NEGOTIABLE INSTRUMENTS
plaintiff was supposed to pay.
EQUITABLE BANKING v. IAC
GR No. 74451
FACTS:
Sometime in 1975 defendant Liberato Casals
went to plaintiff Edward J. Nell Company and
told its senior sales engineer, Amado Claustro
that he was interested in buying one of the
plaintiff's garrett skidders. Plaintiff was a dealer
of machineries, equipment and supplies.
Defendant Casals represented himself as the
majority stockholder, president and general
manager of Casville Enterprises, Inc., a firm
engaged in the large scale production,
procurement and processing of logs and
lumber products, which had a plywood plant in
Sta. Ana, Metro Manila.
After defendant Casals talked with plaintiff's
sales engineer, he was referred to plaintiffs
executive vice-president, Apolonio Javier, for
negotiation in connection with the manner of
payment. When Javier asked for cash payment
for the skidders, defendant Casals informed
him that his corporation, defendant Casville
Enterprises, Inc., had a credit line with
defendant Equitable Banking Corporation.
Apparently, impressed with this assertion,
Javier agreed to have the skidders paid by way
of a domestic letter of credit which defendant
Casals promised to open in plaintiffs favor, in
lieu of cash payment. Accordingly, on
December 22, 1975, defendant Casville,
through its president, defendant Casals,
ordered from plaintiff two units of garrett
skidders.
In a letter dated April 21, 1976, defendants
Casals and Casville requested from plaintiff the
delivery of one (1) unit of the bidders, complete
with tools and cables, to Cagayan de Oro, on
or before Saturday, April 24,1976, on board a
Lorenzo shipping vessel, with the information
that an irrevocable Domestic Letter of Credit
would be opened in plaintiff's favor on or before
June 30, 1976 under the terms and conditions
agreed upon.
On May 3, 1976, in compliance with defendant
Casvile's recognition request, plaintiff shipped
to Cagayan de Oro City a Garrett skidder.
Plaintiff paid the shipping cost in the amount of
P10,640.00 because of the verbal assurance of
defendant Casville that it would be covered by
the letter of credit soon to be opened.
On July 15, 1976, defendant Casals handed to
plaintiff a check in the amount of P300,000.00
postdated August 4, 1976, which was followed
by another check of same date. Plaintiff
considered these checks either as partial
payment for the skidder that was already
delivered to Cagayan de Oro or as
reimbursement for the marginal deposit that
Subsequently, Cesar Umali, plaintiffs credit and
collection manager, accompanied by a
representative of defendant Casville, went to
see Severino Santos to find out the status of
the credit line being sought by defendant
Casville. Santos assured Umali that the letters
of credit would be opened as soon as the
requirements imposed by defendant bank in its
letter dated August 11, 1976 had been
complied with by defendant Casville.
Plaintiff entrusted the delivery of the check and
the latter to defendant Casals because it
believed that no one, including defendant
Casals, could encash the same as it was made
payable to the defendant bank alone. Besides,
defendant Casals was known to the bank as
the one following up the application for the
letters of credit.
Upon receiving the check for P427,300.00
entrusted to him by plaintiff defendant Casals
immediately deposited it with the defendant
bank and the bank teller accepted the same for
deposit in defendant Casville's checking
account. After depositing said check, defendant
Casville, acting through defendant Casals, then
withdrew all the amount deposited.
Meanwhile, upon their presentation for
encashment, plaintiff discovered that the three
checks in the total amount of P427,300.00, that
were issued by defendant Casville as collateral
were all dishonored for having been drawn
against a closed account.
As defendant Casville failed to pay its
obligation to defendant bank, the latter
foreclosed the mortgage executed by
defendant Casville on the Estrada property
which was sold in a public auction sale to a
third party.
Plaintiff allowed some time before following up
the application for the letters of credit knowing
that it took time to process the same. However,
when the three checks issued to it by
defendant Casville were dishonored, plaintiff
became apprehensive and sent Umali on
November 29, 1976, to inquire about the status
of the application for the letters of credit. When
plaintiff was informed that no letters of credit
were opened by the defendant bank in its favor
and then discovered that defendant Casville
had in the meanwhile withdrawn the entire
amount of P427,300.00, without paying its
obligation to the bank plaintiff filed the instant
action.
ISSUE:
Whether or not Equitable Bank is liable to
cover for the loss.
HELD: No.
Nell should bear the loss as it was through its
own acts, which put it into the power of Casals
and Casville Enterprises to perpetuate the
fraud against it.
The subject check was equivocal and patently
ambiguous. By making the check read:
Pay to the EQUITABLE BANKING
CORPORATION Order of A/C OF CASVILLE
ENTERPRISES, INC.
the payee ceased to be indicated with
reasonable certainty in contravention of
Section 8 of the Negotiable Instruments Law.
As worded, it could be accepted as deposit to
the account of the party named after the
symbols "A/C," or payable to the Bank as
trustee, or as an agent, for Casville
Enterprises, Inc., with the latter being the
ultimate beneficiary. That ambiguity is to be
taken contra proferentem that is, construed
against NELL who caused the ambiguity and
could have also avoided it by the exercise of a
little more care. Thus, Article 1377 of the Civil
Code, provides:
Art. 1377. The interpretation of obscure words
or stipulations in a contract shall not favor the
party who caused the obscurity.
Contrary to the finding of respondent Appellate
Court, the subject check was, initially, not non-
negotiable. Neither was it a crossed check. The
rubber-stamping transversall on the face of the
subject check of the words "Non-negotiable for
Payee's Account Only" between two (2) parallel
lines, and "Non-negotiable, Teller- No. 4,
August 17, 1976," separately boxed, was made
only by the Bank teller in accordance with
customary bank practice, and not by NELL as
the drawer of the check, and simply meant that
thereafter the same check could no longer be
negotiated.
NELL had received three (3) postdated checks
all dated 16 November, 1976 from Casvine to
secure the subject check and had accepted the
deposit with it of two (2) titles of real properties
as collateral for said postdated checks. Thus,
NELL was erroneously confident that its
interests were sufficiently protected. Never
had it suspected that those postdated
checks would be dishonored, nor that the
subject check would be utilized by Casals
for a purpose other than for opening the
letter of credit.
Hence, it was NELL's own acts, which put it
into the power of Casals and Casville
Enterprises to perpetuate the fraud against it
and, consequently, it must bear the loss
... As between two innocent persons, one of
whom must suffer the consequence of a
breach of trust, the one who made it possible
by his act of confidence must bear the loss.
Salas v. CA (1990)
181 SCRA 296
FACTS:
Petitioner bought a motor vehicle from the
Violago Motor Sales Corporation evidenced by
a promissory note. The note was subsequently
endorsed to Filinvest Finance & Leasing
Corporation which financed the purchase.
Petitioner defaulted in her installments because
VMS delivered a different vehicle to her. Due to
her failure to pay Filinvest filed a collection suit.
The trial court ordered petitioner to pay the
defendant. They both appealed the decision to
the Court of Appeals. In her appeal, she did not
implead VMS as a party to the case because
she already sued VMS for “breach of contract
with damages” in another case.
In her defense the Petitioner stated that
Filinvest should proceed against VMS because
the alleged fraud, bad faith and
misrepresentation by VMS supposedly
released her from any liability to Filinvest.
The Court of Appeals modified the decision
and ordered the petitioner to pay the defendant
sum of P54,908.30 at 14% per annum. Her
motion for reconsideration was denied.
ISSUE:
Whether or not the promissory note is a
negotiable instrument which will bar completely
all the available defenses of the petitioner
against private respondent.
HELD:
The questioned promissory note is a negotiable
instrument because it complied with all the
requisites provided for by law:
[a] that it is in writing and signed by the
maker Juanita Salas;
[b] that it contains an unconditional
promise to pay the amount of
P58,138.20;
[c] that it is payable at a fixed or
determinable future time which is
“P1,614.95 monthly for 36 months due
and payable on the 21 st day of each
month starting March 21, 1980 thru and
inclusive of Feb. 21, 1983;”
[d] that it is payable to Violago Motor
Sales Corporation, or order and as such,
 [e] that the drawee is named or
indicated with certainty.
The note was negotiated by indorsement in
writing on the instrument itself payable to the
Order of Filinvest Finance and Leasing
Corporation. It is an indorsement of the entire
instrument.
Filinvest is a holder in due course because it
has 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.
As a holder in due course, 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.
Hence, the petitioner cannot set up against
respondent the defense of nullity of the
contract of sale between her and VMS.
NOTES:
• 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”. 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.
The instrument is payable to order where it
is drawn payable to the order of a specified
person or to him or his order. (Consolidated
Plywood Industries Inc. vs. IFC Leasing and
Acceptance Corporation, 149 SCRA 448)
METROPOLITAN BANK & TRUST
COMPANY v. CA (1991)
194 SCRA 169; Cruz, J.
This case, for all its seeming complexity, turns
on a simple question of negligence. The facts,
pruned of all non-essentials, are easily told.
FACTS:
The Metropolitan Bank and Trust Co. is a
commercial bank with branches throughout the
Philippines and even abroad. Golden Savings
and Loan Association was, at the time these
events happened, operating in Calapan,
Mindoro, with the other private respondents as
its principal officers.
In January 1979, a certain Eduardo Gomez
opened an account with Golden Savings and
deposited over a period of two months 38
treasury warrants with a total value of
P1,755,228.37. They were all drawn by the
Philippine Fish Marketing Authority and
purportedly signed by its General Manager and
countersigned by its Auditor. 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.
More than two weeks after the deposits, Gloria
Castillo went to the Calapan branch several
times to ask whether the warrants had been
cleared. She was told to wait. 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 petitioner says it finally decided to
allow Golden Savings to withdraw from the
proceeds of the
warrants.3
The first withdrawal was made on July 9, 1979,
in the amount of P508,000.00, the second on
July 13, 1979, in the amount of P310,000.00,
and the third on July 16, 1979, in the amount of
P150,000.00. The total withdrawal was
P968.000.00.4
In turn, Golden Savings subsequently allowed
Gomez to make withdrawals from his own
account, eventually collecting the total amount
of P1,167,500.00 from the proceeds of the
apparently cleared warrants. The last
withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden
Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July
19, 1979, 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 in the Regional Trial
Court of Mindoro.5 After trial, judgment was
rendered in favor of Golden Savings, which,
however, filed a motion for reconsideration
even as Metrobank filed its notice of appeal.
On appeal to the respondent court, the
decision was affirmed, prompting Metrobank to
file this petition for review.
ISSUE:
Whether or not Court of Appeals erred in
holding that the treasury warrants involved in
this case are not negotiable instruments.
HELD: No.
We find the challenged decision to be
basically correct.
[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. Indeed, Golden Savings might
even have incurred liability for its refusal to
return the money that to all appearances
belonged to the depositor, who could therefore
withdraw it any time and for any reason he saw
fit.
By contrast, Metrobank exhibited extraordinary
carelessness. The amount involved was not
trifling — more than one and a half million
pesos (and this was 1979). There was no
reason why it should not have waited until the
treasury warrants had been cleared; it would
not have lost a single centavo by waiting. Yet,
despite the lack of such clearance — and
notwithstanding that it had not received a
single centavo from the proceeds of the
treasury warrants, as it now repeatedly
stresses — it allowed Golden Savings to
withdraw — not once, not twice, but thrice —
from the uncleared treasury warrants in the
total amount of P968,000.00
Its reason? It was "exasperated" over the
persistent inquiries of Gloria Castillo about the
clearance and it also wanted to
"accommodate" a valued client. It "presumed"
that the warrants had been cleared simply
because of "the lapse of one week."8 For a
bank with its long experience, this explanation
is unbelievably naive.
In stressing that it was acting only as a
collecting agent for Golden Savings,
Metrobank seems to be suggesting that as a
mere agent it cannot be liable to the principal.
This is not exactly true. On the contrary, Article
1909 of the Civil Code clearly provides that —
Art. 1909. — The agent is responsible not only
for fraud, but also for negligence, which shall
be judged 'with more or less rigor by the
courts, according to whether the agency was
or was not for a compensation.
The negligence of Metrobank has been
sufficiently established.]
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.
The following sections of the Negotiable
Instruments Law, especially the underscored
parts, are pertinent:
Sec. 1. — Form of negotiable instruments. —
An instrument to be negotiable must conform to
the following requirements:
(a) It must be in writing and signed by the
maker or drawer;
(b) Must contain an unconditional promise or
order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An
unqualified order or promise to pay is
unconditional within the meaning of this Act
though coupled with —
(a) 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
(b) A statement of the transaction which gives
rise to the instrument judgment.
But an order or promise to pay out of a
particular fund is not unconditional.
 But an order or promise to pay out of a
The indication of Fund 501 as the source of the particular fund is not unconditional. The
payment to be made on the treasury warrants indication of Fund 501 as the source of the
makes the order or promise to pay "not payment to be made on the treasury warrants
unconditional" and the warrants themselves makes the order or promise to pay “not
non-negotiable. There should be no question unconditional” and the warrants themselves
that the exception on Section 3 of the non-negotiable. There should be no question
Negotiable Instruments Law is applicable in the that the exception on Section 3 of the
case at bar. Negotiable Instruments Law is applicable in the
case at bar.
Metrobank cannot contend 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. The simple reason is that this
law is not applicable to the non-negotiable
treasury warrants. The indorsement was made
by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants
but merely to deposit them with Metrobank for
clearing. It was in fact Metrobank that made the
guarantee when it stamped on the back of the
warrants: "All prior indorsement and/or lack of
endorsements guaranteed, Metropolitan Bank
& Trust Co., Calapan Branch."

The petitioner lays heavy stress on Jai Alai

Corporation v. Bank of the Philippine
Islands,12 but we feel this case is inapplicable
to the present controversy. That case involved
checks whereas this case involves treasury
warrants. Golden Savings never represented
that the warrants were negotiable but
signed them only for the purpose of
depositing them for clearance. Also, the fact
of forgery was proved in that case but not in
the case before us. Finally, the Court found the
Jai Alai Corporation negligent in accepting the
checks without question from one Antonio
Ramirez notwithstanding that the payee was
the Inter-Island Gas Services, Inc. and it did
not appear that he was authorized to indorse it.
No similar negligence can be imputed to
Golden Savings.

NOTES:

Negotiable Instruments: Requisites of

Negotiability – An instrument to be negotiable
must contain an unconditional promise or order
to pay a sum certain in money.

SEC. 3. When promise is unconditional.—An

unqualified order or promise to pay is
unconditional within the meaning of this Act
though coupled with:

(a) 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

(b) A statement of the trasaction which

gives rise to the instrument.