Negotiable Instruments Law-libre

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) based on the book of Aquino and De Leon and Audio Lecture of Dean Sundiang

NEGOTIABLE INSTRUMENTS LAW

I. INTRODUCTION A. GOVERNING LAWS ACT No. 2031 effective June 2, 1911 (which

amended some of the provisions of the Rules of the Law Merchant), the Code of Commerce and the Civil Code.

B. APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW the Act applies only to negotiable instruments or those that meet the requirements under Sec. 1 of Act No. 2031.

KRAUFFMAN VS. PNB (GR No. 16454, Sept. 29, 1921) - Herein plaintiff was entitled to P98,000 of the Philippine Fiber and Produce Companys dividend for the year 1917. George B. Wicks, treasurer of the Company, requested that a telegraphic transfer of $45,000 to the plaintiff in New York City. Wicks drew and delivered a check for the amount of P90,355.50, total cost of said transfer, including exchange and cost of message which was accepted by the officer selling the exchange in payment of the transfer in question. As evidence of this transaction a document was made out and delivered to Wicks, which is referred to by the bank's assistant cashier as its official receipt. On the same day the Philippine National Bank dispatched to its New York agency a cablegram for $45,000. However, the bank's representative in New York replied suggesting the advisability of withholding this money from Kauffman. The PNB dispatched to its New York agency another message to withhold the Kauffman payment as suggested. Meanwhile, upon advice of Wicks that the money has been placed to his credit, Kauffman presented himself at the office of the Philippine National Bank in New York and demanded the money. By this time, however, the message from the Philippine National Bank directing the withholding of payment had been received in New York, and payment was therefore refused. Thus the present complaint to recover said sum, with interest and costs. ISSUE: WON Act No. 2031 is applicable in the above case? HELD: NO. The provisions of the Negotiable Instruments Law to come into operation, there must be a document in existence of the character described in section 1 of the Law; and no rights properly speaking arise in respect to said instrument until it is delivered. In the case before us there was an order transmitted by the defendant bank to its New York branch, for the payment of a specified sum of money to George A. Kauffman. But this order was not made payable "to order or "to bearer," as required in Section 1(d) of that Act; and inasmuch as it never left the possession of the bank, or its representative in New York City, there was no delivery in the sense intended in Section 16 of the same Law. In this connection it is unnecessary to point out that the official receipt delivered by the bank to the purchaser of the telegraphic order, and already set out above, cannot itself be viewed in the light of a negotiable instrument, although it affords complete proof of the obligation actually assumed by the bank. GSIS VS. CA (GR No. L-40824, Feb. 23, 1989) - Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the Lagasca spouses, executed a deed of mortgage in favor of petitioner GSIS. Subsequently, another deed of mortgage was executed in connection with earlier two loans granted. A parcel of land, co-owned by said mortgagor spouses, was given as security under the aforesaid two deeds and they also executed a "promissory note". The Lagasca spouses executed an instrument denominated "Assumption of Mortgage" under which they obligated themselves to assume obligation to the GSIS. This undertaking was not fulfilled. Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment of the amortizations due, GSIS extra-judicially foreclosed the mortgage and caused the mortgaged property to be sold at public auction. Private respondents filed a complaint against the petitioner and the Lagasca spouses praying that the extrajudicial foreclosure be declared null and void. In their aforesaid complaint, they alleged that they signed the mortgage contracts not as sureties or guarantors for the Lagasca spouses but they merely gave their common property to the said co-owners who were solely benefited by the loans from the GSIS. Trial court dismissed the case. CA reversed decision stating that the respondents are that only of an accommodation party. ISSUE: WON the NIL is applicable to the promissory note and mortgage deed? HELD: No. Both parties relied on the provisions of Section 29 of Act No. 2031, otherwise known as the Negotiable Instruments Law, which

provide that an accommodation party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving value therefor, but is held liable on the instrument to a holder for value although the latter knew him to be only an accommodation party. This approach of both parties appears to be misdirected and their reliance misplaced. The promissory note hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly not negotiable instruments. These documents do not comply with the fourth requisite to be considered as such under Section 1 of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply, governance shall be afforded, instead, by the provisions of the Civil Code and special laws on mortgages.

C. CONCEPT OF NEGOTIABLE INSTRUMENTS 1. DEFINITION: Negotiable Instruments are written statements

signed by the maker or drawer containing an unconditional promise or order to pay a sum certain money, payable on demand or at a fixed or determinable future time, to order or to bearer.

2. FUNCTIONS OF NEGOTIABLE INSTRUMENTS a. Substitute for money - although they are not considered

legal tender. One of its distinct characteristics is its negotiability which allows it to go from hand to hand in the commercial markets and to take the part of money in commercial transactions free from all personal defenses available against the original owner.

b. Media of exchange they thus increase the purchasing medium in circulation. They are a safe and convenient means of doing business that eliminate the risk of dealing in cash.

c. Medium of credit transactions they allow men of undoubted credit (such as those with illiquid properties) to carry on business enterprise upon their promissory notes, bills of exchange and checks knowing that other businessmen will treat these promises as cash. Checks are primarily used for immediate payment (substitute for money); while ordinary bill of exchange and the promissory note are intended for the circulation of credits (credit instruments)

3. LEGAL TENDER that amount which the creditor can be compelled

to accept as payment.

Sec. 52, New Central Bank Act

Legal Tender Power. All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private: Provided, however, That, unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos (P50.00) for denominations of Twenty-five centavos and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos.

Sec. 60 Legal Character. Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, That a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account

TIBAJIA VS. CA (GR No. 100290, June 4, 1993) - A writ of attachment was issued by the trial court in connection to the collection of a sum of money filed by Eden Tan against the Tibajia spouses. The fund was then on deposit with the cashier of the Regional Trial Court of Pasig. The Tibajia spouses thereafter delivered to the Deputy Sheriff the total money judgment in the form of Cashier's Check worth P262,750.00. However, Eden Tan, refused to accept the payment made and instead insisted that the garnished funds deposited with the cashier of the Regional Trial Court


of Pasig be withdrawn to satisfy the judgment obligation. Petitioners filed a motion to lift the writ of execution on the ground that the judgment debt had already been paid but was denied by the trial court on the ground that payment in cashier's check is not payment in legal tender. When the petitioners' motion for reconsideration was denied, the spouses Tibajia filed herein petition. ISSUE: WON the delivery of the cashier's check is considered payment in legal tender? HELD: No. A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. (Philippine Airlines, Inc. vs. Court of Appeals and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court). The ruling in the two (2) abovementioned cases decided by the Supreme Court applies the statutory provisions which lay down the rule that a check is not legal tender and that a creditor may validly refuse payment by check, whether it be a manager's, cashier's or personal check. PAL VS. CA (GR No. 49188, Jan. 30, 1990) - CFI Manila ruled in favor of Amelia Tan [under the name and style of Able Printing Press] in a complaint for damages against petitioner Philippine Airlines. On appeal, the CA upheld the decision of the CFI with minor modifications as to the damages to be awarded. The corresponding writ of execution was duly referred to Deputy Sheriff Emilio Z. Reyes for enforcement with checks in the name of the latter. Four months later, Amelia Tan moved for the issuance of an alias writ of execution since the judgment remained unsatisfied. The petitioner filed an opposition to the motion for the issuance of an alias writ of execution stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court, Emilio Z. Reyes, as evidenced by cash vouchers properly signed and received by said Emilio Z. Reyes. On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender the amounts paid to him by petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes because he already absconded or disappeared. ISSUE: WON the payment rendered through a check made by PAL to the absconding sheriff in his name operate to satisfy the judgment debt? HELD: Under ordinary circumstances, payment by the judgment debtor to the sheriff should be valid payment to extinguish the judgment debt. There are circumstances, however, which compel a different conclusion such as when the payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. A check, whether a managers check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3). PAL created a situation which permitted the said Sheriff to personally encash said checks and misappropriate the proceeds thereof to his exclusive personal benefit. For the prejudice that resulted, the petitioner himself must bear the fault. As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss.

D. CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS 1. NEGOTIABILITY is that quality or attribute of a bill or note

whereby it may pass from one person to another similar to money, so as to give the holder in due course the right to collect on the instrument the sum payable for himself free from any defect in the title of any of the prior parties or defenses available to them among themselves.

2. ACCUMULATION OF SECONDARY CONTRACTS as they are transferred from one person to another. Once an instrument is issued, additional parties can become involved.

E. INCIDENTS IN THE LIFE OF NEGOTIABLE INSTRUMENTS

PROMISSORY NOTE BILL OF EXCHANGE

Preparation & Signing

Issuance

Negotiation

Presentment for Acceptance

Acceptance

Dishonor by Non-acceptance

Presentment for payment

Dishonor by Non-payment

Notice of Dishonor

Payment

Discharge

F. KINDS OF NEGOTIABLE INSTRUMENTS

1. PROMISSORY NOTES (Sec. 184, NIL) An unconditional promise

in writing mace 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. a. Parties to a Negotiable Promissory Note are (1) Maker and

(2) Payee; b. Kinds of Negotiable Promissory Note include certificates of

deposits, bank notes, due bills and bonds.

2. BILLS OF EXCHANGE (Sec. 126, 185, NIL) 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 bearer. a. Parties to a Bill of Exchange are (1) Drawer, (2) Payee and

(3) Drawee; b. Kinds of Bills of Exchange include drafts, trade acceptances

and bankers acceptances.

G. WHEN BILLS TREATED AS NOTES

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. 17(e) Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (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;

H. BILLS AND NOTES DISTINGUISHED

PROMISSORY NOTES BILLS OF EXCHANGE

2 parties Maker and Payee 3 parties Drawer, Payee and Drawee

Maker cannot be the payee Drawer and payee may be the same person

There is unconditional PROMISE by the maker

There is unconditional ORDER by the drawer to the drawee

Presentment for payment without prior acceptance

Some Bills need prior acceptance by the drawee before presentment for payment

Liability of the maker is primary and absolute

Liability of the drawer is secondary and conditional

I. NEGOTIABLE INSTRUMENTS COMPARE WITH OTHER PAPERS

(Negotiability vs. Assignability) SESBRENO VS. CA (GR No. 89252, May 24, 1993) - Petitioner Sesbreno made a money market placement in the amount of P300,000 with the


Philippine Underwriters Finance Corporation (PhilFinance), with a term of 32 days. PhilFinance issued to Sesbreno (1) the Certificate of Confirmation of Sale of a Delta Motor Corporation Promissory Note, (2) the Certificate of Securities Delivery Receipt indicating the sale of the note with notation that said security was in the custody of Pilipinas Bank, and (3) post-dated checks drawn against the Insular Bank of Asia and America for P304,533.33 payable on March 13, 1981. The checks were dishonored for having been drawn against insufficient funds. Pilipinas Bank never released the note, nor any instrument related thereto, to Sesbreno; but Sesbreno learned that the Delta Promissory Note maturing on 6 April 1981, has a face value of P2,300,833.33 with PhilFinance as payee and Delta Motors as maker; and was stamped non-negotiable on its face. PhilFrance was later on placed under the custody of the Securities and Exchange Commission. As Sesbreno was unable to collect his investment and interest thereon, he filed an action for damages against Delta Motors and Pilipinas Bank. Delta Motors contends that said promissory note was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the word "non-negotiable" stamped across the face of the Note. The trial court and the CA dismissed petitioners complaint and appeal, respectively, for lack of cause of action. If anything, petitioner has a cause of action against Philfrance, which, however, was not impleaded. ISSUE: WON the non-negotiability of a promissory note prevents its assignment? HELD: No. A negotiable instrument, instead of being negotiated, may also be assigned or transferred. The legal consequences of negotiation and assignment of the instrument are different. A non-negotiable instrument may not be negotiated but may be assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the instrument. The subject promissory note, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring such note, in whole or in part.

J. SOME NON-NEGOTIABLE INSTRUMENTS 1. Document of Title like a certificate of stock, bill of lading and

warehouse receipt (non-negotiable because there is no unconditional promise or order to pay a certain sum in money);

2. Letter of Credit a letter from a merchant or bank or banker in one place, addressed to another, in another place or country, requesting the addressee to pay money or deliver goods to a third party therein named, the writer of the letter undertaking to provide him the money for the goods or to repay him. It is a letter requesting one person to make advances to a third person on the credit of the writer. (It is in favor of a certain person and not to order)

3. Treasury Warrant - it is a government warrant for the payment of money such as that issued in favor of a public officer or employee covering payment or replenishment of cash advances for official expenditures. (It is payable out of a specific fund or appropriation)

4. Postal Money Order PHILIPPINE EDUCATION CO. VS. SORIANO (GR No. L-22405, June 30, 1971) - Enrique Montinola sought to purchase from the Manila Post Office 10 money orders (P200 each), offering to pay for them with a private check. Montinola was able to leave the building with his check and the 10 money orders without the knowledge of the teller. Upon discovery, message was sent to all postmasters and banks involving the unpaid money orders. One of the money orders was received by the Philippine Education Co. as part of its sales receipt. It was deposited by the company with the Bank of America, which cleared it with the Bureau of Post. The Postmaster, through the Chief of the Money Order Division of the Manila Post Office informed the bank of the irregular issuance of the money order. The bank debited the account of the company. The company moved for reconsideration. ISSUE: WON postal money orders are negotiable instruments? HELD: No. Philippine postal statutes are patterned from those of the United States, and the weight of authority in said country is that Postal money orders are not negotiable instruments inasmuch as the establishment of a postal money order is an exercise of governmental power for the publics benefit. Furthermore, some of the restrictions imposed upon money order by postal laws and regulations are inconsistent with the character of negotiable instruments. For instance, postal money orders may be withheld under a variety of circumstances, and which are restricted to not more than one indorsement

II. FORM AND INTERPRETATION OF NEGOTIABLE INSTRUMENTS A. HOW NEGOTIABILITY IS DETERMINED?

CALTEX VS. COURT OF APPEALS (GR No. 97753, Aug. 10, 1992) - Respondent bank issued 280 certificates of time deposit (CTDs) in favor of Angel dela Cruz who delivered the same to herein petitioner in connection with his purchased fuel products. Eventually, dela Cruz executed and delivered an Affidavit of Loss for the reissuance of the CTDs. Dela Cruz later on obtained a loan from respondent bank and negotiated the said CTDs, executing a Deed of Assignment of Time Deposit which stated, among others, that the bank has full control of the indicated time deposits from and after date of the assignment and may set-off such and apply the same to the payment of amount or amounts that may be due on the loan upon maturity. Petitioner then went to the Sucat branch for verification of the CTDs declared lost, alleging that the same were delivered to herein petitioner as security for purchases made with Caltex Philippines, Inc. and requested that the CTDs be pre-terminated, which was refused by the respondent bank due to the failure of petitioner to present requested documents to prove such allegation. Petitioner then filed a complaint in the RTC, which was dismissed. On appeal, the CA affirmed the decision of the RTC. Thus, the present petition. ISSUE: WON the CTDs are considered negotiable? HELD: Yes. A sample text of the certificates of time deposit is reproduced below:

SECURITY BANK AND TRUST COMPANY 6778 Ayala Ave., Makati No. 90101 Metro Manila, Philippines SUCAT OFFICE P4,000.00 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

Section 1, of Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable. The CTDs in question undoubtedly meet the requirements of the law for negotiability. The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the fact of the instrument itself. Contrary to what respondent court held (that the CTDs are payable to the depositor which is Angel dela Cruz), 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 dela 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.

B. EFFECT OF ESTOPPEL BANCO DE ORO SAVINGS VS. EQUITABLE BANKING CORP. (GR No. 74917, Jan. 20, 1988) - Manager's checks (Checks) having an aggregate amount of P45,982.23 and payable to certain member establishments of Visa Card. Subsequently, the Checks were deposited with the defendant (respondent Equitable) to the credit of its depositor (Aida Trencios account). Following normal procedures, and after stamping at the back of the Checks the usual endorsements (All prior and/or lack of endorsement guaranteed), Equitable sent the checks for clearing through the Philippine Clearing House Corporation (PCHC). Accordingly, BDO paid the Checks; its clearing account was debited for the value of the Checks and defendant's clearing account was credited for the same amount. Thereafter, BDO discovered that the endorsements appearing at the back of the Checks, purporting to be that of the payees, were forged and/or unauthorized or otherwise belong to persons other than the payees. Pursuant to the PCHC Clearing Rules and Regulations, it presented the Checks directly to


Equitable for the purpose of claiming reimbursement from the latter. However, Equitable refused to do so. After an exhaustive investigation and hearing, the Arbiter rendered a decision in favor of BDO and against Equitable ordering the PCHC to debit the clearing account of the defendant (E), and to credit the clearing account of the plaintiff (B) of the foregoing amount with interest at the rate of 12% per annum from date of the complaint. The Board of Directors of the PCHC affirmed the decision of the Arbiter. Hence this petition. ISSUE 1: Were the subject checks non-negotiable and if not, does it fall under the ambit of the power of the PCHC? OR Does the PCHC has jurisdiction over the controversy involved in view of petitioners claim that the subject matter of the case (the Checks) was not negotiable. HELD: Yes. As provided in the articles of incorporation of PCHC, its operation extend to "clearing checks and other clearing items." No doubt transactions on non-negotiable checks are within the ambit of its jurisdiction. The term check as used in the said Articles of Incorporation of PCHC can only connote checks in general use in commercial and business activities. It cannot be conceived to be limited to negotiable checks only. Checks are used between banks and bankers and their customers, and are designed to facilitate banking operations. It is of the essence to be payable on demand, because the contract between the banker and the customer is that the money is needed on demand. Further, the participation of the two banks, petitioner and private respondent, in the clearing operations of PCHC is a manifestation of their submission to its jurisdiction. ISSUE 2: How does principle of estoppel apply? HELD: Petitioner is estopped from raising the defense of non-negotiability of the checks in question. It stamped its guarantee on the back of the checks and subsequently presented these checks for clearing and it was on the basis of these endorsements by the petitioner that the proceeds were credited in its clearing account. The principle of estoppel effectively prevents the defendant from denying liability for any damages sustained by the plaintiff which, relying upon an action or declaration of the defendant, paid on the Checks. The same principle of estoppel effectively prevents the defendant from denying the existence of the Checks. The petitioner by its own acts and representation cannot now deny liability because it assumed the liabilities of an endorser by stamping its guarantee at the back of the checks. The petitioner having stamped its guarantee of "all prior endorsements and/or lack of endorsements" (Exh. A-2 to F-2) is now estopped from claiming that the checks under consideration are not negotiable instruments. The checks were accepted for deposit by the petitioner stamping thereon its guarantee, in order that it can clear the said checks with the respondent bank. By such deliberate and positive attitude of the petitioner it has for all legal intents and purposes treated the said cheeks as negotiable instruments and accordingly assumed the warranty of the endorser when it stamped its guarantee of prior endorsements at the back of the checks. It led the said respondent to believe that it was acting as endorser of the checks and on the strength of this guarantee said respondent cleared the checks in question and credited the account of the petitioner. Petitioner is now barred from taking an opposite posture by claiming that the disputed checks are not negotiable instrument. PBCOM VS. JOSE ARUEGO (GR No. L-25836-37, Jan. 31, 1981) - Herein plaintiff instituted against an action against defendant for the recovery of the total sum of money plus interests and attorneys fees. The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on different dates. The sum sought to be recovered represents the cost of the printing of "World Current Events," a periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every printing of the "World Current Events," the printer collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to printer, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft. Defendant filed an answer interposing for his defense that he signed the drafts in a representative capacity, that he signed only as accommodation party and that the drafts signed by him were not really bills of exchange but mere

pieces of evidence of indebtedness because payments were made before acceptance. ISSUE1: WON the drafts Aruego signed were bills of exchange? HELD: YES. Under the Negotiable Instruments Law, 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. As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not. ISSUE2: WON Aruego is personally liable? HELD: YES. Firstly, Section 20 of the Negotiable Instruments Law provides that "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 filing a representative character, without disclosing his principal, does not exempt him from personal liability." An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of the Philippine Education Foundation Company. He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he accepted. Secondly, an accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation party. In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as an acceptor/drawee. In doing so, he became primarily and personally liable for the drafts.

C. REQUISITES OF NEGOTIABILITY Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in

money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or

otherwise indicated therein with reasonable certainty.

(a) It must be in writing and signed by the maker or drawer;

Section 191. Definition and meaning of terms.

Written includes printed, and writing includes print.

Signature of the maker or drawer is usually written, preferably with the full name or at least the surname. However, initials or any mark will be sufficient, provided that such signature be used as a substitute and the maker or drawer intends to be bound by it. Signature is presumed valid, the person denying and to whom the signature operates must provide evidence of its invalidity.

(b) Must contain an unconditional promise or order to pay a sum

certain in money;

Money is the medium of exchange authorized or adopted by a domestic or foreign government as part of its currency. In a literal sense, the term means cash. It includes all legal tender which has been defined in p.1.


1. Promise or Order to Pay

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.

Clear intention of the parties the substance of the transaction rather than the form is the criterion of negotiability. Instead of promise the words bind myself may be used; instead of on demand, the words on call may be used and instead of bearer, the word holder may be used. Mere defect in language or grammatical error The words himself order may be construed as himself or order and thus not render the instrument non-negotiable.

2. Promise or Order to Pay Must be Unconditional

Condition Resolutory or Suspensive - In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition (Art. 1181, NCC) Period As opposed to a condition, is when the event is certain to happen or come.

3. When is a promise unconditional

Promissory Notes: It is not essential that the word promise be used. Any words equivalent to a promise or assumption of responsibility for the payment of the note (like payable, to be paid, I agree to pay, I guarantee to pay, M obliges himself to pay, good for, due on demand, etc.) are sufficient to constitute a promise to pay. However, bare acknowledgements like IOU, Due P1,000 or for value received do not constitute promise to pay and are non-negotiable, unless words constituting a promise to pay is added, like IOU (or Due) P1,000 to be paid on Jan. 8. Bills of Exchange: It is not necessary to use the word order. Any other words like Let the bearer or Drawer obliges the drawee to pay P or order are sufficient. An order is a command or imperative direction and, therefore, a mere request, supplication, or authority (like I request you to pay, or I hope you will pay or I authorize you to pay) is not sufficient. However, the use of polite words like please does not convert an order to a request.

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. 39 Conditional indorsement., - see Part III, Conditional Indorsement, p. 13.

Sec. 3 (a): does not render the instrument non-negotiable because the reimbursement is a subsequent act to the payment, which still makes it absolute. Same is true if there is indication of a particular fund to be debited, like Pay P or order the sum of P10,000 and charge it to my account, because here the instrument is payable absolutely, the debit of the account is also a subsequent act to the payment.

Sec. 3, last paragraph: The instrument is deemed non-negotiable because

the payment depends upon the adequacy or existence of the fund designated. It is immaterial, whether the fund has sufficient funds at maturity.

METROPOLITAN BANK & TRUST CO. VS. CA (GR No. 88866; Feb. 18, 1991) - Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months 38 treasury warrants. They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager and counter-signed by its Auditor. Six of these were directly payable to Gomez while the others appeared to have been indorsed by their respective payees, followed by Gomez as second indorser. On various dates all these warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account in the Metrobank. They were then sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. After being told to wait several times, Gloria Castillo and Gomez made subsequent withdrawals at Metrobank with the impression that the treasury warrants had been cleared. Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of Treasury and demanded the refund by Golden Savings of the amount it had previously withdrawn, to make up the deficit in its account. The demand was rejected. ISSUE: WON treasury warrants are negotiable instruments? HELD: No. The treasury warrants in question are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, it is indicated that they are payable from a particular fund, to wit, Fund 501. Sections 1 and 3 of the Negotiable Instruments Law especially underscored this requirement. The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise to pay "not unconditional" and the warrants themselves non-negotiable. Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were "genuine and in all respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for clearing. 4. Provisions which do not affect certainty of sum The Basic Test: is whether the holder can determine by calculation or computation the amount payable when the instrument is due.

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. 2(b): STATED instalments must clearly indicate the amount due on each instalment and the interest, if any. A bill or note indicating payable in two instalments or in instalments does not fulfil the requirement of the law. Sec. 2(c): Stated instalments with acceleration clause: Acceleration clause requires the debtor to pay off the balance sooner than the due date if some specified event occurs, such as failure to pay an instalment. Insecurity clause allows the creditor to demand immediate and full payment of the loan balance if the creditor has reason to believe that the debtor is about to default, as when the debtor suddenly loses a significant source of income. Extension clause allows additional time for the payment of the loan due.

Acceleration at the option of the HOLDER will render the instrument non-negotiable. Sec. 2(d): refers to instruments payable in foreign currency. Exchange is the charge for the expense of providing funds at the place where the instrument is


payable to meet the instrument which is issued at another place. It may be at a fixed rate or at the current rate. Ex. M promises to pay P or order $1,000 with exchange at % or at the current rate. Sec. 2(e): does not affect negotiability because such takes place after maturity.

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: (e) designates a particular kind of current money in which payment is to be made.

General Rule is that, an additional act, aside from payment of money, is prohibited. This is based on the fact that while the payment of money may be indorsed, the additional act would have to be assigned. The following clauses have been held to render non-negotiable the instrument: * pay for taxes assessed upon the note or its mortgage security (Hubard vs. Robert Wallace Co.); * keep free from encumbrance property on which the value of collateral pledged for security of the instrument depends (Streckhold vs. National Salt Co.) * promise to insure the property pledged as security (First State Savings Bank vs. Russel) Exceptions are: Sec. 5(a): I promise to pay P or order the sum of P1,000 secured by a ring I delivered to him by way of pledge and which he could sell should I fail to pay him at maturity the additional act is to be performed after non-payment at maturity. Until maturity, the promise is to pay money only. Sec. 5(b): I promise to pay P or order P10,000 and I hereby authorize my attorney-at-law to appear in any court of record after the obligation becomes due and waive the issuing and service of processes and confess a judgment against me in favor of the holder and thereupon waive all errors in any such proceedings and waive all right of appeal confession of judgment is a written acknowledgment by the defendant of his indebtedness and liability to the plaintiff. It enables the holder to obtain a judgment without the delay usually incident to a lawsuit. While not authorized in this jurisdiction, because it deprives the maker or drawer a day in court, it nevertheless does not affect negotiability. A confession of judgment given AFTER the action is brought to save expenses is valid. Sec. 5(c): Notice of dishonor waived even waiver of protest, presentment for payment, or demand, would not destroy negotiability. Sec. 5(d): or an airconditioner at the option of the holder since the holder has the choice, the instrument is still negotiable because he can still demand payment of money. If the option is on the promisor, it would be difficult to compel him to make payment in money.

(c) Payable on demand or at a fixed or determinable future time

Time must be certain so that the holder will know when he may enforce the instrument, and the person liable maker, drawee, or acceptor when he may be required to pay, or the secondary parties drawer, indorser or

accommodation party when his obligation will arise.

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

Time Instruments Sec. 4(a): To pay on Aug. 12, 2013; Sec. 4(b): To pay sixty days after date; Sec. 4(c): To pay after P dies. Sec. 4, last paragraph: refers to a condition which may or may not happen. A negotiable instrument must be payable in all events.

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.

Demand Instruments are those which are payable on demand, due and payable immediately after delivery. It is a present debt due at once.

(d) Payable to order or bearer

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.

Payable to Order: when it is payable to the (1) order of a specified person; or (2) to him or his order. Consequently, an instrument payable to a specified person (Pay to P), is not a negotiable order instrument. Sec. 8(b): An instrument payable to the maker is not complete until indorsed by him. (Sec. 184) Sec. 8(c): Being payable to the drawee, he may pay himself at maturity from the funds of the drawer. Sec. 8(d): Pay to A and B; for Sec. 8(e), Pay to A or B. Sec. 8(f): Pay to the order of the Commissioner of Internal Revenue. Sec. 8, last paragraph: If there is no payee, there is nobody who could give the order or authority to collect or otherwise indorse and, therefore, there is no


point in considering it negotiable. Bearer Instruments produce the following effect: (a) it is payable to bearer; (b) payment to any person in possession thereof in good faith and without notice that his title is defective, at or after maturity (Sec. 88) discharges the instrument (Sec. 119); (c) Delivery alone is enough to effect negotiation (Sec. 30). Sec. 9(a) and (b) are originally bearer instruments. Those under subsection (c), (d) and (e) are order instruments on the face converted to bearer instruments. Sec. 9(c): A fictitious person is meant to be one who, though named, as payee, has no right to it because the maker or drawer so intended and it matters not, whether the name of the payee used by him be that one living or dead, or one who never existed. (Snyder vs. Com. Exch. Nat. Bank) Sec. 9(c) and (d): They are treated as bearer instruments because it is impossible to indorse when it is payable to cash, sundries or a fictitious person.

ANG TEK LIAN VS. CA (GR No. L-2516; Sept. 25, 1950) - Petitioner Ang Tek Lian approached Lee Hua and asked him if he could give him P4,000.00. He said that he is supposed to withdraw from the bank but his bank was already closed. In exchange, he gave respondent Lee Hua a check which is payable to the order of cash. When Lee Hua presented the check for payment the next day, he discovered that it has an insufficient funds, hence, was dishonored by the bank. In his defense, Ang Tek Lian argued that he did not indorse the check to Lee Hua when the latter accepted the check without his indorsement. ISSUE: WON Ang Tek Lians indorsement of the said check is necessary to hold him liable for the dishonored check? HELD: No. Under Section 9 of the Negotiable Instruments Law, a check drawn payable to the order of cash is a check payable to bearer and the bank may pay it to the person presenting it for payment without drawers indorsement. Consequently, the form of the check was totally unconnected with its dishonor. The check was returned unsatisfied because the drawer had insufficient funds and not because the drawers indorsement was lacking. Hence, Ang Tek Lian may be held liable for estafa because under article 315, paragraph d, subsection 2 of the Revised Penal Code, one who issues a check payable to cash to accomplish deceit and knows that at the time he had no sufficient deposit with the bank to cover the amount of the check and without informing the payee of such circumstances is guilty of estafa. (e) Identity of the drawee

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

D. OMISSIONS AND PROVISIONS THAT DO NOT AFFECT

NEGOTIABILITY

PNB VS. MANILA OIL REFINING (GR No. L-18103; June 8, 1922) - The manager and treasurer of respondent company executed and delivered to the Philippine National Bank (PNB), a promissory note which provides a promise to pay petitioner bank the amount of P61,000 and that in case payment was not made at time of maturity, any lawyer in the Philippines is authorize to represent the company and confess judgment for the said sum with interest, cost of suit and attorney's fees of ten% for collection, a release of all errors and waiver of all rights to inquisition and appeal, and to the benefit of all laws exempting property, real or personal, from levy or sale. Indeed, Manila Oil has failed to pay on demand. This prompted the bank to file a case in court, wherein an attorney associated with them entered his appearance for the defendant. To this the defendant objected. ISSUE: WON provisions in notes authorizing attorneys to appear and confess judgments against makers should not be recognized in Philippine jurisdiction by implication? HELD: No. Judgments by confession as appeared at common law were considered an amicable,

easy, and cheap way to settle and secure debts. They are quick remedy serve to save the court's time. They also save time and money of the litigants and the government the expenses that a long litigation entails. In one sense, instruments of this character may be considered as special agreements, with power to enter up judgments on them, binding the parties to the result as they themselves viewed it. On the other hand, are disadvantages to the commercial world which outweigh the considerations just mentioned. Such warrants of attorney are void as against public policy, because they enlarge the field for fraud, because under these instruments the promissor bargains away his right to a day in court, and because the effect of the instrument is to strike down the right of appeal accorded by statute. The recognition of such form of obligation would bring about a complete reorganization of commercial customs and practices, with reference to short-term obligations. It can readily be seen that judgment notes, instead of resulting to the advantage of commercial life in the Philippines, might be the source of abuse and oppression, and make the courts involuntary parties thereto. If the bank has a meritorious case, the judgment is ultimately certain in the courts. The Court is of the opinion thus that warrants of attorney to confess judgment are not authorized nor contemplated by Philippine law; and that provisions in notes authorizing attorneys to appear and confess judgments against makers should not be recognized in this jurisdiction by implication and should only be considered as valid when given express legislative sanction. 1. OMISSIONS

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. 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 (1) expressed to be payable at a fixed period after date is issued undated, or (2) 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. (emphasis supplied)

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

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thereto prior to its completion, it must be (1) filled up strictly in accordance with the authority given and (2) 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. (separation and emphasis supplied)

Sec. 17 Construction where instrument is ambiguous. see E. Interpretation of Instruments.

Sec. 53 When person not deemed holder in due course. see HOLDER IN DUE COURSE, p. 16

Sec. 71 Presentment where instrument is not payable on demand and where payable on demand. (1) 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. 11: He who claims that some other date is the true date has the burden of establishing such claim. Sec. 13: If an undated note payable to P matures on Aug. 29, 2013, 30 days after issuance, but P inserted July 15 to hasten maturity date, P cannot enforce payment because it is avoided as to him who ante-dated for fraudulent purposes (Sec. 12). But if it was indorsed to A, a holder in due course, he may collect on Aug. 14, as if the date inserted was the true date. Sec. 14: Material Particular is any particular proper to be inserted in a negotiable instrument to make it complete. Authority to Complete does not carry with it the authority to alter (Sec. 124). Authority to put any amount there must be showing of intention to convert it to a negotiable instrument. Otherwise, it cannot be enforced against the maker, even by a holder in due course (Sec. 15). Holder NOT in due course of an instrument filled up in excess of the authority given is treated as a holder of a materially altered instrument (Sec. 124) and therefore cannot collect to parties prior to completion who did not assent to the alteration. If M issues a note and authorized P, payee, to insert P1,000, but P inserts P2,000, N, a subsequent holder NOT in due course cannot enforce it against M. But if N was a holder in due course, he can enforce the instrument against M upto the stated amount of P2,000 since it is conclusive that there was authority to fill up the instrument and the same was not done in excess of authority.

2. ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABILITY Sec. 5 (supra, p.6) a. Confession of Judgment see p.6

a.1 Warrant of attorney to confess judgment, however, are not authorized nor contemplated by our law because under these instruments, the promisor bargains away his right to a day in court. (PNB vs. MANILA OIL REFINING, supra, p.6) a.2 Cognovit Actionem he has confessed the action a.3 Relicta Verificationem his pleading being abandoned; a confession of judgment accompanied by a withdrawal of the plea.

b. Waiver of Obligor 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.

E. INTERPRETATION OF INSTRUMENTS

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. 17(d): Reason for this rule is that, the written words are deemed to express the true intention of the maker or drawer because they are placed there by himself. Also, because the amount in words are harder to alter (Sundiang, 2010 audio lecture). Sec. 17(g): Joint and Solidary Obligation REPUBLIC PLANTERS BANK VS. CA (GR No. 93073; Dec. 21, 1992) - In 1979, World Garment Manufacturing, through its board authorized Shozo Yamaguchi (president) and Fermin Canlas (treasurer) to obtain credit facilities from Republic Planters Bank (RPB). For this, 9 promissory notes were executed. Each promissory note was uniformly written in the following manner:

___________, after date, for value received, I/we, jointly and severally promise to pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila, Philippines, the sum of ___________ PESOS(.) Philippine Currency Please credit proceeds of this note to: ________ Savings Account ______XX Current Account No. 1372-00257-6 of WORLDWIDE GARMENT MFG. CORP. Sgd. Shozo Yamaguchi Sgd. Fermin Canlas

The note became due and no payment was made. RPB eventually sued Yamaguchi and Canlas. Canlas, in his defense, averred that he should not be held personally liable for such authorized corporate acts that he performed inasmuch as he signed the promissory notes in his capacity as officer of the defunct Worldwide Garment Manufacturing. ISSUE: WON Canlas should be held liable for the promissory notes? HELD: Yes. The solidary liability of private respondent Fermin Canlas is made clearer and certain, without reason for ambiguity, by the presence of the phrase joint and several as describing the unconditional promise to pay to the order of Republic Planters Bank. Where an instrument containing the words I promise to pay is signed by two or more persons, they are deemed to be jointly and severally liable thereon. Canlas is solidarily liable on each of the promissory notes bearing his signature for the following reasons: The promissory notes are negotiable instruments and must be governed by the Negotiable Instruments Law. Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are makers and are liable as such. By signing the notes, the maker promises to pay to the order of the payee or any holder according to the tenor thereof.

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SPS. EVANGELISTA VS. MERCATER FINANCE CORP. (GR No. 148864; Aug. 21, 2003) - Petitioner spouses filed a complaint against respondents for the foreclosure of the mortgage on their property and eventual its eventual sale, claiming, among others, that they executed the said mortgage on their capacity as officers of Embassy Farms, and not on their personal capacity, thus, there is no consideration received by them, making the mortgage voidable. Respondent, on the other hand, claims that the promissory note for the loan, for which the mortgage was executed, shows that the spouses signed as co-makers, also with the succeeding promissory notes. The RTC, upon motion of the respondent, granted summary judgment and dismissed the complaint. On appeal, the CA affirmed in toto the decision of the RTC. ISSUE: WON petitioners are solidarily liable with Embassy Farms for the loan as evidenced by the promissory note? HELD: Yes. The promissory note reads: For value received, I/We jointly and severally promise to pay to the order of MERCATOR FINANCE CORPORATION at its office, the principal sum of EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE PESOS & 78/100 (P 844,625.78), Philippine currency, x x x, in installments as follows:

September 16, 1982 - P154,267.87

October 16, 1982 - P154,267.87

November 16, 1982 - P154,267.87

December 16, 1982 - P154,267.87

January 16, 1983 - P154,267.87

February 16, 1983 - P154,267.87

The note was signed by petitioners and Embassy Farms, Inc. with the signature of Eduardo Evangelista below it. Sec. 17 of the Negotiable Instruments Law provide: Construction where instrument is ambiguous Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction shall apply: (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. As such, the promissory note itself proves that petitioners are solidarily liable with Embassy Farms. Moreover, even if petitioners signed merely as officers, it does not erase the fact that they subsequently executed a continuing suretyship agreement which makes them solidarily liable with the principal. They cannot eventually claim that they did not personably receive any consideration for the contract.

III. ISSUE, TRANSFER AND NEGOTIATION A. ISSUANCE/DELIVERY OF NEGOTIABLE INSTRUMENTS

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. 191 Definition and meaning of terms. - In this Act, unless the contract otherwise requires: "Delivery" means transfer of possession, actual or constructive,

from one person to another; "Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder

Section 15: Example: M makes a note for P10,000 with the name of the payee in blank and keeps it in his drawer. P steals the note, names himself as the payee and indorses the note to A, A to B, B to C, a holder in due course. NOTE: C, even though a holder in due course, cannot enforce said note against M by virtue of Sec. 15, but C can go after P, A and B. Section 16: As regards immediate parties and a remote party other than a holder in due course, delivery is a rebuttable presumption, as such can either be conditional or for a special purpose (without intention of transferring title). As regards a holder in due course, valid delivery, of a complete instrument (as opposed to an incomplete instrument under Sec. 15), by all parties prior to him is conclusively presumed (admission of evidence to the contrary is not allowed). B. NEGOTIATION DEFINED

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. (emphasis supplied)

1. Instruments payable to order: two steps are required for negotiation:

(a) indorsement and (b) delivery. 2. Instruments payable to bearer: delivery alone without indorsement.

C. ASSIGNMENT AND NEGOTIATION DISTINGUISHED Assignment is the transfer of the title to an instrument, with the assignee generally taking only such title or rights as his assignor has, subject to all defenses available against his assignor. It is the less usual method which may or may not involve an indorsement in the sense of writing on the back of the instrument.

NEGOTIATION ASSIGNMENT

Applicable Law

Negotiable Instruments Law Civil Code of the Philippines

Type of transaction or instrument:

Negotiable instruments only Contracts in general or assignable rights

Nature of the transferee:

Transferee is a holder who may be a holder in due course

Transferee is a mere assignee and can never be a holder in due course

Rights acquired:

The transferee-holder may acquire more rights than the transferor if he is a holder in due course

Transferee cannot acquire more rights than the transferor because he merely steps into the shoes of the transferor

Availability of personal defenses

Transferee-holder may be free from personal defenses if he is a holder in due course

Transferee is always subject to personal defenses

CASABUENA VS. COURT OF APPEALS (GR No. 115410; Feb. 27, 1998) - Ciriaco Urdaneta was a grantee of a parcel of land purchased by the City of Manila and conveyed to its less privileged inhabitants, through its land reform program. Subsequently, he assigned his rights and interests in 1/2 of the lot to Arsenia Benin covering full payment of his indebtedness in the amount of P500. A deed of sale with mortgage was executed, with Urdaneta undertaking to pay the City the amount figured for a period of forty years in 480 equal installments. Another deed of assignment involving the whole lot, with assignee Benin agreeing to shoulder all obligations including the payment of amortization to the City, in accordance with the contract between it and Urdaneta. As stated in their verbal agreement, Urdaneta could redeem the property upon


payment of the loan within 3yrs. from the date of assignment; failure to pay would transfer physical possession of the lot to Benin for a period of 15 years, without actual transfer of title and ownership thereto. Meanwhile, the administration of the property was assigned to brothers Candido and Juan Casabuena, to whom Benin had transferred her right, title and interest for a consideration of P7,500. Notwithstanding this assignment, Benin constructed a duplex (apartment) on the lot separately occupied by Jose Abejero and Juan Casabuena, who collected rentals from the former. After the lot was fully paid for by the Urdanetas, a Release of Mortgage was executed and period of non-alienation of the land was extended from 5 to 20 years. Casabuena was Benin's rental collector but their relationship soured resulting in a litigation involving issue on ownership, of which the cause was the latters failure to pay rentals. Upon learning of the litigation between petitioner and Benin, Urdaneta asked them to vacate the property and surrender to him possession thereof within 15 days from notice. Petitioner's adamant refusal to comply with such demand resulted in a complaint for ejectment and recovery of possession of property filed by Urdaneta against Casabuena and Benin. Amid the sprouting controversies involving the lot, the Urdaneta spouses succeeded in having the Court declare them as its true and lawful owners with the deed of assignment to Benin merely serving as evidence of Ciriaco's indebtedness to her in view of the prohibition against the sale of the land imposed by the City government. ISSUE: WON a deed of assignment can transfer ownership of the property to the assignee? HELD: At the bottom of this controversy is the undisputed fact that Ciriaco Urdaneta was indebted to Benin, to secure which debt the spouses ceded their rights over the land through a deed of assignment. An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. Stated simply, it is the process of transferring the right of the assignor to the assignee, who would then be allowed to proceed against the debtor. The assignment involves no transfer of ownership but merely effects the transfer rights which the assignor has at the time, to the assignee. Benin having been deemed subrogated to the rights and obligations of the spouses, she was bound by exactly the same conditions to which the latter were bound. This being so, she and the Casabuenas were bound to respect the prohibition against selling the property within the five-year period imposed by the City government. The act of assignment could not have operated to efface liens or restrictions burdening the right assigned, because an assignee cannot acquire a greater right than that pertaining to the assignor. At most, an assignee can only acquire rights duplicating those which his assignor is entitled by law to exercise. In the case at bar, the Casabuenas merely stepped into Benin's shoes, who was not so much an owner as a mere assignee of the rights of her debtors. Not having acquired any right over the land in question, it follows that Benin conveyed nothing to defendants with respect to the property.

Art. 348, Code of Commerce. The conveyer shall answer for the legality of the credit and for the capacity in which he made the transfer; but he shall not answer for the solvency of the debtor, unless there is an express agreement requiring him to do so

D. HOW ARE NEGOTIABLE INSTRUMENTS AND NON-NEGOTIABLE

INSTRUMENTS TRANSFERRED? SESBRENO VS. COURT OF APPEALS (supra, p.3) CONSOLIDATED PLYWOOD INDUSTRIES, INC. VS. IFC LEASING (GR No. 72593; April 30, 1987) - Consolidated Plywood Industries, Inc. (CPII) needed two tractors for its logging business. Atlantic Gulf & Pacific Company through its sister company Industrial Products Marketing (IPM) offered to sell two used" tractors. IPM inspected the job site and assured that the tractors were fit for the job and gave a 90-day warranty for machine performance and availability of parts. CPII officers Wee and Vergara purchased the tractors on installment and paid the down payment. The deed of sale with chattel mortgage with promissory note and the deed of assignment, where IPM assigned its rights and interest in the chattel mortgage in favor of IFC Leasing and Acceptance Corp., were

all executed on the same day by and among the parties. Barely 14 days after delivery, the tractors broke down. Mechanics were sent to do repairs but the tractors were no longer serviceable. CPII logging operations were delayed so Vergara advised IPM that the installment payments would likewise be delayed until it fulfills its obligation under its warranty. IFC then filed a collection suit against petitioners for the recovery of the principal sum plus interest, attorney's fees and costs of suit contending that it was a holder in due course of a negotiable promissory note. ISSUE: WON IFC is a holder in due course of a negotiable promissory note so as to bar all defenses of CPII against IPM? HELD: No. The note in question fails to meet the requirement under Sec. 1(d) of Act No. 2013. IFC is not and will never be a holder in due course of the promissory note but is merely an assignee. The note in question is not a negotiable instrument for lack of the so-called words of negotiability. The seller-assignor IPM is liable for breach of warranty and such liability as a general rule extends to the corporation (IFC) to whom it assigned its rights and interests. Even assuming that the note is negotiable, IFC which actively participated in the sale on installment transaction from its inception cannot be regarded as a holder in due course. Thus, petitioners may raise against the respondent all defenses available to it as against the seller-assignor, IPM. TRADERS ROYAL BANK VS. COURT OF APPEALS (GR No. 93397; Mar. 3, 1997) - Assailed in this Petition is the Decision of the Court of Appeals affirming the nullity of the transfer of Central Bank Certificate of Indebtedness (CBC), with a face value of P500,000 from Philippine Underwriters Finance Corporation (Philfinance) - without authorization to petitioner Traders Royal Bank. ISSUE: WON Central Bank Certificate of Indebtedness (CBCI) is a negotiable instrument? HELD: No. The instrument provides for a promise to pay the registered owner Filriters. Very clearly, the instrument was only payable to Filriters. It lacked the words of negotiability which should have served as an expression of the consent that the instrument may be transferred by negotiation. The language of negotiability which characterizes a negotiable paper as a credit instrument is its freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchstone relating to the protection of holders in due course, and the freedom of negotiability is the foundation for the protection, which the law throws around a holder in due course. This freedom in negotiability is totally absent in a certificate of indebtedness as it merely acknowledges to pay a sum of money to a specified person or entity for a period of time. The transfer of the instrument from Philfinance to TRB was merely an assignment, and is not governed by the negotiable instruments law. The pertinent question then iswas the transfer of the CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with existing law, so as to entitle TRB to have the CBCI registered in its name with the Central Bank? Clearly shown in the record is the fact that Philfinances title over CBCI is defective since it acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that the transfer was for value received, there was really no consideration involved. What happened was Philfinance merely borrowed CBCI from Filriters, a sister corporation. Thus, for lack of any consideration, the assignment made is a complete nullity. Furthermore, the transfer wasn't in conformity with the regulations set by the CB. Giving more credence to rule that there was no valid transfer or assignment to petitioner.

E. HOW NEGOTIATION TAKES PLACE

Sec. 30 What constitutes negotiation. (supra, p. 9) 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.

An instrument payable to bearer is not converted into an instrument payable to order by being indorsed specially. However, the person who indorsed specially is liable only to those holders who can trace their title to the instrument by a series of unbroken indorsements from such special indorser. Instruments originally payable to order: Sec. 40 does not apply to instruments originally payable to order which was indorsed in black.


LIM VS. CA (GR No. 107898; Dec. 19, 1995) - Manuel Lim and Rosita Lim are the officers of the Rigi Bilt Industries, Inc. (RIGI) which had been transacting business with Linton Commercial Company, Inc. The Lims ordered several steel plates and purlins from Linton and were delivered to the Lims place of business which was in Caloocan. To pay Linton, the petitioners issued seven checks. When the checks were presented to the drawee bank (Solidbank), they were dishonored because payment for the checks had been stopped and/or insufficiency of funds. As a result, petitioners were found guilty with Estafa and 7 counts of violation of BP 22 by the Malabon RTC. On appeal, the CA reversed the trial courts decision on Estafa but upheld the decision on violation of BP 22, hence, this petition. ISSUE: WON the issue was within the jurisdiction of the Malabon RTC? HELD: The venue of jurisdiction lies either in the RTC Caloocan or Malabon Trial Court. BP 22 is a continuing crime. A person charged with a transitory crime may be validly tried in any municipality or territory where the offense was partly committed. In determining the proper venue, the ff. must be considered. 1) 7 checks were issued to Linton in its place of business in Navotas. 2) The checks were delivered Linton in the same place. 3) The checks were dishonored in Caloocan 4) The Lims had knowledge of their insufficiency of funds. Under Section 191 of the Negotiable Instruments Law, issue means the first delivery of the instrument complete in its form to a person who takes it as holder. The term holder on the other hand refers to the payee or endorsee of a bill or note who is in possession of it or the bearer thereof. The place where the bills were written, signed or dated does not necessarily fix or determine the place where they were executed. It is the delivery that is important. It is the final act essential to its consummation of an obligation. An undelivered bill is unoperative. The issuance and delivery of the check must be to a person who takes it as a holder. In the case at bar, although Linton sent a collector who received the checks from the petitioners place of business, the checks were actually issued and delivered to Linton in Navotas. The collector is not a holder or an agent, he was just an employee.

LORETO DELA VICTORIA VS. HON. BURGOS (GR No. 111190; June 27, 1995) - Raul Sebreo filed a complaint for damages against Fiscal Bienvenido Mabanto Jr. of Cebu City. Sebreo won and he was awarded the payment of damages. Judge Burgos ordered De La Victoria, custodian of the paychecks of Mabanto, to hold the checks and convey them to Sebreo instead. De La Victoria assailed the decision as he said that the paychecks and the amount thereon are not yet the property of Mabanto because they are not yet delivered to him; that since there is no delivery of the checks to Mabanto, the checks are still part of the public funds; and the checks due to the foregoing cannot be the proper subject of garnishment. ISSUE: WON De La Victoria is correct? HELD: Yes. Under Section 16 of the Negotiable Instruments Law, every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As ordinarily understood, delivery means the transfer of the possession of the instrument by the maker or drawer with intent to transfer title to the payee and recognize him as the holder thereof.

DEVELOPMENT BANK OF RIZAL VS. SIMA WEI (GR No. 85419; June 9, 1983) - In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed and delivered to the former a promissory note, engaging to pay the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank drawn against China Banking Corporation, bearing respectively the serial numbers 384934, for the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly issued in full settlement of the drawer's account evidenced by the promissory note. These two checks were not delivered to the petitioner-payee or to any of its authorized representatives. For reasons not shown, these checks came into the possession of respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's indorsement (forged or otherwise) to the account of respondent Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the

Balintawak branch of Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic Corporation, that the transaction was legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the account of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as aforestated. ISSUE: WON petitioner Bank has a cause of action against any or all of the defendants, in the alternative or otherwise? HELD: A cause of action is defined as an act or omission of one party in violation of the legal right or rights of another. The essential elements are: (1) legal right of the plaintiff; (2) correlative obligation of the defendant; and (3) an act or omission of the defendant in violation of said legal right. The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the business custom of using printed checks where blanks are provided for the date of issuance, the name of the payee, the amount payable and the drawer's signature. All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere fact that he has done these does not give rise to any liability on his part, until and unless the check is delivered to the payee or his representative. A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a species of property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable instrument be delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the Negotiable Instruments Law, which governs checks, provides in part: Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. Delivery of an instrument means transfer of possession, actual or constructive, from one person to another. Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery mus

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