Law on Negotiable Instruments

LAW ON NEGOTIABLE INSTRUMENTSACT NO. 2031February 03, 1911

TABLE OF CONTENTSPART 1: Identifying a Negotiable Instrument Introduction of Text book, secs. 1, 126, 184, 185 ....................................................................................................................... 3 Read secs. 1 – 9; also read secs. 10, 12, 17 – 22 ........................................................................................................................... 3 Read Caltex vs. CA (G.R.97753) 212 SCRA 448 ............................................................................................................................. 5

Part 2: Understanding “negotiation” and “indorsement” Read secs. 30 – 38 ......................................................................................................................................................................................13 Read secs. 39 – 50........................................................................................................................................................................................13 Read Salas vs. CA (G.R. 76788) 181 SCRA 296 .............................................................................................................................14

Part 3: Parties to a negotiable instrument and their liabilities Read secs. 60 – 65........................................................................................................................................................................................19 Read secs. 66 – 69; sec. 29 ......................................................................................................................................................................19 Read Ang Tiong vs. Ting (G.R. L – 26767) 22 SCRA 713 ..........................................................................................................20 Part 4: Acceptance, Payment and Dishonor: Procedures Read secs. 132 – 151 ..................................................................................................................................................................................22 Read secs. 70 – 88; 89 - 117 ..................................................................................................................................................................23 Part 5: Holder and his rights. Defenses against him Read secs. 52, 51 – 59 ................................................................................................................................................................................27 Read De Ocampo vs. Gatchalian (G.R. L – 15126) 3 SCRA 596.............................................................................................28 Read secs. 14 – 16; 124 – 125; 23 .......................................................................................................................................................33 Read Associated Bank vs. CA (G.R. 107382) 252 SCRA 622 ..................................................................................................34 Others: Read secs. 185 – 189; 119 – 123;178 – 183 ...............................................................................................................43 Appendix A: Negotiable Instruments Law ....................................................................................................................................45 NEGOTIABLE INSTRUMENTS|1

Text: DE LEON, The Law on Negotiable Instruments (with Documents and Titles)No. 1 2 Date: 13 November 2010 20 November 10 Coverage and Cases Lecture: Basic Concepts inn Negotiable Instrument Assignment: Bring used check Part 1: Identifying a negotiable instrument Introduction of text book, secs. 1, 126, 184, 185 Read secs. 1 – 9; also read secs. 10, 12, 17 – 22 Read Caltex vs. CA (G.R.97753) 212 SCRA 448 Part 2: Understanding “negotiation” and “indorsement” Read secs. 30 – 38 Read secs. 39 – 50 Read Salas vs. CA (G.R. 76788) 181 SCRA 296 Quiz for Part 1 Continuation of Part 2 Part 3: Parties to a negotiable instrument and their liabilities Read secs. 60 – 65 Read secs. 66 – 69; sec. 29 Read Ang Tiong vs. Ting (G.R. L – 26767) 22 SCRA 713 Continuation of Part 3 Quiz for Part 2 Prelims covering parts 1 – 2 Quiz for Part 3 Part 4: Acceptance, Payment and Dishonor: Procedures Read secs. 132 – 151 Read secs. 70 – 88; 89 - 117 Part 5: Holder and his rights. Defenses against him Read secs. 52, 51 – 59 Read De Ocampo vs. Gatchalian (G.R. L – 15126) 3 SCRA 596 Quiz for Part 4 Continuation of Part 5 Read secs. 14 – 16; 124 – 125; 23 Read Associated Bank vs. CA (G.R. 107382) 252 SCRA 622 Others: Read secs. 185 – 189; 119 – 123;178 – 183 Optional Quiz for Part 5 Integration Finals covering all parts

STUDY SCHEDULE (ATTY. G.I. BANZON)

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Sources: Chanrobles.com Lawphil.net NEGOTIABLE INSTRUMENTS|2

PART 1: IDENTIFYING A NEGOTIABLE INSTRUMENTINTRODUCTION: Sec. 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements: a) It must be in writing and signed by the maker or drawer; b) Must contain an unconditional promise or order to pay a sum certain in money; c) Must be payable on demand, or at a fixed or determinable future time; d) Must be payable to order or to bearer; and e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. Sec. 126. Bill of exchange, 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. Sec. 184. Promissory note, defined. - A negotiable 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, it is not complete until indorsed by him. 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 check.

READ SECS. 1 – 9; ALSO READ SECS. 10, 12, 17 – 22I. FORM AND INTERPRETATION Sec. 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements: a) It must be in writing and signed by the maker or drawer; b) Must contain an unconditional promise or order to pay a sum certain in money; c) Must be payable on demand, or at a fixed or determinable future time; d) Must be payable to order or to bearer; and e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act, although it is to be paid: a) with interest; or b) by stated installments; or c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or d) with exchange, whether at a fixed rate or at the current rate; or e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity. Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with: a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or b) A statement of the transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional. Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: a) At a fixed period after date or sight; or b) On or before a fixed or determinable future time specified therein; or c) 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.

NEGOTIABLE INSTRUMENTS|3

An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which: a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or b) authorizes a confession of judgment if the instrument be not paid at maturity; or c) waives the benefit of any law intended for the advantage or protection of the obligor; or d) gives the holder an election to require something to be done in lieu of payment of money. But nothing in this section shall validate any provision or stipulation otherwise illegal. Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that: a) it is not dated; or b) does not specify the value given, or that any value had been given therefor; or c) does not specify the place where it is drawn or the place where it is payable; or d) bears a seal; or e) designates a particular kind of current money in which payment is to be made. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. Sec. 7. When payable on demand. - An instrument is payable on demand: a) When it is so expressed to be payable on demand, or at sight, or on presentation; or b) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: a) A payee who is not maker, drawer, or drawee; or b) The drawer or maker; or c) The drawee; or d) Two or more payees jointly; or e) One or some of several payees; or f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. Sec. 9. When payable to bearer. - The instrument is payable to bearer: a) When it is expressed to be so payable; or b) When it is payable to a person named therein or bearer; or c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or d) When the name of the payee does not purport to be the name of any person; or e) When the only or last indorsement is an indorsement in blank. Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or postdated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount;


b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency. Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon.

READ CALTEX VS. CA (G.R.97753) 212 SCRA 448Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 97753 August 10, 1992 CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents. Bito, Lozada, Ortega & Castillo for petitioners. Nepomuceno, Hofileña & Guingona for private. REGALADO, J.: This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by herein petitioner against respondent bank. The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of record:


1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280); CTD CTD Dates Serial Nos. Quantity Amount 22 Feb. 82 90101 to 90120 20 P80,000 26 Feb. 82 74602 to 74691 90 360,000 2 Mar. 82 74701 to 74740 40 160,000 4 Mar. 82 90127 to 90146 20 80,000 5 Mar. 82 74797 to 94800 4 16,000 5 Mar. 82 89965 to 89986 22 88,000 5 Mar. 82 70147 to 90150 4 16,000 8 Mar. 82 90001 to 90020 20 80,000 9 Mar. 82 90023 to 90050 28 112,000 9 Mar. 82 89991 to 90000 10 40,000 9 Mar. 82 90251 to 90272 22 88,000 ——— ———— Total 280 P1,120,000 ===== ======== 2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with his purchased of fuel products from the latter (Original Record, p. 208). 3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50). 4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561). 5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the indicated time deposits from and after date" of the assignment and further authorizes said bank to pre-terminate, set-off and "apply the said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62). 6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68). 7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally informing it of its possession of the CTDs in question and of its decision to pre-terminate the same. 8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564). 9. No copy of the requested documents was furnished herein defendant.


10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566). 11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131). 12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as attorney's fees.After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are nonnegotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4 The instant petition is bereft of merit. A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues involved in this recourse. SECURITY BANK AND TRUST COMPANY 6778 Ayala Ave., Makati No. 90101 Metro Manila, Philippines SUCAT OFFICEP 4,000.00 CERTIFICATE OF DEPOSIT Rate 16% Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____ This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per cent per annum. (Sgd. Illegible) (Sgd. Illegible) —————————— ———————————AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note that after the word "BEARER" stamped on the space provided supposedly for the name of the depositor, the words "has deposited" a certain amount follows. The document further provides that the amount deposited shall be "repayable to said depositor" on the period indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be the "bearer" but only to the specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as the person who made the deposit and further engages itself to pay said depositor the amount indicated thereon at the stipulated date. 6


We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz. xxx xxx xxx Atty. Calida: q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in these certificates states that it was Angel dela Cruz? witness: a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic) the amount. Atty. Calida: q And no other person or entity or company, Mr. Witness? witness:a None, your Honor. 7

xxx xxx xxx Atty. Calida: q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the bank is concerned? witness:a Angel dela Cruz is the depositor. 8

xxx xxx xxx On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. 9 In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing may be read in the light of surrounding circumstances


in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. 11 Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical terms in the documents, instead of having the word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12 The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself. In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. 14 A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16 If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates ofpayment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the presumption that evidence willfully suppressed would be adverse if produced. 19 Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos: . . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:


The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in inexistence and is not discharged by the transfer, and that accordingly the use of the terms ordinarily importing conveyance of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge. Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of nonpayment of the principal obligation, must be contractually provided for. The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide: Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely. 26 On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code specifically declares: Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question.


Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private respondent observed the requirements of the law in the case of lost negotiable instruments and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in the lower court. 28 On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was not included in the stipulation of the parties and in the statement of issues submitted by them to the trial court. 29 The issues agreed upon by them for resolution in this case are: (1) Whether or not the CTDs as worded are negotiable instruments. (2) Whether or not defendant could legally apply the amount covered by the CTDs against the depositor's loan by virtue of the assignment (Annex "C"). (3) Whether or not there was legal compensation or set off involving the amount covered by the CTDs and the depositor's outstanding account with defendant, if any. (4) Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date provided therein. (5) Whether or not plaintiff is entitled to the proceeds of the CTDs. (6) Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other. As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing enumeration does not include the issue of negligence on the part of respondent bank. An issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31 Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters. The determination of issues at a pre-trial conference bars the consideration of other questions on appeal. 32 To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal reasons and causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless exercise. 33 Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely permissive and not mandatory. The very first article cited by petitioner speaks for itself. Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate be issued him. (Emphasis ours.) xxx xxx xxx The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and possibility. 36 Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the one hand, a right of


recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the procedure outlined therein, and none establishes a mandatory precedent requirement therefor. WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby AFFIRMED. SO ORDERED. Narvasa, C.J., Padilla and Nocon, JJ., concur. Footnotes 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. Per Justice Segundino G. Chua, with the concurrence of Justices Santiago M. Kapunan and Luis L. Victor. Judge Ramon Mabutas, Jr., presiding; Rollo, 64-88. Rollo, 24-26. Ibid., 12. Exhibit A, Documentary Evidence for the Plaintiff, 8. Rollo, 28. TSN, February 9, 1987, 46-47. Ibid., id., 152-153. 11 Am. Jur. 2d, Bills and Notes, 79. Ibid., 86. Ibid., 87-88. Art. 1377, Civil Code. Exhibit 563, Documentary Evidence for the Defendant, 442; Original Record, 211. Panay Electric Co., Inc. vs. Court of Appeals, et al., 174 SCRA 500 (1989). Philippine National Bank vs. Intermediate Appellate Court, et al., 189 SCRA 680 (1990). Section 2(a), Rule 131, Rules of Court. Original Record, 152. Ibid., 154. Section 3(e), Rule 131, Rules of Court. 174 SCRA 295 (1989), jointly decided with Overseas Bank of Manila vs. Court of Appeals, et al., G.R. No. 0907. Sec. 30, Act No. 2031. Sec. 191, id. Sec. 27, id.; see also Art. 2118, Civil Code. Commentaries and Jurisprudence on the Philippine Commercial Laws, T.C. Martin, 1985 Rev. Ed., Vol. I, 134; Art. 18, Civil Code; Sec. 196, Act No. 2031. Rollo, 25. Tec Bi & Co. vs. Chartered Bank of India, Australia and China, 41 Phil. 596 (1916); Ocejo, Perez & Co. vs. The International Banking Corporation, 37 Phil. 631 (1918); Te Pate vs. Ingersoll, 43 Phil. 394 (1922). Rollo, 25. Ibid., 15. Joint Partial Stipulation of Facts and Statement of Issues, dated November 27, 1984; Original Record, 209. Mejorada vs. Municipal Council of Dipolog, 52 SCRA 451 (1973). Sec. 18, Rule 46, Rules of Court; Garcia, et al. vs. Court of Appeals, et al., 102 SCRA 597 (1981); Matienzo vs. Servidad, 107 SCRA 276 (1981); Aguinaldo Industries Corporation, etc. vs. Commissioner of Internal Revenue, et al., 112 SCRA 136 (1982); Dulos Realty & Development Corporation vs. Court of Appeals, et al., 157 SCRA 425 (1988). Bergado vs. Court of Appeals, et al., 173 SCRA 497 (1989). Rollo, 58. U.S. vs. Sanchez, 13 Phil. 336 (1909); Capati vs. Ocampo, 113 SCRA 794 (1982). Luna vs. Abaya, 86 Phil. 472 (1950). Philippine Law Dictionary, F.B. Moreno, Third Edition, 590. Rollo, 59.

32. 33. 34. 35. 36. 37.


PART 2: UNDERSTANDING “NEGOTIATION” AND “INDORSEMENT” READ SECS. 30 – 38III. NEGOTIATION Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue. Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional. Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. Sec. 35. Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either: a) Prohibits the further negotiation of the instrument; or b) Constitutes the indorsee the agent of the indorser; or c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive. Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the right: a) to receive payment of the instrument; b) to bring any action thereon that the indorser could bring; c) transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument.

READ SECS. 39 – 50Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to the order of two or


more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer. Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature. Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. robles virtual law library Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue. Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated. Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument. Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.

READ SALAS VS. CA (G.R. 76788) 181 SCRA 296Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 76788 January 22, 1990 JUANITA SALAS, petitioner, vs. HON. COURT OF APPEALS and FIRST FINANCE & LEASING CORPORATION, respondents. Arsenio C. Villalon, Jr. for petitioner. Labaguis, Loyola, Angara & Associates for private respondent.


FERNAN, C.J.: Assailed in this petition for review on certiorari is the decision of the Court of Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing Corporation v. Salas", which modified the decision of the Regional Trial Court of San Fernando, Pampanga in Civil Case No. 5915, a collection suit between the same parties. Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to as petitioner) bought a motor vehicle from the Violago Motor Sales Corporation (VMS for brevity) for P58,138.20 as evidenced by a promissory note. This note was subsequently endorsed to Filinvest Finance & Leasing Corporation (hereinafter referred to as private respondent) which financed the purchase. Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to a discrepancy in the engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice, certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle figured in an accident on 9 May 1980. This failure to pay prompted private respondent to initiate Civil Case No. 5915 for a sum of money against petitioner before the Regional Trial Court of San Fernando, Pampanga. In its decision dated September 10, 1982, the trial court held, thus: WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the defendant to pay the plaintiff the sum of P28,414.40 with interest thereon at the rate of 14% from October 2, 1980 until the said sum is fully paid; and the further amount of P1,000.00 as attorney's fees. The counterclaim of defendant is dismissed. With costs against defendant. 1 Both petitioner and private respondent appealed the aforesaid decision to the Court of Appeals. Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle to petitioner, the latter prayed for a reversal of the trial court's decision so that she may be absolved from the obligation under the contract. On October 27, 1986, the Court of Appeals rendered its assailed decision, the pertinent portion of which is quoted hereunder: The allegations, statements, or admissions contained in a pleading are conclusive as against the pleader. A party cannot subsequently take a position contradictory of, or inconsistent with his pleadings (Cunanan vs. Amparo, 80 Phil. 227). Admissions made by the parties in the pleadings, or in the course of the trial or other proceedings, do not require proof and cannot be contradicted unless previously shown to have been made through palpable mistake (Sec. 2, Rule 129, Revised Rules of Court; Sta. Ana vs. Maliwat, L-23023, Aug. 31, 1968, 24 SCRA 1018). When an action or defense is founded upon a written instrument, copied in or attached to the corresponding pleading as provided in the preceding section, the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denied them, and sets forth what he claims to be the facts (Sec. 8, Rule 8, Revised Rules of Court; Hibbered vs. Rohde and McMillian, 32 Phil. 476). A perusal of the evidence shows that the amount of P58,138.20 stated in the promissory note is the amount assumed by the plaintiff in financing the purchase of defendant's motor vehicle from the Violago Motor Sales Corp., the monthly amortization of winch is Pl,614.95 for 36 months. Considering that the defendant was able to pay twice (as admitted by the plaintiff, defendant's account became delinquent only beginning May, 1980) or in the total sum of P3,229.90, she is therefore liable to pay the remaining balance of P54,908.30 at l4% per annum from October 2, 1980 until full payment.


WHEREFORE, considering the foregoing, the appealed decision is hereby modified ordering the defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from October 2, 1980 until full payment. The decision is AFFIRMED in all other respects. With costs to defendant. 2 Petitioner's motion for reconsideration was denied; hence, the present recourse. In the petition before us, petitioner assigns twelve (12) errors which focus on the alleged fraud, bad faith and misrepresentation of Violago Motor Sales Corporation in the conduct of its business and which fraud, bad faith and misrepresentation supposedly released petitioner from any liability to private respondent who should instead proceed against VMS. 3 Petitioner argues that in the light of the provision of the law on sales by description 4 which she alleges is applicable here, no contract ever existed between her and VMS and therefore none had been assigned in favor of private respondent. She contends that it is not necessary, as opined by the appellate court, to implead VMS as a party to the case before it can be made to answer for damages because VMS was earlier sued by her for "breach of contract with damages" before the Regional Trial Court of Olongapo City, Branch LXXII, docketed as Civil Case No. 2916-0. She cites as authority the decision therein where the court originally ordered petitioner to pay the remaining balance of the motor vehicle installments in the amount of P31,644.30 representing the difference between the agreed consideration of P49,000.00 as shown in the sales invoice and petitioner's initial downpayment of P17,855.70 allegedly evidenced by a receipt. Said decision was however reversed later on, with the same court ordering defendant VMS instead to return to petitioner the sum of P17,855.70. Parenthetically, said decision is still pending consideration by the First Civil Case Division of the Court of Appeals, upon an appeal by VMS, docketed as AC-G.R. No. 02922. 5 Private respondent in its comment, prays for the dismissal of the petition and counters that the issues raised and the allegations adduced therein are a mere rehash of those presented and already passed upon in the court below, and that the judgment in the "breach of contract" suit cannot be invoked as an authority as the same is still pending determination in the appellate court. We see no cogent reason to disturb the challenged decision. The pivotal issue in this case is whether the promissory note in question is a negotiable instrument which will bar completely all the available defenses of the petitioner against private respondent. 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. Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and Acceptance Corp., 6 this Court had the occasion to clearly distinguish between a negotiable and a non-negotiable instrument. Among others, the instrument in order to be considered negotiable must contain the so-called "words of negotiability — i.e., must be payable to "order" or "bearer"". Under Section 8 of the Negotiable Instruments Law, there are only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument and the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words "or order or "to the order of", the instrument is payable only to the person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument, but will merely "step into the shoes" of the person designated in the instrument and will thus be open to all defenses available against the latter. Such being the situation in the above-cited case, it was held that therein private respondent is not a holder in due course but a mere assignee against whom all defenses available to the assignor may be raised. 7


In the case at bar, however, the situation is different. Indubitably, the basis of private respondent's claim against petitioner is a promissory note which bears all the earmarks of negotiability. The pertinent portion of the note reads: PROMISSORY NOTE (MONTHLY) P58,138.20 San Fernando, Pampanga, Philippines Feb. 11, 1980 For value received, I/We jointly and severally, promise to pay Violago Motor Sales Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine currency, which amount includes interest at 14% per annum based on the diminishing balance, the said principal sum, to be payable, without need of notice or demand, in installments of the amounts following and at the dates hereinafter set forth, to wit: P1,614.95 monthly for "36" months due and payable on the 21st day of each month starting March 21, 1980 thru and inclusive of February 21, 1983. P_________ monthly for ______ months due and payable on the ______ day of each month starting _____198__ thru and inclusive of _____, 198________ provided that interest at 14% per annum shall be added on each unpaid installment from maturity hereof until fully paid. xxx xxx xxx Maker; Co-Maker: (SIGNED) JUANITA SALAS _________________ Address: ____________________ ____________________ WITNESSES SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE TAN # TAN # PAY TO THE ORDER OF FILINVEST FINANCE AND LEASING CORPORATION VIOLAGO MOTOR SALES CORPORATION BY: (SIGNED) GENEVEVA V. BALTAZAR Cash Manager 8 A careful study of the questioned promissory note shows that it is a negotiable instrument, having complied with the requisites under the law as follows: [a] it is in writing and signed by the maker Juanita Salas; [b] it contains an unconditional promise to pay the amount of P58,138.20; [c] it is payable at a fixed or determinable future time which is "P1,614.95 monthly for 36 months due and payable on the 21 st day of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated with certainty. 9 It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest Finance and Leasing Corporation 10 and it is an indorsement of the entire instrument. 11 Under the circumstances, there appears to be no question that Filinvest is a holder in due course, having taken the instrument under the following conditions: [a] it is complete and regular upon its face; [b] it became the holder


thereof before it was overdue, and without notice that it had previously been dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to Filinvest, the latter had no notice of any infirmity in the instrument or defect in the title of VMS Corporation. 12 Accordingly, respondent corporation holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof. 13 This being so, petitioner cannot set up against respondent the defense of nullity of the contract of sale between her and VMS. Even assuming for the sake of argument that there is an iota of truth in petitioner's allegation that there was in fact deception made upon her in that the vehicle she purchased was different from that actually delivered to her, this matter cannot be passed upon in the case before us, where the VMS was never impleaded as a party. Whatever issue is raised or claim presented against VMS must be resolved in the "breach of contract" case. Hence, we reach a similar opinion as did respondent court when it held: We can only extend our sympathies to the defendant (herein petitioner) in this unfortunate incident. Indeed, there is nothing We can do as far as the Violago Motor Sales Corporation is concerned since it is not a party in this case. To even discuss the issue as to whether or not the Violago Motor Sales Corporation is liable in the transaction in question would amount, to denial of due process, hence, improper and unconstitutional. She should have impleaded Violago Motor Sales. 14 IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs against petitioner. SO ORDERED. Gutierrez, Jr., Feliciano, Bidin and Cortés, JJ., concur. Footnotes 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Rollo, p. 21. Rollo, pp. 23-24. Rollo, pp. 57-59. Art. 1481, New Civil Code. Rollo, p. 10. 149 SCRA 459 (1987). Ibid. Ex. "7 "; Folder of Exhibits. Section 1, Negotiable Instruments Law, emphasis supplied. Section 31, NIL. Section 32, NIL. Section 52, NIL. Section 57, Negotiable Instruments Law; Consolidated Plywood Industries, Inc. v. IFC Leasing and Acceptance Corporation, (supra). 14. Rollo, pp. 22-23.


PART 3: PARTIES TO A NEGOTIABLE INSTRUMENT AND THEIR LIABILITIES READ SECS. 60 – 65V. LIABILITIES OF PARTIES Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse. Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and b) The existence of the payee and his then capacity to indorse. Sec. 63. When a person deemed indorser. - A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity. Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee. Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating an instrument by delivery or by a qualified indorsement warrants: a) That the instrument is genuine and in all respects what it purports to be; b) That he has a good title to it; c) That all prior parties had capacity to contract; d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes.

READ SECS. 66 – 69; SEC. 29Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due course: a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and b) That the instrument is, at the time of his indorsement, valid and subsisting; And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. Sec. 67. Liability of indorser where paper negotiable by delivery. — Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser. Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed


otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally. robles virtual law library Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent.

READ ANG TIONG VS. TING (G.R. L – 26767) 22 SCRA 713Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-26767 February 22, 1968

ANG TIONG, plaintiff-appellee, vs. LORENZO TING, doing business under the name and style of PRUNES PRESERVED MFG., and FELIPE ANG, defendants. FELIPE ANG, defendant-appellant. Chipeco & Alcaraz, Jr. for plaintiff-appellee. Ang, Atienza & Tabora for defendant-appellant. CASTRO, J.: On August 15, 1960 Lorenzo Ting issued Philippine Bank of Communications check K-81618, for the sum of P4,000, payable to "cash or bearer". With Felipe Ang's signature (indorsement in blank) at the back thereof, the instrument was received by the plaintiff Ang Tiong who thereafter presented it to the drawee bank for payment. The bank dishonored it. The plaintiff then made written demands on both Lorenzo Ting and Felipe Ang that they make good the amount represented by the check. These demands went unheeded; so he filed in the municipal court of Manila an action for collection of the sum of P4,000, plus P500 attorney's fees. On March 6, 1962 the municipal court adjudged for the plaintiff against the two defendants. Only Felipe Ang appealed to the Court of First Instance of Manila (civil case 50018), which rendered judgment on July 31, 1962, amended by an order dated August 9, 1962, directing him to pay to the plaintiff "the sum of P4,000, with interest at the legal rate from the date of the filing of the complaint, a further sum of P400 as attorney's fees, and costs." Felipe Ang then elevated the case to the Court of Appeals, which certified it to this Court because the issues raised are purely of law. The appellant imputes to the court a quo three errors, namely, (1) that it refused to apply article 2071 of the new Civil Code to the case at bar; (2) that it adjudged him a general indorser under the Negotiable Instruments Law (Act 2031); and (3) that it held that he "cannot obtain his release from the contract of suretyship or obtain security to protect himself against any proceedings on the part of the creditor and against the danger of insolvency of the principal debtor," because he is "jointly and severally liable on the instrument." This, appeal is absolutely without merit. 1. The genuineness and due execution of the instrument are not controverted. That the appellee is a holder thereof for value is admitted. Having arisen from a bank check which is indisputably a negotiable instrument, the present case is, therefore, in so far as the indorsee is concerned vis-a-vis the indorser, governed solely plaintiff the Negotiable Instruments Law


(see secs. 1 and 185). Article 2071 of the new Civil Code, invoked by the appellant, the pertinent portion of which states, "The guarantor, even before been paid, may proceed against the principal debtor; (1) when he is sued for the payment; . . . the action of the guarantor is to obtain release from the guaranty, to demand a security that shall protect him from any proceedings by the creditor . . .," is here completely irrelevant and can have no application whatsoever. We are in agreement with the trial judge that nothing in the check in question indicates that the appellant is not a general indorser within the purview of section 63 of the Negotiable Instruments Law which makes "a person placing his signature upon an instrument otherwise than as maker, drawer or acceptor" a general indorser, — "unless he clearly indicates plaintiff appropriate words his intention to be bound in some other capacity," which he did not do. And section 66 ordains that "every indorser who indorses without qualification, warrants to all subsequent holders in due course" (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has a good title to it; (c) that all prior parties have capacity to contract; and (d) that the instrument is at the time of his indorsement valid and subsisting. In addition, "he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, and that if it be dishonored, he will pay the amount thereof to the holder." 1 2. Even on the assumption that the appellant is a mere accommodation party, as he professes to be, he is nevertheless, by the clear mandate of section 29 of the Negotiable Instruments Law, yet "liable on the instrument to a holder for value, notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party." To paraphrase, the accommodation party is liable to a holder for value as if the contract was not for accommodation. It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. Nor is it correct to say that the holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an accommodation party. 2 3. That the appellant, again assuming him to be an accommodation indorser, may obtain security from the maker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his liability to the appellee, as the said remedy is a matter of concern exclusively between accommodation indorser and accommodated party. So that the fact that the appellant stands only as a surety in relation to the maker, granting this to be true for the sake of argument, is immaterial to the claim of the appellee, and does not a whit diminish nor defeat the rights of the latter who is a holder for value. The liability of the appellant remains primary and unconditional. To sanction the appellant's theory is to give unwarranted legal recognition to the patent absurdity of a situation where an indorser, when sued on an instrument by a holder in due course and for value, can escape liability on his indorsement by the convenient expedient of interposing the defense that he is a mere accomodation indorser. ACCORDINGLY, the judgment a quo is affirmed in toto, at appellant's cost. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur.1äwphï1.ñët Footnotes1See

also Beutel's Brannan Negotiable Instruments Law, 7th ed., pp. 927, 956; Alvendia, The Negotiable Instruments Law, pp. 119-120; Stuart del Rosario, Treatise on Negotiable Instruments, 1961 ed., p. 189.2Beutel's,

id. pp. 568-569; Stuart del Rosario, id., pp. 165, 242-243; Alvendia, id., pp. 55, 57-58; National Bank vs. Maza, et al., 48 Phil. 210.


PART 4: ACCEPTANCE, PAYMENT AND DISHONOR: PROCEDURES READ SECS. 132 – 151X. ACCEPTANCE Sec. 132. Acceptance; how made, by and so forth. - The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money. Sec. 133. Holder entitled to acceptance on face of bill. - The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored. Sec. 134. Acceptance by separate instrument. - Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value. Sec. 135. Promise to accept; when equivalent to acceptance. - An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value. Sec. 136. Time allowed drawee to accept. - The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation. Sec. 137. Liability of drawee returning or destroying bill. - Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. Sec. 138. Acceptance of incomplete bill. - A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non payment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment. Sec. 139. Kinds of acceptance. - An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn. Sec. 140. What constitutes a general acceptance. - An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere. Sec. 141. Qualified acceptance. - An acceptance is qualified which is: a) Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; b) Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn; c) Local; that is to say, an acceptance to pay only at a particular place; d) Qualified as to time; e) The acceptance of some, one or more of the drawees but not of all. Sec. 142. Rights of parties as to qualified acceptance. - The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto. XI. PRESENTMENT FOR ACCEPTANCE Sec. 143. When presentment for acceptance must be made. - Presentment for acceptance must be made:


a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or b) Where the bill expressly stipulates that it shall be presented for acceptance; or c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Sec. 144. When failure to present releases drawer and indorser. - Except as herein otherwise provided, the holder of a bill which is required by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do so, the drawer and all indorsers are discharged. Sec. 145. Presentment; how made. - Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only; b) Where the drawee is dead, presentment may be made to his personal representative; c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee. Sec. 146. On what days presentment may be made. - A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day. Sec. 147. Presentment where time is insufficient. - Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers. Sec. 148. Where presentment is excused. - Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases: a) Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill. b) Where, after the exercise of reasonable diligence, presentment can not be made. c) Where, although presentment has been irregular, acceptance has been refused on some other ground. Sec. 149. When dishonored by nonacceptance. - A bill is dishonored by non-acceptance: a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not be obtained; or b) When presentment for acceptance is excused and the bill is not accepted. Sec. 150. Duty of holder where bill not accepted. - Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. Sec. 151. Rights of holder where bill not accepted. - When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary.

READ SECS. 70 – 88; 89 - 117VI. PRESENTATION FOR PAYMENT Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers. Sec. 71. Presentment where instrument is not payable on demand and where payable on demand. - Where the


instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after its issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. Sec. 72. What constitutes a sufficient presentment. - Presentment for payment, to be sufficient, must be made: a) By the holder, or by some person authorized to receive payment on his behalf; b) At a reasonable hour on a business day; c) At a proper place as herein defined; d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made. Sec. 73. Place of presentment. - Presentment for payment is made at the proper place: a) Where a place of payment is specified in the instrument and it is there presented; b) Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented; c) Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; d) In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. Sec. 74. Instrument must be exhibited. - The instrument must be exhibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it. Sec. 75. Presentment where instrument payable at bank. - Where the instrument is payable at a bank, presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it at any time during the day, in which case presentment at any hour before the bank is closed on that day is sufficient. Sec. 76. Presentment where principal debtor is dead. - Where the person primarily liable on the instrument is dead and no place of payment is specified, presentment for payment must be made to his personal representative, if such there be, and if, with the exercise of reasonable diligence, he can be found. Sec. 77. Presentment to persons liable as partners. - Where the persons primarily liable on the instrument are liable as partners and no place of payment is specified, presentment for payment may be made to any one of them, even though there has been a dissolution of the firm. Sec. 78. Presentment to joint debtors. - Where there are several persons, not partners, primarily liable on the instrument and no place of payment is specified, presentment must be made to them all. Sec. 79. When presentment not required to charge the drawer. - Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. Sec. 80. When presentment not required to charge the indorser. - Presentment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. Sec. 81. When delay in making presentment is excused. - Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence. Sec. 82. When presentment for payment is excused. - Presentment for payment is excused: a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot be made; b) Where the drawee is a fictitious person; c) By waiver of presentment, express or implied. Sec. 83. When instrument dishonored by non-payment. - The instrument is dishonored by non-payment when: a) It is duly presented for payment and payment is refused or cannot be obtained; or b) Presentment is excused and the instrument is overdue and unpaid.


Sec. 84. Liability of person secondarily liable, when instrument dishonored. - Subject to the provisions of this Act, when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. robles virtual law library Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday. Sec. 86. Time; how computed. - When the instrument is payable at a fixed period after date, after sight, or after that happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment. Sec. 87. Rule where instrument payable at bank. - Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. Sec. 88. What constitutes payment in due course. - Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective. VII. NOTICE OF DISHONOR Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged. Sec. 90. By whom given. - The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given. Sec. 91. Notice given by agent. - Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to given notice, whether that party be his principal or not. Sec. 92. Effect of notice on behalf of holder. - Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. Sec. 93. Effect where notice is given by party entitled thereto. - Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder and all parties subsequent to the party to whom notice is given. chanrobles law Sec. 94. When agent may give notice. - Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder, and the principal, upon the receipt of such notice, has himself the same time for giving notice as if the agent had been an independent holder. Sec. 95. When notice sufficient. - A written notice need not be signed and an insufficient written notice may be supplemented and validated by verbal communication. A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is given is in fact misled thereby. Sec. 96. Form of notice. - The notice may be in writing or merely oral and may be given in any terms which sufficiently identify the instrument, and indicate that it has been dishonored by non-acceptance or non-payment. It may in all cases be given by delivering it personally or through the mails. Sec. 97. To whom notice may be given. - Notice of dishonor may be given either to the party himself or to his agent in that behalf. Sec. 98. Notice where party is dead. - When any party is dead and his death is known to the party giving notice, the notice must be given to a personal representative, if there be one, and if with reasonable diligence, he can be found. If there be no personal representative, notice may be sent to the last residence or last place of business of the deceased.


Sec. 99. Notice to partners. - Where the parties to be notified are partners, notice to any one partner is notice to the firm, even though there has been a dissolution. Sec. 100. Notice to persons jointly liable. - Notice to joint persons who are not partners must be given to each of them unless one of them has authority to receive such notice for the others. Sec. 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, notice may be given either to the party himself or to his trustee or assignee. Sec. 102. Time within which notice must be given. - Notice may be given as soon as the instrument is dishonored and, unless delay is excused as hereinafter provided, must be given within the time fixed by this Act. Sec. 103. Where parties reside in same place. - Where the person giving and the person to receive notice reside in the same place, notice must be given within the following times: a) If given at the place of business of the person to receive notice, it must be given before the close of business hours on the day following. b) If given at his residence, it must be given before the usual hours of rest on the day following. c) If sent by mail, it must be deposited in the post office in time to reach him in usual course on the day following. Sec. 104. Where parties reside in different places. - Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times: a) If sent by mail, it must be deposited in the post office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on last day, by the next mail thereafter. b) If given otherwise than through the post office, then within the time that notice would have been received in due course of mail, if it had been deposited in the post office within the time specified in the last subdivision. Sec. 105. When sender deemed to have given due notice. - Where notice of dishonor is duly addressed and deposited in the post office, the sender is deemed to have given due notice, notwithstanding any miscarriage in the mails. Sec. 106. Deposit in post office; what constitutes. - Notice is deemed to have been deposited in the post-office when deposited in any branch post office or in any letter box under the control of the post-office department. Sec. 107. Notice to subsequent party; time of. - Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. Sec. 108. Where notice must be sent. - Where a party has added an address to his signature, notice of dishonor must be sent to that address; but if he has not given such address, then the notice must be sent as follows: a) Either to the post-office nearest to his place of residence or to the post-office where he is accustomed to receive his letters; or b) If he lives in one place and has his place of business in another, notice may be sent to either place; or c) If he is sojourning in another place, notice may be sent to the place where he is so sojourning. But where the notice is actually received by the party within the time specified in this Act, it will be sufficient, though not sent in accordance with the requirement of this section. Sec. 109. Waiver of notice. - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. Sec. 110. Whom affected by waiver. - Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it binds him only. Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor. Sec. 112. When notice is dispensed with. - Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. Sec. 113. Delay in giving notice; how excused. - Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, notice must be given with reasonable diligence.


Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer in either of the following cases: a) Where the drawer and drawee are the same person; b) When the drawee is fictitious person or a person not having capacity to contract; c) When the drawer is the person to whom the instrument is presented for payment; d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; e) Where the drawer has countermanded payment. Sec. 115. When notice need not be given to indorser. — Notice of dishonor is not required to be given to an indorser in either of the following cases: a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument; b) Where the indorser is the person to whom the instrument is presented for payment; c) Where the instrument was made or accepted for his accommodation. Sec. 116. Notice of non-payment where acceptance refused. - Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted. Sec. 117. Effect of omission to give notice of non-acceptance. - An omission to give notice of dishonor by nonacceptance does not prejudice the rights of a holder in due course subsequent to the omission.

PART 5: HOLDER AND HIS RIGHTS. DEFENSES AGAINST HIM READ SECS. 52, 51 – 59IV. RIGHTS OF THE HOLDER Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon in his own name; and payment to him in due course discharges the instrument. Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder who has taken the instrument under the following conditions: a) That it is complete and regular upon its face; b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; c) That he took it in good faith and for value; d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. Sec. 53. When person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course. Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him. Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. robles virtual law library


Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the lastmentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title.

READ DE OCAMPO VS. GATCHALIAN (G.R. L – 15126) 3 SCRA 596Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-15126 November 30, 1961

VICENTE R. DE OCAMPO & CO., plaintiff-appellee, vs. ANITA GATCHALIAN, ET AL., defendants-appellants. Vicente Formoso, Jr. for plaintiff-appellee. Reyes and Pangalañgan for defendants-appellants. LABRADOR, J.: Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez, presiding, sentencing the defendants to pay the plaintiff the sum of P600, with legal interest from September 10, 1953 until paid, and to pay the costs. The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that plaintiff received it in payment of the indebtedness of one Matilde Gonzales; that upon receipt of said check, plaintiff gave Matilde Gonzales P158.25, the difference between the face value of the check and Matilde Gonzales' indebtedness. The defendants admit the execution of the check but they allege in their answer, as affirmative defense, that it was issued subject to a condition, which was not fulfilled, and that plaintiff was guilty of gross negligence in not taking steps to protect itself. At the time of the trial, the parties submitted a stipulation of facts, which reads as follows: Plaintiff and defendants through their respective undersigned attorney's respectfully submit the following Agreed Stipulation of Facts; First. — That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was then interested in looking for a car for the use of her husband and the family, was shown and offered a car by Manuel Gonzales who was accompanied by Emil Fajardo, the latter being personally known to defendant Anita C. Gatchalian; Second. — That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish said sale, but which facts were not known to plaintiff;


Third. — That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the day following together with the certificate of registration of the car, so that her husband would be able to see same; that on this request of defendant Anita C. Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing to give the certificate of registration unless there is a showing that the party interested in the purchase of said car is ready and willing to make such purchase and that for this purpose Manuel Gonzales requested defendant Anita C. Gatchalian to give him (Manuel Gonzales) a check which will be shown to the owner as evidence of buyer's good faith in the intention to purchase the said car, the said check to be for safekeeping only of Manuel Gonzales and to be returned to defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the car and the certificate of registration, but which facts were not known to plaintiff; Fourth. — That relying on these representations of Manuel Gonzales and with his assurance that said check will be only for safekeeping and which will be returned to said defendant the following day when the car and its certificate of registration will be brought by Manuel Gonzales to defendants, but which facts were not known to plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. "B"; that Manuel Gonzales executed and issued a receipt for said check, Exh. "1"; Fifth. — That on the failure of Manuel Gonzales to appear the day following and on his failure to bring the car and its certificate of registration and to return the check, Exh. "B", on the following day as previously agreed upon, defendant Anita C. Gatchalian issued a "Stop Payment Order" on the check, Exh. "3", with the drawee bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not being know to defendant, Anita C. Gatchalian and who furthermore had no reason to know check was given to plaintiff; Sixth. — That defendants, both or either of them, did not know personally Manuel Gonzales or any member of his family at any time prior to September 1953, but that defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo; Seventh. — That defendants, both or either of them, had no arrangements or agreement with the Ocampo Clinic at any time prior to, on or after 9 September 1953 for the hospitalization of the wife of Manuel Gonzales and neither or both of said defendants had assumed, expressly or impliedly, with the Ocampo Clinic, the obligation of Manuel Gonzales or his wife for the hospitalization of the latter; Eight. — That defendants, both or either of them, had no obligation or liability, directly or indirectly with the Ocampo Clinic before, or on 9 September 1953; Ninth. — That Manuel Gonzales having received the check Exh. "B" from defendant Anita C. Gatchalian under the representations and conditions herein above specified, delivered the same to the Ocampo Clinic, in payment of the fees and expenses arising from the hospitalization of his wife; Tenth. — That plaintiff for and in consideration of fees and expenses of hospitalization and the release of the wife of Manuel Gonzales from its hospital, accepted said check, applying P441.75 (Exhibit "A") thereof to payment of said fees and expenses and delivering to Manuel Gonzales the amount of P158.25 (as per receipt, Exhibit "D") representing the balance on the amount of the said check, Exh. "B"; Eleventh. — That the acts of acceptance of the check and application of its proceeds in the manner specified above were made without previous inquiry by plaintiff from defendants: Twelfth. — That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a complaint for estafa against Manuel Gonzales based on and arising from the acts of said Manuel Gonzales in paying his obligations with plaintiff and receiving the cash balance of the check, Exh. "B" and that said complaint was subsequently dropped; Thirteenth. — That the exhibits mentioned in this stipulation and the other exhibits submitted previously, be considered as parts of this stipulation, without necessity of formally offering them in evidence; WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted and that the parties hereto be given fifteen days from today within which to submit simultaneously their memorandum to discuss the issues of law arising from the facts, reserving to either party the right to submit reply


memorandum, if necessary, within ten days from receipt of their main memoranda. (pp. 21-25, Defendant's Record on Appeal). No other evidence was submitted and upon said stipulation the court rendered the judgment already alluded above. In their appeal defendants-appellants contend that the check is not a negotiable instrument, under the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due course. In support of the first contention, it is argued that defendant Gatchalian had no intention to transfer her property in the instrument as it was for safekeeping merely and, therefore, there was no delivery required by law (Section 16, Negotiable Instruments Law); that assuming for the sake of argument that delivery was not for safekeeping merely, delivery was conditional and the condition was not fulfilled. In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues that plaintiffappellee cannot be a holder in due course because there was no negotiation prior to plaintiff-appellee's acquiring the possession of the check; that a holder in due course presupposes a prior party from whose hands negotiation proceeded, and in the case at bar, plaintiff-appellee is the payee, the maker and the payee being original parties. It is also claimed that the plaintiff-appellee is not a holder in due course because it acquired the check with notice of defect in the title of the holder, Manuel Gonzales, and because under the circumstances stated in the stipulation of facts there were circumstances that brought suspicion about Gonzales' possession and negotiation, which circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the holder. The circumstances are as follows: The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of Facts). Plaintiff could have inquired why a person would use the check of another to pay his own debt. Furthermore, plaintiff had the "means of knowledge" inasmuch as defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts.). The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts). The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7, Stipulation of Facts.) The check could not have been intended to pay the hospital fees which amounted only to P441.75. The check is in the amount of P600.00, which is in excess of the amount due plaintiff. (Par. 10, Stipulation of Facts). It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10, Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff should have been more cautious and wary in accepting a piece of paper and disbursing cold cash. The check is payable to bearer. Hence, any person who holds it should have been subjected to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE BEARER. The same inquiries should have been made by plaintiff. (Defendants-appellants' brief, pp. 52-53) Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance with the best authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a holder in due course, citing Brannan's Negotiable Instruments Law, 6th edition, page 252. On this issue Brannan holds that a payee may be a holder in due course and says that to this effect is the greater weight of authority, thus: Whether the payee may be a holder in due course under the N. I. L., as he was at common law, is a question upon which the courts are in serious conflict. There can be no doubt that a proper interpretation of the act read as a whole leads to the conclusion that a payee may be a holder in due course under any circumstance in which he meets the requirements of Sec. 52. The argument of Professor Brannan in an earlier edition of this work has never been successfully answered and is here repeated.


Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. Sec. 52 defendants defines a holder in due course as "a holder who has taken the instrument under the following conditions: 1. That it is complete and regular on its face. 2. That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact. 3. That he took it in good faith and for value. 4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the first clause of sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read "a holder in due course is a payee or indorsee who is in possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543). The first argument of the defendants-appellants, therefore, depends upon whether or not the plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial that it was the payee and an immediate party to the instrument. The other contention of the plaintiff is that there has been no negotiation of the instrument, because the drawer did not deliver the instrument to Manuel Gonzales with the intention of negotiating the same, or for the purpose of giving effect thereto, for as the stipulation of facts declares the check was to remain in the possession Manuel Gonzales, and was not to be negotiated, but was to serve merely as evidence of good faith of defendants in their desire to purchase the car being sold to them. Admitting that such was the intention of the drawer of the check when she delivered it to Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the check or negotiated it. As the check was payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel Gonzales was the agent of the drawer Anita Gatchalian insofar as the possession of the check is concerned. So, when the agent of drawer Manuel Gonzales negotiated the check with the intention of getting its value from plaintiff-appellee, negotiation took place through no fault of the plaintiff-appellee, unless it can be shown that the plaintiff-appellee should be considered as having notice of the defect in the possession of the holder Manuel Gonzales. Our resolution of this issue leads us to a consideration of the last question presented by the appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due course. Section 52, Negotiable Instruments Law, defines holder in due course, thus: A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances under which the check was delivered to Manuel Gonzales, but we agree with the defendants-appellants that the circumstances indicated by them in their briefs, such as the fact that appellants had no obligation or liability to the Ocampo Clinic; that the amount of the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two parallel lines in the upper left hand corner, which practice means that the check could only be deposited but may not be converted into cash — all these circumstances should have put the plaintiffappellee to inquiry as to the why and wherefore of the possession of the check by Manuel Gonzales, and why he used it to pay Matilde's account. It was payee's duty to ascertain from the holder Manuel Gonzales what the nature of the latter's title to the check was or the nature of his possession. Having failed in this respect, we must declare that plaintiff-appellee was guilty of gross neglect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to legal absence of good faith, and it may not be considered as a holder of the check in good faith. To such effect is the consensus of authority.


In order to show that the defendant had "knowledge of such facts that his action in taking the instrument amounted to bad faith," it is not necessary to prove that the defendant knew the exact fraud that was practiced upon the plaintiff by the defendant's assignor, it being sufficient to show that the defendant had notice that there was something wrong about his assignor's acquisition of title, although he did not have notice of the particular wrong that was committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830. It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud. It is not necessary that he should know the particulars or even the nature of the fraud, since all that is required is knowledge of such facts that his action in taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391. Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less than five feet tall, immature in appearance and bearing on his face the stamp a degenerate, to the defendants' clerk for sale. The boy stated that they belonged to his mother. The defendants paid the boy for the bonds without any further inquiry. Held, the plaintiff could recover the value of the bonds. The term 'bad faith' does not necessarily involve furtive motives, but means bad faith in a commercial sense. The manner in which the defendants conducted their Liberty Loan department provided an easy way for thieves to dispose of their plunder. It was a case of "no questions asked." Although gross negligence does not of itself constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances thrust the duty upon the defendants to make further inquiries and they had no right to shut their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th ed.). The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not be allowed to recover the value of the check. Let us now examine the express provisions of the Negotiable Instruments Law pertinent to the matter to find if our ruling conforms thereto. Section 52 (c) provides that a holder in due course is one who takes the instrument "in good faith and for value;" Section 59, "that every holder is deemed prima facie to be a holder in due course;" and Section 52 (d), that in order that one may be a holder in due course it is necessary that "at the time the instrument was negotiated to him "he had no notice of any . . . defect in the title of the person negotiating it;" and lastly Section 59, that every holder is deemed prima facieto be a holder in due course. In the case at bar the rule that a possessor of the instrument is prima faciea holder in due course does not apply because there was a defect in the title of the holder (Manuel Gonzales), because the instrument is not payable to him or to bearer. On the other hand, the stipulation of facts indicated by the appellants in their brief, like the fact that the drawer had no account with the payee; that the holder did not show or tell the payee why he had the check in his possession and why he was using it for the payment of his own personal account — show that holder's title was defective or suspicious, to say the least. As holder's title was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder's title, and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. And having presented no evidence that it acquired the check in good faith, it (payee) cannot be considered as a holder in due course. In other words, under the circumstances of the case, instead of the presumption that payee was a holder in good faith, the fact is that it acquired possession of the instrument under circumstances that should have put it to inquiry as to the title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding the suspicious circumstances, it acquired the check in actual good faith. The rule applicable to the case at bar is that described in the case of Howard National Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made the following disquisition: Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down by the court of King's Bench that the purchaser of negotiable paper must exercise reasonable prudence and caution, and that, if the circumstances were such as ought to have excited the suspicion of a prudent and careful man, and he made no inquiry, he did not stand in the legal position of a bona fide holder. The rule was adopted by the courts of this country generally and seem to have become a fixed rule in the law of negotiable paper. Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court abandoned its former position and adopted the rule that nothing short of actual bad faith or fraud in the purchaser would deprive him of the character of a bona fide purchaser and let in defenses existing between prior parties, that no circumstances of suspicion merely, or want of proper caution in the purchaser, would have this effect, and that even gross negligence would have no effect, except as evidence tending to establish bad faith or fraud. Some of the


American courts adhered to the earlier rule, while others followed the change inaugurated in Goodman v. Harvey. The question was before this court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the question, a rule was adopted in harmony with that announced in Gill v. Cubitt, which has been adhered to in subsequent cases, including those cited above. Stated briefly, one line of cases including our own had adopted the test of the reasonably prudent man and the other that of actual good faith. It would seem that it was the intent of the Negotiable Instruments Act to harmonize this disagreement by adopting the latter test. That such is the view generally accepted by the courts appears from a recent review of the cases concerning what constitutes notice of defect. Brannan on Neg. Ins. Law, 187-201. To effectuate the general purpose of the act to make uniform the Negotiable Instruments Law of those states which should enact it, we are constrained to hold (contrary to the rule adopted in our former decisions) that negligence on the part of the plaintiff, or suspicious circumstances sufficient to put a prudent man on inquiry, will not of themselves prevent a recovery, but are to be considered merely as evidence bearing on the question of bad faith. See G. L. 3113, 3172, where such a course is required in construing other uniform acts. It comes to this then: When the case has taken such shape that the plaintiff is called upon to prove himself a holder in due course to be entitled to recover, he is required to establish the conditions entitling him to standing as such, including good faith in taking the instrument. It devolves upon him to disclose the facts and circumstances attending the transfer, from which good or bad faith in the transaction may be inferred. In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry, why the holder had the check and used it to pay his own personal account, the duty devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The stipulation of facts contains no statement of such good faith, hence we are forced to the conclusion that plaintiff payee has not proved that it acquired the check in good faith and may not be deemed a holder in due course thereof. For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed, and the defendants are absolved from the complaint. With costs against plaintiff-appellee. Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ., concur. Bengzon, C.J., concurs in the result.

READ SECS. 14 – 16; 124 – 125; 23Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers.


But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor. Sec. 125. What constitutes a material alteration. - Any alteration which changes: a) The date; b) The sum payable, either for principal or interest; c) The time or place of payment: d) The number or the relations of the parties; e) The medium or currency in which payment is to be made; f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.

READ ASSOCIATED BANK VS. CA (G.R. 107382) 252 SCRA 622Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 107382/G.R. No. 107612 January 31, 1996

ASSOCIATED BANK, petitioner, vs. HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL BANK, respondents. xxxxxxxxxxxxxxxxxxxxx G.R. No. 107612 January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner, vs. HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, respondents. DECISION ROMERO, J.: Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee bank or the collecting bank? This is the main issue in these consolidated petitions for review assailing the decision of the Court of Appeals in "Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. 17962). 1 The facts of the case are as follows: The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the Sangguniang Bayan.


A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The allotment checks for said government hospital are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac." The checks are released by the Office of the Provincial Treasurer and received for the hospital by its administrative officer and cashier. In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor. It was then discovered that the hospital did not receive several allotment checks drawn by the Province. On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting as collecting bank. It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until his retirement on February 28, 1978, collected the questioned checks from the office of the Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the checks and had official receipts. 3Pangilinan sought to encash the first check 4 with Associated Bank. However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check in his personal savings account with the same bank. Pangilinan was able to withdraw the money when the check was cleared and paid by the drawee bank, PNB. After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for the second check, in the amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-eight other checks of various amounts and on various dates. The last check negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK." Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks were paid to him for certain projects with the hospital. 7 He did not find as irregular the fact that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given Pangilinan preferential treatment on this account. 8 On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various amounts debited from the current account of the Province. 9 In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10 As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn, impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. 11 After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows: WHEREFORE, in view of the foregoing, judgment is hereby rendered: 1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine National Bank (PNB), ordering the latter to pay to the former, the sum of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon from March 20, 1981 until fully paid; 2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank (PNB) and against third-party defendant/fourth-party plaintiff Associated Bank ordering the latter to reimburse to the former the amount of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully paid;. 3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as against fourth-party defendant Adena Canlas and lack of jurisdiction over the person of fourth-party defendant Fausto Pangilinan as against the latter.


4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, the same are hereby ordered dismissed for lack of merit. SO ORDERED. 12 PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court affirmed the trial court's decision in toto on September 30, 1992. Hence these consolidated petitions which seek a reversal of respondent appellate court's decision. PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province of Tarlac from liability when, in fact, the latter was negligent because it delivered and released the questioned checks to Fausto Pangilinan who was then already retired as the hospital's cashier and administrative officer. PNB also maintains its innocence and alleges that as between two innocent persons, the one whose act was the cause of the loss, in this case the Province of Tarlac, bears the loss. Next, PNB asserts that it was error for the court to order it to pay the province and then seek reimbursement from Associated Bank. According to petitioner bank, respondent appellate Court should have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac to avoid circuity. 14 Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank (PNB) solely and ultimately bearing the loss. Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead of Central Bank Circular No. 580, which, being an administrative regulation issued pursuant to law, has the force and effect of law. 15 The PCHC Rules are merely contractual stipulations among and between member-banks. As such, they cannot prevail over the aforesaid CB Circular. It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of prior indorsements against Associated Bank, the collecting bank. In stamping the guarantee (for all prior indorsements), it merely followed a mandatory requirement for clearing and had no choice but to place the stamp of guarantee; otherwise, there would be no clearing. The bank will be in a "no-win" situation and will always bear the loss as against the drawee bank. 16 Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in question, it is now estopped from asserting the defense that Associated Bank guaranteed prior indorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payee's indorsement before paying the check. 17 While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should solely bear the loss because it cleared and paid the forged checks. xxx xxx xxx

The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were order instruments. Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged signature of the drawer. Section 23 of the Negotiable Instruments Law (NIL) provides: Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a signature is forged or made without authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or


under such signature unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument through it. A person whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to such instrument. 18 Section 23 does not avoid the instrument but only the forged signature. 19 Thus, a forged indorsement does not operate as the payee's indorsement. The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a right is precluded from setting up the forgery or want of authority." Parties who warrant or admit the genuineness of the signature in question and those who, by their acts, silence or negligence are estopped from setting up the defense of forgery, are precluded from using this defense. Indorsers, persons negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on the instrument. 20 In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument. Hence, when the indorsement is a forgery, only the person whose signature is forged can raise the defense of forgery against a holder in due course. 21 The checks involved in this case are order instruments, hence, the following discussion is made with reference to the effects of a forged indorsement on an instrument payable to order. Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. 22 An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting." 23 He cannot interpose the defense that signatures prior to him are forged. A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks's client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank. The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the payee. The drawer's instructions are reflected on the face and by the terms of the check. Payment under a forged indorsement is not to the drawer's order. When the drawee bank pays a person other than the payee, it does not comply with the terms of the check and violates its duty to charge its customer's (the drawer) account only for properly payable items. Since the drawee bank did not pay a holder or other person entitled to receive payment, it has no right to reimbursement from the drawer. 24 The general rule then is that the drawee bank may not debit the drawer's account and is not entitled to indemnification from the drawer. 25 The risk of loss must perforce fall on the drawee bank. However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed to the making of the forged signature, the drawer is precluded from asserting the forgery. If at the same time the drawee bank was also negligent to the point of substantially contributing to the loss, then such loss from the forgery can be apportioned between the negligent drawer and the negligent bank. 26 In cases involving a forged check, where the drawer's signature is forged, the drawer can recover from the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to recredit the amount of the check to the account of the drawer. The liability chain ends with the drawee bank whose responsibility it is to know the drawer's signature since the latter is its customer. 27 In cases involving checks with forged indorsements, such as the present petition, the chain of liability does not end with the drawee bank. The drawee bank may not debit the account of the drawer but may generally pass liability back through the collection chain to the party who took from the forger and, of course, to the forger himself, if


available. 28 In other words, the drawee bank canseek reimbursement or a return of the amount it paid from the presentor bank or person. 29 Theoretically, the latter can demand reimbursement from the person who indorsed the check to it and so on. The loss falls on the party who took the check from the forger, or on the forger himself. In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). The former will necessarily be liable to the latter for the checks bearing forged indorsements. If the forgery is that of the payee's or holder's indorsement, the collecting bank is held liable, without prejudice to the latter proceeding against the forger. Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former must necessarily return the money paid by the latter because it was paid wrongfully. 30 More importantly, by reason of the statutory warranty of a general indorser in section 66 of the Negotiable Instruments Law, a collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement. It warrants that the instrument is genuine, and that it is valid and subsisting at the time of his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this warranty and will be accountable to the drawee bank. This liability scheme operates without regard to fault on the part of the collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the drawee bank because of its indorsement. The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements." 31 The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness. of any indorsement. 32 The drawee bank's duty is but to verify the genuineness of the drawer's signature and not of the indorsement because the drawer is its client. Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the indorsement. Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery, thereby depriving said presentor of the right to recover from the forger, the former is deemed negligent and can no longer recover from the presentor. 33 Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the Province of Tarlac because it paid checks which bore forged indorsements. However, if the Province of Tarlac as drawer was negligent to the point of substantially contributing to the loss, then the drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac were negligent, the loss should be properly apportioned between them. The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable. If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to bear the loss. After careful examination of the records, the Court finds that the Province of Tarlac was equally negligent and should, therefore, share the burden of loss from the checks bearing a forged indorsement. The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retired from government service, was no longer connected with the hospital. With the exception of the first check (dated January 17, 1978), all the checks were issued and released after Pangilinan's retirement on February 28, 1978. After nearly three years, the Treasurer's office was still releasing the checks to the retired cashier. In addition, some of the aid


allotment checks were released to Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were now two persons collecting the checks for the hospital is an unmistakable sign of an irregularity which should have alerted employees in the Treasurer's office of the fraud being committed. There is also evidence indicating that the provincial employees were aware of Pangilinan's retirement and consequent dissociation from the hospital. Jose Meru, the Provincial Treasurer, testified:. ATTY. MORGA: Q Now, is it true that for a given month there were two releases of checks, one went to Mr. Pangilinan and one went to Miss Juco? JOSE MERU: A Yes, sir. Q Will you please tell us how at the time (sic) when the authorized representative of Concepcion Emergency Hospital is and was supposed to be Miss Juco? A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan represented himself as also authorized to help in the release of these checks and we were apparently misled because they accepted the representation of Pangilinan that he was helping them in the release of the checks and besides according to them they were, Pangilinan, like the rest, was able to present an official receipt to acknowledge these receipts and according to them since this is a government check and believed that it will eventually go to the hospital following the standard procedure of negotiating government checks, they released the checks to Pangilinan aside from Miss Juco.34 The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total amount paid on the questioned checks. The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it cannot escape liability and should also bear part of the loss. As earlier stated, PNB can recover from the collecting bank. In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited in the forger's account with the collecting bank and were later paid by four different drawee banks. The Court found the collecting bank (Associated) to be negligent and held: The Bank should have first verified his right to endorse the crossed checks, of which he was not the payee, and to deposit the proceeds of the checks to his own account. The Bank was by reason of the nature of the checks put upon notice that they were issued for deposit only to the private respondent's account. . . . The situation in the case at bench is analogous to the above case, for it was not the payee who deposited the checks with the collecting bank. Here, the checks were all payable to Concepcion Emergency Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings account. Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of endorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot but remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank must fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated to it. It is within the bank's discretion to receive a check for no banking institution would consciously or deliberately accept a check bearing a forged indorsement. When a check is deposited with the collecting bank, it takes a risk on its depositor. It is only logical that this bank be held accountable for checks deposited by its customers. A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the opportunity to go after the forger, signifies negligence on the part of the drawee bank (PNB) and will preclude it from claiming reimbursement.


It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23 of the Philippine Clearing House Corporation Rules comes to fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall be returned within twenty-Sour (24) hours after discovery of the forgery but in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank. Section 23 of the PCHC Rules deleted the requirement that items bearing a forged endorsement should be returned within twenty-four hours. Associated Bank now argues that the aforementioned Central Bank Circular is applicable. Since PNB did not return the questioned checks within twenty-four hours, but several days later, Associated Bank alleges that PNB should be considered negligent and not entitled to reimbursement of the amount it paid on the checks. The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an administrative regulation issued pursuant to law and as such, must prevail over the PCHC rule. The Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing House Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were covered by the PCHC while banks located elsewhere still had to go through Central Bank Clearing. In any event, the twenty-four-hour return rule was adopted by the PCHC until it was changed in 1982. The contending banks herein, which are both branches in Tarlac province, are therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB circular was applicable when the forgery of the checks was discovered in 1981. The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery but in no event beyond the period fixed by law for filing a legal action. The rationale of the rule is to give the collecting bank (which indorsed the check) adequate opportunity to proceed against the forger. If prompt notice is not given, the collecting bank maybe prejudiced and lose the opportunity to go after its depositor. The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-four hours, as mandated by the rule, PNB did not commit negligent delay. Under the circumstances, PNB gave prompt notice to Associated Bank and the latter bank was not prejudiced in going after Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB necessarily had to inspect the checks and conduct its own investigation. Thereafter, it requested the Provincial Treasurer's office on March 31, 1981 to return the checks for verification. The Province of Tarlac returned the checks only on April 22, 1981. Two days later, Associated Bank received the checks from PNB. 36 Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20, 1981, thus giving it notice of the forgeries. At this time, however, Pangilinan's account with Associated had only P24.63 in it.37 Had Associated Bank decided to debit Pangilinan's account, it could not have recovered the amounts paid on the questioned checks. In addition, while Associated Bank filed a fourth-party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even presented him as its rebuttal witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to comply with the twenty-four-hour return rule. Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter paid and cleared the checks. The Court finds this contention unmeritorious. Even if PNB cleared and paid the checks, it can still recover from Associated Bank. This is true even if the payee's Chief Officer who was supposed to have indorsed the checks is also a customer of the drawee bank. 39 PNB's duty was to verify the genuineness of the drawer's signature and not the genuineness of payee's indorsement. Associated Bank, as the collecting bank, is the entity with the duty to verify the genuineness of the payee's indorsement. PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to the Province of Tarlac the amount of the checks and then directing Associated Bank to reimburse PNB. The Court finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is a clientor customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and the collecting bank. The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the Province of Tarlac in its current account with the PNB. Bank deposits are considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve percent (12%) interest per annum for loans, forebearance of money, goods or credits in the absence of express stipulation. Normally, current accounts are likewise interest-bearing, by express contract, thus excluding them from the coverage of CB Circular No. 416. In this case, however, the actual interest rate, if any, for the current account opened by the Province of Tarlac with PNB was not given in evidence. Hence, the Court deems it wise to affirm the trial court's use of the legal interest rate, or six percent (6%) per annum. The interest rate


shall be computed from the date of default, or the date of judicial or extrajudicial demand. 41 The trial court did not err in granting legal interest from March 20, 1981, the date of extrajudicial demand. The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a period close to three years and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to the hospital's real cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB. The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payee's indorsement. IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY GRANTED. The petition for review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED. The decision of the trial court is MODIFIED. The Philippine National Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest from March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent (50%) of P203,300.00 to the Philippine National Bank, likewise, with legal interest from March 20, 1981 until payment is made. SO ORDERED. Regalado, Puno and Mendoza, JJ., concur.

Footnotes Penned by Justice Asaali S. Isnani, with Associate Justices Arturo S. Buena and Ricardo P. Galvez, concurring, dated September 30, 1992. Rollo, p. 22.1

Provincial aid was given irregularly. Hospital staff would often call the provincial treasurer's office to inquire whether there was an allotment check for the hospital. The hospital's administrative officer and cashier would then go to the provincial treasurer's office to pick up the check.2

Checks received by the hospital are deposited in the account of the National Treasury with the PNB. All income of the hospital in excess of the amount which the National Government has directed it to raise, is excess income. The latter is given back to the hospital after a supplemental budget is prepared. When the latter is approved, an advice of allotment is made. Then the hospital requests a cash disbursement ceiling. When approved, this is brought to the Ministry of Health. The regional office of said Ministry then prepares a check for the hospital. The check will be deposited in the hospital's current account at the PNB. (Culled from the testimony of Dr. Adena Canlas, TSN, October 17, 1983, pp. 8-11; December 6, 1983, pp. 43-44.)3

TSN, March 13, 1984, pp. 51-60. Check No. 530863 K, dated January 17, 1978 for P10,000.00. Check No. 526788 K. Check No. 391351 L. TSN, July 10, 1985, pp. 14-15. TSN, July 10, 1985, p. 20-21, 34-35; September 24, 1985.

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7

8


Exhibit FF for Province of Tarlac. On March 20, 1981, the Province of Tarlac reiterated its request in another letter to PNB. Associated Bank was allegedly furnished with a copy of this letter. (Records, pp. 246-247) PNB requested the Province to return the checks in a letter dated March 31, 1981. The checks were returned to PNB on April 22, 1981. (Exhibit GG) On April 24, 1981, PNB gave the checks to Associated Bank. (Exhibit 5) Associated Bank returned the checks to PNB on April 28, 1981, along with a letter stating its refusal to return the money paid by PNB. (Exhibit 6)9 10

Exhibit "MM" for Province of Tarlac.

Civil Case No. 6227, "Province of Tarlac v. Philippine National Bank; Philippine National Bank v. Associated Bank; Associated Bank v. Fausto Pangilinan and Adena G. Canlas," Regional Trial Court Branch 64, Tarlac, Tarlac.11 12

Penned by Judge Arturo U. Barias, Jr., Rollo, pp. 391-392. CA-G.R. CV No. 17962. Petition, pp. 6-7; Rollo, pp. 13-14, G.R. No. 107612. Citing Antique Sawmills, Inc. v. Zayco, 17 SCRA 316, et al., Petition, p. 9, Rollo, p. 10. Associated Bank's Petition, p. 13. Id., at 12. J. CAMPOS & M. LOPEZ-CAMPOS, NEGOTIABLE INSTRUMENTS LAW, 227-230 (4th ed., 1990).

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I A. AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON THE COMMERCIAL LAWS OF THE PHILIPPINES 198 (1989 ed.).19 20

Id., at 199. J. VITUG, PANDECT OF COMMERCIAL LAW AND JURISPRUDENCE 51-53 (Rev. ed., 1990). Id. Section 66, Negotiable Instruments Law.

21

22

23

S. NICKLES, NEGOTIABLE INSTRUMENTS AND OTHER RELATED COMMERCIAL PAPER 416 (2nd ed., 1993).24

Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking Corp., 43 Phil. 678; Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation G.R. No. L-74917, January 20, 1988, 157 SCRA 188; CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283, citing La Fayette v. Merchants Bank, 73 Ark 561; Wills v. Barney, 22 Cal 240; Wellington National Bank v. Robbins, 71 Kan 748.25 26

R. JORDAN & W. WARREN, NEGOTIABLE INSTRUMENTS AND LETTERS OF CREDIT 216 (1992). Id. Id., at 216-235; VITUG, op. cit. note 21 at 53. Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life Insurance Co. v. HSBC, supra.

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28

29


Article 2154 of the Civil Code provides: "If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises." Banco de Oro v. Equitable Banking Corp., supra.30

Bank of the Phil. Islands v. CA, G.R. No. 102383, November 26, 1992, 216 SCRA 51, 63 citing Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life Insurance Co. v. HSBC, supra.31

CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283 citing Inter-state Trust Co. v. U.S. National Bank, 185 Pac. 260; Hongkong and Shanghai Banking Corp. v. People's Bank and Trust Co., supra.32 33

JORDAN & WARREN, op. cit. note 26 at 217; CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283. TSN, June 19, 1984, pp. 10-11. G.R. No. 89802, May 7, 1992, 208 SCRA 465. See footnote 9. Exhibit "3-G" for Associated Bank. TSN, January 8, 1987. San Carlos Milling Co. Ltd. v. BPI, 59 Phil. 59.

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39

Article 1980 of the Civil Code reads: Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.40 41

Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, July 12, 1994, 234 SCRA 78.

OTHERS: READ SECS. 185 – 189; 119 – 123;178 – 183Sec. 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 check. Sec. 186. Within what time a check must be presented. - A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. Sec. 187. Certification of check; effect of. - Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance. Sec. 188. Effect where the holder of check procures it to be certified. - Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. Sec. 189. When check operates as an assignment. - A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder unless and until it accepts or certifies the check. VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged: a) By payment in due course by or on behalf of the principal debtor; b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; c) By the intentional cancellation thereof by the holder;


d) By any other act which will discharge a simple contract for the payment of money; e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. Sec. 120. When persons secondarily liable on the instrument are discharged. - A person secondarily liable on the instrument is discharged: a) By any act which discharges the instrument; b) By the intentional cancellation of his signature by the holder; c) By the discharge of a prior party; d) By a valid tender or payment made by a prior party; e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved. Sec. 121. Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except: a) Where it is payable to the order of a third person and has been paid by the drawer; and b) Where it was made or accepted for accommodation and has been paid by the party accommodated. Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority. XV. BILLS IN SET Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill. Sec. 179. Right of holders where different parts are negotiated. - Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is, as between such holders, the true owner of the bill. But nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him. Sec. 180. Liability of holder who indorses two or more parts of a set to different persons. - Where the holder of a set indorses two or more parts to different persons he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills. Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill. Sec. 182. Payment by acceptor of bills drawn in sets. - When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon. Sec. 183. Effect of discharging one of a set. - Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or otherwise, the whole bill is discharged. -o0o-


Appendix A: THE NEGOTIABLE INSTRUMENTS LAWACT NO. 2031February 03, 1911I. FORM AND INTERPRETATION 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. Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act, although it is to be paid: (a) with interest; or (b) by stated installments; or (c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) with exchange, whether at a fixed rate or at the current rate; or (e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity. Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with: (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional. Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: (a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) 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. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which: (a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) authorizes a confession of judgment if the instrument be not paid at maturity; or (c) waives the benefit of any law intended for the advantage or protection of the obligor; or (d) gives the holder an election to require something to be done in lieu of payment of money. But nothing in this section shall validate any provision or stipulation otherwise illegal. Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that: (a) it is not dated; or (b) does not specify the value given, or that any value had been given therefor; or (c) does not specify the place where it is drawn or the place where it is payable; or (d) bears a seal; or


(e) designates a particular kind of current money in which payment is to be made. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. Sec. 7. When payable on demand. - An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. Sec. 9. When payable to bearer. - The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank. Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case may be. Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and revocable until


delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; (d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency. Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. II. CONSIDERATION Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. Sec. 25. Value, what constitutes. — Value is any consideration sufficient to support a simple contract. An antecedent or preexisting debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. Sec. 27. When lien on instrument constitutes holder for value. — Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien.


Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. Sec. 29. Liability of accommodation party. - An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. III. NEGOTIATION Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue. Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional. Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. Sec. 35. Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either: (a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive. Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the right: (a) to receive payment of the instrument; (b) to bring any action thereon that the indorser could bring; (c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others.


Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer. Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature. Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. robles virtual law library Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue. Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated. Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument. Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable. IV. RIGHTS OF THE HOLDER Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon in his own name; and payment to him in due course discharges the instrument. Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. Sec. 53. When person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course. Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him. Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.


Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. robles virtual law library Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. V. LIABILITIES OF PARTIES Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse. Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. Sec. 63. When a person deemed indorser. - A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity. Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee. Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes. Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due course: (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is, at the time of his indorsement, valid and subsisting; And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.


Sec. 67. Liability of indorser where paper negotiable by delivery. — Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser. Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally. Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent. VI. PRESENTATION FOR PAYMENT Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers. Sec. 71. Presentment where instrument is not payable on demand and where payable on demand. - Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after its issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. Sec. 72. What constitutes a sufficient presentment. - Presentment for payment, to be sufficient, must be made: (a) By the holder, or by some person authorized to receive payment on his behalf; (b) At a reasonable hour on a business day; (c) At a proper place as herein defined; (d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made. Sec. 73. Place of presentment. - Presentment for payment is made at the proper place: (a) Where a place of payment is specified in the instrument and it is there presented; (b) Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented; (c) Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; (d) In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. Sec. 74. Instrument must be exhibited. - The instrument must be exhibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it. Sec. 75. Presentment where instrument payable at bank. - Where the instrument is payable at a bank, presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it at any time during the day, in which case presentment at any hour before the bank is closed on that day is sufficient. Sec. 76. Presentment where principal debtor is dead. - Where the person primarily liable on the instrument is dead and no place of payment is specified, presentment for payment must be made to his personal representative, if such there be, and if, with the exercise of reasonable diligence, he can be found. Sec. 77. Presentment to persons liable as partners. - Where the persons primarily liable on the instrument are liable as partners and no place of payment is specified, presentment for payment may be made to any one of them, even though there has been a dissolution of the firm. Sec. 78. Presentment to joint debtors. - Where there are several persons, not partners, primarily liable on the instrument and no place of payment is specified, presentment must be made to them all. Sec. 79. When presentment not required to charge the drawer. - Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. Sec. 80. When presentment not required to charge the indorser. - Presentment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be


paid if presented. Sec. 81. When delay in making presentment is excused. - Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence. Sec. 82. When presentment for payment is excused. - Presentment for payment is excused: (a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot be made; (b) Where the drawee is a fictitious person; (c) By waiver of presentment, express or implied. Sec. 83. When instrument dishonored by non-payment. - The instrument is dishonored by non-payment when: (a) It is duly presented for payment and payment is refused or cannot be obtained; or (b) Presentment is excused and the instrument is overdue and unpaid. Sec. 84. Liability of person secondarily liable, when instrument dishonored. - Subject to the provisions of this Act, when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday. Sec. 86. Time; how computed. - When the instrument is payable at a fixed period after date, after sight, or after that happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment. Sec. 87. Rule where instrument payable at bank. - Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. Sec. 88. What constitutes payment in due course. - Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective. VII. NOTICE OF DISHONOR Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged. Sec. 90. By whom given. - The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given. Sec. 91. Notice given by agent. - Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to given notice, whether that party be his principal or not. Sec. 92. Effect of notice on behalf of holder. - Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. Sec. 93. Effect where notice is given by party entitled thereto. - Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder and all parties subsequent to the party to whom notice is given. chanrobles law Sec. 94. When agent may give notice. - Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder, and the principal, upon the receipt of such notice, has himself the same time for giving notice as if the agent had been an independent holder. Sec. 95. When notice sufficient. - A written notice need not be signed and an insufficient written notice may be supplemented and validated by verbal communication. A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is given is in fact misled thereby.


Sec. 96. Form of notice. - The notice may be in writing or merely oral and may be given in any terms which sufficiently identify the instrument, and indicate that it has been dishonored by non-acceptance or non-payment. It may in all cases be given by delivering it personally or through the mails. Sec. 97. To whom notice may be given. - Notice of dishonor may be given either to the party himself or to his agent in that behalf. Sec. 98. Notice where party is dead. - When any party is dead and his death is known to the party giving notice, the notice must be given to a personal representative, if there be one, and if with reasonable diligence, he can be found. If there be no personal representative, notice may be sent to the last residence or last place of business of the deceased. Sec. 99. Notice to partners. - Where the parties to be notified are partners, notice to any one partner is notice to the firm, even though there has been a dissolution. Sec. 100. Notice to persons jointly liable. - Notice to joint persons who are not partners must be given to each of them unless one of them has authority to receive such notice for the others. Sec. 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, notice may be given either to the party himself or to his trustee or assignee. Sec. 102. Time within which notice must be given. - Notice may be given as soon as the instrument is dishonored and, unless delay is excused as hereinafter provided, must be given within the time fixed by this Act. Sec. 103. Where parties reside in same place. - Where the person giving and the person to receive notice reside in the same place, notice must be given within the following times: (a) If given at the place of business of the person to receive notice, it must be given before the close of business hours on the day following. (b) If given at his residence, it must be given before the usual hours of rest on the day following. (c) If sent by mail, it must be deposited in the post office in time to reach him in usual course on the day following. Sec. 104. Where parties reside in different places. - Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times: (a) If sent by mail, it must be deposited in the post office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on last day, by the next mail thereafter. (b) If given otherwise than through the post office, then within the time that notice would have been received in due course of mail, if it had been deposited in the post office within the time specified in the last subdivision. Sec. 105. When sender deemed to have given due notice. - Where notice of dishonor is duly addressed and deposited in the post office, the sender is deemed to have given due notice, notwithstanding any miscarriage in the mails. Sec. 106. Deposit in post office; what constitutes. - Notice is deemed to have been deposited in the post-office when deposited in any branch post office or in any letter box under the control of the post-office department. Sec. 107. Notice to subsequent party; time of. - Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. Sec. 108. Where notice must be sent. - Where a party has added an address to his signature, notice of dishonor must be sent to that address; but if he has not given such address, then the notice must be sent as follows: (a) Either to the post-office nearest to his place of residence or to the post-office where he is accustomed to receive his letters; or (b) If he lives in one place and has his place of business in another, notice may be sent to either place; or (c) If he is sojourning in another place, notice may be sent to the place where he is so sojourning. But where the notice is actually received by the party within the time specified in this Act, it will be sufficient, though not sent in accordance with the requirement of this section. Sec. 109. Waiver of notice. - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. Sec. 110. Whom affected by waiver. - Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it binds him only.


Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor. Sec. 112. When notice is dispensed with. - Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. Sec. 113. Delay in giving notice; how excused. - Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, notice must be given with reasonable diligence. Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer in either of the following cases: (a) Where the drawer and drawee are the same person; (b) When the drawee is fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer has countermanded payment. Sec. 115. When notice need not be given to indorser. — Notice of dishonor is not required to be given to an indorser in either of the following cases: (a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument; (b) Where the indorser is the person to whom the instrument is presented for payment; (c) Where the instrument was made or accepted for his accommodation. Sec. 116. Notice of non-payment where acceptance refused. - Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted. Sec. 117. Effect of omission to give notice of non-acceptance. - An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. Sec. 118. When protest need not be made; when must be made. - Where any negotiable instrument has been dishonored, it may be protested for non-acceptance or non-payment, as the case may be; but protest is not required except in the case of foreign bills of exchange. VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. Sec. 120. When persons secondarily liable on the instrument are discharged. - A person secondarily liable on the instrument is discharged: (a) By any act which discharges the instrument; (b) By the intentional cancellation of his signature by the holder; (c) By the discharge of a prior party; (d) By a valid tender or payment made by a prior party; (e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved. Sec. 121. Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except: (a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated.


Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority. Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor. Sec. 125. What constitutes a material alteration. - Any alteration which changes: (a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment: (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; (f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. BILLS OF EXCHANGE IX. FORM AND INTERPRETATION Sec. 126. Bill of exchange, 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. Sec. 127. Bill not an assignment of funds in hands of drawee. - A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same. Sec. 128. Bill addressed to more than one drawee. - A bill may be addressed to two or more drawees jointly, whether they are partners or not; but not to two or more drawees in the alternative or in succession. Sec. 129. Inland and foreign bills of exchange. - An inland bill of exchange is a bill which is, or 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. Sec. 130. When bill may be treated as promissory note. - Where in a bill the drawer and drawee are the same person or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note. 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. It is in the option of the holder to resort to the referee in case of need or not as he may see fit. X. ACCEPTANCE Sec. 132. Acceptance; how made, by and so forth. - The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money. Sec. 133. Holder entitled to acceptance on face of bill. - The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored. Sec. 134. Acceptance by separate instrument. - Where an acceptance is written on a paper other than the bill itself, it does not


bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value. Sec. 135. Promise to accept; when equivalent to acceptance. - An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value. Sec. 136. Time allowed drawee to accept. - The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation. Sec. 137. Liability of drawee returning or destroying bill. - Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. Sec. 138. Acceptance of incomplete bill. - A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non payment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment. Sec. 139. Kinds of acceptance. - An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn. Sec. 140. What constitutes a general acceptance. - An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere. Sec. 141. Qualified acceptance. - An acceptance is qualified which is: (a) Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; (b) Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn; (c) Local; that is to say, an acceptance to pay only at a particular place; (d) Qualified as to time; (e) The acceptance of some, one or more of the drawees but not of all. Sec. 142. Rights of parties as to qualified acceptance. - The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto. XI. PRESENTMENT FOR ACCEPTANCE Sec. 143. When presentment for acceptance must be made. - Presentment for acceptance must be made: (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Sec. 144. When failure to present releases drawer and indorser. - Except as herein otherwise provided, the holder of a bill which is required by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do so, the drawer and all indorsers are discharged. Sec. 145. Presentment; how made. - Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and (a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only; (b) Where the drawee is dead, presentment may be made to his personal representative; (c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee. Sec. 146. On what days presentment may be made. - A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day.


Sec. 147. Presentment where time is insufficient. - Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers. Sec. 148. Where presentment is excused. - Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases: (a) Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill. (b) Where, after the exercise of reasonable diligence, presentment can not be made. (c) Where, although presentment has been irregular, acceptance has been refused on some other ground. Sec. 149. When dishonored by nonacceptance. - A bill is dishonored by non-acceptance: (a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted. Sec. 150. Duty of holder where bill not accepted. - Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. Sec. 151. Rights of holder where bill not accepted. - When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary. XII. PROTEST Sec. 152. In what cases protest necessary. - Where a foreign bill appearing on its face to be such is dishonored by nonacceptance, it must be duly protested for nonacceptance, by nonacceptance is dishonored and where such a bill which has not previously been dishonored by nonpayment, it must be duly protested for nonpayment. If it is not so protested, the drawer and indorsers are discharged. Where a bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary. Sec. 153. Protest; how made. - The protest must be annexed to the bill or must contain a copy thereof, and must be under the hand and seal of the notary making it and must specify: (a) The time and place of presentment; (b) The fact that presentment was made and the manner thereof; (c) The cause or reason for protesting the bill; (d) The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found. Sec. 154. Protest, by whom made. - Protest may be made by: (a) A notary public; or (b) By any respectable resident of the place where the bill is dishonored, in the presence of two or more credible witnesses. Sec. 155. Protest; when to be made. - When a bill is protested, such protest must be made on the day of its dishonor unless delay is excused as herein provided. When a bill has been duly noted, the protest may be subsequently extended as of the date of the noting. Sec. 156. Protest; where made. - A bill must be protested at the place where it is dishonored, except that when a bill drawn payable at the place of business or residence of some person other than the drawee has been dishonored by nonacceptance, it must be protested for non-payment at the place where it is expressed to be payable, and no further presentment for payment to, or demand on, the drawee is necessary. Sec. 157. Protest both for non-acceptance and non-payment. - A bill which has been protested for non-acceptance may be subsequently protested for non-payment. Sec. 158. Protest before maturity where acceptor insolvent. - Where the acceptor has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors before the bill matures, the holder may cause the bill to be protested for better security against the drawer and indorsers. Sec. 159. When protest dispensed with. - Protest is dispensed with by any circumstances which would dispense with notice of


dishonor. Delay in noting or protesting is excused when delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, the bill must be noted or protested with reasonable diligence. Sec. 160. Protest where bill is lost and so forth. - When a bill is lost or destroyed or is wrongly detained from the person entitled to hold it, protest may be made on a copy or written particulars thereof. XIII. ACCEPTANCE FOR HONOR Sec. 161. When bill may be accepted for honor. - When a bill of exchange has been protested for dishonor by non-acceptance or protested for better security and is not overdue, any person not being a party already liable thereon may, with the consent of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is drawn. The acceptance for honor may be for part only of the sum for which the bill is drawn; and where there has been an acceptance for honor for one party, there may be a further acceptance by a different person for the honor of another party. Sec. 162. Acceptance for honor; how made. - An acceptance for honor supra protest must be in writing and indicate that it is an acceptance for honor and must be signed by the acceptor for honor. Sec. 163. When deemed to be an acceptance for honor of the drawer. - Where an acceptance for honor does not expressly state for whose honor it is made, it is deemed to be an acceptance for the honor of the drawer. Sec. 164. Liability of the acceptor for honor. - The acceptor for honor is liable to the holder and to all parties to the bill subsequent to the party for whose honor he has accepted. Sec. 165. Agreement of acceptor for honor. - The acceptor for honor, by such acceptance, engages that he will, on due presentment, pay the bill according to the terms of his acceptance provided it shall not have been paid by the drawee and provided also that is shall have been duly presented for payment and protested for non-payment and notice of dishonor given to him. Sec. 166. Maturity of bill payable after sight; accepted for honor. - Where a bill payable after sight is accepted for honor, its maturity is calculated from the date of the noting for non-acceptance and not from the date of the acceptance for honor. Sec. 167. Protest of bill accepted for honor, and so forth. - Where a dishonored bill has been accepted for honor supra protest or contains a referee in case of need, it must be protested for non-payment before it is presented for payment to the acceptor for honor or referee in case of need. Sec. 168. Presentment for payment to acceptor for honor, how made. - Presentment for payment to the acceptor for honor must be made as follows: (a) If it is to be presented in the place where the protest for non-payment was made, it must be presented not later than the day following its maturity. (b) If it is to be presented in some other place than the place where it was protested, then it must be forwarded within the time specified in Section one hundred and four. Sec. 169. When delay in making presentment is excused. - The provisions of Section eighty-one apply where there is delay in making presentment to the acceptor for honor or referee in case of need. Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is dishonored by the acceptor for honor, it must be protested for non-payment by him. XIV. PAYMENT FOR HONOR Sec. 171. Who may make payment for honor. - Where a bill has been protested for non-payment, any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose account it was drawn. Sec. 172. Payment for honor; how made. - The payment for honor supra protest, in order to operate as such and not as a mere voluntary payment, must be attested by a notarial act of honor which may be appended to the protest or form an extension to it. Sec. 173. Declaration before payment for honor. - The notarial act of honor must be founded on a declaration made by the payer for honor or by his agent in that behalf declaring his intention to pay the bill for honor and for whose honor he pays. Sec. 174. Preference of parties offering to pay for honor. - Where two or more persons offer to pay a bill for the honor of


different parties, the person whose payment will discharge most parties to the bill is to be given the preference. Sec. 175. Effect on subsequent parties where bill is paid for honor. - Where a bill has been paid for honor, all parties subsequent to the party for whose honor it is paid are discharged but the payer for honor is subrogated for, and succeeds to, both the rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter. Sec. 176. Where holder refuses to receive payment supra protest. - Where the holder of a bill refuses to receive payment supra protest, he loses his right of recourse against any party who would have been discharged by such payment. Sec. 177. Rights of payer for honor. - The payer for honor, on paying to the holder the amount of the bill and the notarial expenses incidental to its dishonor, is entitled to receive both the bill itself and the protest. XV. BILLS IN SET Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill. Sec. 179. Right of holders where different parts are negotiated. - Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is, as between such holders, the true owner of the bill. But nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him. Sec. 180. Liability of holder who indorses two or more parts of a set to different persons. - Where the holder of a set indorses two or more parts to different persons he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills. Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill. Sec. 182. Payment by acceptor of bills drawn in sets. - When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon. Sec. 183. Effect of discharging one of a set. - Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or otherwise, the whole bill is discharged. XVI. PROMISSORY NOTES AND CHECKS Sec. 184. Promissory note, defined. - A negotiable 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, it is not complete until indorsed by him. 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 check. Sec. 186. Within what time a check must be presented. - A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. Sec. 187. Certification of check; effect of. - Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance. Sec. 188. Effect where the holder of check procures it to be certified. - Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. Sec. 189. When check operates as an assignment. - A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder unless and until it accepts or certifies the check. XVII. GENERAL PROVISIONS Sec. 190. Short title. - This Act shall be known as the Negotiable Instruments Law. Sec. 191. Definition and meaning of terms. - In this Act, unless the contract otherwise requires:


"Acceptance" means an acceptance completed by delivery or notification; "Action" includes counterclaim and set-off; "Bank" includes any person or association of persons carrying on the business of banking, whether incorporated or not; "Bearer" means the person in possession of a bill or note which is payable to bearer; "Bill" means bill of exchange, and "note" means negotiable promissory note; "Delivery" means transfer of possession, actual or constructive, from one person to another; "Holder" means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof; "Indorsement" means an indorsement completed by delivery; "Instrument" means negotiable instrument; "Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder; "Person" includes a body of persons, whether incorporated or not; "Value" means valuable consideration; "Written" includes printed, and "writing" includes print.Sec. 192. Persons primarily liable on instrument. - The person "primarily" liable on an instrument is the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are "secondarily" liable. Sec. 193. Reasonable time, what constitutes. - In determining what is a "reasonable time" regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case. Sec. 194. Time, how computed; when last day falls on holiday. - Where the day, or the last day for doing any act herein required or permitted to be done falls on a Sunday or on a holiday, the act may be done on the next succeeding secular or business day. Sec. 195. Application of Act. - The provisions of this Act do not apply to negotiable instruments made and delivered prior to the taking effect hereof. Sec. 196. Cases not provided for in Act. - Any case not provided for in this Act shall be governed by the provisions of existing legislation or in default thereof, by the rules of the law merchant. Sec. 197. Repeals. - All acts and laws and parts thereof inconsistent with this Act are hereby repealed. Sec. 198. Time when Act takes effect. - This Act shall take effect ninety days after its publication in the Official Gazette of the Philippine Islands shall have been completed.


Law on Negotiable Instruments

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