CALTEX (PHILS.) INC. V. CA AND SECURITY BANK AND TRUST CO.

(1992)

FACTS:
 Security Bank and Trust Company (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 Security Bank the total amount of P1,120,000

 Angel delivered the CTDs to Caltex for his purchase of fuel products 

 March 18, 1982: Angel informed Mr.Tiangco, the Sucat Branch Manager that he lost all
CTDs, submitted the required Affidavit of Loss and received the replacement

 March 25, 1982: Angel dela Cruz negotiated and obtained a loan from Security Bank in
the amount of P875,000 and executed a notarized Deed of Assignment of Time Deposit

 November, 1982: Mr.Aranas, Credit Manager of Caltex went to the Sucat branch to
verify the CTDs declared lost by Angel 

 November 26, 1982: 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.

 December 8, 1982: Caltex was requested by Security Bank to furnish:

-a copy of the document evidencing the guarantee agreement with Mr. Angel
dela Cruz

-the details of Mr. Angel's obligation against which Caltex proposed to apply the
time deposits 

 Security Bank rejected Caltex demand for payment bec. it failed to furnish a copy of its
agreement w/ Angel

 April 1983, the loan of Angel dela Cruz with Security Bank matured 

 August 5, 1983: CTD were set-off w/ the matured loan

 Caltex filed a complaint praying the bank to pay 1,120,000 plus 16% interest

 RTC dismissed the complaint ruling that the CTD is non negotiable because CTD is
payable only to specified person who is Angel dela Cruz

 CA affirmed RTC

ISSUE: 

1. W/N the CTDs are negotiable - YES

2. W/N Caltex as holder in due course can rightfully recover on the CTDs - NO
HELD: Petition is Denied and appealed decision is affirmed. 

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  -check
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

 The documents provide that the amounts deposited shall be REPAYABLE TO THE
DEPOSITOR

 depositor = bearer

 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

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.

 negotiability or non-negotiability of an instrument is determined from the writing, that is,

from the face of the instrument itself

2. NO. 
 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
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  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  petitioner's   own 
authorized  and  responsible  representative himself.

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T.
VERGARA vs.
IFC LEASING AND ACCEPTANCE CORPORATION

Facts:
 The Consolidated Plywood Industries Incorporated is engaged in the logging business.
 It needed two tractors to operate in its concession area in Davao Oriental
 Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing
arm, Industrial Products Marketing (the "seller-assignor), after inspecting the job site,
sold two tractors to the petitioner with the assurance that the tractors were fit for the job
and giving the corresponding warranty of ninety (90) days performance of the machines
and availability of parts
 The petitioner agreed to purchase the units on installment and paid the down payment of
P210,000.00. The following documents were simultaneously executed:
o Sales invoice
o Deed of Sale with Chattel Mortgage with Promissory Note between Industrial
Products Marketing and Consolidated Plywood
o Deed of Assignment executed by Industrial Products Marketing assigning its
rights and interests in the promissory note with chattel mortgage in favor
of respondent IFC Leasing and Finance Corp.

 One of the tractors broke down barely 14 days after the delivery and the other one
likewise broke down after another 9 days
 The units turned out to be unserviceable even after repairs undertaken by the seller-
assignor.
  Consequently, the petitioner refused to pay the installments on the balance of the
purchase price until the seller fulfilled its obligations under the 90-day warranty.
 Arrangements to recondition and resell the units to recover the costs were initiated by
the petitioner but were unheeded by the seller.
 IFC filed a suit against Consolidated Plywood for the collection of the unpaid balance on
the sale and the accruing interest thereon, amounting to over one million pesos.
 The trial and appellate courts both ruled in favor of the financing corporation and ordered
Consolidated Plywood to pay the unpaid balance plus interest, hence the instant petition.

Issue:
Whether or not the promissory note in question is a negotiable instrument – non negotiable

and if so, whether the respondent-assignee (IFC leasing) is a holder in due course thereof,
barring any defenses that the petitioner (Consolidated Plywood) may have against it.

Ruling:
NO. The promissory note in question is not a negotiable instrument and the respondent is not a
holder in due course thereof.

The pertinent portion of the note is as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL
PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND
SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71), Philippine
Currency, the said principal sum, to be payable in 24 monthly installments starting July 15,
1978 and every 15th of the month thereafter until fully paid. ...

Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer", it cannot be denied that the promissory
note in question is not a negotiable instrument.

These words serve as an expression of consent that the instrument may be transferred.

This consent is indispensable since a maker assumes greater risk under a negotiable
instrument than under a non-negotiable one.

xxxxxxxxx
When instrument is payable to order.
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. . . .
xxxxxxxxx
These are the only two ways by which an instrument may be made payable to order. There
must always be a specified person named in the instrument. It means that 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."

Without the words of negotiability i.e., must be payable to “order” or “bearer.”, the
instrument is payable only to the person designated therein and is therefore, non-
negotiable.
This consent is indispensable since a maker assumes greater risk under a
negotiable instrument than under a non- negotiable one.

Any subsequent purchases 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.
Thus, the petitioner may raise against the respondent all defenses available to it as
against the seller-assignor Industrial Products Marketing.

Since the payee cannot collect, then it follows that the transferee cannot collect also.

Therefore, considering that the subject promissory note is not a negotiable

instrument, it follows that IFC Leasing can never be a holder in due course but
remains a mere assignee of the note in question.

Thus, CPII may raise against IFC Leasing all defenses available to it as against
Industrial Products Marketing.

This being so, there was no need for CPII to implead IPM when it was sued by IFC
Leasing because CPII’s defenses apply to both or either of them.

Even conceding for purposes of discussion that the promissory note in question is a negotiable
instrument, the respondent cannot be a holder in due course for a more significant reason.
Sections 52 and 56 of the Negotiable Instruments Law provide that:
xxxxxxxxx
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:
xxxxxxxxx
xxxxxxxxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument
of deffect in the title of the person negotiating it
Xxxxxxxxx
 SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — 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 amounts to bad faith.

A mere perusal of the documents evidencing the sale on installment of the tractors show that
they were all executed on the same day by and among the buyer, seller-assignor, and the
assignee-financing company.
Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right to
collect the purchase price was conditional, and that it was subject to the condition that the
tractors -sold were not defective.

The respondent knew that when the tractors turned out to be defective, it would be subject to
the defense of failure of consideration and cannot recover the purchase price from the
petitioners.

In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d
766) involving similar facts, it was held that in a very real sense, the finance company was a
moving force in the transaction from its very inception and acted as a party to it. When a finance
company actively participates in a transaction of this type from its inception, it cannot be
regarded as a holder in due course of the note given in the transaction. It follows that the
respondent's rights under the promissory note involved in this case are subject to all defenses
that the petitioners have against the seller-assignor for Section 58 of the Negotiable Instruments
Law 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. ... "

ROMEO C. GARCIA  VS. DIONISIO V. LLAMAS, G.R. NO. 154127. DECEMBER 8, 2003

Facts:

A complaint for sum of money was filed by respondent Dionisio Llamas against Petitioner
Romeo Garcia and Eduardo de Jesus alleging that the two borrowed Php 400, 000 from him.

They bound themselves jointly and severally to pay the loan on or before January 23, 1997 with
a 15% interest per month.

However, the loan remained unpaid despite repeated demands by respondent.

Petitioner Garcia resisted the complaint alleging that he signed the promissory note merely as
an accommodation party for de Jesus and the latter had already paid the loan by means
of a check and that the issuance of the check and acceptance novated or superseded the
note.
The trial court rendered a judgment on the pleadings in favor of the respondent and directed
petitioner to pay jointly and severally respondent the amounts of Php 400, 000 representing the
principal amount plus interest at 15% per month from January 23, 1997 until the same shall
have been fully paid, less the amount of Php 120,000 representing interests already paid.

The Court of Appeals ruled that no novation, express or implied, had taken place when
respondent accepted the check from de Jesus.

According to the CA, the check was issued precisely to pay for the loan that was covered by the
promissory note jointly and severally undertaken by petitioner and de Jesus.

Respondent’s acceptance of the check did not serve to make de Jesus the sole debtor because
first, the obligation incurred by him and petitioner was joint and several; and second, the check
which had been intended to extinguish the obligation bounced upon its presentment.

Issues: (1) Whether or not there was novation of the obligation - none

(2) Whether or not petitioner is free from liability on the promissory note as an
accommodation party? - no

Held: For novation to take place, the following requisites must concur: (1) There must be a
previous valid obligation; (2) the parties concerned must agree to a new contract; (3) the old
contract must be extinguished; and (4) there must be a valid new contract.

The parties did not unequivocally declare that the old obligation had been extinguished by the
issuance and the acceptance of the check or that the check would take the place of the note.

2. No. The note was made payable to a specific person rather than to bearer or to order — a
requisite for negotiability under the Negotiable Instruments Law (NIL).

In this case it is payable specifically to Atty. Dionisio Llamas.

Hence, petitioner cannot avail himself of the NIL’s provisions on the liabilities and defenses of
an accommodation party.

Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the
promissory note.

Under Article 29 of the NIL, an accommodation party is liable for the instrument to a holder
for value even if, at the time of its taking, the party knew the holder to be only an
accommodation party.

The relation between an accommodation party and the party accommodated is, in effect, one of
principal and surety — the accommodation party being the surety.

It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed
an original promissor and debtor from the beginning.
G.R. No. 166018               June 4, 2014
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE
BRANCHES, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent;
x-----------------------x
G.R. No. 167728
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE
BRANCHES, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

NATURE: Petitions for review on certiorari assailing the Decision and Resolution of the CA. The
respective Decisions in the said cases similarly reversed and set aside the decisions of the CTA
and dismissed the petition of Petitioner HSBC.

FACTS:
1. HSBC performs custodial services on behalf of its investor-clients with respect to their
passive investments in the Philippines, particularly investments in shares of stocks in
domestic corporations. As a custodian bank, HSBC serves as the collection/payment
agent.

2. HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts,

which are managed by HSBC through instructions given through electronic messages.
The said instructions are standard forms known in the banking industry as SWIFT, or
"Society for Worldwide Interbank Financial Telecommunication." 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.

3. Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid
Documentary Stamp Tax (DST) from September to December 1997 and also from
January to December 1998 amounting to P19,572,992.10 and P32,904,437.30,
respectively.

4. BIR, thru its then Commissioner, issued BIR Ruling to the effect that instructions or
advises from abroad on the management of funds located in the Philippines which do
not involve transfer of funds from abroad are not subject to DST. A documentary stamp
tax shall be imposed on any bill of exchange or order for payment purporting to be drawn
in a foreign country but payable in the Philippines.

a. While the payor is residing outside the Philippines, he maintains a local

and foreign currency account in the Philippines from where he will draw
the money intended to pay a named recipient. The instruction or order to
 pay shall be made through an electronic message. Consequently, there is
no negotiable instrument to be made, signed or issued by the payee.
b. Such electronic instructions by the non-resident payor cannot be considered as a
transaction per se considering that the same do not involve any transfer of funds
from abroad or from the place where the instruction originates. Insofar as the
local bank is concerned, such instruction could be considered only as a
memorandum and shall be entered as such in its books of accounts. The actual
debiting of the payor’s account, local or foreign currency account in the
Philippines, is the actual transaction that should be properly entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money from a
bank deposit, local or foreign currency account, is not subject to DST, unless the
account so maintained is a current or checking account, in which case, the
issuance of the check or bank drafts is subject to the documentary stamp tax.
c. Likewise, the receipt of funds from another bank in the Philippines for deposit to
the payee’s account and thereafter upon instruction of the non-resident
depositor-payor, through an electronic message, the depository bank to debit his
account and pay a named recipient shall not be subject to documentary stamp
tax. It should be noted that the receipt of funds from another local bank in the
Philippines by a local depository bank for the account of its client residing abroad
is part of its regular banking transaction which is not subject to documentary
stamp tax.

5. With the above BIR Ruling as its basis, HSBC filed on an administrative claim for the
refund of allegedly representing erroneously paid DST to the BIR
6. As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the
matter to the CTA, which favored HSBC and ordered payment of refund or issuance of
tax credit.
7. However, the CA reversed decisions of the CTA and ruled that the electronic messages
of HSBC’s investor-clients are subject to DST.
a. DST is levied on the exercise by persons of certain privileges conferred by law
for the creation, revision, or termination of specific legal relationships through the
execution of specific instruments, independently of the legal status of the
transactions giving rise thereto.

ISSUE: Whether or not the electronic messages are considered transactions pertaining to
negotiable instruments that warrant the payment of DST.
HELD: NO.

The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the
acceptance or payment of "a bill of exchange purporting to be drawn in a foreign country but
payable in the Philippines" and that "a bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain
in money to order or to bearer."

The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients
containing instructions to debit their respective local or foreign currency accounts in the
Philippines and pay a certain named recipient also residing in the Philippines is not the
transaction contemplated under Section 181 of the Tax Code as such instructions are "parallel
to an automatic bank transfer of local funds from a savings account to a checking account
maintained by a depositor in one bank." The Court favorably adopts the finding of the CTA that
the electronic messages "cannot be considered negotiable instruments as they lack the feature
of negotiability, which, is the ability to be transferred" and that the said electronic messages are
"mere memoranda" of the transaction consisting of the "actual debiting of the [investor-client-
payor’s] local or foreign currency account in the Philippines" and "entered as such in the books
of account of the local bank," HSBC.

The instructions given through electronic messages that are subjected to DST in these cases
are not negotiable instruments as they do not comply with the requisites of negotiability under
Section 1 of the Negotiable Instruments Law. The electronic messages are not signed by the
investor-clients as supposed drawers of a bill of exchange; they do not contain an unconditional
order to pay a sum certain in money as the payment is supposed to come from a specific fund
or account of the investor-clients; and, they are not payable to order or bearer but to a
specifically designated third party. Thus, the electronic messages are not bills of exchange. As
there was no bill of exchange or order for the payment drawn abroad and made payable here in
the Philippines, there could have been no acceptance or payment that will trigger the imposition
of the DST under Section 181 of the Tax Code.

In these cases, the electronic messages received by HSBC from its investor-clients abroad
instructing the former to debit the latter's local and foreign currency accounts and to pay the
purchase price of shares of stock or investment in securities do not properly qualify as either
presentment for acceptance or presentment for payment. There being neither presentment for
acceptance nor presentment for payment, then there was no acceptance or payment that could
have been subjected to DST to speak of.

WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2, 2002 in
CTA Case No. 6009 and dated December 18, 2002 in CT A Case No. 5951 of the Court of Tax
Appeals are REINSTATED. SO ORDERED.