident in the execution of the final judgment award, NLRC retained jurisdiction and control over
the case and could issue such orders as were necessary for the implementation of that award. Its
inclusion as a party could not have been accomplished at the earlier stages of the proceedings
because at the time of the filing of the Complaint, private respondents' cause of action was only
against LIRAG. DBP cannot rightfully contend that it was deprived of due process. It had submitted,
therefore, to the jurisdiction of the NLRC.
LOWER RTC: CA:

COURT
RULING
ISSUE/S Whether or not the NLRC gravely abused its discretion in affirming the Order of the Labor Arbiter
granting the Writ of Garnishment out of the proceeds of LIRAG's properties foreclosed by DBP to
satisfy the judgment in these cases
SC RULING Yes. We are constrained to rule in the affirmative. The Court, in Development Bank of the
Philippines vs. Santos, categorically stated: “It is quite clear from the provision that a declaration
of bankruptcy or a judicial liquidation must be present before the workers preference may be
enforced. [Thus,] Article 110 of the Labor Code and its implementing rule cannot be invoked by the
respondents in this case absent a formal declaration of bankruptcy or a liquidation order.” Since
then, however, Article 110 has been amended by Republic Act No. 6715 and now reads as follows:
Sec. 1. Article 110 of Presidential Decree No. 442, as amended, otherwise known as the Labor Code
of the Philippines, is hereby further amended to read as follows:
Art. 110. Worker preference in case of bankruptcy. — In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first preference as regards their unpaid wages and
other monetary claims, any provision of law to the contrary notwithstanding. Such unpaid wages and
monetary claims shall be paid in full before the claims of the Government and other creditors may
be paid.
Section 10, Rule III, Book III of the Omnibus Rules Implementing the Labor Code has also been
amended by Section 1 of the Rules and Regulations Implementing RA 6715 as approved by the
then Secretary of Labor and Employment on 24 May 1989, and now provides:
Sec. 10. Payment of wages and other monetary claims in case of bankruptcy. — In case of
bankruptcy or liquidation of the employer's business, the unpaid wages and other monetary claims
of the employees shall be given first preference and shall be paid in full before the claims of
government and other creditors may be paid.
Notably, the terms "declaration" of bankruptcy or "judicial" liquidation have been eliminated. Does
this mean then that liquidation proceedings have been done away with? We opine in the negative,
upon the following considerations:
1. Because of its impact on the entire system of credit, Article 110 of the Labor Code, in
determining the reach of its terms, cannot be viewed in isolation. Rather, Article 110 must be
read in relation to the provisions of the Civil Code concerning the classification, concurrence and
preference of credits, which provisions find particular application in insolvency proceedings where
the claims of all creditors, preferred or non-preferred, may be adjudicated in a binding manner.
2. In the same way that the Civil Code provisions on classification of credits and the Insolvency
Law have been brought into harmony, so also must the kindred provisions of the Labor Law be
made to harmonize with those laws.
3. In the event of insolvency, a principal objective should be to effect an equitable distribution of

the insolvent's property among his creditors. To accomplish this there must first be some
proceeding where notice to all of the insolvents' creditors may be given and where the claims of
preferred creditors may be bindingly adjudicated. The rationale therefore has been expressed in
the recent case of DBP vs. Secretary of Labor, which we quote:
A preference of credit bestows upon the preferred creditor an advantage of having his credit satisfied
first ahead of other claims which may be established against the debtor. Logically, it becomes
material only when the properties and assets of the debtors are insufficient to pay his debts in full;
for if the debtor is amply able to pay his various creditors in full, how can the necessity exist to
determine which of his creditors shall be paid first or whether they shall be paid out of the proceeds
of the sale the debtor's specific property? Indubitably, the preferential right of credit attains
significance only after the properties of the debtor have been inventoried and liquidated, and the
claims held by his various creditors have been established.
4. A distinction should be made between a preference of credit and a lien. A preference applies
only to claims which do not attach to specific properties. A lien creates a charge on a particular
property. The right of first preference as regards unpaid wages recognized by Article 110 does not
constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of
credit in their favor, a preference in application. It is a method adopted to determine and specify
the order in which credits should be paid in the final distribution of the proceeds of the insolvent's
assets. It is a right to a first preference in the discharge of the funds of the judgment debtor. In the
words of Republic vs. Peralta, supra:
Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for
unpaid wages either upon all of the properties or upon any particular property owned by their
employer. Claims for unpaid wages do not therefore fall at all within the category of specially
preferred claims established under Articles 2241 and 2242 of the Civil Code, except to the extent
that such complaints for unpaid wages are already covered by Article 2241, number 6: "claims for
laborers wages, on the goods manufactured or the work done;" or by Article 2242, number 3: "claims
of laborers and other workers engaged in the construction, reconstruction or repair of buildings,
canals and other works, upon said buildings." To the extent that claims for unpaid wages fall outside
the scope of Article 2241, number 6 and 2242, number 3, they would come within the ambit of the
category of ordinary preferred credits under Article 2244.
5. The DBP anchors its claim on a mortgage credit. A mortgage directly and immediately subjects
the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the
obligation for whose security it was constituted (Article 2176, Civil Code). It creates a real right
which is enforceable against the whole world. It is a lien on an identified immovable property, which
a preference is not. A recorded mortgage credit is a special preferred credit under Article 2242 (5)
of the Civil Code on classification of credits. The preference given by Article 110, when not falling
within Article 2241 (6) and Article 2242 (3) of the Civil Code and not attached to any specific
property, is an ordinary preferred credit although its impact is to move it from second priority to first
priority in the order of preference established by Article 2244 of the Civil Code. In fact, under the
Insolvency Law (Section 29) a creditor holding a mortgage or lien of any kind as security is not
permitted to vote in the election of the assignee in insolvency proceedings unless the value of his
security is first fixed or he surrenders all such property to the receiver of the insolvent's estate.
6. Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean
"absolute preference," the same should be given only prospective effect in line with the cardinal
rule that laws shall have no retroactive effect, unless the contrary is provided (Article 4, Civil Code).
Thereby, any infringement on the constitutional guarantee on non-impairment of the obligation of
contracts (Section 10, Article III, 1987 Constitution) is also avoided. In point of fact, DBP's mortgage
credit antedated by several years the amendatory law, RA No. 6715. To give Article 110 retroactive
effect would be to wipe out the mortgage in DBP's favor and expose it to a risk which it sought to
protect itself against by requiring a collateral in the form of real property.
In fine, the right to preference given to workers under Article 110 of the Labor Code cannot exist
application when, in proceedings such as insolvency, such unpaid wages shall be paid in full before
the "claims of the Government and other creditors" may be paid. But, for an orderly settlement of
a debtor's assets, all creditors must be convened, their claims ascertained and inventoried, and
thereafter the preferences determined in the course of judicial proceedings which have for their
object the subjection of the property of the debtor to the payment of his debts or other lawful
obligations. Thereby, an orderly determination of preference of creditors' claims is assured; the
adjudication made will be binding on all parties-in-interest, since those proceedings are
proceedings in rem; and the legal scheme of classification, concurrence and preference of credits
in the Civil Code, the Insolvency Law, and the Labor Code is preserved in harmony.
WHEREFORE, Certiorari is GRANTED, and the assailed Decision of public respondent, the
NLRC, dated 25 March 1988, is hereby SET ASIDE. The DBP, APT, LAND, and other creditors
who may be so minded, are hereby directed, within 60 days from notice, to institute involuntary
insolvency proceedings before the proper Court where all the assets of Lirag Textile Mills, Inc.,
may be inventoried, the preferences of all its creditors determined, and their claims discharged in
a binding and conclusive manner.
NOTES
CASE #9
CASE TITLE Philippine Deposit Insurance Corporation v BIR GR NO 172892
PONENTE DATE June 13, 2013
DOCTRINE
FACTS
In Resolution No. 1056 dated October 26, 1994, the Monetary Board of the Bangko Sentral ng
Pilipinas (BSP) prohibited the Rural Bank of Tuba (Benguet), Inc. (RBTI) from doing business in
the Philippines, placed it under receivership in accordance with Section 30 of Republic Act No.
7653, otherwise known as the "New Central Bank Act," and designated the Philippine Deposit
Insurance Corporation (PDIC) as receiver.
PDIC conducted an evaluation of RBTI’s financial condition and determined that RBTI remained
insolvent. Thus, the Monetary Board issued Resolution No. 675 dated June 6, 1997 directing PDIC
to proceed with the liquidation of RBTI and so PDIC filed in RTC a petition for assistance in the
liquidation of RBTI. The trial court gave the petition due course and approved it.
(BIR) intervened as one of the creditors of RBTI. The BIR prayed that the proceedings be
suspended until PDIC has secured a tax clearance required under Section 52(C) of Republic Act
No. 8424, otherwise known as the "Tax Reform Act of 1997" or the "Tax Code of 1997.” which
provides:
SEC. 52. Corporation Returns. –
(C) Return of Corporation Contemplating Dissolution or Reorganization. – Every corporation shall,

within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution,
or for the liquidation of the whole or any part of its capital stock, including a corporation which has
been notified of possible involuntary dissolution by the Securities and Exchange Commission, or
for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth
the terms of such resolution or plan and such other information as the Secretary of Finance, upon
recommendation of the commissioner, shall, by rules and regulations, prescribe.
Trial court found merit in the BIR’s motion and granted it
PDIC is directed to secure the necessary tax clearance provided for under Section 45(C) of the
1993 National Internal Revenue Code and now Section 52(C) of the 1997 National Internal
Revenue Code and to secure the same from the BIR District Office No. 9, La Trinidad, Benguet.
Further, petitioner PDIC is directed to submit a comprehensive liquidation report addressed to
creditor Bangko Sentral and to remit the accounts already collected from the pledged assets to
said Bangko Sentral. Claimant Bangko Sentral may now initiate collection suits directly against the
individual borrowers. In the event that the collection efforts of Bangko Sentral against individual
borrowers may fail, Bangko Sentral shall proceed against the general assets of the Rural Bank of
Tuba Benguet.
PDIC moved for partial reconsideration of the Order dated February 14, 2003 with respect to the
directive for it to secure a tax clearance. It argued that Section 52(C) of the Tax Code of 1997 does
not cover closed banking institutions as the liquidation of closed banks is governed by Section 30
of the New Central Bank Act. The motion was denied.
PDIC asserted that the trial court acted with grave abuse of discretion amounting to lack or
excess of jurisdiction in applying Section 52(C) of the Tax Code of 1997 to a bank ordered
closed, placed under receivership and, subsequently, under liquidation by the Monetary Board.
LOWER RTC: CA: AFFIRMED
COURT Banks under liquidation by PDIC are covered by
RULING Section 52 (c ) of Tax Code of 1997
ISSUE/S
WON Sec 52(c) of Tax Code is applicable to banks ordered placed under liquidation by the
Monetary Board oof the BSP
ARGUMENTS Petitioner (PDIC): Respondent (BIR):

PDIC insists that Section 52(C) of the Tax BIR counters that the requirement of a tax
Code of 1997 is not applicable to banks clearance under Section 52(C) of the Tax Code of
ordered placed under liquidation by the 1997 is applicable to rural banks undergoing
Monetary Board of the BSP. It argues that liquidation proceedings under Section 30 of the
closed banks placed under liquidation New Central Bank Act. For the BIR, the authority
pursuant to Section 30 of the New Central given to the BSP to supervise banks does not
Bank Act are not "corporations mean that all matters regarding banks are
contemplating liquidation" within the exclusively under the power of the BSP. Thus,
purview of Section 52(C) of the Tax Code of banking corporations are still subject to
1997. reasonable regulations imposed by the SEC on
corporations.
SC RULING NO.
This Court has held that the RTC, acting as liquidation court under Section 30 of the New Central
Bank Act, commits grave abuse of discretion in ordering the PDIC, as liquidator of a bank
ordered closed by the Monetary Board, to first secure a tax clearance from the appropriate BIR
Regional Office, and holding in abeyance the approval of the project of distribution of the assets
of the closed bank by virtue thereof. Three reasons have been given.
1. Section 52(C) of the Tax Code of 1997 pertains only to a regulation of the relationship
between the SEC and the BIR with respect to corporations contemplating dissolution or
reorganization.
2. Only a final tax return is required to satisfy the interest of the BIR in the liquidation of a
closed bank, which is the determination of the tax liabilities of a bank under liquidation by
the PDIC. In view of the timeline of the liquidation proceedings under Section 30 of the
New Central Bank Act, it is unreasonable for the liquidation court to require that a tax
clearance be first secured as a condition for the approval of project of distribution of a
bank under liquidation
3. It is not for this Court to fill in any gap, whether perceived or evident, in current statutes
and regulations as to the relations among the BIR, as tax collector of the National
Government; the BSP, as regulator of the banks; and the PDIC, as the receiver and
liquidator of banks ordered closed by the BSP. It is up to the legislature to address the
matter through appropriate legislation, and to the executive to provide the regulations for
its implementation.
The law expressly provides that debts and liabilities of the bank under liquidation are to be paid
in accordance with the rules on concurrence and preference of credit under the Civil Code.
Duties, taxes, and fees due the Government enjoy priority only when they are with reference to a
specific movable property, under Article 2241(1) of the Civil Code, or immovable property, under
Article 2242(1) of the same Code. However, with reference to the other real and personal
property of the debtor, sometimes referred to as "free property," the taxes and assessments due
the National Government, other than those in Articles 2241(1) and 2242(1) of the Civil Code,
such as the corporate income tax, will come only in ninth place in the order of preference.
If the BIR’s contention that a tax clearance be secured first before the project of distribution of the
assets of a bank under liquidation may be approved, then the tax liabilities will be given absolute
preference in all instances, including those that do not fall under Articles 2241(1) and 2242(1) of
the Civil Code.
In order to secure a tax clearance which will serve as proof that the taxpayer had completely paid
off his tax liabilities, PDIC will be compelled to settle and pay first all tax liabilities and
deficiencies of the bank, regardless of the order of preference under the pertinent provisions of
the Civil Code. Following the BIR’s stance, therefore, only then may the project of distribution of
the bank’s assets be approved and the other debts and claims thereafter settled, even though
under Article 2244 of the Civil Code such debts and claims enjoy preference over taxes and
assessments due the National Government.
NOTES
CASE #10
CASE TITLE Cordoba v. Reyes Daway Lim Bernardo Lindo Rosales Law Office GR NO 146555
PONENTE Corona, J., DATE

July 03, 2007
DOCTRINE
Article 2241 refers only to specific movable property and not to generic property.
FACTS Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from PhilFinance certificates of
stock of Celebrity Sports Plaza Incorporated (CSPI) and shares of stock of various other
corporations. He was issued a confirmation of sale and the shares were physically delivered by
PhilFinance to the former Filmanbank and Philtrust Bank, as custodian banks, to hold these shares
on behalf of and for the benefit of the petitioner.
On June 18, 1981 , PhilFinance was placed under receivership by public respondent
SEC.Thereafter, private respondents were appointed as liquidators.
Sometime in 1991, without the knowledge and consent of petitioner and without authority
from the SEC, private respondents withdrew the CSPI shares from the custodian banks. On
May 27, 1996, they sold the shares to Northeast Corporation and included the proceeds thereof in
the funds of PhilFinance. Petitioner learned about the unauthorized sale of his shares only on
September 10, 1996; hence, he lodged a complaint with private respondents but the latter ignored
it prompting him to fille, on May 6, 1997, a formal complaint against private respondents in the
receivership proceedings with the SEC, for the return of the shares.
LOWER SEC: On September 24, 1999 SEC granted CA: CA affirmed the SEC. It agreed that
COURT the claims of petitioner. It held that petitioner petitioner was indeed the owner of the CSPI
RULING was the owner of the CSPI shares by virtue shares but the recovery of such shares had
of a confirmation of sale (which was become impossible. It also declared that the
considered as a deed of assignment) issued clarificatory order merely harmonized the
to him by Philfinance. But since the shares dispositive portion with the body of the resolution.
had already been sold and the proceeds Petitioner's motion for reconsideration was
commingled with the other assets of denied.
PhilFinance, petitioner's status was
converted into that of an ordinary creditor for
the value of such shares. Thus, it ordered
private respondents to pay petitioner the
amount of P5,062,500 representing 15% of
the monetary value of his CSPI shares
ISSUE/S .
Whether or not petitioner should be considered as a preferred (and secured)
creditor of Philfinance.
ARGUMENT Petitioner : Respondent (NAME):

S Petitioner argues that he was a preferred
creditor because private respondents
illegally withdrew his CSPI shares from the
custodian banks and sold them without his
knowledge and consent and without
authority from the SEC. He quotes:
Article 2241 (2) of the Civil Code: With
reference to specific movable property of the
debtor, the following
claims or liens shall be preferred: xxx xxx xxx
(2) Claims arising from misappropriation,
breach of trust, or malfeasance by public
officials committed in the performance of
their duties, on the movables, money or
securities obtained by them
SC RULING Yes. There is no dispute that the petitioner was the owner of the CSPI shares. However when
private respondents, as liquidators of PhilFinance, illegally withdrew said certificates of stock
without the knowledge and consent of petitioner and authority of the SEC. After selling the CSPI
shares, private respondents added the proceeds of the sale to the assets of PhilFinance - petitioner
did become a creditor of PhilFinance. And he can no longer seek the return of his CSPI shares
considering that the same had already been sold by the respondents, the proceeds of which are
ADMITTEDLY commingled with the assets of PHILFINANCE. Hence, petitioners now but a
claimant for the value of said shares. As a claimant, he shall be treated as an ordinary creditor in
so far as the value of those certificates is concerned.
As to the issue of whether he is preferred creditor - the court ruled in the negative. Article 2241
refers only to specific movable property. His claim was for the payment of money, which is
generic property and not specific or determinate.
Petitioner's CSPI shares were specific or determinate movable properties. But after they
were sold, the money raised from the sale became generic and were commingled with
the cash and other assets of PhilFinance. Unlike shares of stock, money is a generic
thing. It is designated merely by its class or genus without any particular designation or
physical segregation from all others of the same class. This means that once a certain
amount is added to the cash balance, one can no longer pinpoint the specific amount
included which then becomes part of a whole mass of money.
Considering that petitioner did not fall under any of the provisions applicable to preferred creditors,
he was deemed an ordinary creditor under Article 2245: Credits of any other kind or class, or
by any other right or title not comprised in the four preceding articles, shall enjoy no
preference.
NOTES
TOPIC PREFERENCE OF CREDIT AND LIEN MODULE
CASE #11
CASE TITLE PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE GR NO 118701
CORPORATION, vs. THE HON. COURT OF APPEALS, and
RAIMUND DIEHL
PONENTE VITUG, J. DATE DECEMBER 12,

1995
DOCTRINE A distinction should be made between a preference of credit and a lien. A preference applies
only to claims which do not attach to specific properties. A lien creates a charge on a
particular property. The right of first preference as regards unpaid wages recognized by
Article 110 does not constitute a lien on the property of the insolvent debtor in favor of
workers. It is but a preference of credit in their favor, a preference in application
FACTS On 13 May 1988, private respondent Raimund Diehl, a resident alien, lodged a
complaint for illegal dismissal against the Philippine German Wire Mesh Reinforcing
Corporation ("FILFORCE") with the NLRC.
5 years earlier, FILFORCE had mortgaged its plant and other property in favor of herein
petitioner Philippine Export and Foreign Loan Guarantee Corporation ("PHILGUARANTEE"), a
GOCC, to to secure a guarantee which the latter executed in favor of Kuwait Asia Bank, E.C.,
over 51% of the US$1,357,600.00 loan which had been extended to FILFORCE by the bank.
On 21 December 1990, a judgment favorable to respondent Diehl was rendered by Labor Arbiter
Edilberto J. Pangan , ordering FILFORCE, Delgado, and Sison to pay Diehl to pay $41,624.64
and P35,212. The decision became final.
On 04 April 1991, Labor Arbiter Pangan issued a writ of execution directing NLRC Sheriff Abe
Estrada to execute the judgment against FILFORCE and Basilio Sison. Failing to collect the sum
due, Sheriff Estrada was directed to cause the satisfaction of the award by levying on the
property of FILFORCE. Sheriff effected the levy and scheduled a public auction sale.
PHILGUARANTEE filed a third-party claim which suspended the scheduled auction. Diehl
submitted an indemnity bond issued by Plaridel Surety with a face value of P1,320,772.11,
Sheriff issued a notice resetting the auction for April 27, 1991.
PHILGUARANTEE promptly Fled, on 26 April 1991, a petition/manifestation before the Labor

Arbiter questioning, among other things, the integrity of the indemnity bond and asserting its
superior right and prior lien over the levied property .
Sheriff Estrada proceeded, nonetheless, with the auction sale at which Diehl was declared the
sole and winning bidder. Forthwith, a Certificate of Sale was issued.
On 03 May 1991, PHILGUARANTEE received a copy of an "Urgent Ex-Parte Motion for the
Issuance of an Alias Writ of Execution" from Diehl where he alleged that of the then total
monetary award of P1,320,772.11 only P776,000 worth of property belonging to FILFORCE was
levied and sold leaving a deficiency of P544,772.1. Labor Arbiter Pangan again acted favorably
on Diehl's ex-parte motion; on 06 May 1991, he issued an alias writ of execution directing the
Deputy Sheriff to further collect the sum
On 15 May 1991, PHILGUARANTEE went to the RTC Makati and there filed a complaint for
"Annulment of Sale, Recovery of Possession and Injunction with Urgent Prayer for the Issuance
of a Writ of Preliminary Injunction and/or Temporary Restraining Order and/or Status Quo Order
LOWER RTC: CA:
COURT ● Plaintiff's application for preliminary ● After elevating the case to the CA, the
RULING injunction is hereby GRANTED. court found the petition to be impressed
● Subsequent Motions to Dismiss with merit
were also denied
ISSUE/S 1. whether or not the trial court below was in any good position to take cognizance over the
complaint filed by PHILGUARANTEE
a. whether or not the acts complained of arose out of, or were connected or
interwoven with, cases falling under the exclusive jurisdiction of the Labor Arbiter
or the NLRC
2. Whether the proceedings before the LA concerning the third party claim of
PHILGUARANTEE is proper
3. What was the effect of RA 6715 on Article 110 of the Labor Code
ARGUMENTS Petitioner (PHILGUARANTEE): Respondent (CA & DIEHL):
SC RULING 1.NO. In reality, petitioner's action to annul the execution sale was a motion to quash the writ of
execution on a case aptly within the jurisdiction of the Labor Arbiter. The case brought before the
trial court, being a matter growing out of the labor dispute decided by the Labor Arbiter, clearly
fell outside the competence of the trial court.
2.NO. In executing an order, resolution, or decision of the NLRC, the sheriff of the Commission,
or other officer acting as such, must 'be guided strictly by the Sheriff's Manual . . .." but such was
not properly heeded.
The Manual (second paragraph of Section 1 of Rule VI) requires that the indemnity bond that
must be posted up by the prevailing party should be in a sum not less than the value of the
property levied. Here, Diehl has put up a bond of only P1,320,772.11 which is substantially
deficient compared with the total appraised value of P4,934,000.00
Not only did PHILGUARANTEE promptly challenge the integrity of the bond submitted by Diehl
but it also did question the amount of the bond. Since the difference is substantial, it should have
behooved the Labor Arbiter to take more than just a passing glance on the claim of
PHILGUARANTEE.
3. A distinction should be made between a preference of credit and a lien.

A preference applies only to claims which do not attach to specific properties. A lien creates a
charge on a particular property.
The right of first preference as regards unpaid wages recognized by Article 110 does not
constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference
of credit in their favor, a preference in application. It is a method adopted to determine and
specify the order in which credits should be paid in the final distribution of the proceeds of the
insolvent's assets. It is a right to a first preference in the discharge of the funds of the judgment
debtor.
In fine, the right to preference given to workers under Article 110 of the Labor Code cannot exist
application when, in proceedings such as insolvency such unpaid wages shall be paid in full
before the claims of the Government and other creditors' may be paid.
But, for an orderly settlement of a debtor's assets, all creditors must be convened, their claims
ascertained and inventoried, and thereafter the preferences determined in the course of judicial
proceedings which have for their object the subjection of the property of the debtor to the
payment of his debts or other lawful obligations. The adjudication made will be binding on all
parties-in-interest, since those proceedings are proceedings in rem; and the legal scheme of
classification, concurrence and preference of credits in the Civil Code, the Insolvency Law, and
the Labor Code is preserved in harmony
RATIO: As so succinctly found by the appellate court, however, petitioner's remedy does not
lie with the trial court below; thus, its instant petition must unavoidably be denied (without
prejudice to appropriate recourse before the proper forum)..
NOTES

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NEGOTIABLE INSTRUMENTS

TOPIC Applicable laws MODULE 1

DOCTRINE Applicability of the Negotiable Instruments Law

ARGUMENTS Petitioner (GSIS):

Respondent (CA) & Private Respondents (Racho):

LOWER COURT RTC: DISMISSED. Failure to establish cause of action.

NOTES SECTION 1: FORM OF NEGOTIABLE INSTRUMENTS

TOPIC PARTIES IN A CHECK MODULE 1

Perlas-Bernabe February 6, 2017

LOWER COURT RTC:

TOPIC Parties in Checks MODULE 1

Leonardo-De Castro, J. November 26, 2014

TOPIC Negotiable instruments compared with other papers MODULE 1

TOPIC Parties to Negotiable Instruments (Parties in Checks) MODULE 1

TENDER OF CHECK SUFFICIENT TO COMPEL REDEMPTION BUT IS NOT IN ITSELF A PAYMENT

NOTES Article 1249 of the Civil Code

Article 1233 of the Civil Code

TOPIC Requisites of Negotiability MODULE 1

MENDOZA, J. January 12, 2015

DOCTRINE A check was sufficient evidence of a loan transaction.

LOWER COURT RTC:

PONENTE REGALADO, J.: DATE August 10, 1992

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

(Sgd. Illegible) (Sgd. Illegible)

LOWER COURT RTC:

2.) Whether or not Plaintiff Caltex can recover. - NO

TOPIC Requisites of Negotiability MODULE 2

(a) It must be in writing and signed by the maker or drawer;

ARGUMENTS Petitioner (Caltex):

ISSUE/S Whether or not the subject CTDs are negotiable instruments.

SC RULING YES. The subject CTDs are negotiable instruments.

(a) It must be in writing and signed by the maker or drawer;

TOPIC NEGOTIABILITY MODULE 2

DOCTRINE These electronic message instructions cannot be considered negotiable instruments as

TOPIC Requisites of Negotiability MODULE

(a) FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses

ARGUMENTS Petitioner (Name):

TOPIC Payable to Order or Bearer MODULE 2

TOPIC Omissions and Provisions that do not affect negotiability MODULE 2

DOCTRINE Treasury warrants are not negotiable instruments.

Respondent (Name): N/A

LOWER RTC: N/A

TOPIC Bearer v. Order Instrument MODULE 2

LOWER RTC: in favor of spouses Rodriguez.

CA: reversed RTC.

A check that is payable to a specified payee is an order instrument. However, under

SEC. 9. When payable to bearer. – The instrument is payable to bearer –

SEC. 30. What constitutes negotiation. – An instrument is negotiated when it is transferred

Perez, J. DAT January 14, 2015

TOPIC Interpretation of Negotiable Instruments MODULE

Where an instrument containing the words “I promise to pay” is signed by 2 or more

“Please credit proceeds of this note to:

● Where an instrument containing the words “I promise to pay” is signed by 2 or

● While the general rule is that duly authorized officers or directors of a

TOPIC Negotiable and Non-Negotiable Instrument MODULE 3

Respondents: HON. COURT OF APPEALS and FILINVEST FINANCE & LEASING

PONENTE YNARES-SANTIAGO, J. DATE October 8, 2003

ISSUE/S WON the Deed of Assignment extinguished Lo’s obligation.

PONENTE SERENO, C.J DATE April 25, 2017

3)Respondent refused to pay despite demand.

In assignment, the assignee is merely placed in the position of the

TOPIC Transfer of Negotiable Instrument MODULE 3

NOTES State Investment House v. Intermediate Appellate Court:

b. Petitioner maintains that there exists a duty

c. Petitioner insists that pursuant to Sections

d. Petitioner asserts that it was not

ISSUE/S Whether or not Ocampo is holder in due course - NO

NOTES SECTION 52 of Act. No. 2031 The Negotiable Instruments Law

SECTION 119 of Act. No. 2031 The Negotiable Instruments Law

NEGOTIABILITY NOT AFFECTED BY ITS BEING CROSSED. — According to commentators, the