Negotiable Instruments

Law
By: Atty. Richard M. Fulleros, CPA, MBA
 Chapter 1
• Functions of Negotiable instruments
• Features of Negotiable instruments
• Bill of exchange
• Promissory note
 Negotiable Instruments Law – Chap. 1
• Governing Law - Negotiable Instruments Law (Act No. 2031)
• NIL is applicable only when the instrument is negotiable
• Based on American Uniform Negotiable Instruments Law (1882)
 GSIS vs. Racho GR NO. L-40824
• Facts: Spouses Racho together with Spouses Lagasca executed a deed of mortgage in favor of GSIS in
connection with 2 loans granted by the latter in the sums of p11,500.00 and p3,000.00, respectively. A
parcel of land co-owned by the mortgagor spouses was govern as security under the aforesaid deeds and
executed a promissory note promising to pay the said amounts to GSIS jointly, severally and solidarily.
• The Lagasca spouses executed an instrument obligating themselves  in the assumption of the aforesaid
obligation and to secure the release of the mortgage.
• Failing to comply with the conditions of the mortgage, GSIS extrajudicially foreclosed the mortgage and
caused the property to be sold at public auction.
• More than 2 years after, Spouses Racho filed a complaint against GSIS and Spouses Lagasca praying  that
the extrajudicial foreclosure be declared null and void. They allege that they signed the mortgage
contracts not as sureties for the Lagasca spouses but merely as accommodation party
 Issue:  WON the promissory note and
mortgage deeds are negotiable.
Held: No. Section 29 of the NIL provides that an accommodation party is one
who has signed an instrument as maker, drawer, acceptor of indorser without
receiving value therefore, but is held liable on the instrument to a holder for value
although the latter knew him to be only an accommodation party.
Both parties appears to be misdirected and their reliance misplaced. The
promissory note, as well as the mortgage deeds subject of this case, are clearly not
negotiable instrument because it did not comply with the fourth requisite to be
considered as such under Sec. 1 of the NIL – they are neither payable to order nor
to bearer. The note is payable to a specified party, the GSIS.
 Functions of Negotiable Instruments
• It is substitute for money
• It is a medium of exchange
• It is a credit instrument which increases credit circulation
• It increases purchasing power in circulation
• It is proof of transaction
 Substitute for money
• it serves as an extension of credit. For it to work, it is imperative that the
instrument be easily transferable without danger of being uncollectible
 Medium of exchange

• is an intermediary instrument or system used to facilitate the sale,

purchase, or trade of goods between parties.
 It is a credit instrument
• it is the term used to describe a time agreed upon that can be used as a
currency. It also provides a written means from future reference
describing the terms and conditions of a loan or debt.
 It increases purchasing power in
circulation
• A higher real income means a higher purchasing power since real income
refers to the income adjusted for inflation
 It is proof of transaction
• It is an evidence that will identify the supplier, date of the supply of goods
or things or services that are/is supplied to tha purchaser.
 Emilia Lim vs. Mindanao Wine
• FACTS:Sales Invoice No. 1711 and Statement of Accounts No. 076 indicate that MindanaoWines and
Liquor Galleria delivered several cases of liquors to H & E Commercial owned by Emilia Lim, for
which the latter issued four (4) Philippine National Bank (PNB)postdated checks worth P25,000.00
each. When two (2) of these checks bounced forthe reasons “Account Closed” and “Drawn Against
Insufficient Funds”, Mindanao Wines,thru is properties Evelyn Valdevieso, demanded from H & E
Commercial the payment of their value through two (2) separate letters. When the demands went
unheeded,Mindanao Wines filed before the Municipal Trial Court in Cities against Emilia forviolations
of Batas Pambansa Bilang 22.Emilia was not found guilty as one (1) of the elements was not proven.
However, she was held civilly liable when her Demurrer to Evidence failed to refute the
prosecution’sevidence, that is, the issuing of the checks for value.Consequently, she petitioned asserting
that the dismissal of her case likewise includes the dismissal of their civil aspect considering that
acquittal is based on reasonable doubt as only preponderance of evidence is required in civil cases.
Issue: W/O not the dismissal of criminal case
carries with it the dismissal of civil
Held: NO
Even if acquitted of the criminal case, respondent can still be prosecuted
civilly. The SC used as evidence, the checks issued
Citibank and Investors Finance Corporation vs Modesta Sabeniano
G.R. No. 156132
October 16, 2006

FACTS: Modesta Sabeniano is a client of Citibank and FNCB Finance. On February 1978,
Sabeniano obtained a loan of Php 200,000 from Citibank. This loan was followed with
several other loans – some were paid, while some were not. Those that were not paid upon
maturity were rolled over, reflecting a total unpaid loan of Php 1,069,847.40 as of
September 1979.
These loans were secured by Sabeniano’s money market placements with FNCB Finance
through a Deed of Assignment plus a Declaration of Pledge which states that all present and
future fiduciary placements held in her personal and/or joint name with Citibank
Switzerland, will secure all claims that Citibank may have or, in the future, acquire against
her.
 Held
HELD: The Supreme Court reversed the CA’s findings regarding Sabeniano’s Citibank loan as this
was properly documented and sufficient in evidence. Thus, the execution of deeds was valid,
especially that the agreement was duly notarized, signed and prepared in accordance with the law.
• The court also ordered Citibank to return the amount of P318,897.34 and P203,150.00 plus
14.5% per annum to Sabeniano. This is the total amount from the 2 PNs which were executed
despite being reinvested in said bank. The bank was also ordered to pay moral damages of
P300,000, exemplary damages for P250,000, attorney’s fees of P200,000.
• The SC however affirmed the RTC’s decision regarding the pledge. Being a separate entity,
Citibank cannot exercise automatic remittance from Sabeniano’s Citibank Geneva account to off-
set her outstanding loan.
Negotiable Instruments are not 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 for all debts, both
public and private: Provided, however, That, unless otherwise fixed by the
Monetary Board, coins shall be legal tender in amounts not exceeding Fifty
pesos (P50.00) for denominations of Twenty-five centavos and above, and in
amounts not exceeding Twenty pesos (P20.00) for denominations of Ten
centavos or less.
 Tibajia vs. CA GR No. 100290
• FACTS
• Tibajia spouses delivered to Sheriff the total money judgment in cashier’s
check and cash.Private respondent, Eden Tan, refused to accept the
payment made by the Tibajia spouses and instead insisted that the
garnished funds deposited with the cashier of the Regional Trial Court of
Pasig, Metro Manila be withdrawn to satisfy the judgment obligation.
Tibajias filed a motion to lift the writ of execution on the ground that the
judgment debt had already been paid. The motion was denied.
 Issue
• Whether or not payment by means of cashier’s check is considered
payment in legal tender.
 Ruling
NO. A check, whether a manager’s check or ordinary check, is not legal
tender, and an offer of a check in payment of a debt is not a valid tender of
payment and may be refused receipt by the obligee or creditor. A check is
not legal tender and that a creditor may validly refuse payment by check,
whether it be a manager’s, cashier’s or personal check. The Supreme Court
stressed that, “We are not, by this decision, sanctioning the use of a check
for the payment of obligations over the objection of the creditor.”
 Exception - PNB vs. Seeto 91 S 757
• FACTS:
• Seeto called at a branch of bank and presented a check payable to cash or bearer,  and  drawn  by  Kiao  against 
PBC.    After  consultation  with  the employees, Seeto made a general and qualified indorsement of the check.  He 
was  then  paid  the  amount  of  the  check  by  bank.    The  check  was consequently  dishonored,  a  letter  was 
sent  to  Seeto  and  was  asked  to refund the money given to him.  A second letter was sent to him and he averred
that case against him be deferred while he inquired about why the
check  was  dishonored.    Thereafter,  he  refused  to  pay,  alleging  that  the account against the check was drawn
had sufficient funds when the check was drawn and if the bank didn’t delay in clearing the check, there would have
been sufficient funds.  

The appellate court reversed the lower court in its decision.  It ruled that the bank was guilty of unreasonably
retaining and withholding the check, and that the delay in the presentment was inexcusable, so that respondent
thereby was discharged from liability.
• HELD:
• Section 84 is applicable, nonetheless, it should be read in correlation with Section  186,  which  says  that 
presentment  should  be  within  reasonable time.
 Features of Negotiable Instruments
• Negotiability
• Accumulation of secondary contracts
 Promissory Note - Definition
• Art. 184
• I promise to pay to the Order of _________ the amount of P100,000.00
on December 31, 2021.
Maker - one who signs the PN
Payee - one who receives the PN
 Bill of exchange - Definition
Unconditional Order in writing
Checks -
Drawer - a person who issues and signs the check
Payee - person who receives
Drawee - bank who is ordered to pay
 Chapter 2 - Negotiability
• Section 1 - Form of negotiable instruments. - An instrument to be negotiable must conform to the
following requirements:
• (a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty.
 Acceptance of instrument not a requisite for
negotiability
• PBC vs. Aruego, GR No. L-25836
• Facts:
• Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case... for the recovery of the total sum of
about P35,000.00
• The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of action referring to
twenty-two (22)... transactions entered into by the said Bank and Aruego on different dates
• The sum sought to be recovered represents the cost of the printing of "World Current Events," a periodical...
published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation
from the plaintiff.
• Thus, for every printing of the "World Current Events," the printer, Encal Press and Photo-Engraving, collected the
cost of printing by drawing... a draft against the plaintiff, said draft being sent later to the defendant for acceptance.
 Issue
• Is acceptance of instrument a requisite for its negotiability?
 Ruling
No.
In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter.
He lends his name to enable the accommodated... party to obtain credit or to raise money.
In the instant case, the defendant signed as a drawee/acceptor. Under the Negotiable
Instruments Law, a drawee is primarily liable.
The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of
evidence of indebtedness because payments were made before acceptance. This is also without merit.
As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a
bill of exchange. The nature of acceptance is important only in the determination of the kind of liabilities of
the parties involved, but not in the... determination of whether a commercial paper is a bill of exchange or not.
 Requisites of Negotiability
1. It must be in writing and signed by the maker or drawer
• Electronic messages
• Materials
• Type of signature
 HSBC vs. CIR GR No. 166018
Facts: 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.
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.”
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.
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.
 Issue
Whether or not the electronic messages are considered transactions 
pertaining to negotiable instruments that warrant the payment of DST.
 Ruling
• 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.
 Requisites of negotiability
2. It must contain an unconditional promise or order to pay a sum certain in
money.
• When is it unconditional
• Equivalent words
• Mere acknowledgement not sufficient
 When promise is unconditional
• Section 3
a promise or order is deemed to be unconditional unless one of the two tests
of the subsection make the promise or order conditional. If the promise or
order states an express condition to payment, the promise or order is not an
instrument.
 MBTC vs. CA GR No. 88866
• In 1979, Eduardo Gomez opened an account with Golden Savings (GS)
and deposited 38 treasury warrants (TW) worth P1.7M. GS then
deposited the TW with MBTC who, instead of waiting for the TW to be
cleared by the Bureau of Treasury, allowed GS to withdraw because GS is
a good client. GS then allowed Gomez to withdraw from his savings with
GS. Later on, MBTC informed GS that the TW were dishonored. MBTC
then demanded that GS return the money.
 Issue
• Whether or not the TW are negotiable instruments even though the fund
for which the TW will be paid is clearly indicated
 Held
• No. A statement where the account for which the instrument is to be
debited or drawn does not make it not unconditional. MBTC exercised
extraordinary carelessness in paying GS.
 Certainty as to sum
• Section 2 - The sum payable is a sum certain within the meaning of this act,
although it is to be paid
a. with interest
b. stated installments
c. stated installments with a provision that upon failure to pay installment, the
whole shall become due
d. With exchange
e. with costs of collection
 When payable on demand
• Section 7
• if it states that is payable on demand or at sight or otherwise indicates that
it is payable at the will of the holder
• does not state any time of payment.
 When is an instrument payable at a
determinable future time?
• Section 4
• at a fixed period after date or sight
• on or before a fixed or determinable future time specified therein
• On or at a fixed period after the occurrence of a specified event which is
certain to happen, though the time of happening be uncertain
 Clauses in the instruments
• Acceleration clause
it outlines the reasons that the lender can demand loan repayment and the repayment
required.
• Extension clause
it is an instrument is payable at a definite time if:
1.By its terms it is payable at a definite time subject to extension to a further
definitetime at the option of the maker or acceptor;
2.Automatically upon or after a specified act or event.
When is an instrument payable to bearer?
• Section 9
• when it is expressed to be so payable
• when it is payable to a person named therein or bearer
• when it is payable to the order of a fictitious or non-existing person, and
such fact was known to the person making it so payable
• when he name of the payee does not purport to be the name of any person
• when the only or last indorsement is an indorsement in blank
 PNB vs. Rodriguez GR No. 170325
FACTS:
Respondents-Spouses Rodriguez maintained savings and demand/checking accounts with petitioner. In line with
their informal lending business, they had a discounting arrangement with PEMSLA, an association of PNB
employees, which regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated
checks issued to members whenever the association was short of funds, and would replace the postdated checks
with their own checks issued in the name of the members.PNB later on found out that some PEMSLA officers
took out loans in the names of other members, without their knowledge or consent by forging the indorsement of
the named payees in the checks. PNB then closed the current account of PEMSLA. The checks deposited to
PEMSLA however, were debited from the Rodriguez account. Thus, spouses Rodriguez incurred losses.
The spouses Rodriguez filed a civil complaint for damages against PEMSLA and PNB. They sought to recover
the value of their checks that were deposited to the PEMSLA savings account amounting to P2,345,804.00. The
spouses contended that PNB paid the wrong payees, hence, it should bear the loss.
The RTC rendered judgment in favor of spouses Rodriguez, and ruled that PNB is liable to return the value of
the checks.
 Issue
• Whether the subject checks are payable to order or to bearer and who
bears the loss.
 Ruling
The check if payable to Order.
A check is “a bill of exchange drawn on a bank payable on demand.” It is either an order or a bearer instrument.
As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is
considered as a bearer instrument.
Under Section 30 of the NIL, an order instrument requires an indorsement from the payee or holder before it may be
validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be validly negotiated.
It is negotiable by mere delivery.
Under Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer
instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to the person
making it so payable. Thus, checks issued to “Prinsipe Abante” or “Si Malakas at si Maganda,” who are well-known
characters in Philippine mythology, are bearer instruments because the named payees are fictitious and non-existent.
 Ruling – cont.
• The subject checks are presumed order instruments. This is because, as found
by both lower courts, PNB failed to present sufficient evidence to defeat the
claim of respondents that the named payees were the intended recipients of the
checks’ proceeds. The bank failed to satisfy a requisite condition of a fictitious-
payee situation – that the maker of the check intended for the payee to have no
interest in the transaction.
• Because of a failure to show that the payees were “fictitious” in its broader
sense, the fictitious-payee rule does not apply. Thus, the checks are to be
deemed payable to order. Consequently, the drawee bank bears the loss.
 Fictitious payee rule
• when a person making the check so payable did not intent for the specified
payee to have any part in the transaction, the payee is considered as
fictitious payee.
 When is an instrument payable to order
• Section 8
• A payee who is not maker, drawer, or drawee
• The drawer or maker
• The drawee
• Two or more payees jointly
• One or some of several payees
• The holder of an office for the time being
 Differences between instrument payable to
order, and payable to bearer
• an instrument payable to order requires the indorsement of the person to
whose order the instrument is payable while an instrument is payable to
bearer if it states that it is payable to bearer, but some instruments use
ambiguous terms
 Salas vs. CA 181 S 296
• FACTS:
• Petitioner  bought  a  car  from  Violago  Motor  Sales  Company,  which  was secured  by  a 
promissory  note,  which  was  later  on  indorsed  to  Filinvest Finance,  which  financed  the 
transaction.    Petitioner  later  on  defaulted  in her  installment  payments,  allegedly  due  to 
the  fraud  imputed  by  VMS  in
selling her a different vehicle from what was agreed upon.  This default in payment  prompted 
Filinvest  Finance  to  initiate  a  case  against  petitioner.  The  trial  court  decided  in  favor 
of  Filinvest,  to  which  the  appellate  court upheld by increasing the amount to be paid.
• It is the contention of petitioner that since the agreement between her and the  motor 
company  was  inexistent,  none  had  been  assigned  in  favor  of private respondent.  
 Held
• Petitioner’s  liability  on  the  promissory  note,  the  due  execution  and genuineness of which she never
denied under oath, is under the foregoing factual milieu, as inevitable as it is clearly established.  The records
reveal that involved herein is not a simple case of assignment of  credit  as  petitioner  would  have  it  appear, 
where  the  assignee  merely steps  into  the  shoes  of,  is  open  to  all  defenses  available  against  and  can
enforce payment only to the same extent as, the assignor-vendor.
 
The  instrument  to  be  negotiable  must  contain  the  so-called  words  of negotiability.    There  are  only  2 
ways  for  an  instrument  to  be  payable  to order.  There must always be a specified person named in the
instrument and the bill or note is to be paid to the person designated in the instrument or  to  any  person  to 
whom  he  has  indorsed  and  delivered  the  same.  Without the words “or order” or “to the order of”, the
instrument is payable only  to  the  person  designated  therein  and  is  thus  non-negotiable.    Any subsequent 
purchaser  thereof  will  not  enjoy  the  advantages  of  being  a
holder  in  due  course  but  will  merely  step  into  the  shoes  of  the  person designated  in  the  instrument 
and  will  thus  be  open  to  the  defenses available against the latter.  
 
In  the  case  at  bar,  the  promissory  notes  is  earmarked  with  negotiability and Filinvest is a holder in due
course
 Effect of date in the instrument
• When can the date be inserted?
where the instrument is payable at fixed period after date but is issued undated and
where the instrument is payable at a fixed period after sight but the acceptance is undated
• Presumption as to date
where a party has acted within a reasonable time, but not make the instrument negotiable
• Ante dating
when it contains a date earlier than the actual issuance. It is also known as backdate
• Post dating
when it contains a date later than the actual issuance.
 SMC vs. Puzon, Jr.
• Respondent Bartolome V. Puzon, Jr., (Puzon) owner of Bartenmyk Enterprises, was
adealer of beer products of petitioner San Miguel Corporation (SMC) for Parañaque
City. Puzonpurchased SMC products on credit. SMC required him to issue postdated
checks equivalent tothe value of the products purchased on credit as a security and
said checks are to be returned toPuzon when the transactions covered by these
checks were paid or settled in full. Bank of the Philippine Islands (BPI) Check Nos.
27904 (for P309,500.00) and 27903 (forP11,510,827.00) to cover the said transaction
of Puzon to SMC was issued. BPI Check No.27903 was allegedly stolen by Puzon
when he together with his accountant visited SMC officefor reconciliation of their
accounts
 Facts – cont.
• SMC sent a letter to Puzon on March 6, 2001 demanding the return of the said checks.
Puzon ignored the demand hence SMC filed a complaint against him for theft with the City
Prosecutor'sOffice of Parañaque City. The prosecutor found lack of evidence for the
commission of the crime which wasaffirmed by the RTC. Petition for certiorari with the
CA was also denied which states that the postdated checks were issued by Puzon merely as
a security for the payment of his purchases and that these were not intended to be
encashed. It thus concluded that SMC did not acquire ownership of the checks as it was
duty bound to return the same checks to Puzon after the transactions covering them were
settled. The CA agreed with the prosecutor that there was notheft, considering that a person
cannot be charged with theft for taking personal property that belongs to him
 Issue
• . Issues: WHETHER or not the postdated checks issued by Puzon
transferred ownership topetitioner making him liable for theft?
 Ruling
No, the check still belongs to Puzon, hence not liable of theft. Negotiable InstrumentsLaw provides: Sec.
12. Antedated and postdated- The instrument is not invalid for the reason only thatit is antedated or
postdated, provided this is not done for an illegal or fraudulent purpose. Theperson to whom an
instrument so dated is delivered acquires the title thereto as of the date ofdelivery. (Underscoring
supplied.)Note however that delivery as the term is used in the aforementioned provision meansthat the
party delivering did so for the purpose of giving effect thereto. Otherwise, it cannot besaid that there has
been delivery of the negotiable instrument. Once there is delivery, the personto whom the instrument is
delivered gets the title to the instrument completely and irrevocably.If the subject check was given by
Puzon to SMC in payment of the obligation, thepurpose of giving effect to the instrument is evident thus
title to or ownership of the check wastransferred upon delivery. However, if the check was not given as
payment, but being mere