NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW Volume 1 (Essentials of Negotiable Instruments Law, Warehouse Receipts Law, Letters of Credit and Trust Receipts Law) By TIMOTEO B. AQUINO Professor of Law Philippine Judicial academy University of Perpetual Help College of Lave Angeles University Foundation Coltege of Law ‘San Becla College of Ease Arellano Law Founclation Former Proftct of Student Affaire, San Bede Collegeof Law Author: Torts cad Damages Philippine Corporate Law Compenitium Eoventials of Insurance Laue Casebook on Corporate Late Co-Author, Reviewer on Commercial Lave ‘Notes ancl Cases on the Law un Transportation and other Public Uiilities Fundamentals of Negotiable Instruments Law Pundarentals of Obligations and Cantrace Revised Rules on Suramar Procedure: Revisited Handbook on Summary and Small Claims Procedure anit Bouncing Cheeks Lave Publehod & Dittbund by Book Store 255 Nicanor Reyes, Sr. St Tol, Noe. 795-05:67 -705-12-64 1877 CM, Recta Avenue Tel. Nos. 735-5527 - 736-55-84 anil, Prippine worttexpublishing com phPhilippine Copyright, 2009 by Tasks (etixo ISBN 978-971-23-5493-9 For Bea, our children Leona Isabelle, Lean Carlo and Lauren Margaret No portion of this book may be copied or repro duced in books, pamphlets, outlines or notes, whether ond our: parents printed, mimeographed, {ypewritten, copied in dift ferent electronic devices or in any other form, for distribution or sale, without the written permiseion of the author except brief passages in books, articles, reviews, legal papers, and judicial or other official proceedings with proper citation Any copy of this book without the corresponding number and the signature of the author on this page either proceeds from an illegitimate source or is in possession of one who has no authority to dispose of the same ALL RIGHTS RESERVED BY THE AUTHOR, 0342 ‘MN M-00025, oMras7iztasaesa Printed by ex printing company, inc. pocnaphy & cxearivelikormohy PF, aes hy Tain esien Tahmre YO RS RECO SEMANA PEON ATE PREFACE ‘This book is the third edition of the author's work on Nego- tiable Instruments Law and applicable laws on commercial docu- ment, The two previous inearnations of this book included 2 Part If on banking lawe. The quantity of the materials on banking laws necessitated the separation of Part II into a separate volume, Vol- ‘ume II, The two volumes are still treated as part of one integrated ‘work, An introductory course on banking laws will be deficient ifthe study of the laws dealing with nogotiable instrument laws will not bbe incorporated. After al, the issuance and negotiation of negotiable {instruments are part of the functions of ban! ‘The book responds to the lessons learned by the author from his learned professors and in teaching the subjects ineluded in this ‘work. Instead of resorting to section by section annotation of the statutes, the author resorted to presentation of the topies in both transactional and conceptual lines. It is, to the author's mind, the best approach to a book for use in an introductory course on the laws on negotiable instruments and other commercial documents. Select- ‘ed cases are reproduced in order to provide students with concrete ‘examples of statutory and jurisprudential rules in operation, The present edition is leaner because the nursber of sample edited eases ‘was reduced to make them mare manageable for students. Some of the eases are now presented in “problem-answer" andlor digest form together with sample Bar examination problems. Nevertheless, the author believes that students should be guided by, but should not he satisfied with digest of Supreme Court cases or eazes in problem form provided in this work. The eases should be read in the original. THE AUTHOR ‘Teresa, RizalACKNOWLEDGMENTS It was Raymond Carver who said that “influences are forces — cireumstances, personalities, irresistible as the tide.” Without any doubt, the greatest influence to the author’s academic development ‘as well as his development as a student and as a lawyer is Justice Floren D. Regalado, The author is forever in his debt. ___The author eannot also help but admit that his knowledge ‘about the subject matters of this book is highly “derivative” and came mainly from ideas imparted to him by his professors, especial- ly Dean Jose R. Sundiang of Arellano Law Foundation. Of course, ‘any error in this work is the author's alone because even the bril- lianee of his mentors cannot be an assurance that something will ‘not be lost in the transmission. As usual, special thanks are also due to Assistant Dean Domingo M. Navarro of the Angeles University Foundation College of Law. Justice Isagani Cruz, the former Dean of the College of Lav of the University of Perpetual Help of Rizal likewise deserves special thanks for encouraging and trusting the author to teach Commercial Law Review. The author is elso grateful for the inputs of Atty. Salvador Austria, a learned professor on the Negotiable Instruments Law in his own right. ‘The author is greatly indebted to the following persons for their help: Atty. Maria Paz Tagle-Chua, Atty. Edmundo A. Cruz, Judge Eduardo Peralta, Jr., Atty. Caroline Peralta, Atty, Jane Ong, Me. Rowena Portes, Atty. Ernesto C. Salac and Atty. Charm Nolasco of Rex Book Stone Inc., and the staff of the San Beda College Library.CONTENTS Part | NEGOTIABLE INSTRUMENTS INTRODUCTION CHAPTER 1 — GENERAL CONSIDERATIONS 1. Governing Law . A. Applicebility of the NIL. TL. History of the NIL. IIL. Functions of Nogoti A. Not Legal Tender. a. Coins as Legal ‘Tender. b. Checks not Logal Tender ©. Exceptions. IV. Features of Negotiable Instruments A. Negotiability. B. Accumulation of Secondary Contracts. V. Kinds of Negotiable Instruments A. Bills of xchange . B. Promissory Notes. Kinds of Bonds. ©. Bills Treated as Notes... D._ Bills and Notes Distinguished VI. Parties to Negotiable Instrum: VIL. Distinguished from Non-Negotiable Instraments.. VIIL Incidents or Stages in ‘h Negotiable InstrumentmL Effect of Estoppel.... ‘The Roquisites of Negotiability A 1a, Accoptance. b. Indoreement. c. Rationale of Formalities Tt Must be in Writing Signed by the Maker or Drawer, a. Materials b._ Type of Signature... It Must Contain an Unconditional Promise or Order to Pay a Sum Certain in Money . 1, Promige or Order to Pay Equivalent Words Receipts.. Consideration of Entire Instram b, Promise or Order to Pay Must Be Unconditional... Condition under the new Section 3, NIL... Reference to Transaction. Subject to Transaction ‘Account to be Debited or Source of Payment... Payable in Sum Certain in Money Money... Option of Holder ‘Sum Certain. Installment Payments. Payable on Demand or at a Fixed or Doterminable Future Time ‘a, Payable on Demand. b, Payable at Determinable ‘Acceleration Clauses Insecurity Clauses. Extension Causes ... Payable to Order or Bearer a. Bearer Instruments, 3 Fictitious Payee Rule Burdon of Proof under Fictitious Payee Rule . Bad Paith Exception to Fic Payee Rule Only or Last Indorsement is im BIA DK on SSeee 28888 BBS B & SBSSSRSSS SHRKES I. ML Tt, b. Order Instruments... ¢. Payable to the Order of Bearer. E, Identification of the Dravree. a. Two or More Drawees b. Option to Treat as PN. © Cashier's Checks Omissions and Provisions that Do Not Affect Negotiability b. Confession of Judgment Waiver by Obligor.. CHAPTER — INTERPRETATION OF INSTRUMENTS. Adopted Statute: Effect Effect of Implied Repeel of Code of Commerce . Rules hat Apply in Case of big Other Rules CHAPTER 4 — TRANSFER AND NEGOTIATION ‘Modes of Transfer. A. Non-Negotiable Instruments B. Negotiable Instrument a, Other Modes of Transit. on... ©. Distinctions Between Assignment anc Negotiation ...... How Negotiation Teka Pace Issuanee, B Subsequent Negotiation... a. Other Purposes of Transfer... b. Indorsement of Bearer Instrument .. ©. Incomplote Negotiation of Order Instrument a, Equitable Assignment... Bb, No Presumption .... ¢. Example of Right of Holder D. Indorsement. a. Where indorsement should be placed . SRRESS 65 65 65 er 67 68 68 REBB BES8aRMt. OL b. Other Rules on Indorsement ws Nogotiation of Indorsers Severally Other Provisions on Indorsement ¢. Kinds of Indorsement. Blank and Special Indorsement.. Conversion of Blank to Special Indorsement Qualified Indorsement . Conditional Indorsement. Restrictive Indorsement.. 4. Negotiation by Prior Party ._ Striking out of Indorsement Consideration for Issuance and Subsequent ‘Transfer... ‘A. What Constitutes Value . B. Effect if Value was Previously Given (CHAPTER 5 — HOLDERS Complete and Regular ‘Taking before Overdue..... Installment Instruments ... Overdue Interest Payments. ‘Demand Instruments. 4. Notice of Infirmity and Defect... 8, Good Faith... Crossed Check van. £ Holder for Value Partial Performance Notice before Full Payment... Negotiable Instruments as Vs B. Accommodation Parties.. ©. Presumption. i D. Payee as Holder in Due Course... Rights of Holders in Due Course A. Personal Defenses .. B, Real Defenses ©. Not Holder in Due Course 108 109 109 10 110 ui ut 113 4 us. uy 18 18 120 321 125 125 125 125 126 126 126 127 127 128 130 130 131 131 131 192 133 135 138 138 138 139 IV. Shelter Rule.. a Repurchase by a Prior Party .. V. Consumer Transactions... ‘A. Background: Protection in the US suas B. Protection in Philippine Jurisprudence... CC. _ Protection Under the Consumer Act VIL Rights of Holder in Bills in Sot. CHAPTER 6 — PARTIES WHO ARE LIABLE 1, Nature of Liability... “ A. Primary and Secondary Liability. B. Distinguished from Warranties 4. Maker ML, Drawer A. Relationship with Drawee.... B. Relationship with Collecting Bank... IV, Ac00pt0F sn Effect of Warranties A. Payment without Acceptance.. V. Indorsers A. General Indorser.. a. Secondary Liability... Tywo contracts oxen Not Guarantor ... b. Warranties. ce. Order of Liability... B. b. Parole Evidence. ©. _Indorser of Bearer Instruments VI. Person Nogo’ VEL. AgeRtS ann ‘A. Person Who should Sign B Tradename or assumed name ... C. Agent « D. Per Procuracion VIII. Accommodation Parties... Surety of Accommodated Party. Irregular Indorser. 3 Liability Among Themselves... D. Corporations. — Rp 139 139 1a 11 141 add M7CHAPTER 7 — DEFENSES Real Defenses and Personal Defenses 1. Minority and Other Causes of nexpaciy A. Minority ‘i B, Ultra Vires Acts Il, Non-Delivery and Conditional Delivery. A. Non-Delivery of Incomplete Instrument B. Undelivered and Delivered Complete Instruments a, The Rules 5 bh, Neod for Delivery... Authority to Deliver . <, Presumed Delivery .. Conditional Delivery and Delivery for Special Purpose su.n UL. Filling Up Blanks Beyond Authority . AL The Rule8 eon . B, Matorial Partiewlar ©. Prima Facie Authority a. Incomplete Instrument b. Signed Blank Piece of Paper ¢. Holder in Due Course IV. Fraud V. Material Alteration A. Concept. B. Alteration that Totally Prevents Recovery. C. Alteration of Amount... 4. Bifect of Alteration on Payeo Who is a Holder in Due Course Another view with Respect to Extent of Recovery of Holder in Due Course .. Opposite view Regarding Liability of Payee and Collecting Banks ww VI, Ante-Dating or Post-Dating... VIL. Insertion of a Wrong Date. VIII, Absence or Failure of Consideration IX. Duress and Intimidation.. X. Mlegality Xi. Proseription.. XIL. Porgecy and Want of Autherity A. General Rules. B. Persons Precluded from Setting Up Forgery au an aL 212 215 218 216 217 218 218 219 218 a, Ncker® Signature b. Indorser's Signature... Order Instruments.. Bearer Instruments... D. Forgery in Bills of Exchange. a. Drawer's Signature... Drawee-Acceptor’s Warranties Negligence of Drawee b. Indorser's Signature Order Instruments... Bearer Instruments, CHAPTER 8 — ENFORCEMENT OF LIABILITY 1, Stops to Charge the Parties Liable. A. Primary Liability B, Secondary Liability ‘a, Steps in Promissory b. Steps in Bill of Exchange. © Aeceptor for Honor and Referee in case of Need. IL, Presentment for Payment... A. Requisites for Sufficiency B. Date of Presentment. a, Fixed Date .. b. Payable on Demand c. Payable at a Bank Time of Maturity ‘Time: How Computed. Payable at a Bank... Proper Place. a. Special Place. ‘To Whom Prosented.. 8 PaFtDers sone b. Joint Debtors .. H. Instrument Exhibited... eo 1. When Presentment Not Necessary or Excused. J, Retention of Liability Even if Not Presented IIL, Presentment for Acceptance. 9 BOO 313 313 aitv. V1 po E> Acceptance . pa =P Notice of Dishonor. B, H Rales Regarding Foreign Bills... How Made ‘Time to Provent for Acceptance ‘a, Whon time is insufficient When Delay or Presentment is Excused Dishonor . ‘Where Indicated ‘Timo to Accept and Effect of Retention . a, Scetions 136 and 197 Distinguished .. Futare and Incomplete Bills. Kinds of Acceptanee.... a. Presumed Unqualified Accep ‘Blot of Absence of Notice on Separate Contract. w Who Should Give Notice and Effects. a. Agent.. i Form of Notice... fa. Misdescription b. BP 22 c. How Written Notice is Given .. ‘To Whom Given .. a. Party is Dead « b. Notice to Partners ¢. Notice to Joint Debtors d, Notice to Bankrupt ‘Time and Place of Notice. a Time to give Notice b. Where Notice must be sent... ‘Waiver of Notice... a, Types of Waiver .. b.'To Whom Binding .. c, Waiver of Protest, Delay of Giving Notice ‘Notice is Exeused or Unnecessary 8. Drawer endorser mene Fictitious Drawee See. 115(b) .. : Indorser is accommodated party c. Notice when previously dishonored by non-acceptance. Effect of Failure on HDC 360 361 362 362 366 366 367 367 368 382 ©. Payment for Honor. How Discharged. A. Payment in Due Course. poop A. Protest a. When Required and When Discretionary Inland Bills Cases when Protest is Necessary ... ReatiomAle wren How protest is made. When Made. Proce for Bettor Sosurty Before Maturity Place of Protest... Protest dispensed with Distinguished from Notice of Dishonor. B. fexptance for Honor. Requisites.. How Acceptance for Honor is Made In whose favor .. Liability of Acceptor for Hono Maturity date of Sight Bills Other provisions Distinguished fom Ordinary Acceptance nee Roepe ee Preference Effect on Subsequent Parties Holder has No Option Rights of Payer Distinetions ... eaese Striking out Indorsement .. ‘Accommodated Party Drawer Payment by Third Persons .. b. To Whom .. Good Faith of Payor Renunciation... Cancellation F Acts that Discharge Simple Contracts Principal Debtor Becomes the Holder...1. Surrender of the Instrument Discharge of Perons Ssondarly ish Discharge of Prior Party. B Tender of Payment €. Release of Principal Debtor. . D. Extension of Term. a. Accommodation Party sn. CHAPTER 10 — CHECKS DB, reper ies ‘A. Cashier's and Manager's Checks... a. Distinguished from Draft. b. Cannot be Payable to Bet B. Certified Checks. a. _Certietin Procred ty Holder. C. Crossed Check... a. Applicable Laws b. Effects of Crossing.. c. Other Provisions of BEA of 1882 on Crossed Checks. D, Memorandum and Traveler's Checks... Checks and Ordinary Rills of Exchange: Distinguished Relationship Between Payee, Drawee and Drawer. a. Effect of Death of Drawer b. Liability of Drawer for Wrongful Dishonor of Chocks Collection of Check on A. Applicable Rules ‘ B._ Relationship of Parties a. Warranties... Warranties of Collecting Warranties of Payee-Deposito b. Duty of Care ©. Return of Item: 4. Uncollected Deposits. ‘Stopping Payment sw. A. Iron Clad Rule. Crimes Involving Checks . AL Bstafa a. Negotiable Onder of Withdrawal (NOW) B. Batas Pambansa Blg. 22. an 412 412 44 4lT 421 421 421 423 vi, a. Duty of Banks... ©. Cheek Kiting Parti OTHER COMMERCIAL DOCUMENTS INTRODUCTION CHAPTER 11 — DOCUMENTS OF TITLE Concepts ... Requirement... ‘a, Effect of Stamp or Novation “Non-Negotiable”. b, Other Fermalities B. How Negotiated a. Bearer Document. Effect of Special Indorsoment... b. Order Document. Incomplete Negotiation ©. Effects of Negotiation a, Transfer of Title . ‘Vendor's Lien. b, Pledge of Receint D. Who May Negotiate a, Negotiation by Fraud, Mistake or Duress ‘Loss and Theft Warranties a, Security Non-Nogotiable Receipts A. Bffect Delivery of Good: : ai a. Duties when Delivering the Goods ‘Adverse Claim of Warehouseman Deke for Nen-Deivty 0» Mindalvery : A. Warehouseman’s Lien... si ‘8, Charges That are Included... . b, Properice That are Subject Lien Loss of Lien... = 452 453dd. Satisfaction of Lien 491 D. Rationale .. 547 B. Alteration 493 E. The Parties ... a7 C. Adverse Claimant. 494 F, Purpose of Acquisition of Goods. Bas D. Attachment or Levy. 494 G. Nature of Entruster’s Rights over the Goods... 550 VIII, Duty of Care. * 495 a. View that Ownership is not Acquired by Entruster.. er 550 CHAPTER 12 — LETTERS OF CREDIT AND b. View that the Entruster Owns the Goods 562 ‘TRUST RECEIPTS Observations 558 I. Letters of Credit 497 § ~ 565 A. Definition... 497 - womens 887 Th Nature of Letiars of Cre... 498 Be ieee Ha Be AI omrn 558 1a. Distinctions between Letters of Credit and Guarantee . 499 APPENDICES: S Genesis baw. oo ‘Appondix 1 — Negotiable Instruments Law (Act No. 2081). eons a Appendix 2 — The Bill of Exchange Act, 188: Se een ok Teale Doeumente a“ Appendix 3 — Code of Commerce Provisions on Letters Payment rs 504 of Credits =e 622 b._ Seller-Beneficiary 505 e Buyer-Importer... 507 @. Notifying or Advising Bank. 507 General Index 623 ©. Confirming Bank. 507 f Negotiating Bank 507 ‘Transactions Involved 508 1 Independent Contracts. 509 F, Independence Principle. 508 a Banks deal with Documents. 513 b. Whocan invoke the Independence Principle 514 Fraud Exception 515 ‘Requirements for Injunction under the ‘Fraud Exception .. 516 Protection of Innocent Party .. 516 G. Kinds of Lotters of Credit... Bu a. Confirmed LC. 517 , Irrevocable LC. 518 ©. Other kinds. 518 4. Commercial Credit distinguished from Standby Credit ong II, ‘Trust Receipts. 537 A. Basic Concepts. eaeneenen 537 B. The Statute 538 ©. Trust Receipt Transaction Defined a5 a. Not Applicable to Sale... 548,PARTI NEGOTIABLE INSTRUMENTS INTRODUCTION Commenting on the provisions of the law on negotiable instru- ‘ments, Professor Gilmore observed that the law “is a museum of an- tiquities — a treasure house crammed full of ancient artifacts whose use and function have long since been forgotten. Another function of codification, we may note, is to preserve the past, like a fly in amber." Professor Gilmore is not alone in this view regarding the rules on negotiable instruments. In this age where electronic com- ‘merce and paperless transuetions are commonplace, it would not be ‘easy for some to visualize the application of many of the provisions of the Negotiable Instruments Law. In the Philippines, the Negotiable Instruments Law remains unchanged for more than a century. Its provisions are undisturbed ‘and continue to govern instrumenis that are designed ta be “couri- cers without luggage.” Although it cannot be denied that many ofits provisions have already been overtaken by international commercial practice, its focal provisions still provide a wealth of stimulating dis- cussion in the judicial sphere. Additionally, Negotiable Instrumente Law is still « favorite in law school beeause of its coherence and internal logic. It is a potent implement in developing the students! legal reasoning. "Groom, Fonts so max Law or Nowonasue Ineraoneers, 19 Creighton Low. 441 0979), . ef Justico Gibson in Overton v. Tyler, 8 Pa. S46, 45 Am, Dee. 66 (1848),Chapter 4 GENERAL CONSIDERATIONS |, GOVERNING LAW. ‘The law that governs negotiable instruments in this jurisdiction is Act No. 2031, otherwise known as the “Negotiable Instruments Law. Before the Negotiable Instruments Law (NIL for short) was enacted, nogotiable instruments were governed by Articles 439 to G6 of the Code af Commerce. However, most of these provisions ‘were impliedly repealed by the provisions of the NIL, Section 197 of the NIL provides: Sec, 197. Repeals. — All acts and laws and parts thereof inconsistent with this Act are hereby repealed. ‘Since Section 197 results only in implied repeal of inconsistont acts and laws, there are provisions of the Code of Commerce that are still in force because there are provisions that are not inconsistent ‘with the NIL. For instance, the Code of Commerce provisions on crossed choeks are still in force because there is no provision in the NIL that deals with crossed checks.” ‘The New Civil Code, Republic Act No. 986, has suppletory effect in case of deficiency in the provisions of the NIL. In one case, for instance, the Supreme Court applied suppletorily the provisions of Article 1216 of the New Civil Code which provides that “the creditor may proceed against any one of the solidary creditors or some or "Chan Wan v. Tan Kim, OR, No, L-15880, September 30,1960, 109 Phil. 706. 2 PART — NEGOTIABLE INSTRUMENTS 3 CHAPTER 1 — GENERAL CONSIDERATIONS all of them simultaneously” and that “demand made against one of thom shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected." A. APPLICABILITY OF THE NIL. ‘The provisions of the NIL are not applicable if the instrument involved is not no Bofore the provisions of the NIL ean ‘come into operation, there must be a document in existence of the character described in Section 1 of that law.* Iatall, the NIL can be applied only by analogy. For instance, the Supreme Court applied Section 14 of the NIL by analogy in a case involving a Deed of Assignment of shares of stocks which was signed in blank to facilitate future assignment of the same shares. ‘The Court observed that the situation is similar to Section 14 where the blanks in an instrument may be filled up by the holder, the signing in blank being with the assumed authority to do 80.” CASE: GOVERNMENT SERVICE INSURANCE SYSTEM ¥, ‘COURT OF APPEALS and MR. and MRS. ISABELO R. RACHO. IG.R.No. L-40824, February 25, 1989] 170 SCRA 533, Private respondents, Mr. and Mrs, Isabelo R. Racho, together with the spouses Mr. end Mrs. Flaviana Lagasea, executed a deed of mortgage, dated November 18, 1957, in favor of potitioner Government Service Insurance System (hereinafter referred to as GSIS) and subsequently, another deed cof mortgage, dated April 14, 1958, in connection with two loans granted by the latter in the suras of P11,500.00 and P8,000.00, respectively. A parcel of land covered by Transfer Certificate of Title No. 38989 of the Register of Deed of Quozon City, co-owned by said mortgagor spouses, was given as security under the aforesaid two deeds. They also executed a “promissory ote” which states in part: “Philippine National Bank v. Concepcion Mining Co, Tne. G.R. No L-16868, uly 31, 1962, SCRA 745, 747 “Metropolitan Bank & Trust Company v. Court of Appeals, ef al, O.R. No, ‘88866, February 18, 1981, 194 SCRA 160, 178, "Kauffinan v. Philippine National Bank, G.R. No. 16454, September 21,1921, 2 Ph 182. "Borromeo, tal. v- Sun, GR. No, 75908, Ocaber22, 1999, 114 SCAD 616,317 SCRA 176, 183.‘ NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME +... for value reeeived, we the undersigned ... JOINT. LY, SEVERALLY and SOLIDARILY, promise to pay the GOV- ERNMENT SERVICE INSURANCE SYSTEM the sum of . (P11,500.00) Philippine Currency, with interest atthe rate of siz (@%6) per centurn compounded monthly payable in... (120) equal morithly installments of ...(PI27.65) each.” On July 11, 1961, the Lagases spouses executed an instrument denominated “Assumption of Mortgage” under which they obligated themselves to assume the aforesaid obligation to the GSIS and to secure the release of the mortgage covering that portion of the land belonging to herein private respondents and which was mortgaged to the GSIS. This undertaking wae not fulfilled. Upon failure of the mortgagers to comply with the conditions of the mortgage, particularly the payment of the amortizations due, GSIS extra- Jndicially foreclosed the mortgage und caused the mortgaged property to be ‘s0ld at public auction on December 3, 1962. More than yo year hereafter orn Agus 25, 1966, herein private reaponents ea complain aga he potitoner and Uh Lagaen mus (Sin the former Court of Fist Tnntance bf Quezon City. praying thet the rutin foveclosre “mad thelr property and al thar documents recut relation thereto favor of the Government Servis Insurance ‘SSotom: be ecarod mull and vd I une rer prayed tht eye al Towed ip renver ani property, andor the GSIS be ordered ta pay them the ale ther adr they be slowed te reprchav he land Adina, they asked for atl an moral damagea a atoraeys fo, signed the mortgoge contracts not aa euretios or acrantors forthe Lagasea ‘Spouses but they merely gave their common property to the said co-owners ‘ho wero sololy benefited by the loans from the GSIS. (he trial court rendered judgment dismissing the eom- paint for failure to establish « cause of action. Said decision was reversed By the Court of Appeals which declared the foreclosure toid, Later, the Supreme Court reinstated the Decision of the ‘trial court. One of the issues raised before the Supreme Court is whether or not the private respondents were accomadation par tes, Both parties cited Section 29 of the NIL. The Court rejected ‘the arguments of both parties.) In submitting their case to this Court, both partios relied on the pro- visions of Section 29 of Act No. 2031, otherwise known as the Negotishle Instruments Law, which provide that an 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 elthough the latter kney him to be only an accommodation party PART I — NEGOTIABLE INSTRUMENTS. 5 (CHAPTER 1 — GENERAL CONSIDERATIONS ‘This approach of both parties appoars to be misdirected and their re: liance misplaced, The promissory note hereinbefore quoted, as well as the mortgage deeds subject ofthis case, 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, 2081 because they are neither payable to order nor to bearer. The ncte is poyable to a specified party, the GSIS. Ab- sent the aforesaid requisite, the provisions of Act No. 2031 would not apply, governance shall be afforded, instead, by the provisions of the Civil Code and special laws on mortgages, As earlier indicated, the factual findings of respondent court are that private respondents 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 forthe benefit of the Lagasca spouses, ‘This appears to be duly supported by sufficient evidenco on record. Indeed, it would be unusual for the GSIS to arrange for and deduct the monthly amortizations on the loans from the salary as an army officer of Flaviano LLagasca without likewise affecting deductions from the salary of Isabelo Racho who was also an army sergeant. Then there is also the undisputed fact, as already stated, that the Lagasca spouses executed a so-called “As- sumption of Mortgage” promising to exclude private respondents and their share ofthe mortgaged property from liability to the mortgagee. There is no ‘intimation that the former executed such instrument for a consideration, ‘hus confirming that they did ee pursuant to their eriginal agreement, However, contrary to the holding of the respondent court, it cannot boo said that private respondents are without libility under the aforesaid mortgage contracts. The factual contoxt of this caso is precisely what is ‘contemplated in the last paragraph of Article 2086 of the Civil Code to the effect that third persons who are not partis to the principal obligation may secure the lattar by pledging or mortgaging their ovn property. 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. In consenting thereto, even assuming thet private reepondents may not be assuming. li ability for the debt, their share in the property shall nevertheless secure land respond for the performance of the prineipal obligation. The parties to the mortgage could not have intended that the eame would apply only t6 the aliquot portion of the Lagasea spouses in the property, otherwise the consent of the private respondents would not have boon required, I. HISTORY OF THE NIL, ‘The provisions of the NIL were copied from the American Uni- form Negotiable Instruments Law. In turn, the latter law was besedNOTES AND CASES ON [RANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME! largely om the Bills of Exchange Act of 1882." Heniée, decisions of the courts in the United States and in England basod on the American ‘Uniform Negotiable Instraments Law and the Bills of Exchange Act of 1862 can be applied in this jurisdiction. However, there are provisions of the Bill of Exchange Act. of 11882 that were not included in the American Uniform Negotiable Instruments Law, Nevertheless, the NIL also permits resort to the provisions of the Bill of Exchange Act of 1882 on matters where the NIL provisions are deficient. For instance, the NIL does not contain any provision on crossed checks; only the Code of Commerce includes provisions thereon. Hence, other matters not covered by the Code fof Commerce on crossed checks can be resolved using the Bill of ‘Exchange Act af 1882 ‘The provisions of the Bill of Exchange Act of 1882 that were not made part of the NIL can still be applied in this jurisdiction because the former and the American Uniform Negotiable Instruments Law embody rules that are founded upon the Lex Mereatoria, the Law Merchant, that developed out of international trade. Law ‘Merchant embraces the usages of merchants in different commercial countries.» Section 196 of the NIL provides: ‘See, 196, Cases not provided for in the Act. — Any ‘ease not provided for in this Act shall be governed by existing legislations or in default thereof, by the rules of, the law merchant. I FUNCTIONS OF NEGOTIABLE INSTRUMENTS. ‘The two (2) main functions of negotiable instruments are: 1) ‘They eerve as substitute for money; and 2) They serve as credit instruments. However, they ean also be considered proof of the existence of a transaction because they may state the transaction that gave rise to the issuance of the instrument, In particular, the functions of a negotiable instrument may be enumerated as follows: "hiippine Nationel Bank v.Zuluets, GR No. L-7271, Angust 30, 1957, 101 Phit 1071 "Chan Wan yan Kim, G.R. No, 116380, September 30, 1960, 109 Phil. 707, See Appendix 2 UL Am. dr. 2 67. PART] ~ NEGOTIABLE INSTRUMENTS (CHAPTER 1 — GENERAL CONSIDERATIONS (1) This a substitute for money. (2) Ibis a medium of exchange. (8) It is 6 erodit instrument which increases credit circula- tion, (4) It increases purchasing power in circulation, (5) It is proof of transactions. ‘Negotiable instruments are not mere contracts but are substi- ‘tutes for money." A negotiable instrument is a medium of exchange, it is a tool that is used in commercial transactions, This function of negotiable instruments is better understood in the light of their his- tory which was summarized by Prof. William D. Hawkland in this “In primitive timas, most men were self-sufficient. They srew thoir own food, erected their own shelters, and made thoir ‘own clothing. fn this ‘subsistence’ society there was little need. for money or negotiable instraments, because the minimal trade ‘which existed was carried on by barter, exchanging goods for sods. ‘As men began to supply each other's wants, however, an acute need for money arose. We can specalate only as to when this need developed, but, if history is any guide, it is fair to say that the commercial demand for money probably antedated its ‘reation by many yours. There are always obstructions which ‘impede the effeetuation of commaeree. Finally, hewever, money ‘was coined to servo as the commen denominator of value and ‘the commercial medium of exchange. This development was an important commercial step. No longer was it necessary, for ex- ample, to exchange two bear skins for one cow; the cow could bbe purchased with money having the equivalent value of hides. ‘Money, then, represents property, and it has facilitated greatly the exchange of goods among men. ‘trade continued to expand, ntrchants discovered they needed something more than taney to explo effectively ei Csi Money Pad inte era st, a may fra chatil not cay moved around. Transporting it great ‘stances involved eubetatial risks of rethery. and mee nor: {any money only roprovente property ond et ered, Some thing vas nated o represent mindy. Ahdvomathing was ned Eamare v Martine, M6 SCRA 323NOTES AND CASTS ON DANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME ed to represent the promise of future payment of money. These ‘were answered by the development of negotiable instruments." ‘However, negotiable instruments like checks are not only in- struments of credit, They also serve as receipt or evidence for the debtor. For example, possession of a check by the drawee gives rise to presumption of payment." A. NOTLEGAL TENDER. Negotiable Instruments are not legal tender. Section 52 of the New Central Bank Act, Republic Act No. 7653, provides that only notes and coins issued by the Bangko Sentral ng Pilipinas aro considered legal tender. Sec. 52, Legal Tender Power. — All notes and coins Issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines forall debts, both public and private: Provided, however, That, unless otherwise fixed by the Monotary Board, coins shall be legal tender in amounts not exceeding Fifty pesos {P50.00) for denominations of Twenty-five centaves and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or less. a, Coins as Legal Tender. Pursuant to the above-quoted Section 52 of Republic Act No, 7653 and BSP Circular No, 537, Series of 2006 adjusted the ‘maximum amount of eoins to be considered legal tender as follows: (MAXIMUM AMOUNT | _ DENOMINATIONS ‘One Thousand Pesos | One Peso (P1.00) (P1,000.00) Five Posos (P5.00) ‘Ten Pesos (P10.00) Tam, Chose sm Marnrus ov Connncins. Pare an Bank Devoe ano Councanns, 1967 Bl, p.9, hereinafter referred to as Hawkland "Gitibank, N-A.v-Saboniane, Octaber 16, 2008, 604 SCRA 978 PART I — NEGOTIABLE INSTRUMENTS 8 (CHAPTER 1 ~ GENERAL CONSIDERATIONS ‘One Hundred Pesos | One Centavo (1 Sentimo) (P 100.00) Five Centavos (6 Sentimo) ‘Ten Centavos (10 Sentimo) b. Checks Not Legal Tender. Section 60 of the New Central Bank Act is categorical with respect to checks — they are declared to be not legal tender and creditors eannot be compelled to accept checks in payment of obli- gations. Sec. 60, Legal Character. — Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, That a check which has been cleared and credited to the account of the creditor shall be equivalent toa delivery to the creditor of cash. Consistently, the Civil Code provides that delivery of negotiable instruments does not produce the effect of payment. Even if delivery of the check is accepted by the ereditors, obligations are deemed paid only when the instruments are eneashed. The rule covers manager's checks, cashier's checks or certified checks. A check is not legal tender and therefore cannot constitute a valid tender of payment. Since a negotiable instrument, like a check, is only a substitute for money and not money, delivery of such an instrument does not, by itself, operate as payment, Mere delivery of checks does not discharge the obligation. ‘The obligation is not extinguished and remains suspended until the payment by commereial document is actually realized.” Howover, applying Section 60 of New Central Bank Aci, the obligation to the creditor is deemed paid ifthe check has been cleared and credited to his account. This implies that the creditor deposited ‘Goo alse Villanueva v. Santos, 67 Pil O48 ‘sarsele 1249, Now Ciel Code, "Tibia, J. v. Court of Appel, 224 SCRA 169; Philippine Airlines, tne ‘Court o Appens, 181 SCRA 557; Roman Catholic Bishop of Malek, Ine, IAC, 191 ‘SORA 411 (1880) "Bank ofthe Philippine Islande v. Spouses Reynaldo and Vicaria Rayeca, GR. ‘No. 176564, uly 21, 2008,0 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME the check to his account and the same was honored or cleared by the drawee bank upon presentment, In this ease, the check is in fact paid and the proceeds are now being kept in the bank account of the creditor. Exceptions, Nevertheless, the Civil Code also provides as exceptions, eases where the check is impaired due to the fault of the creditor. In those cases, the obligation is deemed paid even ifthe chock is not encashed. It is also important to mention that while delivery of checks may not be considered payment under the Civil Code, delivery of chocks may be sufficient in the exercise of certain rights or privileges. ‘Thus, the Supreme Court ruled in a number of cases that delivery of checks is sufficiont in the exercise of the right of redemption. The right of redemption is a privilege and is not an ordinary obligation. Hence, Article 1249 does not apply." IV. FEATURES OF NEGOTIABLE INSTRUMENTS. ‘Thore are two (2) distinctive features of negotiable instruments, that is, negotiability and accumulation of secondary contracts. These distinctive foatures make negotiable instruments ideal substitutes for money. A. NEGOTIABILITY. ‘The characteristic of negotiability allows negotiable instra- ‘ments to be transferred from one person to another so as to constitute the transferee a holder. Such holder can be a holder in due course who is free from personal defenses. This characteristic of negotiable instrument as a credit instrument gives it freedom to circulate as 1 substitute for money. Freedom of negotiability is the touchstone relating to the protection of holders in due course, and the freedom of nogotiability is the foundation for the protection which the law throws around a holder in due course» ile 1200, Civil Code; Philippine National Bank v. Seeto, 91 Pil. 756, ertunade v. Curt of Appoala, 196 SCRA 26 (1001) sxtyadors Royal Bank v. Court of Appeals, et al, GR, No, 89997, March 9 1997, 80 SCAD 12, 269 SCRA 18, 26.7, PART — NEGOTIABLE INSTRUMENTS u CHAPTER 1 - GENERAL CONSIDERATION B, ACCUMULATION OF SECONDARY CONTRACTS. When negotiable instruments are transferred through nego- tiation, secondary contracts are accumulated because the indorsers become secondarily liable not only to their immediate transferees but also to any holder, Unless they have valid defenses against the holder or any party, these indorsers are liable to said holder or who- ever may be compelled to pay the instruments There is therefore greater “security” because whoever takes the instrument has greater chances of recovery because more people are linble under the instrument. - _Ifthereis greater probability of payment, people are more likely to accept negotiable instruments as tools in credit transactions. ‘equally true in the case of checks. In checks, the drawer, by drawing the instrument, not only enters into a secondary contract +o pay the holder but also represents that there are sufficient funds in the bank to cover the check that he issued. The Supreme Court: observed in one case: “The drawing and negotiation of a check have certain of- fects aside from transfer of tithe or incurring of lability in regard to the instrument by transfer. The holder who takes the negoti ble paper make a contract on the face ofthe instrument. Ther is an implied representation that funds on credit are available forth payment of tho instrument in the bank upon Which it V. _ KINDS OF NEGOTIABLE INSTRUMENTS. ‘There are two (2) basic types of negotiable instruments, a promissory note and a bill of exchange. The NIL defines promissory notes and bills of exchange as follows: ‘Sec. 126. Bill of oxchange defined. — 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. tate Investment House, In v. Court of Appeals, eal, G.R. No, 101168, “Jenunry 11, 1993, 217 SCRA 38, 382 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME ‘Sec. 184. Promissory note, defined. —Anegotiable promissory note within the meaning of this Act Is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum ‘certain in money to order or to bearer. Where a note is drawn to the maker's own order, itis not complote until indorsed by him. ‘The common types of bills of exchange and promissory notes are defined hereunder. However, the enumeration is subject to the caveat that the instrament specified herein are not always nego- tiable, Although they may be or are usually negotiable, the test is still the presence of the requisites of negotiability on the face of the instrument. The requisites of negotiability are discussed in the next Chapter of this work. A. BILLS OF EXCHANGE. In other jurisdictions, a bill of exchange is commonly ealled. a draft. In fact, the American Institute of Banking defines draft as a ‘Scigned order by one party, the drawer, addressed to another, the drawee, directing the drawee to pay a specified sum of money to the order of a third person, the payee.”* However, the term draft is often tused to designate bills of exchange that are used in trade of goods. It has been said that the most significant modern use of the non: check draft is in documentary exchange involving letters of eredit, ‘A documentary exchange is one of a number of ways in which the ‘assumption of credit risks and payment accompanying the sale of goods may be handled.” A bill of exchange may be an inland bill or a foreign bill. An intand bill isa bill which is, o on its face purports to be, both drawn ‘and payable within the Philippines. Any other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder may treat it as an inland bill.” Tt is important to determine if the bill ss f foreign bill ot an inland bill because there are provisions of the NIL that apply only to foreign bills, For instance, a foreign bill must ‘Orrenneoe, Peremaniowne Burana, Sed Kaition, p. 203 sgopnny J. Nonsraou & Amer T Crowe, Prowass axp Marenuts ev CoM. wencat Pater, 1772 Bil, p. 18, bereinafter referred to as Nordstrom & Clovis, See: Bank of Phil datancs &, CA, GR. Ne. 137002, July 27, 2006, Section 129, NIL, PARTI — NEGOTIABLE INSTRUMENTS Fn (CHAPTER 1 — GENERAL CONSIDERATIONS be protested in case of dishonor while an inland bill need not be protested. A bill of exchange or draft: may be a “time draft” ~ one that is payable at a fixed date ~ or a “sight or demand draft” — one that is payable when the holder presents it for payment. bill may also be 2 “trade acceptance” which is used in contracts of sale. In this type of bil, the sollor as drawer orders the buyer (as drawee) to pay a sum certain to the same seller (payee). A banker's acceptance is time draft across the face of which the drawee bank has written the word accepted. + If the seller does not trust the credit of the buyer of is not f: riliar with him, the seller may wish to require the bank of the buyer to accept the bill or draft. In which case, the bill is called “banker's acceptance.” In the latter ease, the bank is normally an accommoda- tion payor that lends its credit to the buyer. The buyer, in return, will pay the bank commissions and other charges." " ‘Tao mort common form of bil of exchange is “check” which defined under the NIL in this wise: . Sec. 185. Check defined. — A check is a bill of ‘exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a chock, Other bills ofexchange include the following: (2) Clean Bill of Exchange — a till to which no document is attached when presentment for payment or acceptance is made. (2) Documentary Bill of Exchange — a bill of exchange to which a documents is/are attached when presented f . Bier P for payment oF B. PROMISSORY NOTES. Another instrument that involves banks is a “certffeate deposit.” certificate of deposit is a form of promissory vie which Jewitt acknowledgment ofa bank ofits rept of ertain sum with a promise to repay the same. A certificate of deposit is defined "Sections 178 and 192, NIL. ST Parrows Dios, 1840 Bd, p.96,4 [NOTES AND CASES ON [BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME! a8 a written acknowledgment by a bank or banker of the receipt of a um 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 his order, whereby the relation of debtor and creditor between the ‘bank and the depositor ia ereated. The principles governing other ‘types of bank deposits are applicable to certificates of deposit, as fre the rules governing promissory notes when they contain an ‘unconditional pramige to pay a sum certain of money absolutely.” Bonds may also partake the nature of negotiable promissory notes, A bond is defined as « certificate or evidence of a debt on Wwhich the issuing eompany or governmental body promises to pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the expiration date." Debenture is a promissory note or bond backed by the general credit of a corporation and usually not secured by a mortgage or lien ‘on any specific property.” Bonk notes are promissory notes of the issuing bank which are payable to bearer on demand. a. Kinds of Bonds.* (1) Bottomry bonds — bonds secured hy mortgage of ships. (2) Chattel mortgage bonds — bonds secured by mortgage on chattels of business. (3) Collateral trust bonds — bonds secured by collateral de- posited with a trustee, (4) Convertible bonds — bonds that can, at the option of the holder, be converted into stocks. (5) Coupon bonds — bonds with interest coupons attached, (6) Guaranteed bond — @ bond which has interest or principal or both guaranteed by a company other than the issuer. (Income bond — bond on which interest is payable only when cared after payment of interest upon prior mortgages, "Far Hoot Hank & Trust Company v. Queremit, GR. No. 148682, January 16, 2002, Back’s Law Deemowany, Sth Ba, p. 161 bid, p. $81 Backs Lav Diener, p. 162364 PARTI — NEGOTIABLE INSTRUMENTS, 6 (CHAPTER 1 ~ GENERAL CONSIDERATIONS (8) _doint and several bond — a bond the prineipal and interest of which is guaranteed by two or more persons. (9) _doint bond — bond secured by two or more obligors who ‘must be joined in any aetion on such bond, (10) Mortgage bond — bond secured by @ mortgage on a prop- erty. C, BILLS TREATED AS NOTES. ‘There are instances when @ bill may be treated as a pro note bythe holder. Ths, Section 190 ofthe NIL provides that abl ‘may be treated as a promissory note when: (1) the drawer and the drawee are the same person; (2) the drawee is a fictitious person; and (3) the drawee has no capacity to contract Inaddition, Section 17(e)of the NIL provides that an instrument may be treated either as a bill or a note at the election of the holder when the instrument is so ambiguous that there is doubt whether it isa bill or a note. D. BILLS AND NOTES DISTINGUISHED. PROMISSORY NOTE ILL OF EXCHANGE 1. Tteontains anruncondition-| 1, Tt eontains an unconditon- al promise al order. 2 ‘There are two (2) parties |2. There are three (3) con its face. aioe ee 3. The person who signs it is|3. ‘The person who signs itis the maker fede 4. The person who signs it,[4. The persom wh 3 ' 0 signs it, the maker, is primarily li'| the drawer, is secondarily able. liable. 7 5. Theperson primarilyliable|5, ‘The person primarily liable is the maker, is the drawee-accepter. 6. There is only one present-/6. , There are two present- ‘ment: for payment. ments: a) for acceptance and b) for payment.6 NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUME T Vi. PARTIES TO NEGOTIABLE INSTRUMENTS. ‘The original parties in a promissory note are the maker and the payee. The maker is the person who promises to pay according to the tenor of the note while the payee is the person who is to receive payment from the maker. An example of a typical note is provided below (Illustration 1-1) where the maker is Juan de la Cruz while the payee is X Lending Corporation. A typical certificate of deposit is, likewise reproduced below (1-2) where the maker is XYZ Bank while the payee is Juan de la Cruz. 1-1: Typical Note. "720,000.00 Manila, Philippines June 2. 2000 Due: August 1, 2001 Sinty days er date. For value received, the undersigned promises to pay to the ‘order of X LENDING CORPORATION at its office inthe City of ‘Manila, Twenty Thousand Pesos Only (220,000.00) with interest from date hereof at the rate of = 18 = Percent per annum. SIGNATURE: JUANDE LA CRUZ PART] — NEGOTIABLE INSTRUMENTS w (CHAPTER 1 ~ GENERAL CONSIDERATIONS On the other hand, the parties who appear on the face of a bill of exchange are the drawer, drawee and the payee. The drawer is the person who draws the bill and orders the drawee to pay the payee a sum certain in money. The drawee is the one being commanded to pay the instrument. However, in reality, the dravee is not a party unless he accepts the bill. If he accepts, the drawee, now called the acceptor, assents to the order made by the drawer. A typical bill and a check are reproduced below (1-3 and 1-4). In both examples, the drawer is Pedro Santos, the drawee is ABC Bank, while the payee is Juana Santos. 1-8: Typical Bill of Exchange. 1-2: Typical Certificate of Deposit. ‘YZ BANK 11111 Matalin Stroct, Manila ‘Metro Manila, Philippines MANTLA BRANCH CERTIFICATE OF DEPOSIT No. Rate: Date of Maturity: 20 ‘This is t» Certify that Jann de la Cruz has deposited in thie Bank the sum of PESO! e & ____) Pesos, Philippine Currency, repayable to the order ‘of said depositor 120 days after date, upon presentation and sur- render ofthis eartifeate, with inverest at the rate of __per cent per annum from date of this certifiate, ‘Authorized Bank Officer CITY OF MANILA January 16.2000 10,000.00 ‘Ono Hundred Twenty Days after above date PAY T0 ‘THE ORDER OF JUANA SANTOS the amount of Ten Thou- sand Pesos _Only (P10,000.00) Philippine Currency. VALUE RECEIVED AND DERIT THE SAME. FROM ‘THE ACCOUNT OF THE DRAWER, PEDRO SANTOS Drawer ‘To: ABCBANK Makati City 1-4: ‘Typical Check. Signature ‘Account Name: PEDRO SANTOS No, 1254568 Date: June 3.2008. PAY TO THE ORDER OF JUANA SANTOS P 1,000.00 ‘One Thousand Pesos Only. PESOS: ABC BANK ‘Amorsolo Branch (Sea) ‘Makati City as6 [NOTHS AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAN VOLUME! Other persons who may become parties after the issuance of the instrument are the indorsers and the holders, “Indorsere” are persons who transfer or negotiate an instrument by indorsement completed by delivery. “Holder” means “the payee or indorsee of a bill or note who is in possession of it or the bearer thereof." A “bearer” means “the person in possession of a bill or note which is payable to bearer.” Inbills of exchange, a referee in case of need may be designated by the parties. Section 131 provides: Sec. 131. Referee in case of need. — The drawer of a bill and any indorser may insert thereon the name of a person to whom the holder may resort in case of need; that is to say, In case the bill is dishonored by non-acceptance or non-payment. Such person is called ‘a referee in case of need. Its in the option of the holder, to resort to the referee in case of need or not as he may. see fit. At the time the NTT. was enacted, the provision on referee in case of need has been rarely inserted in English and Ameriean bills ‘The usual form is: “In case of need apply to AD at X.” If the referee pays the bill the drawer will be liable to him for the amount.” Vil. DISTINGUISHED FROM NON-NEGOTIABLE INSTRUMENTS, ‘The requirements of negotiability are not concerned with the validity of the instrument. Validity is an issue independent of the issue of negotiability, Verily, the contract represented by or out of which the negotiable instrument arose may be invalid, voidable or rosciasible or unenforceable but the instrument may remain nogo- tiable. Im the same manner, a non-negotiable instrument may repre- sont a valid obligation. It may be an instrument that reprosents a personal property under Article 417 of the New Civil Code, that is, ‘an obligation or action for a demandable sum. Such non-negotiable instrument may be freely transferred and such transfer is governed. by Articles 1624 to 1635 of the New Civil Code on assignment of SRecion 17, NTL, id. ‘=Fraenic K. Baer. BRoTaL's BRAMWAS, Negomse Sermon Law, p, 1228, PARTI — NEGOTIABLE INSTRUMENTS 0 CHAPTER 1 ~ GENERAL CONSIDERATIONS credit. Ifthere are no defenses available to any party, there is hardly no use to distinguish a negotiable instrument from a non-negotiable However, it is equally clear that the basic disadvantage of a non-negotiable instrument from a negotiable instrument is that there can be no holder in due course in @ non-negotiable instrument. Hence, the transferee of a non-negotiable instrument is not free from personal defenses. In a non-negotiable instrument, the title acquired by the transferee is a “derivative title.” If the title of the transferor is defective (and therefore subject to defenses) the title of the transferee will also be defective. In a negotiable instrument, the transferee may acquire more rights. A holder in due course will not merely get a “derivative title” because he will get a “clean title,” one that is free from infirmities in the instrument and defects of title of prior transferors. Teshould be pointed out in this connection that Article 1628 of the New Civil Code provides that the “vendor in good faith shall be responsible for the existence and legality of the credits at the time of the sale, unless it shall have been sold as doubtful; but not for the solvency of the debtor, unless it has been exprosely stipulated or unless the insolvency was prior to the sale and of common knowledge.” In negotiable instruments, the solvency of the debtor is in a sense guaranteed by the indorsers because they engage that the instrument will be accepted, paid or both and that they will pay if the instrument is dishonored. In summary, the distinctions hetween negotiable instruments ‘and non-negotiable instruments may be stated as follows: (2) Only negotiable instruments are governed by the NIL. If an instrument is not negotiable, the NIL does nat apply. Application of the NIL to non-negotiable instruments is only by analogy.” (2) Negotiable instruments can be transferred by negotiation or by assignment, Non-negotiable instruments ean be ‘transferred only by assignment." Government Service Insurance System v. Coutt of Appel, supra, at p. 4 Kautfinan ¥. Philippine National Bank, supra, 2 acta 4 Borrome tal ¥. Sun, ete Git No. 16905, October 22, 1999, 114 SCAD (616, 17 SCRA 176. The Supreme Court applied Section Ld ofthe NIL by analogy Borromeo fai . Sune al, OR. No, 16908, October 22,1999, 114 SCAD 116,817 SCRA 176. The Supreme Core sppled Section 14 ofthe NIL by analogy(3) @ NOTES AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME I ‘The transferee of a non-negotiable instrument can never be a holder in due course but remains to be an assignee.” ‘A transferee of a negotiahle instrament ean be a holder in due course if all the requirements under Section 62 of the NIL are complied with. Since the transferee of a non-negotiable instrument can not be a holder in due course, all defenses available to prior parties may be raised against the last transferee.” VII INCIDENTS OR STAGES IN THE LIFE OF A NEGOTIABLE IN- ‘STRUMENT. a @ @ @ 6) © Preparation and signing complete with all the requi- sites provided for in Section 1 of the NIL. Issuance — first delivery of the instrument to the payee (from maker to payee/bearer or from the drawer to the payee/bearer), Negotiation — transfer from one person to another s0 fan to constitute the transferee a holder. Examples: n) Indorsement and delivery to Mr. A by Mr. X where the instrument is payable “to the order of Mr. X"; b) Delivery to Mr, A by Mr, Xof an instrument payable to bearer. Presentment for aeceptance for certain kinds of Bills of Exchange — the bill of exchange shall be presented to ‘the drawee so that the latter will signify his agreement to the order of the drawer to pay. Acceptance — written assent of the drawee to the order. Dishonor by non-aeceptance — refusal to accept by the drawee. Presentment for payment — the instrument is shown to the maker or drawee/aceoptor so that the said maker or draweelacceptor will pay. TSeshveno Hen, Court of Appeals, ct a, Git No, 89252, May 24, 1909, 222, ‘SConsalidated Plywor Indusirios, ne. IRC Leasing and Ascoptance Corpo ration, GR No, 172503, Apel 30, 1987, 149 SCRA 448, 459 @ O) (ao ap PART I ~ NEGOTIABLE INSTRUMENTS a CHAPTER 1 ~ GENERAL CONSIDERATIONS Dishonor by non-payment — refusal to pay by the maker or drawee/acceptor. Notice of Dishonor — notice to the persons secondarily Viable that the maker or the drawee/acceptor refused to pay cr to accept the instrument. Protest (in some cases). Discharge.Chapter 2 NEGOTIABILITY ‘The requisites of negotiability are provided for under Section 1 of the NIL. It is the most important provision of the NIL because the law does not apply ifthe instrument does not meet the requisites of negotiability as provided therein. Section 1 of the NIL provides: Section 1. Form of negotiable instruments. — An instrument to be negotiable must conform to the follow- ing requirement (2) Itrmust be in writing and signed by the maker or drawer, {b) Must contain an unconditional promise or or- der to pay a sum certain in money: (c) Must bo payable on demand, or at a fixed or determinable future time; (@) Must be payable to order or to bearer; and (ec) Where the instrument is addressed to a draw- , he must be named or otherwise indicated theroin with reasonable certainty |, HOW NEGOTIABILITY IS DETERMINED. Negotiability of an instrument is dotormined by ascertaining if all the requirements of Section 1 appear on the face ofthe instrument. ‘The process of determining the negotiability of an instrument was described in Caltex (Philippines), Ine. v. Court of Appeals, etal! On this score, the accepted rule is that the negotiability for non-negotiability of an instrument is determined from the TER Wo 79, August 10, 1898, 212 SCRA 448, 485, 2 PARTI — NEGOTIABLE INSTRUMENTS 2 ‘CHAPTER? — NEGOTIABILITY writing, that is, rom the face of the instrument itself. In the construction of a bill oF note, the intention of the parties is to contro, ifit can be legally ascertained. While the writing may be read in the light of surrounding cireumstances in order to more perfectly understand the intont and moaning 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 itor substituted ia its stead. The duty of the court in such case isto ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, bat what is the meaning ofthe words they have used. What t parties meant must be determined by wht they said. In other words, the factors that affect the determination of negotiability of instruments are: 1) The whole ofthe instrument shall be considered; 2) Only what appears on the face of the instrument shall be considered; and 3) The provisions of the NIL, espocially Section 1 thereof, shall be applied." a, Acceptance. Consequently, “acceptance” of a bill of exchange is not impor- tant in the determination of its negotiability. In Philippine Bank of Commerce v. dose M. Aruego,’ respondent Aruego signed drafts as drawee-acceptor but later claimed that he was not liable under the drafts. One of the arguments that he raised was that the drafts signed by him were not really bills of exchange but mere pieces of evidence of indebtedness because payments were made before ac- ceptanee. The Supreme Court rejected the argument ruling that: “This is also without merit. Under the Negotiable Instru- ments Law, a bill of exchange is an unconditional order in writ- ing addressed by one person to another, sigmed by the person ving it, requiring the person to whom itis addressed to pay on demand or at a fixed or determinable future time a sum certain ‘in money to order or to bearer. As long as a commersial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange. The nature of neceptance is im- portant only in the determination ofthe kind of liabilities of the Parties involved, but net in the determination of whether a cam mercial paper ie a bill of exchange or not.” *Soeton Ni Gormco, Commas Law Ban Rivirwen, 1969 Ba, p.8, heainater referred to ax "Capanen.” SGR. Not. 1-25806-98, Jasuery 51, 1961, 102 SORA S80,Pr OTS AND CASES ON BANKING LAW AND NEGOTIABLE INSTRUMENTS LAW VOLUME b, Indorsement. In the same manner, the presence of an indorsement of the in- strument (or lack thereof) does not affect the negotiability of the in- strument. However, this rule is subject to the provision that a prom- iseory note that is payable to the order of the maker himself is not yet complete unless it is indorsed by the maker. Moreover, an in- dorser may prevent further negotiation of the instrument, in which ‘case, subsequent transferees can no longer be eonsidored holders * ¢ Rationale of Formalitie ‘The indispensable formalities of negotiable instruments make these instruments effective substitutes for money and desirable tools for credit transaction. The emphasis on the formal requisites of nogotisble instruments was further explained by Professor Chafee im this wise: “Although the law usually cares little about the form of ‘8 coniract and looks to the actual understanding of the parties ‘he mavde it, the form of negotiable instrument is essential for the security of mereantile transactions. The courts ought to en force these requisites of commarcial paper at the risk of hard. ship in particular cases, A businessman must be able to tell at fa glance whether he is taking commercial paper or not. There rust be no twilight zone between negotiable instruments and simple contracts If doubtful instruments are sometimes held to ‘be negotiable, prospective purchasors of queer paper will be en~ couraged to take a enance with the hope that an indulgent judge ‘will eall it negotiable, On the same principle, if trains habitually Teft late, more poople would miss trains than under a system of rigid punctuality Section 184, NIL. "Section 36, NIL. SCuarnn, Acceumarow Proraroe av Tras Paras, 32 HarvL.Rev, 747, 760 919) PARTI — NEGOTIABLE INSTRUMENTS 25 (CHAPTER 2 ~ NEGOTIABILITY CASE: 1. Determine if the following instrument is negotiable (assume that all the blenks were duly filed) “PROMISSORY NOTE (MONTHLY) P58, 138.20 San Fernando, Pampanga, Philippines Feb. 11, 1980 a “For value received, I/We jointly and severally, promise to pay Violago Motor Salca Corporation or order, at ite office in San Fernondo, Parspanga, the sum of FIFTY-EIGHT THOU. ‘SAND ONE HUNDRED THIRTY RIGHT & 20/100 ONLY (P58, 188.20) Philippine currency, which amount ineludes inter: estat 14% per annum based on the diminishing balance, the said principal sum, to be payable, without need of notice or demand, {in inetaliments ofthe amiourts following and ot the dates herein: ‘fter eet forth, to wit: P1,614.95 months for ‘36° monthly due and payable on the 21st day of each month starting March 21, 1980 ‘thru and inclusive of February 21, 1983. P __ monthly for. "—— manth due and payable on the ty ofeach months starting 195 thru and inclusive of__, 198 provided that interest at 14% per an- ‘nu hall be added on each unpaid inatallmont from mata hereof until fully paid. ° ox ax mx “Maker Co-Maker: (SIGNED) JUANITA SALAS: - Address: “WITNESSES SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE TANE TAN “PAY TO THE ORDER OF FILINVEST FINANCE AND LEASING CORPORATION *VIOLAGO MOTOR SALES CORPORATION By: (SIGNED) GENEVEVA V, BALTAZAR Cash Manager®NOTES AND CASES ON BANKING LAW AND NEGOTIABLE. INSTRUMENTS LAW VOLUME A: Thoinstrument ie negotiable. “A careful study of the questioned promissory note shows that itis « negotiable inatru- tment, having complied with the requisites under the law as fol- owe: {ait sin writing and signed by the maker Juanite Salas; {by it contains an unconditional promise to pay the amount of 58,136.20; [e] it s payable at a fixed or determinable future time which is "P1,614.95 monthly for 36 months due and pa ableon the 2ist day ofeach month starting March 21, 1980 thru and inclusive of eb. 21, 1983"; [dl tis payable to Violago Motor Sales Corporation, or order and as such. (Salas v. Hon. Court of Appeals, e al, G.R. No, 76788, January 22, 1990, 181 SCRA 296) I. EFFECT OF ESTOPPEL. fan instrument does not contain all the requisites of negotia~ bility specified in Section 1 of the NIL, can the instrument still be considered negotiable as between the parties on the basis of estop- pel? The Supreme Court took the affirmative stance in Banco de Oro Savings & Mortgage Bank v. Equitable Banking Corporation, et al." In the said case, the petitioner bank claimed that the Philippine Clearing House Corporation (PCHC for short) did not have jurisdic tion over the controversy involved because the instrument that was the subject matter of the case was not negotiable. The High Court ruled that the PCHC had jurisdiction over the ease because its Ar- ticles of Incorporation does not distinguish if the check involved is negotiable or non-negotiable, Furthermore, the Supreme Court ruled that the check may even be treated as negotiable beeause the petitioner was estopped from raising the defense of non-negotiabil- ity. The Supreme Court ruled: “Moreover, petitioner is estopped from raising the defense ‘of non-negotiability of the checks in question. It stamped its fruerantee on the back of the cheeks and subsequently presented theee ehocks for clearing and it was on the basis of these en- Aoreemente by the patitioner that the proceeds were credited in ite clearing account, ‘Tho petitioner by its own acts and representation can not now deny liability because it assumed the liabilities of an en Aorser by stamping its guarantee at the back of the checks. “The petitioner having stamped its guarantéd ofall prior endorsements and/or lack of endorsements” (Exhs: A-2 to F2) TGR. Ne, UF4017, January 20, 1988, 157 SCRA 188 AUNT RET ilies Sian ine Ree RN TES PARTI — NEGOTIABLE INSTRUMENTS ar ‘CHAPTER? — NEGOTLABILITY. tor expe enn at tn aca dr i om cates eat acres for deposit by the petitioner stamping thereon its guarantee, in order that it can clear the said checks with the respondent bank. oe eee erect Eastern catenatae tae bie gotiable instruments and accordingly assumed the warranty of eee a en eS modes Soca earn ee es eer ea tinge mae an Seer oe et a cso ae Beha oe saws eee eran eer case is not sound. believed that the parties cannot be considered ed eae are ena The negotiability of the instrument is determined by law and the Sestiae cannot change what is provided by law. In the Banco de eae es a See anaes Secale reas es coe negotiable instruments. es I THE REQUISITES OF NEGOTIABILITY, A. ITMUST BE IN WRITING SIGNED BY THE MAKER OR DRAWER. ‘The law requires a negotiable instrument to be in wri Whore it otherwise, the instrument cannot effectively subwtitute money. Historical reasons likewise account for the requirement that the instrument be in writing.‘ As explained by Professor Hawkland: ip wae necomarly prvenl. No sings, consequently, cauld acyuire acy rights in it.The ether wes the bal thet no confer of property could be mada wioet tana dion, Dela ar neaglie and printve wee a "Hawklend,p.9a NOTES AND CASES ON cer {KING LAW AND NEGOTIABLE INSTRUMENTS a VOLUME statute nomenon pee eee tere meas a ee Poco careee nerd cere aa eee eee rey telat Eeeeneras See . oe ee en re inn treme omens ma an rng aren ya ah ac een eee iene nde b linn ae Pon do ee eee en of eM includes print.” b. Type of Signature. With respect to the signature of the maker or the drawer, the rule it that th signature may be in ones handwriting, printod, engraved, lithographed or photographed s long as they are adopt ‘as the signature of the signer.* What is important is that the maker or the drawer used what he affixed as his own signature for authentication. The same rule is adopted in the Uniform Commercial Code in the United States. The said Code defines signature as “any symbol executed or adopted by a party with present intention to authenticate a writing.” PROBLEMS: jaan Cruz borzowed P1,000.00 from Pedro Santos as evi- 4 Ted bya promatry note excel ty X a make, Al other requisites of negotiability are present in the note except that Juan Cruz did not affix his usual signature ‘thereon. As Juan was ailing at that time, he was only able "it 8, Bros, Bas & Noms, 2nd 2 erie fered 8 “aeson™ Seton 001 oy en mE MEE MEME na I EB INCRE OS PARTI — NEGOTIABLE INSTRUMENTS 29 CHAPTER 2 — NEGOTIABILITY. to put °X" in the blank space meant for the signature of the maker. Is the requisite that the instrument must bo signed by the malcer complied with? A: Yes. The letter "Kis sufficient vo eomply with the require ‘ment that the instrument must be signed by the maker. It ‘appears from the problem that sich letter was adopted by ‘Juan Cruz with the intent to authenticate the instrum: Te is not necessary that tho signature is the usual sign thre ofthe maker. 2 promissory note states as follows: “I, Cecidia W.Danohe ‘after date Aogust 10, 2002 promiacs to pey to the order of ‘ pesos for value received with interest at 6% per annum." Tho note Was on a printed form, and the worls underscored above were in the handwriting of Mrs. Donohue. No signature appears at any other place on the note, [a the note signed Dy the maker? A: Yes, the fact that Mrs, Donohue's signature appears in the body of the note and not at the end is unimportant, so Jong as she intended thereby to obligate herself for its pay ‘ment. It is not necessary in a negotiable instrament that ‘the signature ofthe maker or the drawer should appear at the end thereof. IFhis name is written by him in ary part of the contract, or atthe top or the right or left hand, with the intention to sign or for the purpose of authenticating. the instrument, itis sufficient to bind him." B. IT MUST CONTAIN AN UNCONDITIONAL PRO- MISE OR ORDER TO PAY A SUM CERTAIN IN’ MONEY. a. Promise or Order to Pay. A.negotiable promissory note contains a promise to pay while a bill of exchange contains an orter to pay. The promise in.a promissory note is the undertaking made by the maker to pay a sum certain in money to the payee or the holder. The “order” in a bill is a command made by the drawer addressed to the drawee ordering the latter to ay the payee or the holder & sum certain in money. () Equivalent Words. ‘The word “promise” or “order” need not appearin theinstrument to satisfy the requirments of Section 1(b) of the NIL. In fact, the "in Re Donchwos Relate, 271 Pa. 664, 115A. B78 (1922,NOTES AND CASES ON 20 INSTRUMENTS LAW .W AND NEGOTIABLE INS BANKING LA\ mpO ASE i command of sword ‘order” does not normally appear to signify the eomm: the drawer. : Words that are equivalent to the word “promise” may be used in a promissory note. However, more acknowledgment of « debs 's insufficient. The Supreme Court explained in Pacifica dimer Dr. dose Bucoy:® come 0 promise bythe “hn acknowiedgment may become a a tion of trde by nhc promise af payment narally i Mina sucha, pay pupa on given. day ‘payable oh Jemand ‘paid... when ealled for’... (10 Corpus Juris dh 7-323) rece words of “To constitute a god promissory not, m0 contrat are necenary provides toy amount in egal tect to Sirois nay, Im ster word, over and bare he mere Libel the erence rom ore tie «promise to ay tthe instrumen rid wromissory note. 1 Daniel, Neg: Inst. sec. 36 et: 4:3 Byles, i Toeyttand eee ted ‘Doe A.B, 6325, papa on demand '-Fecknowledge myself to be indebted to A in $109, tobe pai Geman Totti Fseves 1.0. U. ARS toby pid on May Shri oe omar nin cence MRE Fees ag und caves eited. (Cowan vs. Hallack (Cal 13 P= ‘ic Reporter 700, 703)" with the provisions of ‘The above-quoted rule is consistent Section 10 ofthe NIL which provides that “the instrument need ne: follow the language of this Act, but any terms are sufficient whith ‘clearly indicate an intention to conform to the requirements hereof. (2) Receipts. / ‘The requirement of the NIL that an order or promise must be thorefore, complied with ifthe goeumont is « mere Pifeipe Thus, a cash disbursement. voucher is not a negotiable Jnstrument because it i a nothing more than a receipt evidencing pyment by borrowers of the loans previously extended to them. Ta the same manner, a withdrawal slip addressed to a Grawee ben present is not, Tee te pants istiine Pama ro PARTI — NEGOTIABLE INSTRUMENTS, a CHAPTER 2 — NEGOTIABILITY that is needed for the withdrawal of funds from a bank account is not negotiable. (8) Consideration of Entire Instrument. ‘The presence of an unconditional promise or order may also be satisfied by going over the entire instrument. As pointed out earlier, the whole of the instrumont should be considered in determining its negotiability. Thus, the tenor of the instrument and the presence of other words of negotiability may be sufficient indication of @ promise, Thus, an instrument that states “Due X P1,000.00" merely acknowledges tho existence of an obligation but an instrument that states “Due X or order P1,000.00" ean be deemed to contain an tunconditions] promise. The eollective tenor of the words used in the latter ~ specially the words ‘or order” — transform the instrament into a negotiable instrument from a mere acknowledgment. b. Promise or Order to Pay Must be Unconditional. (Q) Condition under the New Clvil Code, Under Articles 1173 and 1181 of the New Civil Codo, a condi- tion is a future and uncertain event,’or a past event unknown to the parties, the happening (positive) or non-happening (negative) of which may either give rise to an ebligation or may extinguish existing ones, The condition is suspensive if the happening or non- happening of the event will give rise to an obligation, the condition is resolutory if the happening or non-happening of the event will extinguish existing obligations. ‘The negotiability of the instrument is destroyed if the same, on its face, contains either a resolutory or suspensive condition. Thus, ® promissory note is not nogotiable if the maker promises to pay the payee or his order ifthe City of Manila becomes an independent republic, The promise in the said note is conditional. @) Section 3, NIL, Section 3 of the NIL deals with the requirement under Seetion \(b) that the promise or order stated in the instrument must be unconditional. Section 3 provides: “Firestone Tire & Ruther Company of the Philippines v, Court of Appeals and {uazon Dovalopment Bank, 6.8. No. 113236, March 8, 2001, 188 SCAD 127NOTHS AND CASES ON «LAW AND NEGOTIABLE INSTRUMENTS LAW BANKING LA\ BoOTiABL Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is uncont area ening afte Ack though coupled with — Ta)_An indication ofa particular und out of whlch seintadscmunt isto be made of pareuler account to vatdebted withthe amet or ion which gives A statomont of te transact rise s ie Instrument. But an order or promise to pay 55 ofa pertcuar tnd isnot unconetonal (a) Reference to Transaction. statement ofthe transaction that gave rise tothe ebigation covered bythe note othe bill doesnot destroy {he negtiaiity ofthe instrament. However, reference to another thanssetion or document must be deserptve rather chan restrictive, Teather words, the instrument must only give informat it ‘Ras nsued in connection with a partiular transaction or document. Feet not make the order or promise dependent on or burdened by the other transaction. — ‘Thos, an instrument that states that it was executed “as per contrart tug virtue of or ‘pursuant to” a specified contract is till negotiable beenuse there is merely a statement ofthe transaction ine nise t0 the obligation embodied in the instrument enRtonny, reference to a Chattel Mortgage does not make jnstrument non-negotiable. It was observed that: si i The reference in a nots to some extrinc agreement, 2 for vo estoy ies negotiabiity mast be such aa to indicat cae ate eee ante agreement tis wel aetled thet when the reference mores a rectal ofthe consideration for whieh the paper was BREEN ha mere mention of the onan of the transaction, ts oti fe not thereby affected. ™ Section 9 provides thata, (4) Subject to Transaction. However, ifthe instrument is restrict by the terms and con ditions of another transaction, eontraet or agreement, by incorporat; {ng the agreement or # portion thereof as part of the other, the sai TBizalde WC, Ine. v.Binan Transportation Company, CA-G.R. No, 12087-R, agrt, 1960, 56 0.6. 6886, 16 Vexaros Dicest 658-658, PART I — NEGOTIABLE INSTRUMENTS 3 (CHAPTER 2 — NEGOTIABILITY. instrument is non-negotiable, Consequently, a note that is “subject to" the provisions of another contract or document is not negotiable Anote is also not negotiable under the same principle if the amount is payable “as set forth in that certain agreement dated March 12, 2004" In fact, the negotiability of the instrument is affected the mo- ‘ment the holder is required to go beyond the instrument by requir {ing him to check the terms and conditions of another contract. Con- sequently, an instrument is not negotiable if it is “subject to the provisions of a contract of loan” irrespective of the provisions of the contract of loan. In other words, the negotiability of the instrument “is destroyed even if the separate contract to which the instrument is subjected to is in fact not conditional as the term is understood under the New Civil Code, Although the obligation involved is re- ally unconditional the instrument may be considered not negotiable if, on its face, it is burdened by the separate contract. Negotiation is deterred because anybody who takes the instrument will have to check the terms and conditions of the other agreement referred to in the instrument. (5) Account to be Debited or Source of Payment. The negotiability of the instrument is affected if what is specified is the account or fund out of which payment is to be made, Hence, the instrument is not negotiable if it states: “Pay to the order of Juan de Ia Cruz P10,000.00 out of my account with you.” This instrument is conditional because the obligation to pay is subject to the condition that the funds in the account are sufficient. The order to pay is not absolute because no payment will be made if the amount in the account is less than P10,000.00. Consequently, « note is also not negotiable if it contains the following words: “This note is given in payment of merchandize and is to be liquidated by payments reeeived on account of sale of such merchandize."* ‘The test that should be applied is this: Does the instrument earry the general credit of the drawer or maker, or only the credit of a particular fund? ‘Salemonaky v. Kelly, 349 5.8.24 958 (1986). "United States v, Farrington, 172 F Supp. 797, Masa; See alsy Annotation, 304 ALR 1978, Glendora Bonk v, Davie, 204 Cal 220,267 Poe 11 *Siuncio Guevanea, Haxoocor oF Conon Lat, 1th Ee. p. 54, hereinal- ter referred to a8 “Guevara,”NOTES AND CASES ON RANKING LAW AND NEGOTIABLE INSTRUMENTS LAW ‘VOLUMET I the instrument specifics the account from which payment ts to be debited, tho instrument is still negotiable. The promise ct + Nero pay is still unconditional. For example, the instruret ty ofl nogotiable [assuming all the other requirements Gh present) a ease "Pay to the order of Juan de Ia Cruz PLO,000.00 and ‘alke the same from my account.” The order is still ‘unconditional debit ont is reflected iz am absolute obligntion to pay the ae OF 10,000.00, The specified account is only the seuss amouriyarsement ater payment. If the fimds in the account ore of Titont, there would still be an obligation to pay the payee Aithough the drawee may not be fully reimbursed. In the latter ease where the aecount from which payment 15 to be debited is indicated, the willingness of the drawee (0 pay 's 2 ae ocl Ifthe account to be debited may not fully cover the aoe at ctated in the instrument, the drawee may be unwilling 19 uv the payee, Ths wil not affect the negntiability benusa what Pay ortant is the unconditional nature ofthe promise or order Pet sertet the willingness ofthe obligor to comply with the promise oF order, CASE: METROPOLITAN BANK & TRUST COMPANY vy. COURT OF APPEALS IG.R. No. 88806, February 18, 1991] 194 SCRA 169 ‘This case, forall its seeming complexity, turns on a simple question of angligence The fots, pruned ofall non-essentials, are easily 112 "The Metropolitan Bank and Trust Co, is a commereial, bank with ran ighout the Philippines and even sbrond. Golden Savings ax, rae ation ert, at the time those events happened, operating in Cal tear fandoro, with the otber private respondents a ts prinipal efees. tn January 1979, a certain Eduardo Gomer opened an aceount with Golden Sevings and depoeited over a period of two months 28 treantty serge a ith a total value of P1,755,228.37. They were all drawn by the Titenine Fish Marketing Authority and purportedly signed by its Coners) cas aeertand counter-signed by ite Auditor. Six ofthese were direstly pa Manate(umer while the others appeared to have been indorsed by their feapective payees, followed by Gomez as second indoreer june 25 and July 16, 1970, all these war- ria Castillo aa Cashier of Golden 498 in the Metrobank (On various dates between Jt ranls wore subsequently indorsed by Glo ‘Buvinge and deposited to its Savings Account No, 2 eer a, eapomnen nenme * lindoro. They were then sent for clearing ‘office of Mei ec clearing by the branch sip mn ef of Men when rare he eee us ces re ts Se ert ee ce ened a was told to wait. Accordingly, Gomez was meanwhile se ent etthet tan recat oar carmen init meet nemendire eacemmic eT Oe ore marerminaeeraae acess aee he 1¢ proceeds of the warrants. The first withdrawal was made ‘4 Suing imeem ences oe barr 1000.00, and the third on July 16, 1979, in the " 000.00. The total withdrawal was P968,000.00. emeneet In tarn, Golden Sai lowed disrl tromhsoen rote evade eta Bl tet FLIE74000 fom te pee ofthe appre Seal wart: T ‘withdrawal was made on July 16, 1979. ne (on duly 21, 1979, Metrobank inform vgs 1873, Informed Golden Sa ‘warrants had been dishonored by the Bi . eee wera Bareat ef Teaniry on Sn Ananda the rind by Gen Savings ote aun had pen irawn, to make up the deficit in its seeount, acai (ederim i ction dp aearoae Oita ince at ree cence nd dain the compli On apa th Cr of Anas ian dem hi Or Cu a ‘The petition has no morit, a Shatin enay warts ia haan nee Seca nen sg Sect pottenethro “andrei th ch prolbech edad pepstettgeg pt nel ag shee Gen Sen ih en reel Tiblty for atest positor, who could therefore wi poser, ithdraw it any time and for any reason he a we a cauls te cee reer ies of its own. lied on Metrobar = cece eo neces withel rom Gomes ntl Metobonk lowed GalenSavings itself to withdraw them from ita own deposit. It was only when aaa gave the go-signal that Gomoz was finally ellowod by Golden Savings to withdraw them from his own account. ‘The argument of Metrobank that Golden Savings should have exer- csed neve taro in checking the personal circumstances of Come before SeSpting hie deposit does not hold water. It was Gomez who was entrust, aera nrrants, not Golden Savings that was extending him a loan, one sa ioe oe the treewury warrants were subject to clearing, pending which a eynctor could rot withdraw its proceeds There was no question of Co aoe se Tdentity or of the genuineness of his signature as checked by Golden Savings, In fact, the teonsury warrants were dishonored allegedly because sevtetforgeny of te sigaatures ofthe drawers, nt of Gomez 88 payee oF in aaa Rice the eireumstances, is clear that Golden Savings acted with race nd diligence and cannot be faulted for the withdrawals it allowed ‘Gomes to moke, By contrast, Matrobark exhibited extraordinary carelessness. The amount invelved was not trifling — more than one and a half million pases ae ihin was 1979), There waa no reason why it should not have waited (ani the creseury warrants had been cleared it would not have lot single aaartaan by waiting, Yet, despite the lack of such clearance — and notwith: Standing that it had aot received a single centavo from the proceeds of the snare warrants, as it now repeatedly stressos — it allowed Golden Say. {ge to withdeaw not once, cot twice, but thrice ~ from the uncloared treasury warrants in the total amount of P368,000.00, ‘ta reason? Ie was “exasperated” over the persistent inquiries of Gloria Castile about the clearance and it aloo wanted to “accommodate” a valued Rent Te =presumed”™ that the warrants had been cleared simply beeause of ‘the lapec of ene week.” For a bank with its long experienee this explans- ‘on is unbelievably naive. “The negligence of Motrobank has been sufficiently established. To re- peat for emphasis, it-was the clearance given by i€ that assured Golden Ravings it wae already safe to allow Gomes to withdraw the proceeds of the treasury warrants he had deposited. Metrobank misled Golden Savings Thore may have been no express clearance, us Metrobank insists (although tha ie reuted by Golden Savings) but in any case that clearance could be {taped from its allowing Golden Savings to withdraw frem its account not unl once or even twice but three times. The total withdrawal was n exooes orits oriinal balance before the treasury warrants were deposited, which Ship aide to its belief that the treasury warrants had indeed been cleared. Metrobanics axgument that it may recover the disputed amount if the warranta aro not paid far any reason is not acceptable, Any reason doos fot mean no reason at all, Otherwise, there wortd have been no need at Bil for Golden Savings to deposit tho treasury warrants with it for elear- PART _ NEGOTIABLE INpTRLMENTS CHAPTER 2 — NEGOTTABILITY = ance. There would have been no ned foi to wat ned fo i at unl wo ir ned rn re hres Coma Sah cnt i interpreted in the way the petitioner soggess, isnot binding for beng sey ad untae bss mor sw when it is considered that the supposed dishonor of the warrants was = Communiceedo Geen Savings ble trade town payent ts Gomer The belted nticaton aggravated the pei soles 1 vated the potioner arr ing enon Tplad decom the oancey omnes and Allowing payments therefrom to Golden Savings. ut that iat

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