Revised - Negotiable Instruments Law - Annotated.mpp.

CONCEPTUAL FRAMEWORK
I.
Birth/Creation of Negotiable Instruments (sec. 10-29)
II. Life (sec. 30-69)
Negotiability
Holder in due course
Parties
III.
Death (sec. 70-189)
Proceedings
Defenses
Discharge
ACT NO. 2031
(February 3, 1911)
THE NEGOTIABLE INSTRUMENTS LAW
Introduction
History and Development
The term commercial paper refers to written promises or
obligations to pay sums of money that arise from the use of such
instruments as drafts, promissory notes, checks and trade
acceptances. (The most common instruments are checks and
promissory notes.)
However, the term commercial paper in its
broadest sense may refer to either negotiable or non-negotiable
instruments.
During the early part of the Middle Ages, merchants and
traders had to carry gold and silver to pay for the goods they
purchased at the various international fairs.

Obviously these
precious metals were continually subject to loss or theft through
the perils of travel.
To eliminate the dangers of this sort, merchants began to
deposit their gold and silver with bankers. W hen they needed
funds to pay for goods they had purchased, they drew on them
by giving the seller a written order addressed to the bank, telling it
to deliver part of the gold or silver to the seller. These orders,
called bills of exchange, were thus substitutes for money. Today,
checks and the drafts and promissory notes that are payable on
demand serve this same basic purpose.
1 Business Law Text and Cases, Second Edition, Howell, Allison, Henley, 1981, page 400
2 Ibid.
3 Ibid. (italics supplied)
The second major purpose of commercial paper is to serve as
credit device; this came about as a logical extension of the initial
use of commercial paper. Soon after bills of exchange became
established as substitutes for money, merchants who wished to
purchase goods on credit discovered that sellers were sometimes
willing to accept bills of exchange that were not payable until a
stated time in the future such as ninety days after date. If the
seller was satisfied as to the commercial reputation of the bills
drawer (the purchaser), he would take such an instrument (called
a time bill or draft) and wait until the maturity date to collect it. In
this way the seller/payee extended credit to the buyer/drawer.
Soon thereafter ways were devised by which payees could sell
these instruments to third parties, usually banks, and receive
immediate cash in return. Since the banks would then have to
wait for the maturity dates before receiving payment, the payees
would have to sell them the paper at a discount that is, perhaps
five or ten percent less than the face amount. This meant, in
effect, that the purchasing banks were charging the sellers
interest in advance as compensation for their role in the
transaction.
Today, because of the widespread use of time notes and
drafts, the credit aspect of commercial paper is as important to
the business community as its substitute for money aspect.
For
a negotiable instrument to operate practically as either a
substitute for cash or a credit device, or both, it is essential that
the instrument be easily transferable without danger of being
uncollectible.
The negotiability of bills of exchange and promissory notes
originated in the customs of merchants. The statute of Anne,
which is declaratory of the common law, established the
negotiability of promissory notes.
Negotiable Instrument; definition
A negotiable instrument is a special contract which on its face
is signed by the maker or drawer, making an unqualified promise
or order to pay on demand or at a fixed or determinable future
4 Ibid, pages 401-402.
5 Ibid.
6 Ibid.
Business Law Today, Miller & Jentz, 9th Edition, 2011, page 391
8 Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 1
Basic Principles and Jurisprudence on the Negotiable Instruments Law
2nd Edition (2015), M.P.Piad
time, a sum certain in money, to order or bearer, and when it is
addressed to a drawee, the latter must be named or otherwise
indicated therein with reasonable certainty.
Or simply stated: It is a special contract which complies with
the requirements laid down under Section 1 of the Negotiable
Instruments Law.
Purpose for the enactment of the Negotiable Instruments
Law
The Negotiable Instruments Law was enacted for the purpose
of facilitating, not hindering or hampering transactions in
commercial paper. Thus, the said statute should not be tampered
with haphazardly or lightly. Nor should it be brushed aside in
order to meet the necessities in a single case.
Functions of a Negotiable Instrument
1.
Substitute for money merchants often do not want to carry
cash for fear of loss or theft.
2.
Credit device some forms of negotiable instruments
extend credit from one party to another.
3.
Recordkeeping device these records are
financial statements, tax returns, and the like.
used
for
Negotiable Instrument as a substitute for money
The essence of negotiability which characterizes a negotiable
paper as a credit instrument lies in its freedom to circulate freely
10
as a substitute for money.
(Firestone Tire & Rubber Company of
the Philippines vs. Court of Appeals and Luzon Development
Bank, G.R. No. 113236, March 5, 2011, [Quisumbing, J.])
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 (See. 189, Act 2031 on Neg. Insts.; Art.
1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil.
255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check,
9 State Investment House, Inc. v. Court of Appeals, 217 SCRA 32 (1993), cited in Osmea vs. Citibank, March 23,
2004
10 Traders Royal Bank vs. Court of Appeals, 269 SCRA 15, 26 (1997)
whether a manager's check or ordinary cheek, 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
11
realized (Art. 1249, Civil Code, par. 3).
2012 Bar Question:
Negotiable
instruments
are
used
as
substitutes
for
money, which means
a.
that they can be considered legal tender.
b.
that when negotiated, they can be used to pay
indebtedness.
c.
that at all times the delivery of the instrument is equivalent
to delivery of the cash.
d.
that at all times negotiation of the instruments requires
proper indorsement.
Words of Negotiability
The language of negotiability which characterize 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 (11 Am. Jur.
2d, 32).
12
As held in Caltex (Philippines), Inc vs. Court of Appeals,
The accepted rule is that the negotiability or nonnegotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. In
the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. W hile
the writing may be read in the light of the surrounding
circumstance 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
11 Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. L-49188, Jan. 30, 1990, [Gutierrez, J.]
12 G.R. No. 97753, August 10, 1992, 212 SCRA 448, emphasis ours
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.
Quasi-Negotiable Instruments
13
In one case, that of Capco vs. Macaset
, the Supreme Court
had an occasion to rule that: [c]ertificates of stocks are
considered as quasi-negotiable instruments. W hen the owner or
shareholder of these certificates signs the printed form of sale or
assignment at the back of every stock certificate without filling in
the blanks provided for the name of the transferee as well as for
the name of the attorney-in-fact, the said owner or shareholder, in
effect, confers on another all the indicia of ownership of the said
stock certificates. (Campos and Lopez-Campos, Notes and Cases
on Negotiable Instruments Law, 1971 ed., p 605)
The phrase quasi-negotiable has been termed as unhappy
one; and certainly it is far from satisfactory, as it conveys no
accurate, well-defined meaning. But still it described better than
any other short-hand expression the nature of those instruments
which, while not negotiable in the sense of the law merchant, are
so framed and so dealt with, as frequently to convey as good a
title to the transferee as it they were negotiable. (Daniel, The
Elements of Negotiable Instruments Law, page 27)
Very frequently by application of the principles of estoppels,
and to effectuate the ends of justice and the intention of the
parties, the courts decree a better title to the transferee than
actually existed in his transferrer; and the result reached in many
cases is the same as would be reached if the instrument were
14
negotiable.
Types of Negotiable Instruments.
The Philippine Negotiable Instruments Law was basically lifted
from the provisions of the United Stated Uniform Currency Act, in
which Secs. 13-104 thereof specified four types of instruments
(e.g. drafts, checks, certificates of deposit, and notes). In the
Philippine setting, however, Act 2031 (Negotiable Instruments
Law) provides for three (e.g., promissory notes, bills of exchange,
13 G.R. No. 90888, September 13, 1990
14 Railroad Co. v. Howard, 7 Wall. 415
checks), noteworthy is the inclusion of Drafts and Certificates of
Time Deposit through the decisions of the Supreme Court
interpreting our law on negotiable instruments.
At present, in Philippine jurisdiction, we generally recognize
five types of negotiable instruments, to wit:
15
1.
Promissory Notes
16
2.
Bills of Exchange
17
3.
Check
18
4.
Draft
19
5.
Certificates of Time Deposit
2002 Bar Question:
A. Define the following: (1) a negotiable promissory note, (2)
a bill of exchange and (3) a check.
B.
You are Pedro Cruz.
Draft the appropriate contract
language for (1) your negotiable promissory note and (2)
your check, each containing the essential elements of a
negotiable instrument.
ANSWER:
A.
(1) Sec. 184, Act. 2031 it 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.
(2) Sec. 126, Act 2031 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.
(3) Sec. 185, Act 2031 it is a bill of exchange drawn on a bank
payable on demand.
B.
(1)
September 1, 2002
15 Sec. 184, Act 2031, Negotiable Instruments Law.
16 Sec. 126, ibid.
17 Sec. 185, ibid.
18 BPI vs. Commissioner of Internal Revenue,
19 Caltex (Philippines), Inc. vs. Court of Appeals, G.R. No. 97753, August 10, 1992.
I promise to pay Pancho Dela Torre, or order, ONE HUNDRED
THOUSAND PESOS (Php 100,000.00), on December 25, 2002.
(Sgd)
Pedro Cruz
(2)
Bank of the Philippine Islands-Malate, Manila
September 1, 2002
Pay to the order of Pancho Dela Torre, the amount of ONE
HUNDRED THOUSAND PESOS (Php 100,000.00).
(Sgd)
Pedro Cruz
1. What is a Promissory Note?
It 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. (Sec. 184, Negotiable Instruments Law )
In the case of Pentacapital Investment Corporation vs. Makilito
20
21
B. Mahinay,
citing Sierra vs. Court of Appeals ,
it was held that:
A promissory note is a solemn acknowledgment of a
debt and a formal commitment to repay it on the date and
under the conditions agreed upon by the borrower and the
lender. A person who signs such an instrument is bound
to honor it as a legitimate obligation duly assumed by him
through the signature he affixes thereto as a token of his
good faith. If he reneges on his promise without cause, he
forfeits the sympathy and assistance of this Court and
deserves instead its sharp repudiation.
Test to determine a promissory note
To constitute a good promissory note, no precise words of
contract are necessary, provided they amount, in legal effect, to a
promise to pay. In other words, if over and above the mere
acknowledgment of the debtor there may be collected from the
words used a promise to pay it; the instrument may be regarded
20 G.R. No. 171736, July 5, 2010, [Nachura, J.:]
21 G.R. No. 90270, July 24, 1992, 211 SCRA 785, 795
as a promissory note. (Jimenez vs. Bucoy, G.R. No. L-10221,
February 28, 1958, [Bengzon, J.])
Due A. B. $325, payable on demand, or I acknowledge
myself to be indebted to A in $ 109, to be paid on demand, for
th
value received, or I.O.U. $85 to be paid on May 5
, are held to
be promissory notes, significance being given to words of
payment as indicating a promise to pay. (1 Daniel Neg. Inst., see
39 and cases cited [Cowan vs. Hallack, (Colo.) 13 Pacific
Reporter 700, 703) (Supra)
An acknowledgment may become a promise by the addition
of words by which a promise of payment is naturally implied, such
as, payable, payable on a given day, payable on demand,
paid when called for, (10 Corpus Juris Secundump p. 523.)
(supra)
Who are the parties to a Promissory Note?
The maker, he is the person who drafted and issued the
promissory note, and made a promise that upon demand or at a
fixed or determinable future time, he will pay a sum certain in
money to order or to bearer to the holder of the instrument or to a
holder in due course.
The payee is the person in whose favor the promissory note
was issued.
Intimidation, vitiation of consent in promissory notes
Carmela Brobio Mangahas vs. Eufrocina Brobio
G.R. No. 183852, October 20, 2010
NACHURA, J.:
FACTS:
On January 10, 2002, Pacifico S. Brobio (Pacifico)
died intestate, leaving three parcels of land. He
was survived by his wife, respondent Eufrocina A.
Brobio, and four legitimate and three illegitimate
children; petitioner Carmela Brobio Mangahas is
one of the illegitimate children.
On May 12, 2002, the heirs of the deceased
executed a Deed of Extrajudicial Settlement of
Estate of the Late Pacifico Brobio with W aiver. In
the Deed, petitioner and Pacificos other children,
in consideration of their love and affection for
respondent and the sum of P150,000.00, waived
and ceded their respective shares over the three
parcels of land in favor of respondent. According
to petitioner, respondent promised to give her an
additional amount for her share in her fathers
estate. Thus, after the signing of the Deed,
petitioner
demanded
from
respondent
the
promised additional amount, but respondent
refused to pay, claiming that she had no more
money.
A year later, while processing her tax obligations
with the Bureau of Internal Revenue (BIR),
respondent was required to submit an original
copy of the Deed. Left with no more original copy
of the Deed, respondent summoned petitioner to
her office on May 31, 2003 and asked her to
countersign a copy of the Deed. Petitioner refused
to countersign the document, demanding that
respondent first give her the additional amount that
she promised. Considering the value of the three
parcels of land (which she claimed to be worth
P20M), petitioner asked for P1M, but respondent
begged her to lower the amount. Petitioner agreed
to lower it to P600,000.00. Because respondent
did not have the money at that time and petitioner
refused to countersign the Deed without any
assurance that the amount would be paid,
respondent executed a promissory note. Petitioner
agreed to sign the Deed when respondent signed
the promissory note which read
31 May 2003
This is to promise that I will give [a] (sic) Financial
Assistance to CARMELA B. MANGAHAS the
amount of P600,000.00 Six Hundred Thousand
only on June 15, 2003.
(SGD)
EUFROCINA A. BROBIO
W hen the promissory note fell due, respondent
failed and refused to pay despite demand.
Petitioner made several more demands upon
respondent but the latter kept on insisting that she
had no money.
ISSUES:
W as intimidation used to execute the promissory
note subject of the case?
RULING:
Contracts are voidable where consent thereto is
given through mistake, violence, intimidation,
undue influence, or fraud. In determining whether
consent is vitiated by any of these circumstances,
courts are given a wide latitude in weighing the
facts or circumstances in a given case and in
deciding in favor of what they believe actually
occurred, considering the age, physical infirmity,
intelligence, relationship, and conduct of the
parties at the time of the execution of the contract
and subsequent thereto, irrespective of whether
the contract is in a public or private writing.
Nowhere is it alleged that mistake, violence, fraud,
or intimidation attended the execution of the
promissory note. Still, respondent insists that she
was "forced" into signing the promissory note
because petitioner would not sign the document
required by the BIR. In one case, the Court in
characterizing a similar argument by respondents
therein held that such allegation is tantamount to
saying that the other party exerted undue influence
upon them. However, the Court said that the fact
that respondents were "forced" to sign the
documents does not amount to vitiated consent.
There is undue influence when a person takes
improper advantage of his power over the will of
another, depriving the latter of a reasonable
freedom of choice.
For undue influence to be
present, the influence exerted must have so
overpowered or subjugated the mind of a
contracting party as to destroy his free agency,
making him express the will of another rather than
his own.
Respondent
may
have
desperately
needed
petitioners signature on the Deed, but there is no
showing that she was deprived of free agency
when she signed the promissory note. Being
forced into a situation does not amount to vitiated
consent where it is not shown that the party is
10
deprived of free will and choice. Respondent still
had a choice: she could have refused to execute
the promissory note and resorted to judicial means
to
obtain
petitioners
signature.
Instead,
respondent chose to execute the promissory note
to obtain petitioners signature, thereby agreeing to
pay the amount demanded by petitioner.
Contrary to the CAs findings, the situation did not
amount to intimidation that vitiated consent. There
is intimidation when one of the contracting
parties is compelled to give his consent by a
reasonable
and
well-grounded
fear
of
an
imminent and grave evil upon his person or
property, or upon the person or property of his
spouse,
descendants,
or
ascendants.
Certainly, the payment of penalties for delayed
payment
of
"reasonable
taxes
and
would
not
well-grounded
qualify as
fear
of
an
imminent and grave evil." (emphasis supplied)
W e join the RTC in holding that courts will not set
aside contracts merely because solicitation,
importunity, argument, persuasion, or appeal to
affection was used to obtain the consent of the
other party. Influence obtained by persuasion or
argument or by appeal to affection is not prohibited
either in law or morals and is not obnoxious even
in courts of equity.
2.
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. 126, Negotiable Instruments Law)
In the once celebrated case of Manuel Bastida vs. The Acting
22
Commissioner of Customs and The Court of Tax Appeals,
it was
held that:
22 G.R. No. L-24011, October 24, 2970, [Castro, J:]
11
[A]s bills exchange they are, fundamentally, negotiable
instruments. And a negotiable instrument "is more like
23
money than a contract right or chose in action."
As
such, it may be the "subject of conversion (Knight vs.
Seney 290 Ill. 11) or of replevin (Rothwell vs. Taylor 303
24
Ill. 263.)
it may also be the "subject of sale, like any
25
other goods or wares."
As the Tax Court aptly observed,
"checks may be bought and sold like a commodity. As a
matter of fact in the United States the deposit of a check
with a bank is considered a sale (Helvering vs. Stein [CA
4] 115 F 2d 468; Burton vs. United States, 196 US 283,
49 L ed 482)." Money orders, also considered as bills of
exchange of limited negotiability, possess the same
attributes as other negotiable instruments. Thus, they
may, be bought and sold like checks. (emphasis
supplied)
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. (Philippine Bank of Commerce vs.
Aruego, G.R. No. L-25836-37, January 31, 1981, [Fernandez, J.])
(emphasis supplied)
Illustrative Case:
Philippine Bank of Commerce vs. Jose M. Aruego
G.R. Nos. L-25836-37, January 31, 1981
FERNANDEZ, J.:
FACTS:
On December 1, 1959, the Philippine Bank of
Commerce instituted an action against Jose M.
Aruego Civil Case No. 42066 for the recovery of the
total sum of about P35,000.00 with daily interest
thereon from November 17, 1959 until fully paid and
commission equivalent to 3/8% for every thirty (30)
days or fraction thereof plus attorneys fees
equivalent to 10% of the total amount due and
23 Ludwig Teller, Bills and Notes, p. 6 (1948)
24 Ibid., pp. 6-7
25 Ibid., p. 7
12
costs. 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 covering the period from August 28,
1950 to March 14, 1951. The sum sought to be
recovered represents the cost of the printing of
W orld 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 W orld Current Events, the printer
Encal Press and Photo Engraving, collected the cost
of printing by drawing a draft against the plaintiff,
said draft being sent later to the defendant for
acceptance. As an added security for the payment
of the amounts advanced to Encal Press and Photo
Engraving, the plaintiff bank also required the
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 contends that the drafts signed by him
were not really bills of exchange but mere pieces of
evidence of indebtedness because payments were
made before acceptance.
ISSUE:
RULING:
Is his contention tenable?
The contention is without merit.
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
13
involved, but not in the determination of whether a
commercial paper is a bill of exchange or not.
From the definition, does the bill of exchange operate as an
assignment of funds in the hands of the drawee?
A bill in itself does not operate as an assignment of the funds
in the hands of the drawee available for the payment thereof.
(Sec. 127, Negotiable Instruments Law )
Doctrine of Equitable Assignment
The doctrine of equitable assignment is the creature of courts
of equity, and the phrase equitable assignment is used because,
by the technicalities of pleadings at law, no legal assignment can
26
be effectuated.
It is contended that the bill, whether for the
whole of the fund or debt, or only a part, may be evidence to
show as assignment; and that with other circumstances indicating
that such was the intention, will vest in the holder an exclusive
claim to the debt or fund, and bind it in the hands of the drawee
27
after notice.
The bill for the entire amount of debt or fund should
28
operate as an equitable assignment thereof.
Moreover, it may be regarded as a settled doctrine that an
order founded upon a good consideration, given for a specific
debt or fund owing by or in the hands of a third person, operates
as, or rather is evidence of, an equitable assignment of the
29
demand to the holder.
Who are the parties to a bill of exchange?
The drawer, is the person drawing an instrument making an
unconditional order in writing to the drawee, requiring him to pay
on demand or at a fixed or determinable future time a sum certain
in money to order or to bearer.
The drawee, is the person being required by the drawer to pay
on demand or at a fixed or determinable future time a sum certain
in money to the payee, or his order, or to the bearer of the
instrument.
The payee, is the person in whose favor the bill of exchange
was issued.
26 Bank of Commerce v. Bogy, 44 Mo. 15; Grammel v. Cramer, 55 Mich. 201
27 Daniel on Negotiable Instruments, page 18; Mandeville v. Welch, 5 Whaet. 277; Buckner v. Sayre, 17 B. Monroe,
754, cited in the Elements of Negotiable Instruments Law, Daniel, page 8 (bold supplied)
28 Supra
29 The Elements of Negotiable Instruments Law, Daniel, page 9
14
What is the rule if the Bill of Exchange is addressed to more
than one drawee?
A bill may be addressed to two or more drawees jointly,
whether they are partners of not.
But not to two or more drawees in the alternative or in
succession.
Example:
To:
Lancelot Borja and/or Margaux Borja
Bo. Obrero, Iloilo City
In the above instance, the drawee is addressed to two or more
persons jointly, whether they are partners or not. Thus, payment
of any one of them extinguishes the entire obligation.
To:
Lancelot Borja, and in his incapacity or insolvency,
Margaux Borja;
Lancelot
succession.
Borja,
Margaux
Borja,
or
Mizpah
Borja
in
In the second instance, the bill was addressed to two or more
drawees in the alternative or in succession, such is not allowed
under the law.
Bills of exchange are either foreign or inland
Foreign Bill of Exchange when drawn in one State or country,
30
and made payable in another State or country;
Inland Bill of Exchange when drawn, and made payable, in
31
the same State or country.
Difference between bills and notes
In their original structure, a bill of exchange and a promissory
note do not strongly resemble each other. In a bill, there are three
original parties: drawer, drawee, and payee; in a note only two:
maker and payee. In a bill the acceptor is the primary debtor. In
a note the maker is the only debtor. But if the note be transferred
to a third party by the payee, it becomes strikingly similar to a bill.
30 The Elements of Negotiable Instruments Law, Daniel, page 5
31 Ibid
15
The indorser becomes then, as it were, the drawer; the maker, the
32
acceptor; and the indorsee, the payee.
(The Elements of the
Law of Negotiable Instruments, by: John W. Daniel, 1908)
Bank notes or bank bills
Bank notes or bank bills (as they are equally as often called)
are the promissory notes of incorporated banks, designed to
33
circulate like money, and payable to bearer on demand.
The terms bank notes and bank bills are of the like
signification, and for the purposes of interpretation, both in
criminal
and
civil
jurisprudence,
are
equivalent
and
34
interchangeable.
In form and substance they are promissory notes, and they are
governed by very many of the principles which apply to the
negotiable notes of individuals given in the course of trade. But
they are designed to constitute a circulating medium, and this
circumstance imparts to them peculiar characteristics, and
essentially varies the rules which govern promissory notes in
general.
They have been held not securities for money, but
35
money itself.
Chief Characteristics of
Bank Bills
36
Always payable on demand;
Usually payable to bearer, though sometimes expressed to
37
be payable to a person named or bearer;
A lawful tender in payment of debts, unless objected to
38
because they are not money.
Bank Notes
Are not, legally speaking, money, but in a popular sense
are often spoken of as money, and are conventionally used in
39
its stead with the like effect.
3.
Draft, defined.
32 Daniel on Negotiable Instruments, page 29
33 The Elements of Negotiable Instruments Law, Daniel, page 15 (Bold supplied)
34 Ibid
35 Soutcot v. Watson, 3 Atk. 226; Daniel on Negotiable Instruments, page 1664, ibid
36 Daniel on Negotiable Instruments, page 1666
37 Ibid, page 1665
38 Ibid, page 1672a
39 Ibid, page 1672
16
A draft is a form of a bill of exchange used mainly in
transactions between persons physically remote from each other,
an order made by one person, say the buyer of goods, addressed
to a person having in his possession funds of such buyer ordering
the addressee to pay the purchase price to the seller of the
goods, and where the order is made by one bank to another, it is
referred to as a bank draft. (Bank of the Philippine Islands vs.
Commission of Internal Revenue, 496 SCRA 601)
In order for a draft to work, one of two general conditions must
exist. Either the drawee must owe the drawer a debt (in which
case the drawer is simply telling the drawee to pay the debt or a
portion of it to a third party) or some kind of agreement or
relationship must exist between the parties under which the
drawee has consented to the drawing of the draft upon him or her.
If neither of these conditions existed, obviously the drawee would
not obey the order to pay the amount of the draft to the payee or
40
to any subsequent holder of the instrument.
A trade acceptance is a draft or bill of exchange drawn by the
seller of the
(signed) by
enable the
purchasers
goods on the purchaser of those goods and accepted
the purchaser. The purpose of the transaction is to
seller to raise money on the paper before the
41
obligation matures under the sales contract.
To illustrate, X corporation has sold goods to Y company. Due
to the fact that Y company still wishes to utilize the cash instead of
paying in cash, X corporation (drawer) draws a trade acceptance
on Y company for the purchase of the goods. The instrument
orders Y company to pay the amount due to the order of X
corporation on a particular future time. It is then presented to an
officer of Y company who accepts it by signing the same and
returns it to X corporation. The acceptance in effect, would be a
promise of Y company to pay X corporation when the same
becomes due. It can now be negotiated to a third person, say X
corporations bank and receives cash immediately.
Nature of Draft, as distinguished from Bill of Exchange
40 Business Law Text and Cases, Second Edition, Howell, Allison, Henley, 1981, page 402
41 Ibid.
42 G.R. No. L-16106, December 30, 1961
17
The case of Republic of the Philippines vs. Philippine
42
National Bank, et al
, laid down a detailed discussion of the
nature of Drafts, to wit:
To begin with, we may say that a demand draft is a bill of
exchange payable on demand (Arnd vs. Aylesworth, 145 Iowa
185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of
Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered
as a bill of exchange, a draft is said to be, like the former, an open
letter of request from, and an order by, one person on another to
pay a sum of money therein mentioned to a third person, on
demand or at a future time therein specified (13 Words and
Phrases, 371). As a matter of fact, the term draft is often used,
and is the common term, for all bills of exchange. And the words
draft and bill of exchange are used indiscriminately (Ennis vs.
Coshoctan Nat. Bank, 108 S.E., 811; Hinnermann vs. Rosenback,
39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275).
On the other hand, a bill of exchange within the meaning of our
Negotiable Instruments Law (Act No. 2031) does not operate as
an assignment of funds in the hands of the drawee who is not
liable on the instrument until he accepts it. This is the clear import
of Section 127. It says: A bill of exchange of itself does not
operate as an assignment of the funds in the hands of the drawee
available for the payment thereon and the drawee is not liable on
the bill unless and until he accepts the same. In other words, in
order that a drawee may be liable on the draft and then
become obligated to the payee it is necessary that he first
accepts the same.
In fact, our law requires that with regard to
drafts or bills of exchange there is need that they be presented
whether for acceptance or for payment within a reasonable time
after their issuance or after their last negotiation thereon as the
case may be (Section 71, Act 2031).

Failure to make such
presentment will discharge the drawer from liability or to the
extent of the loss caused by the delay (Section 186, Ibid.)
(emphasis supplied)
Since it is admitted that the demand drafts herein involved
have not been presented either for acceptance or for payment,
the inevitable consequence is that the appellee bank never had
any chance of accepting or rejecting them. Verily, appellee bank
never became a debtor of the payee concerned and as such the
aforesaid drafts cannot be considered as credits subject to
escheat within the meaning of the law.
Demand Draft distinguished from a cashiers or managers
check
42 G.R. No. L-16106, December 30, 1961
18
In the very same case of Republic of the Philippines vs.
Philippine National Bank, et al, it has been held that: a demand
draft is very different from a cashiers or managers check,
contrary to appellants pretense, for it has been held that the latter
is a primary obligation of the bank which issues it and constitutes
its written promise to pay on demand. Thus, a cashiers check
has been clearly characterized In Re Bank of the United States,
277 N.Y.S. 96, 100, as follows:
A cashiers check issued by a bank, however, is not an
ordinary draft. The latter is a bill of exchange payable on
demand. It is an order upon a third party purporting to be
drawn upon a deposit of funds. (Drinkall vs. Movious State
Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St.
Rep. 693; State vs. Tyler County State Bank (Tex. Com. App.)
277 S.W. 625, 42 A.L.R. 1347). A cashiers check is of a very
different character. It is the primary obligation of the bank
which issues it (Nissenbaum vs. State, 38 Ga. App. 253, S.E.
776) and constituted its written promise to pay upon demand
(Steinmetz vs. Schultz, 59 S.D. 603, 241 N.W. 734)
The following definitions cited by the appellant also confirm
this view:
A cashiers check is a check of the banks cashier on his or
another bank. It is in effect a bill of exchange drawn by a bank
on itself and accepted in advance by the act of issuance (10
C.J.S. 409)
A cashiers check issued on request of a depositor is the
substantial equivalent of a certified check and the deposit
represented by the check passes to the credit of the
checkholder, who is thereafter a depositor to that amount.
(Lummus Cotton Gin Co. vs. Walker, 70 So. 754, 756, 195 Ala.
552)
A cashiers check, being merely bill of exchange drawn by a
bank on itself, and accepted in advance by the act of issuance,
is not subject to countermand by the payee after indorsement,
and has the same legal effects as a certificate deposit or a
certified check. (Walker vs. Sellers, 77 So. 715; 201 Ala. 189)
A demand draft is not therefore of the same category as a
cashiers check which should come within the purview of the law.
19
4.
Certificates of Time Deposit; Negotiable Instrument.
A certificate of deposit is a receipt of a bank or banker for a
certain sum of money received upon deposit, and it is generally
framed in such a form as to constitute a promissory note, payable
to the depositor, or to the depositor or order, or to bearer. (The
Elements of Negotiable Instruments Law, Daniel, page 16)
In order, however, to be
must possess the requisite
parties, and time and mode
which deprive bills and notes
manner. (ibid)
negotiable, a certificate of deposit
features of certainty in respect to
of payment and the same causes
of negotiability would affect it in like
Illustrative case:
Caltex (Philippines), Inc. vs. Court of Appeals and Security
Bank and Trust Company
G.R. No. 97753, August 10, 1992
REGALADO, J.:
Facts:
On various dates Security Bank and Trust Company
(SBTC) issued 280 certificates of time deposit (CTD) in
favor of one Angel dela Cruz who deposited with SBTC
the aggregate amount of Php 1,200,000.00. 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 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
Angel dela Cruz delivered the said CTDs to Caltex
(Philippines) Inc. (Caltex) in connection with his
purchased of fuel products from the latter. Sometime
20
in March 1982, Angel dela Cruz informed SBTC that he
lost all the certificates of time deposit in dispute. On
March 25, 1982, Angel dela Cruz negotiated and
obtained loan from defendant bank in the amount of
Php 875,000.00. On the same date, said depositor
executed a notarized Deed of Assignment of Time
Deposit stated, among others, that dela Cruz
surrenders to SBTC 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.
Sometime in 1982, plaintiffs agent went to the
defendant bank and presented for verification the CTD
declared lost by Angel dela Cruz alleging that the same
were delivered to herein plaintiff as security for
purchases made with Caltex. On November 26 1982,
defendant received a letter from herein plaintiff formally
informing it of its possession of the CTDs in question
and of its decision to pre-terminate the same.
Accordingly, defendant bank rejected the plaintiffs
demand and claim for payment of value of the CTDs.
In April 1983, the loan in the amount of Php 875,000.00
with defendant bank matured and fell due, and the
latter set-off and applied the time deposits in question
to the payment of the matured loan.
Plaintiff filed the instant complaint praying that the
defendant bank be ordered to pay it the aggregate
value of the certificates of time deposit of Php
1,120,000.00 plus interest and compounded interest
therein at 16% per annum, moral and exemplary
damages as well as attorneys fees.
Trial court rendered its decision dismissing the instant
complaint.
Issue:
W hether or not the Certificates of Time Deposit are
considered as negotiable instruments?
Ruling:
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.
21
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.
x x x
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.
x x x
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 fact of the instrument
43
itself
.
In the construction of a bill or note, the
intention of the parties is to control, if it can be legally
44
ascertained.
W hile the writing may be read in the
light of the surrounding circumstances in order to prove
perfectly understanding 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 instead. 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.
W hat the parties meant must be
45
determined by what they said.
Certificates
of
Consideration;
Time
Not
Deposit;
Covered
Issued
by
the
without
Valuable
Philippine
Deposit
Insurance Corporation.
Illustrative Case:
Philippine Deposit Insurance Corporation vs.
Court of Appeals and John Francis Cotaoco
G.R. No. 118917, December 22, 1997
43 11 Am. Jur. 2d, Bills and Notes, 79.
44 Ibid, 86.
45 Ibid, 87-88.
22
KAPUNAN, J:
Petitioner Philippine Deposit Insurance Corporation (PDIC)
seeks the reversal of the decision of the Court of Appeals
affirming with modification the decision of the Regional Trial Court
holding petitioner liable for the value of thirteen (13) certificates of
time deposit (CTDs) in the possession of private respondents.
The facts, as found by the Court of Appeals, are as follows:
On September 22, 1983, plaintiffs-appellees invested in
money market placements with the Premiere Financing
Corporation (PFC) in the sum of P10,000.00 each for which
they were issued by the PFC corresponding promissory notes
and checks. On the same date (September 22, 1983), John
Francis Cotaoco, for and in behalf of plaintiffs-appellees, went
to the PFC to encash the promissory notes and checks, but
the PFC referred him to the Regent Saving Bank (RSB).
Instead of paying the promissory notes and checks, the RSB,
upon agreement of Cotaoco, issued the subject 13 certificates
of time deposit with Nos. 09648 to 09660, inclusive, each
stating, among others, that the same certifies that the bearer
thereof has deposited with the RSB the sum of P10,000.00;
that the certificate shall bear 14% interest per annum; that the
certificate is insured up to P15,000.00 with the PDIC; and that
the maturity date thereof is on November 3, 1983 (Exhs. "B",
"B-1 to "B-12").
On the aforesaid maturity dated (November 3, 1983),
Cotaoco went to the RSB to encash the said certificates.
Thereat, RSB Executive Vice President Jose M. Damian
requested Cotaoco for a deferment or an extension of a few
days to enable the RSB to raise the amount to pay for the
same (Exh. "D"). Cotaoco agreed. Despite said extension, the
RSB still failed to pay the value of the certificates. Instead,
RSB advised Cotaoco to file a claim with the PDIC.
Meanwhile, on June 15, 1984, the Monetary Board of the
Central Bank issued Resolution No. 788 (Exh. "2", Records, p.
159) suspending the operations of the RSB. Eventually, the
records of RSB were secured and its deposit liabilities were
eventually determined. On December 7, 1984, the Monetary
Board issued Resolution No. 1496 (Exh. "1") liquidating the
RSB. Subsequently, a masterlist or inventory of the RSB
assets and liabilities was prepared. However, the certificates of
23
time deposit of plaintiffs-appellees were not included in the list
on the ground that the certificates were not funded by the PFC
or duly recorded as liabilities of RSB.
On September 4, 1984, plaintiffs-appellees filed with the
PDIC their respective claims for the amount of the certificates
(Exhs. "C," "C-1" to "C-12"). Sabina Yu, James Ngkaion,
Elaine Ngkaion and Jeffrey Ngkaion, who have similar claims
on their certificates of time deposit with the RSB, likewise filed
their claims with the PDIC. To their dismay, PDIC refused the
aforesaid claims on the ground that the Traders Royal Bank
Check No. 299255 dated September 22, 1983 for the amount
of P125,846.07 (Exh. "B") issued by PFC for the
aforementioned certificates was returned by the drawee bank
for having been drawn against insufficient funds; and said
check was not replaced by the PFC, resulting in the
cancellation of the certificates as indebtedness or liabilities of
46
RSB.
Consequently, on March 31, 1987, private respondents filed an
action for collection against PDIC, RSB and the Central Bank.
On September 14, 1987, the trial court, declared the Central
Bank in default for failing to file an answer.
On May 29, 1989, the trial court rendered its decision ordering
the defendants therein to pay plaintiffs, jointly and severally, the
amount corresponding to the latter's certificates of time deposit.
Both PDIC and RSB appealed. The Central Bank, on the other
hand, filed a petition for certiorari, prohibition and mandamus
before the Court of Appeals praying that the writ of execution
issued by the trial court against it be set aside.
On February 8, 1995, the Court of Appeals rendered its
decision granting the Central Bank's petition but dismissing the
appeals of PDIC and RSB. Hence, this petition by PDIC assigning
the following errors:
THE CA ERRED IN HOLDING THAT THE SUBJECT CTDS ARE
NEGOTIABLE INSTRUMENTS
II
THE CA ERRED IN HOLDING THAT THE CTDS W ERE
ACQUIRED FOR VALUE AND CONSIDERATION
III
46 Rollo, pp. 30-31.
24
THE CA ERRED W HEN IT HELD THAT BECAUSE THE CTDS
STATE THAT THESE W ERE INSURED PETITIONER SHOULD
BE HELD LIABLE FOR THE SAME.
W e deal jointly with petitioner's first and third assigned errors.
Relying on this Court's ruling in Caltex (Philippines), Inc. v.
47
Court of Appeals and Security Bank and Trust Company,
the
Court of Appeals concluded that the subject CTDs are negotiable.
Petitioner, on the other hand, contends that the CTDs are nonnegotiable since they do not contain an unconditional promise or
order to pay a sum certain in money nor are they made payable to
order or bearer, as required by Section 1 of the Negotiable
Instruments Law.
W hether the CTDs in question are negotiable or not is,
however, immaterial in the present case. The Philippine Deposit
Insurance Corporation was created by law and, as such, is
governed primarily by the provisions of the special law creating
48
it.
The liability of the PDIC for insured deposits therefore is
49
statutory and, under Republic Act No. 3591,
as amended, such
liability rests upon the existence of deposits with the insured bank,
not on the negotiability or non-negotiability of the certificates
evidencing these deposits.
The authority for this conclusion finds support in decisions by
American state courts applying their respective bank guaranty
laws. Invariably, the plaintiffs in these cases argued that the
negotiability of the certificates of deposit in their possession
entitled them to be paid out of the bank guaranty fund, a
contention that the courts uniformly rejected.
50
Thus, the plaintiffs in Fourth Nat. Bank of Wichita v. Wilson
argued that:
. . . the court should hold the certificates to be guaranteed
because they are negotiable instruments, and were acquired
by the present holders in due course; otherwise it is said
certificates of deposit will be deprived of the quality of
commercial paper. Certificates of deposit have been regarded
as the highest form of collateral. They are of wide currency in
47 212 SCRA 448 (1992).
48 Section 4, Corporation Code.
49 Entitled "An Act Establishing The Philippine Deposit Insurance Corporation, Defining Its Powers And Duties And
For Other Purposes."
50 204 Pac. 715 (1992), 110 Kan. 380.
25
the banking and business worlds, and are particularly useful to
persons of small means, because they bear interest, and may
be readily cashed; therefore to deprive them of the benefit of
the guaranty fund would be a calamity. . . .
The Supreme Court of Kansas, however, found the plaintiffs'
contention to be without merit, ruling thus:
. . . The argument confuses negotiability of commercial paper
with statutory guaranty of deposits. The guaranty is something
extrinsic to all forms of evidence of bank obligation; and
negotiability of instruments has no dependence on existence
or nonexistence of the guaranty.
. . . W hatever the status of the plaintiffs may be as holders in
due course under the Negotiable Instruments Law, they cannot
be assignees of a deposit which was not made, and cannot be
entitled to the benefit of a guaranty which did not come into
existence. . . .
In arriving at the above decision, the Kansas Supreme Court
51
relied on its earlier ruling in American State Bank v. Foster,
which arose from the same facts as the Fourth National Bank
case. There, the Court held:
. . . Even if the plaintiff were to be regarded as an innocent
purchaser of the certificates as negotiable instruments, its
situation would be in no wise bettered so far as relate to a
claim against the guaranty fund. The fund protects deposits
only. And if no deposit is made, or no deposit within the
protection of the guaranty law, the transfer of a certificate
cannot impose a liability on the fund. . . . where a certificate of
deposit is given under such circumstances that it is not
protected by the guaranty fund, although that fact is not
indicated by anything on its face, its indorsement to an
innocent holder cannot confer that quality upon it.
In like fashion did the Supreme Court of Nebraska brush aside
52
a similar contention in State v. Farmers' Stale Bank:
In this contention we think the appellants fail to distinguish
between the liability of the maker of a negotiable instrument,
which rests upon the law pertaining to negotiable paper, and
the liability of the guaranty fund, which is purely statutory. The
circumstances under which the guaranty fund may be liable
are entirely apart from the law pertaining to negotiable paper.
51 204 Pac. 709, 110 Kan. 520 (1922).
52 196 N.W. 908, 111 Neb. 117 (1923).
26
A holder of a certificate of deposit in a bank who seeks to hold
the guaranty fund liable for its payment must show that the
transaction leading up to the issuance of the certificate was
such that the law holds the guaranty fund liable for its
payment. . . .
The
Farmers'
State
Bank
ruling
was
reiterated
by
the
Nebraska Supreme Court in State v. Home State Bank of
53
54
Dunning
and in State v. Kilgore State Bank.
The same ruling
was adopted by the Supreme Court of South Dakota in
55
Mildenstein v. Hirning.
In the case at bar, the Court of Appeals initially found the
subject CTDs to be negotiable. Subsequently, however,
respondent court deemed the issue immaterial, albeit for entirely
different reasons.
. . . Besides, whether the certificates are negotiable or not is of
no moment. The fact remains that the certificates categorically
state that their bearer [sic] have a deposit in the RSB; that the
same will mature on November

56
certificates are insured by PDIC.
3,
1993;
and
that
the
W e disagree with respondent court's rationale. The fact that
the certificates state that the certificates are insured by PDIC does
not ipso facto make the latter liable for the same should the
contingency insured against arise. As stated earlier, the deposit
liability of PDIC is determined by the provisions of R.A. No. 3519,
and statements in the certificates that the same are insured by
PDIC are not binding upon the latter.
. . . The mere fact that a certificate recites on its face that a
certain sum has been deposited, or that officers of the bank
may have stated that the deposit is protected by the guaranty
law, does not make the guaranty fund liable for payment, if in
fact a deposit has not been made . . . . The banks have
nothing to do with the guaranty fund as such. It is a fund raised
by assessments against all state banks, administered by
57
officers of the state to protect deposits in banks. . . .
W e come now to petitioner's second assigned error.
53 201 N.W. 971, 113 Neb. 93 (1925).
54 205 N.W. 297 (1925).
55 207 N.W. 979 (1926).
56 Rollo, p. 38.
57 State v. Farmers' State Bank, supra, note 6.
27
In order that a claim for deposit insurance with the PDIC may
prosper, the law requires that a corresponding deposit be placed
in the insured bank. This is implicit from a reading of the following
provisions of R.A. 3519:
Sec. 1. There is hereby created a Philippine Deposit Insurance
Corporation . . . which shall insure, as provided, the deposits of
all banks which are entitled to the benefits of insurance under
this Act . . . . (Emphasis supplied).
xxx xxx xxx
Sec. 10(a) . . .
xxx xxx xxx
(c) W henever an insured bank shall have been closed on
account of insolvency, payment of the insured deposits in such
bank shall be made by the Corporation as soon as possible . .
. .(Emphasis supplied.)
A deposit as defined in Section 3(f) of R.A. No. 3591, may be
constituted only if money or the equivalent of money is received
by a bank:
Sec. 3. As used in this Act
(f) The term "deposit" means the unpaid balance of money or
its equivalent received by a bank in the usual course of
business and for which it has given or is obliged to give credit
to a commercial, checking, savings, time or thrift account or
which is evidenced by passbook, check and/or certificate of
deposit printed or issued in accordance with Central Bank
rules and regulations and other applicable laws, together with
such other obligations of a bank which, consistent with banking
usage and practices, the Board of Directors shall determine
and prescribe by regulations to be deposit liabilities of the
Bank . . . . (Emphasis ours.)
Did RSB receive money or its equivalent when it issued the
certificates of time deposit? The Court of Appeals, in resolving
who between RSB and PFC issued the certificates to private
respondents, answered this question in the negative. A perusal of
the impugned decision, however, reveals that such finding is
grounded entirely on speculation, and thus, cannot bind this
58
Court:
58 Cuizon vs. Court of Appeals, G.R. No. 102096, August 22, 1996.
28
Equally unimpressive is the contention of PDIC and RSB
that the certificates were issued to PFC which did not acquire
the same for value because the check issued by the latter for
the certificates bounced for insufficiency of funds. First,
granting arguendo that the certificates were originally issued in
favor of PFC, such issuance could only give rise to the
presumption that the amount stated in the certificates have
been deposited to RSB. Had not PFC deposited the amount
stated therein, then RSB would have surely refused to issue
the certificates certifying to such fact. Second, why did not
RSB demand that PFC pay the certificates or file a claim
against PFC on the ground that the latter failed to pay for the
value of the certificates? It could very well be that the reason
why RSB did not run after PFC for payment of the value of the
certificates was because the instruments were issued to the
latter by RSB for value or were already paid to RSB by
plaintiffs-appellees. Third, if it is true that at the time RSB
issued the certificates to PFC, the instruments were paid for
with checks still to be encashed, then why did not RSB
specifically state in the certificates that the validity thereof
hinges on the encashment of said check? Fourth, even if it is
true that PFC did not deposit with or pay the RSB the amount
stated in the certificates, the latter is not be such reason freed
from civil liability to plaintiffs-appellees. For, by issuing the
certificates, RSB bound itself to pay the amount stated therein
to whoever is the bearer upon its presentment for encashment.
Truly, there is no reason to depart from the established
principle that where a bank issues a certificate of deposit
acknowledging a deposit made with a third person or an officer
of the bank, or with another bank representing it to be the
certificate of the bank, upon which assurance the depositor
accepts it, the bank is liable for the amount of the deposit
(Michis, Banks and Banking, Vol. 5A, pp. 48-49, as cited in the
59
Decision on p. 3 thereof).
Moreover, such finding totally ignores the evidence presented
by defendants. Cardola de Jesus, RSB Deputy Liquidator, testified
that RSB received three (3) checks in consideration for the
issuance of several CTDs, including the ones in dispute. The first
check amounted to P159,153.93, the second, P121,665.95, and
the third, P125,846.07 In consideration of the third check, private
respondents received thirteen (13) certificates of deposit with Nos.
09648 to 09660, inclusive, with a value of P10,000.00 each or a
total of P130,000.00. To conform with the value of the third check,
59 Id., at 39-40.
29
CTD No. 09648 was "chopped," and only the sum of P5,846.07
was credited in favor of private respondents. The first two checks
"made good in the clearing" while the third was returned for being
"drawn against insufficient funds."
The check in question appears on the records as Exhibit "3"
60
(for Regent),
and is described in RSB's offer or evidence as
"Traders Royal Bank Check No. 292555 dated September 22,
1983 covering the amount or P125,846.07 . . . issued by Premiere
61
Financing Corporation."
At the back of said check are the words
62
"Refer to Drawer,"
indicating that the drawee bank (Traders
Royal Bank) refused to pay the value represented by said check.
By reason of the check's dishonor, RSB cancelled the
corresponding as evidence by an RSB "ticket" dated November 4,
63
1983.
These pieces of evidence convincingly show that the subject
CTDs were indeed issued without RSB receiving any money
therefor. No deposit, as defined in Section 3 (f) of R.A. No. 3591,
therefore came into existence. Accordingly, petitioner PDIC
cannot be held liable for value of the certificates of time deposit
held by private respondents.
ACCORDINGLY, the instant petition is hereby GRANTED and
the decision of the Court of Appeals REVERSED. Petitioner is
absolved from any liability to private respondents.
SO ORDERED.
Davide, Jr., Bellosillo and Vitug, JJ., concur.
5. Check defined.
A check is a bill of exchange drawn on a bank payable on
demand. (Sec. 185, Negotiable Instruments Law )
A check is (1) a draft or order (2)

house, (3) purporting to be drawn upon
the payment at all events of a certain
certain person therein named, or to him
64
and (6) payable instantly on demand.
upon a bank or banking
a deposit of funds (4) for
sum of money, (5) to a
or his order, or to bearer,
Except as herein otherwise provided, the provisions of this Act
applicable to a bill of exchange payable on demand apply to a
check.
60 Records, p. 161.
61 Id., at 155.
62 Exhibit 3-1 (Regent).
63 Exhibits "5" and "5-A" (Regent); records, p. 163.
64 Blair & Hoge v. Wilson, 28 Gratt. 170; Ridgely Bank v. Patton, 109 Ill, 484, cited in Daniel, page 17
30
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.
(Equitable PCI Bank vs. Ong, 502 SCRA 119)
Check and Inland Bills of Exchange, distinguished
of
The Supreme Court of the United States, in the leading case
Merchants Bank v. State Bank , says of checks when
contrasted with bills of exchange: Bank checks are not inland
bills of exchange, but have many of the properties of such
commercial paper, and many of the rules of the law merchants
are alike applicable to both. Each is for a specified sum, payable
in money in both cases, there is a drawer, a drawee, and payee.
W ithout acceptance, no action can be maintained by the holder,
upon either, against drawee. The chief points of difference are
that (1) a check is always drawn on a bank or banker; (2) the
drawer
is
not
discharged
by
the
laches
of
the
holder
in
presentment, unless he can show that he has sustained some
injury by the default; (3) it is not due until payment is demanded,
and the statute of limitations runs only from that time; (4) it is, by
its fact, the appropriation of so much money of the drawer, in the
hands of the drawee, to the payment of an admitted liability of the
drawer; (5) it is not necessary that the drawer of a bill should have
funds in the hands of the drawee a check in such case would be
a fraud.
65
65 Merchants Bank v. State Bank, 10 Wall. 647, cited in Daniel, page 18 (italics supplied)
31
I. 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
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.
Notes:
2014 Bar Question:
Which of the following instruments is negotiable if all the
other requirements of negotiability are met?
(A) A promissory note with promise to pay out of the U.S.
Dollar account of the maker in XYZ Bank
(B) A promissory note which designates the U.S. Dollar
currency in which payment is to be made
(C) A promissory note which contains in addition a promise to
paint the portrait of the bearer
(D) A promissory note made payable to the order of Jose Cruz
or Josefa Cruz
2013 Bar Question:
32
Antonio issued the following instrument:
August10, 2013
Makati City
P100,000.00
Sixty days after date, I promise to pay Bobby or his
designated
representative
the
sum
of
ONE
HUNDRED
THOUSAND PESOS (P100,000.00) from my BPI Acct. No. 1234
if, by this due date, the sun still sets in the west to usher in
the evening and rises in the east the following morning to
welcome the day.
(Sgd.) Antonio Reyes
Explain each requirement of negotiability present or absent
in the instrument. (8%)
ANSWER:
As required under Sec. 1 (a) of the Negotiable Instruments
Law, the Instrument is in writing and signed by the maker Antonio
Reyes.
As required in Sec. 1 (b), the instrument does not contain an
unconditional promise or order to pay a sum certain in money.
The instrument was made payable out of a particular fund, that is
BPI Account No. 1234, and the fact of payment is upon the
condition that if, by this due date, the sun still sets in the west to
usher in the evening and rises in the east the following morning to
welcome the day.
Under Sec. 1 (c), the instrument is made payable upon
demand, or on a fixed or determinable future time, which is sixty
days after date.
Under Sec. 1 (d), the instrument is payable to order or bearer,
which is payable to Bobby or his designated representative.
Under Sec. 1 (e), where the instrument is addressed to a
drawee, he must be named or otherwise indicated therein with
reasonable certainty, which finds no applicability if the instrument
is a promissory note.
1996 Bar Question:
33
What are the requistes of a negotiable instrument?
The requisites of a negotiable instrument are as follows:
a)
It must be in writing and signed by the maker or drawer;
b)
It must contain an unconditional promise or order to pay a
sum certain in money;
c)
It must be payable on demand, or on a fixed or
determinable future time;
d)
It must be payable to order or to bearer;
e)
W here the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable
certainty. (Sec. 1, NIL)
Parties to Negotiable Instruments:
In sum, parties to negotiable instruments may be primary, or
secondary or incidental.
Primary parties are those which are the primary participants to
the creation of a negotiable instrument (e.g., maker, drawer,
payee, drawee/acceptor).
Secondary or incidental parties are those which came in or
become involved only after the instrument is negotiated or
transferred to a third person (e.g., indorsers, indorsees).
They may also be classified as parties primarily liable and
parties secondarily liable.
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. 192)
Parties to a Promissory Note, include:
a)
Maker;
b)
Payee
Parties to a Bill of Exchange, include:
a)
Drawer;
b)
Drawee;
c)
Payee
At the onset, it ought to be proper for us to define the terms
that the reader would encounter throughout the entire study of this
subject matter, as specified in Section 191 that unless the
contract otherwise requires:
34
"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,
constructive, from one person to another;
actual
or
"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.
The law does not require any particular form, either as to a bill
of exchange or promissory note, or other negotiable instrument,
and while it would be unwise to depart from the approved forms in
vogue amongst merchants, yet the law respects substance more
than form; and where the intention appears to assume the
obligations which devolve upon drawers and makers of negotiable
instruments, it will be enforced, although not evidenced in the
usual commercial form. Thus, an order written under a note,
Please pay the above note, and hold it against me in our
settlement, signed by the drawer and accepted by the drawee,
66
has been held a good bill;
and so, also, it has been held that a
67
like order written under an account is a bill of exchange.
And
35
where an indorsement was made on a bond, ordering the
contents to be paid to order for value received, it was held a
good bill.68
(Daniel, Elements
Instruments Law, page 35)
of
Electronic
be
Messages
cannot
the
Law
of
considered
Negotiable
negotiable
instruments
69
In HSBC v. Commissioner of Internal Revenue,
it was held
that electronic messages cannot be considered negotiable
instruments as they lack the feature of negotiability, which, is the
ability to be transferred and that the said electronic message are
mere memoranda of the transaction consisting of the actual
debiting of the [investor-client-payors] local or foreign currency
account in the Philippines and entered as such in the books of
70
account of the local bank, HSBC.
Must be in Writing
As a substitute for money, a negotiable instrument, similar to
money, must be written or embodied in a medium, in such a way
that it could by physically transferrable from hand to hand similar
to that of money. Strictly speaking, there are no verbal negotiable
instruments.
It may be written on any paper, cloth, board, parchment, wood,
plastic, so long as it has a semi-permanent character, so as to
manifest the intent of the maker or drawer to create a negotiable
instrument, capable of being negotiated or transferred from one
person to another.
Otherwise, if such is incapable of being
physically transferred its negotiable character would be defeated.
[T]his writing can be handwritten, printed, or typewritten, or it
can consists of any other intentional [method of] reduction to
tangible form. (Business Law, Howell, p. 412)
For a negotiable instrument to operate practically as either a
substitute for cash or a credit device, or both, it is essential that
the instrument can be easily transferable without danger of being
71
uncollectible.
The whole of the bill or note must be expressed in writing.
W hether the instrument be a bill of exchange or a promissory
66 Leonard v. Mason, 1 Wend. 252
67 Hoyt v. Lynch, 2 Sandf. 328
68 Bay v. Frazer, 1 Bay, 66
69 G.R. Nos. 166018 & 167728, June 4, 2014
70 Rollo (G.R. No. 167728), p. 55.
71 Miller & Jentz, Business Law Today, 9th Edition, 2011, page 391
36
note, or otherwise, and whether or not it be negotiable, must be
determined by its face, without reference to any other source.72
Signed by the Maker or Drawer
Section 1 requires that the instrument be signed either by the
maker or drawer. This is in line with the provision that No person
is liable on the instrument whose signature does not appear
73
thereon.
Moreover, a negotiable instrument being essentially a
contract requires that there be consent of the maker or drawer,
since they are the ones who start with the creation and initial
delivery of an instrument. Consent is thus, manifested by their
affixing their signature on the instrument.
The term signed means any symbol executed or adopted by a
party with [the] present intention to authenticate a writing. Thus a
signing can occur through the use of ones initials, a rubber
stamp, or some other type of signature, such as the mark X, so
long as it is made with the intention of giving assent to the
writings terms. (ibid, p. 413)
It does not matter upon what portion of the instrument, the
maker or drawer affixes his name, so that he signs as drawer or
74
75
maker.
It is not material whether the writing is in pencil or ink,
although as matter of permanence and security, ink is, of course,
preferable. And the name may be printed a well as written,
though, in such cases, it cannot prove itself, and must be shown
76
to have been adopted and used by the party as his signature.
If
another sign the name of the party in his presence and at his
77
request, it is the same as if he did it himself;
and if another sign
78
the partys name by verbal or other authority, it is sufficient.
The
full name may be written; and at least the surname should appear,
and generally does. But this is not indispensable the initials are
79
sufficient,
and any mark which the party uses to indicate his
80
intention to bind himself will be as effectual as his signature,
whether there be a certificate of witnesses on the instrument or
81
not.
But, of course, a mark does not prove itself like a signature,
72 Daniel on Negotiable Instrument, 77; Gibbon v. Scott, 2 Stark, 268
73 Sec. 18, NIL
74 Clason v. Bailey, 14 Johns, 484; Schmidt v. Schmaeller, 45 Mo. 502
75 Reed v. Roark, 14 Tex. 329; Closson v. Stearns, 4 Vt. 11
76 Brown v. Butchers Bank, 6 Hill, 443; Schneider v. Norris, 2 Maule & S. 286
77 Sager v. Tupper, 42 Mich. 605
78 Daniel on Negotiable Instruments, page 274, 299
79 Merchants Bank v. Spicer, 6 Wend. 443; 1 Parsons on Notes and Bills, 36
80 Lyons v. Holmes, 11 S.C. 429
81 Willoughby v. Moulton, 47 N.H. 205; Shank v. Butach, 28 Ind. 19
37
although it is an adminicle of proof.82

Any peculiarity in it may be
83
shown as evidence of proof;
but, unless there be an attesting
witness, or one who saw it written, or is familiar with its
84
characteristics, the plaintiff cannot recover.
Nor it is necessary
that the substance upon which the instrument is written should be
paper parchment, cloth, leather, or any other substitute for paper
85
will suffice.
(Daniel, Elements of the Law of Negotiable
Instruments, page 35-36)
Electronic messages are not deemed signed
Electronic messages are not signed by the investor-clients as
supposed drawers of a bill of exchange; they do not contain an
unconditional order to pay a sum certain in money as the payment
is suppoed to come from a specific fund or account of the investorclients; and, they are not payable to order or bearer but to a
specifically designated third party. Thus, the electronic messages
are not nills of exchange. (HSBC v. Commissioner of Internal
Revenue, G.R. Nos. 166018 & 167728, June 4, 2014, [LeonardoDe Castro, J.:])
Must Contain Unconditional Promise or Order
In perspective, a negotiable instrument operates as an
undertaking of a person, be it a maker, who promises to pay, or a
drawer, which in turn, orders another person to pay on his behalf,
that is made without any condition to another person, identified as
the payee, and receiving anything of value in exchange thereof.
Vital is the requirement that the promise or order to pay must be
unconditional. Since, a negotiable instrument is intended as a
substitute for money, the payee and the subsequent holder
thereof must be assured that they would be able to receive the
amount indicated on the face of the instrument without any other
condition or additional burden.
If a bill, it must contain a certain direction to pay if a note, a
certain promise to pay. A bill is, in its nature, the demanding of a
right, not the mere asking of a favor, and therefore a supplication
made or authority given to pay an amount is not a bill. (Daniel,
Elements of the Law of Negotiable Instruments, page 45)
A promissory note must contain a certain promise to pay. I
promise to pay, or cause to be paid, would suffice, because the
86
undertaking that the payment be made is definite and certain.
It
82 Hilborn v. Alford, 22 Cal. 482; Flowers v. Billing, 45 Ala. 488
83 George v. Surrey, 1 Moody & M. 516; 2 Parsons on Notes and Bills, 480
84 Thompson on Bills, 30, 31, 33
85 Daniel on Negotiable Instruments, 77
86 Lovell v. Hill, 6 Car. & P. 238; Caviness v. Rushton, 101 Ind. 500
38
is said by Story, that it seems that to constitute a good
promissory note, there must be an express promise upon the fact
of the instrument to pay the money; for a mere promise implied
by law, founded upon an acknowledged indebtedness, will not be
sufficient.
87
But we think the better language is used by Byles,
who says: No precise words of contract are necessary, provided
they amount, in legal effect, to a promise to pay,

88
In other
words, if over and above the mere acknowledgment of debt, there
may be collected from the words used a promise to pay it, the
89
instrument may be regarded as a promissory note.
The instrument must be payable unconditionally and at all
90
events in order to be negotiable.
To be unconditional, the
payment of the instrument must not be made to depend upon a
future uncertain event, which may, or may not happen.
A promise is unconditional, although it is 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.
(Sec. 2, NIL)
And an instrument payable

negotiable, and the happening of
91
defect.
The contingency implied

negotiable character, as the events
upon a contingency is not
the event does not cure the
deprives the instrument of its
92
named may never happen.
If the time must certainly come, although the particular day is
not mentioned, the instrument is regarded as negotiable, as the
93
fact of payment is certain.
If the instrument is payable at, or
within a certain time after, a mans death, it is sufficient, because
94
the event must occur;
and a promise to pay on demand, after
my decease, $850, signed by the promissory, is a good note,
negotiable as any other, and binding on the promisors estate at
95
his death.
So a note payable one day after date or at my
96
death,
and if the day of payment must come at some time, it
87 Story on Promissory Notes, 14
88 Byles on Bills, 8 (italics supplied)
89 Daniel on Negotiable Instruments, 36; Cowan v. Hallack, 9 Colo. 578
90 Daniel, Elements of the Law of Negotiable Instruments, 46
91 Sec. 4, NIL
94 Cooke v. Colehan, 2 Stra. 1217; Conn v. Thornton, 46 Ala. 587; Price v. Jones, 105 Ind. 544.
95 Bristol v. Warner, 19 Conn. 7
96 Conn v. Thornton, 46 Ala. 588
97 Worth v. Case, 42 N.Y. 362
39
has been said that the distance is immaterial.97

(Daniel, Elements
of the Law of Negotiable Instruments, page 48)
However, an order or promise to pay out of a particular fund is
not unconditional. (Sec. 2, N.I.L.)

In accordance with these
principles the negotiable character of the instrument is destroyed
if it be made payable expressly or impliedly out of a particular
98
fund.
Illustrations: The insertion in an order to pay a certain
sum on account of brick work done on a certain building

99
or out
of rents,
100
or out of my growing substance,
101
or out of a
certain claim,
102
or out of my part of the estate of A,
103
or out of
the amount due on contract.

104
On the same principle, receivers
certificates are not regarded as negotiable, although framed with
105
the negotiable words usual in promissory notes.
(Daniel,
An order to pay A, or order, $300.00 or what may be due on
106
my deposit book, is conditional.
Therefore, the same is nonnegotiable.
2011 Bar Question:
A writes a promissory note in favor of his creditor, B. It says:
Subject to my option, I promise to pay B Php1 Million or his
order or give Php1 Million worth of cement or to authorize
him to sell my house worth Php1 Million. Signed, A. Is the
note negotiable?
A. No, because the exercise of the option to pay lies with A,
the maker and debtor.
B. No, because it authorizes the sale of collateral securities in
case the note is not paid at maturity.
C. Yes, because the note is really payable to B or his order,
the other provisions being merely optional.
D. Yes, because an election to require something to be done
in lieu of payment of money does not affect negotiability.
To Pay a sum certain in Money
97 Worth v. Case, 42 N.Y. 362
99 Pitman v. Crawford, 3 Gratt. 127
100 J Parsons on Notes and Bills, 43
101 Josselyn v. Lacier, 10 Mod. 294
102 Richardson v. Carpenter, 46 N.Y.661
103 Mills v. Kuykendale, 2 Blckf., 47
104 Hoagland v. Erck, 11 Neb. 580
105 Staunton v. Railroad Co., 31 Fed. 587; McCurdy v. Bowes, 88 Ind.583
106 The Negotiable Instruments Law Annotated, by Joseph Doddridge Brannan, Second Edition 1911, page 3, citing
National Sav. Bank v. Cable, 73 Conn. 568 Atl. 428.
40
The sum or amount which is promised or ordered to be paid by
the maker or drawer as the case may be must be certain. This
would enable to payee or any subsequent holder to be able to
know how much they are going to claim from the person primarily
liable thereon.
Thus, if an instrument is to be a substitute for money and have
an equivalent degree of acceptability, the necessity that the
amount be a sum certain is obvious. This requirement of certainty
is met if the holder can determine from the terms of the
instrument itself the amount he or she is entitled to receive at
maturity. (Ibid, Howell, p. 417)
The amount which the debtor promises or engages to pay
must either be stated in the instrument itself, in figures or words,
or must be ascertainable from data somewhere on the paper.
Illustrations: A note to pay a certain sum, and all other sums
which may be due is not negotiable, as the aggregate amount is
107
not capable of definite ascertainment.
So, if it be for a certain
sum and whatever sum you may collect of me for C,;

108
or if it be
for the proceeds of a shipment of goods, value about 2,000,
consigned by me to you;
109
or the demands of the sick club in
part of interest;
110
or a certain sum, the same to go as set-off;
111
or if it be expressed, deducting all advances and expenses;

112
or
if it be due for $800 and such additional premium as may be due
on policy No. 218,171.

113
But a promise to pay bearer a certain
sum per acre for so many acres as a certain tract contained was
held to be negotiable as soon as the number of acres was
114
indorsed upon it.
Instruments, page 51)
It is essential to the negotiability of the bill or note that it
purport to be only for the payment of money. Such at least may
be stated to be the general rule, for it any other agreement of a
different character be engrafted upon it, it becomes a special
contract clogged and involved with other matters, and has been
deemed to lose thereby its character as a commercial
115
instrument.
(ibid, page 55)
107 Smith v. Nightinglare, 2 Stark, 375
108 Legro v. Staples, 16 Me. 252; Lime Rock F. & M. Ins. Co. v. Hewitt, 60 Me. 407
109 Jones v. Simpson, 2 B & C, 318
110 Bolton v. Dugdale, 4 B & Ad. 619
111 Clarke v. Percival, 2 B & Ad. 660
112 Cashman v. Haynes, 20 Pick, 132
113 Marret v. Equitable Ins. Co., 54 Me. 537
114 Smith v. Clopton, 4 Tex. 109
115 Fletcher v. Thompson, 55 N.H. 308; Ingham v. Dudley, 60 Iowa 16
41
Payable on Demand or at a Fixed or Determinable Future
Time
This requirement recognizes that the holder of an instrument
wants to know with certainty when he or she will be entitled to
payment. Any appreciable uncertainty as to time of payment
makes the instrument commercially unacceptable and defeats the
concept that a negotiable instrument is a substitute for money.
(Howell, p. 418)
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 fixed. (Sec. 7,
NIL)
W here an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand. (ibid)
An instrument may also be payable on a fixed future time, as
on its face, the holder can clearly discern the date and time when
the instrument shall become due. Example: April 8, 2012; or
April 3, 2007.
W hen an instrument is payable at a determinable future time,
the holder thereof would be able to know the date and time when
instrument would become due by referring to a fixed or known
future event. Example: 10-days after Christmas this year; or 15days after New Year of next year.
Payable to Order or Bearer; Words of Negotiability
The requirement that an instrument be made payable to Order
or Bearer are what we call words of negotiability, this implies
that an instrument, provided it complies with all other requisites of
Section 1 of the Negotiable Instruments Law, can be negotiated or
transferred to other persons, in the manner provided for under the
law.
W ithout these so-called words of negotiability, an instrument
would not be negotiable, as on its face it would be intended only to
be payable to the person named therein, thus, preventing it to be
further negotiated.
An instrument is payable to Order where it is drawn payable to
the order of a specified person or to him or his order. (Sec. 8, NIL)
116
It may be drawn payable to the order of
42
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.
W here the instrument is payable to order, the payee must be
117
named or otherwise indicated therein with reasonable certainty.
118
On the other hand, an instrument is payable to Bearer
a)
W hen it is expressed to be so payable; or
b)
W hen it is payable to a person named therein or bearer;
or
c)
W hen it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person
making it so payable; or
d)
W hen the name of the payee does not purport to be the
name of any person; or
e)
W hen the only or last indorsement is an indorsement in
blank.
2012 Bar Question:
A promissory note which does not have the words "or
order" or "or bearer" will render the promissory note nonnegotiable, and therefore
A.
It will render the maker not liable;
B.
The note can still be assigned and the maker made liable;
C.
The holder can become holder in due course;
D.
The promissory note can just be delivered and the maker
will still be liable.
2000 Bar Question:
MP bought a used cellphone from JR. JR preferred cash but
MP is a friend so JR accepted MPs promissory note for
P10,000.00. JR thought of converting the note into cash by
116 Sec. 8, NIL
117 Ibid
118 Sec. 9, NIL
43
endorsing it to his brother KR.
The promissory note is a
piece of paper with the following hand-printed notation: MP
WILL PAY JR TEN THOUSAND PESOS IN PAYMENT FOR HIS
CELLPHONE 1 WEEK FROM TODAY.
Below this notation
MPs signature with 8/1/00 next to it, indicating the date of
the promissory note.
When JR presented MPs note to KR,
the latter said it was not a negotiable instrument under the
law and so could not be a valid substitute for cash. JR took
the opposite view, insisting on the notes negotiability. You
are asked to referee.
Which of the opposing views is
correct? Explain. (3%)
KRs view is correct. The promissory note does not meet the
requirements of Sec. 1, Act 2031, which requires that the
instrument be payable to bearer or order, therefore it is nonnegotiable.
1998 Bar Question:
X makes a promissory note for P10,000.00 payabe to A, a
minor, to help him buy school books. A endorses the note to
B for value, who in turn endorses the note to C. C knows A
is a minor. If C sues X on the note, can X set up the defenses
of minority and lack of consideration? (3%)
Yes.
The instrument is non-negotiable, the same is not
payable to order or bearer but only payable to A alone. Section 1
(d) of the Negotiable Instruments Law requires that for an
instrument to be negotiable it must be, among others, payable to
order or bearer.
Since the instrument is non-negotiable, C cannot be a holder
in due course, therefore, the defenses of minority and lack of
consideration can be availed of.
Drawee must be named or otherwise Indicated therein with
reasonable certainty
It should be noted that the requirement on Sec. 1 (e) applies
only if the instrument is a Bill of Exchange, wherein, the Drawer
orders a Drawee to pay the payee or his Order, or Bearer thereof,
in which case, the drawee, who becomes subsequently the
acceptor thereof is the person primarily liable to pay the
instrument.
44
As for the requirements of a Promissory Note, Sec. 1 (a) to (d)
would suffice.
W hether the Bill is payable on demand or at a fixed or
determinable future time, so long as the holder would be able to
know or identify the person to whom he would be demanding or
enforcing payment of the instrument.
The requisite is that the drawee must be Named.
Example:
Pepito Aguilar
1002, Santos Avenue, Sta. Cruz, Manila
Or
Luis Lustriano of Luzurriaga & Associates
Ortigas Center, Pasig City
Drawee may also be Indicated with Reasonable Certainty.
Example:
Brgy. Captain
Brgy. Sto Domingo, Laguna
Or
Hon. Municipal Mayor
Municipality of Oton, Iloilo
The instrument can only be negotiable if it complies with
Section 1
A document will only become a Negotiable Instrument if it
complies with the requisites of Section 1 of the Negotiable
Instruments law, unconditionally and in a single document.
45
It should be noted that the existence of a negotiable instrument
is different on who is liable on the instrument. The existence of a
negotiable instrument is answered if the paper strictly complies
with Section 1 of the Negotiable Instruments Law, liability, on the
other hand may be addressed taking into consideration certain
factors, like, proper negotiation, existence of a consideration,
holder in due course, and the like.
Thus, if what we have is a mere innominate contract, without
complying with Section 1 of the said law, then, it may be governed
by the Civil Code, or other pertinent provisions of the Code of
Commerce, but it cannot avail of the provisions of Act 2031.
Distinction
between
negotiable
and
non-negotiable
instrument
In the case of Consolidated Plywood Industries, Inc. vs. IFC
119
Leasing and Acceptance Corp.,
this Court had the occasion to
clearly distinguish between a negotiable and 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.
W ithout 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. (Juanita Salas vs. Court of Appeals, G.R. No. 76788,
January 22, 1990, [Fernan, C.J.:])
In the above-mentioned case of Juanita Salas vs. Court of
Appeals, 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
119 149 SCRA 459 (1987).
46
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
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 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
st
payable on the 21
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. (supra)
The case of Narcisa Buencamino, et. al., vs. Hernandez, et
120
al.
talks about the negotiability of Government negotiable land
certificates, which provide as follows, to wit:
AMOUNT: P10,000.00
NEGOTIABLE LAND CERTIFICATE
THE GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES
is indebted unto the
BEARER
in the sum of TEN THOUSAND PESOS. This certificate is issued in accordance with the
120 G.R. No. L-14883, July 31, 1963, [Regals, J.:]
47
provisions
of Section 9,
DEFINING
LAND
INSTRUMENTALITY
APPROPRIATING
Republic
TENURE
TO
FUNDS
Act
CARRY
FOR
No.
POLICY,
ITS
OUT
1400,
entitled
PROVIDING
THE
"AN
FOR
POLICY,
IMPLEMENTATION",
ACT
AN
AND
approved
September 9, 1955, and is due and payable to BEARER on demand and upon
presentation at the Central Bank of the Philippines without interest, if presented for payment
within five years from the date of issue; with interest at the rate of 4 per centum per annum,
if presented for payment after five years from the date of issue; with interest at the rate of 4 per centum per annum, if presented for payment after ten years from the date of issue;
and, with interest at the rate of 5 per centum per annum, if presented for payment after
fifteen years from the date of issue. Both principal and interest are payable by the Treasurer
of the Philippines, through the Central Bank of the Philippines, in legal tender currency of
the Philippines.
This land certificate is part of the total negotiable land certificates issued and limited to the
aggregate principal sum of SIXTY MILLION PESOS a year, to be issued during the first two
years from September 9, 1955 when Republic Act No. 1400 was approved, and P30 million
each year during the succeeding years, for the purchase of private agricultural lands for
resale at cost to bona-fide tenants or occupants, or, in the case of estates abandoned by the
owners for the last five years, to private individuals who will work the lands themselves and
who are qualified to acquire or own lands, but who do not own more than six hectares of
lands in the Philippines.
Manila, Philippines, August 9, 1957.
Encashment of this certificate may not be made until after five (5) years from the date of
execution of the Deed of Sale of Hacienda de Leon, pursuant to the conditions under
Paragraph "b" of the Memorandum Agreement executed between the Land Tenure
Administration and the owners of Hacienda de Leon on May 11, 1957, acknowledged
before Marcelo Lagramada, Notary Public for Manila, as Doc. No. 324, Page 66, Book No.
6, Series of 1957.
(Sgd.) JUAN CAIZARES
Registrar of the Central
Bank of the Philippines
(Sgd.) CARLOS P. GARCIA
President of the Phil.
(Sgd.) VICENTE GELLA
Treasurer of the Phil.
Date of issue: August 9, 1957
Recorded: Illegible
Examined: Illegible
Under Republic Act No. 1400, the land certificates, as in this
case, shall be payable to bearer upon demand. The one issued,
however, were, payable to bearer only after the lapse of five years
from a given period. Obviously then, the requirement that they
should be payable on demand was not met since an instrument
payable on demand is one which is (a) expressed to be payable
on demand, or at sight, or on presentation; or (b) expresses no
time for payment (Sec. 7, Negotiable Instruments Law), the fiveyear period within which the certificates could not be encashed
was an expression of the time for the payment contrary to the
paragraph (b) of the last law cited.
48
In another significant case, that of Consolidated Plywood
Industries, Inc., et al vs. IFC Leasing and Acceptance
121
Corporation
, [t]he pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL
PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN
HUNDRED EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said
principal sum, to be payable in 24 monthly installments starting July 15, 1978 and every 15th of the
month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note must be
payable to order or bearer, it cannot be denied that the
promissory note in question is not a negotiable instrument.
The instrument in order to be considered negotiable-i.e.
must contain the so-called word of negotiability, must be
payable to order or bearer.

These words serve as an
expression of consent that the instrument may be transferred.
This consent is indispensable since a maker assumes greater
risk under a negotiable instrument than under a non-negotiable
one
xxx xxx xxx
W hen instrument is payable to order.
SEC. 8 W HEN 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
xxx xxx xxx
These are the only two ways by which an instrument may be
made payable to order. There must always be a specified
person named in the instrument. It means that the bill or not 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. (Campos and Campos,
121 G.R. No. 72593, April 30, 1987.
49
Notes and Selected Cases on Negotiable Instruments Law,
Third Editions, page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not
a negotiable instrument, it follows that the respondent can never
be a holder in due course but remains a mere assignee of the
note in question.
Thus, the petitioner may raise against the
respondent all defenses available to it as against the sellerassignor Industrial Products Marketing.
Treasury warrant; not a Negotiable Instrument
Treasury warrants do not fall within the purview of the
Negotiable Instruments Law. Treasury warrants are payable from
a particular appropriation of an order payable out of a particular
fund, and is not unconditional.
Postal Money Orders; not a Negotiable Instrument
It is not disputed that our postal statues were patterned after
statutes in force in the United States. For this reason, ours are
generally construed in accordance with the construction given in
the United Stated to their own postal statutes, in the absence of
any special reason justifying a departure from this policy or
practice. The weight of authority in the United States is that postal
money orders are not negotiable instruments (Bolognesi vs. U.S.
189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed.
912), the reason behind this rule being that, in establishing and
operating a postal money order system, the government is not
engaging in commercial transactions but merely exercises a
governmental power for the public benefit. (Philippine Education
Co., Inc., vs. Soriano, G.R. No. L-22405, June 30, 1971, [Dizon,
J.])
It is to be noted in this connection that some of the restrictions
imposed upon money orders by postal laws and regulations are
inconsistent with the character of negotiable instruments. For
instance, such laws and regulations usually provide for not more
than one endorsement; payment of money orders may be
withheld under a variety of circumstances. (49 C.J. 1153, supra)
Central Bank Certificate of
Indebtedness (CBCI);
not
Negotiable Instrument
In the case of Traders Royal Bank vs. Court of Appeals,
Filriters Guaranty Assurance Corporation and Central Bank
122
of the Philippines
, it was held that: the subject CBCI is not a
50
negotiable instrument in the absence of words of negotiability
within the meaning of the negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received,
hereby promises to pay bearer, of if this Certificate of
indebtedness
be
registered,
to
FILRITERS
GUARANTY
ASSURANCE CORPORATION, the registered owner hereof, the
principal sum of FIVE HUNDRED THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to
certificates for the creation and maintenance of a permanent
improvement revolving fund, is similar to a bond (82 Minn. 202).
Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money, it
is usually used for the purpose of long term loans.
Problem:
What is the nature and characteristic of a NOW account? Is
it Negotiable within the ambit of the Negotiable Instruments
Law?
Negotiable Orders of W ithdrawals (NOW Accounts) is defined
as savings accounts from which funds may be withdrawn by
means of negotiable orders of withdrawal. They shall be kept and
maintained separately from the regular savings deposits subject
to withdrawal through the presentation of withdrawal slips and
passbooks. Only natural persons shall be eligible to maintain
NOW Accounts. The authority to offer NOW Accounts shall be
granted only to thrift banks that meet the requirements laid down
by the Central Bank Regulations.
They are not negotiable within the provisions of the Negotiable
Instruments Law because of certain limits and restrictions, to wit:
(a.)
The order of withdrawal shall be payable
only to a specific person, natural or juridical, and
122 G.R. No. 93397, March 3, 1997, [Torres, J.]
51
not to bearer nor to the order of a specified
person;
Only the payee can encash this order of withdrawal with
drawee bank, or deposit it in his account with the drawee bank or
with any other bank.
When is an instrument considered to be complete? When is
it incomplete?
An instrument is complete if it complies with the requirements
of Section 1 of the Negotiable Instruments Law, embodied in a
single document or medium, and that there must be no other
conditions imposed for its validity or compliance.
An instrument is incomplete if it lacks any material particular
essential for its completion.
123
Essentials of a Bill or Note
To be a negotiable bill of exchange or promissory note, the
instrument must have the following essential characteristics:
a)
The bill must contain an order
b)
The note must contain a promise
c)
The order or promise must be unconditional
d)
It must be an absolute order or promise for the payment of
money alone
e)
The amount of money must be certain
f )
The time of payment must be a time certain to arrive
g)
The instrument must be specific as to all its parties
h)
The instrument must be delivered
1997 Bar Question:
Can a bill of exchange or a promissory note qualify as a
negotiable instrument if
a) It is not dated; or
b)
The day and the month, but not the year of its maturity,
is given; or
c) It is payable to cash; or
52
d) It names two alternative drawees.
ANSWERS:
a)
Yes, it can still qualify as a negotiable instrument. Date is
not essential to the existence of a negotiable instrument.
Section 6 (a) of the NIL states that the validity and
negotiable character of an instrument are not affected by
the fact that it is not dated.
b)
Yes, it can still qualify as a negotiable instrument. An
instrument is payable on demand in which no time for
payment is expressed. (Sec. 7 (b) NIL).
c)
Yes, the instrument is payable to bearer when it is payable
to the order of a fictitious or non-existing person. (Sec. 9
(c) NIL)
d)
It would depend, if the bill is addressed to two or more
drawees jointly, instrument is negotiable; but if it is
addressed to two or more drawees in the alternative or
succession, it is not negotiable. (Sec. 128, NIL)
What are the effects if the instrument is incomplete?
Strictly speaking, we do not have any negotiable instrument.
An instrument only comes within the purview of the Negotiable
Instruments Law if it complies with the requisites of Section 1 of
the Negotiable Instruments Law, in the absence thereof, we only
have a private document or contract, in which the Negotiable
Instruments Law has no application.
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
53
(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.
Notes:
When sum is considered certain
The sum becomes certain if the maker, drawee, or holder of
the instrument would be able to discern with exact certainty how
much would he pay or collect, as the case may be, on the value of
the negotiable instrument.
With Interest
The sum is considered certain although coupled with the
payment of interest. It should be borne in mind that the payment
of the interest is only in addition to the principal sum to be paid,
thus, the sum payable is still certain.
Example:
P30,000.00 plus 2% monthly interest; or
Pay 10% of P100,000.00
By stated installments
Though coupled with payment in stated installments, the sum
is still considered certain.

The main reason is that said
installment, is only a mode of payment of the main obligation,
certainly entire sum due or payable could still be identified.
Example:
Promise to pay bearer P10,000.00 in 2 equal installments; or
Promise to pay bearer five installments of P2,000.00 each.
By stated installments, with a provision that, upon default in
payment of any installment or of interest, the whole shall
become due
54
This is similar to payment by stated installments as previously
mentioned, but this one contains an acceleration clause, where,
default in the payment of any installment or of interest, the whole
sum or amount becomes due.
In Acceleration Clauses : Instruments due at a fixed future
date sometimes have clauses providing that the date of maturity
shall be moved ahead if a specified event occurs prior to the
stated due date. An instrument issued this year with a maturity
date [of] two years hence might contain, for example, either of
these acceleration clauses: (1) This instrument shall become
immediately due and payable upon the makers (or acceptors)
bankruptcy; or (2) for a note payable in monthly installments: If
any instrument is not paid when due, the entire instrument is due
and demandable. (Howell, p. 421)
With exchange, whether at a fixed rate or at the current rate
The sum is still certain, though it is made coupled with
exchange whether fixed rate or at current rate. In this instance, a
reasonable prudent person would still be able to determine the
sum payable.
Example:
Pay to bearer an amount equivalent to $100.00; or
Pay to bearer an amount equivalent to the prevailing rate of
$100.00; or
Pay to bearer an amount equivalent to $100.00 at an
exchange rate of Php 43.50 per dollar.
With costs of collection or an attorney's fee, in case payment
shall not be made at maturity
This would be self-explanatory.

Again the most important
thing to take into consideration is whether or not the holder would
be able to determine the amount due, despite the additional cost
of collection or attorneys fee.
The attorneys fee is due if the unpaid note is placed in the
hands of an attorney for collection, although no suit is brought. A
stipulation in a mortgage securing the note for fees in case of suit
on the mortgage securing the note for fees in case of suit on the
mortgage is cumulative and not restrictive of the provision of the
note. (Brannan, page 5, citing, Morrison v. Ornbaun, 30 Mont.
111, 75 Pac. 953)
55
A provision in a promissory note for attorneys fees if collected
by attorney, or if suit is brought on this note, is a promise to pay
attorneys fees for collection only after dishonor, and does not
impair the negotiability of the note. (Ibid, citing First Natl. Bank of
Shawano v. Miller, 139 Wis. 126, 120 N.W. 820, S.C. sec. 104)
Likewise, [a] provision in a note for an attorneys fee, but
leaving blank the amount thereof, amounts to a promise to pay a
reasonable sum as an attorneys fee, and does not render the
note non-negotiable. W here the plaintiff employed an attorney, it
is sufficient to show what is a reasonable fee, and it is not
necessary to prove an express agreement as to fees, or that
plaintiff paid the attorney before the suit. (Brannan, page 6, citing
McCormick v. Swem (Utah) 102 Pac. 626)
Example:
For value received, I promise to pay David Lancelot, or order, the amount of Php 100,000.00,
ten days after sight. It is understood that an amount equivalent to the cost of collection would be
made payable in addition to the principal amount, and an amount equivalent to Twenty-Five Per
Cent (25%) of the amount due as Attorneys Fees, should there be default in the payment after
demand.
(sgd)
Abigail Margaux
124
In the case of H.R. Andreas vs. B.A. Green
, the promissory
note was worded as follows:
P15,000.00
MANILA, P. I
Aug. 19th, 1921
On or before the 19th day of November, 1921, or on thirty (30) days written demand notice, for
value received, I promise to pay to Harry Bridge, at Manila, P.I., the sum of fifteen thousand pesos
(P15,000) with interest thereon at the rate of twelve per cent (12%) per annum. If not paid when
due after thirty days written demand notice, this note shall bear interest at the rate of 12 per cent
per annum until paid; and a further sum equal to 10 per cent of the total amount due as and for
expenses of collection for attorney's fees whether actually incurred or not and in addition to all costs
as provided for in the Code of Civil Procedure.
This note is secured by real-estate mortgage of even date.
(Sgd.) B. A. GREEN
The Supreme Court in the above-mentioned case held that:
[s]tipulations in negotiable instruments for the payment of
collection and attorneys fees are not forbidden by lay in this
jurisdiction. x x x The purpose of a stipulation in a note for a
reasonable attorneys fees is not to give the lender a larger
compensation for the loan than the law allows, but is to safeguard
the lender against future loss or damage by being compelled to
retain counsel to institute judicial proceedings to collect his debt.
124 G.R. No. L-24322, December 16, 1925
56
2012 Bar Question:
X issued a promissory note which states, "I promise to
pay Y or order Php100,000.00 or one (1) unit Volvo Sedan."
Which statement is most accurate?
a.
The promissory note is negotiable because the forms of
payment are clearly stated.
b.
The promissory note is non-negotiable because the
option as to which form of payment is with the maker.
c.
The promissory note is an invalid instrument because
there is more than one form of payment.
d.
The promissory note can be negotiated by way of
delivery.
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
Notes:
When is promise to pay unconditional?
A promise to pay is unconditional if no other requirement or
qualification or condition is needed for its payment.
Moreover, an unqualified order

unconditional, though coupled with:
57
or
promise
to
pay
is
a.
An indication of a particular fund out of which
debited with the amount; or
b.
A statement of the transaction which gives rise to the
instrument.
An
indication
of
particular
fund
out
of
which
debited with the amount
In this instance, the promise or order to pay is still
unconditional because payment is not premised upon any
condition, or subject to the availability of funds of a particular
account. The holder of the instrument is assured that he be paid
upon presentment of the instrument. It should be taken into
consideration that the law uses the word reimbursement, which
implies that payment is to be advanced by the person primarily
liable and merely reimburse the same from a particular account.
Thus, regardless of the availability of funds in that account, the
holder receives payment.
Example:
To: Maria Santos
1020 Licauco Drive, Ortigas Center, Pasig
This 26th day of October 2011
Please pay, Mario Delos Santos, or order, P10,000.00 five (5) days after sight, and reimburse
said amount from my savings account with PSBank account number 01-092837-99.
(sgd)
Jose Santos
An order drawn by the X company directing payment of a
certain sum, on account of contract between you (the drawee)
and the X Company held negotiable, the words on account of
not having the same effect as out of the proceeds of. (Brannan,
page 6, citing First Nat. Bank v. Lightner, 74 Kans. 736, 88 Pac.
59, 8 L.R.A. (N.S.) 231, 118 Am. St. Rep. 353)
An order to pay on or before a fixed day and charge the same
to the $1,800 payment, is not conditional. (Ibid, citing Shepard v.
Abbott, 179 Mass. 300, 60 N.E. 782)
A bill of exchange is not made non-negotiable because it
contains the words charge to my account and credit according to
a registered letter I have addressed to you. These words do not
mean according to the conditions mentioned in the letter, but
58
merely charge my account and credit according to the letter. (Ibid,
citing In re Boyse, 33 Ch. Div. 612)
A statement of the transaction which gives rise to the
instrument
Though an instrument may contain the reason for the issuance
thereof, it does not in any way impose a condition upon the
payment of the instrument.

W hat is important is that the
statement of transactions must not be made as the condition for
payment of the instrument.
Example:
As payment for the 10 crates of apple, I promise to pay Mario Santos, or his order, Php
100,000.00 five (5) days after sight.
(sgd)
Maria Delos Santos
Note that in the example above, the statement of the
transaction which gave rise to the instrument did not render the
instrument conditional, thus, the same is negotiable.
However, if in the same example, the 10 crates of apple were
not delivered to Maria, but she had already parted with her
promissory note, will that make the instrument non-negotiable?
The answer is no, it should be remembered that an instrument
is negotiable the moment it complies with Section 1 of the
negotiable instruments law. However, if the question pertains to
Marias liability on the promissory note, then we have a different
answer, which will be later on discussed in the succeeding pages
of this work.
It should be remembered that the existence of a negotiable
instrument differs from the question of who? is liable on the
negotiable instrument. The former merely requires compliance
with Section 1 of the law, while the latter takes into consideration
other aspects of liability, e.g., holder in due course, not a holder in
due course, transfer or negotiation, etc.
What about if the order or promise is to pay out of a
particular fund, is it still unconditional?
No. An order or promise to pay out of a particular fund is not
unconditional. (Sec. 3, Negotiable Instruments Law) It is
59
conditional because from the phrase itself, pay out of a particular
fund, makes the payment of the instrument dependent upon the
available funds on the account, thus, the same is conditional,
therefore, non-negotiable. It is of no moment if there are indeed
actual available funds on the account, what matters is what is the
implication of the written words on the face of the paper.
Treasury warrants, which, by their nature are payable out of
particular funds which are the subject of appropriations for which
these treasury warrants were issued are non-negotiable, simply
because the repayment of which is dependent upon the
availability of a particular fund.
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.
Notes:
What constitutes a determinable future time?
An instrument to be negotiable must be made either payable
on a fixed date or at a determinable future time, the latter phrase
means a period of time which could be determined with reference
to another particular time, or event which is certain to happen
though the time of happening is uncertain.
Fixed period after date or sight
This refers to a fixed or definite time after seeing, or accepting
the instrument, or on the date specified on the instrument.
Example:
Ten days after sight; or
Ten days after date of the instrument
60
On or before a fixed or determinable future time specified
therein
This provision is self-explanatory.
Example:
Pay bearer P1,000.00 on or before January 9, 2012
Pay bearer P1,000.00 on or before Christmas day of 2012
If the instrument is made payable upon a contingency, is it
negotiable? What if the contingency occurred?
An instrument payable upon a contingency is not negotiable,
and the happening of the event does not cure the defect. (Sec. 4,
Negotiable Instruments Law)
What is a contingency?
Contingency refers to future uncertain events, or past events
unknown to parties, or circumstances which may or may not
happen.
Example:
I promise to pay bearer, or order, P1,000.00 after passing the
bar exams.
Pay bearer, P500.00

December 25, 2011.
to
buy umbrella
when
it
rains
on
Notes, payable at a certain time, but secured by a mortgage
executed as part of the same transaction, and reciting that the
whole debt shall be due in case of sale or removal of the property
by the mortgagor without the consent of the mortgagee, or in case
the mortgagee deems himself insecure, are uncertain as to time
and amount of payment and are therefore not negotiable.
(Brannan, page 8, citing Iowa Nat. Bank v. Carter (Iowa), 123
N.W. 237, S.C. secs. 25, 26)
Reason for the rule
As a substitute for money, payment of the negotiable
instrument must never be subject to any uncertainties, or
contingency, to do so would create a situation where the holder of
61
the instrument could not enforce payment on the person primarily
liable by reason of the event or contingency upon which an
obligation to pay would arise never occurred.

This, entirely
defeats the purpose for the creation of the negotiable instrument.
2011 Bar Question:
A promissory note states, on its face: I, X, promise to pay Y
the amount of Php 5,000.00 five days after completion of the
on-going construction of my house. Signed, X. Is the note
negotiable?
A. Yes, since it is payable at a fixed period after the
occurrence of a specified event.
B. No, since it is payable at a fixed period after the occurrence
of an event which may not happen.
C. Yes, since it is payable at a fixed period or determinable
future time.
D. No, since it should be payable at a fixed period before the
occurrence of a specified event.
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.
Notes:
If an act is imposed in addition to the order or promise to pay
a sum certain in money, is the instrument still negotiable?
62
No. An instrument which contains an order or promise to do
any act in addition to the payment of money is not negotiable.
(Sec. 5, Negotiable Instruments Law )
This would impose additional burden to the person primarily
liable on the instrument.
2011 Bar Question:
B borrowed Php1 million from L and offered to him his BMW
car worth Php1 Million as collateral. B then executed a
promissory note that reads: I, B, promise to pay L or bearer
the amount of Php1 Million and to keep my BMW car (loan
collateral) free from any other encumbrance. Signed, B. Is
this note negotiable?
A. Yes, since it is payable to bearer.
B. Yes, since it contains an unconditional promise to pay a
sum certain in money.
C. No, since the promise to just pay a sum of money is
unclear.
D. No, since it contains a promise to do an act in addition to
the payment of money.
2002 Bar Question:
Which
of
the
following
stipulations
or
features
of
promissory note (PN) affect or do not affect its negotiability,
assuming that the PN is otherwise negotiable? Indicate your
answer by writing the paragraph number of the stipulation or
feature of the PN as shown below and your corresponding
answer, either Affected or Not affected. Explain. (5%)
(1) The date of the PN is February 30, 2002.
(2) The PN bears interest payable on the last day of each
calendar quarter at a rate equal to five percent (5%) above
the then prevailing 91-day Treasury Bill rate as published at
the beginning of such calendar quarter.
(3) The PN gives the maker the option to make payment
either in money or in quantity of palay of equivalent value.
63
(4)
The PN gives the holder the option either to require
payment in money or to require the maker to serve as the
bodyguard or escort of the holder for 30 days.
ANSWER:
(1) Not affected; Sec. 12, Negotiable Instruments Law, 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. Thus, date is not essential for its negotiability.
(2) Not affected; Sec. 2, Act 2031, the sum payable payable is
a sum certain within the meaning of this Act, although it is to be
paid with installments, or with exchange, whether at a fixed rate or
at the current rate.
(3)
Affected; it makes the payment of the instrument
conditional by giving the maker an option to pay in money or other
palay.
(4)
Not Affected; Sec. 5 (d), Act 2031, the negotiable
character of an instrument otherwise negotiable is not affected by
a provision which gives the holder an election to require
something to be done in lieu of payment of money.
What may be some provisions added to the instrument which
would not affect its negotiability?
The negotiable character of an instrument

negotiable is not affected by a provision which:
otherwise
a.
Authorizes the sale of collateral securities in case the
instrument is not paid at maturity; or
b.
Authorizes a confession of judgment if the instrument be
not paid at maturity; or
c.
W aives 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.
Authorization of sale of collateral securities in case the
instrument be not paid at maturity
A note, reciting that the title to property for which it is given
shall remain in the payee, and that he shall have the right to
64
declare the money due and take possession of the property
whenever he may deem himself insecure, even before the
maturity of the note, is not negotiable. (Brannan, page 9, citing
Kimpton v. Studebaker Bros. Co., 14 Idaho, 552, 94 Pac. 1039,
125 Am. St. Rep. 185)
Warrants of Attorney to Confess Judgment
In the case of Philippine National Bank vs. Manila Oil
125
Refining & By-Products Company, Inc.
the written instrument
read as follows:
RENEWAL.
P61,000.00
MANILA, P.I., May 8, 1920.
On demand after date we promise to pay to the order of the Philippine National Bank sixty-one
thousand only pesos at Philippine National Bank, Manila, P.I.
Without defalcation, value received; and to hereby authorize any attorney in the Philippine Islands,
in case this note be not paid at maturity, to appear in my name and confess judgment for the above
sum with interest, cost of suit and attorney's fees of ten (10) per cent 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. Value received. No. ____ Due ____
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) VICENTE SOTELO,
Manager.
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) RAFAEL LOPEZ,
Treasurer
The question raised in reference to the aforementioned
Promissory Note concerns the validity of one of its provisions
whereby in case the same is not paid at maturity, the maker
authorizes any attorney to appear and confess judgment thereon
for the principal amount, with interest, costs, and attorneys fees,
and waives all errors, rights to inquisition, and appeal, and all
property exceptions.
125 G.R. No. L-18103, June 8, 1922, [Malcom, J.:].
65
The attorney for the appellee contends that the Negotiable
Instruments Law (Act No 2031) expressly recognizes judgment
notes, and that they are enforcible under the regular procedure.
The Negotiable Instruments Law, in Section 5, provides that The
negotiable character of an instrument otherwise negotiable is not
affected by a provision which. . . (b) Authorizes a confession of
judgment if the instrument be not paid at maturity. W e do not
believe, however, that his provision of law can be taken to
sanction judgments by confession, because it is a portion of a
uniform law which merely provides that, in jurisdiction where
judgment notes are recognized, such clauses shall not affect the
negotiable character of the instrument.

Moreover, the same
section of the Negotiable Instruments Law concludes with these
words. But nothing in this section shall validate any provision or
otherwise illegal.
Judgments by confession as appeared at common law were
considered an amicable, easy, and cheap way to settle and
secure debts. They are a quick remedy and serve to save the
courts time. They also save the 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, there 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 of fraud, because under these instruments
the promissory 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 a 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 court
involuntary parties thereto.
W e are of the opinion that warrants of attorney to confess
judgment are not authorized nor contemplated by our law. W e
are further of the opinion 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. (supra)
66
In the Memoranda of Amici Curiae in the case of PNB,
Professor Jose A. Espiritu, of the University of the Philippines,
states:
1.
Confession of judgment has been defined as a voluntary
submission to the jurisdiction of the court, giving consent and
without the service of process, what could otherwise be
obtained by summons and complaint, and other formal
proceedings, an acknowledgment of indebtedness, upon which
it is contemplated that a judgment may and will be rendered.
(8 Cyc., pp. 563, 564)
2.
As to the general effects of confession of judgment, the
following statements may be mentioned: A warrant to confess
judgment does not destroy the negotiability of the note. Such
a note is commonly called a judgment note. Decisions to the
contrary in the Stated where the Negotiable Instruments Law is
now in force are abrogated thereby, since it expressly provides
that the negotiable character of an instrument otherwise
negotiable is not affected by a provision which authorizes a
confession of judgment, if the instrument is not paid at
maturity. However, this statutory provision does not apply to
stipulations for the confession of judgment prior to maturity.
(8 C.J., p. 128, sec. 222)
3.
Nature of Requisites. A judgment may be rendered upon
the confession of defendant, either in an action regularly
commenced against him by the issuance and service of
process, in which case the confession may be made by his
attorney of record, or, without the institution of a suit, upon a
confession by defendant in person or by his attorney in fact. It
implies something more than a mere admission of a debt to
plaintiff, in addition, it is defendants consent that a judgment
shall be entered against him .. (23 cyc., 699)
4.
Statutory Provisions, Statutes regulating the confession of
judgments without action, or otherwise than according to the
course of the common law, are strictly construed, and a strict
compliance with their provisions must be shown in order to
sustain the validity of the judgment. (Chapin vs. Tompson, 20
Cla., 681) And this applies also to statutory restriction upon
the right to confess judgment, as that authority to confess
judgment shall not be given in the same instrument which
contains the promise or obligation to pay the debt, or that such
confession shall not be authorized by any instrument executed
prior to suit brought. (23 Cyc., 699, 700)
67
5.
W arrant or Power of Attorney Validity and Necessity. A
judgment by confession may be entered upon a written
authority, called a warrant or letter of attorney, by which the
debtor empowers an attorney to enter an appearance for him,
waive process, and confess judgment against him for a
designated sum, except where this method of proceeding is
prohibited by statute. The warrant as the basis of judgment is
generally required to be placed on file in the clerks office, and
no judgment can be so entered until it is so filed. (23 Cyc.,
703)
6.
Requisites and Sufficiency. A warrant or power of attorney
to confess judgment should be in writing and should conform
to the requirements of the statute in force at the time of its
execution, although in the absence of specific authority
directions it is sufficient, without much regard to its form, if it
contains the essential of a good power and clearly states its
purpose. It must be signed by the person against whom the
judgment is to be entered .. (23 Cyc., 704)
Illegal provisions or stipulations
Nothing in this section (Sec. 5) 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.
68
Notes:
This provision thus rejects the possible view that such
omissions cause an instrument to be incomplete and therefore
126
non negotiable.
These Omissions does not in any way affect
the validity and negotiable character of an instrument so long as
the same adheres with the requirements of Sec. 1.
Undated instrument
Negotiability of an instrument is not affected by an omission of
the date. Sec. 7 (b) of the N.I.L. provides that where no time for
payment is expressed on the face of the instrument, the same
shall be presumed to be payable on demand.
Also, Sec. 11, makes a presumption on instrument dates,
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.
Moreover, Sec. 12, N.I.L. also recognizes that an instrument is
not invalid by reason only that it is post-dated or ante-dated, so
long as it is not done for an illegal or fraudulent purpose.
Subsequently, Sec. 13 thereof also declares that a proper date
may be inserted on an undated instrument.
Thus, date is not an essential requirement for the validity or
negotiability of a Bill or Note.
No mention of the value given in exchange of the Bill of Note
The validity and negotiability of a Bill or Note is not affected by
the mere fact that the instrument does not specify the value given,
127
or that any value had been given therefor.
This is because the
law presumes that 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
128
thereto for value.
Designation of a particular kind of current money in which
payment is made
126 Business Law, Second Edition, Rate A. Howell, 1981, p. 425
127 Sec. 6 (b), N.I.L.
128 Sec. 24, N.I.L.
69
Note that the law makes mention of a current money, referring
to a particular currency.
Thus, [a] check payable in current
funds is not payable in money and is not negotiable. (Brannan,
page 9, citing Dille v. White, 132 Iowa, 327, 109 N.W. 909, 10
L.R.A. (N.S.) 510, following former Iowa cases, but not citing the
N.I.L. S.C. sec. 65, emphasis supplied)
Payment in current money is different from current funds, in as
much as the latter implies that payment of the instrument is
premised upon the availability of the current fund, eventually
making it conditional.
2012 Bar Question:
X issued a promissory note which states "I promise to pay Y
or bearer the amount of HK$50,000 on or before December
30, 2013." Is the promissory note negotiable?
a.
No, the promissory note becomes invalid because the
amount is in foreign currency.
b.
Yes, the promissory note is negotiable even though the
amount is stated in foreign currency.
c.
No, the promissory note is not negotiable because the
amount is in foreign currency.
d.
Yes, the promissory note is negotiable because the Hong
Kong dollar is a known foreign currency in the Philippines.
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
indorsing it, payable on demand.
Notes:
When note is expressed to be payable on demand
A note payable on demand after date is a demand note, and
presentment need not be made the day after date, but only within
a reasonable time to hold an indorser. (Brannan, page 11, citing
Hardon v. Dixon, 77 App. Div. 241, 78 N.Y.S. 106), holding that
70
the Statute of Limitations did not begin to run on such a note until
the day after its date, said to have no application. (Ibid, citing
Schlesinger v. Schultz, 110 App. Div. 356, 96 N.Y.S. 383, S.C.
secs. 71, 73)
What would be the effect if the instrument is dated and was
issued, accepted, or indorsed when already overdue?
W here an instrument is issued, accepted, or indorsed when
indorsing it, payable in demand. (Sec. 7, Negotiable Instruments
Law)
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 with reasonable certainty.
Notes:
Pay to ---- order means pay to my order, and a bill so
reading and indorsed by the drawer is a valid bill of exchange.
(Brannan, page 12, citing Chamberlain v. Youn [1893], 2 Q.B.
206)
An order means any form of words implying a right on the part
of the drawer to command, and a corresponding duty on the part
129
of the drawee to make, the payment specified.
71
The order to pay must be distinguished from a mere request to
pay
Prof. Norton said: [o]ur purpose here is to illustrate the
difference between a mandatory form of words directing payment
and a mere request.
The theory of a bill of exchange is that
the drawer has funds in the hands of the drawee, which he
orders or directs to be delivered or paid over to the payee or
indorsee of the bill. Hence, where the instrument is so written
as to show that the drawee has or attempts to exercise no right to
order the money paid, it is not a bill of exchange. To determine
whether or not the instrument is so written is, of course, a
question purely of the construction of the instrument.

Parol
evidence cannot be admitted, since, if the bill is to operate as
money, the instrument must be pronounced to be a bill or not
according to its face. The point to be determined is whether the
terms of the instrument, on the one hand, leave compliance or
refusal optional, or, on the other hand, amount to an imperative
direction. In the former case it is a mere request; in the latter it is
a demand, with which the drawee must in common honesty
comply, and amount to the order which is a necessary constituent
of a bill of exchange.
130
(emphasis supplied)
The
payee
must
be
indicated
therein
with
reasonable
certainty
In the case of Equitable Banking Corporation vs. Intermediate
131
Appellate Court
, the subject check reads:
Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE ENTERPRISES,
INC.
The said check was declared by the Supreme Court to be
equivocal and patently ambiguous. x x x the payee ceased to be
indicated with reasonable certainty in contravention of Section 8 of
132
the Negotiable Instruments Law.
As worded, it could be
accepted as deposit to the account of the party named after the
symbols A/C or payable to the Bank as trustee, or as an agent,
for Casville Enterprises, Inc., with the latter being the ultimate
beneficiary.
Sec. 9. When payable to bearer. - The instrument is payable
to bearer:
130 Id., footnotes omitted.
131 G.R. No. 74451, May 25, 1988
132 Section 8, Negotiable Instruments Law
72
(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 nonexisting 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.
Notes:
When the payee of the check is not intended to be the true
recipient of its proceeds
As a rule, when the payee is fictitious or not intended to be
the true recipient of the proceeds, the check is considered as a
BEARER instrument.
The distinction between bearer and order instruments lies in
their manner of negotiation. Under Section 30 of the NIL, an
order instrument requires an indorsement from the payee or
holder before it may be validly negotiated. A bearer instrument,
on the other hand, does not require an indorsement to be validly
negotiated. It is negotiable by delivery. (Philippine National Bank
vs. Erlando T. Rodriguez and Norma Rodriguez, G.R. No.
170325, September 26, 2008, Reyes, R.T., J.])
When instrument is payable to the order of a fictitious or nonexisting person
A check that is payable to a specified payee is an order
instrument. However, under Section 9 (c) of the NIL, a check
payable to a specified payee may nevertheless be considered as
a bearer instrument if it is payable to the order of a fictitious or
non-existing person, and such fact is known to the person making
it so payable. Thus, checks issued to Prinsipe Abante or Si
Malakas at si Maganda, who are well-known characters in
Philippine mythology, are bearer instruments because the named
73
payees are fictitious and non-existent. (Philippine National Bank
vs. Erlando T. Rodriguez and Norma Rodriguez, supra)
Term Fictitious as used under Section 9 (c)
W e have yet to discuss a broader meaning of the item
fictitious as used in the NIL. It is for this reason that we look
somewhere for guidance. Court rulings in the United States are a
logical starting point since our law on negotiable instruments was
directly lifted from the Uniform Negotiable Instruments Law of the
133
United States.
A review of the US jurisprudence yields that an actual existing
and living payee may also be fictitious if the maker of the check
did not intent for the payee to receive the proceeds of the check.
This usually occurs when the maker places a name of an existing
payee on the check for convenience or to cover up an illegal
134
activity.
Thus, a check made expressly payable to a nonfictitious and existing person is not necessarily an order
instrument.
If the payee is not the intended recipient of the
proceeds of the check, the payee is considered a fictitious payee
and the check is a bearer instrument. (Philippine National Bank
vs. Erlando T. Rodriguez and Norma Rodriguez, supra)
FICTITIOUS-PAYEE RULE; Who is liable under it; exceptions.
W hen a person making the check so payable did not intent for
the specified payee to have any part in the transaction, the payee
is considered as fictitious payee. (Mueller & Martin vs. Liberty
Insurance Bank). Fictitious-payee rule extends protection even to
non-bank transferee of the checks. (Getty Petroleum Corp. vs.
American Express Travel Related Services Company, Inc, 90 NY
2d 322 (1997), citing the Uniform Commercial Code, Sec. 3-405)
In a fictitious-payee situation, the drawee bank is absolved
from liability and the drawer bears the loss. W hen faced with a
check payable to a fictitious payee, it is treated as a bearer
instrument that can be negotiated by delivery. The underlying
theory is that one cannot expect a fictitious payee to negotiate the
check by placing his indorsement thereon. And since the maker
knew this limitation, he must have intended for the instrument to
be negotiated by mere delivery. Thus, in case of controversy, the
drawer of the check will bear the loss. This rule is justified for
otherwise, it will be most convenient for the maker who desires to
133 Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected Cases on Negotiable Instruments Law (1994),
5th ed, pp.8-9
134 Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City Bank & Trust Co., 294 F.839 (1923); United
States v. Chase Nat. Bank, 250 F. 105 (1918)
74
escape payment of the check to always deny the validity of the
indrosement. This despite the fact that the fictitious payee was
purposely named without any intention that the payee should
135
receive the proceeds of the check.
(Philippine National Bank vs.
Erlando T. Rodriguez and Norma Rodriguez, supra)
The rule protects the depositary bank and assigns the loss to
the drawer of the check who was in a better position to prevent
the loss in the first place. (Getty Petroleum Corp. vs. American
Express Travel Related Services Company, Inc.)
However, there is a commercial bad faith exception to the
fictitious-payee rule. A showing of commercial bad faith on the
part of the drawee bank, or any transferee of the check for that
matter, will work to strip it of its defense. The exception will cause
it to bear the loss.

Commercial bad faith is present if the
transferee of the checks acts dishonestly, and is a party to the
fraudulent scheme. (Philippine National Bank vs. Erlando T.
Rodriguez, et al, G.R. No. 170325, September 26, 2008 [Reyes,
R.T., J.])
The payee in an order instrument was not properly identified
with reasonable certainty
W here the instrument is payable to order, the payee must be
named or otherwise indicated therein with reasonable certainty,
otherwise, it would be considered as a bearer instrument.
Check made payable to cash, deemed payable to bearer
Under the Negotiable Instruments Law, this type of check was
payable to tge bearer and could be negotiated by mere delivery
136
without the need of an indorsement.
(People v. Wagas, G.R.
No. 157943, Sept. 4, 2013, [Bersamin, J.:])
Knowledge of the drawer of the fictitious and non-existing
character of the payee controls
135 Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465 (1920)
136
See, Sec. 9 and Sec. 30, Negotiable Instruments Law
75
A requested a bank to draw a draft to the order of C Bros., an
existing firm who were ignorant of the transaction. A indorsed the
draft in the name of C Bros., and the indorsee collected it from the
drawee. Held, that the knowledge of the drawer of the fictitious or
non-existing character of the payee controls, not the knowledge of
the person at whose request the draft is drawn. That the draft
was not payable to bearer and that the drawee could recover the
money from the indorsee. (Brannan, pages 13-14, citing,
Seaboard Nat. Bank v. Bank of America, 193 N.Y. 26, 85 N.E.
829; Jordan Marsh Co. v. Nat. Shawmut Bank, 201 Mass. 397, 87
N.E. 740 accord, italics supplied)
Illustrative cases:
A clerk had a power of attorney to draw checks on his
employers bank account. The clerk fraudulently drew checks to
X, an existing person, but who had no interest in the checks and
was not intended by the clerk to receive them. The clerk indorsed
the name of X and negotiated the checks for his own purposes,
and the drawee bank paid them in good faith. Held, that the
payee was a fictitious person within the section, that the checks
were payable to bearer and that the payment by the bank was
rightful. (Brannan, page 14, citing Snyder v. Corn Exch. Nat.
Bank, 221 Pa. 599, 70 Atl. 876, S.C. sec. 124)
The name of the drawer was forged to checks made payable
to real persons. It did not appear who the forger was, but he
knew that the payees would never have any interest in the
checks. The drawee bank paid the checks to defendant, a holder
in due course, on the forged indorsement of the payee. Held, that
the payees were fictitious, that the checks were payable to bearer,
and that the drawer could not recover the money from defendant.
(Ibid, citing Trust Company of America v. Hamilton Bank, 127
App. Div. 515, 112 N.Y. Supp. 84)
An instrument knowingly made payable to the order of a
fictitious or non-existing person is negotiable without indorsement,
but to recover upon the instrument as payable to bearer, it must
be shown that the maker had knowledge of the fiction, and if the
plaintiff declares only upon the instrument as payable to order, it is
not necessary to decide whether there is evidence of such
knowledge, as the issue is not open. (Ibid, citing Boles v. Harding,
201 Mass. 103, 87 N.E. 481)
A bill payable to a real person not intended by the drawer to
have any interest in it is payable to a fictitious person, and is to be
treated as payable to bearer, and the acceptors ignorance of the
76
fiction is immaterial. (Ibid, citing Bank of England v. Vagliano
[1891], A.C. 107)
The drawers ignorance that the payee is non-existing is also
immaterial. (Ibid, citing Clutton v. Attenborough [1897], A.C. 9).
But if the payee is a real person intended by the drawer to be the
payee, he is not a fictitious person, and the drawer is not liable to
one claiming under a forged indorsement of the payees name,
although the payee really had no interest in the instrument.
(Brannan, page 15, citing Bank of England v. Vagliano and
Clutton v. Attenborough, distinguished. Vinden v. Huges [1905], 1
K.B. 795; North & South Wales Bank v. Macbeth [1908], App.
Cas. 137)
When the only or last indorsement is an indorsement in
blank
A promissory note indorsed in blank by the payee is payable to
bearer. (Brannan, page 16, citing Mass. Nat. Bank v. Snow, 187
Mass. 159, 72 N.E. 959, S.C. secs. 16, 56, 124, 191; Unaka Nat.
Bank v. Butler, 113 Tenn. 574, 83 S.W. 655 (a check), S.C. sec.
56)
The indorsement in blank of a non-negotiable promissory note
does not make it negotiable, and the indorser is liable only as an
assignor. (Ibid, citing Wettlaufer v. Baxter (Ky.), 125 S.W. 741)
2012 Bar Question:
Which phrase best completes the statement -- A check
which is payable to bearer is a bearer instrument and:
a.
b.
c.
d.
negotiation
negotiation
negotiation
negotiation
can be made by delivery only;
must be by written indorsement;
must be by specific indorsement;
must be by indorsement and delivery.
X delivered a check issued by him and payable to the
order of CASH to Y in payment for certain obligations
incurred by X in favor of Y. Y then delivered the check to Z in
payment for certain obligations. Which statement is most
accurate?
a.
Z can encash the check even though Y did not indorse
the check.
77
b.
Z cannot encash the check for lacking in proper
endorsement.
c.
Y is the only one liable because he was the one who
delivered the check to Z.
d.
The negotiation is not valid because the check is an
instrument payable to order.
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.
Notes:
Substantial compliance with the requirements of negotiability
The law does not require that the Bill or Note have to literally
follow the language of the Negotiable Instruments Law, it is
enough that looking at the face of the instrument, substantial
compliance from Sec. 1 of the said law can be inferred.
Illustrative case:
A certificate of deposit reciting that X has deposited in the Y
bank three thousand dollars to the credit of himself, payable in
current funds on return to this certificate properly indorsed on July
1, 1909 is a negotiable instrument under the N.I.L. ( Brannan,
page 16, citing, Forest v. Safety Banking & Trust Co. (E.D. Pa.),
174 Fed. 345)
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.
Notes:
A Date in a bill or note is not essential to its validity
The date of an instrument is not necessary to it in law, that its
absence avoids the instrument.

It is not an essential
characteristic of the instrument, as other qualities are
characteristic of the instrument or of its negotiability. For this
reason the date may be supplied by parol, the date of delivery
being the day of date; or it may be antedated or postdated, or, if
the date be left blank, all parties are deemed to consent that the
holder may fill up the blank with a date. Legally speaking, the
78
chief importance of a date is that it is presumptive evidence of the
time of its actual execution, a presumption, however, which may
137
be contradicted by parol evidence.
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.
Notes:
An indorsee of a post-dated check is not put upon inquiry
merely because of its negotiation prior to its date. (Brannan, page
17, citing Albert v. Hoffman, 64 Misc. Rep. 87; 117 N.Y. Supp.
1043, S.C. sec. 25)
A post-dated check is not invalid, any may be properly
stamped as a bill payable on demand. (Ibid, citing, Royal Bank v.
Tottenham, [1894] 2 Q.B. 715; Hitchcock v. Edwards, 60 L.T.
Rep. 636)
A post-dated check is not irregular x x x so as to charge the
holder with equities. (Ibid)
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.
Notes:
If the instrument is issued undated, is it a negotiable
instrument?
Yes.
137 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 72, footnotes ommitted
79
W here
a.
an instrument expressed to be payable at a fixed date is
issued undated or
b.
where the acceptance of an instrument payable at a fixed
period after sight is undated
Then any holder may insert therein the true date of issue
or acceptance, and the instrument shall be paid
accordingly. (Sec. 13, Negotiable Instruments Law )
The validity and negotiable character of an instrument is
not affected by the fact that it is not dated. (Sec. 5,
What if a wrong date was inserted by the holder?
The insertion of a wrong date does not avoid the instrument in
the hands of a subsequent holder in due course but it is as to him,
the date so inserted is to be regarded as the true date. (Sec. 13,
Illustrative case:
An undated note, payable four months after date, was
delivered to the payee by an accommodation indorser on
st
December 1
. The payee, without authority, filled in the date
th
December 30
. Held, that in the absence of other authority the
payee could only fill in the blank with the date of issue and that the
indorser was discharged. (Brannan, page 17, citing Bank of
Houston v. Day, (Mo. App.), 122 S.W. 756)
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.
80
Notes:
What happens when there are blanks on the instrument?
W hen there are blanks on the instrument, so long as they are
material to the completion of the instrument, it may be filled up by
the person in possession thereof.
Illustrative case:
Defendant signed a note in blank on the statement that it was
to be used to borrow money for a co-defendant who was jointly
liable with the plaintiff to a bank. The note was filled up in the
presence of plaintiffs, who were made payees, and delivered
them, and they paid the co-defendants share of the debt to the
bank. Held, that the note was filled up in accordance with the
authority given, that the payees were holders for value and could
recover on the note. (Brannan, page 19, citing Hermanns Exr. v.
Gregory (Ky.), 115 S.W. 809, S.C.sec. 25)
General Rule:
W hen there are blanks on the instrument,
consisting of material particulars, the person in possession
thereof has a prima facie authority to fill it up. Provided, that he
fills it up strictly in accordance with the authority given and within a
reasonable time.
W e have here an instance, where a paper, which has yet to
comply with Sec. 1, there being wanting of any material particular,
may be filled up by the person in possession thereof. But in order
to bind any person who became a party to the instrument prior to
its completion, such blanks must be filled up strictly in accordance
with the authority given to the person in possession thereof.
However, if the instrument, after completion, regardless of
whether or not he complied with the authority given him, is
negotiated to a holder in due course, it is valid and effectual for all
purposes in his hands, irrespective of how the blank was filled up,
as the law gives a presumption that it had been filled up strictly in
accordance with the authority given and within a reasonable time.
W hat if the instrument which was irregularly filled up was
negotiated to a person not a holder in due course? W ill the
answer be the same?
No. The answer will not be the same. If it was negotiated to a
person not a holder in due course, he cannot enforce the
81
instrument, as it was not filled up strictly in accordance with the
authority given and within a reasonable time.
How must the blanks to the instrument be filled up?
They must be filled up:
a)
Strictly in accordance with the authority give; AND
Ex. If the authority was for the payment of bills due and
it was filled up strictly for that purpose.
b) W ithin a reasonable time.
Ex. In the above example, it was filled up almost
immediately thereafter the knowledge of the bills due.
Materiality of the blanks to the completion of the instrument
The word material in this section is not synonymous with
necessary so as to restrict the right of filling a blank to
something essential to a complete negotiable instrument.
Therefore the name of a place may be written after delivery in a
blank space after the word at and the instrument will not be
thereby avoided in the hands of a holder in due course. (Brannan,
page 18, citing Johnston v. Hoover, 139 Iowa, 143; 117 N.W. 277)
W here the maker of a note signed and delivered it, leaving a
blank after the amount between the words at and value
received, the payee or any subsequent holder was authorized to
fill the blank with a place of payment either without or without the
State, and such act was not an alteration avoiding the note. (Ibid,
citing Diamon Distilleries Co. v. Gott (Ky.), 126 S.W. 131)
Presumption of authority to sign
Hence, the law merely requires that the instrument be in the
possession of a person other than the drawer or maker. From
such possession, together with the fact that the instrument is
wanting in a material particular, the law presumes agency to fill up
138
the blanks.
Because of this, the burden of proving want of
authority or that the authority granted was exceeded, is placed on
139
the person questioning such authority.
(John Dy vs. People of
the Philippines, et al, G.R. No. 158312, November 14, 2008,
[Quisumbing, Acting C.J.])
138 I.A.F. Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 168 (1987 ed)
139 J.C. Campos, Jr. and M.C. Lopez-Campos, Notes and Selected Cases on Negotiable Instruments Law, 351 (3rd
ed., 1971)
82
Suppose a person signed a blank instrument and delivered it
to the payee, would the holder still have the authority to
convert it into a negotiable instrument?
Yes. 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. (Sec. 14, Negotiable Instruments
Law)
Burden to prove authority
The burden is on the plaintiff, a party prior to the completion of
an instrument signed in blank, to prove that the blanks were filled
up within a reasonable time. From October to the following June
9 is, if unexplained, more than a reasonable time. ( Brannan, page
19, citing Madden v. Gaston, 121 N.Y. Supp. 951, semble, S.C.
sec. 16)
1997 Bar Question:
A, single proprietor of a business concern, is about to leave
for a business trip and, as he so often does on these
occasions, signs several checks in blank. He instructs B, his
secretary, to safekeep the checks and fill them out when and
as required to pay accounts during his absence. B fills out
one of the checks by placing her name as payee, fills in the
amount, endorses and delivers the check to C who accepts it
in good faith as payment for goods sold to B. B regrets her
action and tells A what she did. A directs the Bank in time to
dishonor the check.
When C encashes the check, it is
dishonored.
Can A be held liable to C?
Yes, A can be held liable to C. In the instant case, C is a

In Section 14 of the NIL, when an
instrument which is wanting in any material particulars is delivered
and subsequently reaches the hands of 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
Sec. 15. Incomplete instrument not delivered. - Where an
incomplete instrument has not been delivered, it will not, if
83
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.
Notes:
Incomplete and undelivered instruments
A class of cases, illustrative of want of consent, arises when in
an incomplete instrument has been signed and stolen, without any
delivery to an agent in trust, or otherwise, intervening. In such
cases no trust for any purpose has been created. No instrument
has been perfected. No appearance of validity has been given it.
No negligence can be imputed. Therefore if the blank be filled, it
is sheer forgery, in which the maker is in nowise involved, and he
is not therefore bound, even to a bona fide holder without
140
notice.
What
is
required
in
order
that
the
completed
blank
instrument may be enforceable against any person?
In order 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
What if the above-indicated instrument was negotiated to a
holder in due course?
If 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.
What is the rule in incomplete and undelivered instruments?
W here 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. 15,
Does Section 15 include a holder in due course?
140 1 Parsons on Notes and Bills, 114; Daniel on Negotiable Instruments, 839
84
Yes. There was no intention of the part of the person whose
signature was placed before delivery to make or draw a
negotiable instrument, thus, it will not be binding upon him.
What if the instrument is later on completed, but not
delivered?
W hile it cannot be said that the authorities are uniform, it may
be stated to be safely settled that if a negotiable instrument has
been fully completed in form and signed by the drawer or maker,
and, before delivery, is stolen from the possession of the party
who has signed it, and passed by the thief to a bona fide holder
for value in the usual course of business, it would afford him no
defense against such bona fide holder. W hether the instrument
be payable to bearer, or to the order of the thief, if it be indorsed
by him, we can see no reason why the bona fide holder should not
be entitled to recover.
The want of delivery is a defect not
apparent on the face of the bill or note. The party has given the
appearance of validity to his paper. His signature is itself an
assurance that his obligation has been perfected by delivery; and
it being necessary that the loss should fall upon one of two
innocent parties, it should fall upon the one whose act had opened
141
the door for it to enter.
W here the maker has perfected the instrument, and left it
undelivered in a safe, desk, or other receptacle, it should then be
at his hazard.
Such papers are made for use, and not for
preservation. The maker creates the risk of their being eloigned
by keeping them on hand, and places them on the same basis as
negotiable papers which have been put upon the market. W hen
once issued the purchaser is protected and the owner loses, even
though he had guarded his property with bolt and bar; and if
bankers and others who must necessarily be in possession of
negotiable securities in the course of trade are not protected, we
can discover no principle which can be invoked to protect one
who holds his own paper contrary to the ordinary wants and
142
usages of trade.
(Ibid)
Illustrative Case:
Bank of America NT & SA vs. Philippine Racing Club
G.R. No. 150228, July 30, 2009
141 Daniel on Negotiable Instruments, 837; Kinyon v. Wohlford, 17 Minn. 239
142 Thompson on Bills (Wilsons ed.), 92; 1 Parsons on Notes and Bills, 114
85
LEONARDO-DE CASTRO, J.:
FACTS:
Philippine Racing Club Inc. (PRCI) maintained a
Current Account with Bank of America.

The
authorized joint signatories with respect to said
account were the President (Antonia Reyes) and
Vice-President for Finance (Gregorio Reyes).
nd
On or about the 2
week of December 1988, the
President and Vice President were scheduled to go
out of the country in connection with the
corporations business.
In order not to disrupt
operations in their absence, they pre-signed several
checks relating to said account. The intention was
to insure continuity of the corporations operations by
making available cash/money especially to settle
obligations that might become due. These checks
were entrusted to the accountant with instruction to
make use of the same as the need arose. The
internal arrangement was, in the event there was
need to make use of the checks, the accountant
would prepare the corresponding voucher and
thereafter complete the entries on the pre-signed
checks.
On December 16, 1988, a John Doe presented two
(2) checks to the bank for encashment a couple of
the pre-signed checks worth Php 110,000.00 each.
The two (2) checks had similar entries with similar
infirmities and irregularities.

Despite the highly
irregular entries on the face of the checks, the bank,
without as much as verifying and/or confirming the
legitimacy of the checks considering the substantial
amount involved and the obvious infirmity/defect of
the check on their faces, encashed said checks. A
verification process, even by way of a telephone call
to PRCI office, would have taken less than ten (10)
minutes.
But this was not done by the bank.
Investigation conducted by PRCI yielded the fact that
there was no transaction involving PRCI that call for
the payment of Php 220,000.00 to anyone.

The
checks appeared to have come into the hands of
any employee of PRCI who eventually completed
without authority the entries on the pre-signed
checks. PRCIs demand for the bank to pay fell on
deaf ears. Hence, complaint was filed.
86
ISSUE:
W hether the proximate cause of the wrongful
encashment of the checks in question was due to (a)
petitioners failure to make a verification regarding
the said checks with the respondent in view of the
misplacement of entries on the face of the checks.
RULING:
It is well-settled that banks are engaged in a
business impressed with pubic interest, and it is their
duty to protect in return their many clients and
depositors who transact business with them. They
have the obligation to treat their clients account
meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship.
The diligence required of banks, therefore, is more
143
than of a good father of a family.
In the case at bar, extraordinary diligence demands
that petitioner should have ascertained from the
respondent the authenticity of the subject checks or
the accuracy of the entries therein not only because
of the presence of highly irregular entries on the face
of the checks but also of the decidedly unusual
circumstances surrounding their encashment. x x x
the confluence of the irregularities on the face of the
checks and circumstances that depart from the
usual banking practice of respondent should have
put petitioners employees on guard that the checks
were possibly not issued by the respondent in due
course of its business. Petitioners subtle sophistry
cannot exculpate it from behavior that fell extremely
143 Samsung Construction Company Philippines, Inc. v. Far East Bank and Trust Company, Inc., G.R. No. 129015,
August 13, 2004, 436 SCRA 402, 421
144 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.
145 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 of a 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
87
short of the highest degree of care and diligence
required of it as a banking institution.
In defense of its cashier/tellers questionable action,
144
petitioner insists that pursuant to Sections 14
and
145
16
of the NIL, it could validly presume, upon
presentation of the checks, that the party who filled
up the blanks had authority and that a valid and
intentional delivery to the party presenting the
checks had taken place. Thus, in petitioners view,
the sole blame for this debacle should be shifted to
respondent for having its signatories pre-sign and
146
deliver the subject checks.
Petitioner argues that
there was indeed delivery in this case because,
following
American
jurisprudence,
the
gross
negligence
of
respondents
accountant
in
safekeeping the subject checks which resulted in
their theft should be treated as a voluntary delivery
by the maker who is estopped from claiming non147
delivery of the instrument.
Petitioners contention would have been correct if the
subject checks were correctly and properly filled out
by the thief and presented to the bank in good order.
In that instance, there would be nothing to give
notice to the bank of any infirmity in the title of the
holder of the checks and it could validly presume
that there was proper delivery to the holder. The
bank could not be faulted if it encashed the checks
under
those
circumstances.
However,
the
undisputed facts plainly show that there were
circumstances that should have alerted the bank to
the likelihood that the checks were not properly
144 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.
145 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 of a 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
146 Rollo, p. 304
147 Id. at 306
88
delivered to the person who encashed the same. In
all, we seen no reason to depart from the finding in
the assailed CA Decision that the subject checks are
properly
characterized
as
incomplete
and
148
undelivered instruments this making Section 15
of
the NIL applicable in this case.
2000 Bar Question:
PN makes a promissory note for P5,000.00, but leaves the
name of the payee in blank because he wanted to verify its
correct spelling first.
He mindlessly left the note on top of
his desk at the end of the workday.
When he returned the
following morning, the note was missing. It turned up later
when X presented it to PN for payment.
Before X, T, who
turned out to have fliched the note from PNs office, had
endorsed the note after inserting his own name in the blank
space as the payee.
PN dishonored the note, contending
that he did not authorize its completion and delivery. But X
said he had no participation in, or knowledge about, the
pilferage and alteration of the note and therefore he enjoys
the rights of a holder in due course under the Negotiable
Instruments Law. Who is correct and why? (3%)
PN is correct.
Sec. 15, Act 2031, provides that 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. Therefore PN is correct
when he dishonored the note.
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,
148 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
89
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.
Notes:
Delivery is the final step necessary to perfect the existence of
any written contract; and, therefore, as long as a bill or note
149
remains in the hands of the drawer or maker, it is a nullity.
The inception of a note is defined by Judge Platt to mean
when it was first given, or when it first became the evidence of an
existing contract. It has no legal inception until it is delivered as
evidence of a subsisting debt. The mere writing and signing of a
bill or note, which the drawer or maker retains in his hands, forms
no contract. No person has then a right of action upon it any
more than if it were blank paper. The inception of the paper is
when there came into existence a right of action upon it. This is
because while the note or bill is in the makers hands, it can be
erased, canceled, or revoked.

It cannot, therefore, be an
evidence of indebtedness until it is beyond such possibility. The
150
decisive step for this is the delivery.
So essential is delivery that it has been held that where a
promissory note, the existence of which was unknown to the
grantee, lay in the grantors possession, and was found amongst
151
his papers after death, the payee could not claim or sue upon it;
and though such a note should be found, accompanied with
written directions to deliver it to the payee, the payee will still have
152
no right of action, unless the directions be valid as a testament.
(Ibid)
When can there be Delivery?
Two things must concur in a delivery. The first is the transfer,
actual or constructive, of the possession of the instrument; the
second an intent to transfer the title on the part of the transferrer.
149 Devries v. Shumate, 53 Md. 216; Purviance v. Jones, 120 Ind. 164
150 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 68, citations ommitted
151 Disher v. Disher, 1 P. Wms. 204
152 Gough v. Findon, 7 Exch. 48
90
The minds of both parties, to this extent, must concur.153
On the other hand, such acts as handing completed notes to
the payee, who, though objecting to the form, retained them; or
depositing completed notes, properly addressed, in the post
office; or giving a duplicate bill in place of one lost, which the
payee treated as an original,--have been held to constitute
sufficient deliveries. It is to be noted, however, that the delivery
needs to be to the payee, nor need the intent of the transferrer to
transfer title be communicated to him. For, as will be seen, a bill
or note may be delivered in escrow, and take effect on
performance of the condition, without knowledge or actual assent
of the payee, and a note delivered in a sealed envelope, to be
opened after the makers death, is operative, although the payee
does not become aware of the existence of the note until after the
death occurs. The outward and visible indication of delivery is
154
possession.
Types of Delivery
Delivery may be constructive a well as actual. (Ibid)
There is actual delivery, when it is effected by the manual
155
passing of the instrument itself to the payee or his agent.
There is constructive delivery, when it is effected by direction
to a third person in actual possession of the instrument to deliver
156
it to, or to hold it for, the payee.
Delivery may also be upon conditions.

Deliveries upon
conditions are of two classes: delivery as an escrow, and delivery
to the other party to the instrument upon a condition. Delivery as
an escrow is defined as a delivery to a third person, made to await
the happening of an event, or performance of a condition, or
some affirmative action on the part of the other party, before he is
entitled to the absolute delivery of the instrument, as distinguished
from the affirmative action of the party who delivers the instrument
in escrow. The authorities agree that a delivery in escrow has two
elements: It must be to some person not ultimately entitled to
receive it; and the delivery must take effect and the title to the
instrument pass the instant condition of the escrow is fulfilled,
even though the depositary has not formally delivered it to the
153 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 69, citations ommitted
154 Id., pp. 69-70
155 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 67
156 Id.
91
person entitled to the possession. In these respects it is like the
escrow of a deed, from the analogy of which it is in fact drawn.
There are, however, these distinctions: A deed once delivered
to be held in escrow by a third party, and wrongly passed on by
him, is subject to defenses, even in the hands of a purchaser for
value without notice, but a negotiable instrument is not. A deed
being delivered conditionally to the obligee, parol evidence that it
157
was conditional is admissible.
A delivery upon a condition is where the instrument is
delivered to the payee, to be held by him pending some future
158
event.
A direction to a third person, who is in actual custody of the
instrument, to hold it subject to the payees or transferees order,
or an order to the depositary to deliver it, or a delivery to a third
person for the payee without condition is sufficient in legal
contemplation.
In either of the cases suggested the delivery
159
would be constructive.
Without delivery there can be no valid and binding contract
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument to the payee for the
160
purposes of giving effect thereto.
The first delivery of the
instrument, complete in form, to the payee who takes it as a
161
holder, is called issuance of the instrument.
W ithout the initial
delivery of the instrument from the drawer of the check to the
payee, there can be no valid and binding contract and no liability
on the instrument. (Gempesaw vs. Court of Appeals, G.R. No.
92244, February 9, 1993)
162
This is further explained in People vs. Yabut
, the place
where the bills were written, signed, or dated does not necessarily
fix or determine the place where they were executed. W hat is of
decisive importance is the delivery thereof. The delivery of the
instrument is the final act essential to its consummation as an
obligation.
An undelivered bill or note is inoperative.
Until
delivery, the contract is revocable. And the issuance as well as
the delivery of the check must be to a person who takes it as a
holder, which means (t)he payee or indorsee of a bill or note,
who is in possession of it, or the bearer thereof. Delivery of the
check signifies transfer of possession, whether actual or
157 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 70-71, citations, ommitted
158 Id., p. 71
159 Gordon v. Adams, 127 Ill. 225; Howe v. Ould, 28 Gratt. 7
160 NIL, Sec. 16
161 Ibid., Sec. 191, par. 10 (bold supplied)
162 No. L-42902, 29 April 1977, 76 SCRA 624
92
constructive, from one person to another with intent to transfer
title thereto.
Delivery denotes physical transfer
Significantly, delivery is the final act essential to the
negotiability of an instrument. Delivery denotes physical transfer
of the instrument by the maker or drawer coupled with an intention
163
to convey title to the payee and recognize him as a holder.
It
means more than handing over to another; it imports such
transfer of the instrument to another as to enable the latter to hold
164
it for himself.
(John Dy vs. People of the Philippines, et al, G.R.
No. 158312, November 14, 2008, [Quisumbing, Acting C.J.])
In the case of Development Bank of Rizal vs. Sima Wei, et
165
al,
it was ruled by the High Court that it had had long been
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 drawers 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 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. (emphasis supplied)
Thus, the payee of a negotiable instrument acquires no
166
interest with respect thereto until its delivery to him.
Delivery of
an instrument means transfer of possession, actual or
167
constructive, from one person to another.
W ithout the initial
delivery of the instrument from the drawer to the payee, there can
be no liability on the instrument. Moreover, such delivery must be
intended to give effect to the instrument. (supra)
When does the instrument become effectual between the
parties?
163 De la Victoria vs. Burgos, G.R. No. 111190, June 27, 1995, 245 SCRA 374, 379
164 Lewis County et al. v. State Bank of Peck, 170 Pacific Reporter 98, 100 (1918), citing Bigelow, Bills, Notes and
Checks, 2nd Ed., p. 13
165 G.R. No. 85419, March 9, 1993, [Campos, Jr., J.:]
166 In re Martens Estate, 226 Iowa 162, 283 N.W. 885 (1939); Shriver vs. Danby, 113 A. 612 (1921).
167 Negotiable Instruments Law, Sec. 191, par. 6.
93
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving
effect thereto.
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.
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.
(Dela Victoria vs. Burgos, G.R. No. 111190, June 27, 1995,
[Bellosillo, J.])
A bill of exchange payable to the order of the drawer does not
come into existence until it is delivered as well as indorsed by the
payee. (Brannan, page 19, citing Stouffer v. Curtis, 198 Mass.
560, 85 N.E. 180)
Intention essential
It is essential to delivery that the minds of both parties should
assent, in order to bind them; and if, through inattention, infirmity,
or otherwise, one does not assent, the act of the other is
168
nugatory.
Therefore, leaving a check on the desk of a clerk of a
bank, and without knowledge of such clerk of an officer of the
169
bank, does not constitute delivery.
Delivery must be for purposes of giving effect thereto
Note however that delivery as the term is used in the
aforementioned provision means that the party delivering did so
170
for the purpose of giving effect thereto.
Otherwise, it cannot be
said that there has been delivery of the negotiable instrument.
Once there is delivery, the person to whom the instrument is
delivered gets the title to the instrument completely and
irrevocably. (San Miguel Corporation vs. Puzon, G.R. No. 167567,
September 22, 2010, [Del Castillo, J.:])
Illustrative Case:
San Miguel Corporation vs. Bartolome Puzon, Jr.
G.R. No. 167567, September 22, 2010
169 Chicopee Bank v. Philadelphia Bank, 8 Wall. 641; Kinney v. Ford, 52 Barb. 194
170 Sec. 16 of the Negotiable Instruments Law
94
DEL CASTILLO, J.:
Puzon was a dealer of beer products of San Miguel
Corporation (SMC). He purchased products on credit. To ensure
payment and as a business practice, SMC required him to issue
post-dated checks equivalent to the value of the products
purchased on credit before the same were released to him. Said
checks were returned to Puzon when the transactions covered by
these checks were paid or settled in full. On December 31, 2000,
Puzon purchased products on credit amounting to P11,820,327
for which he issued, and gave to SMC, BPI Check Nos. 27904 (for
P309,500.00) and 27903 (for P11,510,827.00) to cover the said
transaction.
On January 23, 2001, Puzon, together with his
accountant, visited the SMC Sales Office to reconcile his account
with SMC. During that visit Puzon allegedly requested to see BPI
Check No. 17657. However, when he got hold of BPI Check No.
27903 which was attached to a bond paper together with BPI
Check No. 17657 he allegedly immediately left the office with his
accountant, bringing the checks with them. SMC sent a letter to
Puzon demanding the return of the said checks. Puzon ignored
the demand hence SMC filed a complaint against him for theft
with the City Prosecutors Office.
The High Court held that: [t]he essential elements of the crime
of theft are the following: (1) that there be a taking of personal
property; (2) that said property belongs to another; (3) that the
taking be done with intent to gain; (4) that the taking be done
without the consent of the owner; and (5) that the taking be
accomplished without the use of violence or intimidation against
171
persons or force upon things.
Considering that the second element is that the thing taken
belongs to another, it is relevant to determine whether ownership
of the subject check was transferred to petitioner. On this point
the Negotiable Instruments Law provides:
Sec. 12. Antedated and Postdated The instrument is not
invalid for the reason only that it is antedated 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 dated of delivery. (underscoring supplied)
171 Aoas v. People, G.R. No. 155339, March 3, 2008; 547 SCRA 311, 317-318; People v. Puig, G.R. Nos. 173654765, August 28, 2008, 563 SCRA 564, 570; Cruz v. People, G.R. No. 176504, September 3, 2008, 564 SCRA 99,
110.
95
Note however that delivery as the term is used in the
aforementioned provision means that the party delivering did so
172
for the purpose of giving effect thereto.
Otherwise, it cannot be
said that there has been delivery of the negotiable instrument.
Once there is delivery, the person to whom the instrument is
delivered gets the title to the instrument completely and
irrevocably.
If the subject check was given by Puzon to SMC in payment of
the obligation, the purpose of giving effect to the instrument is
evident thus title to or ownership of the check was transferred
upon delivery. However, if the check was not given as payment,
there being no intent to give effect to the instrument, then
ownership of the check was not transferred to SMC.
The evidence of SMC failed to establish that the check was
given in payment of the obligation of Puzon.

There was no
provisional receipt or official receipt issued for the amount of the
check. W hat was issued was a receipt for the document, a
POSTDATED CHECK SLIP.

173
Furthermore, the petitioners demand letter sent to respondent
states As per company policies on receivables, all issuances are
to be covered by post-dated checks. However, you have deviated
from this policy by forcibly taking away the check you have issued
to us to cover the December issuance.

174
Notably, the term
payment was not issued instead the terms covered and cover
were used.
W hen taken in conjunction with the counter-affidavit of Puzon
where he stated that As the [liquid beer] contents are paid for, the
SMC return[s] to me the corresponding PDCs or request[s] me to
replace them with whatever was the unpaid balance.

175
it
becomes clear that both parties did not intend for the check to pay
for the beer products. The evidence proves that the check was
accepted, not as payment, but in accordance with the longstanding policy of SMC to require its dealers to issue postdated
checks to cover its receivables. The check was only meant to
cover the transaction and in the meantime Puzon was to pay for
the transaction by some other means other than the check. This
being so, title to the check did not transfer to SMC; it remained
with Puzon.
The second element of the felony of theft was
therefore not established. Petitioner was not able to show that
Puzon took a check that belonged to another. Hence, the
172 Sec. 16 of the Negotiable Instruments Law
173 Rollo, p. 76
174 Demand letter. Id. At 79.
175 Id. At 113.
96
prosecutor and the DOJ were correct in finding no probable cause
for theft.
How must the delivery of the instrument be made for it to be
effectual?
The delivery, in order to be effectual as between immediate
parties and as regards a remote party other than a holder in due
course, must be made either by or under the authority of the party
making, drawing, accepting, or indorsing, as the case may be.
Illustrative Case:
Dela Victoria vs. Sesbreo
G.R. No. 111190, June 27, 1995
BELLOSILLO, J:
FACTS:
Raul H. Sesbreo filed a complaint for damages
against Assistant City Fiscals Bienvenido N.
Mabanto, Jr., and Dario D. Rama, Jr., before the
Regional Trial Court of Cebu City.

After trial
judgment was rendered ordering the defendants to
pay P11,000.00 to the plaintiff, private respondent
herein.
The decision having become final and
executory, on motion of the latter, the trial court
ordered its execution. A notice of garnishment was
served on petitioner Loreto dela Victoria as City
Fiscal of Mandaue City where defendant Mabanto,
Jr. was then detailed. The notice directed petitioner
not to disburse, transfer, release or convey to any
other person except to the deputy sheriff concerned
the salary checks or other checks, monies, or cash
due or belonging to Mabanto, Jr., under penalty of
law.
Petitioner moved to quash the notice of
garnishment claiming that he was not in possession
of any money, funds, credit, property or anything of
value belonging to Mabanto, Jr., except his salary
and RATA checks, but that said checks were not yet
properties of Mabanto, Jr., until delivered to him. He
further claimed that, as such, they were still public
funds which could not be subject of garnishment.
ISSUE:
W hether a check still in the hands of the maker or
its duly authorized representative is owned by the
97
payee before physical delivery to the latter?
RULING:
Garnishment is considered as a species of
attachment for reaching credits belonging to the
judgment debtor owing to him from a stranger to the
litigation. Emphasis is laid on the phrase belonging
to the judgment debtor since it is the focal point in
resolving the issues raised.
As Assistant City Fiscal, the source of the salary of
Mabanto, Jr., is public funds.

He received his
compensation in the form of checks from the
Department of Justice through petitioner a City
Fiscal of Mandaue City and head of office. Under
Sec. 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
understood,
possession
drawer with
giving effect thereto.

As ordinarily
delivery means the transfer of the
of the instrument by the maker or
intent to transfer title to the payee and
recognize him as the holder thereof.
According to the trial court, the checks of Mabanto,
Jr., were already released by the Department of
Justice duly signed by the officer concerned through
petitioner and upon service of the writ of
garnishment by the sheriff petitioner was under
obligation to hold them for the judgment creditor. It
recognized the role of the petitioner as custodian of
the checks. At the same time however it considered
the checks as no longer government funds and
presumed delivered to the payee based on the last
sentence of Sec. 16 of the Negotiable Instruments
Law which states: 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.
Yet, the presumption is not
conclusive because the last portion of the provision
says until the contrary is proved. However this
phrase was deleted by the trial court for no apparent
reason. Proof of the contrary is its own finding that
the checks were in the custody of the petitioner.
Inasmuch as said checks had not yet been delivered
to Mabanto, Jr., they did not belong to him and still
had the character of public funds.

176
Hontanosas
we ruled that-
176 No. L-32312, 25 November 1983, 125 SCRA 697.
98
In Tiro v.
The salary check of a government officer of
employee such as a teacher does not belong to him
before it is physically delivered to him. Until that
time the check belongs to the government.
Accordingly, before there is actual delivery of the
check, the payee has no power over it; he cannot
assign it without the consent of the Government.
If the instrument is in the hands of a holder in due course, is
delivery conclusively presumed?
W here the instrument is in the hands of a holder in due
course, a valid delivery thereof by all the parties prior to him so as
to make them liable to him is conclusively presumed.
But the presumption both as to the fact and the time of delivery
177
may be rebutted.
As a bill or note takes effect only by delivery,
so it takes effect only on delivery; and if this be subsequent to its
178
date, it will be binding only from the day of actual delivery.
If the bill or note bears no date, the time must be computed
from its delivery; and if the day of actual delivery cannot be
proved, it will be computed from the earliest day on which it
179
appears to have been in the hands of the payee or any holder.
Burden of proving delivery
Under the last clause of section 16 and section 14, the burden
is on the defendant to show the agreement under which a
negotiable instrument signed in blank was delivered and that the
terms have been violated. (Brannan, page 22, citing Madden v.
Gaston (Misc. Rep.) 121 N.Y. Supp. 951 S.C. sec. 14)
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
177 Woodford v. Dorwin, 3 Vt. 82; Scaife v. Byrd, 39 Ark. 568
178 Lovejoy v. Whipple, 18 Vt. 379
179 Clark v. Sigourney, 17 Conn. 511; Richardson v. Lincoln, 5 Metc. (Mass.) 201
99
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.
Notes:
Where sum payable is written in words or figures
The law mandates that 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.
Example:
Sum payable is Eleven Million Seven Hundred Six
Thousand Pesos (Php 11,706.00); in this instance we follow
the sum expressed in words.
But if the words are ambiguous or uncertain, reference may be
had to the figures to fix the amount.
Example:
100
Sum payable is Sex Mellion Sevn Fifty Pesos (Php
6,000,750.00); in this instance there is ambiguity in the sum
payable in words, thus, reference may be had to the figures to fix
the amount.
In another illustration, the instrument provides that the sum
payable is Eleven Million Six Hundred Fifty Seven Thousad Nine
Hundred Fifty Pesos (Php 6,750,980.00). W hat should be the
construction of the instrument?
The instrument is not negotiable, the sum payable is uncertain.
The sum payable in words and figures must be reconciled in order
for Sec. 17 (a) to apply, otherwise, we have an non-negotiable
instrument for being uncertain as to the amount payable.
2012 Bar Question:
In a negotiable instrument, when the sum is expressed
both in numbers and in words and there is discrepancy
between the words and the numbers
A.
The sum expressed in words will prevail over the one
expressed in numbers.
B.
The sum expressed in numbers will prevail over the one
expressed in words.
C.
The
instrument
becomes
void
because
of
the
discrepancy.
D.
This will render the instrument invalid.
2011 Bar Question:
X issued a check in favor of his creditor, Y. It reads: Pay to
the
amount
(Php700,000.00).
of
Seven
Signed,
X.
Thousand
What
Hundred
amount
Pesos
should
be
construed as true in such a case?
A. Php700,000.00.
B. Php700.00.
C. Php7,000.00.
D. Php700,100.00.
Where the instrument provides for the payment of interest
101
W here the instrument provides for the payment of interest,
without specifying the date from which the interest is to run, the
interest runs from the date of the instrument.
Example:
For value received I promise to pay David Lancelot, or his
order, Php 1,000.00 with 10% interest per annum.
(Sgd)
Abigail Margaux
(January 1, 2011)
In the above-cited example, there was no date specified as to
when the interest will start to run, applying Sec. 17 (b), the rate of
interest will start to run on January 1, 2011, which is the date of
the instrument.
However, where the said instrument is undated, interest runs
from the time of issuance thereof.
In the above example, assuming the instrument is undated,
the 10% interest shall commence from the time of the actual
issuance or delivery thereof, as the holder of an undated
instrument has a prima facie authority to insert the proper date as
may be necessary.
Undated Instrument
This provision is self-explanatory. The same rule as abovementioned shall be followed. This manifests that date is not
essential to the validity of the instrument, but only as with regards
to liability.
2012 Bar Question:
A promissory note which is undated is presumed to be
A.
Dated as of the date of issue;
B.
Dated as of the date of the first indorsement;
C.
Promissory note is invalid because there is no date;
D.
Dated on due date.
Conflict between the Written and Printed provisions
Printed provisions here would mean those printed by the use
of a typewriter, risograph, or any other mark which came about as
a result of a mechanical process. W hereas, written provisions are
102
those writings made by hand, and in case of conflict, written
provisions prevail over the printed ones.
Ambiguity of whether a Bill or a Note
An instrument in the following form:
$1000
New York 190
Pay to the order of Rosario Didato
Value received and charge on account
to 38 Stanton Street
Lansa Rosalia
May be declared upon as a promissory note. (Brannan, page
24, citing Didato v. Coniglio, 50 Misc. R. 280, 100 N.Y. Supp. 466)
W here there is ambiguity whether the instrument is a bill or a
note, the holder may treat it as either at his election. (Sec. 17 (e),
N.I.L.)
1998 Bar Question:
How
do
you
treat
negotiable
instrument
that
is
so
ambiguous that there is doubt whether it is a bill or a note?
(5%)
Section 17 (e) of the Negotiable Instruments Law provides
that [W]here 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.
Where signature is placed in such a way that the capacity of
the signatory is uncertain; signature may be treated as an
indorser
This provision applies only to cases of doubt arising out of the
location of the signature. Therefore one who signed in the place
of the makers name is not an indorser. (Ibid, citing Germania
Natl. Bank v. Mariner, 129 W is. 544, 109 N.W . 574, S.C. secs. 63,
64.)
103
Joint and Several Liability
A promissory note reads:
I/We hereby consent to any extension which may be requested by anyone of us
for the payment of the note.
It was held that said promissory note expressly provides that
the signatories engaged to pay, jointly and severally, the amount
specified therein. And that this did not guarantee the payment of
one signatory by the other signatories, but in fact bound
themselves solidarily to pay the said amount. (China Banking
Corporation vs. Court of Appeals, G.R. No. L-59887, August 31,
1982, [Relova, J.:])
In another case, that of Republic Planters Bank vs. Court of
180
Appeals and Fermin Canlas
, defendant Shozo Yamaguchi
and private respondent Fermin Canlas were President/Chief
Operating Officer and Treasurer respectively, of W orldwide
Garment Manufacturing, Inc., by virtue of Board Resolution No. 1
dated August 1, 1979, defendant Shozo Yamaguchi and private
respondent Fermin Canlas were authorized to apply for credit
facilities with the petitioner Republic Planters Bank in the forms of
export
advances
and
letters
of
credit/trust
receipts
accommodations, worded 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...
On the right bottom margin of the promissory notes appeared
the signatures of Shozo Yamaguchi and Fermin Canlas above
their printed names with the phase and 9 (in) his personal
capacity typewritten below. At the bottom of the promissory
notes appeared:
"Please credit proceeds of this note to:
________ Savings Account ______XX Current Account No. 1372-00257-6 of WORLDWIDE
GARMENT MFG. CORP.
180 G.R. No. 93073, December 21, 1992, [Campos, J.]
104
The only issue material to the resolution of the Honorable
Court is whether private respondent Fermin Canlas is solidarily
liable with the other defendants, on the promissory notes?
It was held by the Supreme Court that: private respondent
Fermin 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
181
governed by the Negotiable Instruments Law.
Under the Negotiable Instruments Law, persons who write
their names on the face of promissory notes are makers and are
182
liable as such.
By signing the notes, the maker promises to pay
183
to the order of the payee or any holder
according to the tenor
184
thereof.
Based on the above provisions of law, there is no
denying that private respondent Fermin Canlas is one of the comakers of the promissory notes. As such, he cannot escape
liability arising therefrom.
W here an instrument containing the words I promise to pay is
signed by two or more persons, they are deemed to be jointly and
185
severally liable thereon.
An instrument which begins I, W e,
or Either of us promise to pay, when signed by two or more
186
persons, makes them solidarily liable.
The fact that the singular
pronoun is used indicates that the promise is individual as to each
other; meaning that each of the co-signers is deemed to have
made an independent singular promise to pay the notes in full.
In the case at bar, 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. A joint and several note is one in which
the makers bind themselves both jointly and individually to the
payee so that all may be sued together for its enforcement, or the
187
creditor may select one or more as the object of the suit.
A joint
and several obligation in common law corresponds to a civil law
solidary obligation; that is, one of several debtors bound in such
wise that each is liable for the entire amount, and not merely for
181 Act 2031, enacted on February 3, 1911
182 Negotiable Instruments Law, section 184; H.D. Lee Mercantile Co. vs. Mercantile Co., 275 P. 807 (1929)
183 Ibid, Section 1
184 Ibid, Section 60
185 Ibid, Section 17 (g).
186 Powell vs- Mobley, 142 S.E. 678 (1928); Keenig vs. Curran's Restaurant, 159 Atl. 553 (1932)
187 Rice vs.Gove, 22 pick Mass 158; 33 AM Dec. 724
105
his proportionate share.188

By making a joint and several promise
to pay to the order of Republic Planters Bank, private respondent
Fermin Canlas assumed the solidary liability of a debtor and the
payee may choose to enforce the notes against him alone or
jointly with Yamaguchi and Pinch Manufacturing Corporation as
solidary debtors.
As to whether the interpolation of the phrase and [in] his
personal capacity below the signatures of the makers in the
notes will affect the liability of the makers, we do not find it
necessary to resolve and decide, because it is immaterial and will
not affect to the liability of private respondent Fermin Canlas as a
joint and several debtor of the notes.

W ith or without the
presence of said phrase, private respondent Fermain Canlas is
primarily liable as a co-maker of each of the notes and his liability
189
is that of soliday debtor.
Illustrative Case:
Philippine National Bank vs. Concepcion Mining Company,
Inc., et al
G.R. No. L-16968, July 31, 1962
LABRADOR, J:
Appeal from a judgment or decision of the Court of First
Instance of Manila, Hon. Gustavo Victoriano, presiding,
sentencing defendants Concepcion Mining Company and Jose
Sarte to pay jointly and severally to the plaintiff the amount of
P7,197.26 with interest up to September 29, 1959, plus a daily
interest of P1.3698 thereafter up to the time the amount is fully
paid, plus 10% of the amount as attorney's fees, and costs of this
suit.
The present action was instituted by the plaintiff to recover
from the defendants the face of a promissory note the pertinent
part of which reads as follows:
Manila, March 12, 1954
NINETY DAYS after date, for value received, I promise to
pay to the order of the Philippine National Bank . . . .
188 Blacks Law Dictionary, p. 1249 (5th ed., 1979
189 Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21, 1992, [Campos, Jr., J]
106
In case it is necessary to collect this note by or through an
attorney-at-law, the makers and indorsers shall pay ten percent
(10%) of the amount due on the note as attorney's fees, which in
no case shall be less than P100.00 exclusive of all costs and fees
allowed by law as stipulated in the contract of real estate
mortgage. Demand and Dishonor Waived. Holder may accept
partial payment reserving his right of recourse again each and all
indorsers.
(Purpose mining industry)
CONCEPCION MINING COMPANY, INC.,
By:
(Sgd.) VICENTE LEGARDA
President
(Sgd.) VICENTE LEGARDA
(Sgd.) JOSE S SARTE
"Please issue check to
Mr. Jose S. Sarte"
Upon the filing of the complaint the defendants presented their
answer in which they allege that the co-maker the promissory
note Don Vicente L. Legarda died on February 24, 1946 and his
estate is in the process of judicial determination in Special
Proceedings No. 29060 of the Court of First Instance of Manila.
On the basis of this allegation it is prayed, as a special defense,
that the estate of said deceased Vicente L. Legarda be included
as party-defendant. The court in its decision ruled that the
inclusion of said defendant is unnecessary and immaterial, in
accordance with the provisions of Article 1216 of the Civil Code
and section 17 (g) of the Negotiable Instruments Law.
A motion to reconsider this decision was denied and thereupon
defendants presented a petition for relief, asking that the effects
of the judgment be suspended for the reason that the deceased
Vicente L. Legarda should have been included as a partydefendant and his liability should be determined in pursuance of
the provisions of the promissory note. This motion for relief was
also denied, hence defendant appealed to this Court.
107
Section 17 (g) of the Negotiable Instruments Law provides as
follows:
SEC. 17. Construction where instrument is ambiguous .
W here the language of the instrument is ambiguous or
there are omissions therein, the following rules of
construction apply:
xxx
xxx
x x x
(g) W here 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.
And Article 1216 of the Civil Code of the Philippines also
provides as follows:
ART. 1216. The creditor may proceed against any one of
the solidary debtors or some of them simultaneously. The
demand made against one of them shall not be an
obstacle to those which may subsequently be directed
against the others so long as the debt has not been fully
collected.
In view of the above quoted provisions, and as the promissory
note was executed jointly and severally by the same parties,
namely, Concepcion Mining Company, Inc. and Vicente L.
Legarda and Jose S. Sarte, the payee of the promissory note had
the right to hold any one or any two of the signers of the
promissory note responsible for the payment of the amount of the
note. This judgment of the lower court should be affirmed.
Our attention has been attracted to the discrepancies in the
printed record on appeal. W e note, first, that the names of the
defendants, who are evidently the Concepcion Mining Co., Inc.
and Jose S. Sarte, do not appear in the printed record on appeal.
The title of the complaint set forth in the record on appeal does
not contain the name of Jose Sarte, when it should, as two
defendants are named in the complaint and the only defense of
the defendants is the non-inclusion of the deceased Vicente L.
Legarda as a defendant in the action. W e also note that the copy
of the promissory note which is set forth in the record on appeal
does not contain the name of the third maker Jose S. Sarte.
Fortunately, the brief of appellee on page 4 sets forth said name
of Jose S. Sarte as one of the co-maker of the promissory note.
Evidently, there is an attempt to mislead the court into believing
that Jose S. Sarte is not one of the co-makers. The attorney for
the defendants Atty. Jose S. Sarte himself and he should be held
108
primarily responsible for the correctness of the record on appeal.
W e, therefore, order the said Atty. Jose S. Sarte to explain why in
his record on appeal his own name as one of the defendants does
not appear and neither does his name appear as one of the cosigners of the promissory note in question. So ordered.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Barrera,
Paredes, Dizon, Regala and
Makalintal, JJ., concur.
Reyes, J.B.L., J., took no part.
2001 Bar Question:
X, Y, and Z signed a promissory note in favor of A stating:
We promise to pay A on December 31, 2001 the sum of
P5,000.00. When the note fell due, A sued X and Y who put
up the defense that A should have impleaded Z.
Is the
defense valid?
No. Sec. 17 (g), Act 2031, 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.
signature
No
person
does
not
is
liable
appear
on
the
thereon,
instrument whose
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.
Notes:
Who may be liable on the negotiable instrument?
Only persons signing under their name are liable on the
instrument. No person is liable on the instrument whose signature
does not appear thereon, except as herein otherwise expressly
provided.
Since a negotiable instrument is a special form of contract, the
signature of the parties is needed as a manifestation of their
consent to be bound the said instrument.
What may be the liability of a person signing under a trade or
assumed name?
109
A person who signs in under a trade or assumed name will be
liable to the same extent as if he had signed in his own name.
(Sec. 18, Negotiable Instrument Law )
Example:
Alex Cruz issued a promissory note to the order of Nico
Santos, but instead of using the name Alex Curz, he signed under
his trade-name Curzifix Radio W orks, thus, under the law he will
be treated as if he signed as Alex Cruz.
Indication of a maker
Under the Negotiable Instruments Law, persons who write
their names on the face of the promissory notes are makers and
190
are liable as such.
By signing the notes, the maker promises to
191
pay to the order of the payee or to any holder
according to the
192
tenor thereof
. (Republic Planters Bank vs. Court of Appeals,
G.R. No. 93073, December 21, 1992, [Campos, Jr., J])
No application to an oral guaranty by the payee
This section has no application to an oral guaranty by the
payee upon transferring a note for value without indorsement, the
guaranty being an original and absolute obligation to which the
note is collateral. (Brannan, page 25, citing Swenson v. Stoltz,
Wash. 318, 78 Pac. 999, S.C. sec. 49)
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.
Notes:
May the signature be made through an agent? How should
the authority be shown?
Yes, the signature of any party may be made by a duly
authorized agent.
For this purpose, no particular form of
appointment is necessary.
190 Negotiable Instruments Law, section 184; H.D. Lee Mercantile Co. vs. Mercantile Co., 276 P. 807 (1929).
191 Ibid, Section 1.
192 Ibid, Section 60.
110
A person may become a party to, or transfer, a bill or note by
the hand of an agent. W hether one whose name purports to have
been signed by another as drawer, acceptor, maker, or indorser is
liable as such depends upon the authority express or implied, of
the person who wrote the signature. If such authority existed, the
principal, and he alone, is bound.

No particular form of
appointment is necessary, and the authority of the agent may be
193
established as in other cases of agency.
The best mode for an agent to sign or indorse a negotiable
instruments for his principal, so that it may clearly appear that he
is the mere scribe who applies the executive hand as the
instrument of another, is as follows: A.B. by his attorney or agent,
C.D.; or A.B. by C.D., agent; or, C.D., for A.B.; or, C.D., agent
for A.B.
194
W hen an instrument payable to X, was indorsed X by Y with
power of attorney plaintiff, in order to prove his title, must show
the authority of the agent to indorse. (Scotland County Nat. Bank
v. Hohn (Mo. App.), 125 S.W. 539, S.C. sec. 30)
What are particular cases or instances which establishes
agency?
In a contract of agency, one binds oneself to render some
service or to do something in representation or on behalf of
another, with the latters consent or authority. The following are
the elements of agency: (1) the parties consent, express or
implied, to establish the relationship; (2) the object, which is the
execution of a juridical act in relation to a third person; (3) the
representation, by which the one who acts as agent does so, not
for oneself, but as a representative; (4) the limitation that the
agent acts within the scope of his or her authority. As the basis of
agency is representation, there must be, on the part of the
principal, an actual intention to appoint, an intention naturally
inferable from the principals words or actions.

In the same
manner, there must be an intention on the part of the agent to
accept the appointment and act upon it. Absent such mutual
intent, there is generally no agency. (Dominion Insurance Corp.
vs. CA, 426 Phil. 620 [2002]; Tuazon, et al. vs. Heirs of Bartolome
Ramos, G.R. No. 156262, July 14, 2005, cited in Civil Law
Reviewer, Albano, Albano, Jr., Albano-Pua, Albano III, 2008
Edition, page 836)
194 Bradlee v. Boston Glass Co., 46 Pick. 347; Weaver v. Carnall, 35 Ark. 198; 1 Parsosns on Notes and Bills, 91;
Tannant v. Rocky Mountain Nat. Bank, 1 Colo. 278
111
Agency may be express or implied from the acts of the
principal, from his silence or lack of action, or his failure to
repudiate the agency knowing that another person is acting on his
behalf without authority. (Ibid, p. 837)
Agency may be oral, unless the law requires a specific form.
(Ibid, Art. 1869, NCC)
General Rule:
The power of persons to incur liability as parties to, and to
transfer, negotiable instruments by the hands of others is
governed by the general rules applicable to principals and
195
agents.
EXCEPTION
An undisclosed principal cannot sue or be sued as a party to a
196
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.
Notes:
All persons who are themselves competent to become parties
to a negotiable contract, in their own individual right, can do so
through the instrumentality of an agent. (Daniel, Elements of the
Law of Negotiable Instruments, page 75)
If the agent signs a note with his own name, and discloses no
principal, he is personally bound. The party so signing must have
intended to bind somebody upon the instrument, and no promisor
but himself thereon appearing, it must be construed as his note or
197
as a nullity.
And although he term himself agent, such suffix
to his name will be regarded as a mere description personae, or
196 Ibid.
197 Arnold v. Stackpole, 11 Mass. 27; Sharpe v. Bellis, 61 Pa. St. 71; Finan v. Babcock, 58 Mich. 305
112
as an earmark of the transaction, and may be rejected as
surplusage.198
(ibid, page 80)
Three things are essential to the creation of an obligation on
the part of one individual by ad through the act of another, viz: (1)
The principal himself must be competent; (2) The agent must be
competent to act as such; (3) Authority, express or implied, verbal
or in writing, must be conferred by the principal upon the agent.
(ibid, page 75)
If the agent exceeded his authority in signing his principals
name, or signs his own professedly as binding his principal, who
is named, he is not bound as a party to the paper itself, but only in
an action of tort for falsely assuming authority to bind another.
(ibid, page 80)
What is the liability of a person signing as an agent?
He is not liable on the instrument, where he adds to his
signature words indicating that he signs for or on behalf of a
principal or in a representative capacity if he was duly authorized.
However, 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.
20, Negotiable Instruments Law)
Illustrative Case:
G.R. Nos. L-25836-37, January 31, 1981
FERNANDEZ, J.:
FACTS:
198 Toledo Iron & Agr. Works v. Heisser, 51 Mo. 128; Arnold v. Sprague, 34 Vt. 409
113
the defendant.
printing
the
defendant
obtained
a
credit
from the draft.
Aruego contends that he signed the bills of
exchange referred to in the plaintiffs complaint in a
representative capacity, as the then President of the
Philippine
Education
Foundation
Company,
publisher of W orld Current Events and Decision
Law Journal, printed by Encal Press and PhotoEngraving, drawer of the said bills of exchange in
favor of the plaintiff bank;
ISSUE:
RULING:
Section 20 of the Negotiable Instruments Law
provides that W here the instrument contains or a
person add 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 his 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
114
that he was signing as a representative of the
Philippine Education Foundation Company.

He
merely signed as follows: JOSE ARUEGO
(Acceptor) (SGD) JOSE ARUEGO. For failure to
disclose his principal, Aruego is personally liable for
the draft he has accepted.
Principal must be disclosed
It is a general principle of commercial law that a negotiable
instrument must wear no mask, but must reveal its character
upon its face. And it extends to the liability of parties thereto, who
must appear as distinctly as the terms of the instrument itself, in
order to be bound thereby. It follows, therefore, that no party can
be charged as principal upon a negotiable instrument unless his
name is disclosed therein. The reason for this rule is that each
party who takes a negotiable instrument makes his contracts with
the parties who appear on its face to be bound for its payment; it
is a courier without luggage, whose countenance is its passport;
and in suits upon negotiable instruments, no evidence is
admissible to charge any person as a principal party thereto,
unless his name in some way is disclosed upon the instrument
199
itself;
although upon other written contracts, not negotiable, it is
often competent to show that, although signed in the name of the
agent only, they were executed in the business of the principal,
and with the intent that he should be bound. (Daniel, Elements of
the Law of Negotiable Instruments, page 79-80)
A note was written on a lithographed receipt form, with the
name of a corporation at the head, and the impressed seal of the
company upon the paper, but not referred to in the note, and the
defendants
added the word president and secretary
respectively to their signatures. Held, not such disclosure of a
principal as will exempt the signers from personal liability.
(Brannan, page 27, citing Daniel v. Glidden, 38 Wash. 556, 80
Pac. 811, sub nom. Daniel v. Buttner)
W here defendant signed a note as a trustee, held, that as to
holders in due course the principal must be disclosed on the face
of the note in order to relieve defendant of personal liability
(semble), but as between defendant and the payee the disclosure
might be made aliunde, and is a question of fact x x x. (Ibid, citing
Megowan v. Peterson, 173 N.Y. 1, 65 N.E. 738)
199 Cragin v. Lovell, 109 U.S. 194; Texas Land Co. v. Carroll, 63 Tex. 51; Brown v. Baker, 7 Allen, 339
115
If the payee knows the nature and object of the trust, and that
the maker of the note was acting in his capacity as trustee, the
maker is not individually liable to the payee, although none of
such information appears on the note. (Ibid, citing Kerby v.
Ruegamer, 107 App. Div. 491, 95 N.Y. Supp. 408)
Effect of non-disclosure
W here the agent signs his name but nowhere in the instrument
has he disclosed the fact that he is acting in a representative
capacity or the name of the third party for whom he might have
acted as agent, the agent is personally liable to take holder of the
instrument and cannot be permitted to prove that he was merely
acting as agent of another and parol or extrinsic evidence is not
admissible to avoid the agents personal liability. ( Republic
Planters Bank vs. Court of Appeals, G.R. No. 93073, December
21, 1992, [Campos, Jr., J:], citing, Crocker National Bank vs. Say,
209 Cal 436; 288 P 69 (1930); Dayries vs. Lindsly, 54 So. 791
(1911); Granada vs. PNB, 18 SCRA 1 (1966)
As a general rule, officers or directors under the old corporate
name bear no personal liability for acts done or contracts entered
into by officers of the corporation, if duly authorized. Inasmuch as
such officers acted in their capacity as agent of the old
corporation and the change of name meant only the continuation
of the old juridical entity, the corporation bearing the same name
200
is still bound by the acts of its agents if authorized by the Board.
Certainly an agent who actually makes a contract, and who
has notice of all equities emanating therefrom, can stand on no
better footing that his principal with respect to commercial paper
growing out of the transaction. To place him on any higher plane
would be incompatible with the fundamental conception
underlying the relation of the principal and agent. (Fossum vs.
Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:])
It is a well-known rule of law that if the original payee of a note
unenforceable for lack of consideration repurchase the instrument
after transferring it to a holder in due course, the paper again
becomes subject in the payees hands to the same defenses to
which it would have been subject if the paper had never passed
through the hands of a holder in due course. (Fossum vs.
Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:], citing
Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L.R.A. [1915
D], 271; 8 C.J., 470.) The same is true where the instrument is
200 Ibid.
116
retransferred to an agent of the payee. (supra, citing Battersbee
vs. Calkins, 128 Mich., 569)
In Dollarhide vs. Hopkins (72 III. App., 509), the plaintiff, as
agent of a corporation engaged in manufacturing agricultural
implements, sold to the defendant a separator for threshing small
grain, with a general warranty that the machine, properly handled,
would thresh and clean grain as well as any other separator of like
size.
The notes in suit were executed by the defendant in
payment of the separator, and were assigned to the plaintiff
before maturity. They were then indorsed by the plaintiff bank
which became holder in due course; but afterwards, and before
the commencement of the action, the notes were retransferred by
the bank to the plaintiff.

In an action upon the notes the
defendant alleged and proved breach of warranty and showed
that the plaintiff knew of the defect in the separator at the time he
purchased the notes. It was held that the plaintiff could not
recover, notwithstanding the fact that the notes had passed
through a bank, in whose hands they would not have been subject
to the defense which had been interposed (54 L.R.A., 678)
Ratification
A corporation, as well as an individual, may ratify the acts of
another, when such acts are done and performed in the name of
the alleged principal; and the ratification may be by express
consent, or by conduct of the alleged principal inconsistent with
any other hypothesis than that he approved and intended to adopt
what had been done in his name.

Intelligent acquiescence
201
amounts to a binding ratification.
Three things are essential to a ratification: (1) The party must
have the capacity to have made the contract in the particular
mode adopted; (2) The principal must have known all of the facts
attending the transaction; (3) The contract must have been
202
originally lawful.
Revocation of agency
A general authority to an agent is presumed to continue until
its revocation is generally known. And if A is the agent of B to
draw bills in his name, B will be liable as drawer to ignorant
indorsees, who had no knowledge of the change in the
201 Knox County v. Aspinwall, 32 How. 544; Supervisors v. Schenck, 5 Wall. 782; Bissell v. Jeffersonville, 24 How.
299; Daniel on Negotiable Instruments, 317
202 Daniel on Negotiable Instruments, 318-320
117
203
relationship of the parties, or of the revocation of the agency.
(Ibid)
Other Illustrative cases :
A note reading six months after demand I promise to pay and
signed J.H.S. Laundry and Dye W orks, J.H.S. Managing
Director is the note of the company and J.H.S. is not personally
liable. (Brannan, page 26, citing, Chapman v. Smethurst [1909], 1
K.B. 927)
However, in a different case, A check was drawn in favor of
plaintiff was stamped near the top with the words B. Marcus &
Co. (Limited) and signed by the two defendants as follows: B.
Marcus, Director, S.H. Davids, Director---Secretary, the space for
the signature of the secretary left blank.

The name of the
company appeared only at the top of the check. Held, that the
defendants were personally liable on the check.

(Ibid, citing
Landes v. Marcus and Davids (K.B. Div. Mar. 31, 1909), 25 T.L.
Rep. 478)
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.
Notes:
W henever an authority purports to be derived from a written
instrument, or the agent signs the paper with the words by
procuration, in such a case the party dealing with him is bound to
take notice that there is a written instrument of procuration, and
he ought to call for and examine the instrument itself to see
whether it justifies the act of the agent.

Under such
circumstances, he is chargeable with inquiry as to the extent of
the agents authority; and if, without examining into it when he
knows of its existence and especially if he has it in his
possession he ventures to deal with the agent, he acts at his
peril, and must bear the loss if the agent transcended his
204
authority.
But no duty exists to make inquiry respecting private
instructions to the agent from his principal, whether written or oral,
for they may well be presumed to be of a secret and confidential
205
nature.
203 Chitty on Bill [32]. 42; Story on Agency, 470, 473; Smith v. Stranger, Peake Add. 116
204 Stainback v. Bank of Virginia, 11 Gratt. 259; North River Bank v. Aymar, 3 Hill, 262
205 North River Bank v. Aymar, 3 Hill, 262; Story on Agency, 73
118
What is a signature by procuration? What is the effect
thereof?
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. 21, Negotiable Instruments Law )
Illustrative Cases:
The manager of a company in order to obtain a guarantee for
the companys business, without authority, gave a note signed for
myself and in representation of the company. This was not
necessary or in the ordinary course of the companys business.
Held. That the company was not liable on the note. (Brannan,
page 27, citing Re Cunningham & Co., 36 Ch. D. 532)
An agent of a company drew a

his authority. The company is not
cashed it in good faith, but must
came into its possession and was
check per proc., in excess of
liable on the check to one who
account for any money which
employed for its benefit. (Ibid,
citing Reid v. Rigby & Co. [1984] 2 Q.B. 40.

Fox, 53 L.T.R. 193, S.C. infra, p. 309)
See also Bissel v.
Directors of a company which had no power to accept bills,
accepted a bill per proc. The company. Held, that they were
personally liable in an action for false representations. (Ibid, citing
West London Commercial Bank v. Kitson, 13 Q.B.D. 360)
W here an agent accepts or indorses per proc., the taker of a
bill or note so accepted or indorsed is bound to inquire as to the
extent of the agents authority. But when the agent has the
authority to do the act in question, his abuse of such authority will
not affect bona fide holder for value. (Ibid, citing Bryant, Powis &
Bryant v. Quebec Bank, [1893] A.C. 170, 179)
2011 Bar Question:
Under
the
Negotiable
Instruments
Law,
signature
by
procuration operates as a notice that the agent has but a
limited authority to sign. Thus, a person who takes a bill that
is drawn, accepted, or indorsed by procuration is duty-bound
to inquire into the extent of the agent's authority by:
A. examining the agents special power of attorney.
119
B. examining the bill to determine the extent of such authority.
C. asking the agent about the extent of such authority.
D. asking the principal about the extent of such authority.
In a signature by procuration, the principal is bound only in
case the agent acted within the actual limits of his authority.
The signature of the agent in such a case operates as notice
that he has
A. a qualified authority to sign.
B. a limited authority to sign.
C. a special authority to sign.
D. full authority to sign.
Sec. 22. Effect of indorsement by infant or corporation.- The
indorsement
or
assignment
of
the
instrument
by
corporation or by an infant passes the property therein,
notwithstanding that from want of capacity, the corporation
or infant may incur no liability thereon.
Notes:
What is the effect of an indorsement by an infant or a
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. (Sec. 22, Negotiable Instruments Law )
Indorsements made by infant or corporations
Infant, as being referred to by Sec. 22 means unemancipated
minors, who lack the capacity to act with legal effect. Under Sec.
22, their indorsement, notwithstanding the fact of their want of
legal capacity to act transfers title of the instrument to another,
without incurring any liability thereafter.
Same rule is applied to a corporation, who, in this instance,
may have acted ultra vires.
This provision deals with the lack of legal capacity of the infant
or corporation, which, despite their incapacity may validly transfer
title over the instrument without incurring any liability.
The capacity of parties is in general governed by the same
206
rules as their power to make a contract. It is of two kinds:
(31)
120
a)
Capacity to incur liability.
b)
Capacity to transfer the instrument.
The following classes of persons incur no liability, though they
207
may make a valid transfer of the instrument:
(32)
a)
A person non compos mentis.
b)
An infant.
c)
In some jurisdictions, a married woman.
d)
A corporation, when the act is ultra vires.
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.
Notes:
Forgery
The counterfeiting of any writing, consisting in the signing of
208
anothers name with intent to defraud, is forgery.
(Bank of the
Philippine Islands vs. CASA Montessori Internationale, G.R. Nos.
149454, 149507, May 28, 2004, [Panganiban, J.]) The most
usual species of forgery is fraudulently writing the name of an
existing person; but where one is in possession of a paper
containing a genuine signature, and fraudulently fills it up so as to
make it appear to be signed as maker, or indorser, or other party
to a bill or note, it is as much a forgery as if the signature itself
209
had been forged.
Intent to defraud, and uttering, essential
An intent to defraud is essential to constitute forgery, and
although a bill or note will not be binding upon those whom it
purports to bind if their names have been signed to it, or it has
207 Id.
208 Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol I (1989 ed.), page
191
209 Rex V. Hales, 17 St. Trials; Powell v. Commonwealth, 1T Gratt. 822
121
been altered without authority, the party who has ignorantly or
innocently executed or altered it under a supposed authority, will
210
not be deemed guilty of forgery.
The delivery of a bill or note, or other written contract, is
necessary to its validity; and so the uttering, which is the term
used to describe the delivery by a forger or counterfeiter to some
person of the forged instrument, is necessary in order to complete
the crime of forgery. Giving the bill or note to a confederate to
211
utter is an uttering thereof.
What are the effects of forgery?
W hen a signature is forged or made without the authority of
the person whose signature it purports to be, -
The signature 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.
The case of Natividad Gempesaw vs. The Honorable Court
212
of Appeals and Philippine Bank of Communications
, the
Supreme Court, speaking through Justice Campos laid down a
detailed discussion on the nature and effect of forgery, to wit:
Under the aforecited provision, forgery is a real or absolute
defense by the party whose signature was forged. A party
whose signature to an instrument was forged was never a
party and never gave his consent to the contract which gave
rise to the instrument. Since his signature does not appear in
the instrument, he cannot be held liable thereon by anyone,
not even by a holder in due course.

Thus, if a persons
signature is forged as a maker of a promissory note, he cannot
be made to pay because he never made the promise to pay.
Or where a persons signature as a drawer of a check is
forged, he cannot charge the amount thereof against the
drawers account because he never gave the bank the order to
pay.
And said section does not refer only to the forged
signature of the maker of a promissory note and of the drawer
of a check. It covers also a forged indorsement, i.e., the
forged signature of the payee or indorsee of a note or a check.
Since under said provision a forged signature is wholly
inoperative no one can gain title to the instrument through
such forged indorsement. Such an indorsement prevents any
210 Roscoes Cr. Ev. 505
211 Chitty on Bills [785]
212 G.R. No. 92244, February 9, 1993
122
subsequent party from acquiring any right as against any party
whose name appears prior to the forgery. Although rights may
exist between and among parties subsequent to the forged
indorsement, not one of them can acquire rights against
parties prior to the forgery. Such forged indorsement cuts off
the rights of all subsequent parties as against parties prior to
the forgery. However, the law makes an exception to these
rules where a party is precluded from setting up forgery as a
defense.
Types of forgeries:
1.
W here forgery was accomplished by a person not
associated with the drawer for example a mail robbery; and
2.
W here the indorsement was forged by an agent of the
drawer.
This difference in situations would determine the effect of the
drawers negligence with respect to forged indorsements. W hile
there is no duty resting on the depositor to look for forged
indorsements on his cancelled checks in contrast to a duty
imposed upon him to look for forgeries of his own name, a
depositor is under a duty to set up an accounting system and a
business procedure as are reasonably calculated to prevent or
render difficult the forgery of indorsements, particularly by the
depositors own employees. And if the drawer (depositor) learns
that a check drawn by him has been paid under a forged
indorsement, the drawer is under duty promptly to report such fact
213
to the drawee bank.
For his negligence or failure either to
discover or to report promptly the fact of such forgery to the
drawee the drawer losses his right against the drawee who has
214
debited his account under a forged indorsement.
In other
words, he is precluded from using forgery as a basis for his claim
for re-crediting of his account. (Gempesaw vs. Court of Appeals,
[1993])
Illustrative case:
The Great Eastern Life Assurance Co., vs. HSBC & PNB
G.R. No. L-18657, August 23, 1922
213 Britton, Bills and Notes, Sec. 143, pp. 663-664
214 City of New York vs. Bronx County Trust Co., 261 N.Y. 64, 184 N.E. 495 (1933); Detroit Piston Ring Co. vs.
Wayne County & Home Savings Bank, 252 Mich. 163, 233 N.W. 185 (1930); C.E. Erickson Co. vs. Iowa Nat. Bank
211 Iowa 495, 230 N.W. 342 (1930)
123
JOHNS, J.:
FACTS:
May 3, 1920, the plaintiff drew its check for P2,000 on
the Hongkong and Shanghai Banking Corporation
with whom it had an account, payable to the order of
Lazaro Melicor.
E. M. Maasim fraudulently obtained possession of the
check, forged Melicor's signature, as an endorser,
and then personally endorsed and presented it to the
Philippine National Bank where the amount of the
check was placed to his credit.
After having paid the check, and on the next day, the
Philippine national Bank endorsed the check to the
Hongkong and Shanghai Banking Corporation which
paid it and charged the amount of the check to the
account of the plaintiff. In the ordinary course of
business,
the
Hongkong
Shanghai
Banking
Corporation rendered a bank statement to the plaintiff
showing that the amount of the check was charged to
its account, and no objection was then made to the
statement.
About four months after the check was charged to the
account of the plaintiff, it developed that Lazaro
Melicor, to whom the check was made payable, had
never received it, and that his signature, as an
endorser, was forged by Maasim, who presented and
deposited it to his private account in the Philippine
National Bank. W ith this knowledge, the plaintiff
promptly made a demand upon the Hongkong and
Shanghai Banking Corporation that it should be given
credit for the amount of the forged check, which the
bank refused to do, and the plaintiff commenced this
action to recover the P2,000 which was paid on the
forged check. On the petition of the Shanghai Bank,
the Philippine National Bank was made defendant.
The Shanghai Bank denies any liability, but prays
that, if a judgment should be rendered against it, in
turn, it should have like judgment against the
Philippine National Bank which denies all liability to
either party.
ISSUES:
W ho is responsible for the refund to the drawer of the
amount of the check drawn and payable to order,
when its value was collected by a third person by
means of forgery of the signature of the payee?
124
Is it the drawee or the last indorser, who ignored the
forgery at the time of making the payment, or the
forger?
RULING:
Plaintiffs check was drawn on Shanghai Bank
payable to the order of Melicor. In other words, the
plaintiff authorized and directed the Shanghai Bank to
pay Melicor, or his order, P2,000. It did not authorize
or direct the bank to pay the check to any other
person than Melicor, or his order, and the testimony is
undisputed that Melicor never did part with his title or
endorse the check, and never received any of its
proceeds. Neither is the plaintiff estopped or bound
by the banks statement, which was made to it by the
Shanghai Bank.
This is not a case where the
plaintiffs own signature was forged to one of its
checks.
In such a case, the plaintiff would have
known the forgery, and it would have been its duty to
have promptly notified the bank of any forged
signature, and any failure on its part would have
released the bank from any liability. That is not this
case. Here, the forgery was that of Melicor, who was
the payee of the check, and the legal presumption is
that the bank would not honor the check without the
genuine endorsement of Melicor.

In other words,
when the plaintiff received its bank statement, it had a
right to assume that Melicor had personally endorsed
the check, and that, otherwise, the bank would not
have paid it.
x x x
The money was on deposit in the Shanghai Bank,
and it had no legal right to pay it out to anyone except
the plaintiff or its order. Here, the plaintiff ordered the
Shanghai Bank to pay the P2,000 to Melicor, and the
money was actually paid to Maasim and was never
paid to Melicor, and he never paid to Melicor, and he
never personally endorsed the check, or authorized
any one to endorse it for him, and the alleged
endorsement was a forgery.

Hence, upon the
undisputed facts, it must follow that the Shanghai
Bank has no defense to this action.
It is admitted that the Philippine National Bank cashed
125
the check upon a forged signature, and placed the
money to the credit of Maasim, who was a forger.
That the Philippine National Bank then endorsed the
check and forwarded it to the Shanghai Bank by
whom it was paid. The Philippine National Bank had
no license or authority to pay the money to Maasim or
anyone else upon a forge[d] signature. It was its legal
duty to know that Melicors endorsement was genuine
before cashing the check.

Its remedy is against
Maasim to whom it paid the money.
Adopting of forged signature
If ones signature is forged, it is, as a general rule, a mere
nullity as to him. It is legally accurate to say that he did not make
the instrument. But if the person whose signature has been
forged pronounces it genuine, or the instrument valid, the
question arises whether or not such declaration renders him liable
as if he were a party to a genuine instrument; and a variety of
circumstances affect its just solution. (Elements of the Law of
Negotiable Instruments, Daniel, 285)
In the first place, when third parties buy the paper on his
assurances or representations of the genuineness of his
signature, or of the validity of the instrument, or are induced to act
upon such assurances or representations, and would suffer loss if
he were permitted to set up forgery as a defense, it is quite clear
215
upon principles of estoppel that such defense cannot be made.
(Ibid)
In the second place, if no principle of estoppel applies, and if
through mistake a party stated that a signature is genuine, and
afterward he discovers his error, and speedily corrects it, and
before the holder has changed his relation to the paper, or anyone
has dealt with it upon the faith of his admission, forgery can be
216
successfully pleaded.
(Ibid, pp. 285-286)
In the third place, it may be stated that where the party,
knowing his signature to be a forgery, deliberately and
understandingly adopts it as his own, he would be bound,
because ratification thus made is equivalent to a previous
authority, provided, however, that an innocent third party has been
induced to act upon the faith of the adoption in such a way as to
suffer loss by its repudiation. This is based upon the familiar
principles of estoppel. But whether such deliberate adoption of a
forgery, without the consequent loss to a third party, acting on the
215 Workman v. Wright, 33 Ohio St. 405; Woodruff v. Monroe, 33 Md. 158; Beeman v. Duck, 11 M & W 251
216 Daniel on Negotiable Instruments, 1352; Woodruff v. Monroes, 33 Md. 158
126
faith thereof, would be binding is a mooted question, both in
217
England and America.
(Ibid, p. 286)
2011 Bar Question:
Due to his debt to C, D wrote a promissory note which is
payable to the order of C. C's brother, M, misrepresenting
himself as agent of C, obtained the note from D. M then
negotiated the note to N after forging the signature of C. May
N enforce the note against D?
A. Yes, since D is the principal debtor.
B. No, since the signature of C was forged.
C. No, since it is C who can enforce it, the note being payable
to the order of C.
D. Yes, since D, as maker, is primarily liable on the note.
Forgery committed by an agent having authority to indorse
An agent having authority to indorse checks payable to his
principal and to deposit them in a certain bank for collection,
indorsed his principals name and transferred the checks to a third
person who deposited them in defendants bank, which collected
and paid the amount to such third person in good faith. Held, that
the indorsement by the agent was not a forgery and the defendant
was not liable to the principal for a conversion of the checks.
(Brannan, page 29, citing Salen v. Bank, 110 App. Div. 636, 97
N.Y. Supp. 361)
Is there any exception to the forgery rule?
Yes. Section 23 of the Negotiable Instruments Law further
provides that, unless the party against whom the instrument is
sought to enforce such right is precluded from setting up the
forgery or want of authority.
Who are these persons that are precluded from setting up
the defense of forgery?
217 on Negotiable Instruments, 1352a, 1352b, and cases cited
127
Those persons who warrant or admit the genuineness of the
signature in question (e.g., indorsers, persons negotiating by
delivery, acceptors of bills of exchange)
Those who, by their acts, silence or negligence, are stopped
from setting up the defense of forgery. (estoppel)
W hen the forged signature is unnecessary to the title of the
holder as when the indorsement is forged on an instrument
payable to bearer.
When one party is estopped to deny the genuineness of
anothers signature
The relation of one party to a negotiable instrument is often
such that he cannot deny the genuineness of anothers signature,
for, having treated it himself as genuine. It would be fraud to
permit him to assert the contrary. Having issued or transferred
the instrument as genuine in all respects, he would not only be
bound by his guaranty that it is genuine, but it would be unjust to
and fraudulent upon other to permit him to deny it; and proof of his
having so issued or used it would be sufficient to entitle the holder
218
to recover against him.
2012 Bar Question:
The signature of X was forged as drawer of a check. The
check was deposited in the account of Y and when deposited
was accepted by AAA Bank, the drawee bank. Subsequently,
AAA Bank found out that the signature of X was actually
forged. Which statement is most accurate?
A.
The drawee bank can recover from Y, because the check
was deposited in his account.
B.
The drawee bank can recover from X, because he is the
drawer even though his signature was forged.
C.
The drawee bank is estopped from denying the
genuineness of the signature of the X, the drawer of the
check.
D.
The drawee bank can recover from Y because as
endorser he warrants the genuineness of the signature.
If a bank pays out on a forged check, is it liable to reimburse
the drawer from whose account the funds were paid out?
218 Hortsman v. Henshaw, 11 How. 177; Meacher v. Fort, 3 Hill (S.C.) 227; Alleman v. Wheeler, 101 Ind. 144
128
General rule remains that the drawee who has paid upon the
forged signature bears the loss. The exception to this rule arises
only when negligence can be traced on the part of the drawer
whose signature was forged, and the need arises to weigh the
comparative negligence between the drawer and the drawee to
determine who should bear the burden of loss. x x x
The general rule is to the effect that a forged signature is
wholly inoperative, and payment made through or under such
signature is ineffectual or does not discharge the instrument.
If
payment is made, the drawee cannot charge it to the drawers
account. The traditional justification for the result is that the
drawee is in a superior position to detect a forgery because he
has the makers signature and is expected to know and compare
it.
The rule has a healthy cautionary effect on banks by
encouraging care in the comparison of the signatures against
those on the signature cards they have on file. Moreover, the very
opportunity of the drawee to insure and to distribute the cost
among its customers who use checks makes the drawee an ideal
party to spread the risk to insurance. (Samsung Construction
Company Philippines, Inc. vs. Far East Bank and Trust Company,
G.R. No. 129015, August 13, 2004 [Tinga, J.])
Moreover, the same case held that:
Under Section 23 of the Negotiable Instruments Law, forgery
is a real or absolute defense by the party whose signature is
forged.
x x x
Still, even if the bank performed with utmost diligence, the
drawer whose signature was forged may still recover from the
bank as long as he or she is not precluded from setting up the
defense of forgery.
After all, Section 23 of the Negotiable
Instruments Law plainly states that no right to enforce the
payment of check can arise out of a forged signature. x x x
Consequently, if a bank pays a forged check, it must be
considered as paying out its funds and cannot charge the amount
so paid to the account of the depositor.

A bank is liable,
irrespective of its good faith, in paying a forged check.
x x x
Judicial notice can be taken that it is highly unusual in practice
for a business establishment to draw a check for close to a million
pesos and make it payable to cash or bearer, and not to order.
129
x x x
The Court recently emphasized that the highest degree of care
and diligence is required of banks.
Banks are engaged in a business impressed with public
interest, and it is their duty to protect in return their many
clients and depositor who transact business with them. They
have the obligation to treat their clients account meticulously
and with the highest degree of care, considering the fiduciary
nature of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a family.
Given the circumstances, extraordinary diligence dictates that
FEBTC should have ascertained from Jong personally that the
signature in the questionable check is his.
A bank is bound to know the signatures of its customers; and if
it pays a forged check, it must be considered as making the
payment out of its own funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was
forged. (7 C.J., 683, cited in San Carlos Milling Co., Ltd. vs. Bank
of the Philippine Islands and China Banking Corporation, G.R. No.
L-37467, December 11, 1933, [Hull, J.])
Duty of the encashing bank
In the case of Philippine Commercial International Bank vs.
Court of Appeals and Form Philippines, Inc., it was ruled that:
[l]astly, banking business requires that the one who first cashes
and negotiates the check must take some precautions to learn
whether or not it is genuine. And if the one cashing the check
through indifference or other circumstance assists the forger in
committing the fraud, he should not be permitted to retain the
proceeds of the check from the drawee whose sole fault was that
it did not discover the forgery or the defect in the title of the
person negotiating the instrument before paying the check. For
this reason, a bank which cashes a check drawn upon another
bank, without requiring proof as to the identity of the persons
presenting it, or making inquiries with regard to them, cannot hold
the proceeds against the drawee when the proceeds of the
checks were afterwards diverted to the hands of a third party. In
such cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the negotiation of
the checks. Thus, one who encashed a check which had been
forged or diverted in turn received payment thereon from the
130
drawee, is guilty of negligence which proximately contributed to
the success of the fraud practiced on the drawee bank.
The
latter may recover from the holder the money paid on the
219
check.
2010 Bar Question:
Marlon deposited with LYRIC Bank a money market
placement of P1 million for a term of 31 days. On maturity
date, one claiming to be Marlon called up the LYRIC Bank
account officer and instructed him to give the managers
check representing
the proceeds of
the money market
placement to Marlons girlfriend Ingrid.
The check, which bore the forged signature of Marlon,
was deposited in Ingrids account with YAMAHA Bank.
YAMAHA Bank stamped a guaranty on the check reading:
"All
prior
endorsements
and/or
lack
of
endorsement
guaranteed."
Upon presentment of the check, LYRIC Bank funds the
check. Days later, Marlon goes to LYRIC Bank to collect his
money
market
placement
and
discovers
the
foregoing
transactions.
Marlon thereupon sues LYRIC Bank which in turn files a
third-party complaint against YAMAHA Bank. Discuss the
respective rights and liabilities of the two banks. (5%)
ANSWER:
One who encashed a check which had been forged or diverted
in turn received payment thereon from the drawee, is guilty of
negligence which proximately contributed to the success of the
fraud practiced on the drawee bank. The latter may recover from
the holder the money paid on the check. (Philippine Commercial
International Bank vs. Court of Appeals and Form Philippines,
Inc.)
In the case at bar, Lyric Bank may recover from Yamaha
Bank, moreover, the latter, being the last endorser generally
bears the risk of loss, as an endorser, Yamaha Bank is precluded
219 Supra note 20 at Section 611, (Vda De Batacllan et al, vs. Medina, 102 Phil. 181, 186 (1957)
131
from setting up the defense of forgery, and is thus liable on the
amount.
Forgery committed by drawer-payors confidential employee;
liability
In Philippine Commercial International Bank vs. Court of
Appeals and Form Philippines, Inc., [t]he mere fact that the
forgery was committed by a drawer-payors confidential employee
or agent, who by virtue of his position had unusual facilities for
perpetrating fraud and imposing the forged paper upon the bank,
does not entitle the bank to shift the loss to the drawer-payor, in
the absence of some circumstance raising estoppel against the
220
drawer.
This rule likewise applies to the checks fraudulently
negotiated or diverted by the confidential employees who hold
them in their possession.
x x x
On this point, jurisprudence regarding the imputed negligence
of employer in a master-servant relationship is instructive. Since
a master may be held for his servants wrongful act, the law
imputes to the master the act of the servant, and if the act is
negligent or wrongful and proximately results in an injury to a third
person, the negligence or wrongful conduct is the negligence or
221
wrongful conduct of the master, for which he is liable.
The
general rule is that if the master is injured by the negligence of a
third person and the concurring contributory negligence of his own
servant or agent, the latters negligence is imputed to his superior
and will defeat the superiors action against the third person,
assuming, of course that the contributory negligence was the
222
proximate cause of the injury of which complaint is made.
Depositor owes a duty to the drawee bank to examine his
cancelled checks for forgery of his own signature; his failure
to do so is tantamount to his negligence which bar his
recovery; however, he has no similar duty as to forged
indorsements
As held by the Supreme Court in the case of Gempesaw vs.
223
Court of Appeals
, [a]s a rule, a drawee bank who has paid a
check on which an indorsement has been forged cannot charge
the drawers account for the amount of said check. An exception
to this rule is where the drawer is guilty of such negligence which
causes the bank to honor such a check or checks. If a check is
220 Am Jur 2d, Volume 10, Banks Section 604 (1963 Edition)
221 Am Jur 2d, Volume 58, Negligence, Section 458
222 Am Jur 2d, Volume 58, Negligence Section 464
223 February 9, 1993, G.R. No. 92244
132
stolen from the payee, it is quite obvious that the drawer cannot
possibly discover the forged indorsement by mere examination of
his cancelled check. This accounts for the rule that although a
depositor owes a duty to his drawee bank to examine his
cancelled checks for forgery of his own signature, he has no
similar duty as to forged indorsements. A different situation arises
where the indorsement was forged by an employee or agent of
the drawer, or done with active participation of the latter. Most of
the cases involving forgery by an agent or employee deal with the
payees indorsement.
The drawer and the payee often time
shave business relations of long standing.

The continued
occurrence of business transactions of the same nature provides
the opportunity for the agent/employee to commit the fraud after
having developed familiarity with the signatures of the parties.
However, sooner or later, some leak will show on the drawers
books. It will then be just a question of time until the fraud is
discovered. This is specially true when the agent participates a
series of forgeries as in the case at bar.
The fact that forgery was committed by an employee of the
party whose signature was forged cannot necessarily imply
that such partys negligence was the cause for the forgery
The discussion laid down by the Supreme Court in the case of
Samsung Construction Co. Phils., Inc. vs. Far East Bank &
224
Trust Company
is extensive on the matter, to wit:
W e recognize that Section 23 of the Negotiable Instruments
Law bars a party from setting up the defense of forgery if it is
guilty of negligence.
Yet, we are unable to conclude that
Samsung Corporation was guilty of negligence in this case. The
appellate court failed to explain precisely how the Korean
accountant was negligent or how more care and prudence on his
part would have prevented the forgery. W e cannot sustain this
tar and feathering resorted to without any basis.
The bare fact that the forgery was committed by an employee
of the party whose signature was forged cannot necessarily imply
that such partys negligence was the cause for the forgery.
Employers do not possess the preternatural gift of cognition as to
the evil that may lurk within the hearts and minds of their
224 August 13, 2004, published in The New Philippine Law Report, Vol. XXXII No. 8, August 2004, pages 30-31
133
employees. The Courts pronouncement in PCI Bank v. Court of
Appeals, applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawerpayors confidential employee or agent, who by virtue of his
position had unusual facilities for perpetrating fraud and
imposing the forged paper upon the bank, does not entitle the
bank to shift the loss to the drawer-payor, in the absence of
some circumstance raising estoppels against the drawer.
Still, in the absence of evidence to the contrary, we can
conclude
that
there
was
no
negligence
on
Samsung
Constructions part. The presumption remains that every person
takes ordinary care of his concerns, and that the ordinary course
of business has been followed. Negligence is not presumed, but
must be proven by him who alleges it. W hile the complaint was
lodged at the instance of Samsung Construction, the matter it had
to prove was the claim it had alleged whether the check was
forged. It cannot be required as well to prove that it was not
negligent, because the legal presumption remains that ordinary
care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the
negative fact that Samsung Construction was negligent. W hile
the payee, as in this case, may not have the personal knowledge
as to the standard procedures observed by the drawer, it well has
the means of disputing the presumption of regularity. Proving a
negative fact may be a difficult office, but necessarily so, as it
seeks to overcome a presumption in law. FEBTC was unable to
dispute the presumption of ordinary care exercised by Samsung
Construction, hence we cannot agree with the Court of Appeals
finding of negligence.
The assailed Decision replicated the extensive efforts which
FEBTC devoted to establish that there was no negligence on the
part of the bank in its acceptance and payment of the forged
check. However, the degree of diligence exercised by the bank
would be irrelevant if the drawer is not precluded from setting up
the defense of forgery under Section 23 by his own negligence.
The rule of equity enunciated in PNB v. National City Bank of New
York, as relied upon by the Court of Appeals, deserves careful
examination.
The point in issue has sometimes been said to be that of
negligence.
The drawee who has paid upon the forged
signature is held to bear the loss, because he has been
negligent in failing to recognize that the handwriting is not that
of his customer. But it follows obviously that if the payee,
134
holder, or presenter of the forged paper has himself been in
default, if he was himself been guilty of a negligence prior to
that of the banker, or if any act of his own he has at all
contributed to induce the bankers negligence, then he may
lose his right to cast the loss upon the banker.
Quite palpably, the general rule remains that the drawee who
has paid upon the forged signature bears the loss. The exception
to his rule arises only when negligence can be traced on the part
of the drawer whose signature was forged, and the need arises to
weigh the comparative negligence between the drawer and the
drawee to determine who should bear the loss. The Court finds
no basis to conclude that Samsung Construction was negligent in
the safekeeping of checks. For one, the settled rule is that the
mere fact that the depositor leaves his check book lying around
does not constitute such negligence as will free the bank from
liability to him, where a clerk of the depositor or other persons
taking advantage of the opportunity, abstract some of the check
blanks, forges the depositors signature and collect on the checks
from the bank.

And for another, in point of fact Samsung
Construction was not negligent at all since it reported the forgery
almost immediately upon discovery.
Forged Indorsement; effect thereof
225
In the case of Republic Bank vs. Mauricia Ebrada
, a
question was poised by the ponente, Justice Martin in this wise,
[i]t is clear from the provision that where the signature on a
negotiable instrument if forged, the negotiation of the check
is without force or effect.
But does this mean that the
existence of one forged signature therein will render void all
the other negotiations of the check with respect to the other
parties whose signature are genuine?
The Court held that: [i]n the case of Beam vs. Farrel, (135
Iowa 670, 113 N.W. 590), where a check has several
indorsements on it, it was held that it is only the negotiation based
on the forged or unauthorized signature which is inoperative.
Applying this principle to the case before us, it can be safely
concluded that it is only the negotiation predicated on the forged
indorsement that should be declared inoperative. This means
that the negotiation of check in question from Martin Lorenzo (who
died seven (7) years before the issuance of the instrument in
225 G.R. No. L-40796, July 31, 1975, [Martin, J.], bold supplied
135
question), the original payee, to Ramon R. Lorenzo, the second
indorser, should be declared of no effect, but the negotiation of
the aforesaid check from Ramon R,. Lorenzo to Adelaida
Dominguez, the third indorser, and from Adelaida Dominguez to
the defendant-appellant who did not know of the forgery, should
be considered valid and enforceable, barring any claim of
226
forgery.
A subsequent question was then again raised by Justice
Martin, when he asked: What happens then, if, after the
drawee bank has paid the amount of the check to the holder
thereof, it was discovered that the signature of the payee
was forged? Can the drawee bank recover from the one who
encashed the check?
The High Court answered this query citing the case of State
227
vs. Broadway Mut. Bank
, wherein it was held that: the drawee
of a check can recover from the holder the money paid to him on
a forged instrument. It is not supposed to be its duty to ascertain
whether the signatures of the payees or indorsers are genuine or
not. This is because the indorser is supposed to warrant to the
drawee that the signatures of the payee and previous indorsers
are genuine, warranty not extending only to holders in due course.
One who purchases a check or draft is bound to satisfy himself
that the paper is genuine and that by indorsing it or presenting it
for payment or putting it into circulation before presentation he
impliedly asserts that he has performed his duty and that drawee
who has paid the forged check, without actual negligence on his
part, may recover the money paid from such negligent
purchasers. In such cases the recovery is permitted because
although the drawee was in a way negligent in failing to detect the
forgery, yet if the encasher of the check had performed his duty,
the forgery would in all probability, have been detected and the
fraud defeated. The reason for allowing the drawee bank to
recover from the encahser is:
Every one with the least experience in business knows that
no business man would accept a check in exchange for money
or goods unless he is satisfied that the check is genuine. He
accepts it only because he has proof that it is genuine, or
because he has sufficient confidence in the honesty and
financial responsibility of the person who vouches for it. If he
is deceived he has suffered a loss of his cash or goods
through his own mistake. His own credulity or recklessness,
or misplaced confidence was the sole cause of his loss. W hy
should he be permitted to shift the loss due to his own fault in
226 Since endorsers are precluded from setting up the defense of forgery
227 282 S.W. 196, 197
136
assuming the risk, upon the drawee, simply because of the
accidental circumstance that the drawee afterwards failed to
228
detect the forgery when the check was presented?
Similarly, in the case before us, the defendant-appellant, upon
receiving the check in question from Adelaida Dominguez, was
duty-bound to ascertain whether the check in question was
genuine before presenting it to the plaintiff-bank for payment. Her
failure to do so makes her liable for the loss and the plaintiff-bank
may recover from her the money she received for the check. As
reasoned out above, had she performed the duty of ascertaining
the genuineness of the check, in all probability the forgery would
have been detected and the fraud defeated.
Moreover, in the same case, the court held that: [i]n our
229
jurisdiction, we have a case of similar import
The Great Eastern
Life Insurance Company drew its check for P2000.00 on
Hongkong and Shanghai Banking Corporation payable to the
order of Lazaro Melicor.

A certain E.M. Maasin fraudulently
obtained the check and forged the signature of Melicor, as an
indorser, and then personally indorsed and presented the check
to the Philippine National Bank where the amount of the check
was placed to his (Maasins) credit.

On the next day, the
Philippine National Bank indorsed the check to the Hongkong and
Shanghai Banking Corporation which paid it and charged the
amount of the check to the insurance company. They Court held
that the Hongkong and Shanghai Banking Corporation was liable
to the insurance company for the amount of the check and that
the Philippine National Bank was in turn liable to the Hongkong
and Shanghai Banking Corporation. Said the Court:
W here a check is drawn payable to the order of one person
and is presented to a bank by another and purports upon its
face to have been duly indorsed by the payee of the check, it is
the duty of the bank to know that the check was duly indorsed
by the original payee, and where the bank pays the amount of
the check to a third person, who has forged the signature of
the payee, the loss falls upon the bank who cashed the check,
228 Gloucester Bank v. Salem Bank, 17 Mass. 33; Bank of U.S. Bank of Georgia, 10 Wheat 333, 6
L. Ed. 384; National Bank of America v. Bangs, 196 Mass. 441, 8 Am. Rep. 349; First National Bank of Danvers v.
First National Bank of Salem, 151 Mass. 280, 24 N.E. 44, 21 Am. St. Rep. 450; First National Bank v. Ricker, 71 Ill.
439, 22 Am. Rep. 104; Rouvant v. Bank, 63 Tex. 610; Bank v. Bank, 30 Ill. 96 Am. Dec. 554; People's Bank v.
Franklyn Bank, 88 Tenn. 299, 12 S.W. 716, 6 L.R.A. 724, 17 Am St. Rep. 884; Ellis & Morton v. Trust Co., 4 Ohio St.
628, 64 Am. Dec. 610; Bank v. Bank, 58 Ohio St. 207, 50 N.E. 723; Bank v. Bank, 22 Neb. 769, 36 N.W. 289, 3 Am.
St. Rep. 294; Canadian Bank v. Bingham, 20 Wash. 484, 71 Pac. 43, 60 L.R.A. 955
229 Great Eastern Life Insurance Company vs. Hongkong and Shanghai Banking Corporation, 43 Phil. 678
137
and its only remedy is against the person to whom it paid the
money.
2011 Bar Question:
D, debtor of C, wrote a promissory note payable to the order
of C. C's brother, M, misrepresenting himself as Cs agent,
obtained the note from D, then negotiated it to N after forging
C's signature.
N indorsed it to E, who indorsed it to F, a
holder in due course. May F recover from E?
A.
No, since the forgery of C's signature results in the
discharge of E.
B.
Yes, since only the forged signature is inoperative and E is
bound as indorser.
C.
No, since the signature of C, the payee, was forged.
D.
Yes, since the signature of C is immaterial, he being the
payee.
Exception to the Rule; Payment made upon a check to which
the name of the drawer has been forged; comparative
negligence
The Supreme Court in the case of Philippine National Bank vs.
230
The National City Bank of New York
, speaking through Justice
Recto held:
[T]he rule is perfectly well settled that in determining the
relative rights of a drawee who, under a mistake of fact, has
paid, and a holder who has received such payment, upon a
check to which the name of the drawer has been forged, it is
only fair to consider the question of diligence or negligence of
the parties in respect thereto. (Woods and Malone vs. Colony
Bank [1902[, 56 L.R.A., 929, 932)
The responsibility of the drawee who pays a forged check,
for the genuineness of the drawers signature, is absolute only
in favor of one who has not, by his own fault or negligence,
contributed to the success of the fraud or to mislead the
drawee. (National Bank of America vs. Bangs, 106 Mass., 441;
8 am. Rep., 349; Woods and Malone vs. Colony Bank, supra,
de Fereit vs. Bank of America, 23 La., Ann., 310; B.B. Ford &
Co. vs. Peoples Bank of Orangeburg, 74 S.C., 180; 180 L.R.A.
[N.S.], 63)
230 October 31, 1936
138
If it appears that the one to whom payment was made was
not an innocent sufferer, but was guilty of negligence in not
doing something, which plaint duty demanded, and which, if it
had been done would have avoided entailing loss on any one,
he is not entitled to retain the moneys paid through a mistake
on the part of the drawee bank. (First Nat. Bank of Danvers vs;
First Nat. Bank of Salem, 151 Mass., 280; 24 N.E., 44; 21 A. S.
R., 450; First Nat. Bank of Orleans vs. State Bank of Alma, 22
Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American Exp. Co.
vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A.
[N. S.], 188; B. B. Ford & Co. vs. People's Bank of
Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986; 7
Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs.
Franklin Bank, 88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884;
6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30
Wash., 484; 71 Pac., 43; 60 L. R. A., 955)
In other words, to entitle the holder of a forged check to
retain the money obtained he must be able to show that the
whole responsibility of determining the validity of the signature
was upon the drawee, and that the negligence of such drawee
was not lessened by any failure of any precaution which, from
his implied assertion in presenting the check as a sufficient
voucher, the drawee had the right to believe he had taken.
(Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628;
Rouvant vs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429;
First National Bank of Danvers vs. First Nat. Bank of Salem,
24 N. E., 44, 45; B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra)
The recovery is permitted in such case, because, although
the drawee was constructively negligent in failing to detect the
forgery, yet if the purchaser had performed his duty, the
forgery would in all possibility have been detected and the
fraud defeated. (First National Bank of Lisbon vs. Bank of
Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49)
In the absence of actual fault on the part of the drawee, his
constructive fault in not knowing the signature of the drawer
and detecting the forgery will not preclude his recovery from
the one who took the check under circumstances of suspicion
without proper precaution, or whose conduct has been such as
to mislead the drawee or induce him to pay the check without
the usual scrutiny or other precautions against mistake or
fraud. (National Bank of America vs. Bangs, supra; First
National Bank vs. Indiana National Bank, 30 N. E., 808-810;
139
Woods and Malone vs. Colony Bank, supra; First National
Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280)
W here a loss, which must be borne by two parties alike
innocent of forgery, can be traced to the neglect or fault of
either, it is unreasonable that it would be borne by him, even if
innocent of any intentional fraud, through whose means it has
succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass., 33;
First Nat. Bank of Danvers vs. First National Bank of Salem,
supra; B. B. Ford & Co. vs. People's Bank of Orangeburg,
supra)
Again if the indorser is guilty of negligence in receiving and
paying the check or draft, or has reason to believe that the
instrument is not genuine, but fails to inform the drawee of his
suspicions the indorser according to the reasoning of some
courts will be held liable to the drawee upon his implied
warranty that the instrument is genuine. (B. B. Ford & Co. vs.
People's Bank of Orangeburg, supra; Newberry Sav. Bank vs.
Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S], 1200)
Most of the courts now agree that one who purchases a
check or draft is bound to satisfy himself that the paper is
genuine; and that by indorsing it or presenting it for payment or
putting it into circulation before presentation he impliedly
asserts that he has performed his duty, the drawee, who has,
without actual negligence on his part, paid the forged demand,
may recover the money paid from such negligent purchaser.
(Lisbon First National Bank vs. Wyndmere Bank, supra) Of
course, the drawee must, in order to recover back the holder,
show that he himself was free from fault. (See also 5 R. C. L.,
pp. 556-558)
So, if a collecting bank is alone culpable, and, on account
of its negligence only, the loss has occurred, the drawee may
recover the amount it paid on the forged draft or check.
(Security Commercial & Sav. Bank vs. Southern Trust & C.
Bank [1925], 74 Cal. App., 734; 241 Pac., 945)
But we are aware of no case in which the principle that the
drawee is bound to know the signature of the drawer of a bill or
check which he undertakes to pay has been held to be
decisive in favor of a payee of a forged bill or check to which
he himself given credit by his indorsement. (See also,
Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of
Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat. Bank
vs. Indiana National Bank; 30 N. E., 808-810)
140
231
In First Nat Bank vs. United States National Bank
, the
court declared: A holder cannot profit by mistake which his
negligent disregard of duty has contributed to induce the
drawee to commit The holder must refund, if by his
negligence he has contributed to the consummation of the
mistake on the part of the drawee by misleading him If the
only fault attributatble to the drawee is the constructive fault
which the law raises from the bald fact that he has failed to
detect the forgery, and if he is not chargeable with factual fault
in addition to such constructive fault, then he is not precluded
from recovery from a holder whose conduct has been such as
to mislead the drawee or induce him to pay the check or bill of
exchange without the usual security against fraud. The holder
must refund to a drawee who is nor guilty of actual fault if the
holder was negligent in not making due inquiry concerning the
validity of the check before he took it, and if the drawee can be
said to have been excused from making inquiry before taking
the check because of having had a right to, presume that the
holder had made such inquiry.
W here a bank, without inquiry or identification of the person
presenting a forged check, purchases it, indorses it, generally,
and presents it to the drawee bank, which pays it, the latter may
recover if its only negligence was its mistake in having failed to
detect the forgery, since its mistake, did not mislead the
purchaser to bring about a change in position. (Security
Commercial & Savings Bank vs. Southern Trust & C. Bank [1925],
74 Cal. App., 734; 241 Pac., 945)
Also, a drawee could recover from another bank the portion of
the proceeds of a forged check cashed by the latter and deposited
by the foreigner in the second bank and never withdrawn, upon
the discovery of the forgery three months later, after the drawee
had paid the check and returned the voucher to the purported
drawer, where the purchasing bank was negligent in taking the
check, and was not injured by the drawees negligence in
discovering and reporting the forgery as to the amount left on
deposit, since it was not a purchaser for value. (First State Bank &
T. Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382)
Similarly, it has been held that the drawee of a check could
recover the amount paid on the check, after discovery of the
forgery, from another bank, which put the check into circulation by
cashing it for the one who had forged the signature of both the
231 ([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547)
141
drawer and payee, without making an inquiry as to who he was
although he was a stranger, after which the check reached, and
was paid by, the drawee, after going through the hands of several
intermediate indorsees. (71 A. L. R., p. 340)
It has been held by many courts that a drawee of a check, who
is deceived by forgery of the drawers signature may recover the
payment back, unless his mistake has placed an innocent holder
of the paper in a worse position than he would have been in if the
discovery of the forgery had been made on presentation. (5
R.C.L., p. 559; 2 Daniel on Negotiable Instruments, 1538)
Forgeries often deceived the eye of the most cautious experts;
and when a bank has been deceived, it is a harsh rule which
compels it to suffer although no one has suffered by its being
deceived. (17 A.L.R. 891; 5 R.C.L., 559)
Daniel, in his treatise on Negotiable Instruments, has the
following to say:
In all the cases which hold the drawee absolutely estopped
by acceptance or payment from denying genuineness of the
drawers name, the loss is thrown upon him on the ground of
negligence on his part in accepting or paying, until he has
ascertained the bill to be genuine.

But the holder has
preceded him in negligence, by himself not ascertaining the
true character of the paper before he received it, or presented
it for acceptance or payment. And although, as a general rule,
the drawee is more likely to know the drawers handwriting
than a stranger is, if he is in fact deceived as to its
genuineness, we do not perceive that he should suffer more
deeply by mistake than a stranger, who, without knowing the
handwriting, has
taken
the
paper
without
previously
ascertaining it genuineness. And the mistake of the drawee
should always be allowed to be corrected, unless the holder,
acting upon faith and confidence induced by his honoring the
draft, would be placed in a worse position by according such
privilege to him.
This view has been applied in a well
considered case, and is imitated in another, and is forcefully
presented by Mr. Chitty, who says it is going a great way to
charge the acceptor with knowledge of his correspondents
handwriting, unless some bona fide holder has purchased the
paper on the faith of such an act. Negligence in making
payment under a mistake of fact is not now deemed a bar to
recovery of it, and we do not see why any exception should be
made to the principle, which would apply as well as to release
th
an obligation not consummated by payment. (Vol. 2, 6
edition,
pp. 1537-1539)
142
Forged Signature of the drawer differs in treatment than a
forged signature of the indorser
232
Further, in the case of Samsung Construction
, it was stated
that: [i]t is also worth noting that the forged signatures in PNB v.
National City Bank of New York were not of the drawer, but of
indorsers.
The same circumstance attends PNB v Court of
Appeals (25 SCRA 693 [1968]), which was also cited by the Court
of Appeals. It is accepted that a forged signature of the drawer
differs in treatment than a forged signature of the indorser.
The justification for the distinction between forgery of

signature of the drawer and forgery of an indorsement is that
drawee is in a position to verify the drawers signature
comparison with one in his hands, but has ordinarily
opportunity to verify an indorsement.
the
the
by
no
Thus, a drawee bank is generally liable to his depositor in
paying a check which bears either a forgery of the drawers
signature or a forged indorsement. But the bank may, as a
general rule, recover back the money which it has paid on a check
bearing a forged indorsement, whereas it has not this right to the
same extent with reference to a check bearing a forgery of the
drawers signature.
2011 Bar Question:
Forgery of bills of exchange may be subdivided into, a)
forgery of an indorsement on the bill and b) forgery of the
drawer's signature, which may either be with acceptance by
the drawee, or
A. with acceptance but the bill is paid by the drawee.
B. without acceptance but the bill is paid by the drawer.
C. without acceptance but the bill is paid by the drawee.
D. with acceptance but the bill is paid by the drawer.
Forged signature of the Payee; effects thereof
233
In the case of Westmont Bank vs. Ong
, it was held that:
[s]ince the signature of the payee, in the case at bar, was forged
232 Samsung Construction vs. FEBTC [2004], published in The New Philippine Law Reports Vol. No. XXXVII, No. 8,
August 2004, page 31
233 G.R. No. 132560, January 30, 2002, published in Philippine Law Report Vol. XXX, No. 1, January 2002, page 9
143
to make it appear that he had made an endorsement in favor of
the forger, such signature should be deemed as inoperative and
ineffectual. Petitioner, as the collecting bank, grossly erred in
making payment by virtue of said forged signature. The payee,
herein respondent, should therefore be allowed to recover from
the collecting bank.
The collecting bank is liable to the payee and must bear the
loss because of its legal duty to ascertain that the payees
endorsement was genuine before cashing the check.

As a
general rule, a bank or corporation who has obtained possession
of a check upon an unauthorized or forged indrosement of the
payees signature and who collects the amount of the check from
the drawee, is liable for the proceeds thereof to the payee or other
owner, notwithstanding that the amount has been paid to the
person from whom the check was obtained.
The theory of the rule is that the possession of the check on
the forged or unauthorized indorsement is wrongful, and when the
money had been collected on the check, the bank or other person
or corporation can be held as for moneys had and received, and
the proceeds are held for the rightful owners who may recover
them. The position of the bank taking the check on the forged or
unauthorized indorsement is the same as if had taken the check
and collected the money without indorsement at all and the act of
the bank amount to conversion of the check.
2011 Bar Question:
X found a check on the street, drawn by Y against ABC Bank,
with Z as payee. X forged Z's signature as an indorser, then
indorsed it personally and delivered it to DEF Bank.
The
latter, in turn, indorsed it to ABC Bank which charged it to
the Ys account.
Y later sued ABC Bank but it set up the
forgery as its defense. Will it prosper?
A. No, since the payee's signature has been forged.
B. No, since Ys remedy is to run after the forger, X.
C. Yes, since forgery is only a personal defense.
D. Yes, since ABC Bank is bound to know the signature of Y,
its client.
Doctrines Laid down in the case of Philippine National Bank
v. The National City Bank of New York on the Rule on
Forgery
1.
That where a check is accepted or certified by the bank on
which it is drawn, the bank is estopped to deny the
144
genuineness of the drawers signature and his capacity to
issue the instrument;
2.
That if a drawee bank pays a forged check which was
previously accepted or certified by the said bank it cannot
recover from a holder who did not participate in the forgery and
did not have actual notice thereof;
3.
That the payment of a check does not include or imply its
acceptance in the sense that this would be used in section 62
of the Negotiable Instruments Law;
4.
That in case of the payment of a forged check, even
without former acceptance, the drawee can not recover from a
holder in due course not chargeable with any act of negligence
or disregard of duty;
5.
That to entitle the holder of a forged check to retain the
money obtained thereon, there must be a showing that the
duty to ascertain the genuineness of the signature rested
entirely upon the drawee, and that the constructive negligence
of such drawee in failing to detect the forgery was not affected
by any disregard of duty on the part of the holder, or by failure
of any precaution which, from his implied assertion in
presenting the check as a sufficient voucher, the drawee had
the right to believe he had taken;
6.
That in the absence of actual fault on the part of the
drawee, his constructive fault in not knowing the signature of
the drawer and detecting the forgery will nor preclude his
recovery from the one who took the check under
circumstances of suspicion and without proper precaution, or
whose conduct has been such as to mislead the drawee or
induce him to pay the check without the usual scrutiny or other
precautions against mistake or fraud;
7.
That one who purchases a check or draft is bound to
satisfy himself that the paper is genuine, and that by indorsing
it or presenting it for payment or putting it into circulation
before presentation he impliedly asserts that he performed his
duty;
8.
That while the foregoing rule, chosen from a welter of
decisions on the use as the correct one, will not hinder the
circulation of two recognized mediums of exchange by which
the great bulk of business is carried on, namely, drafts and
145
checks, on the other hand, it will encourage and demand
prudent business methods on the part of those receiving such
mediums of exchange;
9.
That it being a matter of record in the present case, that the
appellee bank in no more chargeable with the knowledge of
the drawers signature that the appellant is, as the drawer was
as much the customer of the appellant as of the appellee, the
presumption that the drawee bank is bound to know more than
any indorser the signature of its depositor does not hold;
10.
That according to the undisputed facts of the case the
appellant in purchasing the papers in question from unknown
persons without making any inquiry as to the identity and
authority of the said persons negotiating and indorsing them,
acted negligently and contributed to the appellees constructive
negligence in failing to detect the forgery;
11.
That under the circumstances of the case, if the appellee
bank is allowed to recover, there will be no change of position
as to the injury or prejudice of the appellant.
146
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.
Notes:
By consideration, is meant a benefit or gain of some kind to
the party making the promise, or a loss or injury of some kind to
the party to whom it is made. By the common law a promise
made without consideration was invalid, and in order to enforce
any contract it was necessary to aver and prove a consideration.
(Daniel, Elements of the Law of Negotiable Instruments, page 56 )
What
is
the
rule
on
presumption
of
consideration
in
negotiable instruments?
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. 24, Negotiable Instruments Law )
However, [t]he presumption that a negotiable instrument is
issued for a valuable consideration is only prima facie. It can be
rebutted by proof to the contrary. (Bank of the Philippine Islands
vs. Laguna Coconut Oil Co., et al, 48 Phil 5, cited in Pineda vs.
Dela Rama, G.R. No. L-31831, April 28, 1983, [Gutierrez, Jr., J.:])
If the Act establishes this presumption for the case where
there might be doubt with respect to the existence of a valuable
consideration, in order to avoid taking of evidence in the matter,
when the consideration appears from the instrument itself by the
expression of the value, the introduction of evidence is entirely
unnecessary and improper. (concurring opinion, Justice Torres, in
the case of Maulini, et al vs. Serrano, December 16, 1914)
Moreover, it has been stated that: [t]he omission of the words
for value received does not weaken the presumption of valuable
consideration. (Brannan, page 32, citing McLeod v. Hunter, 29
Misc. R. 558, 61 N.Y. Supp. 73)
147
Burden of proof is shifted to the party alleging the absence
of consideration
W here the maker pleads want of consideration, plaintiff
(payee) may recover in the absence of evidence in support of the
plea. But if defendant gives evidence tending to show want of
consideration the burden is on the plaintiff to show by a fair of
preponderance of evidence upon the whole case that there was
consideration. (Brannan, page 31, citing Bringman v. Van Glahn,
71 App. Div. 537, 75 N.Y. Supp. 845, semble)
234
In Cely Yang vs. Court of Appeals, et al
, with respect to
consideration, Section 24 of the Negotiable Instruments Law
created a presumption that every party to an instrument acquired
the same for a consideration or for value. Thus, the law itself
creates a presumption in Davids favor that he gave valuable
consideration for the checks in question. In alleging otherwise,
the petitioner has the onus to prove that David got hold of the
checks absent said consideration. In other words, the petitioner
must present convincing evidence to overthrow the presumption.
Negotiable Instrument, Issued for an Illegal Consideration
The Supreme Court held in the case of Pineda vs. Dela
235
Rama
, [w]hether or not the supposed cash advance reached
the destination is of no moment.

The consideration for the
promissory note to influence public officers in the performance
of their duties is contrary to law and public policy.

The
promissory note is void ab initio and no cause of action for the
collection cases can arise from it.
Sec.
25.
Value,
what
constitutes .
Value
is
any
consideration sufficient to support a simple contract. An
antecedent or pre-existing debt constitutes value; and is
deemed such whether the instrument is payable on demand
or at a future time.
Notes:
What is value?
Value is any consideration sufficient to support a simple
contract.
234 G.R. No. 138074, August 15, 2003, published in The New Philippine Law Report, Vol. XXXI, No.8, August 2003,
page 17, citations omitted
235 G.R. No. L-31831 April 28, 1983
148
A promise to forbear suing on an antecedent debt is value.
(Brannan, page 34, citing Milius v. Kauffmann, 104 App. Div. 442,
93 N.Y. Supp. 669)
The surrender of a non-negotiable note is sufficient
consideration for a negotiable note. (Ibid, citing Petrie v. Miller, 57
App. Div. 17, 67 N.Y. Supp. 1042, affirmed 173 N.Y. 596 without
report)
How about pre-existing debts?
Are they considered as
value?
Yes. An antecedent or pre-existing debt constitutes value; and
is deemed such whether the instrument is payable on demand or
at a fixed or at a future time. (Sec. 25, Negotiable Instruments
Law)
According to section 25 of the same Act, value is any
consideration sufficient to support a simple contract, and so broad
is the scope the law gives to the meaning of value in this kind of
instruments that it considers as such a prior of preexistent debt,
whether the instrument be payable on demand or at some future
date. (concurring opinion, Justice Torres, in the case of Maulini, et
al vs. Serrano, December 16, 1914)
Payment or part payment of a pre-existing debt is value.
(Brannan, page 33, citing Bigelow Co. v. Automatic Gas Co., 56
Misc. R. 389, 107 N.Y. Supp. 894; other citations omitted)
An antecedent or pre-existing debt is value, even though the
instrument is transferred merely as collateral security for such
debt. (Brannan, page 33, citing Brewster v. Sharder, 26 Misc. R.
480, 57 N.Y. Supp. 606, S.C. sec. 112; other citations omitted)
There is no doubt that a pre-existing debt of the drawer,
maker, or acceptor is a valid consideration for his drawing or
accepting a bill or executing a note, and indeed is as frequently
the consideration of negotiable paper as a debt contracted at the
236
time,
and it is equally as valid and sufficient consideration for
the indorsement and transfer to the creditor of the bill or note of a
third party which is in his hands. (Daniel, Elements of the Law of
Negotiable Instruments, page 61)
236 Swift v. Tyson, 16 Pet. 1; Townsley v. Sumrall, 2 Pet. 170; McIntyre v. Yates, 104 Ill. 500
149
What includes a valuable consideration
Valuable consideration may in general terms, be said to
consist either in some right, interest, profit or benefit accruing to
the party who makes the contract, or some forbearance,
detriment, loss or some responsibility, to act, or labor, or service
given, suffered or undertaken by the other aide. Simply defined,
valuable consideration means an obligation to give, to do, or not
to do in favor of the party who makes the contract, such as the
237
maker or indorser.
(Ty vs. People of the Philippines, G.R. No.
149275, September 27, 2004)
In an exchange of checks each check is a consideration for
the other; each is an independent obligation and not conditional
on the payment of the other. Hence, one who bona fide gives his
check for that of a third person without notice of the illegality of
such check is not bound to stop payment of his own check upon
receiving notice of the illegality of the check exchanged for his,
and he may recover against the drawer of such check. (Brannan,
page 33, citing Matlock v. Scheuerman, 51 Oregon 49, 93 Pac.
823, 17 L.R.A. (N.S.) 747, S.C. secs. 53, 56, 186)
Consideration sufficient, even if it benefited a third person
238
The case of Bridges vs. Vann, et al,
tells us that it is no
defense to an action on a promissory note for the maker to say
that there was no consideration which was beneficial to him
personally; it is sufficient if the consideration was a benefit
conferred upon a third person, or a detriment suffered by the
promise, at the instance of the promissory. It is enough if the
obligee foregoes some right or privilege or suffers some detriment
and the release and extinguishment of the original obligation of
George Vann, Sr., for that of appellants meets the requirement.
Appellee accepted one debtor in place of another and gave up a
valid, subsisting obligation for the note executed by the
appellants. This, of itself, is sufficient consideration for the new
notes. (supra)
Consequently, a sale of goods to the maker of a note is a
consideration for the indorsement of a third person before the
delivery of the note. (Brannan, page 32, citing, Mohlman v.
McKane, 60 App. Div. 546, 69 N.Y. Supp. 1046)
237 Agbayani, Aguedo, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 1992 Edition,
p. 235; Citations omitted
238 88 Kan 98, 127 Pacific Reporter 604, 9 November 1912; Citations omitted
150
Consideration must be absolute
In one case, a bank receiving a certificate of deposit and
crediting the same to the depositor, does not give value where the
credit was not absolute but conditional upon the collection of the
certificate. (Brannan, page 32, citing Commercial Nat. Bank v.
State Bank, 132 Iowa 706, 109 N.W. 198)
Effect of absence of valuable consideration
In one case, [d]efendant, by mistake, gave a check to the
payee who indorsed it to a plaintiff as a loan. Held, that plaintiff
was not a holder in due course, having given no value. (Brannan,
page 33, citing Rosenthal v. Parsont, 110 N.Y. Supp. 223)
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.
2011 Bar Question:
X executed a promissory note with a face value of Php
50,000.00, payable to the order of Y. Y indorsed the note to
Z, to whom Y owed Php 30,000.00. If X has no defense at all
against Y, for how much may Z collect from X?
A. Php 20,000.00, as he is a holder for value to the extent of
the difference between Y's debt and the value of the note.
B. Php 30,000.00, as he is a holder for value to the extent of
his lien.
C. Php 50,000.00, but with the obligation to hold Php
20,000.00 for Y's benefit.
D. None, as Z's remedy is to run after his debtor, Y.
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.
Notes:
What constitutes a holder for value?
151
A holder for value is a holder which has given anything of
value for the instrument. Thus, where value has at anytime been
given for the instrument, the holder is deemed a holder for value
in respect to all parties who became such prior to that time. (Sec.
Moreover, 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. 27, Negotiable
Instruments Law)
239
In the case of Maulini, et al vs. Serrano
, Supreme Court
Associate Justice Torres wrote the foregoing concurring opinion,
to wit: [s]ection 26 provides that where value has at any time
been given for the instrument, the holder is deemed a holder for
value, both in respect to the maker and to the defendant indorser,
it is immaterial whether he did so directly to the person who
appears in the promissory note as the maker or whether he
delivered the sum to the defendant in order that this latter might in
turn deliver it to the maker.
Illustrative case:
The holder of a note for $2,000, surrendered it for a payment
of $500, and a new note for $1,500 executed by the maker and
indorsed by defendant. Held, that the holder of the note was a
holder for value. (Brannan, page 35, citing Van Norden Trust Co.
v. L. Rosenburg, 62 Misc. R. 285, 114 N.Y. Supp. 1025)
2011 Bar Question:
Under the Negotiable Instruments Law, if the holder has a
lien on the instrument which arises either from a contract or
by implication of law, he would be a holder for value to the
extent of
A. his successor's interest.
B. his predecessor's interest.
C. the lien in his favor.
D. the amount indicated on the instrument's face.
Sec. 28. Effect of want of consideration. - Absence or failure
of consideration is a matter of defense as against any person
not
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.
239 supra
152
Notes:
Want, failure, or illegality of consideration
Prof. Daniel said: [w]hile consideration is presumed in all
cases of negotiable contracts, and the plaintiff can rely upon this
presumption, and thus cast the burden of showing its absence
upon the defendant, the presumption is rebuttable, and when the
want or failure of a sufficient consideration is attacked and
substantial evidence is offered to sustain this defense, the burden
shifts, and it rests with the plaintiff upon the whole case to show
by a preponderance of evidence a consideration sufficient to
support the instrument sued on. The defense of absence or
failure of consideration is good only between immediate parties.
The consideration is presumed to be legal, and, so far as
presumptions and burden of proof are concerned, is governed by
the same principles that apply to want or failure of consideration;
but if in consequence of the illegality of consideration, the
instrument is by law declared void, thus defense avails not only as
between the immediate parties, but also against the bona fide
holder for value. (Elements of the Law of Negotiable Instruments,
Daniel, p. 304)
What is the effect of lack of consideration?
The 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 ascertained and liquidated amount or otherwise. (Sec. 28,
The defense that there was failure or absence of consideration
can only be invoked by the drawer if the holder was a privy to the
purpose for which the instrument were issued and therefore is not
a holder in due course. (State Investment House vs. Court of
Appeals and Nora B. Moulic, G.R. No. 101163, January 11, 1993,
[Bellosillo, J:])
The drawee by acceptance becomes liable to the payee or his
indorsee, and also to the drawer himself. But the drawer and
acceptor are the immediate parties to the consideration, and if the
acceptance be without consideration, the drawer cannot recover
from the acceptor. The payee holds a different relation; he is a
stranger to the transaction between the drawer and the acceptor,
and is, therefore, in a legal sense a remote party. In a suit by him
153
against the acceptor, the question of consideration between the
drawer and the acceptor cannot be inquired into. The payee or
holder gives value to the drawer, and if he is ignorant of the
equities between the drawer and the acceptor, he is in the position
of a bona fide indorsee. Hence, it is no defense to a suit against
the acceptor of a draft which has been discounted, and upon
which money has been advanced by the plaintiff, that the draft
was accepted or the accommodation of the drawer. (Philippine
National Bank vs. Bartolome Picornell, et al, G.R. No. L-18751,
18915, September 26, 1922, [Romualdez, J:], citing 3 R.C.L., pp.
1143, 1144, par, 358)
It is a well-known rule of law that if the original payee of a note
unenforceable for lack of consideration repurchase the instrument
after transferring it to a holder in due course, the paper again
becomes subject in the payees hands to the same defenses to
which it would have been subject if the paper had never passed
through the hands of a holder in due course. (Fossum vs.
Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:], citing
Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L.R.A. [1915
D], 271; 8 C.J., 470.) The same is true where the instrument is
retransferred to an agent of the payee. (supra, citing Battersbee
vs. Calkins, 128 Mich., 569)
Illustrative Case:
A check was made by A to the order of B to be used to pay C
for withdrawing a charge of rape against B, alleged to be a false
charge, and to prevent his re-arrest on said charge. The check
was indorsed by B to C and by C to the plaintiff, without
consideration, and upon payment being stopped plaintiff sued A.
Held, that A could not defend on the ground of duress which was
not exercised on him, but that he could defend on the ground of
want of consideration. (Brannan, page 36, citing Weiss v. Reiser,
62 Misc. Rep. 292, 114 N.Y. Supp. 983)
In a suit between remote parties to a bill of exchange, as the
payee or indorsee and the acceptor, to sustain the defense of no
consideration, there must have been no consideration received by
the defendant and plaintiff must have been given no
consideration. (Ibid, citing National Park Bank v. Saitta, 127 App.
Div. 624, 111 N.Y. Supp. 927, S.C. sec. 133)
Partial Want of Consideration
W henever the defendant is entitled to go into the question of
consideration, he may set up the partial as well as the total want
240
of consideration.
154
So, where a father gives his son a note partly for services and
partly as a gratuity, the partial want of consideration might be
pleaded as to such portion of the amount as was gratuitous; and
it would be no objection that no distinct amount was fixed upon as
compensation for the services, but it would be for the jury [judge]
to settle what amount was founded on the one consideration, and
241
what on the other.
If a note be given by mistake on settlement
of account for an amount greater than that actually due, there is
want of consideration as to the excess, and between the parties it
242
may be pleaded.
Total and Partial failure of consideration
The total failure of consideration is a good defense to a suit
upon a bill or note as the original want of it, and is confined to the
like parties. If the contract is rescinded, the consideration of the
243
bill or note totally fails, and payment of it cannot be enforced.
And a partial failure of the consideration is a good defense pro
244
tanto.
But such part as is alleged to have failed must be distinct
and definite, for only a total failure, or the failure of a specific and
ascertained part, can be availed of by way of defense; and if it be
an unliquidated claim the defendant must resort to his cross245
action.
Thus, where bills have been accepted in consideration
of the payee giving the acceptor the lease of a house, and he let
him into possession, but gave no lease, it was held no defense to
an action on the bill, but that there was merely a counter-claim for
246
damages.
So where the bill was given for work to be done, and
the work when done was bungled in part, and not worth the
247
amount of the bill.
Partial Illegality of consideration
W hen the defense is founded on illegality of consideration, it is
to be distinguished from a defense on the ground of a want or
failure of consideration by this peculiarity that a partial illegality
vitiates the bill or note in too, while the partial want of
240 McGregor v. Bishop, 14 Ont. 10; Daniel on Negotiable Instruments, 201
241 Parish v. Stone, 14 Pick. 198
242 Seeley v. Engell, 13 N.Y. 542; Claxon v. Demaree, 14 Bush. 173
243 Hacker v. Brown, 81 Mo. 68; Maltz v. Fletcher, 52 Mich. 484
244 Agnew v. Aldem, 84 Ala. 502; Torinus v. Buckham, 29 Minn. 128
245 Elminger v. Drew, 4 McLean, 388; Stobe v. Peake, 16 Vt. 213; Pulsifer v. Hotchkiss, 12 Conn. 234
246 Moggridge v. Jones, 14 East, 485
247 Trickey v. Larne, 6 M & W 278
155
248
consideration only vitiates it pro tanto.
Who are parties privy in negotiable instruments
The same rule which admits inquiry into the consideration of
negotiable paper between the original payor and payee extends to
admit such inquiry in any suit between parties between whom
there is privities. That is to pay, between immediate parties to any
contract evidenced by the drawing, accepting, making or indorsing
a bill or note, or may be shown that there was no consideration
249
(as, that it was for accommodation);
or that consideration has
failed, or a set-off may be pleaded; but as between other parties
remote to each other, none of these defenses are admissible. It
becomes important then to determine who are to be regarded as
the immediate parties, or parties between whom there is a privity,
to a negotiable instrument, and who are remote. Among the
250
former may be classed: (1) The drawer and acceptor of a bill;
or
251
(2) The drawer and payee
of a bill as a general rule; (3) The
252
maker and payee of a note;
; and (4) The indorser and
253
immediate indorsee of a bill or note.
Who are remote parties to negotiable instruments
But want of consideration, or the failure thereof, cannot be
pleaded in a suit brought: (1) By an indorsee against the maker of
254
a note;
(2) By an indorsee against a prior, but not his immediate
255
indorser;
(3) By the indorsee against the acceptor of a bill, as a
256
general rule.
They are regarded as remote parties to each
other, and between such parties two distinct considerations must
be inquired into in order to perfect a defense against the holder:
(1) The consideration which the defendant received for his liability;
257
and (2) That which the plaintiff gave for his title.
And if any
immediate holder gave value for the instrument, that intervening
258
consideration will sustain the plaintiffs title.
Want, Failure, or Fraudulency of consideration
248 Hanauer v. Doane, 12 Wall. 342; Hyslop v. Clark, 14 Johns 465; Mn Namra v. Gargett, 68 Mich. 454
249 Murphy v. Keyes, 39 N.Y. Sup. Ct. 18; Wilson v. Ellsworth, 25 Nebr. 246
250 Thomas v. Thomas, 7 Wis. 476; Spurgeon v. McPheeters, 42 Ind. 527
251 McCulloch v. Hoffman, 10 Hun, 133; Spurgeon v. McPheeters, 42 Ind. 527
252 Kennedy v. Goodman, 14 Nebr. 585; Flaun v. Wallace, 9 S.E. 571
253 Barnett v. Offerman, 7 Watts, 130; Klein v. Keyes, 17 Mo. 326; Platt v. Snipe, 43 Ark. 23
254 Price v. Keen, 40 N.J.L 332; Brunes v. Scott, 117 U.S. 582
255 Ethridge v. Gallagher, 55 Miss. 464; 1 Parsons on Notes and Bills, 176
256 Flower v. Sadler, 10 Q.B. Div. 572
257 Laflin & Rand Power Co. v. Sinsheimer, 48 Md. 411; Hoffman & Co. v. Bank of Milwaukee, 12 Wall. 181
258 United States v. Bank of Metropolis, 15 Pwt. 393; Swift v. Tyson, 16 Pet. 1; Goetz v. Bank of Kansas City, 119
U.S. 556
156
If the original consideration were tainted with fraud or illegality,
or has failed in whole, or in part, and the bill or note has passed
into the hands of a bona fide holder for value without notice, yet if
returned for a valuable consideration to the payee who is a privy
to the original consideration, he could stand upon no better footing
259
than if the instrument had remained in his hands.
Defenses between privy parties
260
1.
That the bill or note has been lost or stolen;
261
2.
W as executed under duress;
262
3.
Under fraudulent misrepresentations;
263
4.
Fraudulent consideration;
264
5.
Illegal consideration;
265
6.
Fraudulently obtained from an immediate holder;
266
7.
Been in any way the subject of fraud or felony;
How illegality may be purged renewal of instrument
If the consideration of the original bill or note be illegal, a
267
renewal of it will be open to the same objection and defense;
and if the original instrument was obtained by fraud, a renewal of
it by the original parties without knowledge of the fraud, would
268
stand in the same footing.
But if at the time the renewal was
executed the parties signing knew of the fraud in the original, they
will be regarded as purging the contract of the fraud, and cannot
269
then plead it.
So if the maker of a note held by an indorsee who
knew that the consideration between the maker and the payee
had failed when he took it, executes to him a new note, it had
been held to be a waiver of the defense, and the payee of the new
270
note can recover.
Partial Illegality of the instrument
259 Swayner v. Wiswell, 9 Allen, 42; Kost v. Bender, 25 Mich. 516; Cline v. Templeton, 78 Ky. 550
260 Mills v. Barner, 1 M & W, 425
261 Clark v. Peace, 41 N.H. 414; Griffith v. Sitgreaves, 90 Pa. St. 161
262 Vathir v. Zane, 6 Gratt. 246; Hutchinson v. Bogg, 28 Pa. St. 294
263 Rogers v. Morton, 12 Wend. 484
264 Shirley v. Howard, 53 Ill. 455; Holden v. Cosgrove, 12 Gray, 216
265 1 Parsons on Notes and Bills, 188
266 Holden v. Cosgrove, 12 Gray, 216; Western Bank v. Mills, 7 Cush. 546
267 Schutt v. Evans, 109 Pa. St. 627; Wegner v. Biering, 65 Tex. 511; Sawyer v. Wiswell, 9 Allen, 39
268 Sawyer v. Wiswell, 9 Allen, 39
269 Sawyer v. Wiswell, 9 Allen, 39; Calvin v. Sterrett, 41 Kan, 220
270 Gil v. Morris, 11 Heisk, 614; Keyes v. Mann, 63 Iowa, 560
157
If a note or bill be given for a consideration which is in part
illegal, a new note for the same, or in renewal of the first, is
271
equally void.
But a new note for that part of the consideration
which is legal is good and valid. And if several new notes are
given for the old one, some of the new one may be taken for the
legal part, and so be valid, especially if they are only adequate to
the part or if the deduction be otherwise favored by
272
circumstances.
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.
Notes:
Who is an 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. (Sec. 29, Negotiable Instruments Law )
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. (Philippine Bank of
Commerce vs. Aruego, G.R. No. L-25836-37, January 31, 1981,
[Fernandez, J.]; Ang vs. Associated Bank, G.R. No. 146511,
September 5, 2007, 532 SCRA 244, 272-273, cited in Claude P.
Bautista vs. Auto Plus Traders, Inc., G.R. No. 166405, August 6,
2008, [Quisumbing, J:])
In accommodation transactions recognized by the Negotiable
Instruments Law, an accommodation party lends his credit to the
accommodated party, by issuing or indorsing a check which is
held by a payee or indorsee as a holder in due course, who gave
full value therefor to the accommodated party. The latter, in other
words, receives or realizes full value which the accommodated
271 Chapman v. Black, 2 B & Ald. 588; Seeligson v. Lewis, 65 Tex. 115; Preston v. Jackson, 2 Stark. 237
272 Daniel on Negotiable Instruments, 206; Crookshank v. Rose, 5 Car. & P. 19
158
party then must repay to the accommodating party, unless of
course the accommodating party intended to make a donation to
the accommodated party. But the accommodating party is bound
on the check to the holder in due course who necessarily a third
party and is not the accommodated party.

Having issued or
indorsed the check, the accommodating party has warranted to
the holder in due course that he will pay the same according to its
tenor. (Travel-On, Inc. vs. Court of Appeals and Arturo Miranda,
G.R. No. L-56169, June 26, 1992, [Feliciano, J:])
Nature of the relationship between the accommodation party
and the accommodated party
[T]he relation between an accommodation party and the
accommodated party is one of principal and surety the
273
accommodation party being the surety.
As such, he is deemed
274
an original promissor and debtor from the beginning,
he is
considered in law as the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter since
275
their liabilities are interwoven as to be inseparable.
Although a
contract of suretyship is in essence accessory or collateral to a
valid principal obligation, the suretys liability to the creditor is
immediate, primary and absolute; he is directly and equally bound
276
with the principal.
As an equivalent of a regular party to the
undertaking, a surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal
interest in the obligations nor does he receive any benefit
277
therefrom.
(Eusebio Gonzales vs. Philippine Commercial and
International Bank, et. al., G.R. No. 180257, February 23, 2011,
[Velasco, J.:])
An accommodation bill or note is not considered a real
security, but a mere blank, until it has been negotiated, and it then
becomes binding upon all of the accommodation indorsers in like
manner and to the like effect as if they were successive
273 Garcia v. Llamas, supra at 305; Agro Conglomerates, Inc. v. Court of Appeals, 401 Phil. 644, 654- 655 (2000);
Spouses Gardose v. Tarroza, supra at 807; Caneda, Jr. v. Court of Appeals, G.R. No. 81322, February 5, 1990, 181
SCRA 762, 772; Crisologo-Jose v. Court of Appeals, supra at 598; Prudencio v. Court of Appeals, 227 Phil. 7, 12
(1986); and Philippine Bank of Commerce v. Aruego, supra at 539
274 Garcia v. Llamas, supra at 305
275 Trade & Investment Development Corp. v. Roblett Industrial Construction Corp., G.R. No. 139290, November
11, 2005, 474 SCRA 510, 531
276 International Finance Corporation v. Imperial Textile Mills, Inc., G.R. No. 160324, November 15, 2005, 475
SCRA 149, 160; Trade & Investment Development Corp. v. Roblett Industrial Construction Corp., id. at 531; Garcia
v. Llamas, supra at 305; Agro Conglomerates, Inc. v. Court of Appeals, supra at 655; and Philippine Bank of
Commerce v. Aruego, supra at 540
277 International Finance Corporation v. Imperial Textile Mills, Inc., id. at 160-161 and Trade & Investment
Development Corp. v. Roblett Industrial Construction Corp., id. at 531
278 Withworth v. Adams, 5 Rand. 342; May v. Boisseau, 8 Leigh, 164
159
indorsers,278
but until it has been negotiated any party may
withdraw his indorsement, acceptance, or other liability upon it,
279
and rescind his engagement;
and that right is not impaired by
the circumstance that he may be indemnified by an assignment,
280
or other security.
To whom does the accommodation refer to?
The accommodation to which reference is made in the section
quoted is not the person who takes the note that is, the payee or
indorsee, but one to the maker or indorser of the note. (Maulini, et
al vs. Serrano, G.R. No. L-8844, December 16, 1914, [Moreland,
J.])
What are the requisites of an accommodation party?
An accommodation party is one who meets all the three
requisites:
(a) He must be a Party to the instrument, signing as a maker,
drawer, acceptor, or indorser;
(b) He must not receive value therefor; and
(c) And he must sign for the purpose of lending his name or
credit to some other person. (Claude P. Bautista vs. Auto Plus
Traders, Inc., G.R. No. 166405, August 6, 2008, [Quisumbing,
J.]; Ernestina Crisologo-Jose vs. Court of Appeals, G.R. No.
80599, September 15, 1989 )
Without receiving value therefor.
Based on the foregoing requisites, it is not a valid defense that
the accommodation party did not receive any valuable
consideration when he executed the instrument.

From the
standpoint of contract law, he differs from the ordinary concept of
a debtor therein in the sense that he has not received any
valuable consideration for the instrument he signs. Nevertheless,
he is liable to a holder for value as if the contract was not for
281
accommodation
in whatever capacity such accommodation
party signed the instrument, whether primary or secondarily.
Thus, it has been held that in lending his name to the
accommodated party, the accommodation party is in effect a
282
surety for the latter.
(Ernestina Crisologo-Jose vs. Court of
278 Withworth v. Adams, 5 Rand. 342; May v. Boisseau, 8 Leigh, 164
279 Second Nat. Bank v. Howe, 40 Minn, 390
280 May v. Boisseau, 8 Leight, 164
281 Ang Tiong vs. Ting, et al., 22 SCRA 713 (1968)
282 Philippine Bank of Commerce vs. Aruego, 102 SCRA 530 (1981)
160
Appeals, et al, G.R. No. 80599, September 15, 1989, [Regalado,
J.])
As to whether or not the defendant is an accommodation party,
it should be taken into account that by putting his signature to the
note, he lent his name, not to the creditor, but to those who signed
with him placing himself with respect to the creditor in the same
position and with the same liability as the said signers. It should
be noted that the phrase without receiving value therefor, as
used
in
Section
29
of
the
foresaid
Act,
means without
receiving value by virtue of the instrument and not, as it
apparently is supposed to mean, without receiving payment for
lending his name. If, as in the instant case, a sum of money was
received by virtue of the note, it is immaterial, so far as the
creditor is concerned, whether one of the signers has, or has not,
received anything in payment of the use of his name. In reality
the legal situation of the defendant in this case may properly be
regarded as that of a joint surety rather than of an
accommodation party. The defendant, as a joint surety, may,
upon the maturity of the note, pay the debt, demand the collateral
security and dispose of it to his benefit; but there is no proof
whatever that this was done. As to the plaintiff, he is the holder
for value, under the phrase of said Section 29, for he had paid
the money to the signers at the time the note was executed and
delivered to him. (R.N. Clark vs. George C. Sellner, G.R. No. L16477, November 22, 1921, [Romualdez, J:]) (emphasis supplied)
The phrase without receiving value therefor used in Sec. 29
of the NIL means without receiving payment value by virtue of the
instrument and not as it is apparently supposed to mean, without
receiving payment for lending his name.

283
Stated differently,
when a third person advances the face value of the note to the
accommodated party at the time of its creation, the consideration
for the note as regards its makers is the money advanced to the
accommodated party. It is enough that value was given for the
284
note at the time of its creation.
(Tomas Ang vs. Associated
Bank and Antonio Ang Eng Liong, G.R. No. 146511, September 5,
2007, [Azcuna, J.])
In the words of Joseph Doddridge Brannan: the words value
therefor in section 29 mean value for the negotiable instrument,
not value for the use of the name, and that one may be an
accommodating party although he is paid nothing for the use of
283 Clark v. Sellner, 42 Phil. 384, 386 (1921)
284 Caneda, Jr. v. Court of Appeals, supra at 772
161
his name. (citing Morris County Brick Co. v. Austin (N.J.) 75 Atl.
285
550)
1998 Bar Question:
For the purpose of lending his name without receiving value
therefor, Pedro makes a note for P20,000.00 payable to the
order of X who in turn negotiates it to Y, the latter knowing
that Pedro is not a party for value.
1.
May Y recover from Pedro if the latter interposes the
absence of consideration? (3%)
2.
Supposing under the same facts, Pedro pays the said
P20,000.00, may he recover the amount from X? (2%)
ANSWERS:
1.
Yes, Y may recover from Pedro. Section 29 of the NIL
provides that an accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for
purposes 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.
2.
Yes, Pedro may recover the amount from X. Section 119
(b) NIL, states that a negotiable instrument is discharged
by payment in due course by the party accommodated,
where the instrument is made or accepted for his
accommodation.
The
Rule
on
Accommodation
party does
not
apply
to
corporations
The aforequoted provision of the Negotiable Instruments Law
which holds an accommodation party liable on the instrument to a
holder for value, although such holder at the time of taking the
instrument knew him to be only an accommodation party, does
not include nor apply to corporations which are accommodation
286
parties.
This is because the issue or indorsement of negotiable
paper by a corporation without consideration and for the
287
accommodation of another is ultra vires.
Hence, one who has
285 Cited in the Negotiable Instruments Law Annotated, Joseph Doddridge Brannan, second edition, 1911, page 38
286 11 C.J.S. 309
287 14A C.J. 732
162
taken the instrument with knowledge of the accommodation
nature thereof cannot recover against a corporation where it is
only an accommodation party. If the form of the instrument, or
the nature of the transaction, is such as to charge the indorsee
with knowledge that the issue or indorsement of the instrument by
the corporation is for the accommodation of another, he cannot
288
recover against the corporation thereon.
(Ernestina CrisologoJose vs. Court of Appeals, et al, G.R. No. 80599, September 15,
1989, [Regalado, J.])
In other relevant and older cases, it was held that: a
manufacturing corporation has no power to bind itself as an
accommodation party. Therefore in such a case the plaintiff must
show both that he paid value and also that he did not know of the
accommodation character of the instrument. (Brannan, page 38,
citing Nat. Bank v. Snyder Co., 117 App. Div. 370, 102 N.Y.
Supp.. 478; Bradley Engineering Co., v. Heyburn (Wash.), 106
Pac. 170, S.C. sec. 119; Cf. In re Troy & Cohoes Shirt Co., infra,
sec. 56) The possession and negotiation by the maker of a note
with the indorsement of the payee imports that the indorsement
was for accommodation, and neither sec. 29 nor sec. 22 give
power to a corporation to make accommodation indorsements.
(Ibid, citing Oppenheim v. Simon Reigel Cigar Co., 90 N.Y. Supp.
355)
Exception
By way of exception, an officer or agent of a corporation shall
have the power to execute or indorse a negotiable paper in the
name of the corporation for the accommodation of a third person
289
only if specifically authorized to do so.
Corollary, corporate
officers, such as the president and vice-president, have no power
to execute for mere accommodation a negotiable instrument of
the corporation for their individual debts or transactions arising
from or in relation to matter in which the corporation has no
legitimate concern. Since such accommodation paper cannot
thus be enforced against the corporation, especially since it is not
involved in any aspect of the corporate business or operations,
the inescapable conclusion in law and in logic is that the
signatories thereof shall be personally liable therefor, as well as
the consequences arising from their acts in connection therewith.
x x x The fact that for lack of capacity the corporation is not bound
by an accommodation paper does not thereby absolve, but should
288 Oppenheim vs. Simon Reigel Cigar Co., 90 N.Y.S. 355, cited in 11 C.J.S. 309
289 In re Wrentham Mfg. Co., 2 Low. 119; Hall vs. Auburn Turnp. Co., 27 Cal. 255, cited in 14A C.J. 461
163
render personally liable, the signatories of said instrument where
the facts show that the accommodation involved was for their
personal account,
thereof. (supra)
undertaking
and
the
creditor
was
aware
2012 Bar Question:
Y, as President of and in behalf of AAA Corporation, as a
way to accommodate X, one of its stockholders, endorsed
the check issued by X. Which statement is most acurate?
a.
It is an ultra vires act.
b.
It is a valid indorsement.
c.
The corporation will be held liable to any holder in due
course.
d.
It is an invalid indorsement.
Does the accommodation party have any liability?
Yes, 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. (Sec.
To paraphrase, the accommodation party is liable to a holder
for value as if the contract was not for an 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
290
knew that the indorser was only an accommodation party.
(Ang
Tiong vs. Lorenzo Ting, G.R. No. L-26767, February 22, 1968,
[Castro, J:])
2012 Bar Question:
X acted as an accommodation party in signing as a maker
of a promissory note. Which phrase best completes the
sentence - This means that X is liable on the instrument to
any holder for value:
a.
for as long as the holder does not know that X is only an
b.
even though the holder knew all along that X is only an
290 Beutels Brannan Negotiable Instruments Law, 7th ed., pp. 568-569; Stuart del Rosario, Treatise on Negotiable
Instruments, 1961 ed., 165, 242-243; Alvendia, The Negotiable Instruments Law, pp 55, 57-58; National Bank va.
Maza, et al, 48 Phil. 210.
164
c.
for as long as X did not receive any consideration for
acting as accommodation party.
d.
provided X received consideration for acting as
Illustrative Case:
G.R. Nos. L-25836-37, January 31, 1981
FERNANDEZ, J.:
FACTS:
the defendant.
printing
the
defendant
obtained
a
credit
from the draft.
165
Aruego contends that he signed the bills of
exchange
not
as
principal
obligor,
but
as
accommodation or additional party obligor, to add to
the security of said plaintiff bank. His reason is that
unlike real bills of exchange, where payment of the
face value is advanced to the drawer only upon
acceptance of the same by the drawee, in the case
in question, payment for the supposed bill of
exchange were made before acceptance; so that in
effect, although these documents are labeled bills of
exchange, legally they are not bills of exchange but
mere instruments evidencing indebtedness of the
drawee of who received the face value thereof, with
the defendant as only a additional security of the
same.
ISSUE:
RULING:
Defendant contends that he signed the drafts only
as an accommodation party and as such, should be
made liable only after showing that the drawer is
incapable of paying.
This contention is without
merit.
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.
291 G.R. No. L-34539, July 14, 1986.
166
291
Prudencio vs. Court of Appeals
, held that: In the case of
Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539),
we held that in lending his name to the accommodated party,
the accommodation party is in effect a surety However, unlike
in a contract of suretyship, the liability of the accommodation party
remains not only primary but also unconditional to a holder for
value such that even if the accommodated party received an
extension of the period for payment without the consent of the
accommodation party, the latter is still liable for the whole
obligation and such extension does not release him because as
far as the holder for value is concerned, he is a solidary co-debtor.
Expounding on the nature of the liability of an accommodation
party under the aforequoted section, we ruled in Ang Tiong v. Ting
(22 SCRA 713, 716):
[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 the
accommodation indorser and accommodated party. So 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 appellants 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 accommodation indorser.
There is, therefore, no question that as accommodation
makers, petitioners would be primarily and unconditionally liable
on the promissory note to a holder for value, regardless of
whether they stand as sureties or solidary co-debtors since such
distinction would be entirely immaterial and inconsequential as far
as a holder for value is concerned. Consequently, the petitioners
cannot claim to have been released from their obligation simply
because the time of payment of such obligation was temporarily
deferred by PNB without their knowledge and consent. There has
291 G.R. No. L-34539, July 14, 1986.
167
to be another basis for their claim of having been freed from their
obligation. The question which should be resolved in this instant
petition, therefore, is whether or not PNB can be considered a
holder for value under Section 29 of the Negotiable Instruments
Law such that the petitioners must be necessarily barred from
setting up the defense of want of consideration or some other
personal defenses which may be set up against a party who is not
a holder in due course.
A holder for value under Section 29 of the Negotiable
Instruments Law is one who must meet all the requirements of a
holder in due course under Section 52 of the same law expect
notice of want of consideration. (Agbayani, Commercial Law of
the Philippines, 1964, p.208). If he does not qualify as a holder in
due course then he holds the instrument subject to the same
defenses as if it were non-negotiable. (Section 58, Negotiable
Instruments Law).
Problem:
Mr. B, in his capacity as President and Presiding Officer of
BB Bus Lines, Inc., purchased various spare tires from AA
Auto Supply, and issued two (2) post-dated checks to cover
his purchases. The checks were subsequently dishonored.
Thereafter, two counts of violation of BP 22 were filed
against Mr. B. The criminal cases were eventually dismissed
on a demurrer to evidence filed by Mr. B, but the latter was
directed to pay AA Auto Supply the value of the checks with
interest of 12% per annum and cost. Mr. B through a petition
for review on certiorari with the Supreme Court raised the
issue that he being an officer of the corporation, he should
not be personally and civilly held liable for the value of the
checks.
AA Auto Supply, on the other hand, contends that, Mr. B, by
issuing his check to cover the obligation of the corporation,
became an accommodation party, thus, he is liable on the
instrument to a holder for value.
Is Mr. B liable?
No. Judicial entities have personalities separate and distinct from
its officers and the persons composing it.

Generally, the
stockholders and officers are not personally liable for the
obligations of the corporations except only when the veil of
corporate fiction is being used as a cloak or cover for fraud or
168
illegality, or to work injustice. These situations, however, do not
exist in this case. The evidence shows that it is BB Bus Lines,
Inc. that has obligations to AA Auto Supply for tires. There is no
agreement that Mr. B shall be held liable for the corporations
obligations in his personal capacity. Hence, he cannot be held
liable for the value of the checks.
Likewise, Mr. B cannot be considered liable as an
accommodation party. An accommodation party lends his name
to enable the accommodated party to obtain credit or to raise
money; he received no part of the consideration for the instrument
but assumes liability to the other party/ies thereto. The first two
elements are present here, however there is insufficient evidence
presented in the instant case to show the presence of the third
requisite. All that the evidence shows is that Mr. B signed the
check corresponding to the spare tires received by BB Bus Lines,
Inc. There is no showing of when petitioner issued the check and
in what capacity. In the absence of concrete evidence it cannot
just be presumed that Mr. B intended to lend his name to the
corporation.
Hence, Mr. B cannot be considered as an
accommodation party. (Claude P. Bautista vs. Auto Plus Traders,
Inc., G.R. No. 166405, August 6, 2008, [Quisumbing, J.])
1996 Bar Question:
Nora applied for a loan of Php 100,000.00 with BUR Bank. By
way of accommodation, Noras sister, Vilma, executed a
promissory note in favor of BUR Bank. When Nora defaulted,
BUR
Bank
sued
Vilma,
despite
knowledge
that
Vilma
received no part of the loan.
May Vilma be held liable? Explain.
Yes, Vilma may be held liable.
Vilma is an accommodation party as defined under Sec. 29 of
the Negotiable Instruments Law. As such she 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
Extent of liability of the Accommodation Party
292
In Ang vs Associated Bank,
, the High Court held that: the
liability of an accommodation party remains not only primary but
169
also unconditional to a holder for value, even if the
accommodated party received an extension of the period for
payment without the consent of the accommodation party, the
latter is still liable for the whole obligation and such extension
does not release him because as far as a holder for value is
293
294
concerned, he is a solidary co-debtor.
In Clark v. Sellner,
this
Court held:
x x x The mere delay of the creditor in enforcing the
guaranty has not by ay means impaired his action against the
defendant. It should not be lost sight of that the defendants
signature on the note is an assurance to the creditor that the
collateral guaranty will remain good, and that otherwise, he,
the defendant, will be personally responsible for the payment.
True, that if the creditor had done any act whereby the
guaranty was impaired in its value, or discharged, such an act
would have wholly or partially released the surety, but it must
be born in mind that it is a recognized doctrine in the matter of
suretyship that with respect to the surety, the creditor is under
no obligation to display any diligence in the enforcement of his
rights as a creditor.
His mere inaction, indulgence,
passiveness, or delay in proceeding against the principal
debtor, or the fact that he did not enforce the guaranty or apply
on the payment of such funds as were available, constitute no
defense at all for the surety, unless the contract expressly
requires diligence and promptness on the party of the creditor,
which is not the case in the present action. There is in some
decisions a tendency toward holding that the creditors laches
may discharge the surety, meaning by laches a negligent
forebearance. This theory, however, is not generally accepted
and the courts almost universally consider it essentially
inconsistent with the relation of the parties to the note. (21
295
R.C.L., 1032-1034)
Solidary Accommodation Maker
On principle, a solidary
payment has
the
right
accommodation maker, in
contrary between them, and
This right springs from
accommodation makers to
accommodation maker who made
to
contribution,
from
his
cothe absence of agreement to the
subject to conditions imposed by law.
an implied promise between the
share equally the burdens that may
ensue from their having consented to stamp their signatures on
292 supra
293 Prudencio v. Court of Appeals, supra at 12-13
294 42 Phil. 384 (1921)
295 Id. at 387-388
170
the promissory note.296

For having lent their signatures to the
principal debtor, they clearly placed themselves in so far as
payment made by one may create liability on the other in the
297
category of mere joint grantors of the former.
This is as it
should be. Not one of them benefited by the promissory note.
They stand on the same footing. In misfortune, their burdens
should be equally spread. (Intestate Estate of Victor Sevilla, et al
vs. Francisco Sevilla, G.R. No. L-17845, April 27, 1967, [Sanchez,
J:])
The rule is that: (1) A joint and several accommodation maker
of a negotiable promissory note may demand from the principal
debtor reimbursement for the amount that he had paid to the
payee; and (2) a joint and several accommodation maker who
pays on the promissory note may directly demand reimbursement
from his co-accommodation maker without first directing his
action against the principal debtor provided that (a) he made the
payment by virtue of a judicial demand, or (b) a principal debtor is
insolvent. (supra)
In the case of Ernestina Crisologo-Jose vs. Court of
298
Appeals, et al
, it was held: [t]he fact that he was only a co-
signatory does not detract from his personal liability. A co-maker
or co-drawee under the circumstances in this case is as much an
accommodation party as the other co-signatory or, for that matter,
as a lone signatory in an accommodation instrument. Under the
doctrine in Philippine Bank of Commerce vs. Aruego, supra, he is
in effect a co-surety for the accommodated party with whom he
and his co-signatory, as the other co-surety, assume solidary
liability ex lege for the debt involved.
On the other hand, an accommodation maker of a note is
liable to one whom it was indorsed in payment of an antecedent
debt, the use of the note having been restricted by the maker.
(Brannan, page 39, citing English v. Schlesinger, 55 Misc. R. 584,
105 N.Y. Supp. 989)
Accommodation Indorser
296 Daniel on Negotiable Instruments, id., p. 1597.
297 Daniel on Negotiable Instruments, id., p. 1595; and Footnote 65: The liability of cosureties to each other for
contribution is not joint [joint and several] but several, citing Vansant vs. Gardner, 240 Ky. 318, 42 S.W. (2nd) 300;
Voss vs. Lewis, 126 Ind. 155, 25 N.E. 892.
298 G.R. No. 80599, September 15, 1989
171
In case of accommodation indorsement the indorser makes
the indorsement for the accommodation of the maker.

Such
indorsement is generally for the purpose of better securing the
payment of the note that is, he lend his name to the maker,
not the holder. Putting it another way: An accommodation note
is one to which the accommodation party has put his name,
without consideration, for the purpose of accommodating some
other party who is to use it and is expected to pay it. The credit
given to the accommodation party is sufficient consideration to
bind the accommodation maker.

W here, however, an
indorsement is made as a favor to the indorsee, who requests it,
not the better to secure payment, but to relieve himself from a
distasteful situation, and where the only consideration for such
indorsement passes from the indorser to the indorsee, the
situation does not present one creating an accommodation
indorsement, nor one where there is a consideration sufficient to
sustain an action on the indorsement. (Maulini, et al vs. Serrano)
Right of the Accommodation Party to sue the Accommodated
Party
[I]t may be properly remarked that when the accommodation
parties make payment to the holder of the notes, they have the
right to sue the accommodated party for reimbursement, since the
relation between them is in effect that of principal and sureties,
the accommodation parties being the sureties. (Philippine
National Bank vs. Ramon Maza and Francisco Mecenas, G.R.
No. L-24224, November 3, 1925)
Extinction of an Accommodation Note
If an accommodation note has once been negotiated and paid
at maturity it is extinguished and cannot be re-issued so as to bind
the accommodating party. A repeated use of the instrument is not
within the authority given. (Brannan, page 38, citing Comstock v.
Buckley, (Wis.), 124 N.W. 414, S.C. sec. 58)
Knowledge of an indorsee for value that the note was given
for the accommodation payee is not a defense
Knowledge of an indorsee for value that the note was given for
the accommodation of the payee is not a defense to an action by
the indorsee against the accommodating maker.

Nor is an
agreement between the payee and maker that the note should be
deposited in a bank as collateral security for advances to be made
to the payee (and which were made) and that the bank should
hold and not negotiate the note, although the indorsee of the bank
172
had knowledge of the agreement. The bank being a holder in due
course could transfer its rights to the plaintiff. (Brannan, page 38,
citing Black v. Bank of Westminster, 96 Md. 399, 54 Atl. 88, S.C.
sec. 56)
Illustrative Cases:
W here it was agreed between the maker and the payee of a
note that each should receive one-half the proceeds of the
discount and pay one-half of the note, the maker was not an
accommodation maker. (Brannan, page 38, citing, Reyburn v.
Queen City Savings Bank & Trust Co., 171 Fed. 609, 96 C.C.A.
373)
An accommodation note may be negotiated after maturity even
though it be the first negotiation and to one having knowledge of
the accommodation so as to make the accommodation maker
liable. (Ibid, citing Marling v. Jones, 138 Wis. 82, 119 N.W. 931;
Mersick v. Alderman, 77 Conn. 634, 60 Atl. 109, semble, S.C.
sec. 52)
III. NEGOTIATION
173
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.
Notes:
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. (Sec. 30, Negotiable Instruments Law )
It is important to bear in mind that the negotiation of a
negotiable instrument must be distinguished from the assignment
or transfer of an instrument whether that be negotiable or nonnegotiable.

Only an instrument qualifying as a negotiable
instrument under the relevant statute may be negotiated either by
indorsement thereof coupled with delivery, or by delivery alone
where the negotiable instrument is in bearer form. A negotiable
instrument may, however, instead of being negotiated, also be
assigned or transferred. The legal consequences of negotiation
as distinguished from assignment of a negotiable instrument are,
of course, different. A non-negotiable instrument may, obviously,
not be negotiated; but it may be assigned or transferred, absent
an express prohibition against assignment or transfer written in
the face of the instrument. (Sesbreo vs. CA, G.R. No. 89252,
May 24, 1993, [Feliciano, J.])
The words not negotiable, stamped on the face of the bill of
lading, did not destroy its assignability, but the sole effect was to
exempt the bill from the statutory provisions relative thereto, and a
bill, though not negotiable, may be transferred by assignment, the
assignee taking subject to the equities between the original
parties. (supra)
2012 Bar Question:
As payment for a debt, X issued a promissory note in
favor of Y but the promissory note on its face was marked
non-negotiable. Then Y instead of indorsing the promissory
note, assigned the same in favor of Z to whom he owed some
debt also. Which statement is most accurate?
174
a.
Z cannot claim payment from X on the basis of the
promissory note because it is marked non-negotiable.
b.
Z can claim payment from X even though it is marked nonnegotiable.
c.
Z can claim payment from Y because under the
Negotiable Instrument Law, negotiation and assignment is
one and the same.
d.
Z can claim payment from Y only because he was the
endorser of the promissory note.
299
Distinction between Assignability and Negotiability
1. Assignability pertains to contracts in general.
2.
An assignment is the legal method of transferring property
or rights evidenced by a contract.
3.
An assignment is an impracticable method, as regards
circulating medium, because:
a.
Title created by assignment, as against the
debtor, is not complete without notice to the debtor.
b.
No subsequent purchaser of the property or rights
can acquire better title than that of his immediate
assignor.
4. Negotiability pertains to a special class of contracts.
5.
Negotiability facilitates
medium, because:
their
transfer
as
circulating
a.
The bona fide purchaser for value is presumed to
be the true owner, and has good title.
b.
Transfer is effected by indorsement or delivery.
c.
In general, a consideration for the contractual
relation is conclusively presumed as between parties
not immediate.
300
Purpose of Negotiability
175
Negotiable bills and notes in some respects play the part of
money in business affairs.

The fundamental purpose of
negotiability is to endow them with all the qualities necessary for a
301
limited commercial medium.
Professor Charles Norton goes on to say that: [p]robably the
primary object of negotiability is to give bills or notes the effect
which money, in the shape of government bills or notes, plays in
commercial transactions.
These last are an unquestioned
medium of payment for debts or for the transfer of property rights.
They are such an unquestioned medium because the credit or
solvency of the government, which has caused them to be issued,
is behind them. It is the distinct promise of a whole nation to
exchange for the bill or note itself, in precious metal, a sum of
money intrinsically worth its face. x x x A mans credit is rated at
the amount of property or valuable rights he has or can procure.
He makes this credit available in his bill or note because his credit
is its guaranty of future payment. The elements of credit may be
either his earning capacity or the accumulated property he owns.
Business men rely upon these as the source of probable future
payment.
And so the merchant sells goods, and the bank
discounts for the seller the buyers note or draft. And business
men who have no property in cash are by means of credit enabled
to conduct and carry to completion business and commercial
enterprises. Other business men will take these promises of men
of undoubted credit, and treat them as cash. Thus we see bills
and notes going from hand to hand in commercial markets, and
credit taking the part of money in commercial transactions. And
here, perhaps, as a part of this theory of negotiability, it is well to
show how far and under what circumstances courts have treated
negotiable instruments as liquidation of indebtedness.

302
If an instrument is payable to bearer, how is it negotiated?
If the instrument is payable to bearer, it is negotiated by
delivery.
How about if the instrument is payable to order?
If payable to order, it is negotiated by the indorsement of the
holder and completed by delivery.
Effect of a defective negotiation; Legal title to instrument not
vested in plaintiff
301 Id.
302 Id.
176
According to Prof. Daniel: [a]s has been seen, the transferee
of a non-negotiable contract must bring action in the name of the
original payee, to the use of the transferee. This is upon the
theory that, notwithstanding the assignment, the legal title remains
in the original owner. But the transfer of a negotiable contract
carries with it the legal title thereto, and the owner thereof must
bring action in his own name. It follows that if the plaintiff is not
the legal owner of the instrument, he cannot maintain suit thereon
in his own name. Any defense which attacks the method and
manner of transferring the legal title to a negotiable instrument, or
that would invalidate the transfer, or any denial of the existence of
a transfer to the plaintiff, either by delivery, or by indorsement and
deliver, as the case may be, would, if made out, constitute a legal
bar to an action brought thereon. W hat has been heretofore said
on the subject transfer by indrosement and delivery, and of the
steps that may be necessary in detail to effectuate a change of
legal ownership from one person to another, need not be
repeated here. x x x It is generally sufficient here to say that if the
plaintiff is not the owner or the agent or trustee of the owner, a
defense successfully setting up the fact will defeat recovery.
(Elements of the Law of Negotiable Instruments, Daniel, p. 305-
306)
Illustrative Case:
The plaintiff made a note to the order of X, who was to
negotiate it for plaintiffs benefit. About three months later after
several unsuccessful attempts to negotiate the note, plaintiff
asked X for the note and was falsely told that it had been
destroyed. About six months thereafter but before its maturity X
delivered the note, without indorsing it, to defendant as collateral
for a loan to himself. Plaintiff sued to restrain defendant from
disposing of the note and for its cancellation. Held, that the relief
should not be granted, that although defendant was not a holder
in due course under the Negotiable Instruments Law, yet plaintiff
was liable to him on the ground that X was his agent to borrow
money from him.

(Brannan, page 40, citing Sublette v.
Brewington (Mo. App.), 122 S.W. 1150)
In another case, the cashier of a bank sold certain notes,
indorsed in blank by the payee, to defendant who deposited them
in his private box in the bank. The cashier had a key to the box
and was authorized by defendant to collect the notes.

The
cashier abstracted the notes from the box and sold them to
plaintiff, a bona fide purchaser. Plaintiff deposited them in his
private box, authorizing the cashier to collect them. W hen the
177
notes were due the cashier got new notes from the maker,
payable to the order of the defendant, forged defendants
indorsement and deposited the notes in plaintiffs box where they
were found after the suicide of the cashier. Held, that there was
sufficient delivery of the original notes to plaintiff to complete a
valid transfer, whether they were deposited in his box by him or by
the cashier, and that plaintiff was entitled to impress a trust on the
new notes taken in place thereof. (Ibid, citing Irwin v. Deming,
142 Iowa, 299; 120 N.W. 645)
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.
Notes:
Meaning of term indorsement
INDORSEMENT Is the writing of the name of the indorser on
the instrument with the intent wither to transfer the title to the
same, or to strengthen the security of the holder by assuming a
contingent liability for its future payment, or both. It strictly applies
303
only to negotiable instruments.
Indorsing an instrument, in its literal sense means writing ones
name on the back thereof; and, in its technical sense, it means
writing ones name thereon with intent to pass title thereto and to
incur the liability of a party who warrants payment of the
instrument, provided it is duly presented to the principal at
maturity, not paid by him, and such fact is duly notified to the
indorser. Indorsement, strictly speaking, is applicable only to
negotiable paper, and the term includes delivery for value to the
304
indorsee, but it is otherwise as to an instrument not negotiable.
(Daniel, Elements of the Law of Negotiable Instruments, page 107-
108)
305
The formal requisites of an indorsement are:
a)
Though usually on the back of the instrument, an
indorsement is on its face, but it must be somewhere upon
it.
W hen by reason of rapid circulation the instrument
becomes filled with indorsements, the law merchant
permits the holder to paste on a slip of paper for his own
306
and subsequent indorsements. This is called an allonge.
304 Daniel of Negotiable Instruments, 666
178
b)
The usual form of indorsement is the signature of the
indorser, with or without a direction to pay the indorsee
described or to him or order. Any form of words with the
signature from which the intent of the holder to incur the
liability of an indorser may be gathered is a sufficient
307
indorsement.
By an indorsement, therefore, a party not only passes his
interest in the bill to another, but also pledges his credit for the
honor of the bill. In other words, an indorsement is at once a
308
transfer and a contract.
Nature of Indorsement
The nature of an indorsement is a follows: It is
a)
A contract which the indorser assumes with his indorsee
and subsequent holder that, if the drawee, acceptor, or
maker fails to honor the bill or note, he will, upon the
performance of certain conditions imposed by the law
merchant, indemnify the holder for all loss incurred by
309
reason of the dishonor of the bill or note.
310
b) A transfer of the title to the instrument.
The student must fully grasp this idea,--that the indorsement is
a contract, and a contract to which the law merchant and the
common law have appended very peculiar conditions.

It is
contract something in the nature of a guaranty, something in the
nature of a warranty, and to the liability under which the laws have
attached the very unusual conditions of presentment, demand,
and notice of dishonor. It is, to be sure, an evidence of a transfer
of title, but it is principally a development of a form of contract at
the hands of the creators of the body of rules of the law
311
merchant.
The last general element of an indorsement is that it is a
transfer of the title to the instrument. It is sufficient here to say, in
general terms, that by this is meant nothing more than that it is a
mere purchase and sale of a piece of property. The indorser or
306 Id.
307 Id.
308 Id., p. 107, citations ommitted
310 Id.
311 Id., citations ommitted
179
transferor is viewed in many respects as a vendor, and the
indorsee or transferee as a vendee. It is, of course, not tangible
property, but a chose in action, and as such transferee or vendee
312
the indorsee merely purchases the rights of the indorser.
Requisites of indorsement
313
The requisites of an indorsement are as follows:
a)
It must follow the tenor of the bill or note.
b)
It must be by the payee or a subsequent holder.
c)
It is only complete upon delivery.
It must follow the tenor of the bill or note.
The indorser, as well as the acceptor, may not alter the
amount of money obligated in the instrument to be paid, nor the
time, place, or manner of payment. If, for instance, the indorser
ordered payment of part of the sum called for in the original
instrument to one person, and part to another, it would amount to
an apportionment of the contract, and the acceptor or maker
would thus, by the indorsers act, be liable to two actions where,
by the terms of the original contract, he was liable to but one.
W ere the rule otherwise, the indorser would be empowered to
make a contract for the maker or acceptor without his assent,--a
reduction ad absurdum. But this does not mean that, when an
instrument has been paid in part, a receipt for the amount paid
may not be written on its back, and the indorser may not transfer
the balance, nor that the note may not be transferred to two or
more persons, who hold it on co-ownership as a joint right, nor
that an instrument may not be indorsed to a third person as
collateral security for a claim equaling but part of the amount
called for in the instrument itself. All these are perfectly proper
courses, because they transfer but one right of action. The test
is, does the transfer cut up the right of action, or vary it, or invest
different persons with different rights of action against different
parties to the instrument? If it does, the indorsement is void as
314
such.
Who may indorse.
The sense of this rule is, however, restricted. x x x [A] person
who is not a holder or owner of the instrument in any sense, but
who outs his name upon it merely to support its circulation by his
credit, may incur liability as a so-called irregular indorser. All
312 Id., p. 132
313 Id.
314 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 131-132
180
that we would here say is that in case of instruments payable to
315
order the payee must be in the first instance the first indorser.
This is because of several reasons.

The first is that the
property of the instrument is in the payee. Until he indorses it, the
legal title is not transferred. Mere possession by someone else of
the instrument unendorsed does not entitle that other person to
the full rights of a bona fide purchaser, and if the maker or
acceptor pays it to such person, it is at the risk of possible re316
payment.
But this rule is not universal in its application. An indorsement
is only necessary to transfer the legal as distinguished from the
equitable title to the paper. If by mistake, accident, or fraud, the
indorsement has been omitted, when it was intended that the
indorsement should be made, the payee may be compelled by a
court of equity to make the indorsement. Meantime the transferee
holds the bill or note under the same rights that he would have
acquired under the assignment of paper not negotiable. In other
words, he is the beneficial owner, and has those rights and only
those rights against prior parties which the payee or his assignor
must have,--and every equitable defense available against them
is available against him. This rule applies to subsequent holders.
In cases of indorsements in full, the indorsee in such indorsement
named must for the same reasons himself indorse the instrument.
In no other way will the transfer convey the legal title to the holder,
317
so that he can at law hold the other parties liable to him.
The second reason rests upon the theory that the liability of
indorsers to each other is regulated by the position of their names.
This reason also is restricted in its application. To this rule, too,
the irregular indorser, who has not owned the paper, and to whom
no such transfer has been made, is also an exception; although,
of course, where the second accommodation indorser of an
instrument has paid and taken it up, he becomes a holder for
value, and may compel the first accommodation indorser to pay
318
him, although both are accommodation indorsers.
[T]he contract which each indorser makes when he indorses
the paper is that he is liable to every subsequent indorsee, just as
every antecedent party is liable to him. The liability is several. It
is successive. And the object of the rule is only to maintain these
315 Id., p. 134
316 Id.
317 Id., pp. 134-135
318 Id., p. 135
181
indorsements in the regular order of their liability. It does not go
further than this.319
Thus where A made a note payable to B or order, and B
afterwards indorsed the note to C, who afterwards indorsed it to B
again, the court, upon suit by B against C, refused a recovery
because it was a prior indorser calling upon a subsequent one;
and the inference of the decision is that this course was not
allowed because it involved circuitry of action. One who has
indorsed a bill or note, and become liable as indorser, cannot, as
a rule, on having the instrument reindorsed to him by the other,
bring an action against him on the indorsement, for the
intermediate indorsee would have his remedy over, and the result
of the action would be to place the parties in precisely the same
situation as before any action at all. But if such prior indorser had
indorsed without recourse, or if the circumstances otherwise
negative the right of his intermediate indorsee to sue upon the
indorsement, the objection as to circuitry of action would be
removed, and the prior indorser could recover under the
320
indorsement back as indorsee.
Necessity for Delivery.
As in the case of the inception of the original contract rights
under the principal terms of the instrument, and also under the
acceptance, an indorsement requires delivery. And the rules and
reasons relating to the delivery of an indorsed instrument by the
payee or indorser are in most respects the same as those already
given relating to the delivery of bills and notes and of
acceptances. The negotiation of the instrument begins with the
act of indorsement as distinguished from the intention of the
parties to indorse, and is consummated by the delivery of the
instrument and its acceptance with the intention to pass and vest
title. On these simple acts the whole contract rests. The law
prima facie presumes the other elements of contract.

For
example, delivery once being made and the title having once
passed, these facts of themselves import a consideration.
Possession of the instruments obviates the necessity of pleading
delivery, non-delivery being wholly a matter of affirmative defense.
And the terms indorsed in pleading includes delivery for value to
the indorsee. But both indorsement and delivery must concur in
the transfer.
The indorsement without delivery is nothing,
although the indorser has in fact signed his name and the
indorsee knows that it is signed. Still the contracts so far as it has
gone may be revoked by the indorser, and the indorsement
countermanded, unless some contract right other than that of the
319 Id.
320 Id., citations ommitted
182
indorsement itself exists in the indorsee. The delivery must be
made by the indorser, otherwise the transfer of the instrument is
not by his order. His executor or administrator even cannot make
delivery, although the payee before his decease has written a
name upon it. So, too, if a transferee of a bill or note send it back
to his indorser, refusing to accept it, this is a refusal of an offer,
and his subsequent getting possession of the instrument without
assent of the indorser will not invest him with title, because there
was then no intention to contract present between them, and
321
hence no contract.
How should the indrosement be made?
The indorsement must be written on the instrument itself or
upon a paper attached thereto.
Moreover, the signature of the indorser, without additional
words, is sufficient indorsement. ( Sec. 31, Negotiable Instruments
Law)
An indorsement is necessary for the proper negotiation of
check specially if the payee named therein or holder thereof is not
the one depositing or encashing it. (Vicente Go vs. Metropolitan
Bank and Trust Co., G.R. No. 168842, August 11, 2010)
Thus, it was held that stamping the name of the payee on the
back with a rubber stamp with his authority and with intent to
indorse the instrument, is a valid indorsement. (Brannan, page
41, citing Mayers v. McRimmon, 140 N.C. 640, 53 S.E. 447, 111
Am. St. Rep. 879, S.C. sec. 49)
Where shall an indorsement be written?
W hile an indorsement, as its derivation and meaning would
indicate, should be, and generally is, placed on the back of the
instrument, it may be written although unusual and irregular on
any other portion of it, even on the face, and under the makers
322
name.
(Daniel, Elements of the Law of Negotiable Instruments,
page 111)
At any rate, the indorsement must, as a general rule, be
somewhere on the paper itself, or attached thereto, and unless it
323
is, the party cannot be held liable as an indorser,
but a promise
321 Id., pp. 136-137
322 Partridge v. Davis, 20 Vt. 449; Bigelow on Bills and Notes, 135
183
made on a sufficient consideration will sustain an action upon its
breach.324
(ibid, page 112)
Allonge
It is not necessary, however, that the indorsement should be
upon the original bill or note, in order to constitute it such, in the
full sense of the term.

It sometimes happens that by rapid
circulation from hand to hand, the back of the paper is completely
covered by indorsements; and in such cases the holder may tack
or paste on a piece of paper sufficient to bear his own and
subsequent indorsements, and thereon the indorsements may be
made. Such addition of the original instruments is called and an
allonge, and it becomes for the purposes above named,
325
incorporated as a part of it.
(ibid, page 112)
What is the effect of transfer without indorsement?
W here 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. (Sec. 49,
In the case of banks, they are deemed to be negligent when
they accept for deposit crossed checks without indorsement and
326
in not verifying the authenticity of the negotiation of the checks.
Irregular Indorsements
A person whose name is on the back of a bill or note payable to
the order of the maker or drawer, or payable to bearer, is deemed
327
to be a indorser.
If an instrument is payable to bearer, or to order of the maker
or drawer, and indorsed in blank, so that it passes by delivery, a
person, not otherwise a party to the instrument, whose name
appears on the back of the instrument, is deemed to be an
indorser only. In such case the name of the indorser appears in
its regular place upon the instrument, and is treated, as in fact it
appears to be, as if it had been made by one to whom the
instrument had been delivered, and who, before himself
transferring it by delivery, had indorsed it in order to incur the
323 Fenn v. Harrison, 3 T.R. 757; Daniel on Negotiable Instruments, 748
324 Moxon v. Pulling, 4 Campb. 51; French v. Tunrner, 15 Ind. 59
325 Crosby v. Roub, 16 Wis. 622; Folger v. Chase, 18 Pick. 63
326 Vicente Go vs. Metropolitan Bank and Trust Co., G.R. No. 168842
184
liability of indorser to his transferee and subsequent holders. The
effect of the indorsement cannot be varied by parol proof.328
Indorsement in full
It is one which mentions the name of the person in whose
favor it is made; and to whom or to whose order, the sum is to be
paid.
For instance:
Pay to B, or order, signed A, is an
indorsement in full by A, the payee or holder of the paper to B. An
indorsement in full prevents the bill or note from being indorsed by
329
anyone but the indorsee.
(Daniel, Elements of the Law of
Can
the
transferee
force
the
transferor
to
make
his
indorsement?
Yes, the transferee acquires in addition, the right to have the
indorsement of the transferor. (Sec. 49, Negotiable Instruments
Law)
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. (ibid)
Can there be partial indorsement?
As a general rule, no, there can be no partial indorsement of
the instrument. The indorsement must be an indorsement of the
entire instrument.
As an exception to the rule, however, where the instrument
has been paid in part, it may indorsed as to the residue.
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
negotiation
of
the
instrument. But where the instrument has been paid in part,
it may be indorsed as to the residue.
329 Mead v. Young, 4 T.R. 28
185
Notes:
What is the effect of partial indorsement?
ANSWER:
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. (Section 32, Negotiable
Instruments Law)
Example:
An instrument reads:
Pay to David Lancelot, or order, Php 1,000.00 upon demand.
Applying Sec. 32, the instrument must be indorsed in its
entirety to a subsequent holder, if for instance, the instrument is
indorsed only to the extent of Php 500.00, said indorsement does
not operate as a negotiation of the instrument. But, if there was
payment made by the maker to the extent of Php 750.00, the
instrument may be further indorsed, only to the extent of the
residue which in this case is Php 250.00
2012 Bar Question:
A issued a check in the amount of Php20,000 payable to B. B
endorsed the check but only to the extent of Php 10,000.
Which statement is most accurate?
a.
The partial indorsement is not a valid indorsement,
although will result in the assignment of that part.
b.
The partial indorsement will invalidate the whole
instrument.
c.
The endorsee will be considered as a holder in due
course.
d.
The partial indorsement is valid indorsement up to the
extent of the Php10,000.
Sec. 33. Kinds of indorsement. - An indorsement may be
either be special or in blank; and it may also be either
restrictive or qualified or conditional.
Notes:
What are the different kinds of indorsements?
186
ANSWER:
1.
Special indorsement;
2.
Indorsement in blank;
3.
Restrictive indorsement;
4.
Qualified indorsement.
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.
Notes:
What constitutes a special indorsement?
ANSWER:
A special indorsement specifies

whose order, the instrument is
indorsement of such indorsee is
negotiation of the instrument. (Sec.
the person to whom, or to
to be payable, and the
necessary to the further
34, Negotiable Instruments
Law)
An instrument which is originally payable to bearer, or which
has been indorsed in blank, though afterwards specially indorsed,
is still payable to bearer; except as to the special indorser, who,
on such an instrument, after such an indorsement, is only liable
330
on his indorsement to such parties as make title through it.
W here an instrument is specially indorsed, title can only be
transferred from the indorsee by his indorsement. In the very
outset, this principle must be sharply contrasted with the case of
bills or notes payable to bearer or indorsed in blank. W ith bills or
notes payable to bearer or indorsed in blank, the holder is
presumed to be the true owner. Possession and title are one and
the same thing and this though the party possession it is in no
wise a party to the instrument. But where the direction in the
contract is to pay specially to some person, that person and no
other can direct that the money is to be paid in its turn. No other
person can personate this indorsee, and by forgery satisfy the
187
condition of this contract. And it does not avail even that the bill
is paid under a forged indorsement. Such payment or transfer
was not in contemplation of the parties making the contract, and
331
is utterly void.
What constitutes indorsement in blank?
ANSWER:
Indorsement in blank specifies no indorsee, and an instrument
so indorses is payable to bearer, and may be negotiated by
delivery. (Sec. 34, Negotiable Instruments Law )
It is one which does not mention the name of the indorsee, and
generally consists simply of the name of the indorser written on
the back of the instrument. W hen the bill or note is indorsed in
blank, it is, as has been said, transferable by mere delivery to the
transferee; but one indorsed in full must be indorsed again by the
indorsee, in order to render it transferable to every intent for he
who indorses to a particular person, declares his intention not to
be made liable except by that persons indorsement over.
(Daniel, Elements of the Law of Negotiable Instruments, page
113)
The student must keep in mind that this relates only to an
instrument held by a bona fide holder. W here the instrument is
not in the possession of a bona fide holder, but of the finder or the
thief, this extreme rule does not apply. The instrument is, then,
like all other property. It cannot be enforced by the wrongful
holder. But, when once it is in the hands of the bona fide holder,
then it is treated as money in the ordinary course of business.
Alike in case of money and of paper indorsed in blank, where
either has been stolen or found, the true owner cannot recover it
after it has been paid away fairly and honestly upon a valuable
consideration, because it is necessary for the purpose of
332
commerce that its currency should be established and secured.
Illustrative Cases:
An indorsement in blank is not nullified by a guaranty following
it and guaranteeing the payment of a greater rate of interest, and
costs of collection, and waiving demand and notice of nonpayment. (Brannan, page 42,citing Elgin City Banking, Co. v.
Hall, 119 Tenn. 548, 108 S.W. 1068, S.C. secs. 38, 52-3)
331 Id., p. 117
332 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 111-112, citations
ommitted
188
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.
Notes:
The receiver of a negotiable instrument indorsed in blank, or
any bona fide holder of it, may write over it an indorsement in full
to himself, or to another, or any contract consistent with the
333
character of an indorsement;
but he cannot enlarge the liability
of the indorser in blank by writing over it a waiver of any of his
334
rights, such as demand and notice;
and he cannot fill it up so as
to make the instrument payable in part to one person and in part
to another. The indorsers contract is single and entire, and the
obligation created thereby cannot be broken into fragments, and
335
the indorser required to pay in fractions to different persons.
113)
Combination of the rules
In case of the combination of the two classes,--indorsements
in blank and in full,--the application of the rules is somewhat
confusing to the student. For example, let us assume that there
are indorsed upon an instrument some blank indorsements, then
some special indorsements, and after these again some
indorsements in blank. The special indorser will be liable only to
those who can make their title through his special indorsement.
The rule is well settled that if a note or bill be once indorsed in
blank, though afterwards indorsed in full, it will still, as against the
drawer, the payee, and prior indorsers, by payable to bearer,
though, as against the special indorser himself, title must be
336
made through his indorsee.
Can
blank
indorsement
be
changed
to
special
indorsement?
Yes. The holder may convert a blank indorsement into a
special indorsement by writing over the signature of the indorser
333 Evans v. Gee, 11 Pet. 80; Condon v. Pearce, 43 Mid. 83; Johnson v. Mitchell, 50 Tex. 212
335 Erwin v. Lynn, 16 Ohio (N.S.), 547
336 Id., p. 118
189
in blank any contract consistent with the character of indorsement.
(Sec. 35, Negotiable Instruments Law)
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.
Notes:
A RESTRICTIVE INDORSEMENT Means that the indorsee
is deputed by the indorser to be his agent in collecting the bill or
note, or else that the title is vested in the indorsee as a trustee or
337
for the use or for the benefit of a third person.
An indorsement may be so worded as to restrict the further
negotiability of the instrument; and it is then called a restrictive
indorsement. Thus, pay the contents to J.S. only , or to J.S. for
my use, or to order for my use, or for me, are restrictive
338
indorsements, and put an end to the negotiability of the paper.
Of the like character is an indorsement, credit my account, or
pay J.S. or order for account or on account of C.D., or for
collection, or for collection and immediate returns .

339
These and
similar restrictive words indicate that the indorsee is merely an
agent to receive the money, and that he paid no consideration for
the paper, as a purchaser would not intelligently accept such an
indorsement. The indorsee in such a case can only collect the
money; he cannot sell or hypothecate the instrument for his own
benefit, nor can he hold the indorser liable to himself.

The
restrictive words of the indorsement give notice of the trust
engrafted upon it, and if the indorsee passes it off for his own
debt, or in any other manner violate the trust, the transferee would
340
take it subject to the trust.
337 Id., p. 119
338 Wilson v. Holmes, 5 Mass. 543; Williams v. Potter, 72 Ind. 354, (italics supplied)
339 First Nat. Bank v. Reno County, 3 Fed. 257; White v. National Bank, 102 U.S. 658; Continental Nat. Bank v.
Weems, 69 Tex. 489, (italics supplied)
340 Hook v. Pratt, 78 N.Y. 371; Claflin v. Wilson, 51 Iowa, 15; Daniel on Negotiable Instrument, 698
190
2011 Bar Question:
Z wrote out an instrument that states: Pay to X the amount
of Php1 Million for collection only. Signed, Z. X indorsed it
to his creditor, Y, to whom he owed Php1 million.
Y now
wants to collect and satisfy X's debt through the Php1 million
on the check. May he validly do so?
A. Yes, since the indorsement to Y is for Php1 Million.
B. No, since Z is not a party to the loan between X and Y.
C. No, since X is merely an agent of Z, his only right being to
collect.
D. Yes, since X owed Y Php1 Million.
When is indorsement considered restrictive?
An indorsement is considered restrictive which either:
1.
Prohibits the further negotiation of the instrument; or
2.
Constitutes the indorsee the agent of the indorser; or
3.
Vests the title in the indorsee in trust for or to the use of
some other persons.
What if on the face of the instrument, there is the absence of
words implying the power to negotiate, does it make the
indorsement restrictive?
No. The mere absence of words implying power to negotiate
does not make an indorsement restrictive. (Sec. 36, Negotiable
Instruments Law)
Only after complying with Sec. 36 (a) to (c) will there be a
restrictive indorsement. The law does not presume it from the
mere absence of words implying the power to negotiate.
Must be written in express words at the back of the
instrument
In this kind of restrictive indorsement, the prohibition to
transfer or negotiate must be written in express words at the
back of the instrument, so that any subsequent party may be
forewarned that it ceases to be negotiable.

However, the
restrictive indorsee acquires the right to receive payment and
bring any action thereon as any indorser, but he can no longer
transfer his rights as such indorsee where the form of the
191
indorsement does not authorize him to do so.341

(Gempesaw vs.
Court of Appeals, G.R. No. 92244, February 9, 1993, bold
supplied)
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.
Notes:
What are the effects of restrictive indorsement?
A restrictive indorsement confers upon the indorsee the right:
1.
To receive payment of the instrument;
2.
To bring any action thereon that the indorser could
bring;
3.
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.
Indorsee for collection can sue in his own name
An indorsee for collection can sue in his own name, but he
takes the instrument subject to all equities existing between his
indorser and the maker. Payment by the maker to the indorser
after the indorsement is a good defense, and parol evidence to
show that the indorsee was the actual owner of part of the note is
inadmissible as tending to contradict the indorsement. (Brannan,
page 44, citing Smith v. Bayer, 46 Or. 143, 79 Pac. 497, 114 Am.
St. Rep. 858)
Kinds of restrictive indorsement
341 NIL, Sec. 37
192
The first and the commonest variety, and the one which is
generally spoken of by some text writers as restrictive
indorsement, is that where the holder deputes to some person
the business of collecting the bill; the other where the holder
indorses the instrument to one person for the use or benefit
of, or as the trustee of, another. Upon an indorsement of the
first kind the instrument is no longer negotiable; the second
variety of indorsement does not, however, restrict its circulation.
Examples of the first species of indorsement are indorsements
For collection, the indorsement for collection meaning that the
holder takes no title to it and can transfer to none, but can merely
present it and receive the money upon it. In construing these and
other cases like them, such as Pay to A only, or Pay to A for my
use, or Pay to A for me, or Pay to my steward and no other
person, or Pay to my servant for mu use, the courts have been
governed by two principles. The first and most important is the
reason that the natural construction of such a form of words is
that it implies a mere authority to receive the money called for in
the instrument for the use of the indorser himself, or according to
his directions. It therefore vests a mere agency in the indorsee,
and shows that he, at least, did not give a valuable consideration
for the bill or note and is not therefore its absolute owner. It
follows from this that the restrictive indorser, in creating such
agency, did not intend to pass the title to the indorsee, but rather
to retain it in himself. And hence, there being no intention to
transfer, the instrument cannot be negotiated through the
indorsement.
The second is the reason that the restrictive
indorsement, like the conditional indorsement, operates as notice
both to the persons called upon to pay the instrument and those
who might acquire it after the indorsement as purchasers. No
subsequent purchaser could take the instrument in good faith,
because whoever reads the indorsement, as it would be every
purchasers legal duty to read it, must see that its operation was
limited. Such a purchaser must see that the object of the indorser
was to prevent the money received from being applied to the use
of any other person than himself. And therefore, whomsoever the
money might be paid, it would be paid in trust for the indorser, and
wheresoever the instrument traveled it carried that trust on the
342
face of it.
2011 Bar Question:
A negotiable instrument can be indorsed by way of a
restrictive indorsement, which prohibits further negotiation
193
and constitutes the indorsee as agent of the indorser.
As
agent, the indorsee has the right, among others, to
A. demand payment of the instrument only.
B. notify the drawer of the payment of the instrument.
C. receive payment of the instrument.
D. instruct that payment be made to the drawee.
May the indorsee of a promissory note indorsed to him for
deposit file a suit against the indorser?
A. Yes, as long as the indorser received value

restrictive indorsement.
B. Yes, as long as the indorser received value

conditional indorsement.
C. Yes, whether or not the indorser received value

conditional indorsement.
D. Yes, whether or not the indorser received value

restrictive indorsement.
for the
for the
for the
for the
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.
Notes:
AN INDORSEMENT W ITHOUT RECOURSE means that the
indorser exempts himself from liability to indemnify the holder
343
upon the dishonor of the bill or note.
An indorsement qualified by the words without recourse,
sans recourse, or at the indorsees own risk, renders the
indorser a mere assignor of the title of the instrument, and
344
relieves him of all responsibility for its payment,
though not from
345
certain liabilities which have been already enumerated.
But
such an indorsement does not throw any suspicion upon the
346
character of the paper.
Negotiable Instruments, pages 114-115)
The indorsement without recourse is in form of words,
W ithout recourse, or Sans recourse, or At the indorsees own
344 Wilson v. Codmans Exr., 3 Cranch, 192; Borden v. Clark, 26 Mich. 410
345 See ante, 173
346 Lomax v. Picot, 2 Rand. 260; Kelley v. Whitnet, 45 Wis. 117
194
risk, or I hereby indorse and transfer my right and interest in this
bill to C D, or order, but with this express condition: that I shall not
be liable to him or to any subsequent holder for the acceptance or
payment of the bill. Such indorsements throw no discredit on the
bill. Such an indorser does not escape from the effect of the
warranties, as explained hereafter. The promise of a negotiable
bill or note indorses it to a third person, merely stipulating that, as
indorser, he is not to be responsible if the acceptor or maker does
not pay it. This he may do, because he has the property in the bill
or note, and he may dispose of it on what terms he pleases. Such
and indorsement does not render the negotiable security no
longer negotiable. The bill or note remains negotiable in the
hands of the indorsee, although he has no remedy against the
indorser without recourse. And, into whose hands so ever the bill
or note may come, the maker is still liable according to the terms
of his original contract. The question with the courts in construing
indorsements without recourse is whether the words of
indorsement are such that they clearly express an intention on the
part of the indorser not to be bound, and a corresponding
intention on the part of the immediate subsequent indorsees,
evidenced by their acceptance of the instrument with such an
indorsement, to exempt the indorser from his liability.

The
presumption is rather that the usual liability of an indorser is
intended to be incurred. And, to overcome this, it must clearly
appear that the transfer of the instrument was only to transfer the
title to it, and not to indemnify the indorsee against loss in case it
was not paid by the acceptor or maker. (Handbook of the Laws of
Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 120121, citations ommitted)
Act No. 2031, known as the Negotiable Instruments Law, x x x
establishes various kinds of indorsements by means of which the
liability of the indorser is in some manner limited, distinguishing it
from that of the regular or general indorser, and among those
kinds is that of the qualified indorsement which, pursuant to
section 38 of the same Act, constitutes the indorser a mere
assignor of the title to the instrument, and may be made by adding
to the indorsers signature the words without recourse or any
words of similar import. (concurring opinion, Torres, J., in (Maulini,
et al vs. Serrano [1914])
If it was not its purpose or intent to assume and agree to pay
the notes, it should have indorsed them without recourse, or in
such a manner as to disclaim any personal liability. W hen a
person makes an unqualified indorsement of a promissory note,
the Negotiable Instruments Law specifies and defines his liability,
195
and parol testimony is not admissible to explain or defeat such
liability. (Jose Velasco vs. Tan Liuan & Co., G.R. No. 17230,
March 17, 1922, [Johns, J;])
Such an indorsement relieves the indorser of the general
obligation to pay if the instrument is dishonored but not of the
liability arising from the warranties on the instrument as provided
in Section 65 of the Negotiable Instruments Law. (Metropol
(Bacolod) Financing & Investment Corporation vs. Sambok
Motors Company, G.R. No. L-39641, February 28, 1983, [De
Castro, J.])
Recourse means resort to a person who is secondarily liable
347
after the default of the person who is primarily liable.
Appellant
by indorsing the note with recourse does not make itself a
qualified indorser but a general indorser who is secondarily liable,
because by such indorsement, it agreed that if Dr. Villaruel fails to
pay the note, plaintiff-appellee can go after said appellant. The
effect of such indorsement is that the note was indorsed without
qualification.
A person who indorses without qualification
engages that on due presentment, the note shall be accepted or
paid, or both as the case may be, and that if it be dishonored, he
348
will pay the amount thereof to the holder.
(Ibid)
Liability of indorser without recourse
W hen the indorsement is without recourse the indorser
specially decline to assume any responsibility as a party to the bill
or note; but the very act of transferring it, he engages that it is
what it purports to be the valid obligation of those whose names
are upon it. He is like a drawer who draws without recourse; but
is nevertheless liable if he draws upon a fictitious party, or one
without funds. And, therefore, the holder may recover against the
indorser without recourse, (1) if any of the prior signatures were
not genuine; or (2) if the note was invalid between the original
parties, because of the want, or illegality of, the consideration; or if
(3) prior party was incompetent, or (4) the indorser was without
349
title.
(Daniel, Elements of the Law of Negotiable Instruments,
page 109)
2011 Bar Question:
X is the holder of an instrument payable to him (X) or his
order, with Y as maker. X then indorsed it as follows:
347 Ogden, the Law of Negotiable Instruments, p.200 citing Industrial Bank and Trust Company vs. Hesselberg, 195
S.W. (2d) 470
348 Ang Tiong vs. Ting, 22 SCRA 715
349 Dumont v. Williamson, 18 Ohio (N.S.) 515; Seeley v. Reed, 28 Fed. 167; Challiss v. McCrum, 22 Kan. 127
196
Subject to no recourse, pay to Z. Signed, X. When Z went
to collect from Y, it turned out that Y's signature was forged.
Z now sues X for collection. Will it prosper?
A.
Yes, because X, as a conditional indorser, warrants that
the note is genuine.
B.
Yes, because X, as a qualified indorser, warrants that
the note is genuine.
C.
No, because X made a qualified indorsement.
D.
No, because a qualified indorsement does not include
the warranty of genuineness.
What is a qualified indorsement? How is it made?
ANSWER:
A qualified indorsement constitutes the indorser a mere
assignor of the title of the instrument. It may be made by adding
to the indorsers signature the words without recourse or any
words of similar import. (Sec. 38, Negotiable Instruments Law)
Does a qualified indorsement impair the negotiable character
of the instrument?
ANSWER:
No. Such an indorsement does not impair the negotiable
character of the instrument.
Illustrative case:
The payee wrote on the back of the instrument the words, I
hereby transfer and assign all my rights, title, and interest to and
in within the note. Held, that this is a qualified indorsement and
equivalent to an indorsement without recourse. (Brannan, page
45, citing Evans v. Freeman, 143 N.C. 61, 54 S.E. 847.)
The fact that an indorsement is without recourse is not
enough to put a purchaser upon notice of equities. (Ibid, citing
Elgin City Banking Co. v. Hall, 119 Tenn. 548, 108 S.W . 1068,
S.C. secs. 34, 52-3.)
197
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.
Notes:
A CONDITIONAL INDORSEMENT Means an indorsement
by which the title to the instrument does not pass until the
350
condition mentioned in the indorsement is fulfilled.
Rationale of the provision
The conditional indorsement is a device by which a payee or
an indorsee may part with the possession of an instrument, but
not with the legal title to it. Mr. Daniel instances Pay to A B, or
order, if he arrives at 21 years of age, or Pay to A B, or order,
unless before payment I give you notice to the contrary, as
examples of conditional indorsement, the former being an
indorsement upon a condition precedent, and the latter one upon
a condition subsequent. These conditional indorsement have not
come very often before the courts, but they are recognized as
distinct class. It may be said, by way of criticism, that in them
commercial convenience has overridden the strict theory of
negotiability. This theory would not permit to exist a condition
which charged every subsequent indorsee with the duty of seeing
whether the condition had been fulfilled before he could legally
own the instrument.

For, certainly, with the conditional
indorsement, as well as with the conditional bill or note, it would
be a most effective restriction to circulation as a medium of
351
payment.
[I]t is well to note the authority usually referred to as the
leading
case
upon
the
subject,--ROBERTSON
v.
352
KENSINGTON.
There is this indorsement was made upon an
ordinary draft: Pay the within sum of Messrs. Clerk & Ross, or
order, upon my name appearing in the Gazette as ensign in any
st
th
regiment of the line, between the 1
and 64
, if within two months
from this date. This was transferred to bona fide holders, and the
acceptors paid the bill on its maturity to one of these. In the
meantime the indorsers name had never appeared in the Gazette
as an ensign, and he brought suit as the payee of the bill against
352 ROBERTSON v. KENSINGTON, 4 Taunt. 30
198
the acceptors who had accepted the bill after this indorsement
had been written upon it. And it is to be inferred from the report of
the case that the court decided that such an indorsement was
only a conditional transfer of the absolute interest in the bill, and,
its condition never having been performed, the transfer was
defeated. As appears from the cases, the point emphasized is
that the condition operates as notice, and, being merely a notice,
it does not destroy the negotiability of the bill or note. Thus, where
a note in usual form had these words upon it, signed by the
makers, The within obligation is to be delivered to the payees of
the note as a consideration for a judgment which has to be
assigned to the makers, the court properly said the words were
no part of the note. Their effect is only to show the consideration,
and to operate as a notice to any person who might purchase the
note. By this was meant that it was the intention of the parties
that it was not to affect the original contract. And in cases of
conditional indorsement, when it is not the intention of the original
parties that the main instrument should be contingent, the act of
the conditional indorser is not to be understood as operating to
change the main instrument.

The terms of the face of the
instrument still remain an absolute negotiable order or promise of
payment to someone. That someone might in turn negotiate the
bill or note to someone else, who in his turn might continue his
negotiation until it came to the conditional indorser. But he, on
parting with it, having the right of property himself, might make a
special contract which would be distinct from the contract
embodied on the face of the instrument. And the only purpose
and result of this contract would be to notify every holder
subsequent to himself, and the maker or acceptor, when the time
for the payment of the instrument arrived, that he as an indorser
parted with the instrument upon the understanding that his
ownership of it was not to cease until some stated condition was
fulfilled. As between the immediate indorser and indorsee, there
can be little doubt that this is a correct and proper rule. As to
them the contract of indorsement is but an ordinary contract, open
to all objections and defenses to which other contracts are open.
Some of these objections and defenses may even be shown by
parol evidence. This is because the contract consists partly of
written indorsement, partly of the act of delivery of the bill to the
indorsee, and partly of the mutual intention with which the delivery
is made by the indorser and received by the indorsee. But when
the question is not one between the immediate indorser and
indorsee, but between the indorser or indorsee and third parties
holding in good faith and for value, it becomes much more
embarrassing.
It is clear that parol evidence or evidence of
intention cannot be allowed to engraft a condition upon the
199
instrument such that it will affect third parties.
But where the
indorsement is in writing, the rule is so far settled that the maker
or acceptor and probably prior parties are bound to take notice of
the title of the indorsee, and, having such notice, they pay the
instrument to him or to subsequent parties at the risk of
repayment to the conditional indorser, if the condition is unfulfilled.
But, on the other hand, the conditional indorser cannot restrict the
negotiability of the instrument and prevent its further indorsement
by his indorsee. The terms of the original instrument making it
negotiable prevail, and persons other than the conditional
indorsee may take it subject to the notice of the condition. And
though there is little, if any, authority upon the point, still it may be
assumed that in the absence of an express warranty no other
than a conditional warranty of title in the subsequent indorser
would be implied. There seems to be no reason why the other
implied warranties should not remain a part of the contract. But
the notice of a conditional title with which the subsequent
purchaser of the instrument would be charged would seem to
expressly except warranty of title from the obligations of the
indorser. (Handbook of the Laws of Bills and Notes, Charles P.
Norton, Third Edition, 1900, pp. 121-124)
Absolute and Conditional indorsements
An absolute indorsement is one by which the indorser binds
himself to pay, upon no other condition than the failure of prior
parties to do so, and of due notice to him of such failure (protest
preceding it when necessary, as in the case of a foreign bill). A
conditional indorsement is one by which the indorser annexes
some other condition to his liability. Sometimes the condition is
precedent, and sometimes subsequent. Thus, Pay to A.B. or
order, of he arrives at twenty-one years of age, or, if he is living
when it becomes due, is an indorsement upon a condition
precedent. Pay A.B. or order, unless, before payment, I give you
notice to the contrary, is upon a condition subsequent. The
condition attached to the indorsement in no manner affect the
353
negotiability of the paper.
Negotiable Instruments, pages 113-144)
In conditional indorsements, can the fact that the condition
had not yet been fulfilled be disregarded by the party
required to pay?
ANSWER:
353 Story on Notes, 140; Daniel on Negotiable Instruments, 697
200
Yes. W here 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.
What if the aforementioned instrument was indorsed to
another person?
ANSWER:
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. 39, Negotiable
Instruments Law)
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.
Notes:
What is the effect of an indorsement made on an instrument
which is payable to bearer?
ANSWER:
W here 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. 40,
This is what is being referred to as Bearer Always Bearer
Rule.
Furthermore, 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. 48,
201
Illustration:
The instrument reads:
Pay to Margaux, or bearer, Php 1,000.00.
(sgd)
Lance
The instrument was thereafter negotiated by delivery from
Margaux to Karl, but Karl indorsed it and delivered it to Kate.
In this instance, Kate can further negotiate the note by delivery
to a subsequent holder, and Karl then becomes liable as an
indorser to Kate and to subsequent holders.
1998 Bar Question:
Richard Clinton makes a promissory note payable to bearer
and delivers the same to Aurora Page.
Aurora Page,
however, endorses it to X in this manner:
Payable to X. Signed: Aurora Page
Later, X, without endorsing the promissory note, transfers
and
delivers
the
same
to
Napoleon.
The
note
is
subsequently dishonored by Richard Clinton. May Napoleon
proceed against Richard Clinton for the note? (5%)
ANSWER:
Yes, Napoleon may proceed against Richard Clinton. Section
40 of NIL provides that 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.
1997 Bar Question:
A delivers a bearer instrument to B.
B then specially
indorses it to C and C later indorses it in blank to D. E steals
the instrument from D and, forging the signature of D,
succeeds
in
negotiating
it
to
instrument in good faith and for value.
202
who
acquires
the
a)
If, for any reason, the drawee bank refuses to honor
the check, can F enforce the instrument against the
drawer?
b)
In case of the dishonor of the check by both the
drawee and the drawer, can F hold any of B, C and D
liable secondarily on the instrument?
ANSWERS:
a)
Yes, F being a holder in due course, and the instrument is
a bearer instrument that is negotiated by mere delivery.
b)
Only B and C are liable.

D is not liable because his
signature/indorsement was forged by E, thus, a forged
signature confers no right upon the subsequent
transferee thereof.
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.
Notes:
If a bill or note be made payable to several persons not
partners, the transfer can only be made by a joint indorsement of
all of them; and as Chitty says, If a bill has been transferred to
several persons not in partnership, the right to transfer is in all
collectively, and not in any one individually.

354
W here, however,
one of two or more joint payees or transferees undertake to
transfer the instrument, the extent of the transfer will depend upon
the nature of his interest. Such interest, whatever it is, passes to
his indorsee or assignee; but nothing beyond that, as against his
co-party, unless indeed there be some other element in the
transaction in the nature of fraud, agency, or other circumstance,
355
modifying the rights of the parties.
No action could be
356
maintained on the indorsement of one of the joint parties,
the
interest passing thereby being equitable merely.

(Daniel,
354 Chitty on Bills [201], 232; Daniel on Negotiable Instruments, 701a
355 Brown v. Dickinson, 27 Gratt. 693
356 Caverick v. Vickery, 2 Dough. 652
203
An assignment by one joint payee of his interest to another
payee carries with it authority to indorse instrument for him.
(Brannan, page 47, citing Kaufman v. State Sav. Bank, 151 Mich.
65, 114 N.W. 863, 18 L.R.A. (N.S.) 630, 123 Am. St. Rep. 259)
How can an instrument be indorsed if it is payable to two or
more persons?
W here 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. 41,
Illustrative Case:
Metropolitan Bank and Trust Company (formerly Asianbank
Corporation)
vs. BA Finance Corporation and Malayan Insurance Co., Inc.
G.R. No. 179952, December 4, 2009
CARPIO-MORALES, J.:
Bitanga obtained from BA Finance a loan in the amount of Php
329, 280 secured by a chattel mortgage. As required by the
mortgage agreement, Bitanga insured his car with Malayan
Insurance Co., Inc. Policy contains a stipulation that: Loss, if any
shall be payable to BA FINANCE CORP. as its interest may
appear. It is hereby expressly understood that his policy or any
renewal thereof, shall not be cancelled without prior notification
and conformity by BA FINANCE CORPORATION. The car was
stolen, and on Bitangas claim, Malayan Insurance issued a check
payable to the order of B.A. Finance Corporation and Lamberto
Bitanga. For Php 224, 500, drawn against China Banking
Corporation.
The check was crossed with the notation For
Deposit Payees Account Only.

W ithout the indorsement or
authority of his co-payee BA Finance, Bitanga deposited the
check to his account with the Asianbank Corporation, now
merged with Metropolitan Bank and Trust Company. Bitanga
subsequently withdrew the entire proceeds of the check. BA
Finance upon knowing of the same instituted a complaint for sum
of money and damages.
The Court held that: [w]here 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
357
the others.
Bitanga alone endorsed the crossed check, and
357 Sec. 41, Act 2031
204
petitioner allowed the deposit and release of the proceeds
thereof, despite the absence of authority of Bitangas co-payee
BA Finance to endorse it on its behalf The payment of an
instrument over a missing indorsement is the equivalent of
358
payment on a forged indorsement
or an unauthorized
359
indrosement in itself in the case of joint payees.
Clearly,
petitioner, through its employee, was negligent when it allowed the
deposit of the crossed check, despite the lone endorsement of
Bitanga, ostensibly ignoring the fact that the check did not, it
360
bears repeating, carry the indorsement of BA Finance.
As has been repeatedly emphasized, the banking business is
imbued with public interest such that the highest degree of
diligence and highest standards of integrity and performance are
expected of banks in order to maintain the trust and confidence of
361
the public in general in the banking sector.
Undoubtedly, BA
Finance has a cause of action against petitioner.
Subsequently, this question was raised therein on whether or
not petitioner Metrobank is liable to BA Finance for the full value
of the check?
The Court held that provisions of the Negotiable Instruments
Law and underlying jurisprudential teachings on the black-letter
law provide definitive justification for petitioners full liability on the
value of the check.
To be sure, a collecting bank, Asianbank in this case, where a
check is deposited and which indorses the check upon
362
presentment with the drawee bank, is an indorser.
This is
because in indorsing a check to the drawee bank, a collecting
bank stamps the back of the check with the phrase all prior
endorsements and/or lack of endorsement guaranteed

363
and, for
all intents and purposes, treats the check as a negotiable
364
instrument, hence, assumes the warranty of an indorser.
358 Kelly v. Central Bank and Trust Co. (Colo App), 794 P2d 1037, 12 UCCRS2d 1089; Humberto Decorators, Inc.
v. Plaza Natl Bank, 180 NJ Super 170, 434 A2d 618, 32 UCCRS 494; Vide: 11 Am Jur 2d, Bills and Notes, 224, at
p. 557
359 Beyer v. First Natl Bank, 188 Mont 208, 612 P2d 1285, 29 UCCRS 563; Vide: 11 Am Jur 2d, Bills and Notes,
224, at p. 557
360 Gempesaw v. Court of Appeals, G.R. No. 92244, Feb. 9, 1993, 218 SCRA 682, 695
361 Philippine Commercial International Bank v. Court of Appeals, G.R. No. 121413, January 29, 2001, 350 SCRA
446
362 Associated Bank v. Court of Appeals, 322 Phil. 677, 697 (1996)
363 Section 17 of the Philippine Clearing House Corporation Rules states that: "BANK GUARANTEE. All checks
cleared through the PCHC shall bear the guarantee affixed thereto by the Presenting Bank/Branch which shall read
as follows: Cleared thru the Philippine Clearing House Corporation. All prior endorsements and/or lack of
endorsement guaranteed."
205
Without Asianbanks warranty, the drawee bank (China Bank in
this case) would not have paid the value of the subject check.
Petitioner, as the collecting bank or last indorser, generally
suffers the loss because it has the duty to ascertain the
genuineness of all prior indorsements 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
365
ascertain the genuineness of prior indorsements.
Accordingly, one who credits the proceeds of a check to the
account of the indorsing payee is liable in conversion to the non366
indorsing payee for the entire amount of the check.
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.
Notes:
W here the president of a bank by authority of the directors
discharges the duties ordinarily performed by a cashier, a draft
drawn payable to the president by name with the addition of pt is
payable to the bank. (Brannan, page 48, citing Griffin v. Erskine,
131 Iowa, 444, 109 N.W. 13)
S was cashier of the C bank. A certificate of deposit issued by
the C bank to the order of S Cashier was indorsed S Cashier
364 Banco de Oro v. Equitable Banking Corp., 241 Phil. 187, 196-197 (1988)
365 Sections 65 and 66 of the Negotiable Instruments Law state that:
Sec. 65. 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 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
366 Vide Peoples Nat. Bank v. American Fidelity Fire Ins. Co., 39 Md. App. 614, 386 A.2d 1254, 24 U.C.C. Rep.
Serv. 362 (1978); Middle States Leasing Corp. v. Manufacturers Hanover Trust Co., 62 A.D.2d 273, 404 N.Y.S.2d
846, 23 U.C.C. Rep. Serv. 1215 (1st Dep't 1978); Vide 11 Am Jur 2d, Bills and Notes, 225, at p. 557
206
and came to the plaintiff, a holder in due course. Held, that the
indorsement was that of the bank, and that it was not competent
of the bank to show that S acted in his own interest and in
violation of his duty to the bank. ( Ibid, citing Johnson v. Buffalo
Bank, 134 Iowa, 731, 112 N.W. 165)
W here a note was indorsed to A, parol evidence is not
admissible to show that a bank was intended as indorsee, even
though A is, in fact, cashier of such bank. If A delivers the note to
the bank without indorsement, the bank may sue upon it, but
subject to equities. (Ibid, citing First Nat. Bank v. McCullough, 50
Oregon, 508, 93 Pc. 366, 17 L.R.A. (N.S.) 1105, 126 Am. St. Rep.
758)
Sec. 43. Indorsement where name is misspelled, and so forth. -
Where
the
name
of
payee
or
indorsee
is
wrongly
designated or misspelled, he may indorse the instrument as
therein
described
adding,
if
he
thinks
fit,
his
proper
signature.
Notes:
What is the remedy if the name of the payee or indorsee is
wrongly designated or misspelled?
ANSWER:
W here the name of the payee or indorsee is wrongly
designated or misspelled, he may endorse the instrument as
therein described adding, if he thinks fit, his proper signature.
(Sec. 43, Negotiable Instruments Law)
This is an instance where a bill or note is indorsed specially
designating the name of the person to be indorsed, and his name
is wrongly designated or misspelled. Thus, the payee or indorsee
may endorse the instrument as therein described, but he may, if
he thinks fit, add his proper signature.
2012 Bar Question:
A check was issued to Tiger Woods. But what was written
as payee is the word "Tiger Woods". To validly endorse the
check
A.
Tiger W oods must sign his real name.
207
B.
Tiger W oods must sign both his real name and assumed
name.
C.
Tiger W oods can sign his assumed name.
D.
The check has become non-negotiable.
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.
Notes:
How could an instrument be indorsed in a representative
capacity?
ANSWER:
W here any person is under obligation to indorse in a
representative capacity, he may indorse in such terms as to
negative personal liability. (Sec. 44, Negotiable Instruments Law)
He may do so by disclosing his principal and signing for or in
behalf of said principal. Otherwise, if he signs without disclosing
his principal, he may be personally liable as an indorser of the bill
or note.
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.
Notes:
What
is
the
presumption
regarding
the
time
of
the
indorsement of the instrument? Is there any exception to the
presumption?
ANSWER:
Every negotiation is deemed prima facie effected before the
instrument was overdue.
Except where an indorsement bears date after the maturity of
the instrument. (Sec. 45, Negotiable Instruments Law)
The presumption is grounded upon good faith and sound
business practices, and only applies when there is no date
208
indicated for the maturity of the instrument, otherwise, the written
date will govern.
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.
Notes:
What is the presumption regarding the place of indorsement
of the instrument?
ANSWER:
Every instrument is presumed prima facie to have been made
at the place where the instrument is dated. Except where the
contrary appears. (Sec. 46, Negotiable Instruments Law )
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.
Notes:
What is the rule on the continuity of a negotiable instrument?
ANSWER:
An instrument negotiable in its origin continues to be
negotiable until it has been restrictively indorsed or discharged by
payment or otherwise. (Sec. 47, Negotiable Instruments Law )
However, the same rule is subject to the statute of limitations.
Overdue note still negotiable
An overdue promissory note is still negotiable within a statute
exempting from attachment debts secured by bills of exchange or
negotiable promissory notes, and hence the amount due thereon
is exempt from foreign attachment. (Brannan, page 49, citing
Oaskdale Mfg. Co. v. Clarke, 29 R.I. 192, 69 Atl. 681)
209
After maturity, negotiable paper circulates, but transferee
only acquires the right and title of the transferrer
After maturity negotiable paper still passes from hand to hand
ad infinitum until paid. Moreover, the indorser, after maturity,
writes in the same form, and is bound only upon the same
condition of demand upon the drawer and notice of nonpayment
as any other indorser.

The paper retains its commercial
attributes, and circulates as such in the community; but there is
this vital distinction between the rights of a transferee who
received the paper before, and of one who received it after
maturity.
The transferee of negotiable paper to whom it is
transferred after maturity, acquires nothing but the actual right and
367
title of the transferrer;
and the like rule applies to the transferee
who takes the paper after a refusal to accept by the drawee,
368
provided he had notice of such refusal.
In other words, the
transferee of negotiable paper refused acceptance (with notice
thereof), or overdue, takes it subject to all the equities with which
it was encumbered in the hands of the party from whom he
received it; for it comes, to use Lord Ellenboroughs words,
disgraced to him. Thus, if he took it from a thief, or finder, or
from a bankrupt incapacitated by law to make the transfer, he
could not recover on it, inasmuch as the thief, finder, or bankrupt
369
could not.
Instruments, pages 126-127)
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.
Notes:
W here an indorsement is not necessary to the title of the
holder of the bill or note, he may, as a rule, strike it out and all
indorsers subsequent to him are relieved from their liability. It
should be taken into consideration that indorsers incur liability
once they indorse the bill or note. And once that indorsement is
stricken off, all subsequent indorsers are relieved from liability.
Illustrative cases:
An indorsee indorsed the note to a bank for collection, and
upon its dishonor received it back. Held, such indorsee in
367 Texas v. Hardenburg, 10 Wall. 68; Morgan v. United States, 113 U.S. 500
368 OKeefe v. Dunn, 6 Taunt. 305; Bartlett v. Benson, 14 M & W 733
369 Byles on Bills [161], 284; Ashurst v. Royal Bank, 27 Law Times, 168
210
possession of the note was a holder under sec. 191, and that he
could sue upon it without striking out his indorsement. Mere
possession was sufficient evidence of ownership to support the
suit (sec. 51). (Brannan, page 49, citing New Haven Mrg. Co. v.
New Haven Pulp Co., 76 Conn. 126, 55 Atl. 604)
One in possession of negotiable paper, indorsed in blank by
the payee, is prima facie the owner thereof, and the mere erasure
of subsequent indorsements does not destroy this presumption.
(Ibid, citing King v. Bellamy (Kan.), 108 Pac. 117)
Plaintiff sued the maker and the payee on a note indorsed by
the payee in blank, under which indorsement appeared the words
to acct of B.F.E. Held, that even if these words constituted a
subsequent restrictive indorsement, it was not necessary to
plaintiffs title, and he could strike it out at the trial and recover as
bearer. (Ibid, citing Jerman v. Edwards, 29 App. D.C. 535)
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.
Notes:
Section 49 of the Negotiable Instruments Law contemplates a
situation whereby the payee or indorsee delivers a negotiable
370
instrument for value without indorsing it.
It bears stressing that
the above transaction is an equitable assignment and the
transferee acquires the instrument subject to defenses and
equities available among prior parties. Thus, if the transferor had
legal title, the transferee acquires such title and, in addition, the
right to have the indorsement of the transferor and also the right,
as holder of the legal title, to maintain legal action against the
maker or acceptor or other party liable to the transferor. The
underlying premises of this provision, however, is that a valid
transfer of ownership of the negotiable instrument in question has
371
taken place.
370 Bank of the Philippine Islands vs. Court of Appeals, et al, G.R. No. 136202, January 25, 2007, [Azcuna, J.]
371 Ibid.
211
Transferees in this situation do not enjoy the presumption of
ownership in favor of holders since they are neither payees nor
indorsees of such instruments. The weight of authority is that the
mere possession of a negotiable instrument does not in itself
conclusively establish neither the right of the possessor to receive
payment, or of the right of one who has made payment to be
discharged from liability.

Thus, something more than mere
possession by persons who are not payees or indorsers of the
instruments is necessary to authorize payment to them in the
absence of any other facts from which the authority to receive
372
payment may be inferred.
It is an exception to the general rule for a payee of an order
instrument to transfer the instrument without indorsement.
Precisely because the situation is abnormal, it is but fair to the
maker and to prior holders to require possessors to prove without
the aid of an initial presumption in their favor, that they came into
possession by virtue of a legitimate transaction with the last
373
holder.
It has been held in Scotland that under the Bills of Exchange
Act, section 31 (4) which is the same as section 49, N.I.L., the
transferee for value, but without indorsement, of a bill accepted
for the accommodation of the drawer-payee gets the title of the
transferor and may hold the acceptor without first getting an
th
indorsement. (Hood v. Stewart, 17 Session Cases (4
Series)
749. x x x Section 49 seems to change the law to the extent that
transfer for value, even without indorsement, of an instrument,
payable to order, passes the legal title, although subject to
equities. But accommodation, as against a transferee for value, is
not, properly speaking, an equity but only a defense against the
accommodated party and transferees without value. (cited in
Brannan, pages 50-51)
This section vests the title in the transferee without
indorsement, and is not affected by secs. 30, 31. (Swenson v.
Stoltz, 36 W ash. 318, 78 Pac. 999, S.C. sec. 18; Meuer v.
Phoenix Nat. Bank, 94 App. Div. 331, 88 N.Y. Supp. 83, S.C. sec.
187.) But the transferee without indorsement of a note payable to
order cannot be a holder in due course, notwithstanding sec. 59,
for under sec. 191 he is neither holder, because not a payee or
indorsee, nor bearer, because the instrument is not payable to
bearer. ( Mayers v. McRimmon, 140 N.C. 640, 53 S.E. 447, 111
Am. St. Rep. 879, S.C. sec. 31, cited in Brannan, page 51)
372 11 Am Jur 2d, 988, citing Doubleday v. Kress, 50 NY 410, Hoffmaster v. Black, 84 NE 423, and First Nat.
Bank v. Gorman, 21 P2d 549
373 Campos Jr. and Lopez Campos, "Notes and Selected Cases on Negotiable Instruments Law," p. 108, (1994)
212
Illustrative Cases:
Plaintiff sued the maker on a note, on the back of which
appeared an indorsement of the name of the payee, but gave no
proof of genuineness of the indorsement. Held, that plaintiff could
recover as the equitable owner of the note, subject to any
defenses against the payee. (Johnson County Savings Bank v.
Scoggin Drug Co. (N.C.), 67 S.E. 253)
Defendant, to accommodate C, drew a bill to his own order on
C, who accepted the bill and transferred it to plaintiff for a loan.
Defendant neglected to indorse the bill, which was not noticed by
plaintiff when he made the advance. Held, that defendant was the
holder of the bill within sec. 2 (N.I.L. sec. 191), that he
transferred it by means of C to the plaintiff, and that plaintiff was
entitled to have the indorsement of defendant and to recover
against him on the bill. (Walters v. Neary, 21 T.L.R. 146; cf. Day
v. Longhurst, Weekly notes (1893), 3, S.C. sec. 191., cited in
Brannan, page 52)
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.
Notes:
Can a prior party further negotiate the instrument?
ANSWER:
Yes. W here an instrument is negotiated back to a prior party,
such party may, subject to the provisions of the Negotiable
Instruments Law, reissue and further negotiate the same. (Sec.
Are there limitations on the reissuance or further negotiation
of the instrument?
ANSWER:
213
Yes. The prior party is not entitled to enforce payment of the
instrument against any intervening party to whom he was
personally liable. (Sec. 50, Negotiable Instruments Law )
Illustration:
A indorsed the note to B, B to C, C to D, then D back to B.
Applying this rule, B can still further reissue or negotiate said note,
however, the limitation is that he cannot enforce payment against
C and D (hereto referred as intervening parties), in case the note
is dishonored by the maker, this is because B is also liable to C
and D as an indorser, before the note was negotiated back to him.
IV. RIGHTS OF THE HOLDER
It is a general principle of the law merchant that, as between
the immediate parties to a negotiable instrument parties
between whom there is a privity the only superiority of such an
instrument over other unsealed evidences of debt is that it prima
facie imports a consideration. But a bona fide holder for value of
such an instrument takes it discharged of all the equities existing
between antecedent parties, ad may recover it although it be
without any validity as between the parties prior to himself, as, for
example, if it was without consideration originally, or the
consideration has failed, or the instrument was subsequently
released or paid, or even through it was originally obtained by
374
fraud, theft, or robbery.
This general rule is subject to certain
374 Daniel on Negotiable Instruments, 169a, and cases cited
214
exceptions, treated of in the succeeding sections. (Daniel,
It should be observed, however, that as between him and his
immediate predecessor, or party between whom and himself a
privity exists, he stands upon the same footing as the payee of a
note against the maker.

Fraud, illegality, want or failure of
consideration may be pleaded against him by such immediate
375
party as freely as if the instrument were not negotiable.
(Ibid)
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.
Notes:
Holder with legal title may sue
Any holder of a bill or note who can trace a clear legal title to it,
is entitled to sue upon it in his own name, whether he possesses
376
the beneficial interest in its contents or not.
If the note by
payable to A or B, it may be sued upon by them jointly or by either
377
one of them.
If there be a special indorsement, or assignment
to a particular person, he is the proper person to sue; and if he is
in possession he may sue although his name be indorsed on the
paper, after the special indorsement or assignment. For in such
case his indorsement will be presumed to be a mere
memorandum, or evidence that he had negotiated the paper and
378
then taken it up.
(Ibid, page 268)
Agents,
receivers,
assignees,
trustees,
or
personal
representatives, may sue on a note or bill payable to bearer, or
379
indorsed in blank.
And the done cause mortis of a note payable
to the donors order may use the name of his personal
380
representative, even against his protest.
But a mere depositary
381
of such a note cannot maintain suit.

If the paper be indorsed
specially to a particular person, none but such person or his
376 Caldwell v. Lawrence, 84 Ill. 161; Harpending v. Daniel, 80 Ky. 456
377 Westgate v. Healy, 4 R.I. 524
378 Humphreyville v. Culver, 73 Ill. 485
379 Law v. Parnell, 7 C.B. (N.S.) 282; Bowman v. Wood, 15 Mass, 534; Haxtun v. Bishop, 3 Wend. 13; Daniel on
Negotiable Instruments, 264; 2 Parsons on Notes and Bills, 446
380 Grover v. Grover, 24 Pick. 261; Sessions v. Mosley, 4 Cush. 87
381 Sherwood v. Roys, 14 Pick. 172
215
representative can sue.382

A party for accommodation who pays
the bill may sue prior parties, but not subsequent ones. If an
acceptor or maker for accommodation pays the bill he cannot sue
drawer or indorser upon the bill, because, according to its terms,
he is liable to them. But he may sue the accommodation party for
383
money paid at his request.
(Ibid, page 269)
Cause of action indivisible
It is a general principle of law that a party cannot divide an
entire demand or cause of action, and maintain several suits for
its recovery; and a recovery for part of an entire demand will bar
an action for the remainder, if due at the time that the first action
was brought. (Ibid, page 271)
When instrument payable to bearer
An action on a bill or note payable to bearer, or indorsed in
blank, may be maintained in the name of the nominal holder who
is not the owner by the owners consent; and that possession by
such nominal holder is prima facie sufficient evidence of his right
to sue, and cannot be rebutted by proof that he has no beneficial
384
interest, or by anything else but proof of mala fides.
If it were
shown that the plaintiff upon suing upon a note payable to bearer
or indorsed in blank, has no interest in it, and in addition that he is
suing against the will of the party beneficially interested, he could
385
not recover, and his conduct would be in bad faith.
It matters
not that such nominal holder will receive the amount as trustee,
386
agent, or pledge.
The suit by him holding the paper shows his
title to recover; and it cannot matter to the defendant who
discharges the debt that the plaintiff is accountable over to a third
party. Evidence, however, that the plaintiff has no interest in the
instrument will be competent when foundation has been laid for its
introduction by offer to prove offset, or other defense, available
387
against a third person who is its true owner.
(Ibid, page 273)
Rights of a holder under a blank indorsement
The holder of a note blank as to the payee may fill it up with his
388
own name and sue upon it.
If payable to a fictitious person, it
389
may be sued on as payable to bearer.
The holder of such a
paper, in transferring it, should not use the fictitious name, but
382 Daniel on Negotiable Instruments, 692, 1181a
383 Stark v. Alford, 49 Tex. 260
384 Demuth v. Cutler, 50 Me. 300; Rubelman v. McNichol, 13 Mo. App. 584
385 Tonne v. Wasson, 128 Mass. 517
386 Nicolay v. Fritschle, 40 Mo. 67; King v. Fleece, 7 Heisk. 67; Bowman v. Wood, 15 Mass. 534
387 Logan v. Cassell, 88 Pa. St. 290
388 Crutchley v. Clarence, 2 Maule & S 90
389 Parsons on Notes and Bills, 448
216
pass it by delivery only, or by indorsement,390

and even after the
trial, where judgment has gone for the plaintiff under the
impression that the indorsement had been filled up, the correction
391
being made nunc pro tunc.
(Ibid, page 274)
But the filling up of the blank indorsement is formal merely,
and not necessary that it should be filled up at all, for the mere act
of suing upon it by the holder evidences his intention to treat the
392
indorser as a transferrer and indorser to himself.
And if the
plaintiff omit to state in his declaration all the indorsements after
the first indorsement in blank, he may strike out the intervening
indorsements, and aver that the first blank indorser indorsed
393
immediately to himself.
(Ibid)
When indorsement is in full
If the bill or note be not payable to bearer or indorsed in blank,
or indorsed specially to himself, the holder cannot (unless
authorized by statute) sue in his own name, for although he may
possess the entire beneficial interest, the legal title is still
outstanding in his transferrer, and he must use his name in order
394
to maintain the suit.
By leaving the instrument unendorsed, the
transferrer necessitates and authorizes the use of his name to the
recovery of the amount; and he cannot object to its use, or
395
release the action when instituted.
If the transferrer indorses
the paper, then his name cannot be used save by his own
consent; for then the legal title and right to sue is vested in his
396
indorsee.
But if the suit is commenced without his consent, he
397
may subsequently assent to it.
(Ibid, pages 274-275)
Possession is prima facie evidence of ownership
Possession is in itself prima facie evidence of the right of the
party to sue and receive money when he holds under a legal title,
and also that the title, although not expressly, is actually vested in
him. And therefore in order to defeat his suit, it must be shown
398
that he is a mala fide holder.
As said in a Maryland case by
Chambers, J.: A bill payable to bearer, or a bill payable to order
390 Maniort v. Roberts, 4 E.D. Smith, 83
391 Whitter v. Hayden, 9 Allen, 408
392 Rees v. Conococheague Bank, 5 Rand. 329; Poorman v. Mills, 35 Cal. 118
393 Rand. V. Dovey, 83 Pa. St. 281; Merz v. Kaiser, 20 La. Ann. 379; Byles on Bills [149], 268
394 Allen v. Newbury, 8 Iowa 65; Robsinson v. Wilkinson, 38 Mich. 301; Marsh v. Hayford, 80 Mc. 97
395 Paese v. Hirst, 10 B & C 123; Amherst Academy v. Cowles, 6 Pick, 427; Royce v. Nye, 52 Vt. 372
396 Bowie v. Duval, 1 Gill & J 175; Mosher v. Allen, 16 Mass. 451
397 Golder v. Foss, 43 Me, 364
398 Wheeler v. Johnson, 97 Mass. 39; Wilson Sewing Machine Co. v. Spears, 50 Mich, 534; Union Nat. Bank v.
Barber, 56 Iowa, 562
217
and indorsed in blank, will pass by delivery, and bare possession
is prima facie evidence of title, and for that reason possession of
such a bill would entitle the holder to sue.

399
And possession of
the note or bill is prima facie evidence that the same was indorsed
400
by the person by whom it purports to be indorsed;
and
production at the trial is prima facie evidence that it remains
unpaid. But possession of the instrument is not always necessary
in order to institute a suit. If the holder has indorsed a note in
blank and pledged it as collateral security, he may negotiate it to a
third person, while still pledged, and such person may sue as
indorsee while it is still in pledge, and maintain an action by
401
discharging the lien and producing the note at the trial.
(Ibid,
page 275)
Who may be sued? General Principle
As a general rule, the holder may sue all the prior parties on
the bill or note, but not any subsequent party. Thus a payee may
sue the acceptor or maker. An indorsee may sue the acceptor or
maker, and all prior indorsers. (Ibid, page 276)
When indorser can sue acceptor or maker
The indorser of a bill or note cannot sue the acceptor or maker
until he has paid or satisfied it. But as soon as he does this he
402
may sue the acceptor or maker.
And if one indorser sues a
prior party, it is not necessary for him to show that he had
received notice, provided it was duly received by such prior
403
party.
W here there are a number or indorsers, any one may
sue, by arrangement between them, all indorsers subsequent to
404
his being stricken out.
(Ibid)
When drawer can sue acceptor and vice versa
The drawer, says Mr. Chitty, may maintain an action on the
bill against the acceptor, in case of a refusal to pay a bill already
accepted, but not on a refusal to accept, in which latter case the
action must be special on the contract to accept.

405
Certainly the
drawer may sue the acceptor if he had to pay the bill, or may
406
leave it in the hands of the indorsee to sue for his benefit;
but is
399 Whiteford v. Burckmyer, 1 Gill, 127
400 Bank v. Mallan, 37 Minn. 404
401 Fisher v. Bradford, 7 Greenl. 28
402 Hoyt v. Wilkinson, 10 Pick. 31; McDonald v. Magruder, 3 Pet. 470
403 Ellsworth v. Brewer, 11 Pick, 316
404 Walwyn v. St. Quintin, 1 Bos & P 652
405 Chitty on Bills [537], 608
406 Louviere v. Laubray, 10 Mod. 36; Thurman v. Van Brunt, 19 Barb. 410; Williams v. James, 15 Ad & El (N.S.) 69
218
has been held that he cannot recover without evidence that he
has paid the bill.

407
(Ibid, page 277)
W here the acceptance is for the drawers accommodation, and
the acceptor pays the bill, he cannot sue the drawer upon the bill,
for it imports no liability to him, but he may sue for money paid at
408
his request.
But an acceptor for honor of the drawer or indorser
409
may sue such drawer or indorser upon the bill itself.
(Ibid)
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.
Notes:
The act of crossing a check serves as a warning to the holder
that the check has been issued for a definite purpose so that the
holder thereof must inquire if he has received the check pursuant
to that purpose; otherwise, he is not a holder in due course. (Dino
vs. Loot, G.R. No. 170912, April 19, 2010, [Carpio, J.])
However, the fact that respondents are not holders in due
course does not automatically mean that they cannot recover on
the check. The Negotiable Instruments Law does not provide that
holder who is not a holder in due course may not in any case
recover on the instrument. The only disadvantage of a holder
who is not in due course is that the negotiable instrument is
subject to defenses as if it were non-negotiable. Among such
407 Thompson v. Flower, 1 Mart. N.S. (La) 301; 2 Parsons on Notes and Bills, 453
408 Bell v. Norwood, 7 La. 95; Stark v. Alford, 49 Tex. 260
219
defenses is the absence or failure of consideration, which
petitioner sufficiently established in this case. Petitioner issued
the subject check supposedly for a loan in favor of Consings
group, who turned out to be a syndicate defrauding gullible
individuals. Since there is in fact no valid loan to speak of, there
is no consideration for the issuance of the check. Consequently,
petitioner cannot be obliged to pay the face value of the check.
(supra)
An allegation in an answer that plaintiff is not a holder in due
course is a conclusion of law and insufficient to show which of the
conditions named in sec. 52 has not been complied with.
(Rogers v. Morton, 46 Misc. R. 494, 95 N.Y. Supp. 49, S.C. secs.
26, 30, cited in Brannan, page 54)
A woman delivered to her husband a check made payable to
a certain creditor, with instructions to pay her debt with it. The
husband handed the check to the creditor as payment upon a
debt of his own to the same creditor who accepted it as such in
good faith. Held, the creditor was a holder in due course of the
check. (Boston Steel & Iron Co. v. Steuer, 183 Mass. 140, 66
N.E. 646, 97 Am. St. Rep. 426, S.C. sec. 14, Ibid)
A note payable to the makers order was indorsed in blank to
a bank. The note was afterwards altered by inserting payable
with interest. The bank made a deed of trust of all its property
including the note to secure its creditors. Held, that in Virgina a
pre-existing debt is a valuable consideration for a deed of trust to
secure it, and that the trustee was a holder in due course and
could recover on the note according to its original tenor, under
sec. 124. (Trustees of American Bank v. McComb, 105 Va. 473,
54 S.E. 14, S.C. secs. 25, 52-1, cited in Brannan, pages 54-55)
The payee of a note agreed with the accommodation maker
that it should not be negotiated to one R, of which fact R was
aware. The payee offered to sell the note to R, who lent the
money to S, who bought the note. Before maturity S sold the note
to plaintiff, who was ignorant that it was an accommodation note
and of the agreement, and who paid for it by his own note to S,
who still held it. Held, plaintiff could recover of the maker the full
amount of the latters note.
(Mehlinger v. Harriman, 185 Mass.
245, 70 N.E. 51., cited in Brannan, page 55)
Complete and Regular upon its Face
The fact that the words payable with interest are written on a
blank space after the words value received in the same
handwriting as the other written parts of the note, does not
220
prevent the note being complete and regular on its face.
(Trustees of American Bank v. McComb, 105 Va. 473, 54 S.E. 14,
sec. 25, 52, cited in Brannan, page 55)
A partner in a firm which had dissolved, but without giving
notice thereof, signed notes in blank payable to X and sent them
to X or to a bank where they were filled up as to date, amount,
and maturity by the cashier as occasion required, and the
proceeds placed to the credit of X. Held, that the bank was not a
holder in due course, and could not recover against the retired
partner without proof that he had authorized or ratified the issue of
the notes. (Hunder v. Allen, 127 App. Div. 572; 111 N.Y. Supp.
820, ibid)
A post-dated check is valid and negotiable, and is complete
and regular on its face, notwithstanding it is stamped as a check,
and not as a bill of exchange payable on time. (Hitchcock v.
Edwards, 60 L.T. Rep. 636, cited in Brannan, page 56)
The defendant accepted a bill otherwise complete, but the
place for the drawers signature was left blank and under it was
written, Drawn to the order of X. The bill was sent to X to be
used for a certain purpose. X instead of using the bill for such
purpose transferred it to plaintiff, who paid value bonafide. X
indorsed the bill, but neglected to sign it was drawer until after it
was overdue and dishonored. Held, that the bill was not complete
and regular when plaintiff took it and that he could not recover.
(South Wales, etc., Co. v.. Underwoord (Q.B. Div. 1899), 15 T.L.
Rep. 157, ibid)
Became Holder before Overdue
A note providing that any delinquency in the payment of
interest shall cause the note to immediately become due and
collectible is made overdue by the failure to pay the interest when
due, and a subsequent taker cannot be a holder in due course.
(Hodge v. Wallace, 129 Wis. 84, 108 N.W. 212, 116 Am. St. Rep.
938, cited in Brannan, page 56)
A note payable one day after date is not overdue at any time
on the day after its date. (Wilkins v. Usher, 123 Ky. 696, 97 S.W.
37, S.C. sec. 25, Brannan, page 56)
A bill drawn for the acceptors accommodation but which had
never been negotiated was in the hands of the drawer after
221
maturity, and having come into the possession of the drawers
solicitors, the latter claimed a lien on it for services previously
rendered the drawer in an action to recover the bill from a
converter, and sued the acceptor on the bill. Held, that plaintiffs
taking the bill overdue could acquire no rights against the
acceptor. (Redfern v. Rosenthal, 86 L.T. Rep. 855, cited in
Brannan, page 56)
In his own right is used merely in contradistinction to a right in
a representative capacity, but indicates a right not subject to that
of another person, and good against all the world. x x x A gave a
demand note payable to B or order on the understanding that it
would not be negotiated. B, however, indorsed the note for value
to C. Afterwards A paid B the amount of the note. B then
obtained the note from C by fraud and gave it to A. Held, that A
was not a holder for value, the previous payment not being a
consideration given when he received back the note, and he is still
liable to C on the note. (Nash v. DeFreville [1900] 2 Q.B. 72,
cited in Brannan, page 56)
Meaning of term before maturity
The holder in order to acquire a better right and title to the
paper than his transferrer, must have possessed of it before it is
overdue. For if it were already paid by the maker or acceptor, and
had been left outstanding, it would be already discharged, and
they would not be bound to pay it again to anyone who acquired if
after the period when payment was due. And if it were not paid at
maturity, it is then considered as dishonored; and although still
transferable in like manner and form as before, yet the fact of its
dishonor, which is apparent from its face, is equivalent to notice to
the holder that he takes it subject to its infirmities, and can acquire
410
no better title than his transferrer.
The doctrine applicable to
this subject has been admirably stated by Chief Justice Shaw,
who says: W here a negotiable note is found in circulation after its
due, it carries suspicion on the fact of it. The question instantly
arises: W hy is it in circulation? W hy is it not paid? There is
something wrong.
Therefore, although it does not give the
indorsee notice of any specific matter of defense, such as set-off
payment, or fraudulent acquisition, yet it puts him on inquiry; he
takes only such title as the indorser himself has, and subject to
any defense which might be made if the suit were brought by the
indorser.
411
But there is this limitation to this doctrine: that if the
holder acquired the paper after maturity, from one who became a
bona fide holder for value and without notice before maturity, he is
410 Morgan v. United States, 113 U.S. 500; Speck v. Pullman Car Co., 121 Ill. 57
411 Fisher v. Leland, 4 Cush. 456
222
then protected by the strength of his transferrers title.412

(Daniel,
Elements of the Law of Negotiable Instruments, pages 151-152)
Took it in Good Faith and for Value
A bank discounting a note and obtaining credit in favor of the
seller in another solvent bank for the amount, is a holder for value.
But the mere statement that such credit was given, when it does
not appear how it was given or that it was ever used, is not
enough to enable the court to determine whether the credit was
real or substantial. (Elgin City Banking Co. v. Hall, 119 Tenn.
548 S.W. 1068, S.C. secs, 34, 38, cited in Brannan, page 57)
The manager of a bank stole negotiable securities from the
bank and pledged them with A. He afterwards got them back,
with other negotiable securities from A by fraud and replaced
them in the bank. The bank knew nothing of the transaction.
Held, that the bank was a holder in due course and entitled to
keep the securities. (Brannan, page 58 citing London & County
Banking Co. v. London & River Plate Bank, 21 Q.B.D. 535)
The purchaser must have acquired the instrument for a
413
valuable consideration.
In some cases it is said that the holder
must have parted with full value, sometimes fair value, and
sometimes the expression for value is used. And if he does so
at any price, the holder acquires full rights and interests in the
instrument as against all parties, unless he had notice of defects,
or willfully abstained from inquiry under circumstances which
justify the imputation of bad faith. (Daniel, Elements of the Law of
Without notice of fraud or defect of title, and illegality
In order to stand upon a better footing than his transferrer, the
holder must acquire the instrument without notice of fraud, defect
of title, illegality of consideration, or other fact which impeaches its
validity in his tranferrers hands; and word notice in this
connection signifies the same as knowledge. Knowledge of fraud
or illegality impeaches the bona fides of the holder, or at least
destroys the superiority of his title, and leaves him in the shoes of
414
the transferrer.
And any fraud upon the transferrer
incapacitates the transferee or one acquiring from him with notice
412 Ante, 201
413 See ante 90-115 (Murray v. Lardner, 2 Wall. 710)
414 Hanauer v. Doane, 12 Wall. 342; Crampton v. Perkins, 65 Md. 24; Mace v. Kennedy, 68 Mich. 70
223
from recovering against the transferrer.415

(Daniel, Elements of
the Law of Negotiable Instruments, page 155)
Illustrative Case:
Crossed Checks; Holder in Due Course.
State Investment House vs.
Intermediate Appellate Court, Anita Chua and Harris Chua
G.R. No. 72764, July 13, 1989
FERNAN, C.J:
Petitioner State Investment House seeks a review of the
decision of respondent Intermediate Appellate Court (now Court
of Appeals) in AC-G.R. CV No. 04523 reversing the decision of
the Regional Trial Court of Manila, Branch XXXVII dated April 30,
1984 and dismissing the complaint for collection filed by petitioner
against private respondents Spouses Anita Pea Chua and Harris
Chua.
It appears that shortly before September 5, 1980, New
Sikatuna W ood Industries, Inc. requested for a loan from private
respondent Harris Chua. The latter agreed to grant the same
subject to the condition that the former should wait until
December 1980 when he would have the money. In view of this
agreement, private respondent-wife, Anita Pea Chua issued
three (3) crossed checks payable to New Sikatuna W ood
Industries, Inc. all postdated December 22, 1980 as follows:
DRAW EE BANK
1.
China
Corporation
CHECK
NO.
DATE
Banking
589053
AMOUNT
Dec.
22,
P98,750.00
1980
2.
International
04045549
Corporate Bank
Dec.
22,
102,313.00
1980
3. Metropolitan Bank &

036512
Trust Co.
Dec.
22,
1980
98,387.00
The total value of the three (3) postdated checks amounted to
P 299,450.00.
Subsequently, New Sikatuna W ood Industries, Inc. entered
into an agreement with herein petitioner State Investment House,
Inc. whereby for and in consideration of the sum of Pl,047,402.91
under a deed of sale, the former assigned and discounted with
415 Lenheim v. Fay, 27 Mich. 70
224
petitioner
eleven
(11)
postdated
checks
including
the
aforementioned three (3) postdated checks issued by herein
private respondent-wife Anita Pea Chua to New Sikatuna W ood
Industries, Inc.
W hen the three checks issued by private respondent Anita
Pea Chua were allegedly deposited by petitioner, these checks
were dishonored by reason of "insufficient funds", "stop payment"
and "account closed", respectively. Petitioner claims that despite
demands on private respondent Anita Pea to make good said
checks, the latter failed to pay the same necessitating the former
to file an action for collection against the latter and her husband
Harris Chua before the Regional Trial Court of Manila, Branch
XXXVII docketed as Civil Case No. 82-10547.
Private respondents-defendants filed a third party complaint
against New Sikatuna W ood Industries, Inc. for reimbursement
and indemnification in the event that they be held liable to
petitioner-plaintiff. For failure of third party defendant to answer
the third party complaint despite due service of summons, the
latter was declared in default.
416
On April 30, 1984, the lower court
rendered judgment
against herein private respondents spouses, the dispositive
portion of which reads:
W HEREFORE, judgment is hereby rendered in favor of the
plaintiff or against the defendants ordering the defendants
to pay jointly and severally to the plaintiff the following
amounts:
1. P 229,450.00 with interest at the rate of 12%
per annum from February 24,1981 until fully paid;
2. P 29,945.00 as and for attorney's fees; and
3. the costs of suit.
On the third party complaint, third party defendant New
Sikatuna W ood Industries, Inc. is ordered to pay third party
plaintiffs Anita Pea Chua and Harris Chua all amounts
said defendants' third- party plaintiffs may pay to the
417
plaintiff on account of this case.
On appeal filed by private respondents in AC-G.R. CV No.
418
04523, the Intermediate Appellate Court
(now Court of Appeals)
reversed the lower court's judgment in the now assailed decision,
the dispositive portion of which reads:
416 Presided over by then Judge (now Court of Appeals Justice) Bienvenido C. Ejercito.
417 Petition, Annex "A", RTC Decision, Rollo, pp. 42- 43.
418 Penned by Justice Eduardo P. Caguioa, concurred in by Presiding Justice Ramon G. Gaviola, Jr., Justices Ma.
Rosario Quetulio-Losa and Leonor Ines-Luciano.
225
W HEREFORE,
Reverse and Set
30, 1984 and
dismissing the
419
appellee.
finding this appeal meritorious, W e
Aside the appealed judgment, dated April
a new judgment is hereby rendered
complaint, with costs against plaintiff-
Hence, this petition.
The pivotal issue in this case is whether or not petitioner is a
holder in due course as to entitle it to proceed against private
respondents for the amount stated in the dishonored checks.
Section 52(c) of the Negotiable Instruments Law defines a
holder in due course as one who takes the instrument "in good
faith and for value". On the other hand, Section 52(d) provides
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 x x x defect in the title of the person
negotiating it." However, under Section 59 every holder is deemed
prima facie to be a holder in due course.
Admittedly, the Negotiable Instruments Law regulating the
issuance of negotiable checks as well as the rights and liabilities
arising therefrom, does not mention "crossed checks". But this
Court has taken cognizance of the practice that a check with two
parallel lines in the upper left hand corner means that it could only
be deposited and may not be converted into cash. Consequently,
such circumstance should put the payee on inquiry and upon him
devolves the duty to ascertain the holder's title to the check or the
nature of his possession. Failing in this respect, the payee is
declared guilty of gross negligence amounting to legal absence of
good faith and as such the consensus of authority is to the effect
420
that the holder of the check is not a holder in good faith.
Petitioner submits that at the time of the negotiation and
endorsement of the checks in question by New Sikatuna W ood
Industries, it had no knowledge of the transaction and/or
arrangement made between the latter and private respondents.
W e agree with respondent appellate court.
Relying on the ruling in Ocampo v. Gatchalian (supra), the
Intermediate Appellate Court (now Court of Appeals), correctly
elucidated that the effects of crossing a check are: the check may
not be encashed but only deposited in the bank; the check may
be negotiated only once to one who has an account with a bank;
and the act of crossing the check serves as a warning to the
holder that the check has been issued for a definite purpose so
that he must inquire if he has received the check pursuant to that
419 Rollo, p. 51.
420 Ocampo & Co. v. Gatchalian, 3 SCRA 603 (1961).
226
purpose, otherwise he is not a holder in due course. Further, the
appellate court said:
It results therefore that when appellee rediscounted the
check knowing that it was a crossed check he was
knowingly violating the avowed intention of crossing the
check. Furthermore, his failure to inquire from the
holder, party defendant New Sikatuna W ood Industries,
Inc., the purpose for which the three checks were cross
despite the warning of the crossing, prevents him from
being considered in good faith and thus he is not a
holder in due course. Being not a holder in due course,
plaintiff is subject to personal defenses, such as lack of
consideration between appellants and New Sikatuna
W ood Industries. Note that under the facts the checks
were postdated and issued only as a loan to New
Sikatuna W ood Industries, Inc. if and when deposits
were made to back up the checks. Such deposits were
not made, hence no loan was made, hence the three
checks are without consideration (Sec. 28, Negotiable
Instruments Law).
Likewise New Sikatuna W ood Industries negotiated the
three checks in breach of faith in violation of Article (sic)
55, Negotiable Instruments Law, which is a personal
421
defense available to the drawer of the check.
In addition, such instruments are mentioned in Section 541 of
the Negotiable Instruments Law as follows:
Sec. 541. The maker or any legal holder of a check
shall be entitled to indicate therein that it be paid to a
certain banker or institution, which he shall do by writing
across the face the name of said banker or institution, or
only the words "and company."
The payment made to a person other than the banker or
institution shall not exempt the person on whom it is
drawn, if the payment was not correctly made.
Under usual practice, crossing a check is done by placing two
parallel lines diagonally on the left top portion of the check. The
crossing may be special wherein between the two parallel lines is
written the name of a bank or a business institution, in which case
the drawee should pay only with the intervention of that bank or
company, or crossing may be general wherein between two
parallel diagonal lines are written the words "and Co." or none at
421 Petition, Annex "B", IAC Decision, Rollo, pp. 50- 51.
227
all as in the case at bar, in which case the drawee should not
encash the same but merely accept the same for deposit.
The effect therefore of crossing a check relates to the mode of
its presentment for payment. Under Section 72 of the Negotiable
Instruments Law, presentment for payment to be sufficient must
be made (a) by the holder, or by some person authorized to
receive payment on his behalf ... As to who the holder or
authorized person will be depends on the instructions stated on
the face of the check.
The three subject checks in the case at bar had been crossed
generally and issued payable to New Sikatuna W ood Industries,
Inc. which could only mean that the drawer had intended the
same for deposit only by the rightful person, i.e., the payee named
therein. Apparently, it was not the payee who presented the same
for payment and therefore, there was no proper presentment, and
the liability did not attach to the drawer.
Thus, in the absence of due presentment, the drawer did not
422
become liable.
Consequently, no right of recourse is available
to petitioner against the drawer of the subject checks, private
respondent wife, considering that petitioner is not the proper party
authorized to make presentment of the checks in question.
Yet it does not follow as a legal proposition that simply
because petitioner was not a holder in due course as found by the
appellate court for having taken the instruments in question with
notice that the same is for deposit only to the account of payee
named in the subject checks, petitioner could not recover on the
checks. The Negotiable Instruments Law does not provide that a
holder who is not a holder in due course may not in any case
recover on the instrument for in the case at bar, petitioner may
recover from the New Sikatuna W ood Industries, Inc. if the latter
has no valid excuse for refusing payment. The only disadvantage
of a holder who is not in due course is that the negotiable
423
instrument is subject to defenses as if it were non-negotiable.
That the subject checks had been issued subject to the
condition that private respondents on due date would make the
backup deposit for said checks but which condition apparently
was not made, thus resulting in the non-consummation of the loan
intended to be granted by private respondents to New Sikatuna
W ood Industries, Inc., constitutes a good defense against
petitioner who is not a holder in due course.
W HEREFORE, the decision appealed

AFFIRMED with costs against petitioner.
from
SO ORDERED.
422 Chan Wan v. Tan Kim and Chen So, L-15380, September 30, 1960,109 Phil. 706 (1960).
423 Chan Wan v. Tan Kim and Chen So, supra.
228
is
hereby
Gutierrez, Jr., Bidin and Cortes, JJ., concur.
Feliciano, J., is on leave.
Bataan Cigar and Cigarette Factory vs.
The Court of Appeals and State Investment House, Inc.
G.R. No. 93048, March 3, 1994
NOCON, J:
For our review is the decision of the Court of Appeals in the
case entitled "State Investment House, Inc. v. Bataan Cigar &
424
Cigarette Factory Inc.,"
affirming the decision of the Regional
425
Trial Court
in a complaint filed by the State Investment House,
Inc. (hereinafter referred to as SIHI) for collection on three unpaid
checks issued by Bataan Cigar & Cigarette Factory, Inc.
(hereinafter referred to as BCCFI). The foregoing decisions
unanimously ruled in favor of SIHI, the private respondent in this
case.
Emanating from the records are the following facts. Petitioner,
Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation
involved in the manufacturing of cigarettes, engaged one of its
suppliers, King Tim Pua George (herein after referred to as
George King), to deliver 2,000 bales of tobacco leaf starting
October 1978. In consideration thereof, BCCFI, on July 13, 1978
issued crossed checks post dated sometime in March 1979 in the
426
total amount of P820,000.00.
Relying on the supplier's representation that he would
complete delivery within three months from December 5, 1978,
petitioner agreed to purchase additional 2,500 bales of tobacco
leaves, despite the supplier's failure to deliver in accordance with
their earlier agreement. Again petitioner issued post dated
crossed checks in the total amount of P1,100,000.00, payable
427
sometime in September 1979.
During these times, George King was simultaneously dealing
with private respondent SIHI. On July 19, 1978, he sold at a
428
discount check TCBT 551826
bearing an amount of
P164,000.00, post dated March 31, 1979, drawn by petitioner,
424 CA-G.R. CV No. 03032, Justice Jorge R. Coquia, ponente, Justices Josue N. Bellosillo and Venancio D.
Aldecoa, Jr., concurring, November 13, 1987.
425 Judge Agusto E. Villarin, presiding, Branch XL, National Capital Region, Manila.
426 Exhibit "1", Folder of Exhibits, p. 11.
427 Exhibit "4", Folder of Exhibits, p. 14.
229
naming George King as payee to SIHI. On December 19 and 2 6, 1978,
he again sold to respondent checks TCBT Nos. 608967 &
429
608968,
both in the amount of P100,000.00, post dated
September 15 & 30, 1979 respectively, drawn by petitioner in
favor of George King.
In as much as George King failed to deliver the bales of
tobacco leaf as agreed despite petitioner's demand, BCCFI
issued on March 30, 1979, a stop payment order on all checks
payable to George King, including check TCBT 551826.
Subsequently, stop payment was also ordered on checks TCBT
Nos. 608967 & 608968 on September 14 & 28, 1979,
respectively, due to George King's failure to deliver the tobacco
leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted
the present case, naming only BCCFI as party defendant. The
trial court pronounced SIHI as having a valid claim being a holder
in due course. It further said that the non-inclusion of King Tim
Pua George as party defendant is immaterial in this case, since
he, as payee, is not an indispensable party.
The main issue then is whether SIHI, a second indorser, a
holder of crossed checks, is a holder in due course, to be able to
collect from the drawer, BCCFI.
The Negotiable Instruments Law states what constitutes a
holder in due course, thus:
Sec. 52 A holder in due course is a holder who
has taken the instrument under the following
conditions:
(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;
(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.
428 Annex "A", Folder of Exhibits, p. 3.
429 Annexes "B" and "C", Folder of Exhibits, pp. 4-5.
230
Section 59 of the NIL further states that every holder is
deemed prima facie a holder in due course. However, 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
The facts in this present case are on all fours to the case of
State Investment House, Inc. (the very respondent in this case) v.
430
Intermediate Appellate Court
wherein we made a discourse on
the effects of crossing of checks.
As preliminary, a check is defined by law as a bill of exchange
431
drawn on a bank payable on demand.
There are a variety of
checks, the more popular of which are the memorandum check,
cashier's check, traveler's check and crossed check. Crossed
check is one where two parallel lines are drawn across its face or
across a corner thereof. It may be crossed generally or specially.
A check is crossed specially when the name of a particular
banker or a company is written between the parallel lines drawn. It
is crossed generally when only the words "and company" are
written or nothing is written at all between the parallel lines. It may
be issued so that the presentment can be made only by a bank.
Veritably the Negotiable Instruments Law (NIL) does not mention
432
"crossed checks," although Article 541
of the Code of
Commerce refers to such instruments.
According to commentators, the negotiability of a check is not
affected by its being crossed, whether specially or generally. It
may legally be negotiated from one person to another as long as
the one who encashes the check with the drawee bank is another
bank, or if it is specially crossed, by the bank mentioned between
433
the parallel lines.
This is specially true in England where the
Negotiable Instrument Law originated.
In the Philippine business setting, however, we used to be
beset with bouncing checks, forging of checks, and so forth that
banks have become quite guarded in encashing checks,
particularly those which name a specific payee. Unless one is a
430 G.R. No. 72764, 175 SCRA 310.
431 Sec. 185, Negotiable Instruments Law.
432 Article 541 -- The maker of any legal holder of a check shall be entitled to indicate therein that it be paid to a
certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or
only the words "and company".
433 CAMPOS AND LOPEZ-CAMPOS, Negotiable Instruments Law, p. 574-575; AGBAYANI, AGUEDO,
Commercial Laws of the Philippines, Vol. 1, 1987 Ed., p. 446.
231
valued client, a bank will not even accept second indorsements on
checks.
In order to preserve the credit worthiness of checks,
jurisprudence has pronounced that crossing of a check should
have the following effects: (a) the check may not be encashed but
only deposited in the bank; (b) the check may be negotiated only
once to one who has an account with a bank; (c) and the act of
crossing the check serves as warning to the holder that the check
has been issued for a definite purpose so that he must inquire if
he has received the check pursuant to that purpose, otherwise, he
434
is not a holder in due course.
The foregoing was adopted in the case of SIHI v. IAC, supra.
In that case, New Sikatuna W ood Industries, Inc. also sold at a
discount to SIHI three post dated crossed checks, issued by Anita
Pea Chua naming as payee New Sikatuna W ood Industries, Inc.
Ruling that SIHI was not a holder in due course, we then said:
The three checks in the case at bar had been crossed
generally and issued payable to New Sikatuna W ood
Industries, Inc. which could only mean that the drawer
had intended the same for deposit only by the rightful
person, i.e. the payee named therein. Apparently, it was
not the payee who presented the same for payment and
therefore, there was no proper presentment, and the
liability did not attach to the drawer. Thus, in the
absence of due presentment, the drawer did not
become liable. Consequently, no right of recourse is
available to petitioner (SIHI) against the drawer of the
subject checks, private respondent wife (Anita),
considering that petitioner is not the proper party
authorized to make presentment of the checks in
question.
xxx xxx xxx
That the subject checks had been issued subject to the
condition that private respondents (Anita and her
husband) on due date would make the backup deposit
for said checks but which condition apparently was not
made, thus resulting in the non-consummation of the
loan intended to be granted by private respondents to
New Sikatuna W ood Industries, Inc., constitutes a good
434 Ocampo v. Gatchalian, G.R. No. L-15126, 3 SCRA 603 (1961); Associated Bank v. Court of Appeals, G.R. No.
89802, 208 SCRA 465; SIHI v. IAC, supra.
232
defense against petitioner who is not a holder in due
435
course.
It is then settled that crossing of checks should put the holder
on inquiry and upon him devolves the duty to ascertain the
indorser's title to the check or the nature of his possession. Failing
in this respect, the holder is declared guilty of gross negligence
amounting to legal absence of good faith, contrary to Sec. 52(c) of
436
the Negotiable Instruments Law,
and as such the consensus of
authority is to the effect that the holder of the check is not a holder
in due course.
In the present case, BCCFI's defense in stopping payment is
as good to SIHI as it is to George King. Because, really, the
checks were issued with the intention that George King would
supply BCCFI with the bales of tobacco leaf. There being failure
of consideration, SIHI is not a holder in due course. Consequently,
BCCFI cannot be obliged to pay the checks.
The foregoing does not mean, however, that respondent could
not recover from the checks. The only disadvantage of a holder
who is not a holder in due course is that the instrument is subject
437
to defenses as if it were non-negotiable.
Hence, respondent can
collect from the immediate indorser, in this case, George King.
W HEREFORE, finding that the court a quo erred in the
application of law, the instant petition is hereby GRANTED. The
decision of the Regional Trial Court as affirmed by the Court of
Appeals is hereby REVERSED. Cost against private respondent.
SO ORDERED.
Narvasa, C.J., Regalado and Puno, JJ., concur.
Padilla, J., took no part.
Security Checks; Holder in Due Course.
State Investment House, Inc. vs. Court of Appeals and
Nora B. Moulic
G.R. No. 101163, January 11, 1993
435 Id. at pp. 316-317.
436 quoted supra.
437 Chan Wan v. Tan Kim and Chen So, L-15380, 109 Phil., 706 (1960); SIHI v. IAC, supra.
233
BELLOSILLO, J:
The liability to a holder in due course of the drawer of checks
issued to another merely as security, and the right of a real estate
mortgagee after extrajudicial foreclosure to recover the balance of
the obligation, are the issues in this Petition for Review of the
Decision of respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon
Victoriano, as security for pieces of jewelry to be sold on
commission, two (2) post-dated Equitable Banking Corporation
checks in the amount of Fifty Thousand Pesos (P50,000.00)
each, one dated 30 August 1979 and the other, 30 September
1979. Thereafter, the payee negotiated the checks to petitioner
State Investment House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned
them to the payee before maturity of the checks. The checks,
however, could no longer be retrieved as they had already been
negotiated. Consequently, before their maturity dates, MOULIC
withdrew her funds from the drawee bank.
Upon presentment for payment, the checks were dishonored
for insufficiency of funds. On 20 December 1979, STATE
allegedly notified MOULIC of the dishonor of the checks and
requested that it be paid in cash instead, although MOULIC avers
that no such notice was given her.
On 6 October 1983, STATE sued to recover the value of the
checks plus attorney's fees and expenses of litigation.
In her Answer, MOULIC contends that she incurred no
obligation on the checks because the jewelry was never sold and
the checks were negotiated without her knowledge and consent.
She also instituted a Third-Party Complaint against Corazon
Victoriano, who later assumed full responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as
well as the Third-Party Complaint, and ordered STATE to pay
MOULIC P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of
Appeals, but the appellate court affirmed the trial court on the
ground that the Notice of Dishonor to MOULIC was made beyond
the period prescribed by the Negotiable Instruments Law and that
even if STATE did serve such notice on MOULIC within the
reglementary period it would be of no consequence as the checks
234
should never have been presented for payment. The sale of the
jewelry was never effected; the checks, therefore, ceased to
serve their purpose as security for the jewelry.
W e are not persuaded.
The negotiability of the checks is not in dispute. Indubitably,
they were negotiable. After all, at the pre-trial, the parties agreed
to limit the issue to whether or not STATE was a holder of the
438
checks in due course.
In this regard, Sec. 52 of the Negotiable Instruments Law
provides
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 was 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.
Culled from the foregoing, a prima facie presumption exists
that the holder of a negotiable instrument is a holder in due
439
course.
Consequently, the burden of proving that STATE is not
a holder in due course lies in the person who disputes the
presumption. In this regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the postdated checks were complete and regular: (b) petitioner bought
these checks from the payee, Corazon Victoriano, before their
440
due dates;
(c) petitioner took these checks in good faith and for
value, albeit at a discounted price; and, (d) petitioner was never
informed nor made aware that these checks were merely issued
to payee as security and not for value.
438 Rollo, pp. 13-14.
439 State Investment House, Inc. v. Court of Appeals, G.R. No. 72764, 13 July 1989; 175 SCRA 310, bold supplied
440 Per Deeds of Sale of 2 July 1979 and 25 July 1979, respectively; Rollo, p. 13.
235
Consequently, STATE is indeed a holder in due course. As
such, it holds the instruments free from any defect of title of prior
parties, and from defenses available to prior parties among
themselves; STATE may, therefore, enforce full payment of the
441
checks.
MOULIC cannot set up against STATE the defense that there
was failure or absence of consideration. MOULIC can only invoke
this defense against STATE if it was privy to the purpose for
which they were issued and therefore is not a holder in due
course.
That the post-dated checks were merely issued as security is
not a ground for the discharge of the instrument as against a
holder in due course. For the only grounds are those outlined in
Sec. 119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged.
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) W hen the
principal debtor becomes the holder of the
instrument at or after maturity in his own right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as
possible grounds for the discharge of the instrument. But, the
intentional cancellation contemplated under paragraph (c) is that
cancellation effected by destroying the instrument either by
442
443
tearing it up,
burning it,
or writing the word "cancelled" on the
instrument. The act of destroying the instrument must also be
made by the holder of the instrument intentionally. Since MOULIC
failed to get back possession of the post-dated checks, the
intentional cancellation of the said checks is altogether
impossible.
On the other hand, the acts which will discharge a simple
contract for the payment of money under paragraph (d) are
determined by other existing legislations since Sec. 119 does not
444
specify what these acts are, e.g., Art. 1231 of the Civil Code
which enumerates the modes of extinguishing obligations. Again,
441 Salas v. Court of Appeals, G.R. No. 76788, 22 January 1990; 181 SCRA 296.
442 Montgomery v. Schwald, 177 Mo App 75, 166 SW 831; Wilkins v. Shaglund, 127 Neb 589, 256 NW 31.
443 See Henson v. Henson, 268 SW 378.
236
none of the modes outlined therein is applicable in the instant case as
Sec. 119 contemplates of a situation where the holder of the instrument
is the creditor while its drawer is the debtor. In the present action,
the payee, Corazon Victoriano, was no longer MOULIC's creditor
at the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge
herself from her liability by the mere expediency of withdrawing
her funds from the drawee bank. She is thus liable as she has no
legal basis to excuse herself from liability on her checks to a
Moreover, the fact that STATE failed to give Notice of
Dishonor to MOULIC is of no moment. The need for such notice
is not absolute; there are exceptions under Sec. 114 of the
Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer .
Notice of dishonor is not required to be given to the
drawer in the following cases: (a) W here the drawer and
the drawee are the same person; (b) W hen the drawee
is a fictitious person or a person not having capacity to
contract; (c) W hen the drawer is the person to whom
the instrument is presented for payment: (d) W here the
drawer has no right to expect or require that the drawee
or acceptor will honor the instrument; (e) W here the
drawer had countermanded payment.
Indeed, MOULIC'S actuations leave much to be desired. She
did not retrieve the checks when she returned the jewelry. She
simply withdrew her funds from her drawee bank and transferred
them to another to protect herself. After withdrawing her funds,
she could not have expected her checks to be honored. In other
words, she was responsible for the dishonor of her checks,
hence, there was no need to serve her Notice of Dishonor, which
is simply bringing to the knowledge of the drawer or indorser of
the instrument, either verbally or by writing, the fact that a
specified instrument, upon proper proceedings taken, has not
been accepted or has not been paid, and that the party notified is
445
expected to pay it.
444 Art. 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By
the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By
compensation; (6) By novation . . . . .
445 Martin v. Browns, 75 Ala 442.
237
In addition, the Negotiable Instruments Law was enacted for
the purpose of facilitating, not hindering or hampering transactions
in commercial paper. Thus, the said statute should not be
tampered with haphazardly or lightly. Nor should it be brushed
446
aside in order to meet the necessities in a single case.
The drawing and negotiation of a check have certain effects
aside from the transfer of title or the incurring of liability in regard
to the instrument by the transferor. The holder who takes the
negotiated paper makes a contract with the parties on the face of
the instrument. There is an implied representation that funds or
credit are available for the payment of the instrument in the bank
447
upon which it is drawn.
Consequently, the withdrawal of the
money from the drawee bank to avoid liability on the checks
cannot prejudice the rights of holders in due course. In the instant
case, such withdrawal renders the drawer, Nora B. Moulic, liable
to STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment
as MOULIC left no funds with the drawee bank to meet her
448
obligation on the checks,
so that Notice of Dishonor would be
futile.
The Court of Appeals also held that allowing recovery on the
checks would constitute unjust enrichment on the part of STATE
Investment House, Inc. This is error.
The record shows that Mr. Romelito Caoili, an Account
Assistant, testified that the obligation of Corazon Victoriano and
her husband at the time their property mortgaged to STATE was
extrajudicially foreclosed amounted to P1.9 million; the bid price at
449
public auction was only P1 million.
Thus, the value of the
property foreclosed was not even enough to pay the debt in full.
W here the proceeds of the sale are insufficient to cover the
debt in an extrajudicial foreclosure of mortgage, the mortgagee is
450
entitled to claim the deficiency from the debtor.
The step thus
taken by the mortgagee-bank in resorting to an extra-judicial
foreclosure was merely to find a proceeding for the sale of the
property and its action cannot be taken to mean a waiver of its
451
right to demand payment for the whole debt.
For, while Act
3135, as amended, does not discuss the mortgagee's right to
446 Reinhart v. Lucas, 118 W Va 466, 190 SE 772.
447 11 Am Jur 589.
448 See Agbayani, Commercial Laws of the Philippines, Vol. 1, 1984 Ed., citing Ellenbogen v. State Bank, 197 NY
Supp 278.
449 TSN, 25 April 1985, pp. 16-17.
450 Philippine Bank of Commerce v. de Vera, No. L-18816, 29 December 1962;
6 SCRA 1029.
451 Medina v. Philippine National Bank, 56 Phil 651.
238
recover such deficiency, it does not contain any provision either,
expressly or impliedly, prohibiting recovery. In this jurisdiction, when
the legislature intends to foreclose the right of a creditor to sue for any
deficiency resulting from foreclosure of a security given to
guarantee an obligation, it so expressly provides. For instance,
452
with respect to pledges, Art. 2115 of the Civil Code
does not
allow the creditor to recover the deficiency from the sale of the
thing pledged. Likewise, in the case of a chattel mortgage, or a
thing sold on installment basis, in the event of foreclosure, the
vendor "shall have no further action against the purchaser to
recover any unpaid balance of the price. Any agreement to the
453
contrary will be void".
It is clear then that in the absence of a similar provision in Act
No. 3135, as amended, it cannot be concluded that the creditor
loses his right recognized by the Rules of Court to take action for
the recovery of any unpaid balance on the principal obligation
simply because he has chosen to extrajudicially foreclose the real
estate mortgage pursuant to a Special Power of Attorney given
454
him by the mortgagor in the contract of mortgage.
The filing of the Complaint and the Third-Party Complaint to
enforce the checks against MOULIC and the VICTORIANO
spouses, respectively, is just another means of recovering the
unpaid balance of the debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the
checks she issued to the holder in due course, STATE, without
prejudice to any action for recompense she may pursue against
the VICTORIANOs as Third-Party Defendants who had already
been declared as in default.
W HEREFORE, the petition is GRANTED. The decision
appealed from is REVERSED and a new one entered declaring
private respondent NORA B. MOULIC liable to petitioner STATE
INVESTMENT HOUSE, INC., for the value of EBC Checks Nos.
30089658 and 30089660 in the total amount of P100,000.00,
P3,000.00 as attorney's fees, and the costs of suit, without
prejudice to any action for recompense she may pursue against
the VICTORIANOs as Third-Party Defendants. Costs against
private respondent.
452 Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of
the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. . . . If the price of
the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the
contrary.
453 Art. 1484 [3] of the Civil Code.
454 See Note 14.
239
SO ORDERED.
Cruz and Grio-Aquino, JJ., concur.
Padilla, J., took no part.
Holder in due Course; Holder in good faith and for value
Vicente R. De Ocampo & Co., vs. Anita Gatchalian, et al
G.R. No. L-15126, November 30, 1961
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
240
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
241
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
242
considered as parts of this stipulation, without necessity
of formally offering them in evidence;
W HEREFORE, 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 plaintiff-appellee
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).
243
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 W ITHOUT
INQUIRY FROM THE BEARER. The same inquiries
should have been made by plaintiff. (Defendantsappellants' brief, pp. 52-53)
Answering the first contention of appellant, counsel for plaintiffappellee 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:
W hether 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.
244
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 plaintiffappellee 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
245
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:
(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;
(d) That at the time it was negotiated to him he had no
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 defendantsappellants 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 plaintiff-appellee 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
246
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)
247
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 facie to be a holder in due
course.
In the case at bar the rule that a possessor of the instrument is
prima facie a 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. W ilson, 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
248
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: W hen 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
249
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. W ith 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.
Non-applicability
of
lack
of
notice
or
infirmity
in
the
instrument, to accommodation party transaction
To be sure, as regards an accommodation party (such as
STEELW ELD), the fourth condition, i.e., lack of notice of any
infirmity in the instrument or defect in the title of the persons
negotiating it, has no application. This is because Section 29
of the law above quoted preserves the right of recourse of a
holder in due course against the accommodation party
notwithstanding that such holder, at the time of taking the
instrument knew him to be only an accommodation party.
(Stelco Marketing Corporation vs, Court of Appeals and Steelweld
Corporation of the Philippines, Inc., G.R. No. 96160, June 17,
1992, [Narvasa, C.J:], citing Agbayani, Commercial Laws of the
Philippines, 1975 ed., Vol. I, citing Prudential Bank and Trust Co.
vs. Ramesh Trading Co., C.A. 32908-R, Sept. 10, 1964, bold
supplied)
Financing Company, not a holder in good faith as to the
buyer
In the case of Consolidated Plywood Industries, Inc. et al vs.
455
IFC Leasing and Acceptance Corporation
, the High Court held,
250
subscribing to the view of Campos and Campos, that: a financing
company is not a holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note
payable to the seller to cover the purchase price. Many
times, in pursuance of a previous arrangement with the
seller, a finance company pays the full price and the note
is indorsed to it, subrogating it to the right to collect the
price from the buyer, with interest. W ith the increasing
frequency of installment buying in this country, it is most
probable that the tendency of the courts in United States
to protect the buyer against the finance company will, the
finance company will be subject to the defense of failure
of consideration and cannot recover the purchase price
from the buyer. As against the argument that such a rule
would seriously affect a certain mode of transacting
business adopted throughout the State, a court in one
case stated:
It may be that our holding here will require some
changes in business methods and will impose a
greater burden on the finance companies. W e
think the buyer Mr. & Mrs. General Public
should have some protection somewhere along
the line.
W e believe the finance company is
better able to bear the risk of the dealers
insolvency than the buyer and in a far better
position
to
protect
his
interests
against
unscrupulous and insolvent dealers
If this opinion imposes great burdens on finance
companies it is a potent argument in favor of a
rule which will afford public protection to the
general public buying against unscrupulous
dealers in personal property (Mutual Finance
Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953])
(Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law, Third
Edition, p. 128)
In the case of Commercial Credit Corporation v. Orange
County Machine Works (34 Cal. 2d 766) involving similar facts, it
was held that in a very real sense, the finance company was a
moving force in the transaction from its very inception and acted
as a party to it. W hen a finance company actively participates in a
455 G.R. No. 72593, April 30, 1987.
251
transaction of this type from its inception, it cannot be regarded as
a holder in due course of the note given in the transaction.
In like manner, therefore, even assuming that the subject
promissory note is negotiable, the respondent, a financing
company which actively participated in the sale on installment of
the two subject Allis Crawler tractors, cannot be regarded as a
holder in due course of said note. If follows that the respondents
rights under the promissory note involved in this case are subject
to all defenses that the petitioner have against the seller-assignor,
Industrial Products Marketing. For Section 58 of the Negotiable
Instruments Law provides that in the hands of any holder other
than a holder in due course, a negotiable instrument is subject to
the same defenses as if it were non-negotiable
Whether or not payee is deemed a holder in due course
On this note, the ruling of the Supreme Court in the case of
Prudencio vs. Court of Appeals, G.R. No. L-34539, July 14, 1986,
is controlling, wherein it was held that: [a]lthough as a general
rule, a payee may be considered a holder in due course we think
that such a rule cannot apply with respect to the respondent PNB.
Not only was PNB an immediate party or in privy to the promissory
note, that is, it had dealt directly with the petitioners knowing fully
well that the latter only signed as accommodation makers but
more important, it was the Deed of Assignment executed by the
Construction Company in favor of PNB which principally moved
the petitioners to sign the promissory note also in favor of PNB.
Petitioners were made to believe and on that belief entered into
the agreement that no other conditions would alter the terms
thereof and yet, PNB altered the same From the foregoing
circumstances, PNB cannot be regarded as having acted in good
faith which is also one of the requisites of a holder in due course
under Section 52 of the Negotiable Instruments Law. The PNB
knew that the promissory note which it took from the
accommodation makers was signed by the latter because of full
reliance of the Deed of Assignment, which, PNB had no intention
to comply with strictly W e, therefore, hold that respondent PNB
is not a holder in due course.
In those cases where a payee was considered a holder in
due course, such payee either acquired the note from
another holder or has not directly dealt with the maker
thereof. As was held in the case of Bank of Commerce and
Savings v. Randell (186 NorthWestern Reporter 71) (emphasis
supplied):
252
We conclude, therefore, that a payee who receives a
negotiable promissory note, in good faith, for value,
before
maturity,
and
without
any
notice
of
any
infirmity, from a holder, not the maker to whom it was
negotiated as a completed instrument, is a holder in
due course within the purview of [a] Negotiable
Instruments Law, so as to preclude the defense of
fraud and failure of consideration between the maker
and
the
holder
to
whom
the
instrument,
was
delivered. (supra) (emphasis supplied)
Similarly, in the case of Stone v. Goldberg & Lewis (60
Southern Reporter 748) on rehearing and quoting Daniel on
Negotiable Instruments, it was held:
It is a general principle of the law merchant that, as
between the immediate parties to a negotiable instrumentthe parties between whom there is a privity-the
consideration may be inquired into; and as to them the
only superiority of a bill or note over other unsealed
evidence of debt is that it prima facie imports a
consideration. (supra)
2000 Bar Question:
Can the payee in a promissory note be a holder in due
course within the meaning of the Negotiable Instruments
Law (Act 2031). Explain your answer. (2%)
ANSWER:
Yes. Provided, such payee acquired the note from another
holder or has not directly dealt with the maker thereof. Sec. 191,
Act 2031, defines a holder as the payee or indorsee of a bill or
note who is in possession of it, or the bearer thereof, and in Sec.
59, every holder is deemed prima facie to be a holder in due
course.
1996 Bar Question:
What constitutes a holder in due course?
ANSWER:
253
Sec. 52 of the Negotiable Instruments Law provides that a
holder in due course is a person 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 that it was negotiated to him, he had no
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.
Illustrative cases:
Sixteen months is not an unreasonable time where payments
of monthly interest were made to the payee and also to plaintiff
after he took the instrument. (Brannan, page 59, citing McLean
v. Bryer, 24 R.I. 599, 54 Atl. 378, S.C. sec. 64-1)
Five days between the issue and negotiation of a cashiers
check is not an unreasonable time, such a check, whether
certified or not, being a bill of exchange payable on demand.
(Mfg. Co. v. Summers, 143 N.C. 102, 55 S.E. 522, S.C. sec. 59,
A check dated and issued on one day and negotiated at noon
the next day is not overdue so as to convey notice to the indorsee
of its illegality or of its previous dishonor. ( Ibid, citing Matlock v.
Scheuerman, 51 Oregon, 49, 93 Pac. 823, 17 L.R.S. (N.S.) 747,
S.C. secs. 25, 56, 186)
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.
Illustrative case:
254
W here a bank discounted a note and placed the proceeds to
the credit of the debtor, quaere whether the mere fact that the
note was not paid when due is such notice of defect of title of the
depositor as to make the subsequent payment of the balance of
the proceeds a wrongful payment.

(Albany County Bank v.
Peoples Ice Co., 92 Ap. Div. 47, 86 N.Y. Supp. 773, Ibid)
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.
Notes:
Breach must be committed by the perpetrator
Pursuant to this provision, it is vital to show that the negotiation
is made by the perpetrator in breach of faith amounting to fraud.
The person negotiating must have gone beyond the authority
given by his principal. If the principal could prove that there was
no negligence in the performance of his duties, he may set up the
personal defense to escape liability and recover from other parties
who, through their own negligence, allowed the commission of the
crime. (Philippine Commercial International Bank vs. Court of
Appeals and Ford Philippines, Inc., G.R. Nos. 121413, 121479,
128604, January 29, 2011, [Quisumbing, J.])
Reason for the Rule
Justice Street, in his dissent in the case of Asia Banking
Corporation vs. Ten Sen Guan, G.R. No. L-19397, February 16,
1923, explained that [t]he reason for this statutory rule given by
the courts in innumerable decisions is that the guilty maker of an
instrument vitiated by fraud or illegality will naturally seek to put it
in the hands of some other person in order to cut off the defense
to which the instrument is subject, and a presumption arises
against the bona fides of the transfer. The law therefore requires
the holder of such paper to manifest the most complete can do
and show exactly the circumstances under which the paper was
acquired.
255
This fraud having been set up in the defendants answer and
established by the proof, it became incumbent upon the plaintiff in
this case to prove that it occupies the position of a bona fide
purchaser of said draft for value and without notice.
Illustrative Cases:
The title of the payee of a note is defective where the only
consideration is accrued interest on a loan previously made at an
unlawful rate of interest. (Keene v. Behan, 40 Wash. 505, 82
Pac. 884)
If one of the signatures of several makers is obtained by fraud
so as to make the title of the payee defective as to him, it will be
defective as to the other makers also, since the equality of burden
is thus disturbed and increased as to them. (Hodge v. Smith,
130 Wis. 326, 110 N.W. 192, S.C. secs. 16, 52-3). But a holder
in due course can recover against those who signed. (First Nat.
Bank of Durand v. Shaw, 157 Mich. 192, 121 N.W. 811) The
fraud consisted in the fact that the signatures of some of the
makers were forged. (Ibid)
X owed plaintiff. In order to provide funds to pay the debt,
defendant at Xs request drew a check payable to X or order,
which X was to pay into his bank to meet his check for the same
amount to plaintiff. X indorsed the defendants check, paid it into
his bank and gave his own check to plaintiff. Defendant changed
his mind and stopped his check, whereupon X stopped his check
and indorsed and delivered defendants check to plaintiff who had
notice of its dishonor.

Held, that as the check was an
accommodation bill and plaintiff, even assuming that he gave
consideration for it, not being a holder in due course, since he
took the check with notice that it had been dishonored, took it
subject to any defect of title at the time of dishonor, and as X had
negotiated it to plaintiff in breach of faith, there was a defect of
title attaching to it and the plaintiff could not recover. (Hornby v.
McLaren (C.A., March 31, 1908). 24 T.L. Rep. 494)
Sec. 56. What constitutes notice of defect. - To constitute
notice of an infirmity in the instrument or defect in the title of
the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity
or defect, or knowledge of such facts that his action in taking
the instrument amounted to bad faith.
Notes:
256
This provision is self-explanatory. That in order to constitute a
notice of defect in the instrument or defect in the title of the
person negotiating the same, the person to whom it is negotiated
must have actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the instrument
amounted to bad faith. The same is a matter of evidentiary fact
which must be established by actual knowledge.
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.
Notes:
A holder in due course, as established in Sec. 52, has the right
to:
a)
Hold the bill or note free from any defect of title of prior
parties,
b)
Be free from defenses available to prior parties, and
c)
Enforce payment of the instrument for the full amount
thereof against parties liable thereon.
Right to hold the bill or note free from any defect of title of
prior parties
A holder in due course holds the instrument free from any
defect of title of prior parties; thus, they acquire better title over
the bill or note than their predecessors in interest. It does not
matter if the title of the previous holder is tainted with
irregularities, so long as the holder qualifies as a holder in due
course, he ipso facto acquires a valid and effectual title over the
instrument and supersedes any defect of title of prior parties.
Be free from defenses available to prior parties
As a consequence of the right to hold the instrument free from
any defect of title of prior parties, a holder in due course is also
free from any defenses available to prior parties. So that the
maker of a promissory note cannot raise a defense of absence of
consideration, because it only affects the title of the transferor, but
never the validity and enforceability of the note when it is acquired
by a holder in due course.
257
Enforce payment of the instrument for the full amount
thereof against parties liable thereon
Ultimately, as indicated under Sec. 51, the holder has the right
to sue for the payment of the instrument. Corollary, the holder in
due course has the right to enforce payment of the instrument for
the full amount thereof against parties liable thereon. In as much
as the holder has the right to hold the instrument free from any
defect of title of prior parties, and free from any defenses
available against them, as a consequence, he has the absolute
right to enforce payment to its full amount.
2011 Bar Question:
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. An example of
such a defense is
A. fraud in inducement.
B. duress amounting to forgery.
C. fraud in esse contractus.
D. alteration.
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 nonnegotiable. 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.
Notes:
Owner, though not himself bona fide holder, acquires title of
his transferor
A transferee can generally get as good a title as his transferrer
possesses, and it is, therefore, a settled principle that if the party
who transferred the instrument to the holder acquired the note
before maturity, and was himself unaffected by any infirmity in it,
the holder acquires as good a title as he held, although it were
456
overdue and dishonored at the time of transfer.
Thus, it has
been held that in an action by a second indorsee of a bill given for
456 Woodman v. Churchill, 52 Me. 58; Bassett v. Avery, 15 Ohio St. 209
258
smuggling
debt,
he
could
recover
against
the
acceptor,
although he took it overdue, his indorser having acquired it bona
457
fide, without notice before it fell due.
And, therefore, even if he
have notice that there was fraud in the inception of the paper, or
that it was lost or stolen, or that the consideration has failed
between some anterior parties, or the paper be overdue and
dishonored, he is, nevertheless, entitled to recover, provided his
immediate indorser was a bona fide holder for value unaffected by
any of these defenses. As soon as the paper comes into the
hands of a holder, unaffected by any defect, it character as a
negotiable security is established; and the power of transferring it
to others, with the same immunity which attached in his own
hands, is incident to his legal right, and necessary to sustain the
character and value of the instrument as property, and to protect
the bona fide holder in its enjoyment. To prohibit him from selling
as good a right and title as himself has, would destroy the very
object for which they are secured to him would indeed be
paradoxical. And it has been justly said that this doctrine is
indispensable to the security and circulation of negotiable
instruments, and is founded on the most comprehensive and
458
liberal principles of public policy.
But this rule is subject to the single exception that if the note
were invalid as between maker and payee, the payee could not
himself by purchase from a bona fide holder become a successor
to his rights; it not being essential to such bona fide holders
459
protection to extend the principle so far.
the Law of Negotiable Instruments, pages 124-125)
Illustrative Cases:
A payee whose title is defective cannot better it by selling the
instrument to a holder in due course and buying it back again.
(Andrews v. Robertson, 111 Wis. 334, 87 N.W. 190, 87 Am. St.
Rep. 870)
A note, made or indorsed by defendants for the
accommodation of a third person, was delivered to an agent to be
negotiated and the proceeds paid to such third person. The agent
sold the note to a bona fide purchaser but appropriated the
proceeds to his own use. At maturity the note was protested for
non-payment, and the agent paid it and afterwards sold it to the
plaintiff, who had notice of the dishonor and agreed with the agent
457 Chalmers v. Lanion, 1 Campb. 383
458 Scotland County v. Hill, 132 U.S. 117; Porter v. Pittsburg Steel Co., 122 U.S. 267
459 Todd v. Wick, 38 Ohio St. 387; Sawyer v. Wiswell, 9 Allen, 42
259
to extend the time. Held, that the agent having fraudulently sold
the note could not acquire a good title by payment to or purchase
from the bona fide purchaser and could not give a good title to
plaintiff. (Comstock v. Buckley, (Wis.) 124 N.W. 414, S.C. sec.
29)
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.
Notes:
Meaning of term bona fide holder; presumption
Two presumptions may be considered as settled principles of
commercial law principles which have been, for the most part,
reiterated by the Supreme Court of the United States, and prevail
throughout the Union:
First.
That to entitled one to the rights and protection of a
purchase of holder of a negotiable instrument, as set out in the
preceding paragraphs of this chapter, the paper must have been
acquired (1) bona fide, (2) for a valuable consideration, (3) in the
usual and ordinary course of business, (4) before maturity, or
rather when it was not overdue, and (5) without notice of facts
460
which impeach its validity as between antecedent parties.
Second.
The mere possession of a negotiable instrument,
produced in evidence by the indorsee, or by the assignee where
no indorsement is necessary, imports prima facie that he acquired
it bona fide for full value, in the usual course of business, before
maturity, and without notice of any circumstance impeaching its
validity; and that he is the owner thereof, entitled to recover the
full amount against all prior parties. In other words, the production
of the instrument and proof that it is genuine (where indeed such
proof is necessary), prima facie establishes his case; and he may
460 Daniel on Negotiable Instruments, 769a
260
461
there rest it.
Culled from the foregoing, a prima facie presumption exists
that the holder of a negotiable instrument is a holder in due
course.
Consequently, the burden of proving that [the
holder] is not a holder in due course lies in the person who
disputes the presumption. (State Investment House vs. Court of
Appeals and Nora B. Moulic, G.R. No. 101163, January 11, 1993,
[Bellosillo, J:], bold supplied)
The presumption expressed in [this] section arise only in
favor of a person who is a holder in the sense defined in
Section 191 of the same Law, that is, a payee or indorsee
who is in possession of the draft, or the bearer thereof.
Under this definition, in order to be a holder, one must be in
possession of the note or the bearer thereof. (Night & Day
Bank vs. Roseenbaum, 191 Mo. App., 559, 574.) If this action
had been instituted by the bank itself, the presumption that the
bank was a holder in due course would have arisen from the tenor
of the draft and the fact that it was in the banks possession; but
when the instrument passed out of the possession of the bank
and into the possession of the present plaintiff, no presumption
arises as to the character in which the bank held the paper. The
banks relation to the instrument became past history when it
delivered the document to the plaintiff; and it was incumbent upon
the plaintiff in this action to show that the bank had in fact
acquired the instrument for value and under such conditions as
would constitute it a holder in due course. In the entire absence
of proof on this point, the action must fail. (Fossum vs. Hermanos,
G.R. No. L-19461, March 28, 1923, [Street, J:], bold supplied)
The defendant being the holder of the instrument, he is also
unquestionably the holder in due course. In the first place, in
order to avoid doubts with respect to this matter which might
require the introduction of evidence, the Act before mentioned has
provided, in section 59, that every holder is deemed prima facie to
be a holder in due course, and such is the weight it gives to this
presumption and to the consequences derived therefrom, that it
imposes upon the holder the burden to prove that he or some
person under whom he claims acquired the title in due course,
only when it is shown that the title of any person who has
negotiated the instrument was defective. This rule, however,
461 Daniel on Negotiable Instruments, 812, and cases cited
261
pursuant to the said section, does not apply in favor of a party
who became bound on the instrument prior to the acquisition of
such defective title, in which case the defendant Serrano is not
included, because, in the first place, he was not bound on the
instrument prior to the acquisition of the title by the plaintiff, but it
was the maker of the promissory note who was bound on the
instrument executed in favor of the defendant or indorser prior to
the acquisition of the title by the plaintiff, and, in the second place,
it does not appear, nor was it proved, as will be seen hereinafter,
that the title in question was defective. (concurring opinion,
Justice Torres, in the case of Maulini, et al vs. Serrano, December
16, 1914.)
This section is declaratory of the common law.

The
Negotiable Instrument Act is in the main a codification of the
common law rules. W here it lays down a new rule it controls; but
where its language is consistent with the rule previously
recognized, it should be construed as simply declaratory of the
law as it was before the adoption of the Act. ( Cambell v. Fourth
Nat. Bank (Ky.), 126 S.W. 114, S.C. sec. 25)
Illustrative Cases:
In an action by an indorsee against the maker, where
defendant admits that the note was made for a valuable
consideration, but denies, on information and belief, the
indorsements, it was sufficient for the plaintiff to introduce the
note in evidence with the indorsements thereon. (Beck v. Maller,
131 App. Div. 243, 115 N.Y. Supp. 596)
W hen defendant has proved fraud, the further inquiry is not
whether defendant has shown that plaintiff took with notice of the
fraud, but whether plaintiff had shown that he took in good faith
and without notice. (Cox v. Cline, 139 Iowa 128, 117 N.W. 48)
W here the evidence establishes that the title of the party
negotiating the instrument was defective, the holder claiming to be
a purchaser in good faith for value and without notice must make
his claim good by the greater weight of evidence. (Mfg. Co. v.
Summers, 143 N.C. 102, 55 S.E. 522, S,C. sec. 53; other
American cases omitted)
Proof that plaintiff gave value before maturity is not enough to
show good faith. (Natl Bank v. Foley, 54 Misc. R. 126, 103 N.Y.
Supp. 553, S.C. secs. 25, 52-3)
262
Bona fides essential
The holder, in order to be entitled to protection against offsets
and equities and defenses based upon frauds, pleaded by prior
parties, must have acquired the paper in good faith from his
predecessor. Fraud cuts down everything,

462
and although the
holder may pay value, yet, if his acquisition of the paper be in any
respect fraudulent as where it is made or transferred to give him
preference over other parties to a compromise of creditors he
463
cannot claim the position of a bona fide holder.
In pleading,
mala fides must be distinctly alleged, and an allegation that the
464
party is not the bona fide holder is not sufficient.
It is the bona
fides of the holder alone that is to be considered, not that of his
transferrer, and the fact that the payee had interest to part with
the paper, is not a circumstance which affects the rights of his
465
indorsee.
V. LIABILITIES OF PARTIES
Defenses; Classification
The defenses that may be interposed to an action upon a
negotiable contract may be grouped or arranged into five classes:
1. That the defendant did not make the instrument.
a.
Forgery (Sec. 23);
b.
Material Alterations (Sec. 125)
2. That the
a.
b.
c.
d.
contract sued upon is in law unenforceable
Incapacity of the party;
W ant, failure, or illegality of the consideration
That the paper was obtained by fraud;
That it was obtained by duress
3. That the plaintiff is not entitled to sue thereon
a.
That the legal title to the instrument is not
vested in the plaintiff
4. That the obligation created has been discharged:
a.
By payment;
462 Rogers v. Hadley, 32 L.J. Exch. 248
463 Daniel on Negotiable Instruments, 193 et seq
464 Uther v. Rich, 10 Ad & El 784
465 Helmer v. Krolick, 36 Mich. 373
263
b.
By bankruptcy, or assignment under insolvent
laws;
c.
By accord and satisfaction;
d.
By release;
e.
By covenant not to sue;
f .
By substitution of another obligation;
g.
By set-off;
h.
Under what circumstances a surety or
guarantor is discharged when the principal is not
5.
That the action upon the instrument is barred by statute
of limitations
Defenses available against a bona fide holder for value, and
without notice, as against any other party
They are those which go to show that the instrument was
absolutely and utterly void, and not merely voidable
1.
By reason of the incapacity of the party assuming to
contract;
2.
By reason of some positive interdiction of law; or
3.
By reason of the want of consent of the party sought to be
466
bound to the particular contract.
Real and Personal Defenses
Mr. Norton, in his treatise on the subject of Bills and Notes,
adopts the classification of Professor Ames in his work on that
subject, and classifies defenses into real and personal,--grouping
all defenses that are good against a bona fide holder for value
under the class described by him as real defenses, and all the
defenses good as between immediate parties, but not available
against a bona fide holder, he groups under class denominated as
personal defenses.
defenses:
He
thus
defines
the
two
classes
of
(a) Real Or those that attach to the instrument itself, and are
good against all persons.
(b) Personal Or those that grow out of the agreement or
conduct of a particular person in regard to the instrument, which
renders it inequitable for him, though holding the legal title, to
enforce it against the defendant, but which are not available
against bona fide purchasers for value without notice.

467
(Daniel,
467 Norton on Bills and Notes, 216
264
In general, this classification shows that a bona fide holder can
recover when the defense interposed is a personal defense, but
cannot recover when the defense is real.

In the case of
immediate parties, all defenses are available, because each
independent contract is governed by the general laws of contract.
In the case of remote parties, where the holder enforcing the
instrument is a purchaser for value without notice, a personal
defense cannot be successfully interposed, and only the real
468
defenses are allowed by the courts.
W ith real defenses the right sought to be enforced has never
existed, or has ceased to exist. They are called real defenses
because they attach to the res or the thing, irrespective of the
conduct or agreement of the parties to it. It cannot be enforced by
the holder because there is no contract to enforce. Personal
defenses, in contrast to this, are founded upon the act, conduct,
469
or agreement of the parties with reference to the instrument.
Personal Defenses:
Lack or Failure of Consideration is essentially a breach of
contract. It exists in a commercial paper where a maker or
drawer of an instrument issues it to the payee in any case where
the payee does not give consideration under ordinary contract
law principles. In such situations want of consideration can be
asserted by the maker or drawer against an ordinary holder. To
illustrate: D, a distant relative of P, drafts a check and makes a
gift of it to P so that P can attend college. P negotiates the check
to H. P does not go to college, and D, in disgust, stops payment
of the check. If H sues D on the instrument, D can successfully
assert the defense of want of consideration but only if H fails to
470
qualify as an HDC (holder in due course).
Fraud in the inducement where a person signs a negotiable
instrument (knowing it to be such) has been induced to sign by
471
some intentional misrepresentation of the other party.
For
instance, X agrees to buy Ys car for Php 120,000.00 after the
assurance that the latter brought it brand-new and is only eight
months old, X issues a check for Php 70,000.00 as downpayment
and a post-dated check for Php 50,000.00, thereafter he learned
468
Norton on Bills and Notes, page 217
469
Id.
470
Business Law, Howell, page 455-456 with notation
471
Id.
265
that said car was brought by Y second-hand from a junkshop for
only Php 20,000.00. Ys intentional misrepresentation constitutes
fraud in the inducement, and X can assert his defense against Y
and against any subsequent holder who does not qualify as an
472
HDC.
Illegality like the general defense of fraud, some types of
illegality constitute personal defenses and other constitute real
defenses. This is so because although certain transactions are
illegal (prohibited) under state statutes or ordinances, the
applicable statutes do not always provide that the prohibited
transactions are void.

If a statute voids the transaction, the
473
defense is real; if it does not, the defense is merely personal.
Nondelivery of an instrument sometimes and instrument finds
its way into the hands of a subsequent holder through loss or
theft. In such a case the maker or drawer of the instrument has
available the defense of nondelivery. To illustrate: M is the
maker of a bearer instrument that is stolen from her home by X
and negotiated to H. If H is merely an ordinary holder, he takes
the instrument subject to the defense of nondelivery and therefore
474
cannot enforce it against M.
Unauthorized completion of an incomplete but delivered
instrument In Sec. 14 of Act 2031, where an instrument is
lacking in any material particular or where a person placed his
signature on a blank paper, the holder thereof has the prima facie
authority to fill it up, strictly in accordance with the authority
granted and within a reasonable time. Thus, where said holder
filled up the blanks in the instrument but not in accordance with
the authority given, this, in effect can be set up as a defense,
however, the same does not apply against a holder in due course.
Prior payment If for instance the bill or note is already paid by
the person primarily liable, but, for some reason the instrument is
not physically surrendered to him, and said instrument is further
negotiated to another person, the maker or named drawee, as the
case may be, may set-up the defense of prior payment, which
already extinguishes their liability on the instrument. Thus, it is a
personal defense as it can be availed only by the person who
already made the prior payment, but not by the person who
subsequently negotiated it to the subsequent holder.
When instrument which is materially altered and is in the
hands of a holder in due course not a party to the alteration
472
Id., page 457
473
Id.
474
Id.
266
In such a case, the holder in due course may enforce the payment
of the instrument, but only up to the extent of its original tenor,
before it was materially altered.
Real Defenses:
Forgery In Sec. 23, Act 2031, where the signature of a person
is forged or made without the authority of the person it purports to
be, it is wholly inoperative and no right to retain the instrument, or
give a discharge 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.
Fraud in the execution (Fraud in factum) in this case, a
person is caused to sign a negotiable instrument under
circumstances in which he or she honestly and reasonably
475
believes it to be something other than a negotiable instrument.
Material Alteration (Deliberate) Sec. 124, Act 2031 states that
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 holders.
Illegality (When declared by the statute) W hen a law is
passed declaring void any contract on which the negotiable
instrument may be based, it will in effect invalidate any negotiable
instrument issued as consideration for such an illegal act. It
should be taken into consideration that the freedom to enter into
contracts and conduct trade and commerce is always subject to
the qualification that the same should not be contrary to any law,
duly passed and enacted by the State.
Incapacity where the maker or drawer is a minor, or is insane,
or his capacity to act is prevented by civil interdiction, strictly
speaking, he cannot act with any valid or legal effect, thus, if a
minor makes a promissory note, his minority can be raised as a
real defense, as being a minor, he cannot enter into contracts,
much more issue a promissory note. The minor cannot be held
liable for the note he issued, but his parents or guardian may be
held subsidiarily liable for civil indemnity, for they exercise
parental authority over him.
475
Business Law, Howell, page 459
267
2011 Bar Question:
P sold to M a pair of gecko (tuko) for Php50,000.00. M then
issued a promissory note to P promising to pay the money
within 90 days.
Unknown to P and M, a law was passed a
month before the sale that prohibits and declares void any
agreement to sell gecko in the country.
If X acquired the
note in good faith and for value, may he enforce payment on
it?
A. No, since the law declared void the contract on which the
promissory note was founded.
B. No, since it was not X who bought the gecko.
C. Yes, since he is a holder in due course of a note which is
distinct from the sale of gecko.
D. Yes, since he is a holder in due course and P and M were
not aware of the law that prohibited the sale of gecko.
Types of Fraud
Two kinds of fraud are recognized in the area of commercial
paper; one creates a personal defense and the other a real
defense. Fraud in the inducement falls into the personal category.
It arises where a person who signs a negotiable instrument
(knowing it to be such) has been induced to sign by some
476
misrepresentation from the other party.
Unlike fraud in the
inducement, in the case of Fraud in the execution (fraud in
factum) a person is caused to sign a negotiable instrument under
circumstances in which he or she honestly and reasonably
477
believes it to be something other than a negotiable instrument.
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.
Notes:
Liabilities and warranties of the maker
By making the note, the maker
476
Business Law, Howell, page 457
477
Id., with notations, page 459
268
a)
Engages that he will pay it according to the tenor of the
note;
b)
Admits the existence of the payee; and
c)
Admits the payees capacity to indorse.
In effect, the maker is estopped or precluded from making a
stand in contrary to the foregoing.
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.
Notes:
Liabilities and warranties of the drawer
The drawer, by drawing the bill
a)
Admits the existence of the payee;
b)
Admits the payees capacity to indorser;
He further engages that
c)
On due presentment, the instrument will be accepted
or paid, or both, according to its tenor; and
d)
If it be dishonored and the necessary proceedings on
dishonor be duly take, he will pay the amount
thereof to the holder or to any subsequent indorser
who may be compelled to pay it.
Limitation of liability
The drawer may insert in the written instrument an express
stipulation negativing or limiting his own liability to the holder.
Liability of drawer before acceptance
The drawer of a bill undertakes that when it is presented to the
drawee be will accept it; and by acceptance is meant an
undertaking on the acceptors part to pay the bill according to its
269
478
tenor.
Until the bill has been accepted, the drawer is the
primary
debtor,
and
his
liability
is
contingent
and
conditioned upon a strict compliance with the law as to
presentment of the bill for acceptance (if the bill be of such a
character that it is necessary to present it for acceptance), and
due protest and notice of dishonor.
After acceptance, the
drawer becomes secondarily liable, and his position is that of
479
the first indorser upon a promissory note.
(Daniel,
(emphasis supplied)
Relation of drawee to bill before acceptance
Until he has accepted the bill, so entirely is the drawee a
stranger to it, that he may himself discount it. And he may then
transfer it as the bona fide holder to another, who may sue and
480
charge the drawer.
He may discount it either for the drawer, the
payee, or an indorsee. If the acceptor discounts the bill for the
drawer, and then indorses it away, the drawer will be liable upon it
to the holder, and the transfer by the drawer to the acceptor will
operate as an indorsement, although, at the time, the drawer does
not intend to transfer by way of indorsement, being under the
impression that the bill is discharged by coming into the hands of
the acceptor.
Nor will the payment of the amount, less the
discount, be deemed a payment of the bill by the acceptor.

481
(Daniel, Elements of the Law of Negotiable Instruments, pages
172-173)
The effect of acceptance of a bill
482
Is to constitute the acceptor the principal debtor.
The bill
becomes by the acceptance very similar to a promissory note
the acceptance being the promissory, and the drawer standing in
the relation of an indorser. (Ibid)
But in respect to the acceptors position with regard to the
drawer, and the amount for which he renders himself liable by
accepting the bill, it is well to observe that the acceptance does
not entitle the acceptor to charge it in account against the drawer
from the date of acceptance, unless he pays the whole amount at
483
the time, or discharges the drawer from all responsibility.
(Ibid)
478 Story on Bills, 272; Cox v. National Bank, 100 U.S. 712
480 Desha v. Stewart, 6 Ala. 852; Swope v. Ross, 40 Pa. St. 186
481 Swope v. Ross, 40 Pa. St. 186
482 Heutematte v. Morris, 101 N.Y. 63; Capital City Ins. Co. v. Quinn, 73 Ala. 560
483 Bracton v. Willing, 4 Call, 288
270
Like the maker of a note, the acceptor is bound by all the
terms of the instrument, and if it contains a stipulation for payment
484
of attorneys fees, he is bound by it.
(Ibid)
If the acceptance be for the drawers accommodation, the
acceptor does not thereby become entitled to sue the drawer
upon the bill; but when he has paid the bill, and not before, he
may recover back the amount from the drawer in an action for
485
money had and received.
If the acceptor put the bill in
486
circulation, he is estopped from showing it was then paid.
(Ibid)
2011 Bar Question:
D draws a bill of exchange that states: One month from
date, pay to B or his order Php100,000.00. Signed, D. The
drawee named in the bill is E. B negotiated the bill to M, M to
N, N to O, and O to P. Due to non-acceptance and after
proceedings for dishonor were made, P asked O to pay,
which O did. From whom may O recover?
A. B, being the payee
B. N, as indorser to O
C. E, being the drawee
D. D, being the drawer
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.
Notes:
487
Comment of Dean James Barr Ames
: Since an acceptor,
by section 62, engages to pay the bill according to the tenor
484 Smith v. Muncie Nat. Bank, 29 Ind. 158
485 Christian v. Keen, 80 Va. 377; Martin v. Muncy, 40 La. Ann. 190
486 Hinton v. Bank of Columbus, 9 Port. (Ala.) 463
271
of his acceptance, he must pay to the innocent payee or
subsequent holder the amount called for by the amount
ordered by the drawer. A bank certifying a raised check is in the
same case, since section 187 assimilates a certification to an
acceptance. If an acceptor or certifying bank must honor his
acceptance or certification in such a case, a fortiori a drawee who
pays a raised bill or check, without acceptance or certification,
should not recover the money paid from an innocent holder.
These are changes for the better, and, so far as adopted, bring
the law of this country into harmony with the law of nearly, if not
indeed all, of the European States.
Defendant bank, without negligence cashed a forged check
on plaintiff bank, indorsed it, Indorsement guaranteed. Pay any
national or state bank or order, and sent it for collection and it
was paid by plaintiff, who upon discovery of the forgery, sued to
recover the money. Held, that plaintiff could not recover; that
section 62 was intended to adopt the doctrine of Price v. Neal, 3
Burrow 1354, and applied as well to payment as to an acceptance
by the drawee of a forged bill or check.

Also, that the
indorsement of the defendant bank was not a guaranty to the
drawee, but only to indorsees, Semble, that such an indorsement
is only for collection and does not transfer title to an indorsee.
(National Bank of Rolla v. First Nat. Bank of Salem (Mo. App.) 125
S.W. 513; National Bank of Commerce v. Mechanics Am. Nat.
Bank (Mo. App.), 127 S.W. 429 accord, cited in Brannan, page
74)
Section 62 does not apply to instruments acquired without
consideration
Some unknown person forged a check on plaintiff bank and
paid the same to the city to discharge a street assessment on
defendants land, which defendants subsequently sold.

The
plaintiff bank having paid the check and charged the account of its
depositor, upon discovery of the forgery, credited the sum back to
the depositor and sued defendants for the amount.
Held, that section 62, N.I.L. has no application in behalf of one
who has acquired the paper without consideration.

That the
plaintiff was entitled to be subrogated to the lien of the city as
against the proceeds of the sale of the land in the hands of
defendants, if it should appear upon a new trial that the payment
of the assessments were purely gratuitous and not in discharge of
a real or supposed obligation on the part of the depositor or the
487 Dean, Harvard Law School, cited in The Negotiable Instruments Law Annotated, by Joseph Doddridge Brannan,
Second Edition, 1911, page 74, citing 4 Harvard Law Review, 306, 307, bold supplied.
272
unknown forger. (Title Guarantee & Trust Co., v. Haven, 196
N.Y. 487, 89 N.E. 1082, cited in Brannan, page 74)
Diligence required of the collecting bank
488
The case of Banco de Oro vs. Equitable Bank
, citing the
489
case of American Exchange National Bank vs. Yorkville Bank
held that: the drawer owes no duty of diligence to the collecting
bank (one who had accepted an altered check ad had paid over
the proceeds to the depositor) except of seasonably discovering
the alteration by a comparison of its returned checks and check
stubs or other equivalent record, and to inform the drawee
thereof. In this case it was further held that:
The real and underlying reasons why negligence of
the drawer constitutes no defense to the collecting
bank are that there is no privity between the drawer
and the collecting bank (Corn Exchange Bank vs.
Nassau Bank, 204 N.Y.S. 80) and the drawer owe to
that bank no duty of vigilance (New York Produce
Exchange Bank vs. Twelfth Ward Bank, 204 N.Y.S. 54)
and no act of the collecting bank is induced by any
act or representation or admission of the drawer
(Seaboard National Bank vs. Bank of America (supra)
and it follows that negligence on the part of the
drawer cannot create any liability from it to the
collecting bank, and the drawer thus is neither a
necessary nor a proper party to an action by the
drawee bank against such bank.
It is quite true that
depositors in banks are under the obligation of examining
their passbooks and returned vouchers as a protection
against the payment by the depositary bank against
forged checks, and negligence in the performance of that
obligation may relieve that bank of liability for the
repayment of amounts paid out on forged checks, which
but for such negligence it would be bound to repay. A
leading case on that subject is Morgan vs. United States
Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871
Amn. Cas. 1914D, 462, L.R.A. 1915D, 74.
Thus we hold that while the drawer generally owes no duty of
diligence to the collecting bank, the law imposes a duty of
diligence on the collecting bank to scrutinize checks deposited
488 January 20, 1988, bold supplied
489 204 N.Y.S. 621 101 N.E. 87l Anm. Cas. 1914D, 462, L.RA. 191D, 74
273
with it for the purpose of determining their genuineness and
regularity. The collecting bank being primarily engaged in baking
holds itself out to the public as the expert and the law holds it to a
high standard of conduct. (supra)
Problem:
Sometime
on
June
1998,
Samuel
Tagoe,
foreigner,
purchased from a Jewelry Store several pieces of jewelry
valued at Php 258, 000.00.
In payment of the same, he
offered a Foreign Draft issued in favor of United Overseas
Bank
(Malaysia)-UOB,
addressed
to
Land
Bank
of
the
Philippines (LBP), payable to the Jewelry Store for Php 380,
000.00.
Subsequently
said
draft
was
cleared
and
the
collecting bank, Far East Bank was credited with the amount.
Three (3) weeks thereafter, LBP informed Far East that the
amount in the Foreign Draft had been materially altered from
Php 300.00 to Php 380, 000.00 and it was returning the same.
Far East Bank then refunded the amount and debited the
same from the account of the Jewelry Store, however, there
is a deficiency of Php 211, 946.64, thus Far East Bank
demanded for the payment thereof, and when the same went
futile, they filed a case for sum of money against the Jewelry
Store.
RTC ruled in favor of Far East Bank, however, on
appeal, the CA reversed the ruling that Far East Bank could
not charge the Jewelry Store on its secondary liability as an
indorser. Bank appealed the ruling to the SC.
Is
the
petition
for
review
on
certiorari
under
rule
45,
meritorious?
ANSWER:
No.
Act No. 2031, or the Negotiable Instruments Law (NIL),
explicitly provides that the acceptor, by accepting the instrument,
engages that he will pay it according to the tenor of his
acceptance. This provision applies with equal force in case the
drawee pays a bill without having previously accepted it. His
actual payment of the amount in the check implies not only his
assent to the order of the drawer and a recognition of his
corresponding obligation to pay the aforementioned sum, but also,
his clear compliance with that obligation. Actual payment by the
drawee is greater than his acceptance, which is merely a promise
in writing to pay.
The payment of a check includes its
acceptance.
274
Unmistakable herein is the fact that the drawee bank cleared
and paid the subject foreign draft and forwarded the amount
thereof to the collecting bank. The latter then credited to the
Jewelry Stores account the payment it received. Following the
plain language of the law, the drawee, by said payment,
recognized
and
complied
with
its
obligation
accordance with the tenor of his acceptance.
to
pay
in
The tenor of
his acceptance is determined by the terms of the bill as it is
when the drawee accepts. Stated simply, LBP was liable on its
payment of the check according to the tenor of the check at the
time of payment, which was the raised amount.
Because of that engagement, LBP could no longer repudiate
the payment it erroneously made to a due course holder. W e
note at his point that Gold Palace (Jewelry Store) was not a
participant in the alteration of the draft, was not negligent, and
was a holder in due course it received the draft complete and
regular on its face, before it became overdue and without notice of
any dishonor, in good faith and for value, and absent any
knowledge of any infirmity in the instrument or defect in the title of
the person negotiating it. Having relied on the drawee banks
clearance and payment of the draft and not being negligent,
respondent Store is amply protected by the said Section 62.
Commercial policy favors the protection of anyone who, in due
course, changes his position on the faith of the drawee banks
clearance and payment of a check or draft. (Far East Bank &
Trust Company vs. Gold Palace Jewelry Company, G.R. No.
168274, August 20, 2008 [Nachura, J.])
2011 Bar Question:
A bill of exchange has D as drawer, E as drawee and F as
payee. The bill was then indorsed to G, G to H, and H to I. I,
the current holder presented the bill to E for acceptance. E
accepted but, as it later turned out, D is a fictitious person.
Is E freed from liability?
A. No, since by accepting, E admits the existence of the
drawer.
B. No, since by accepting, E warrants that he is solvent.
C. Yes, if E was not aware of that fact at the time of
acceptance.
D. Yes, since a bill of exchange with a fictitious drawer is void
and inexistent.
275
Can a drawee who accepts a materially altered check recover
from the holder and the drawer?
A. No, he cannot recover from either of them.
B. Yes from both of them.
C. Yes but only from the drawer.
D. Yes but only from the holder.
A bill of exchange states on its face: One (1) month after
sight, pay to the order of Mr. R the amount of Php50,000.00,
chargeable to the account of Mr. S. Signed, Mr. T. Mr. S, the
drawee, accepted the bill upon presentment by writing on it
the words I shall pay Php30,000.00 three (3) months after
sight.
May he accept under such terms, which varies the
command in the bill of exchange?
A. Yes, since a drawee accepts according to the tenor of his
acceptance.
B. No, since, once he accepts, a drawee is liable according to
the tenor of the bill.
C. Yes, provided the drawer and payee agree to the
acceptance.
D. No, since he is bound as drawee to accept the bill
according to its tenor.
1998 Bar Question:
X draws a check against his current account with the Ortigas
branch of Bonifacio Bank in favor of B. Although X does not
have sufficient funds, the bank honors the check when it is
presented for payment. Apparently, X has conspired with the
banks bookkeeper so that his ledger card would show that
he still has sufficient funds.
The bank files an action for recovery of the amount paid to B
because
the
check
presented
has
no
sufficient
funds.
Decide the case. (5%)
ANSWER:
The banks action will not prosper.
W hen the bank honored the check for payment, the latter
became an acceptor. Section 62 of the Negotiable Instruments
276
Law provides that the acceptor, by accepting the instrument,
engages that he will pay it according to the tenor of his
acceptance and admits the existence of the drawer, the
genuineness of his signature, and his capacity and authority to
draw the instrument; and the existence of the payee and his then
capacity to endorse.
Therefore, the bank being an acceptor is estopped from
recovering the amount paid to B because of the check.
The only remedy now of the bank is to sue the bookkeeper
and X.
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.
Notes:
Justice Torres, in his concurring opinion in the case of
490
Fernando Maulini, et al vs. Antonio G. Serrano
, stated that:
[s]ection 63 of the Act above-cited says that a person placing his
signature upon an instrument otherwise than as maker, drawer, or
acceptor is deemed to be an indorser, unless he clearly indicated
by appropriate words his contention to be bound in some other
capacity.
This provision of the law clearly indicates that in
every negotiable instrument it is absolutely necessary to
specify the capacity in which the person intervenes who is
mentioned therein or takes part in its negotiation, because
only by so doing can it be determined what liabilities arise
from that intervention and from whom, how and when they
must be exacted. And if, in the event of a failure to express
the capacity in which the person who signed the negotiable
instrument intended to be bound, he should be deemed to be
an indorser, when the very words of the instrument expressly and
conclusively show that such he is, as occurs in the present case,
and when the indorsement contains no restriction, modification,
condition or qualification whatsoever, there cannot be attributed to
him, without violating the provisions of the said Act, any other
intention than that of being bound in the capacity in which he
appears in the instrument itself, not can evidence be admitted or,
490 G.R. No. L-8844, December 16, 1914, bold supplied
277
if already admitted, taken into consideration, for the purpose of
proving such other intention, for the simple reason that if the law
has already fixed and determined the capacity in which it must be
considered that the person who signed the negotiable instrument
intervened and the intention of his being bound in a definite
capacity, for no other purpose, undoubtedly, than that there shall
be no other evidence given in the matter, when the capacity
appears in the instrument itself and the intention is determined by
the very same capacity as occurs in this case, the admission of
evidence in reference thereto is entirely unnecessary, unless, and
contrary to the purposes of the law, which is clear and precise in
its provisions and admits of no subterfuges or evasions for
escaping obligations contracted upon the basis of credit, with
evident and sure detriment to those who intervened or took part in
the negotiation of the instrument.
Illustrative Cases:
W here defendants signature appeared with another in the
place for the makers name, he is not deemed an indorser
although the body of the instrument names the other signer as a
promissor without mention of defendants name. (Germania Nat.
Bank v. Mariner, 129 Wis. 544, 109 N.W. 574, S.C. secs. 17-6,
The payee of a note, who indorsed it to enable the maker to
negotiate it for his own benefit, is liable merely as an
accommodation indorser and is discharged if no notice of
dishonor is given. (Ibid, citing Mechanics & Farmers Savings
Bank v. Katterjohn (Ky.), 125 S.W. 1071, S.C. secs. 109, 196)
Upon a sale of property the seller required the buyer to
procure an indorser to a note to be given for part of the price. The
buyer executed a note to the seller with the blank indorsement of
the defendant. Held, that defendant was liable as an indorser and
not as a maker. (Roesale v. Lancaster, 130 App. Div. 1, 114
N.Y. Supp. 387, cited in Brannan, pages 75-76)
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
278
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.
Notes:
If instrument is payable to the order of a third person, he is
liable to the payee and all subsequent parties
This section has no application to a case where the signature
was placed on the instrument after its delivery to the payee.
(Kohn v. Consolidated Bank Co., 30 Misc. R. 725, 63 N.Y. Supp.
265)
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
Professor Ames, a legal scholar in the field of Negotiable
Instruments made the following comment on this provision, on the
following wise: [t]his section (referring to Section 64 (2) is an
otherwise excellent piece of codification, but defective because
under subsection 2 a party signing as indorser for the
accommodation of an acceptor would not be liable to a drawerpayee, but only to subsequent parties..
However, the U.S.
Supreme Court held in the case of Haddock, Blanchard & Co. v.
491
Haddock
,
that [o]ne who endorsed a bill in blank before
delivery for the purpose of backing the acceptor is liable to the
drawer-payee, who had indorsed and transferred the instrument
and was compelled to take it up. In this case the court reached
the desirable result advocated by Professor Ames without an
amendment of the section, by holding that sections 63 and 64-2
merely established a presumption and that parol evidence was
admissible to show an intention that the indorser should be liable
to the drawer.
492
In Jenkings v. Coomber [1898] 2 Q.B. 168, it was held that,
where A drew a bill on B, payable to his own order, which B
accepted, and C, in accordance with a previous agreement to
guarantee its payment, wrote his name on the back, and the bill
was delivered to A, C was not liable as indorser, as the bill had
491 192 N.Y. 499, 85 N.E. 682, S.C. secs. 29, 64-3, 68.
492 Brannan, page 78
279
not been indorsed by A before C put his name on the back.

493
Illustrative Cases:
A note recited The A.B. Co. promise to pay to the order of C,
and was signed by A. B. Co., E.R.S. Treasurer, J.W .M. Held,
section 64 was not applicable, because J.W .M. did not place his
signature in blank on the note and he was therefore not liable as
indorser. That there was a plain ambiguity on the face of the
note, and that evidence was admissible even against a holder in
due course to show that J.W .M. was secretary of the A.B. Co. and
intended to sign as such but omitted his title by mistake.
(Germania Nat. Bank v. Mariner, 129 Wis. 544, 109 N.W. 574,
S.C. secs. 17-6, 63, cited in Brannan, page 77)
This section deals only with the liability of an irregular indorser
to the payee and subsequent parties and does not define the
rights and liabilities of several irregular indorsers as between
themselves. This is done by section 68. ( Wilson v. Hendee, 74
N.J. Law 640, 66 Atl. 413, S.C. secs. 63, 64-1, 68, Ibid)
One who endorses under this section is entitled to the same
defenses as to legality or consideration as the maker for whose
accommodation he signed. (Leonard v. Drapper, 187 Mass, 536,
73 N.E. 644, semble S.C. sec. 66, ibid)
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
493 Ibid, page 79
280
to a person negotiating public or corporation securities other
than bills and notes.
Notes:
That the instrument is genuine and in all respects what it
purports to be
The warranty that the instrument is genuine and in all
respects what it purports to be covers all the defects in the
instrument affecting the validity thereof, including a forged
indorsement. Thus, the last indorser will be liable for the amount
indicated in the negotiable instrument even in a previous
indorsement was forged. W e held in a line of cases that a
collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all
prior indorsements, including forged indorsement itself, and
ultimately should be held liable therefor.

494
(Allied Banking
Corporation vs. Lim Sio Wan, et al, G.R. No. 133179, March 27,
2008)
Exception
However, this general rule is subject to exceptions. One such
exception is when the issuance of the check itself was attended
with negligence.
Thus, in the cases cited above where the
collecting bank is generally held liable, in two of the cases where
checks were negligently issued, this Court held the institution
issuing the check just as liable as or more liable than the
collecting bank. (supra)
Illustrative Cases:
The payee of a note secured by chattel mortgage transferred
the note and mortgage, indorsing the note as follows: By
agreement with recourse after all security has been exhausted
waiving protest. Held, that the indorser was liable only for the
balance due after the security has been exhausted, and as no
494 Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, October 10, 2002, 390 SCRA 608,
617; Associated Bank v. Court of Appeals, G.R. No. 107382, January 31, 1996, 252 SCRA 620, 633; Bank of the
Philippine Islands v. Court of Appeals, G.R. No. 102383, November 26, 1992, 216 SCRA 51, 63; Banco de Oro
Savings and Mortgage Bank v. Equitable Banking Corporation, G.R. No. 74917, January 20, 1988, 157 SCRA 188,
198; Republic Bank v. Ebrada, No. L-40796, July 31, 1975, 65 SCRA 680, 687-688
281
cause of action accrues against him until the security is exhausted
he cannot be joined as a defendant in the action to foreclose the
mortgage. (Smith v. Bradley, 16 N. Dak. 306, 112 N.W. 1062,
An action for cancellation of a note because cashiers checks
received therefor were worthless is not an action for breach of
warranty in negotiation of the checks, and is therefore not
governed by this section. (Dille v. White, 132 Iowa, 327, 109
N.W. 909, 10 L.R.A. (N.S.) 510, S.C. supra, sec. 6-5, ibid)
The transferor by delivery of a forged note is not released from
liability as warrantor by the act of the transferee in receiving
interest from the alleged maker and extending the note, without
the consent of the transferor, all the parties still in ignorance of the
forgery. (Cluseau v. Wagner (La.), 52 So. 547, ibid)
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.
Notes:
Matters mentioned in subdivisions (a), (b) and (c) of Section
65 are the following:
(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
282
2011 Bar Question:
Which of the following indorsers expressly warrants in
negotiating an instrument that 1) it is genuine and true; 2) he
has a good title to it; 3) all prior parties have capacity to
negotiate; and 4) it is valid and subsisting at the time of his
indorsement?
A. The irregular indorser.
B. The regular indorser.
C. The general indorser.
D. The qualified indorser.
Liabilities of an indorser
495
In People v. Maniego,
this Court described the liabilities of
an indorser as follows:
Appellants contention that as a mere indorser, she may
not be liable on account of the dishonor of the checks
indorsed by her, is likewise untenable. Under the law, the
holder or last indorsee of a negotiable instrument has the
right to enforce payment of the instrument for the full
amount thereon against all parties liable thereon. Among
the parties liable thereon is an indorser of the
instrument, i.e., a person placing his signature upon an
instrument otherwise than as a maker, drawer or acceptor
x x x unless he clearly indicated by appropriate words his
intention to be bound by some other capacity. Such an
indorser who indorses without qualification, inter alia
engages that on due presentment, x x x (the instrument)
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 of dishonor be duly taken, he will
pay the amount thereof to the holder, or any subsequent
indorser who may be compelled to pay it. Maniego may
also be deemed an accommodation party in the light of
the facts, i.e., a person who has signed the instrument as
maker drawer, acceptor, or indorser, without receiving
value thereof, and for the purpose of lending his name to
495 L-30910, 148 SCRA 30, 25 (1987), cited in Bank of the Philippine Islands vs. Court of Appeals and Benjamin C.
Napiza, February 29, 2000
283
some other person. As such, she is under the law liable
on the instrument to a holder for value, notwithstanding
such holder at the time of taking the instrument knew x x
x (her) to be only an accommodation party, although she
has the right, after paying the holder, to obtain
reimbursement from the party accommodated, since the
relation between them is in effect that of principal and
surety, the accommodation party being a surety.
It is thus clear that ordinarily private respondent may be held
liable as an indorser of the check or even as an accommodation
496
party.
2011 Bar Question:
M, the maker, issued a promissory note to P, the payee which
states: I, M, promise to pay P or order the amount of Php1
Million. Signed, M. P negotiated the note by indorsement to
N, then N to O also by indorsement, and O to Q, again by
indorsement. But before O indorsed the note to Q, O's wife
wrote the figure 2 on the note after Php1 without O's
knowledge, making it appear that the note is for Php12
Million. For how much is O liable to Q?
A. Php1 Million since it is the original tenor of the note.
B. Php1 Million since he warrants that the note is genuine and
in all respects what it purports to be.
C. Php12 Million since he warrants his solvency and that he
has a good title to the note.
D. Php12 Million since he warrants that the note is genuine
and in all respects what it purports to be.
Notice of dishonor necessary to charge all indorsers
The
Negotiable
Instruments
Law
contains
provisions
establishing the liability of a general indorser and giving the
procedure for a notice of dishonor.

The general indorser of
negotiable instrument engages that if it be dishonored and the
necessary proceedings of dishonor be duly taken, he will pay the
amount thereof to the holder. (Sec. 66, Negotiable Instruments
Law)
In this connection, it has been held in a long line of
authorities that notice of dishonor is in order to charge all
indorser and that the right of action against him does not
accrue until the notice is given. (Paulino Gullas vs. Philippine
496 In Town Savings and Loan Bank, Inc. v. Court of Appeals, G.R. No. 106011, 223 SCRA 459 (1993), the Court
held that the accommodation parties to a promissory note are liable for the amount of the loan notwithstanding that
they were not the actual beneficiaries of such loan as they merely signed the promissory note in order that the party
accommodated could be granted the full amount of the loan
284
National Bank, G.R. No. L-43191, November 13, 1935, [Malcom,
J:]; citing Asia Banking Corporation vs. Javier [1923] 44 Phil., 777,
bold supplied)
Section 66 cannot be used by a party which introduced a
defect in the instrument
In Melva Theresa Alviar Gonzales vs. Rizal Commercial
497
Banking Corporation
, petitioner is was an employee of the
respondent bank, the formers mother was issued a foreign check
in the amount of $7,500, her mother then endorsed the check.
Since respondent bank gives special accommodations to its
employees to receive the checks value without awaiting the
clearing period, petitioner presented the foreign check to
respondent banks Head of Retail Banking. After examination the
head of retail banking requested petitioner to endorse it which the
latter did. Olivia Gomez (Head of Retail Banking) acquiesced to
the early encashment of the check and signed the check but
indicated thereon her authority of "up to P17,500.00 only".
Afterwards, Olivia Gomez directed Gonzales to present the check
to RCBC employee Carlos Ramos and procure his signature.
After inspecting the check, Carlos Ramos also signed it with an
"ok" annotation. After getting the said signatures Gonzales
presented the check to Rolando Zornosa, Supervisor of the
Remittance section of the Foreign Department of the RCBC Head
Office, who after scrutinizing the entries and signatures therein
authorized its encashment. Gonzales then received its peso
equivalent of P155,270.85.
Thereafter respondent bank tried to
collect the amount of the check with the foreign drawee bank,
however, the check was twice dishonored by reason of irregular
endorsement and again dishonored due to account closed.
Respondent RCBC filed a case against petitioner for the collection
of the amount.
The Supreme Court held that: [t]he foreign drawee bank,
W ilkshire Center Bank N.A., refused to pay the bearer of this
dollar-check drawn against it because of the defect introduced by
respondent RCBC, through its employee, Olivia Gomez. It is,
therefore, a useless piece of paper if returned in that state to its
original payee, Eva Alviar.
497 G.R. No. 156294, November 29, 2006
285
There is no doubt in the mind of the Court that a subsequent
party which caused the defect in the instrument cannot have any
recourse against any of the prior endorsers in good faith.
x x x
This provision (Sec. 66, NIL), however, cannot be used by the
party which introduced a defect on the instrument, such as
respondent RCBC in this case, which qualifiedly endorsed the
same, to hold prior endorsers liable on the instrument x x x results
in the absurd situation whereby a subsequent party may render an
instrument useless and inutile and let innocent parties bear the
loss while he himself gets away scot-free.
Section 66 of the Negotiable Instruments Law which further
states that the general endorser additionally engages that, on due
presentment, the instrument 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 endorser who may be compelled to pay it, it must be
read in the light of the rule in equity requiring that those who come
to court should come with clean hands. The holder or subsequent
endorser who tries to claim under the instrument which had been
dishonored for irregular endorsement must not be the irregular
endorser himself who gave cause for the dishonor. Otherwise, a
clear injustice results when any subsequent party to the
instrument may simply make the instrument defective and later
claim from prior endorsers who have no knowledge or
participation in causing or introducing said defect to the
instrument, which thereby caused its dishonor.
Refusal of the Bank to pay the check drawn upon it.
As a general rule, a bank has a right to set-off the deposits in
its hands for the payment of any indebtedness to it on the part of
a depositor. In Louisiana, however, a civil law jurisdiction, the rule
is denied, and it is held that a bank has no right, without an order
from or special assent of the depositor to retain out of his deposit
an amount sufficient to meet his indebtedness. The basis of the
Louisiana doctrine is the theory of confidential contracts arising
from irregular deposits, e.g., the deposit of money with a banker.
W ith freedom of selection and after full preference to the minority
rule as more in harmony with modern banking practice. (1 Morse
th
on Banks and Banking, 5
ed., Sec. 324; Garrison vs. Union Trust
Company [1905], 111 A.S.R, 407; Louisiana Civil Code
Annotated, Arts. 2207 et seq.; Gordon & Gomila vs. Muchler
286
[1882], 34 L. Ann., 604; 8 Manrea, Comentarios al Codigo Civil
th
Espaol, 4
ed., 359 et seq., 11 Manresa pp. 694 et seq.)
Starting, therefore, from the premise that the Philippine
National Bank had with respect to the deposit of Gullas a right of
set-off, we next consider if that remedy was enforced properly.
The fact we believe is undeniable that prior to the mailing of notice
of dishonor, and without waiting for any action by Gullas, the bank
made use of the money standing in his account to make good for
the treasury warrant. At this point recall that Gullas was merely
an indorser and had issued in good faith.
As to a depositor who has funds sufficient to meet payment of
a check drawn by him in favor of a third party, it has been held
that he has a right of action against the bank for its refusal to pay
such a check in the absence of notice to him that the bank has
applied the funds so deposited in extinguishment of past due
claims held against him. (Callahan vs. Bank of Anderson [1904], 2
Ann. Cas., 203).

The decision cited represents the minority
doctrine, for on principle it would seem that notice is not
necessary to a maker because the right is based on the doctrine
that the relationship is that of creditor and debtor. However this
may be, as to an indorser the situation is different, and notice
should actually have been given him in order that he might protect
his interests. (Paulino Gullas vs. Philippine National Bank, G.R.
No. L-43191, November 13, 1935, [Malcom, J:])
Endorser is estopped from claiming that the check is nonnegotiable
In the case of Banco de Oro Savings and Mortgage Bank
vs.
Equitable
Banking
Corporation,
Philippine
Clearing
House Corporation, and Regional Trial Court of Quezon City,
498
Branch XCII (92)
, the plaintiff (BDO) drew six (6) crossed
Managers Check payable to certain member establishments of
Visa Card, deposited with the defendant.

Following normal
procedures, and after stamping at the back of the Checks the
usual endorsements.
All prior and/or lack of endorsement
guaranteed the defendant sent the checks for clearing through the
Philippine Clearing House Corporation. Accordingly, plaintiff paid
the checks, thereafter it was discovered that the endorsements
appearing at the back of the Checks and purporting to be that of
498 G.R. No. 74917, January 20, 1988
287
the payees were forged and/or unauthorized or otherwise belong
to persons other than the payees.
The Supreme Court ruled: petitioner (BDO) 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 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 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 intents
and purposes treated the said checks 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 its 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
A commercial bank cannot escape the liability of an endorser
of a check and which may turn out to be a forged endorsement.
W henever any bank treats the signature at the back of the checks
as endorsements and thus logically guarantees the same as such
there can be no doubt said bank has considered the checks as
negotiable.
Apropos the matter of forgery in endorsements, this Court has
succinctly emphasized 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
ascertain the genuineness of the endorsements.

This is laid
499
down in the case of PNB vs. National City Bank
. In another
case, this court held that if the drawee-bank discovers that the
499 63 Phil. 711
288
signature of the payee was forged after it has paid the amount of
the check to the holder thereof, it can recover the amount paid
from the collecting bank500
W e made clear in Our decision in Philippine National Bank vs.
The National City Bank of NY & Motor Service Co., that:
1.
W here a check is accepted or certified by the
bank on which it is drawn, the bank is estopped to
deny the genuineness of the drawers signature and
his capacity to issue the instrument;
2.
If a drawee bank pays a forged check which was
previously accepted or certified by the said bank, it
can recover from a holder who did not participate in
the forgery and did not have actual notice thereof;
3.
The payment of a check does not include or imply
its acceptance in the sense that this word is used in
501
Section 82 of the Negotiable Instruments Act.
Reason for the rule
In the same case, This Court enunciated in Philippine
502
National Bank vs. Court of Appeals
, a point relevant to the issue
when it stated the doctrine of estoppels is based upon the
grounds of public policy, fair dealing, good faith and justice and its
purpose is to forbid one to speak against his own act,
representations or commitments to the injury of one whom they
were directed and who reasonably relied thereon.
A truism stated by this Court is that The doctrine of
estoppels precludes a party from repudiating an obligation
voluntarily assumed after having accepted benefits therefrom. To
countenance such repudiation would be contrary to equity and put
503
premium on fraud or misrepresentation.
Illustrative Case:
500 Republic Bank vs. Ebrada, 65 SCRA 680
501 Supra (10 Saura Import & Export Co., 24 SCRA 974)
502 94 SCRA 357
503 10 Saura Import & Export Co., 24 SCRA 974
289
A made a note to the order of B, forged Bs indorsement, then
procured Cs indorsement for As accommodation, and negotiated
the note.
Held, C by his indorsement, guaranteed the
genuineness of Bs signature, and was liable to a holder in due
course. (Packard v. Windholz, 88 App. Div. 365, 84 N.Y. Supp.
An indorser of a check does not warrant the genuineness of
the drawers signature to the drawee who pays it. The drawee is
not a holder in due course under Sec. 52, nor a holder under the
definition in Sec. 191. The drawee when he accepts a check
becomes the guarantor thereof.

(Farmers Bank v. Bank of
Rutherford, 115 Tenn. 64, 88 S.W . 939, 112 Am. St. Rep. 817)
But the drawee may recover back the money when the drawee
was without fault and the indorser was guilty of negligence in not
discovering the forgery. (Williamsburgh Trust Co. v. Tum Suden,
120 App. Div. 518, 105 N.Y. Supp. 335)
A note made by a corporation was indorsed by defendants
before its delivery to the payee. The consideration was known to
all parties to be an illegal purchase by the corporation of its own
capital stock. Held, that the payee was not a holder in due course
because he knew of the illegality and want of consideration, and
could not hold the indorsers upon their warranty. (Burke v.Smith,
(Md.), 75 Atl. 114)
2011 Bar Question:
P sold to M 10 grams of shabu worth Php 5,000.00.
As he
had no money at the time of the sale, M wrote a promissory
note promising to pay P or his order Php 5,000.
P then
indorsed the note to X (who did not know about the shabu),
and X to Y. Unable to collect from P, Y then sued X on the
note. X set up the defense of illegality of consideration. Is he
correct?
A. No, since X, being a subsequent indorser, warrants that the
note is valid and subsisting.
B. No, since X, a general indorser, warrants that the note is
valid and subsisting.
C. Yes, since a void contract does not give rise to any right.
D. Yes, since the note was born of an illegal consideration
which is a real defense.
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.
290
Notes:
See, cross-reference comments and notes on Sec. 48.
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.
2011 Bar Question:
M makes a promissory note that states: I, M, promise to pay
Php5,000.00 to B or bearer. Signed, M.
M negotiated the
note by delivery to B, B to N, and N to O. B had known that M
was bankrupt when M issued the note. Who would be liable
to O?
A. M and N since they may be assumed to know of M's
bankruptcy
B. N, being O's immediate negotiator of a bearer note
C. B, M, and N, being indorsers by delivery of a bearer note
D. B, having known of M's bankruptcy
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
291
Obligations
of
maker,
acceptor,
drawer,
and
indorser,
respectively, as to payment; general rule
The engagement entered into by the acceptor of a bill and the
maker of a note is, that it shall be paid at its maturity that is, on
the day that it falls due, and at the place specified for payment, if
any place be designated upon its presentment.

This
engagement is absolute, but that of the drawer of a bill and the
indorser of a bill or note is conditional, and contingent upon the
true presentment at maturity, and notice in case it is not paid. The
maker and acceptor are bound, although the bill or note be not
504
presented on the day it falls due;
but the drawer and indorsers
are discharged if such presentment be not made, unless some
sufficient cause excuses the holder for failure to perform that
505
duty.
It is important, therefore, to ascertain how the
presentment should be provided for by the holder of the bill or
note, lest by failure to observe the necessary precautions, the
drawer and indorsers may be discharged, and the solvency of his
debt destroyed or impaired.

W e shall consider, therefore, in
order:
(1)
The person by and whom

presented.
(2)
The time of presentment.
(3)
The place of presentment.
(4)
The mode of presentment.
the
instrument
should
be
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.
Illustrative Case:
Presentment for payment is unnecessary to charge the person
primarily liable whether the instrument is payable on time or on
demand, although it is made payable at a particular place.
(Farmrers Nat. Bank v. Venner, 192 Mass. 531, 78 N.E. 540;
Hyman v. Doyle, 53 Misc. R. 597, 103 N.Y. Supp. 778, cited in
Brannan, page 88)
504 Sims v. National Com. Bank, 73 Ala. 251
505 Magruder v. Bank of Washington, 3 Pet. 92; Cox v. National Bank, 100 U.S. 712; Harvey v. Girard Nat. Bank,
119 Pa. St. 212
292
W here a note names no place of payment, it is generally
payable at the makers residence or place of business. W here a
note, payable on or before a given date with the option to the
holder to declare the whole due on default as to monthly
installments of interest, did not fix a place of payment and the
maker had a place of business in the city where the note was
payable and was able and willing to make interest payments as
they matured, the holder could not declare the note due for failure
to pay installments of interest, without presentment, demand and
refusal at the makers place of business, although the note may
not be, under section 70 N.I.L., By its terms payable at a special
place. (Bradley v. Washington Mill Co. (Wash.), 103 Pac. 822,
ibid)
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
bill
of
exchange,
presentment for payment will be sufficient if made within a
reasonable time after the last negotiation thereof.
Notes:
Under this section and section 193 the burden is on the holder
to prove presentment without a reasonable time, and the
defendant indorser need not plead failure to make due
presentment. W here the facts are ascertained and not in dispute
reasonable time is a question of law. Circumstances held to
make three and a half years an unreasonable time. (Commercial
Nat. Bank v. Zimmerman, 185 N.Y., 210 77 N.E. 1020, cited in
Brannan, page 89)
Bills payable on demand or at sight without grace (which are
immediately payable in presentment), or payable at a certain
number of days after date, need not be presented, for acceptance
at all, but only for payment. And the fact that such bills are
payable at a bank, or other particular place, does not alter the rule
506
on the subject.
But it is usual and best, when the bill is payable
at a future day, to present it for acceptance, in order to ascertain
whether it will certainly be honored, and to procure the assurance
507
of the acceptors liability.
And in such cases, if acceptance be
506 Bank of Washington v. Triplett, 1 Pet. 25; Townley v. Sumrall, 2 Pet. 170
293
refused, the holder must make protest, and give notice in the
same manner as if the bill were payable at so many days after
sight. There are, however, three exceptions to this general rule
that is not necessary to present a bill payable at a fixed time for
acceptance, but only at maturity for payment: First, when there is
an express direction to the payee or holder of a bill; second, when
it is put into the hands of an agent for negotiation; and, third,
where the drawer and drawer are either the same person, or the
drawer is a member of the firm or connected with the corporation
which is the drawee. (Daniel, Elements of the Law of Negotiable
Instruments, pages 163-164)
Bills payable at sight, or at so many days after sight, or after
demand, or after any other event not absolutely fixed, must be
presented to the drawee for acceptance and payment, or for
acceptance only, without unreasonable delay, or the drawer and
indorsers will be discharged, for they have an interest in having
the bills accepted immediately in order to shorten the time of
payment, and thus put a limit to the period of their liability and also
enable them to protect themselves by other means before it is too
late, if the bill is not accepted and paid within the time originally
508
contemplated by them.
W hen the words acceptance waived
are embodied in a bill, the ordinary proceedings in acceptance are
dispensed with, and merged into those of payment or
509
nonpayment.
(Ibid, page 164)
Presentment to the drawee, it has been held, is necessary
510
even though the drawer has requested him not to accept;
but
the holder is not bound to present again after refusal to accept
and notice given, even though the drawer requests him to do so,
511
and promises that the bill shall be honored.
(Ibid)
The only cases in which the holder of a bill which, according to
its tenor, should be presented for acceptance, can charge the
drawer without presenting it for acceptance, arise when the
relations between the drawer and drawee are such as to
512
constitute the drawing of the bill a fraud upon the holder.
W hen
the bill is presented the acceptance must be according to its tenor
to pay in money. If it be to pay another bill, it is no acceptance,
513
and the bill should be protested.
What constitutes a reasonable time?
507 United Stated v. Barker, 4 Wash. C.C. 464; Story on Bills, 288
508 Bell v. First Nat. Bank, 115 U.S. 379; Mitchell v. De Grand, 1 Mason, 176; Robinson v. Ames, 20 Johns, 146
509 Carson v. Russel, 26 Tex. 472; English v. Wall, 12 Rob. (La.) 132; Webb v. Mears, 9 Wright, 222
510 Hill v. Heap, Dowl. & R.N.P. 57; 1 Parsosns on Notes and Bills, 388
511 Hickligg v. Hardey, 7 Taunt. 312
512 Bank of Washington v. Triplett. 1 Pet. 25; Smiths Mercantile Law (Holcombe & Gholsons ed.), 304
513 Russel v. Phillips, 14 Q.B. 891
294
No hard and fast demarcation line can be drawn between what
may be considered as a reasonable or unreasonable time,
because reasonable time depends upon the peculiar facts and
circumstances in each case. (Tolentino, Comments and
Jurisprudence on Commercial Laws of the Philippines, Vol. I,
Eight Edition, p. 327)
Reasonable time has been defined as so much time as is
necessary under the circumstances for a reasonable prudent and
diligent man to do, conveniently, what the contract or duty
requires should be done, having a regard for the rights, and
possibility of loss, if any, to the other party. (Far East Realty
Investment Inc. vs. Court of Appeals, Dy Hian Tat, et al, G.R. No.
L-36549, October 5, 1988, citing Citizens Bank Bldg. v. L& E.
Werthiermer 189 S.W. 361, 362, 126 Ark, 38, Ann. Cas. 1917 E,
520)
Sec.
72.
What
constitutes
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.
Notes:
Presentment by the Holder or his authorized agent
The bill must be presented by the holder or his authorized
agent, and to the drawee or his authorized agent. The party in
possession of the bill is with ostensible legal title thereto,
presumed to be the holder, and to have the right to make
514
presentment for acceptance of payment.
The drawee may
accept without risk, and if he refuse, the protest will inure to the
514 Bank of Utica v. Smith, 18 Johns. 230; Freemen v. Boynton, 7 Mass. 483; Agnew v. Bank of Gettysburg, 2 Harr
& Groll, 478
295
515
benefit of the rightful holder.
If the drawee cannot be found,
and any person has been indicated to be resorted to in case of
516
need (au besoin), the bill should be presented to that person.
165)
Any bona fide holder of a negotiable instrument, or anyone
lawfully in possession of it for the purpose of receiving payment,
517
may present it for payment at maturity.
(supra, page 200)
The mere possession of a negotiable instrument which is
payable to the order of the payee, and is indorsed by him in blank,
or of a negotiable instrument payable to bearer, is in itself
sufficient evidence of his right to present it, and to demand
518
payment thereof.
And payment to such person will always be
valid, unless he is known to the payor to have acquired
possession wrongfully. And if the party holding possession of a
negotiable instrument which is not indorsed by the payee, or has
been indorsed by him specially, to another, and has not been
indorsed over by such indorsee but has been placed in the
holders hands as agent, for the purpose of receiving payment to
him will be valid; even, as it has been held, although made in a
manner different from that provided for in the instructions to the
agent. The fact that the instrument is not indorsed by the owner
is, as has been held, under such circumstances, of no
importance.
Such indorsement would be necessary to the
negotiation of the instrument, but would not be necessary to the
validity of the payment. (Ibid)
As has been indicated, the presentment may be made by the
holder or owner himself, or by his duly authorized agent, and his
authority need not be in writing, although possibly the maker or
acceptor may insist upon a written authorization or indorsement to
519
the agent before being required to make payment.
(Ibid)
To whom; general rule
Presentment for payment must be made to the drawee or
acceptor of the bill, or maker of the note, or to an authorized
agent. A personal demand is not necessary, and it is sufficient to
make the demand at his usual residence or place of business of
his wife, or other agent; for it is the duty of an acceptor or
515 Chitty on Bills (13th Am. Ed.), 311
516 Story on Bills, 229; Edwards on Bills, 402
517 Leftly v. Mills, 4 T.R. 170; Bachellor v. Priest, 12 Pick. 399
518 Weber v. Orten, 91 Mo. 680; Jackson v. Love, 82 N.C. 405
519 Tiedeman on Bills and Notes, 311, note 2
296
promissory, if he is not present himself, to leave provision for the
payment of his bills or notes.520

(Supra, page 203)
Sec. 73. Place of presentment. - Presentment for payment is
made at the proper place:
(a)
Where
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.
Notes:
Presentment to person on premises
If presentment be made at the place specified in the
instrument, or in the case of one payable generally at the place of
business of the acceptor or maker during business hours, or at
his domicile during a reasonable hour of the day, it is sufficient if it
be made to any person to be found upon the premises, especially
521
if the maker be absent or inaccessible.
W here presentment
was made to the wife of the maker, she informing the holder that
522
her husband was out of town, it was held sufficient.
And so it
was deemed sufficient to charge the indorser where the holder
presented the bill to an inmate of the makers house, who was
coming out, and who stated that the acceptor had removed the
holder leaving a card containing notice for the acceptor of the
523
maturity of the bill.
W here there is no one to answer,
520 Matthews v. Haydon, 2 Esp. 509; Brown v. McDermott, 5 Esp. 265
521 Cromwell v. Hynson, 2 Campb. 596; Phillips v. Astberg, 2 Taunt. 206; Draper v. Clemons, 4 Mo. 52
522 Moodie v. Morrall, 1 Const. Rep. 367
523 Buxton v. Jone, 1 M & G 83; Story on Bills (Bennetts ed.), 350, note 1
524 Stivers v. Prentice, 3 B. Mon. 461
297
524
presentment at the makers dwelling is sufficient.
(Daniel,
Illustrative Cases:
A note payable at a bank is properly presented for payment at
the bank although the bank is in the hands of a receiver and
closed.
Presentment need not be made to the receiver
personally, he having no authority to pay. (Schlesinger v. Schultz,
110 App. Div. 356, 96 N.Y. Supp. 383, S.C. secs. 7-1, 71, cited in
Brannan, page 92)
W here a note is payable at a certain store, presentment for
payment at such store to a person connected therewith is
sufficient and no personal demand on the maker is necessary.
(Nelson v. Grondahl, 13 N.D. 363, 100 N.W. 1093, ibid)
W here a note is payable at a designated branch of a trust
company, presentation at the original office of the company on the
date of maturity and at the branch after banking hours on the day
following is not sufficient as against an indorser. (Ironclad Mfg.
Co. v. Sackin, 129 App. Div. 555, 114 N.Y. Supp. 43, cited in
Brannan, page 93)
A note was made payable at the home of the maker and at
maturity he was called up by telephone and asked what he was
going to do about it, and answered that he could not pay, and was
told that the note would be protested. Held, that the right of the
maker under section 74 to the exhibition of the note was waived,
and that the demand over the telephone was a sufficient
presentment to charge the indorser. (Gilpin v. Savage, 60 Misc.
Rep. 605, 112 N.Y. Supp. 802, ibid)
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.
Notes:
Must be actually exhibited
Presentment of the bill or note, and demand of payment,
should be made by an actual exhibition of the instrument itself; or
at least the demand of payment should be accompanied by some
clear indication that the instrument is at hand, ready to be
524 Stivers v. Prentice, 3 B. Mon. 461
298
delivered, and such must really be the case.525

This is requisite in
order that the drawee or acceptor may be able to judge (1) of the
genuineness of the instrument; (2) of the right of the holder to
receive payment; and (3) that he may immediately reclaim
possession of it upon paying the amount.

If, on demand of
payment, the exhibition of the paper is not asked for, and the
party to whom demand is made declines to pay on other grounds,
a more formal presentment by actual exhibition of the paper will
526
be considered as waived.
x x x The demand of payment should
not vary from the tenor of the paper; and if it be payable simply in
money, without specifying the kind, a demand for gold coin would
527
be insufficient to charge and indorser.
(Daniel, Elements of the
Presentment by mail
Bills of exchange are most frequently drawn on parties at
distant places, and it is undoubtedly legal, customary, and proper
to forward them by mail to correspondents or other agents at the
place where the drawee is addressed, to -be by them presented,
in due course. (Ibid, pages 220-221)
Leaving instrument in debtors hands
A bill or note, when presented for payment, cannot be left in
the debtors hands as when presented for acceptance; and if it is
so left, presentment cannot be considered as made until payment
is demanded. (Ibid)
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.
Notes:
As to mode of presentment of negotiable paper payable at a
bank
525 Musson v. Laek, 4 How. 262; Nailor v. Bowie, 3 Md. 251; Crandall v. Schroeppel, 1 Hun, 557; Etheridge v. Ladd,
44 Barb. 69
526 Lockwood v. Crawford, 18 Conn. 361; King v. Crowell, 61 Me. 244
527 Langenberger v. Kroeger, 48 Cal. 147
299
W hen a bill or note is made payable at a bank, it is considered
a sufficient presentment of it if it is actually in the bank at maturity,
read to be delivered up to any party who may be entitled to it on
payment of the amount due; and if, at the close of business hours,
the bill or note remains unpaid, it is considered as dishonored,
528
and notice should be immediately given to the proper parties.
Such also is the case when the instrument is payable at a
529
particular place.
Sometimes a formal presentment of the bill or
note, in such cases, at the bank, or upon the maker, is made; and
the cases are uniform in holding that such a presentment at the
bank is sufficient, even when the place is mentioned in the
530
memorandum;
but it is settled that nothing more than the
531
presence of the paper there is necessary.
The person to make payment has until the close of banking
hours of the bank where the instrument is made payable in which
to pay it, and if before the close of such hours he deposits money
enough to pay it, a demand earlier in the day is premature.
(German-American Bank v. Milliman, 31 Misc. R. 87, 65 N.Y.
Supp. 242, cited in Brannan, page 94)
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.
Notes:
When acceptor or maker is dead
If the acceptor or maker be dead at the time of the maturity of
the bill or note, it should be presented to his personal
representative, if one be appointed, and his place of residence
532
can, by reasonable inquiries, be ascertained.
If there be no
personal representative, the presentment should be made, and
payment demanded, at the dwelling-house of the deceased, if the
533
instrument were payable generally.
But if it was drawn payable
at a particular place, then it will be sufficient that it was presented
528 Chicopee Bank v. Philadelphia Bank, 8 Wall. 641; Peoples Bank v. Brooks, 31 Md. 7; Folger v. Chase, 18 Pick.
63
529 Hunt v. Maybee, 7 N.Y. 266
530 Bank of Utica v. Smith, 18 Johns 230; Woodbridge v. Brigham, 13 Mass 556; Saunderson v. Judge, 2 H. Bl. 509
531 Fullerton v. Bank of United States, 1 Pet. 604; Merchants Bank v. Elderkin, 25 N.Y. 178
532 Magruder v. Union Bank, 3 Pet. 87; Juniata Bank v. Hale, 16 Serg. & R. 167
533 Magruder v. Union Bank, 3 Pet. 87; Juniata Bank v. Hale, 16 Serg. & R. 167; Story on Notes, 253
534 Boyds Admr. V. City Sav. Bank, 15 Gratt. 501; Holtz v. Boppe, 37 N.Y. 634; Philport v. Bryant, 1 Moore & P.
754
300
at such place.534
Illustrative case:
Calling two or three times at the banking office of the
administrator of a deceased maker, and again seeking him at a
railroad station near the seat of his other business interests at a
time when he might be expected to be there, warrants a finding of
reasonable diligence to present a note for payment. (Reed v.
Spear, 107 App. Div. 144, 94 N.Y. Supp. 1007, S.C. secs. 89, 96,
ibid)
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,
instrument
and
not
no
partners,
place
of
primarily
payment
liable
is
on
the
specified,
presentment must be made to them all.
Notes:
Where there are several promissors
W hen the note is executed by several joint promissors who are
not partners, but liable only as joint and several promissors, it has
been held, and, as we think correctly, that presentment should be
535
made to each, in order to fix the liability of an indorser.
But
presentment of a bill drawn upon or accepted by, and of a note
executed by, a co-partnership firm, is sufficient, if made to any
536
one of the members of such firm.
And if the signature of the
parties entitled to presentment be apparently that of a partnership,
as, for instance, if signed W alter & Burr, presentment to either is
534 Boyds Admr. V. City Sav. Bank, 15 Gratt. 501; Holtz v. Boppe, 37 N.Y. 634; Philport v. Bryant, 1 Moore & P.
754
535 Blake v. McMillen, 33 Iowa, 150; Union Bank v. Willis, 8 Metc. (Mass.) 504; Arnold v. Dresser, 8 Allen, 435
536 Branch of State Bank v. McLeran, 26 Iowa, 306; Shedd v. Brett, 1 Pick. 401
537 Erwin v. Downs, 15 N.Y. 375
301
sufficient.537
(Daniels, Elements
of
the
Law
of
Negotiable
Even after the dissolution of the firm, presentment to any one
of the partners is sufficient, for as to the bill or note upon which
they are liable, the liability continues until duly satisfied or
538
discharged.
(Ibid)
In the event of the death of one of the members of the firm to
which presentment should be made before the maturity of the bill
or note, the presentment should be made to the survivors, and not
to the personal representative of the deceased, because the
539
liability devolves upon the surviving partner.
The same rule
obtains in the event of the death of one of two or more joint
540
makers not partners.
(Ibid)
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.
2011 Bar Question:
X executed a promissory note in favor of Y by way of
accommodation.
It says: Pay to Y or order the amount of
Php50,000.00. Signed, X. Y then indorsed the note to Z, and
Z to T. When T sought collection from Y, the latter countered
as indorser that there should have been a presentment first
to the maker who dishonors it. Is Y correct?
A. No, since Y is the real debtor and thus, there is no need for
presentment for payment and dishonor by the maker.
B. Yes, since as an indorser who is secondarily liable, there
must first be presentment for payment and dishonor by the
maker.
C. No, since the absolute rule is that there is no need for
presentment for payment and dishonor to hold an indorser
liable.
537 Erwin v. Downs, 15 N.Y. 375
538 Crowley v. Barry, 4 Gill, 194; Hubbard v. Matthews, 4 N.Y. 50
539 Cayuga Bank v. Hunt, 2 Hill, 635; Story on Bills, 346-362
302
D. Yes, since the secondary liability of Y and Z would only
arise after presentment for payment and dishonor by the
maker.
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.
Notes:
For Section 84 to apply, the check must be presented for
payment within a reasonable period of time after its issue
The applicability of this provision is subject to the condition
imposed under Sec. 186, to the effect that the check must be
presented for payment within a reasonable period of time after its
issue. (Philippine National Bak vs, Benito Seeto, G.R. No. L-4388,
303
August 13, 1952, [Labrador, J:]) It must however be noted that
Sec. 186 explicitly provides for the discharge of the drawer. The
silence of Section 186 as to the indorser is due to the fact that his
discharge is already expressly covered by the provision of Section
84, the indorser being a person secondarily liable on the
instrument. The reason for the difference between the liability of
the indorser and that of the drawer in case of dishonor is that the
drawer is not probably or necessarily prejudiced thereby, while an
indorser is, actually or by legal presumption. (supra)
When does liability arise?
After an instrument is dishonored by nonpayment, indorsers
cease to be merely secondarily liable; they become principal
debtors whose liability becomes identical to that of the original
obligor. The holder of a negotiable instrument need not even
541
proceed against the maker before suing the indorser.
(Tuazon
vs. Heirs of Bartolome Ramos, G.R. No. 156262, July 14, 2005)
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.
Notes:
The third sentence of this section presents the anomaly that
while an instrument falling due on Saturday must be presented on
Monday in order to hold drawers and indorsers, yet if the
instrument is payable at a special place and the person primarily
liable is able and willing to pay it there at maturity (see section 70),
it must be presented on Saturday in order to charge the parties
liable for such payment with interest after Saturday. This question
has arisen in a practical way in Boston, and counsel for both
parties agreed upon this construction of the sentence, but the
question has not been submitted to a court. It seems also that if a
bank or other collecting agent should fail to present the instrument
on Saturday such agent might be chargeable with negligence and
liable for any loss thereby caused to the principal. (Brannan, page
99)
541 Metropol (Bacolod) Financing & Investment Corp. v. Sambok Motors Company, 205 Phil. 758, 762, February
28, 1983
304
General rule as to time
In respect to the maker of a note and the acceptor of a bill, it is
not important upon what day the presentment is made, provided it
be made at some time before the statute of limitations bar action
542
against them.
In respect, however, to the drawer of a bill and
the indorser of a bill or note, it is essential to the fixing of their
liability that the presentment should be made on the day of
543
maturity, provided it is within the power of the holder to make it.
If the presentment be made before the bill or note is due, it is
entirely premature and nugatory, and, so far as it affects the
544
drawer or indorser, a perfect nullity.
When instrument payable on demand
All bills of exchange payable on demand are closely
assimilated to checks, and contemplate the immediate payment
of the amount called for.

They are payable immediately on
presentment, without grace, and if the drawee and the payee or
indorsee reside in the same place, it is laid down by a number of
the authorities that they must be presented within business hours
of the day on which they are drawn in order to holder the drawer in
545
the event of the failure of the drawee to honor them.
And if the
drawee resides in a different place they must be forwarded by the
546
regular post of the day after they were received.
But these
rules are not inflexible. W hat is reasonable time must be depend
upon circumstances and in many cases upon the time, the mode,
and the place of receiving bills, and upon the relations of the
547
parties between whom the question arises.
W here the draft
required indorsement by a school board, which had to be
548
convened, delay of a week to forward it was held justifiable.
(Supra, page 208)
Sec. 86. Time; how computed. - When the instrument is
payable at a fixed period after date, after sight, or after that
542 Chitty on Bills [354], 396; Metzger v. Waddell, 1 N. Mex. 409
543 1 Parsons on Notes and Bills, 373; Pendleton v. Knickerbocker Life Ins. Co., 7 Fed. 170
544 Griffin v. Goff, 12 Johns, 423; Jackson v. Newton, 8 Watts, 401; Farmers Bank v. Duvall, 7 Gill & J 78
545 Kampmann v. Williams, 70 Tex. 571; McMonigal v. Brown, 45 Ohio St. 504
546 Chitty on Bills (13th Am. Ed.), 432; Parker v. Reddick, 65 Miss. 246
547 Morgan v. United States, 113 U.S. 501; Marbourg v. Brinkman, 23 Mo. App. 513
548 Muncy Borough School Dist. V. Commonwealth, 84 Pa. St. 464
305
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.
Notes:
A bank has no authority to pay notes of a depositor made
before the adoption of the Negotiable Instruments Law ad payable
at another bank. (Elliot v. W orcester Trust Co., 189 Mass. 542,
75 N.E. 944) W hen the depositor sues the bank, the bank cannot
claim the rights of a bona fide purchaser for value before maturity
when it simply pleads a general denial and payment and files no
claim in set-off. (Ibid, cited in Brannan, page 101)
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.
Notes:
The payee of a demand note held a mortgage to secure the
debt. He sold and transferred the mortgage to one person for full
value and afterwards indorsed the note to a holder in due course.
Held, that the note was not paid by the sale of the mortgage.
(Glasscock v. Balls, 24 Q.B.D. 13, S.C. sec. 119-1, ibid)
306
VII. NOTICE OF DISHONOR
Necessity of notice; general rule
W hen a negotiable bill or note is dishonored by nonacceptance on presentment for acceptance, or by nonpayment at
its maturity, it is the duty of the holder to give immediate notice of
such dishonor to the drawer, if it be a bill, and to the indorser,
whether it be a bill or note. The party primarily liable is not entitled
to notice, for it was his duty to have provided for payment of the
paper; and the fact that he is the maker or acceptor for
549
accommodation does not change the rule.
Notice is not due o any party to a bill or note not negotiable,
the rules of the law merchant concerning notice and protest
550
applying to none but strictly commercial instruments.
(Supra)
It is regarded as entering as a condition in the contract of the
drawer and indorser of a bill, and of the indorser of a note, that he
shall only be bound in the event that acceptance or payment is
only demanded; and he notified if it is not made. And in default of
notice of non-acceptance or nonpayment, the party entitled to
notice is at once discharged, unless some excuse exist which
551
exonerates the holder.
(Supra)
Failure to notify party entitled to notice discharges debt for
which bill was drawn or indorsed
So absolute is the necessity for notice to an indorser, in order
to charge him, that if a note has been indorsed to the holder in
conditional payment of a debt, the failure to give notice to the
indorser will not only discharge the indorser as a party to the
notice, but also a debtor upon the original consideration, even
though it be secured by a mortgage or deed of trust. The notes,
then, is made an absolute discharge of his liability, and the
552
indorsee must look solely to prior parties.
(Supra, page 234-
235)
549 Hays v. N.W. Bank, 9 Gratt. 127
550 Pitman v. Breckinridge, 3 Gratt. 129
551 Rothschild v. Currie, 41 Eng. C.L. 43; Musson v. Lake, 4 How. 262
552 Shipman v. Cook, 1 Green, 251; Peacock v. Purcell, 14 C.B. (N.S.) 728
307
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.
Notes:
Professor Ames states: By section 89, if the drawer of a
check is not notified of the dishonor, he will be absolutely
discharged, although he has suffered no loss by the failure to give
him notice. Yet by section 186 the drawer is only discharged to
the extent of loss caused by delay in presentment of the check for
payment within a reasonable time.

553
W here notice of dishonor to the drawer of a check is required
it must be alleged in the complaint. (Ewald v. Faulhaber Co., 105
N.Y. Supp. 114, cited in Brannan, page 102)
Judgment for the payees of a check against the drawer cannot
be sustained in the absence of proof that notice of dishonor was
given to the drawer. (Kuflick v. Glasser, 114 N.Y. Supp. 870, ibid)
The drawer of a check is discharged by failure to give him
notice of dishonor, the bank refusing to pay because it was short
of funds, and subsequently proving to be insolvent. (Bacigalupo
v. Parrillo, 112 N.Y. Supp. 1040, ibid)
In an action against the indorser of a note it is not sufficient to
allege that upon maturity the note was duly presented for
payment, and the indorser duly notified of non-payment. The
allegation and evidence must show the demand and note to have
been upon such a day as will charge the defendant. (Hoyland v.
National Bank of Middlesborough (Ky.), 126 S.W. 356, Brannan,
page 102-103)
An allegation that due notice of the protest of a note was duly
given to an indorser is sufficient allegation of notice of dishonor;
the term protest including a popular sense all the steps taken to
fix the liability of an indorser, and the word duly, in legal
parlance, meaning according to law, and relating not to form
only, but including both form and substance. (Sherman v. Ecker,
59 Misc. Rep. 216, 110 N.Y. Supp. 265, cited in Brannan, page
103)
553 Cited in Brannan, page 101
308
Failure to notify an indorser of an installment note of the nonpayment of previous installments does not affect his liability for
later installments of the non-payment of which he has been duly
notified. (Hopkins v. Merrill, 79 Conn. 626, 66 Atl. 174, S.C. sec.
66, ibid)
A joint maker, though a surety, is not an indorser and is
primarily liable, and, therefore, is not entitled to notice of dishonor.
(Rouse v. Wooten, 140 N.C. 557, 53 S.E. 430, 111 Am. St. Rep.
875, ibid)
Although presentment is excused because no administrator
had been appointed (sec. 76), yet if the instrument is dishonored
(sec. 83) notice of dishonor must be given to the indorser in
compliance with sec. 89. (Reed v. Spear, 107 App. Div. 144, 94
N.Y. Supp. 1007, S.C. secs. 76, 96, ibid)
An action against an indorser after legal notice of dishonor is
not barred because judgment was rendered in his favor in a
previous action solely for the reason that he had not been notified
before that action was brought. (Peck v. Eston, 74, Conn. 456, 51
Atl. 134, S.C. sec. 64-1, ibid)
Illustrative Case:
Asian Banking Corporation vs. Juan Javier
G.R. No. L-19051, April 4, 1923
AVANCEA, J:
On May 10, 1920, Salvador B. Chaves drew a check on the
Philippine National Bank for P11,000 in favor of La Insular, a
concern doing business in this city. This check was indorsed by
the limited partners of La Insular, and then deposited by Salvador
B. Chaves in his current account with the plaintiff, Asia Banking
Corporation. The deposit was made on July 14, 1920.
On June 25, 1920, Salvador B. Chaves drew another check for
P18,785.30 on the Philippine National Bank, in favor of the
aforesaid La Insular. This check was also indorsed by the limited
partners of La Insular, and was likewise deposited by Salvador B.
Chaves in his current account with the plaintiff, Asia Banking
Corporation, on July 6, 1920.
309
The amount represented by both checks was used by
Salvador B. Chaves after they were deposited in the plaintiff bank,
by drawing checks on the plaintiff. Subsequently these checks
were presented by the plaintiff to the Philippine National Bank for
payment, but the latter refused to pay on the ground that the
drawer, Salvador B. Chaves, had no funds therein.
The plaintiff now brings this action against the defendant, as
indorser, for the payment of the value of both checks.
The lower court sentenced the defendant to pay the plaintiff
P11,000, upon the check of May 10, 1920, with interest thereon at
9 per cent per annum from July 10, 1920, and P18,778.34 on the
check of June 25, 1920, with interest thereon at 9 per cent per
annum from August 5, 1920. From this judgment the defendant
appealed.
One of the contentions of the appellant in support of this
appeal is, that at all events its liability as indorser of the checks in
question was extinguished. W e may say in connection with this
assignment of error that the liability of the defendant never arose.
Section 89 of the Negotiable Instruments Law (Act No. 2031)
provides that, when a negotiable instrument is dishonored for nonacceptance or non-payment, notice thereof must be given to the
drawer and each of the indorsers, and those who are not notified
shall be discharged from liability, except where this act provides
otherwise. According to this, the indorsers are not liable unless
they are notified that the document was dishonored. Then,
under the general principle of the law of procedure, it will be
incumbent upon the plaintiff, who seeks to enforce the
defendant's liability upon these checks as indorser, to establish
said liability by proving that notice was given to the defendant
within the time, and in the manner, required by the law that the
checks in question had been dishonored. If these facts are not
proven, the plaintiff has not sufficiently established the
defendant's liability. There is no proof in the record tending to
show that plaintiff gave any notice whatsoever to the defendant
that the checks in question had been dishonored, and there it has
not established its cause of action. (bold supplied)
For the foregoing, the judgment appealed from is reversed and
the defendant is absolved from the complaint without special
pronouncement as to costs.
So ordered.
310
Araullo, C. J., Street, Malcolm, and Ostrand., concur.
Effect of Notice of Dishonor; required only to preserve the
right of the payee to recover on the check
A notice of dishonor is required only to preserve the right
of the payee to recover on the check. It preserves the liability
of the drawer and the indorsers on the check. Otherwise, if the
payee fails to give notice to them, they are discharged from their
liability thereon, and the payee is precluded from enforcing
payment on the check. (Bank of the Philippine Islands vs.
Spouses Royeca, G.R. No. 176664, July 21, 2008, bold supplied)
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
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.
Illustrative Case:
A note made by A to the order of B, indorsed by B and also by
A, was protested for non-payment. Notice addressed to B was
sent to A, who forwarded it to B. Held, that although A could not
give notice in his own behalf to B under Sec. 90, since B was
presumptively an accommodation indorser for A and not liable, yet
A could forward it to B, on behalf of the holder, and as his agent.
(Traders Royal Bank v. Jones, 104 App. Div. 433, 93 N.Y. Supp.
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.
311
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.
Notes:
Illustrative Case:
A branch of a country banking company sent to a London bank
for collection a bill bearing several indorsements. Upon dishonor
the London bank sent notice by post on the next day to another
branch of the forwarding bank. The next day notice was sent by
telegraph to the right branch, and the subsequent notices of
sufficient notice of dishonor were given in due time. Held, that
sufficient notice of dishonor was given and the first indorser was
liable. (Fielding v. Corry [1898] 1 Q.B. 268, cited in Brannan,
page 105)
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.
Illustrative Case:
W here the notice of protest described the note correctly and
the envelope was correctly addressed and was received and
opened by the indorser, the notice was sufficient, although the
notice was on its face by mistake addressed to the maker.
(Wilson v. Peck, 121 N.Y. Supp. 344, S.C. secs. 103-3, 106 ) But
it was held otherwise where both the notice and the envelope
containing it were addressed to another party.

(Marshall v.
Sonneman, 216 Pa. 65, 64 Atl. 874, S.C. sec. 97, cited in
Brannan, page 105)
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
312
cases be given by delivering it personally or through the
mails.
Notes:
Form of notice
No particular phrase or form is necessary. The object of it is to
inform the party to whom it is sent: (1) That the bill or note has
been presented; (2) That it has been dishonored by nonacceptance, or nonpayment; and (3) That the holder considers
him liable, and looks to him for payment. And in framing the
notice, all that is necessary to appraise the party of the dishonor
of the instrument is, to intimate that he is expected to pay it.
236)
In order that a notice should answer these conditions, and duly
intimate dishonor to the drawer or indorser, it should therefore,
either expressly or by just and natural implication, comprise the
following elements: (1) A sufficient description of the bill or note to
ascertain its identity. (2) That it has been duly presented for
acceptance or payment to the drawee, acceptor, or maker. (3)
That it has been dishonored by non-acceptance or nonpayment.
554
(4) That the holder looks to the party notified for payment.
(Ibid)
Notice may be verbal or written
The notice need not be in writing; it is sufficient if it be given
555
verbally;
but for precision and safety written notice is preferable.
Verbal notice must be necessarily confined to those cases in
which notice is directly given to the party in person, or is sent by a
messenger to his place of business or residence. It seems that a
verbal notice is less strictly construed than a written one,
especially when its sufficiency is impliedly admitted by the partys
556
response.
Mere knowledge of dishonor does not constitute
557
notice.
Notice signifies more; but when the fact of dishonor is
communicated by one entitled to call for payment, it becomes
notice, as it is then to be inferred that the intention is to hold the
554 Bank of Old Dominion v. McVeigh, 29 Gratt. 558; Thompson v. Williams, 14 Cal. 162; Story on Notes, 348;
Daniel on Negotiable Instruments, 973
555 Boyds Admr. V. City Sav. Bank, 15 Gratt. 501; First Nat. Bank v. Ryerson, 23 Iowa, 508; Stanley v. McElrath,
25 Pac. 16
556 Phillips v. Gould, 8 C & P 355; Byles on Bills [264], 211, 212
557 Juniata Bank v. Hale, 16 Serg & R 157; Bank of Old Dominion v. McVeigh, 29 Gratt. 559
313
party notified responsible.558

Negotiable Instruments, page 235-236)
Description of the bill or note dishonored
The notice should describe the bill or note in unmistakable
terms; should state where the note is, that the party notified may
find it; should state who the holder is, and who gives the notice, or
at whose request it is given. Such, at least in theory, are the
requisites of a proper notice; and a good business man should
never neglect to comply with them. But the courts are not strict in
requiring this thorough description of the dishonored instrument;
and the requirements of the law are considered as satisfied by
any description which, under all the circumstances of the case, so
designates the bill or note as to leave no doubt in the mind of the
559
party, as a reasonable man, what bill or note was intended
Story says that the description of the note should be sufficiently
definite to enable the indorser to know to what one in particular
the notice applies; for an indorser may have indorsed many notes
of very different dates, sums, and times of payment, and payable
to different persons, so that he may be ignorant, unless the
description in the note is special, to which it properly applies or
which it designates.
560
But no misdescription of the amount, or of
the date, or of the names of the parties, or of the time the paper
fell due, or other defect will vitiate the notice, unless it misleads
561
the party to whom sent.
(Supra, page 236-237)
By whom notice given
The notice of dishonor should emanate from the holder of the
instrument at the time of its dishonor, and should be
communicated to all the parties whom he means to hold liable for
its payment. But it is not absolutely necessary that it should come
from him, for the holder is entitled to the benefit of notice given in
due time by any party to the instrument who would be liable to him
562
if he, the holder, had himself given him notice of dishonor.
(Ibid)
Illustrative Cases:
558 Caunt v. Thompson, 7 C.B. 400; Miers v. Brown, 11 M & W 372
559 Gilbert v. Dennis, 3 Metc. (Mass.) 495; Shelton v. Braithwaite, 7 M & W 436; Glickman v. Early, 47 N.W. 272
560 Story on Notes, 349
561 Bank of Alexandria v. Swan, 9 Pet. 33; Mills v. Bank of United States, 11 Wheat 431; Dennistoun v. Stewart, 17
How. 606; Smith v. Whiting, 12 Mass, 6
562 Chapman v. Keene, 3 Ad. & El. 193; Bank of United States v. Goddard, 5 Mason, 366; Stafford v. Yates, 18
Johns, 327
314
After several efforts to find an indorser, notice of the dishonor
was delivered at his store to his wife, who acted as his assistant.
Held, a sufficient service, especially when the indorser actually
received the notice upon the same day. (Reed v. Spear, 107 App.
Div. 144, 94 N.Y. Supp. 1007, S.C. secs. 76, 89, cited in Brannan,
page 106)
The
certificate
of
protest
being
(by statute)
prima
facie
evidence of the facts therein stated, the burden is on the indorser
to show that he did not receive notice either personally or through
the mails, where the certificate alleges that he was duly notified of
the dishonor. (ibid)
A notice which contained a copy of the note and declared that
payment had been demanded and refused, is sufficient. (Marshall
v. Sonneman, 216 Pa. 65, 65 Atl. 874 infra, S.C. sec. 97, ibid)
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.
Notice:
To whom notice should be given; general rule
Each indorser of a bill or note is entitled to notice, and so also
is the drawer of a bill payable to a third party, as bill generally
563
are.
The acceptor of a bill and the maker of a note are not
entitled to notice, the being the primary debtors, nor are those
who, from their irregular execution of the instrument, are adjudged
joint makers or sureties, their contract being to pay in default of
564
the principal, at all events.
W here there are several successive
indorsers, the holder may, and ordinarily does, give notice to all,
with a view to preserve his recourse upon all. But he is not bound
to give notice to all, in order to bind those to whom he does give it.
He may, if he please, give notice to any one or more of the
indorsers, who are then made liable to him; and the indorser
receiving notice must then notify antecedent indorsers in order to
565
assure himself.
It is not, therefore, necessary for the notary to
take any notice of the residence of the maker of the note, or make
any inquiry as to the residence of any of the indorsers except the
563 Joseph v. Salomon, 19 Fla. 623; Sweet v. Swift, 65 Mich. 91
564 Fitch v. Citizens Nat. Bank, 97 Ind. 212; Hofheimer v. Losen, 24 Mo. App. 657
565 Cardwell v. Allen, 33 Gratt. 167; Wood v. Callaghan, 61 Mich. 402
315
last.
A different rule would obstruct business, and is not
required.566
(Daniel, Elements
Instruments, page 240-241)
of
the
Law
of
Negotiable
Notice to agent
Notice to the agent of the part for the general conduct of his
567
business is the same as if given to the principal in person.
But
notice to the partys attorney or solicitor, unless he is specially
568
authorized to receive it, is insufficient.
If an agent draws a bill in
his own name, notice should be given to him, and if given to his
569
principal it will be insufficient, he being no party to the paper.
If
the paper be signed by a duly authorized agent in the principals
name, notice should be given to the principal, who is the party
570
liable.
If a note be payable by installments, demand and notice
571
as to the last installment binds the indorser as to that.
(Ibid,
page 241)
Illustrative Case:
Leaving the notice at the window of the cashier of a hotel
corporation is not sufficient service, it not appearing that any ones
attention was drawn to the notice, or that any one was present,
and the president and managers having testified that it was not
brought to their attention. (Am. Exch. Nat. Bank v Am. Hotel
Victoria Co., 103 App. Div. 372, 92 N.Y. Supp. 1006, cited in
Brannan, page 106)
But the notice of dishonor and the envelope containing it were
addressed to the second indorser and delivered by a notary public
to the first indorser. Held, that this did not fix the liability of the
first indorser, even though he read the notice; it did not inform him
that he was looked to for payment. (Marshall v. Sonneman, ibid)
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.
Illustrative Case:
566 Lawson v. Farmers Bank, 1 Ohio St. 206; Warren v. Gilman, 17 Me. 360
567 Crosse v. Smith, 1 Maule & S. 545; Lake Shore Nat. Bank v. Colliery Co., 58 N.Y.S.C. 68
568 Louisiana State Bank v. Ellery, 16 Mart. 87; Crosse v. Smith, 1 Maule & S. 545
569 Grosvenor v. Stone, 8 Pick. 79
570 Clay v. Oakley, 17 Mart. 137
571 Eastman v. Turman, 24 Cal. 383
316
Notice to the representative of a deceased indorser of a note,
made and payable in Canada, must be given in accordance with
the laws of Canada, although the indorsers residence has been in
New York. (Merchants Bank v. Brown, 86 App. Div. 599, 83 N.Y.
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.
Notes:
What is meant by expression same place
317
According to once class of cases, all persons are to be
regarded as of the same place who receive their mails through
the same post-office. (Daniel, Elements of the Law of Negotiable
Illustrative Case:
A notice placed in a small chute on the day of protest, but not
postmarked until the next day at noon, is mailed in time and it will
be presumed, in the absence of evidence to the contrary that the
notice reached its destination by 5 oclock, which would be before
the close of business hours, both parties residing in Manhattan.
The indorser swore that he did not get the notice until the
following day, but did not testify that he was at his office on the
day that it was mailed. This was not enough to show that the
notice was not received on time. (Wilson v. Peck (Misc. Rep.)
121, N.Y. Supp. 344, S.C. secs. 95, 106, cited in Brannan, page
108)
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.
Illustrative Case:
Although non-receipt of a duly mailed notice of dishonor does
not discharge an indorser, evidence of such non-receipt is
competent on the question whether the note was actually mailed.
(Union Bank of Brooklyn v. Deshel (App. Div.), 123 N.Y. Supp.
318
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.
Illustrative Case:
W hen the answer alleged that the indorser had no notice of
dishonor, the burden is on the holder to show that due notice was
given. It is not shown by testimony of a notary that, not knowing
the address of the indorser, he inclosed the notice of dishonor to a
subsequent indorser with postage for forwarding the notice to the
prior indorser. (Fuller Buggy Co. v. Waldorn, 112 App. Div. 814,
99 N.Y. Supp, 920, cited in Brannan, page 110)
Plaintiff indorsed and deposited a check for collection in bank
th
th
on the 28
. On the 29
he was notified of the dishonor of the
th
check, and on the 30
he notified the defendant indorser by
telegraph. Held, that the notice was in due time. (Jurgens v
Wichmann, 124 App. Div. 531, 108 N.Y. Supp. 881, ibid)
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.
319
Notes:
Illustrative Cases:
Notice of protest addressed merely C.H., N.Y., is not
sufficient where there is no evidence that the indorser lived or
ever had lived, or was sojourning in New York, or that any inquiry
was made to ascertain the fact. (Fonesca v. Hartman, 84 N.Y.
The indorser lived at the place where the note was dated, but
moved from said place at some time not stated. Held, that notice
of dishonor mailed to said place was sufficient, the court
assuming that there had been no change of residence up to that
time. (Mohlman v. McKane, 60 App. Div. 546, 69 N.Y. Supp.
1046, ibid)
Notice to an indorser, who has added no address to his
signature, mailed to the post office of his place of residence is
good, but not if addressed to a house where the indorser does not
reside or do business or receive his letters, even though he
owned the house and his sons did business there.

(Ebling
Brewing Co. v. Reinheimer, 32 N.Y. Misc. R. 594, 66 N.Y. Supp.
458, ibid)
W here a notary inquired of several persons as to the post
office address of an indorser, all of whom seemed to have some
information and stated their belief that a certain town was the
nearest town to the farm where the indorser lived, and a much
larger place than the town where the indorser actually received his
mail, a notice of dishonor sent to such nearest town was
sufficient, although the indorser did not received it within a
reasonable time. (Vogel v. Starr, 132 Mo. App. 430, 112 S.W. 27,
ibid)
Plaintiff, the payee of a dishonored note, knew that the
defendant indorser lived in New York City, but claimed that he did
not know his address.

Defendant testified that plaintiff had
frequently corresponded with defendant at his New York address.
The notice of dishonor was mailed to defendant in the care of the
maker, but not delivered to defendant. Held, that this was not
sufficient notice, and that defendant was discharged.

(E.I.
Dupont, etc., Power Co. v. Rooney, 63 Rep. 344, 117 N.Y. Supp.
220, ibid)
320
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.
Illustrative Cases:
If presentment for payment be waived (see secs. 82 and 83)
notice of dishonor is dispensed with. (Baumeister v. Kuntz, 53
Fla. 340, 42 So. 886, S.C. sec. 64-1, cited in Brannan, page 112)
Defendant was one of several payees and indorsers of a note.
Some days before its maturity defendant indorsed a renewal note
having also several payees. The maker struck out the name of
one of the payees in the renewal note and substituted his own
name as payee, and several day after maturity of the original note
took it up by the renewal note. Held, that defendant had not
waived notice of dishonor of the original note and was not liable
on it. (First Nat. Bank v. Gridley, 112 App. Div. 398, 98 N.Y.
Supp. 445, S.C. secs. 66, 119-4, ibid)
A mere oral promise to renew a note, made after its maturity
by an accommodation indorser, is not a waiver of the failure to
give notice of dishonor; such promise is not an acknowledgment
of liability. (Mechanics and Farmers Savings Bank v. Katterjohn
(Ky.), 125 S.W. 1071, S.C. secs. 63, 196, ibid)
Plaintiff, an indorser of a check deposited by him with
defendant bank, was not given due notice of its dishonor. W ith
knowledge thereof, plaintiff gave his own check for the dishonored
check and sued defendant for its failure to give him due notice of
such dishonor. Held, that plaintiff had waived the banks laches
and could not recover. (Weil v. Corn Exchange Bank, 63 Misc.
Rep. 300, 116 N.Y. Supp. 665, ibid)
A bill was drawn by A Company to its own order on the B
Company and accepted and indorsed to the C Company. All
three companies knew that the bill would be dishonored. No
notice of dishonor was given to the drawer, because the secretary
of the C Company, who was also secretary of the other two
companies, knew it never was intended to make the drawer liable.
Held, that it was not the duty of the secretary of the C Company to
communicate his knowledge of the dishonor to the drawer, that
321
his knowledge was therefore not notice to the drawer, and that the
latter was discharged. (In re Fenwick [1902] 1 Ch. 507, ibid)
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.
Illustrative Case:
Failure, after the exercise of reasonable diligence, to find the
drawer of a dishonored bill at the address given by him, does not
dispense with notice if an address at which he is to be found
comes to the holders knowledge before action brought. ( Studdy
v. Beesty, 60 T.L. Rep. 647, cited in Brannan, page 113)
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.
Notes:
Delay in giving notice of dishonor caused by the necessity of
making inquiries as to the address of the party to be notified is
excusable, the holder being ignorant of the address.

(The
Elmville, [1904], P. 319, ibid)
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;
322
(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.
Illustrative Cases:
Defendant gave a check which was duly presented to the
drawee bank and dishonored, for what reason did not appear.
Notice of dishonor was not given to defendant for fourteen days
thereafter. Held, that the failure to give notice is dispensed with
only under defined circumstances, and that the burden is on the
holder of the check, or one claiming under him, to excuse the
failure to give notice. (Cassel v. Regierer, 114 N.Y. Supp. 601,
1996 Bar Question:
When is notice of dishonor not required to be given to the
drawer?
ANSWER:
Under Sec. 114 of the Negotiable Instruments Law, notice of
dishonor is not required tp be givrn to the drawer in any of the
following cases:
(a) W here the drawer and drawee are the same person;
(b) W hen the drawee is fictitious person or a person not having
capacity to contract;
(c) W hen the drawer is the person to whom the instrument is
presented for payment;
(d) W here the drawer has no right to expect or require that the
drawee or acceptor will honor the instrument;
323
(e) W here 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.
Notes:
Neither the receipt by defendant, with other of property of the
maker of a note on an agreement to take care of the note at
maturity, nor an admission that defendant, with others, was
responsible for the note, will support an action against defendant
alone on the ground that such receipt of property or such
admission is a waiver of presentment and notice of dishonor or an
excuse therefrom. (Jordan v. Reed (N.J.), 71 Atl. 280, cited in
Brannan, page 115)
Illustrative Cases:
A stockholder of a corporation, who endorsed, before delivery,
a note made by another stockholder, to raise money for the
corporation is not entitled to notice of dishonor, because the
instrument was really for his benefit. (Mercantile Bank v. Busby
(Tenn.), 113 S.W. 390, S.C. supra, sec. 64, ibid)
2011 Bar Question:
Notice of dishonor is not required to be made in all cases.
One instance where such notice is not necessary is when the
indorser is the one to whom the instrument is suppose to be
presented for payment. The rationale here is that the indorser
A. already knows of the dishonor and it makes no sense to
notify him of it.
B. is bound to make the acceptance in all cases.
C. has no reason to expect the dishonor of the instrument.
324
D. must be made to account for all his actions.
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 nonpayment, as the case may be; but protest is not required
except in the case of foreign bills of exchange.
Notes:
There mere fact of a protest is not conclusive upon the
dishonor of the instrument and due notice to the indorser; other
evidence is competent on these questions and they must be left to
the jury. W here no formal protest is necessary, and defendant
admitted having received notice of dishonor, and did not ask to
have the questions of presentment and payment submitted to the
jury, he was not aggrieved by the court allowing the notary to
amend his certificate of protest by annexing his seal or by the
admission of his certificate in evidence. (Demelman v. Brazier,
198 Mass. 458, 84 N.E. 856, S.C. sec. 55, cited in Brannan, page
115)
325
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.
Notes:
Enumeration is exclusive
The modes of discharge of a person primarily liable mentioned
in this section are exclusive. Hence a plea that one of the makers
to the knowledge of the payee-holder signed a note as surety only
and had been discharged by an extension of time by the payee to
the principal debtor is bad. (Vanderford v. Farmers Bank, 105
Md. 164, 66 Atl. 47, 10 L.R.A. (N.S.), 129, S.C. sec. 120-6, cited
in Brannan, page 117) An accommodating maker who placed the
word surety after his signature is not discharged by an extension
of time given without his consent to the co-maker. (Cellers v.
Mecham, 49 Oregon 186, 89 Pac. 426, 10 L.R.A. (N.S.), 133,
ibid). So also where time was given to an accommodated payee
by a holder, with knowledge of the accommodation, it was held
that the accommodation maker was not discharged. (National
Citizens Bank v. Toplitz, 81 App. Div. 593, 81 N.Y. Supp. 422,
ibid)
326
A demand note is discharged when the holder upon payment
of a part surrenders the note to the maker, although the maker
promised at the time to pay the balance. (Schwartzman v. Post,
84 N.Y. Supp. 922, 94 App. Div. 474, 87 N.Y. Supp. 872, cited in
Brannan, page 118)
A note is discharged when it is surrendered to the maker and
cancelled by him after maturity in exchange for a renewal note,
although the maker had altered the renewal note by striking out
the name of one of the payees and substituting his own name.
(First Nat. Bank v. Gridley, 112 N.Y. App. Div. 398, 98 N.Y. Supp.
445, S.C. secs. 66, 109, cited in Brannan, pages 118-119)
In his own right is not used merely in contradistinction to a
right in a representative capacity, but indicates a right not subject
to that of another person, and good against all the world. (ibid,
page 119)
Payment, nature of
By payment is meant the discharge of a contract to pay money
by giving to the party entitled to receive it, the amount agreed to
be paid by one of the parties who entered into the agreement.
Payment is not a contract. It is the discharge of a contract in
which the party of the first part has a right to demand payment,
and the party of the second part has a right to make payment.
(Elements of the Law of Negotiable Instruments, Daniel, p. 306)
A sale is altogether different. It is a contract which does not
extinguish a bill or note, but continues it in circulation as a valid
security against all parties. And it is necessary to constitute a
transaction a sale that both parties should then expressly or
impliedly agree, the one to sell, and the other to purchase the
572
paper.
(Ibid, pp. 306-307)
Credit given by the drawee of a bill, or by a party to a bill or
note, who is liable for its payment to the holder at his request, is
573
equivalent to payment.
But if a bill accepted for the drawers
accommodation be sent to bank for collection, and be credited to
the holder at maturity, it has been held that the bank, as its holder,
574
may sue the acceptor.
(Ibid)
572 Lancey v. Clark, 64 N.Y. 209; Eastman v. Plumer, 32 N.H. 238
573 Savage v. Merle, 5 Pick. 83
574 Pacific Bank v. Mitchell, 9 Metc. (Mass.) 297
327
Payment of a debt is not necessarily a payment of money; but
that is payment which the parties contract shall be accepted as
575
payment, or which the law recognizes as such.
W hen a party
to the instrument pays to the holder the amount due upon it, he
cannot show that he was acting as the secret agent of another,
and convert the payment thus made into a purchase. (Ibid)
Sec. 88 is controlling as to what constitutes payment in due
course
Sec. 88 of the Negotiable Instruments Law mandates as to
what constitutes payment in due course, it states that, 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.
It therefore follows that, when there is notice or knowledge that
there is indeed a defect in the title of the holder of the bill or not,
yet despite which, payment was made, it will not discharge the
instrument.
Who may make payment
Any party to a bill or note may pay it, and an indorser who has
been discharged by failure of notice may still sue a prior indorser
or other parties who were not discharged, because, although not
compelled to pay it, he acquires the right of the holder from whom
he took the instrument, or is remitted to his own rights as
576
indorsee.
But it seems that if the indorser has another note
given to secure and indemnify him for his indorsement, and, not
being notified, waives the defense, and voluntarily pays the bill or
577
note, he cannot enforce the note given him as indemnity.
And a
stranger has no right to pay or discharge the contract of another,
and cannot pay a bill or note so as to acquire the rights of a
578
holder, except supra protest, as hereinafter indicated.
But a
stranger may always purchase a bill or note with the consent of
the holder. W here the drawer, when discharged by the failure of
the collecting agent of the holder to present in due time,
nevertheless took up and paid his draft, but under protest, to
protect his credit, he was held a mere volunteer with no right to
recover against the collecting agent of the holder through whose
579
default he was discharged from payment.
(Supra, p. 308)
575 Huffmanns v. Walker, 29 Gratt. 315; Lionberger v. Kinealy, 13 Mo. App. 4
576 Ellsworth v. Brewer, 11 Pick. 316
577 Bachelor v. Priest, 12 Pick. 399
578 Edwards on Bills; Burton v. Slaughter, 26 Gratt. 919
579 Harvey v. Girard Nat. Bank, 119 Pa. St. 212
328
Payment under mistake of law or fact
It is a general principle that money paid with knowledge of fact,
580
but under a mistake of law, cannot be recovered back.
But a
party paying money under a mistake of the real facts may recover
581
it back.
Therefore, where a bank paid a post-dated check to a
holder who knew that the drawer was insolvent, and that the
drawee has no funds, but was in expectation of them that day,
and none were received by the bank, it was held that the amount
582
might be recovered back.
So an indorser, discharged by
laches, who pays a bill to the holder under a misrepresentation of
fact, may recover back the amount, and so if such indorser pays
the bill, relying on the notarial certificate of due presentment,
583
when in fact no such presentment was made.
(Supra, p. 309)
Surrender of instrument and giving receipt as evidence of
payment
The party making payment should insist on the presentment of
the paper by the party demanding payment, in order to make sure
that it is at the time of his possession, and not outstanding in
another. And if at the time he makes payment it is outstanding,
and held by a bona fide holder for value, he will be liable to pay it
584
again, and a receipt taken will be no protection.
The party
making payment of the bill or not should also not fail to insist upon
its being surrendered up, as a voucher that the party receiving the
585
money was entitled to do so, and also that he has paid it to him.
The possession of the note by the maker is presumptive evidence
586
that he has paid it;
and so, likewise, is the possession of the bill
by the acceptor, provided it can be shown that it passed out of his
587
hands after he accepted it, though otherwise it would seem not.
(Supra, pp. 309-310)
In addition to the surrender of the instrument, the fact that it
has been paid should be indorsed upon the paper itself. This is at
once advertises the fact of payment to every person who might
580 Adams v. Reeves, 68 N.C. 134
581 National Bank of the Commonwealth, 139 Mass. 513
582 Martin v. Morgan, 3 Moore, 635
583 Milnes v. Duncan, 6 B & C 671; Talbot v. National Bank, 129 Mass. 67
584 Wheeler v. Guild, 20 Pick. 545; Davis v. Miller, 14 Gratt 1
585 Otisfield v. Mayberry, 63 Me. 197
586 Dugan v. United States, 3 Wheat. 172; Norris v. Badger, 6 Cow. 449
587 Pfiel v. Vanbatenberg, 2 Campb. 439; Barring v. Clark, 19 Pick. 220
329
subsequently come into possession of the instrument by accident
or fraud.
This precaution is especially wise and necessary if the
instrument has been paid before maturity.
When an indorser
makes payment, it is especially desirable that he should take a
588
receipt as well as require delivery of the instrument.
If there be
a general receipt of payment on the back of the instrument, it will
be presumed that it was made by the maker or acceptor, who was
primarily liable; and this presumption would exist even when the
drawer had possession and sued the acceptor upon a bill
589
indorsed with such a receipt.
(Supra, p. 310)
To whom payment may be made
Payment of a bill or note should be made to the legal owner or
590
holder thereof, or someone authorized by him to receive it.
If it
be payable to bearer or indorsed in blank, any person having it in
possession may be presumed to be entitled to receive payment,
591
unless the payor have notice to the contrary;
and a payment to
such person will be valid, although he may be a thief, finder, or
592
fraudulent holder.
(Ibid)
Payment in due course by the party accommodated
In accommodation instruments, the instrument is

discharged by the payment of the accommodation party to
holder of the bill or note, but rather, it is the payment of
accommodated party to the accommodation party which
discharge the instrument.
not
the
the
will
Intentional cancellation by the holder
The intentional cancellation contemplated under paragraph (c)
is that cancellation effected by destroying the instrument either by
593
594
tearing it up,
burning it,
or writing the word "cancelled" on the
instrument. The act of destroying the instrument must also be
made by the holder of the instrument intentionally. (State
Investment House vs. Court of Appeals, January 11, 1993 )
To discharge the instrument, cancellation must be intentionally
made by the holder. On the contrary, any cancellation made by
the holder which is unintentional or was caused through
588 Story on Notes, 452
589 Scholey v. Walsby, Peake Cas. 24; Jones v. Fort, 9 B & C 764
590 Stevenson v. Woodhull, 19 Fed. 575; Draper v. Rice, 56 Iowa, 114
591 Chappelear v. Martin, 45 Ohio St. 132; Brennan v. Merchants Bank, 62 Mich. 343
592 Bank of the United States v. United States, 2 How. 711; Dugan v. United States, 3 Wheat. 172; Bank of Utica v.
Smith, 18 Johns. 230
593 Montgomery v. Schwald, 177 Mo App 75, 166 SW 831; Wilkins v. Shaglund, 127 Neb 589, 256 NW 31.
594 See Henson v. Henson, 268 SW 378.
330
negligence will not discharge the instrument, as there is no clear
indicia that the holder intended to waive any persons liability
thereon.
Moreover, similar to ordinary contracts, intentional cancellation
is an expressed action of the holder to condone or cancel a debt.
Other acts which will discharge a simple contract for the
payment of money
Art. 1231 of the New Civil Code enumerates the modes how
an obligation is extinguished:
1)
By payment or performance;
2)
By loss of the thing due;
3)
By the condonation or remission of the debt;
4)
By the confusion or merger of rights of the creditor and
debtor;
5)
By compensation;
6)
By novation.
Novation; as a ground to discharge the instrument
In the case of Anamer Salazar vs. J.Y. Brothers Marketing
595
Corporation
, Anamer Salazar was approached by Isagani
Calleja and Jess Kallos, if she knew a supplier of rice. Answering
in the positive, Salazar accompanied the two to J.Y. Bros. As a
consequence, Salazar, with Calleja and Kallos procured from J.Y.
Bros. 300 cavans of rice worth P214,000.00.

As payment,
Salazar negotiated and indorsed to J.Y. Bros. Prudential Bank
Check No. 067481 dated October 15, 1996 issued by Nena
Jaucia Timario in the amount of P214,000.00 with the assurance
that the check good as cash. On that assurance, J.Y. Bros.
parted with 300 cavans of rice to Salazar.

However, upon
presentment, the check was dishonored due to closed account.
Informed of the dishonor of the check, Calleja, Kallos and
Salazar delivered to J.Y. Bros. a replacement cross Solid Bank
Check No. PA365704 dated October 29, 1996 again issued by
Nena Jauican Timario in the amount of P214,000.00 but which,
just the same, bounced due to insufficient funds.
Petitioner contends that the issuance of the Solid Bank check
and the acceptance thereof by the respondent, in replacement of
595 G.R. No. 171998, October 20, 2010, [Peralta, J.:]
331
the dishonored Prudential Bank check, amounted to novation that
discharged the latter check, notwithstanding its eventual dishonor
by the drawee bank, had the effect of erasing whatever criminal
responsibility, under Article 315 of the Revised Penal Code, the
drawer or indorser of the Prudential Bank check would have
incurred in the issuance thereof in the amount of P214,000.00;
and that a check is a contract which is susceptible to a novation
just like any other contract.
The Supreme Court held that Novation as a ground for
extinguishing an obligation, is done by the substitution or change
of the obligation by a subsequent one which extinguishes the first,
either by changing the object or principal conditions, or by
substituting the person of the debtor, or by subrogating a third
person in the rights of the creditor. Novation may:
[E]ither be extinctive or modificatory, much being dependent
on the nature of the change and the intention of the parties.
Extinctive novation is never presumed, there must be an express
intention to novate; in cases where it is implied, the acts of the
parties must clearly demonstrate their intent to dissolve the old
obligation as the moving consideration for the emergence of the
new one. Implied novation necessitates that the incompatibility
between the old and the new obligation be total on every point
such that the old obligation is completely superseded by the new
one.
The test of incompatibility is whether they can stand
together, each one having an independent existence; if they
cannot and are irreconcilable, the subsequent obligation also
extinguishes the first.
An extinctive novation would thus have the twin effects of, first,
extinguishing an existing obligation and, second, creating a new
one in its stead. This kind of novation presupposes a confluence
of four essential requisites: (1) a previous valid obligation, (2) an
agreement of all parties concerned to a new contract, (3) the
extinguishment of the old obligation, and (4) the birth of a valid
new obligation.
Novation is merely modification, where the
change brought about by any subsequent agreement is merely
incidental to the main obligation (e.g., a change in interest rates or
an extension of time to pay; in this instance, the new agreement
will not have the effect of extinguishing the first but would merely
supplement some but not all of its provisions.)
The obligation to pay a sum of money is not novated by an
instrument that expressly recognizes the old, changes only the
terms of payment, adds other obligations not incompatible with
the old one or the new contract merely supplements the old
596
one.
332
In this case, respondents acceptance of the Solid Bank check,
which replaced the dishonored Prudential Bank check, did not
result to novation as there was no express agreement to establish
that petitioner was already discharged from his liability to pay
respondent the amount of P214,000.00 as payment for the 300
bags of rice. As we said, novation is never presumed, there must
be an express intention to novate. In fact, when the Solid Bank
check was delivered to respondent, the same was also indorsed
by petitioner which shows petitioners recognition of the existing
obligation to respondent to pay P214,000.00 subject of the
replaced Prudential Bank check.
Moreover, respondents acceptance of the Solid Bank check
did not result to any incompatibility, since the two checks
Prudential and Solid Bank checks were precisely for the purpose
of paying the amount of P214,000.00, i.e., the credit obtained
from the purchase of the 300 bags of rice from respondent.
Indeed, there was no substantial change in the object or principal
condition of the obligation of the obligation of petitioner as
indorser of the check to pay the amount of P214,000.00. It would
appear that respondent accepted the Solid Bank check to give
petitioner the chance to pay her obligation.
In a similar case of Nyco Sales Corporation vs. BA Finance
597
Corporation,
[t]here are only two ways which indicate the
presence of novation and thereby produce the effect of
extinguishing an obligation by another which substitutes the same.
First, novation must be explicitly stated and declared in
unequivocal terms as novation is never presumed. Secondly, the
old and the new obligation must be incompatible on every point.
The test of incompatibility is whether or not the two obligations
can stand together, each one having its independent existence. If
they cannot, they are incompatible and the latter obligation
novates the first.
Upon payment of the bank, as drawee, the check ceased to be
a negotiable instrument, and became a mere voucher or proof of
payment. (National Bank of Commerce of Seattle v. Seattle Nat.
Bank, 187 P. 342, 346, cited in Philippine National Bank vs. Court
of Appeals and Philippine Commercial and Industrial Bank, G.R.
No. L-26001, October 29, 1968, [Concepcion, J:])
596 Foundation Specialists, Inc. vs. Betnoval Ready Concrete, Inc., and Stronghold Insurance Co., Inc., G.R. No.
170674, August 24, 2009, 596 SCRA 697.
597 G.R. No. 71694, August 16, 1991, 200 SCRA 637
333
2014 Bar Question:
Bong bought 300 bags of rice from Ben for P300,000.00.
As payment, Bong indorsed to Bena Bank of the Philippine
Islands (BPI) check issued by Baby in the amount of
P300,000.00. Upon presentment for payment, the BPI check
was dishonored because Babys account from which it was
drawn has been closed. To replace the dishonored check,
Bong
indorsed
crossed
Development
Bank
of
the
Philippines (DBP) check issued also by Baby for P300,000.00.
Again, the check was dishonored because of insufficient
funds. Ben sued Bong and Baby on the dishonored BPI
check. Bong interposed the defense that the BPI check was
discharged by novation when Ben accepted the crossed DBP
check as replacement for the BPI check. Bong cited Section
119 of the Negotiable Instruments Law which provides that a
negotiable instrument is discharged "by any other act which
will discharge a simple contract for the payment of money."
Is Bong correct?
ANSWER:
No. Bong is incorrect.
Novation is never presumed, there must be an express
intention to novate. Secondly, the old and the new obligation must
be incompatible on every point.
In the instant case, there was no express intention of the
parties to novate, and also, the acceptance of the second check
did not result to any incompatibility, since the two checks were
precisely for the purpose of paying the amount of P300,000.00,
the credit obtained from the purchase of the 300 bags of rice.
Thus, there is no novation.
Principal debtor becomes the holder in his own right
This pre-supposes that the principal debtor, became the holder
of the instrument in his own right, thereby creating a scenario that
he is at the same the creditor and debtor of himself.

The
instrument ought to be discharged as it would be absurd for a
person to be a creditor and a debtor of himself all at the same
time.
For instance, A executed a promissory note in favor of B or his
order, B endorsed and delivered it to C, C further negotiated it to
D, and D to A. In this case, assuming that the instrument is due
334
for payment, this circumstance discharges the promissory note.
However, if A got hold of it before it was overdue, he can still
negotiate it to a subsequent party, and this provision will find no
application.
Illustrative Cases:
The plaintiff, the second indorser of a note, was requested by
the defendant, the maker, on the day of maturity, to take up the
note and defendant promised to pay him. Plaintiff paid the holder,
but in some way defendant got possession of the note without
having paid it. Held, that defendant was not a holder in his own
right, that the instrument was not discharged and defendant was
liable to plaintiff. (Korkemas v. Macksoud, 131 App. Div. 728, 116
A gave a demand note payable to B or order on the
understanding that it should not be negotiated. Afterwards A paid
B the amount of the note. B then obtained the note from C by
fraud and gave it to A. Held, that A was not a holder for value, the
previous payment not being a consideration given when he
received back the note, and he is still liable to C on the note.
(Nash v. De Freville [1900] 2 Q.B. 72, ibid)
Sec. 120. When persons secondarily liable on the instrument
are
discharged.
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
335
party secondarily liable or unless the right of recourse
against such party is expressly reserved.
Notes:
Innumerable decisions have already been rendered in the
state courts of the United States to the effect that although the
drawer of a check is discharged only to the extent of loss caused
by unreasonable delay in presentment, an indorser is wholly
discharged thereby irrespective of any question of loss or injury.
(Swift & Co. vs. Miller, 62 Ind. App. 312, 113 N.E. 447, cited in
Brannans Negotiable Instruments Law, p. 1134, Nuzum vs.
Sheppard, 87 W. Va. 243, 104 S.E. 587, 11 A.L.R. 1024, Ibid.,
cited in Philippine National Bak vs, Benito Seeto, G.R. No. L4388, August 13, 1952, [Labrador, J:])
The proposition maintained in the reported case (Nuzman vs.
Sheppard, ante. 1024) that the indorser of a check, unlike the
drawer, is relieved of liability thereon by an unreasonable delay in
presenting the same for payment, whether or not he is injured by
the delay, is supported by the great weight of authority. (Cases
cited)
The Court, in Gough v. Staats (N.Y.) supra, says: Upon the
question of due diligence to charge an indorser, whether he has
been prejudiced or not by the delay is perfectly immaterial. It is
not inquired into. The law presumes he has been prejudiced.
According to the Court in Caroll v. Sweet (1891) 128 N.Y. 19, 13
L.R.A. 43, 27 N.E. 763, presentment to due time as fixed by the
law merchant was a condition upon performance of which the
liability of the defendant, as indorser, depended, and this delay
was not excused although the drawer of the check had no funds,
or was insolvent, or because presentment would not been
unavailing as a means of procuring payment. Only where there
is affirmative proof that the indorsers knew when he cashed the
check that there would be no funds in the bank to meet it can the
rule be avoided. Otherwise, the failure to present the check in
due course of payment will discharge the indorser even though
such presentment would have been unavailing. Start v. Tupper
(Vt.) supra (11 A.L.R. Annotation, pp. 1028-1029)
W e have been unable to find any authority sustaining the
proposition that an indorser of a check is not discharged from
liability for an unreasonable delay in presentment for payment.
This is contrary to the essential nature and character of negotiable
instruments their negotiability. They are supposed to be passed
on with promptness in the ordinary course of business
transactions; not to be retained or kept for such time as the holder
336
may want, otherwise the smooth flow of commercial transactions
would be hindered. (Philippine National Bak vs, Benito Seeto,
G.R. No. L-4388, August 13, 1952, [Labrador, J:])
No consideration is necessary to support a discharge by the
intentional cancellation of a partys signature by the holder.
(McCormick v. Shea, 50 Misc. R. 592, 99 N.Y. Supp. 467, cited in
Brannan, page 120)
An agreement by the holder of a note not to press a suit begun
against the maker while certain monthly payments continue to be
made, discharges non-assenting indorsers. (Deahy v. Choquet,
28 R.I. 338, 67 Atl. 421, 14 L.R.A. (N.S.), 847, S.C. sec. 64-1,
An offer to prove a change by the cashier of a bank holding a
note, on which defendant claimed to be a surety, by altering to a
later a marginal notation of the due date made by the cashier
when the note was discounted, and making a lie change in the
entry as to the maturity of the note in the banks index book of
notes, was rightly refused in the absence of evidence to who that
these acts of the cashier were within his authority or were ratified
by the bank. (Vanderford v. Farmers Bank, ibid, page 122)
The negotiable quality of a promissory note, payable on or
before a fixed day, is not destroyed by a provision that the maker
and indorsers severally waive presentment and notice of protest,
and consent that the time of payment may be extended without
notice. (First Nat. Bank of Pomeroy v. Buttery, (N.D.), 116 N.W.
341, 16 L.R.A. (N.S.), 878, ibid)
Defendant indorsed a note, payable to plaintiff, for the
accommodation of the maker. Before maturity, the maker gave a
series of notes, falling due weekly, and agreed that the plaintiff
might hold the old notes as collateral until the new notes were
paid. The old note was protested when due, and charged to the
account of the maker, and the new notes were discounted, and
credited to his account. Held, that this was not as a matter of law
an unconditional extension releasing the indorser, but presented a
question of fact whether a right to sue the indorser was reserved.
Defendant could have paid the old note, and demanded the notes
held by the plaintiff for the debt, and proceeded at once against
the maker on them. (National Park Bank v. Koheler, 121 N.Y.
Supp. 640, ibid)
2011 Bar Question:
337
Any agreement binding upon the holder to extend the time of
payment or to postpone the holder's right to enforce the
instrument results in the discharge of the party secondarily
liable unless made with the latter's consent. This agreement
refers to one which the holder made with the
A. principal debtor.
B. principal creditor.
C. secondary creditor.
D. secondary debtor.
The rule is that the intentional cancellation of a person
secondarily liable results in the discharge of the latter. With
respect to an indorser, the holder's right to cancel his
signature is:
A. without limitation.
B. not limited to the case where the indorsement is necessary
to his title.
C. limited to the case where the indorsement is not necessary
to his title.
D. limited to the case where the indorsement is necessary to
his title.
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.
Notes:
In an action by the indorsee of a promissory note against an
indorser, payment by a subsequent indorser is not a defense
unless defendant can show that the payment was made for him.
(Twelfth Ward Bank v. Brooks, 63 App. Div. 220, 71 N.Y. Supp.
338
Payment by an anomalous indorser extinguishes the note, and
neither he nor his transferee can hold the maker on the note, for
the anomalous indorser had no former rights on the instrument.
(Quimby v. Varnum, 190 Mas. 211, 76 N.E. 671, ibid )
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.
Notes:
An agreement for immediate payment of part of a promissory
note is sufficient consideration for the release of a surety from
obligation to pay the residue. But under section 122 N.I.L. such
release must be in writing, renunciation being used in the sense
of release. (Baldwin v. Daly, 41 Wash. 416, 83 Pac. 724; Pitt v.
Little (Wash.), 108 Pac. 491, cited in Brannan, page 123)
A holder may covenant not to sue the maker and reserve his
rights against an indorser even though the note is made by a firm
and indorsed by members of the firm individually. (Faneuil Hall
Nat. Bank v. Meloon, 183 Mass. 66, 66 N.E. 410, 97 Am. St. Rep.
416, ibid)
Illustrative Cases:
After the death of the payee of a promissory note was found
enclosed in an envelope with a writing addressed to his executors
stating that he wished the note cancelled in case of his death, and
if the law did not allow this to notify his heirs that it was his wish
and orders. Held, not a valid renunciation. (Leak v. Dew, 102
App. Div. 529, 92, N.Y. Supp. 891, Brannan, page 123)
The holder of a demand note, being in articulo mortis,
instructed his nurse to write a memorandum to the effect that the
note should be destroyed as soon as it could be found. Held, that
this was not a renunciation within the statute, but merely an
expression of an intention or desire to renounce. (In re George,
44 Ch. D. 627, cited in Brannan, page 123)
339
C, the holder of a note made by B, delivered the note to X, a
devisee under the will of B, and verbally renounced his rights.
The real estate in Xs hands was charged with payment of the
testators debts. Held, that the note was not discharged, for
although the word maker could not probably includes his
devisees.
(Edwards v. Walters, [1896] 2 Ch. 157, cited in
Brannan, page 124)
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.
Illustrative Case:
An agent for collection, without authority, accepted from the
acceptor less than the amount claimed by the holder, and allowed
the acceptor to cancel his signature. The holder refused to ratify
the agents act, returned the money to the acceptor, and received
back the bill.

Held, that the cancellation was inoperative.
(Dominion Bank v. Anderson, 15 Cas. (1888) 408, cited in
Brannan, page 124)
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.
Notes:
Alterations on the serial number of a check, not material
alterations; reasons thereto
The High Court held in the case of International Corporate
598
Bank, Inc. vs. Court of Appeals and Philippine National Bank
that: [t]he question on whether an alteration of the serial number
598 G.R. No. 129910, September 5, 2006, [Carpio, J.]
340
of
check
is
material
alteration
under
the
Negotiable
Instruments Law is already a settled matter.

In Philippine
National Bank v. Court of Appeals, this Court ruled that the
alteration on the serial number of a check is not a material
alteration. Thus:
An alteration is said to be material if it alters the
effect of the instrument.
It means an unauthorized
change in an instrument that purports to modify in
any
respect
the
obligation
of
party
or
an
unauthorized addition of words or number or other
change to an incomplete instrument relation to the
obligation of a party.
In other words, a material
alteration is one which changes the item which are
required to be stated under Section 1 of the Negotiable
Instrument[s] Law.
x x x x
In his book entitled Pandect of Commercial Law and
Jurisprudence, Justice Jose C. Vitug opines that an
innocent alteration (generally, changes on items other
than those required to be stated under Sec. 1, N.I.L.) and
spoliation (alterations done by a stranger) will not avoid
the instrument, but the holder may enforce it only
according to its original tenor.
x x x x
The case at bench is unique in the sense that what was
altered is the serial number of the check in question, an
item which, it can readily be observed, is not an essential
requisite for negotiability under Section 1 of the
Negotiable Instruments Law.

The aforementioned
alteration did not change the relations between the
parties. The name of the drawer and the drawee were
not altered. The intended payee was the same. The sum
of money due to the payee remained the same. x x x
x x x x
The checks serial number is not the sole indication of its
origin. As succinctly found by the Court of Appeals, the
name of the government agency which issued the subject
check was prominently printed therein. The checks
341
issuer was therefore sufficiently identified, rendering the
referral
to
the
serial
number
redundant
and
inconsequential. x x x
x x x x
Petitioner, thus cannot refuse to accept the check in
question on the ground that the serial number was
599
altered, the same being immaterial or innocent one.
Illustrative Cases:
This section applies to the physical alteration of the instrument.
An extension of time, given by the holder of a note to the principal
maker, without the consent of a surety co-maker is not an
alteration. (Richards v. Market Exch. Bank Co. (Ohio), 90 N.E.
1000, S.C. sec. 119, cited in Brannan, page 127)
W here the mere inspection of a check showed that it had been
altered (in date), a purchaser cannot recover on it according to its
original tenor. He cannot be a holder in due course because it
was not regular on its face (section 52). (Elias v. Whitney, 50
Misc. R. 326, 98 N.Y. Supp. 667, cited in Brannan, page 125)
W here the alteration is material and suspicious, it is incumbent
upon the party offering it to give some evidence to explain its
condition. W hether the alteration is suspicious is a question of
law for the court, but when the instrument has been admitted, the
question whether the alteration was made before or after delivery
or with consent of the parties is for the jury. (Ofenstein v. Bryan,
20 App. D.C. 1; Towles v. Tanner, 21 App. D.C. 530, semble, ibid )
The proper practice when a note is offered which appears to
have been altered is for the court to determine, upon inspection
and in view of the state of the evidence, whether the instrument
should be admitted without further proof to explain the alterations,
and to the exercise of the courts sound discretion no exception
lies. (Wood v. Skelly, 196 Mass. 114, 81 N.E. 872, ibid)
The payee of a check represented that it was lost and received
another check from the drawer, and collected it, and then
changed the first check by dating it ten days later, and transferred
it to plaintiff, a holder in due course. Held, that the drawers loss
was not caused by delay in presentment, but by reliance on the
payees false representations, and the plaintiff could recover from
the drawer of the check according to its original tenor.
599 326 Phil. 504 (1996), 511-516
342
(Moekowitz v. Deutsch, 46 Misc. Rep., 603, 92 N.Y. Supp. 721,
A written agreement, securely glued to an accepted bill of
exchange, is a part thereof, and if it be detached therefrom,
without the acceptors consent, this is a fraudulent material
alteration.
But a holder in due course may recover on the
instrument according to its original terms. (Bothell v. Schweitzer
(Neb.), 120 N.W. 1129, cited in Brannan, page 127)
2011 Bar Question:
A material alteration of an instrument without the assent of
all parties liable thereon results in its avoidance, EXCEPT
against a
A. prior indorsee.
B. subsequent acceptor.
C. subsequent indorser.
D. prior acceptor.
Sec.
125.
What
constitutes
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.
Notes:
Material alteration; general rule
343
Any change in the terms of a written contract which varies its
original legal effect and operation, whether in respect to the
obligation it imports, or its force as matter of evidence, when
made by any party to the contract, is an alteration thereof, unless
all the other parties to the contract gave their express or implied
consent to such change. And the effect of such alteration is to
nullify
and
destroy
the
altered
instrument
as
legal
600
obligation, whether made with fraudulent intent or not.
(Elements of the Law of Negotiable Instruments, Daniel, pp. 289290, emphasis ours)
In what material alteration consists
Prof. Daniel said: In order to constitute an alteration
material, it must have the legal effect of changing the legal
status or relationship of the parties to the instrument. This is
true, without regard to the question whether it injures or benefits
either the debtor or creditor. Hence, a material alteration may
consist in changing its date, or the time or place of payment, or
the amount of principal or interest to be paid, or the medium or
currency in which payment is to be made, or the number or the
relations of parties, or the character and effect of the instrument
601
as matter of obligation or evidence.
And the alteration may
effected by adding to the instrument some new provision, or by
substituting one provision for another, or by obliterating or
subtracting from it some provision incorporated in it. As has been
indicated, it will be no answer to a plea of alteration that its
operation is favorable to the parties affected by it, whether in
lessening or increasing the amount to be paid, or in enlarging or
abbreviating the time of payment, or otherwise. No man has a
right to vary anothers obligation at his discretion, whether for his
good or ill. It ceases, when thus varied, to be that others act, and
it is sufficient for him to say: This is not my contract.

602
Even a
decrease of the amount destroys the identity, and confuses and
traces of his obligation, and every reason of policy and principle
forbid that the laws should tolerate tampering with the rights and
engagements of others. (supra, emphasis supplied, pp. 290-291)
In the Philippine setting, the case of Philippine National Bank
603
vs. Court of Appeals
, laid down distinctively as to what
constitutes material alteration.
The ponente Justice Kapunan
wrote: [a]n alteration is said to be material if it alters the effect of
604
the instrument.
It means an unauthorized change in an
instrument that purports to modify in any respect the obligation of
600 Mersman v. Werges, 112 U.S. 141; Angle v. Insurance Co., 92 U.S. 330; Health v. Blake, 28 N.C. 406
601 Daniel on Negotiable Instruments, 1375, Drexler v/ Smith, 30 Fed. 757
602 Weir v. Walmsley Ind. 246; Warden v. Ryan, 37 Mo. App. 566; Wager v. Brooks, 37 Minn. 392
603 G.R. No. 107508, April 25, 1996.
604Agbayani, Commentaries and Jurisprudence of the Commercial Laws of the Philippines, Vol. 1, 1992 ed., p. 403.
344
a party or an unauthorized addition of words or numbers or other
change to an incomplete instrument relating to the obligation of a
party.605
In other words, a material alteration is one which
changes the items which are required to be stated under Section
1 of the Negotiable Instruments Law In his book entitled
Pandect of Commercial Law and Jurisprudence, Justice Jose C.
Vitug opines that an innocent alteration (generally, changes on
items other than those required to be stated under Sec. 1, N.I.L.)
and spoliation (alterations done by a stranger) will not avoid the
instrument, but the holder may enforce it only according to its
original tenor.
606
Reproduced hereunder are some examples of material and
immaterial alterations:
A. Material Alterations:
(1) Substitution the words or bearer for order.
(2) W riting protest waived above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: Iron County Bank,
Crystal Falls, Mich. Aug. 5, 1901. Pay to G.L. or order $9 fifty
cents CTR The insertion of the figure 5 before the figure 9,
the instrument being otherwise unchanged.
(5) Adding the words with interest with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for
payment is thereby curtailed or extended.
(7) An instrument was payable First Natl Bank the plaintiff
added the word Marion.
(8) Plaintiff, without consent of the defendant, struck out the
name of the defendant as payee and inserted the name of the
maker of the original note.
(9) Striking out the name of the payee and substituting that of
the person who actually discounted the note.
605 Nicklees, Negotiable Instruments and other related Commercial Paper, 1993 2nd ed., p. 168.
606 Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 55
345
(10) Substituting the address of the maker for the name of a
607
co-maker.
B. Immaterial Alterations:
(1) Changing I promise to pay to W e promise to pay, where
there are two makers.
(2) Adding the word annual after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of a
note gave it with the date in blank, July ________.
(5) An alteration of the marginal figures of a note where the
sum stated in words in the body remained unchanged.
(6) The insertion of the legal rate of interest where the note
had a provision for interest at ___________ per cent.
(7) A printed form of promissory note had on the margin the
printed words: Extended to ____________. The holder on or
after maturity wrote in the blank space the words: May 1,
1913, as a reference memorandum of a promise made by him
to the principal maker at the time the words were written to
extend the time of payment.
(8) W here there was a blank for the place of payment, filling in
the blank with the place desired.
(9) Adding to an indorsees name the abbreviation Cash
when it had been agreed that the drafts should be discounted
by the trust company of which the indorsee was cashier.
(10) The indorsement of a note by a stranger after its delivery
to the payee at the time the note was negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the
608
principal maker, without the consent of a surety co-maker.
The case at bench is unique in the sense that what was
altered is the serial number of the check in question, an item
which, it can readily be observed, is not an essential requisite for
negotiability under Section 1 of the Negotiable Instruments Law.
607 Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 1, 1992 ed., pp.
403-404.
608 Id., at 404-405.
346
The aforementioned alteration did not change the relations
between the parties. The name of the drawer and the drawee
were not altered. The intended payee was the same. The sum of
money due to the payee remained the same.
Changing date of instrument and time of payment
Any change in the date imparts a new legal effect and
operation to it, and is a material alteration, which avoids it as
against prior parties and sureties even in the hands of a bona fide
609
holder without notice.
The time the instrument became a
subsisting contract, and the time when the contract is to be
performed in many cases, and a thousand circumstances may
arise which may add consequence to the question when the
instrument was issued. It matter not that the time of payment by
relation to the date, may be prolonger, for suffice it to say it was
not the time agreed on. (Daniel, Elements of the Law of
Negotiable Instruments, Daniel, p. 291)
The alteration may be in the year, or the month, or the day of
610
the monthly, or in all three.
(Ibid,pp. 291-292)
A change in the time of payment is obviously of the same
nature as a change in the date, identical in principle and effect;
and whether such change delays, accelerates, or preserves in
legal effect the time specified, or implied for payment, it
611
constitutes a material alteration.
(Ibid)
Changing place of payment
W hen the instrument has been drawn payable at a particular
place, the obliteration of such place, so as to make it payable
generally, constitutes a material alteration as against all the
612
parties not consenting;
and likewise where no place is
613
designated, it is a material alteration to insert one.
(Supra, p.
292)
Even a bona fide holder cannot recover upon an acceptance
so altered, nor upon a note so altered against parties prior to the
614
one making the alteration.
Changing the place of date would
609 Master v. Miller, 4 T.R. 320; Crawford v. West Side Bank, 100 N.Y. 56; Britton v. Dierker, 46 Mo. 592
610 Thompson on Bills, 111; Jacob v. Hart, 2 Stark. 45; Outhwaite v. Luntley, 4 Campb. 179; Walton v. Hastings, 4
Campb. 223
611 Bathe v. Taylor, 15 East, 412; Miller v. Gilleland, 19 Pa. St. 119
612 McCurbin v. Turnbull, Thompson on Bills, 112
613 Nazro v. Fuller, 24 Wend. 374; Townsend v. Star Wagon Co., 10 Nebr. 615; Whitesides v. Northern Bank, 10
Bush, 501
347
615
change the rights of the parties, and hence is an alteration.
(Ibid, pp. 292-293)
Change in amount of principal or interest
Any change in the amount of the principal for which the
instrument is executed is a material alteration, whether it be
increased or lessened. (Supra, p. 293)
Any addition of words making the bill or note bear interest is of
616
the same character as if it changed the principal.
(Ibid)
Change as to parties
Any alteration in the personality, number, or relations of the
parties is, as a general rule, a material alteration. Thus, where C.,
member of the firm of C. & Co., obtained an accommodation
indorsement to his individual note, and then added & Co. to his
signature, thus making it his firms note, it was held a material
617
alteration.
(Supra, p. 295)
[T]he erasure of the name of one of two drawers or makers, or
payees, who have indorsed the paper, or of one of several cosureties, or the name of the payee and inserting another, is
618
likewise a material alteration.
So the substitution of one drawer
619
or drawee, or maker or co-maker for another, is of like effect.
(Supra, pp. 295-296)
However, [w]hether or not the addition of another name to that
of the maker (when there is but one) is a material alteration, which
discharges him, is a question upon which authorities are divided.
Applying sound principle to the controversy, it would seem that the
alteration should be regarded as immaterial. The addition does
not vary the original makers liabilities in any respect. There could
be no motive of fraud upon him or others to induce the addition.
And while it would come within the letter of those declarations of
courts that maintain anything which affects the integrity of the
instrument to be a material alteration, it does not seem to come
620
within their spirit.
(Supra, p. 296)
Change affecting the character of the obligation
614 Nazro v. Fuller, 24 Wend. 374; Sudler v. Collins, 2 Houst. 538
615 Mahaiwe Bank v. Douglass, 31 Conn. 170
616 Harsh v. Klepper, 28 Ohio St. 200; Woodworth v. Anderson, 63 Iowa, 503; Davis v. Henry, 13 Nebr. 500
617 Haskell v. Champion, 30 Miss. 136
618 Mason v. Bradley, 11 M & W 590; Cumberland Bank v. Hall, 1 Hals. 215; McCramer v. Thompson, 21 Iowa,
244; Robinson v. Berryman, 22 Mo. App. 510; Horn v. Bank, 32 Kan. 521
619 Davis v. Coleman, 7 Ired. 424; Swtate v. Polk, 7 Blackf. 27
620 Daniel on Negotiable Instruments, 1388, 1389, and cases cited
348
A change in the character or effect of the instrument, whether
in respect to its obligation or to its weight in evidence, is a material
alteration. Thus, the addition of a seal to the signature of the
maker of a note converts it into a bond, against which no plea of
want of consideration can be made, and thus invests his contract
621
with attributes which he decline to impart to it.
Consequently
the note is avoided. So a bond is avoided by detaching the
622
seal.
As when a seal is added to the name of one of several comakers of a note, all are discharged, because the holder could
not have the same recourse against the three which he held
before; one would be estopped from denying a want of
consideration which might inure to the benefit of all, and new
relations and obligations would be created. (Ibid, pp. 296-297)
[T]he changing of a note from I promise to W e promise is
material, because it changes a joint and several note into one joint
623
only.
(Supra, p. 297)
The addition of the name of a witness to an instrument
required by law to be witnesses is a material alteration, but if the
instrument need not be witnesses or if it already has on it the
number of witness required by law, the alteration is immaterial.
(Ibid)
Change in consideration
It has been held that if a bill be expressed generally for value
received, and words are added describing such consideration as
for the good-will and lease in trade of a certain person, or for a
624
certain tract of land, it is materially altered and avoided.
The
reasons assigned are, first, that it makes the note a confession in
evidence of a fact which might otherwise requires extraneous
proof; and, second, that it puts the holder upon inquiry whether
625
that consideration passed.
(Ibid)
Change in words of negotiability
621 United States v. Linn, 1 How. 104; Marshall v. Gougler, 10 Serg. & R. 164
622 Piercy v. Piercy, 5 W. Va. 199
623 Humphreys v. Guillow, 13 N.H. 385; Hemmenway v. Stone, 7 Mass. 58
624 Knill v. Williams, 10 East, 413; Low v. Argrove, 30 Ga. 129
625 2 Parsons on Notes and Bills, 562; Daniel on Negotiable Instruments, 1394
349
The addition of the negotiable words, or order, or bearer, is
not an alteration when there were intended to have been inserted,
626
and were accidentally left out.
W here the effect of such
addition is to impart negotiability to an instrument not designed to
be negotiable, it is a most material alteration in the nature of the
627
contract, and the bill or note is thereby avoided.
So the
interlineations of or bearer in a negotiable note, payable to a
certain person or order, is an alteration of it, because it materially
628
changes the manner of its negotiability.
(Supra, pp. 297-298)
Rights of bona fide holder of altered instrument
As a general rule, the material alteration of an instrument will
vitiate it, even in the hands of a bona fide holder without notice.
But when the drawer of the bill or the maker of the note has
himself, by careless execution of the instrument, left room for any
alteration to be made, wither by insertion or erasure, without
defacing it, or exciting the suspicions of a careful man, he will be
liable upon it to any bona fide holder without notice when the
opportunity which has afforded has been embraced, and the
instrument filled up with a larger amount or different terms than
629
those which it bore at the time he signed it.
(Supra, pp. 299300)
The true principle applicable to such cases is that the party
who puts his paper in circulation, invites the public to receive it of
anyone having it in possession with apparent title, and he is
estopped to urge an actual defect in that which, through his act,
630
ostensibly has none.
It is the duty of the maker of the note to
guard not only himself, but the public, against frauds and
alteration by refusing to sign negotiable paper made on such a
form as to admit of fraudulent practices upon them with ease, and
without ready detection.

631
The inspection of the paper itself
furnishes the only criterion by which a stranger to whom it is
offered can test its character, and when the inspection reveals
nothing to arouse the suspicions of a prudent man, he will not be
permitted to suffer when there has been an actual alteration, to
632
which the payor by his negligence contributed.
(Ibid)
If the alteration were made without any fault on the part of the
maker, drawer, or acceptor, neither will then be bound, although
626 Kershaw v. Cox, 3 Esp. 246; Byrom v. Thompdon, 11 Ad. & El. 31
627 Bruce v. Westcott, 3 Barb. 274; Johnson v. Bank of the United States, 2 B. Mon. 310
628 Booth v. Powers, 56 N.H. 30; Union Nat. Bank v. Roberts, 45 Wis. 373
629 Garrard v. Haddan, 67 Pa. St. 82; Johnston Harvester Co. v. McLean, 57 Wis. 258; Lowden v. National Bank,
38 Kan. 533
630 Van Duzer v. Howe, 21 N.Y. 538
631 Zimmerman v. Rote, 75 Pa. St. 188; Brown v. Reed, 79 Pa. St. 370
632 Daniel on Negotiable Instruments, 1405; Blakey v. Johnson, 13 Bush, 204
350
the alteration were so skillfully made as to escape notice upon
careful observation. Thus, where a bankers check had been
dexterously altered by a chemical process, the original sum being
expunged, and a larger inserted, the banker was not allowed to
recover of the drawer more than the sum for which the draft
633
actually called when he drew it.
(Ibid)
Effect of material alteration fraudulently made
W hen a party to a bill or note fraudulently alters its legal effects
he not only destroys its the instrument by thus destroying its legal
identity, but he also extinguishes the debt for which it was given.
And it cannot afterward be made the basis of, or evidence for, a
recovery in any form of action. (Ibid, pp. 300-301)
Effect of material alteration innocently made
If the alteration is material, and was made innocently, the
instrument, notwithstanding, is vitiated, and no suit thereon can be
634
maintained.
But the holder may sue upon the original cause of
635
action;
but he could not sue any party whose remedy, after
636
making payment, would be impaired by the alteration.
(Supra,
pp. 301)
Can the drawee bank still recover the value of the check even
if it failed to return the check within 24-hour clearing period
because the check was tampered?
In the same case of PNB vs. CA, whether or not the drawee
bank may still recover the value of the check from the collecting
bank even if it failed to return the check within the twenty-four (24)
hours clearing period because the check was tampered suffice it
to state that since there is no material alteration in the check,
petitioner has no right to dishonor it and return it to PBCom, the
same being in all respects negotiable.
Illustrative Cases:
633 Hall v. Fuller, 5 B & C 750
634 Angle v. N.W., etc, Inc. Co., 92 U.S. 342; Harsh v. Klepper, 20 Ohio St. 200; Booth v. Powers, 56 N.Y. 31;
Moore v. Hutchinson, 69 Mo. 429
635 Atkinson v. Hawden, 2 Ad. & El. 169; Owen v. Hall, 70 Md. 100; Sloman v. Cox, 1 Cromp., M & R 471
636 Alderson v. Langdale, 3 B & Ald. 660
351
Defendant signed a note payable to her own order which was
delivered unendorsed to plaintiff in renewal of another note on
which defendant was an indorser. Plaintiff without the consent of
defendant struck out the name of defendant as payee and
inserted the name of the maker of the original note, who then
indorsed the new note. Held, that the alteration was material and
the note was avoided as to the defendant. (Hoffman v. Planters
Nat. Bank, 99 Va. 480, 39 S.E. 134, cited in Brannan, page 129)
It is not material alteration to add an indorsees name the
abbreviation Cash when it had been agreed that the draft should
be discounted by the trust company of which the indorsee was
cashier. (Brimingham Trust Co. v. Whitney, 95 App. Div. 280, 88
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.
Illustrative Cases:
An order by a contractor, directing the owner of the building to
pay another a certain sum of money and deduct it from any
amount due on final payment, is not a bill of exchange. (Buttrick
Lumber Co. v. Collins, 202 Mass. 413, 89 N.E. 138, cited in
Brannan, page 130)
An order for the payment of money, addressed to no one in
particular but generally to any one for whom the drawer might be
employed or who owed him money, is too indefinite and uncertain
to be binding on any one. (Dugane v. Hvezda Pokroku No. 4
(Iowa), 119 N.W. 141, ibid)
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.
Illustrative Cases:
352
A having a certain sum on deposit with a bank, gave a check
for a larger sum. Held, that the check on presentation operated
as an intended assignation of the amount of the deposit. (British
Linen Co. Bank v. Carruthers, 10 Sess. Case. 923, cited in
Brannan, page 131)
A bill accepted payable at a bankers operates on presentment
as an intended assignation of the hands of the acceptor in the
bankers hands. (British Linen Co. v. Rainey, 12 Sess. Cas. 825,
ibid)
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.
2011 Bar Question:
A bill of exchange has T for its drawee, U as drawer, and F as
holder. When F went to T for presentment, F learned that T is
only 15 years old.
F wants to recover from U but the latter
insists that a notice of dishonor must first be made, the
instrument being a bill of exchange. Is he correct?
A. Yes, since a notice of dishonor is essential to charging the
drawer.
B. No, since T can waive the requirement of notice of
dishonor.
353
C. No, since F can treat U as maker due to the minority of T,
the drawee.
D. Yes, since in a bill of exchange, notice of dishonor is at all
times required.
If the drawer and the drawee are the same person, the holder
may present the instrument for payment without need of a
previous presentment for acceptance. In such a case, the
holder treats it as a
A. non-negotiable instrument.
B. promissory note.
C. letter of credit.
D. check.
P authorized A to sign a bill of exchange in his (Ps) name.
The bill reads: Pay to B or order the sum of Php1 million.
Signed, A (for and in behalf of P). The bill was drawn on P.
B indorsed the bill to C, C to D, and D to E. May E treat the
bill as a promissory note?
A. No, because the instrument is payable to order and has
been indorsed several times.
B. Yes, because the drawer and drawee are one and the same
person.
C. No, because the instrument is a bill of exchange.
D. Yes, because A was only an agent of P.
P authorized A to sign a negotiable instrument in his (Ps)
name. It reads: Pay to B or order the sum of Php1 million.
Signed, A (for and in behalf of P).
The instrument shows
that it was drawn on P. B then indorsed to C, C to D, and D
to E. E then treated it as a bill of exchange. Is presentment
for acceptance necessary in this case?
A. No, since the drawer and drawee are the same person.
B. No, since the bill is non-negotiable, the drawer and drawee
being the same person.
C. Yes, since the bill is payable to order, presentment is
required for acceptance.
D. Yes, in order to hold all persons liable on the bill.
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
354
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.
Notes:
Section 132, requiring the acceptor of a bill of exchange to be
in writing, does not apply to a foreign bill, payable in another
State; the law of such State not having been proved, the common
law, according to such acceptance may be oral will be held to
apply. (Bank of Laddonia v. Bright-Coy Commission Co. (Mo..
App.), 120 S.W. 648, cited in Brannan, page 133)
355
Acceptance, in the sense in which this term is used in the
Negotiable Instruments Law is not required for checks, for the
637
same are payable on demand.
Acceptance applies only to bills of exchange
638
Acceptance applies only to bills of exchange.
(HSBC v.
Commissioner of Internal Revenue, G.R. Nos. 166018 & 167728,
June 4, 2014, Leonardo-De Castro, J.:])
It is an act that is not even applicable to promissory notes, but
639
only to bills of exchange.
Under Section 132 of the Negotiable
Instruments Law (which provides for how acceptance should be
made), the act of acceptane refers solely to bills of exchange. Its
object is to bind the drawee of a bill and make him an actual and
640
bound party to the instrument.
(Philacor Credit Corporation v.
Commissioner of Internal Revenue, G.R. No. 169899, Feb. 6,
2013, [Brion, J.:])
Nature of Acceptance
Under the law, therefore, what is is accepted is a bill of
exchange, and the acceptance of a bill of exchange is both the
manifestation of the drawees consent to the drawers order to pay
money and the expression of the drawees promise to pay. It is
the act by which the drawee manifests his consent to comply with
the request contained in the bill of exchange directed to him and it
contemplates an engagement or promise to pay.

641
Once the
642
drawee accepts, he becomes an acceptor.
As acceptor, he
engages to pay the bill of exchange according to the tenor of his
643
acceptance.
How should presentment for acceptance be made?
Acceptance is made upon presentment of the bill of exchange,
644
or within 24 hours after such presentment.
Presentment for
acceptance is the production or exhibition of the bill of exchange
637Sections 143 and 185, Act No 2031; Phil Nat. Bank vs. Nat. City Bank of New York, 63 Phil 711; I Morse on
Banks and Banking, 6th ed. 898, 899; Watchel v. Rosen, 249 N.Y. 386, 164 N.E. 326.
Philacor Credit Corporation v. Commissioner of Internal Revenue, G.R. No. 169899, February 6, 2013, 690
638
SCRA 28, 37.
639
Jose Campos Jr. & Maria Clara Lopez-Campos. Notes and Selected Cases on Negotiable Instruments Law.,
1994 edition, p. 520
640
Supra.
641
Hunt v. Security State Bak, 179 Pac. 248 (1919), cited in De Leon, Hector, The Philippine Negotiable Instruments
Law (and Allied Laws) Annotated (2010 edition), p. 343.
642
De Leon, id. At 239
643
See Section 62, Negotiable Instruments Law
644
Sec. 136 of the Negotiable Instruments Law provides: 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.
356
to the drawee for the purpose of obtaining his acceptance.645
Is
presentment
for
acceptance
necessary
to
hold
the
acceptor liable?
Presentment for acceptance is necessary only in instances
646
where the law requires it.
In the instances where presentment
for acceptance is not necessary, the holder of the bill of exchange
can proceed directly to presentment for payment. (HSBC v.
Commissioner of Internal Revenue, supra)
What is presentment for payment?
Presentment for payment is the presentation of the instrument
to the person primarily liable for the purpose of demanding and
647
obtaining payment thereof.
Instrument must be produced and shown
Thus, whether it be presentment for acceptance or
presentment for payment, the negotiable instrument has to be
produced and shown to the drawee for acceptance or to the
acceptor for payment. (HSBC v. Commissioner of Internal
Revenue, supra)
Promise and Acceptance of check; distinguished.
Acceptance and payment are, within the purview of said
Law, essentially different things, for the former is a promise to
perform an act, whereas the latter is the actual performance
648
649
thereof.
In the words of the Law,
the acceptance of a bill is
the signification by the drawee of his assent to the order of the
drawer, which, in the case of checks, is payment, on demand, of
a given sum of money. Upon the other hand, actual payment of
the amount of a check implies not only an assent to said order of
the drawer and recognition of the drawers recognition of the
drawers obligation to pay the aforementioned sum, but, also, a
645
Campos, Jose Jr., Notes and Selected Cases on Negotiable Instruments Law (5th Edition), pp. 709- 710.
646
See, Sec. 143, Negotiable Instruments Law
647
Campos, supra note 33, p. 715.
648 First National Bank of Washington v. Whitman, 94 U.S. 343, 347, 24 L. ed. 229.
649 Section 132, Act No. 2031.
357
compliance with said obligation. (Philippine National Bank vs.
Court of Appeals and Philippine Commercial and Industrial Bank,
G.R. No. L-26001, October 29, 1968, [Concepcion, C.J:])
2011 Bar Question:
X, drawee of a bill of exchange, wrote the words: Accepted,
with promise to make payment within two days. Signed, X.
The drawer questioned the acceptance as invalid.
Is the
acceptance valid?
A. Yes, because the acceptance is in reality a clear assent to
the order of the drawer to pay.
B. Yes, because the form of the acceptance is really
immaterial.
C. No, because the acceptance must be a clear assent to the
order of the drawer to pay.
D. No, because the document must not express that the
drawee will perform his promise within two days.
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.
Notes:
This section is not confined to sight bills but is applicable to all
bills of exchange. Presentment for acceptance of a bill, payable
at a fixed time is not necessary to charge the drawer or indorser,
but it may be presented for acceptance at any time. (National
Park Bank v. Saitta, 127 App. Div. 624, 111 N.Y. Supp. 927, S.C.
sec. 28, cited in Brannan, page 134)
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.
358
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.
Notes:
It was held that under section 137 N.I.L., the presentation for
acceptance is a demand for acceptance which, if the bill is
retained by the drawee, implies a demand for its return if
acceptance is declined, and that the mere failure to return the bill
within twenty-four hours is acceptance. And it was further held
that under section 185 a check was subject to the same rules,
and that failure to return within twenty-four hours a check sent to a
drawee band for payment was an acceptance of a check upon
which the holder could recover against the bank, although the
delay was due to the neglect of a notary public to whom the check
was handed by the drawee bank to protest on the day of its
receipt by the bank. (Brannan, page 136)
The delivery of a check by a bank to a notary public for protest
is not a compliance with this section and does not relieve the
drawee from liability, following Wisner v. First Nat. Bank;
Provident S. & B. Co. v. First Nat. Bank, 37 Pa. Super. Ct. 17.
(ibid)
In order to hold a drawee as acceptor under this section, the
burden is upon the plaintiff to show that the instrument was
negotiable paper of the nature and kind that could be presented
for acceptance or that it was actually delivered to the drawee for
acceptance and not for payment. (First Nat. Bank of Omaha v.
Whitmore, 177 Fed. Rep. 397, ibid)
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 nonpayment. But when a bill payable after sight is dishonored by
359
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.
qualified
acceptance in express terms varies the effect of the bill as
drawn.
Sec.
140.
acceptance
What
to
constitutes
pay
at
general
particular
acceptance.
place
is
- An
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
discharged
is
from
taken,
the
liability
on
drawer
the
bill
and
indorsers
unless
they
are
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.
360
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.
Notes:
Sight Drafts do not require presentment for acceptance
Bills payable on demand or at sight without grace (which are
immediately payable on presentment), or payable at a certain
number of days after date, or after any other certain event, or
payable on a day certain, need not be presented, for acceptance
at all, but only for payment. (Elements of the Law of Negotiable
Instruments, Daniel, page 163)
Bills payable at sight, or at so many days after sight, or after
demand, or after any other event not absolutely fixed, must be
presented to the drawee for acceptance and payment, or for
acceptance only, without unreasonable delay, or the drawer and
indorsers will be discharged, for they have an interest in having
the bills accepted immediately in order to shorten the time of
payment, and thus put a limit to the period of their liability; and
361
also enable them to protect themselves by other means before it
is too late, if the bill is not accepted and paid within the time
650
originally contemplated by them.
(Ibid)
W hen the words acceptance waived are embodied in a bill,
the ordinary proceedings in acceptance are dispensed with, and
651
merged into those of payment or nonpayment.
(Ibid)
Exception to the Rule
There are, however, three exceptions to this general rule that it
is not necessary to present a bill payable at a fixed time for
acceptance, but only at maturity for payment:
First, when there is an express direction to the payee or holder
of a bill;
Second, when it is into the hands of an agent for negotiation;
and
Third, where the drawer and drawee are either the same
person, or the drawer is a member of the form or connected with
the corporation which is the drawee. (Ibid)
Significance of Acceptance
The acceptance of a bill is the signification by the drawee of
652
his assent to the order of the drawer;
this may be done in
writing by the drawee in the bill itself, or in a separate
653
instrument.
(Prudential Bank vs. Intermediate Appellate Court,
G.R. No. 74886, December 8, 1992, [Davide, Jr., J.])
The effect of the acceptance of a bill
654
Is to constitute the acceptor the principal debtor.
The bills
becomes by the acceptance very similar to a promissory note
the acceptor being the promissor, and the drawer standing in the
relation of an indorser.
But in respect to the acceptors position with regard to the
drawer, and the amount for which he renders himself liable by
accepting the bill, it is well to observe that the acceptance does
not entitle the acceptor to charge it in account against the drawer
650 Bell v. First Nat. Bank, 115 U.S. 379; Mitchell v. De Grand, 1 Mason, 176; Robinson v. Ames, 20 Johns, 146
651 Carson v. Russel, 26 Tex. 472; English v. Wall, 12 Rob. (La.) 132; Webb v. Mears, 9 Wright, 222.
652 Section 132, NIL
653 Sections 133 and 34, Id.
654 Heurtematte v. Morris, 1Y. 63; Capital City Ins. Co. v. Quinn, 73 Ala. 560
362
from the date of acceptance, unless he pays the whole amount at
the time or discharges the drawer from all responsibility.655

(Ibid)
Like the maker of a note, the acceptor is bound by all the
terms of the instrument, and if it contains a stipulation for payment
656
of attorneys fees, he is bound by it.
(Ibid)
If the acceptance be for the drawers accommodation, the
acceptor does not thereby become entitled to sue the drawer
upon the bill; but when he has paid the bill, and not before, he
may recover back the amount from the drawer in an action for
657
money had and received.
If the acceptor put the bill in
658
circulation, he is estopped from showing it was then paid.
When drawer of bill requiring presentment for acceptance
bound without such presentment
Presentment to the drawee, it has been held, is necessary,
659
even though the drawer has requested him not to accept;
but
the holder is not bound to present again after refusal to accept
and notice given, even though the drawer requests him to do so,
660
and promises that the bill shall be honored.
(Daniel, Elements
of the Law of Negotiable Instruments, pages 164 to 165)
The only cases in which the holder of a bill which, according to
its tenor, should be presented for acceptance, can discharge the
drawer without presenting it for acceptance, arise when the
relations between the drawer and drawee are such as to
661
constitute the drawing of the bill a fraud upon the holder.
W hen
the bill is presented the acceptance must be according to its tenor
to pay money. If it be to pay another bill, it is not acceptance, and
662
the bill should be protested.
(Ibid)
Acceptance admits
1.
Signature of drawer It follows from the fact that
the acceptor assumes to pay the bill, and becomes the
principal debtor for the amount specified, that acceptance
655 Bracton v. Willing, 4 Call, 288
656 Smith v. Muncie Nat. Bank, 29 Ind. 158
657 Christian v. Keen, 80 Va. 377; Martin v. Muncy, 40 La. Ann. 190
658 Hinton v. Bank of Columbus, 9 Port. (Ala.) 463
659 Hill v. Heap, Dowl. & R.N.P. 57; 1 Parsons on Notes and Bills, 388
660 Hickligg v. Hardey, 7 Taunt. 312
661 Bank of Washington v. Triplett, 1 Pet. 25; Smiths Mercantile Law (Holcombe & Gholsons ed.), 304
662 Russell v. Phillips, 14 Q.B. 891
363
is an admission of everything essential to the existence of
such liability. Therefore, acceptance, is, in the first place,
an admission of the signature of the drawer, the drawee
being supposed to know his correspondents handwriting,
and, by accepting, to acknowledge it; and in a suit against
the acceptor he would not be permitted to plead or show
that the handwriting was not the drawers and would be
bound by his acceptance even though the drawers name
663
were forged.
2.
Admission of funds of drawer in drawees hands
In the second place, acceptance admits that the acceptor
had funds of the drawer in his hands, for the drawing of
the bill implies this, and acceptance in the usual course of
business only follows when it is the fact. Therefore, the
acceptor cannot deny that he was in funds when suit is
664
brought by a holder of the bill;
though as between
himself and the drawer it is only prima facie evidence that
the drawer had funds in his hands, and he may rebut this
presumption by showing that the acceptance was for the
drawers
accommodation,
or
otherwise
under
circumstances which place him under no obligation to pay
665
the bill to him.
(Ibid)
3.
Admission of drawers capacity to draw In the
third place, the acceptor admits the capacity of the drawer
666
to draw the bill, for otherwise, it would not be valid;
and
therefore he cannot set up a plea, that the drawer of a bill,
which he had accepted, was a body corporate having no
legal authority to draw the bill, or was a bankrupt, infant,
667
or fictitious person.
W hen the bill is drawn in the name
of a firm, acceptance admits that there is such a firm, and
if it be drawn by a person as executor, it admits his right
668
to sue in that character.
(Ibid)
4.
Admission of payees capacity to indorse In the
fourth place, the acceptor admits the capacity of the
payee to indorse the bill when it is drawn payable to the
payees order, for by the very act of acceptance he
669
agrees to pay to his order;
and, therefore, he cannot
show that at the time of acceptance the payee was an
663 Jenys v. Fawler, 2 Stra. 946; Hoffman & Co. v. Bank of Milwaukee, 12 Wall. 193; Goetz v. Bank, 119 U.S. 556
664 Raborg v. Peyton, 2 Wheat. 385; Hortsman v. Henshaw, 11 How. 177; Heurtematte v. Morris, 101 N.Y. 63
665 Daniel on Negotiable Instruments, 174-176; Park v. Nichols, 20 Ill. App. 143; Klopfer v. Levi, 33 Mo. App. 322
666 Story on Bills, 113; Byles on Bills [193], 325
667 Halifax v. Lyle, 3 Welsb., Hurl & Gord. (Exch.) 466; Braithwaite v. Gardiner, 8 Q.B. 473; Taylor v. Croker, 4 Esp.
187; Cowton v. Wickersham, 54 Pa. St. 302; Cooper v. Meyer, 10 B & C 468
668 Bass v. Clive, 4 Maule & S. 13; Aspinwall v. Wake, 10 Bing. 51 (portions omitted)
669 Daniel on Negotiable Instruments, 93, 242
364
infant, an insane person, a bankrupt, or a corporation
without legal existence.670

It is a general principle,
applicable to all negotiable securities, that a person shall
not dispute the power of another to indorse such
instrument, when he asserts by the instrument which he
671
issued to the world, that the other has such power.
Indeed, there could be no reason why the acceptor should
be interested to show that the payee was incompetent to
make the order; for he has been guaranteed in that
regard by the drawer, and may charge the amount in
account against him whether the payee were competent
or not. (Ibid, pages 175-176)
5.
Admission of agents handwriting and authority
In the fifth place, if the bill be drawn by one professing to
act as agent of the drawer, the acceptance admits his
672
handwriting and authority as agent to draw.
(Ibid)
Acceptance does not admit
1.
Signature of payee In the first place, it does not
admit the genuineness of the signature of the payee when
it purports to bear his indorsement, or that any other
indorser, for with their handwriting he is not presumed to
be familiar; and, therefore, if the signature of the payee or
other indorser be forged, the acceptor will not be bound to
pay the bill to anyone who is compelled to trace title
673
through such indorsements.
And if he has gone so far
as to pay the bill to any one holding it under such forged
indorsement, he may, as a general rule, recover back the
674
amount.
The rule would not apply, however, where the
drawer had issued the bill with the forged indorsement
upon it, for then the acceptor could charge the amount in
account against him, and as the forged indorsement
could in such case subject him to no loss, he would not
675
be entitled to recover back the amount.
The
acceptance does not admit the signature of the indorser,
even when the bill is payable to the drawers order, and
purports to be indorsed by him in the same handwriting as
670 Jones v. Darch, 4 Price, 300; Smith v. Marsack, 6 C.B. 486; Drayton v. Dale, 2 B & C 293; Daniel on Negotiable
Instruments, 93 et seq. (portions omitted)
671 Daniel on Negotiable Instruments, chap. 42, section 3
672 Robinson v. Yarrow, 7 Taunt 455; 1 Parsons on Notes and Bills, 322
673 Holt v. Ross, 54 N.Y. 474; Edwards on Bills, 432
674 Holt v. Ross, 54 N.Y. 474; Dick v. Leverich, 11 La. 573; Williams v. Drexel, 14 Md. 586
675 Hortsman v. Henshaw, 11 How. 177; Cogill v. American Exchange Bank, 1 N.Y. 113
365
the drawers.676
But if the drawer is a fictitious person,
and the bill is payable to the drawers order, the
acceptors undertaking is that he will pay to the signature
of the same person that signed for the drawer; and in
such case the holder may show, as against the acceptor,
that the signature of the fictitious drawer and of the first
677
indorser are in the same handwriting.
(Daniel, Elements
2.
No admission of agency to indorse In the
second place, acceptance does not admit agency to
indorse, which must be proved by the holder in order to
recover against the acceptor, even though the acceptor
acknowledges agency to draw the bill, and the
indorsement was upon it at the time of acceptance. (Ibid)
3.
No admission of genuineness of terms in body of
the bill In the third place, the acceptance does not
admit the genuineness of the terms contained in the body
of that bill at the time of the acceptance; and, therefore, if
at that time they had been altered so as to purport to bind
the drawer for a larger sum, or in a different manner than
that in the original bill, he will not be bound by his
acceptance to pay the amount, unless the drawer had by
his own carelessness afforded opportunity for the
alteration, and the acceptor could therefore charge him in
678
account with the whole amount.
But where the drawer
alters it himself, or acquiesces in an alteration, before
679
acceptance, it binds him, and therefore the acceptor.
(Ibid, page 178)
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
676 Robinson v. Yarrow, 7 Taunt 455; Williams v. Drexel, 14 Md. 566
677 Cooper v. Meyer, 10 B & C 468; Beeman v. Duck, 11 M & W 251
678 Young v. Grote, 4 Bing 253; Young v. Lehman, 63 Ala. 519; White Continental Nat. Bank, 64 N.Y. 320
679 Langton v. Lazarus, 5 M & W 628; Ward v. Allen, 2 Metc. (Mass.) 57
366
(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.
Notes:
To whom should the bill be presented for acceptance?
The drawing of a bill imports a contract on the part of the
drawer that the drawee is a person competent to accept and,
therefore, if the holder upon presentment of the bill ascertains that
the drawee is incapable of contracting. (Ibid, page 178-179)
It follows, therefore, as a general rule, that the bill should and
can be accepted only by the party on whom drawn or his
680
authorized agent, except in the cases of acceptance for honor;
and if a bill addresses to one be accepted by two persons, it has
been thought that the acceptance of the first will be vitiated by
681
having been altered in an essential part,
unless made with the
acceptors consent. But if any other person, after an acceptance,
subsequently accepts the bill for the purpose of guaranteeing its
credit, at the acceptors request, in the usual form of an
acceptance, then, if there is a sufficient consideration, he may be
bound thereby as a guarantor; but he is not liable as an
682
683
acceptor.
And the addition will not be a material alteration.
(Ibid)
How presentment for acceptance should be made
The holder of the bill should have it in his possession, make an
684
actual exhibit of it to the drawee, and request its acceptance.
680 Polhill v. Walter, 3 B & Ad 114; May v. Kelly, 27 Ala. 497; Keenan v. Nash, 8 Minn. 409
681 Thompson on Bills, 112, 212
682 Story on Bills, 254; Jackson v. Hudson, 2 Campb. 447
683 Smith v. Lockridge, 425
367
The term presentment imports not a mere notice of existence of
a draft which the party has in his possession, but the exhibiting of
it to the person on whom it is drawn, that he may see the same,
and examine his accounts or correspondence, and judge what he
shall do; whether he shall accept the draft or not.

685
(Daniel,
If the holder does not produce the bill, the drawee may require
him to do so, and decline accepting, save in the proper form by
writing his name on its face; and then unless the holder produces
it the drawer cannot be charged with the penalties of nonacceptance; but if the drawee makes no such requirement and
does what is equivalent to acceptance he cannot afterward refuse
686
to be held on the ground that he did not see the bill.
(Ibid)
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.
Notes:
Within what period of time presentment for acceptance must
be made
It seems to be the general commercial law of the civilized
world, that when a bill is payable at a day certain as, for
instance, on a day named, or a fixed day after date it need not
be presented until the day of payment, in order to charge the
687
drawer or an indorser.
The reason for this is that the drawer, by
fixing a date certain for payment, assumes the responsibility of
providing funds at that time, whatever may have been his previous
credit with the drawee. And as to the indorsee, by the very act of
indorsement, he draws a new bill on the same terms; and,
besides, he waives his right of immediate acceptance by not
enforcing it himself, but putting his bill into circulation without
688
acceptance.
If payable at sight, or at a certain time after sight,
or on demand, the only rule which can be laid down is that it must
689
be presented within a reasonable time,
unless there be some
well-established usage of trade which fixes a definite time for
685 Fall River Union Bank v. Willard, 5 Metc. (Mass.) 216; Edwards on Bills, 505
686 Fall River Union Bank v. Willard, 5 Metc. (Mass.)216
687 Townsley v. Sumrall, 2 Pet. 178; Bachellor v. Priest, 12 Pick. 399
688 Allen v. Suydam, 17 Wend. 368
689 Wallace v. Agry, 4 Mason, 336; Bridgeport Bank v. Dyer, 19 Conn. 136
368
such payment, in which case such usage would control.690

If the
bill be not presented within a reasonable time, the drawee is
discharged, although all the parties continue solvent, and there is
691
no damage caused by the delay.
(Daniel, Elements of the Law
of Negotiable Instruments, page 170 to 171)
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
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 cannot be made.
(c) Where, although presentment has been irregular,
acceptance has been refused on some other ground.
Sec. 149. When dishonored by non-acceptance. - 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
cannot 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
690 Mellish v. Rawdon, 9 Bing. 416
691 Carter v. Flower, 16 M & W 743; Thornburg v. Emmons, 23 W. Va. 333
369
within the prescribed time, the person presenting it must
treat the bill as dishonored by non-acceptance or he loses
the right of recourse against the drawer and indorsers.
Notes:
Liability of drawer before acceptance
The drawer of a bill undertakes that when it is presented to the
drawee he will accept it; any by acceptance is meant an
undertaking on the acceptors part to pay the bill according to its
692
tenor.
Until the bill has been accepted, the drawer is the
primary debtor, and his liability is contingent and conditioned upon
a strict compliance with the law as to presentment of the bill for
acceptance (if the bill be of such a character that it is necessary to
present it for acceptance), and due protest and notice of dishonor.
After acceptance, the drawer becomes secondarily liable, and his
693
position is that of the first indorser upon a promissory note.
172)
Relation of drawee to bill before acceptance
Until he has accepted the bill, so entirely is the drawee a
stranger to it, that he may himself discount it. And he may then
transfer it as the bona fide holder to another, who may sue and
694
charge the drawer.
(ibid, page 173)
Sec. 151. Rights of holder where bill not accepted. - When a
bill is dishonored by non-acceptance, an immediate right of
recourse against the drawer and indorsers accrues to the
holder and no presentment for payment is necessary.
XII. PROTEST
Meaning of term Protest
692 Story on Bills, 272; Cox v. National Bank, 100 U.S. 712
694 Desha v. Stewart, 6 Ala. 852; Swope v. Ross, 40 Pa. St. 186
370
The term includes, in a popular sense, all the steps taken to fix
the liability of a drawer or indorser, upon the dishonor of
commercial paper to which he is a party.

More accurately
speaking, it is the solemn declaration on the part of the holder
against any loss to be sustained by him by reason of the nonacceptance, or even nonpayment, as the case may be, of the bill
in question; and a calling of the notary to witness that due steps
have been taken to prevent it. The word protest signifies to
testify before; and the testimony before the notary that proper
steps were taken to fix the drawers liability is the substance, and
the certificate of the notary the formal evidence, to which the
695
terms protest is legally applicable.
(Daniel, Elements of the Law
of Negotiable Instruments, page 225)
What instruments must or may be protested
W hen a foreign bill of exchange is presented for acceptance or
payment, and acceptance or payment is refused, the holder must
take what is called a protest, in order to charge the drawer or any
indorser. According to the law of most foreign nations, a protest
696
is essential in the case of the dishonor of any bill.
So
indispensable is the protest of a foreign bill in case of its dishonor,
that no other evidence will supply the place of it, and no part of the
facts requisite to the protest can be proved by extraneous
testimony, and it has been said, that it is a part of the constitution
697
of a foreign bill.
(Ibid, page 226)
By whom the protest should be made and how authenticated
As to the person by whom the protest should be made, it is
necessary, as a general rule, that it should be made by a notary
public in person, and by the same notary who presented and
698
noted the bill.
The notary us a public officer, commissioned by
the State, and possessing an official seal, and full faith and credit
are given to his official acts, in foreign countries as well as his
699
own.
But when no notary can be conveniently found, the
protest may be made by any respectable private individual
700
residing in the place where the bill is dishonored.
If, however,
the protest is made by a notary, the official seal of the notary
696 Thompson on Bills (Wilsons ed.), 307
697 Union Bank v. Hyde, 6 Wheat. 572; Borough v. Perkins, 1 Salk. 121
698 Ocean Nat. Bank v. Williams, 102 Mass. 141; Sacriber v. Brown. 3 McLean, 481; Commercial Bank v. Varnum,
49 N.Y. 269; Commercial Bank v. Barksdale, 36 Mo. 563
699 Daniel on Negotiable Instruments, 579, 587
700 Burke v. McKay, 2 How. 66; Read v. Bank of Kentucky, 1 T.B. Mon. 91
371
attached to the certificate of protest is everywhere received as a
sufficient prima facie proof of its authenticity. The courts take
judicial notice of the seal, and it proves itself by its appearance
upon the certificate. But may be controverted as false, fictitious,
701
or improperly annexed.
But if the protest is made by a notary,
and the certificate is not authenticated by the notarys seal, or if it
is made by a private person, it does not prove itself, and there
must be extraneous evidence to show that it was duly made by
702
the person officiating.
Place of protest
703
It is usually made at the place where the dishonor occurs.
If
the protest be for non-acceptance, the place of protest should be
the place where the bill is presented for acceptance, and a like
704
rule obtains if the protest be for nonpayment;
but when the bill
is drawn upon the drawee in one place, and by its terms made
payable in another, there is eminent authority for the statement
that the protest for non-acceptance may be made at either
705
place.
(Supra, page 228)
The presentment and demand of payment; notary must have
personal knowledge of
The first step taken is the presentment of the instrument to the
drawee, or acceptor, or maker, by the notary, and a demand of
payment. By the law merchant, it is absolutely necessary that the
notary himself should make his formal presentment and demand.
And, although the holder may have already presented the bill and
demanded acceptance or payment, and been refused, it is still
necessary that the presentment and demand, which are to be
made the basis of the notarys certificate, should be made by him
in person. For otherwise his testimony contained in the protest
would be hearsay and secondary, and would lack the very
element of certainty which the protest is especially designed to
assure. Not even his clerk, nor, unless authorized by law, his
deputy, can perform these functions for the notary, as it is to his
official character that the law imputes the solemnity and sanction
706
which are accorded his certificate.
What certificate must contain
701 Pierce v. Indseth, 106 U.S. 549; Nichols v. Webb, 8 Wheat. 326; Bradley v. Northern Bank, 60 Ala. 258
702 Carter v. Burley, 9 N.H. 558; Chanoine v. Fowler, 3 Wend. 173
703 Benjamins Chalmers Digest, 175; Ames on Bills and Notes, 450; Edwards on Bills, 580
704 Story on Bills, 282
705 Chitty on Bills, [334], 374
706 Daniel on Negotiable Instruments, 579, 587, 938
372
The protest, or, more strictly speaking, the notarial certificate
thereof, should set forth: (1) The time of presentment; (2) The
place of presentment; (3) The fact and manner of presentment;
(4) The demand of payment; (5) The fact of dishonor; (6) The
name of the party by whom presentment was made; and (7) The
707
name of the person to whom presentment was made.
(Supra,
page 229)
Protest; evidence only of facts that are and should be stated
The admission of the certificate of protest as evidence only
makes it evidence of such facts as it should and does distinctly
708
state.
The purpose of the certificate, as it has been seen, is to
enable the plaintiff, by this species of documentary evidence, to
prove all of the essential requirements of a formal and legal
presentment of the instrument for acceptance or payment, and
that due demand was made and that the bill or note was in fact
dishonored. It follows, therefore, that the certificate of protest can
be taken as evidence only as to the essentials stated, and hence
the certificate is not evidence of any collateral facts which may be
stated in it. (Supra, page 233)
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 non-acceptance, by
non-acceptance 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.
Notes:
Contract of an indorser and Contract of a guarantor/surety
distinguished.
The distinction was laid down in the case of Allied Banking
709
Corporation vs. Court of Appeals, et al
, to wit:
707 Daniel on Negotiable Instrument, 950
708 Duchess County Bank v. Ibbottaon, 5 Den. 110
709 G.R. No. 125851, July 11, 2006, [Quisubing, J.]
373
1.
The contract of indorsement is primarily that of transfer,
710
while the contract of guaranty is that of personal security.
2.
The liability of a guarantor/surety is broader than that of an
indorser.
3.
Unless the bill is promptly presented for payment at
maturity and due notice of dishonor given to the indorser within
a reasonable time, he will be discharged from liability
711
thereon.
On the other hand, except where required by the
provisions of the contract of suretyship, a demand or notice of
712
default is not required to fix the suretys liability
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.
Illustrative Case:
710 Acme Shoe, Rubber & Plastic Corp. v. Curt of Appeals, G.R. No. 103576, August 22, 1996, 260 SCRA 714, 719
711 Supra note 5 (Sec. 152. NIL)
712 Umali v. Court of Appeals, G.R. No. 126490, March 31, 1998, 288 SCRA 422, 439
374
th
A bill was protested on the 25
September, but nothing on the
th
th
bill was 24
September.
The extended protest dated 25
th
September contained 25
September was date of noting. The
protest was held invalid. (MPherson v. Wright, 12 Secs, Cas.
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
375
There is a peculiar kind of acceptance called acceptance for
honor, or supra protest. This most frequently happens when the
original drawee (and the drawee au besoin, if any) refuses to
accept the bill, in which case a stranger may accept the bill for the
honor of some one of the parties thereto, which acceptance will
inure to the benefit of all the parties subsequent to him for whose
713
honor it was accepted.
Negotiable Instruments, page 183-184)
An acceptance for honor is only allowable when acceptance by
the drawee has been refused, and then the bill has been
714
protested, and hence it is called acceptance supra protest.
The reason assigned for this is that the drawers and indorsers
have a right to say that the bill was not primarily drawn on the
acceptor for honor; and the only proof of the refusal of the original
drawee is by protest, that being the known instrument, by the
715
customs of merchants, to establish the facts.
The usual form
used in such acceptance is, Accepted supra protest, for the
honor of A.B.
Another approved form is, Accepted under
protest, for the honor of A.B., and will be paid for his account, if
regularly protested and refused when due. It is essential that the
acceptor for honor appear before a notary public and declare that
he accepts the protested bill in honor of the drawer or indorser, as
716
the case may be, and that he will pay it at the appointed time.
(Ibid)
It is the duty of the acceptor supra protest, as soon as he has
made the acceptance, to notify the fact to the party for whose
717
honor it is done;
and the party paying a bill under protest for
honor must give reasonable notice to the person for whose honor
718
he pays, otherwise he will not be bound to refund.
(Ibid)
Who may be an acceptor for honor?
A stranger may undoubtedly accept for honor; and by the word
stranger in this connection is meant any third person not a party to
the bill. It seems that acceptance for honor may also be made by
the drawee, who, if he does not choose to accept the bill drawn
generally on account of the person in whose favor, or on whose
account, he is advised it is drawn, he may accept it for honor of
713 Konig v. Bayard, 1 Pet 250; Hoare v. Cazenove, 16 East, 391; Story on Bills, 255, 256
714 Bayley on Bills, 177; Story on Bills, 255, 256
715 Story on Bill, 256
716 Gazzam v. Armstrong, 3 Dana, 554
717 Story on Bills, 259; Edwards on Bills, 441
718 Wood v. Pugh, 7 Ohio, Pt. II, 156
376
719
the drawer, or of the indorsers, or of all or any of them.
(Ibid,
page 185)
But if the drawee were bound in good faith to accept the bill, he
cannot change his relations to the parties, and accept it supra
protest for the honor of an indorser; he must either accept or
720
refuse.
(Ibid)
An acceptor supra protest for the honor of an indorser may,
however, recover against such indorser, though he accepted at
the instance of the drawee, and as his agent, provided the
indorser were not thereby damnified. The indorser might avail
himself of any defense which he could have made, and the
drawee accepted for his honor, and then sued upon the
721
acceptance.
It is immaterial, indeed, as to the defenses which
a drawer or indorser may make against an acceptor for honor,
whether such acceptor acted at the instance of the drawer, or as
722
the agent of the drawee.
(Ibid)
Several acceptors for honor of different parties
W hile there cannot be successive acceptors of a bill, generally
speaking, there may be several acceptors supra protest for the
honor of different parties that is, one may accept for the honor of
the drawer, another for the honor of the first indorser, and another
723
for the honor of the second indorser, and so on.
(Ibid,
page
185)
And the acceptor supra protest may accept for the honor of
any one, or all, of the parties to the bill; and his acceptance should
designate for whose honor it was made, in which case it could be
724
at once perceived for who benefit it inured.
If the acceptance
do not specify for whose honor it was made, it will be construed to
725
be for the honor of the drawer;
and if for the honor of the bill, or
726
of all the parties, it should be so expressed.
(Ibid, pages 185186)
720 Schimmelpennich v. Bayard, 1 Pet. 264
721 Konig v. Bayard, 1 Pet, 250
722 Gazzam v. Armstrong, 3 Dana, 554; Wood v. Pugh, 7 Ohio, 156
723 Story on Bills, 260; Byles on Bills [255], 403; 1 Parsons on Notes and Bills, 315
724 Hussey v. Jacob, 1 Ld. Raym. 88; 1 Parsons on Notes and Bills, 313
725 Gazzam v. Armstrong, 3 Dana, 552
726 Goodall v. Polhill, 1 C.B. 233; Byles on Bills [259], 406
377
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.
Notes:
Liability of the acceptor for honor
The acceptance for honor or supra protest is not an absolute
engagement like an ordinary acceptance for value.

It is a
conditional engagement, and to render it absolute, the
performance of several acts as conditions precedent are
essential. Such an acceptance, says Lord Tenterden, C.J., is to
be considered not as absolutely such, but in the nature of a
conditional acceptance. It is equivalent to saying to the holder of
the bill, keep this bill, dont return it, and when the time arrives at
which it ought to be paid, if it be not paid by the party to whom it
was originally drawn, come to me and you shall have your
money.
727
The nature of such an acceptors undertaking is more
728
analogous to that of an indorser
than that of an ordinary
acceptor, and to render him absolutely liable it is necessary:
727 Williams v. Germaine, 7 B & C 457
378
First.
To present the bill at maturity to the original drawee,
notwithstanding his prior refusal, because between the time of
such refusal and the time of maturity, effects may have reached
the drawee, out of which he might, if the bill were again presented,
pay it; and the drawer and other parties are entitled to the chance
of any benefit which might arise from such second demand. And
if it were not made (except in the case of a bill made payable at a
place not being the residence of the drawee), the drawer and
indorsers would be discharged; and as the acceptor supra protest
729
would thereby lose recourse against him, he is also discharged.
Second.
Upon refusal by the original drawee to pay the bill
when it is presented at maturity, it must be again protested for
nonpayment, and such protest and presentment must be alleged
in the declaration against the acceptor supra protest. And third, it
is then necessary to present the bill in due time to the acceptor
730
supra protest.
If on such presentment the acceptor supra protest refuses to
pay, there must be another formal protest, stating

presentment for payment to the drawee, the protest for
nonpayment, the presentment of the bill and acceptance to
acceptor supra protest, and demand of payment of him, and
the
his
the
the
protest for his nonpayment; and notice thereof must be forthwith
731
forwarded to the drawer and indorsers.
Admissions of acceptor for honor
The rule has been broadly stated to be that he does not admit
the genuineness of the signature of any party for whose honor the
acceptance is given, not even the drawers and therefore he could
recover money paid to the holder if the bill should prove to be a
732
forgery;
but the rule stated is certainly subject to the
modification that one who accepts for the honor of the drawer is
stopped from denying that the bill is a valid bill; and, consequently,
it would not be competent for him to set up a defense to an action
by an indorsee that the payee is a fictitious person, and that he
733
was ignorant of the fact at the time he accepted the bill.
(Supra,
page 188)
729 Barry v. Clark, 19 Pick. 220; Story on Bills, 261
730 Chitty on Bills [350, 351], 392; Story on Bills, 261
731 Chitty on Bills [352], 393; 1 Parsons on Notes and Bills, 320
733 Phillips v. Thurn, 18 C.B. (N.S.) 694
379
Holder not bound to take acceptance for honor
The holder is in no case bound to take an acceptance for
734
honor;
but if he receives it, and it is for the honor of a particular
party, he cannot sue such party until the maturity of the bill, and its
735
dishonor by the acceptor supra protest.
And if the acceptance
is for the honor of all the parties to the bill, he cannot sue any of
736
them until it has matured and been dishonored.
(Supra, page
188)
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.
Notes:
Professor Ames explains that: [s]ection 166 enacts that the
maturity of an acceptance for honor of a bill payable after sight
shall be calculated from the date of the noting for nonacceptance, and not, as was erroneously decided in Williams v.
737
Germaine
, from the
(Brannan, page 146)
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:
734 Mitford v. Walcott, 12 Mod. 410; Chitty on Bills [345], 387
735 Williams v. Germaine, 7 B & C, 468
737 7 B & C, 408
380
(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.
381
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
Notes:
In order to avoid delay and inconvenience which may result
from the loss or miscarriage of a foreign bill, and to facilitate and
expedite its transmission for acceptance or payment, the custom
has prevailed from an early period for the drawer to draw and
deliver to the payee several parts of the same bill of exchange,
which may be forwarded by different conveyances, and any one of
them being paid, the others are to be void. These several parts
738
are called a set, and constitute in law one and the same bill.
739
Sometimes there are four, but usually three parts.

And if any
person undertakes to draw or deliver a foreign bill to another
person, it seems that he is bound to deliver the usual number of
740
parts,
and it has been thought that the promise may, in such a
741
case, demand as many parts as he pleases.
(Daniel, Elements
It is usual for the drawer, and to his protection it is essential, to
incorporate in each part of the set a condition that it shall only be
payable provided the other remains unpaid. This operates as
notice to the world that l the parts constitute one bill, and if drawee
738 Daniel on Negotiable Instruments, 113; Story on Bills, 66
739 Daniel on Negotiable Instruments, 113; Story on Bills, 66
740 Kearney v. West Granada Mining Co., 1 H & N, 412
741 Chitty on Bills [154], 178; Byles on Bills [376], 556
382
pay any part, the whole is extinguished.742
The drawee should accept but one part of the set. And having
accepted one part, he should not pay another part, for he would
743
still be liable on the accepted part.
W hen, however, he pays
744
the part he accepts, the whole bill is extinguished.
For it is the
duty of the person taking one part to inquire after the others; and
he is advertised by their absence they, or one of them, may be
745
outstanding in the hands of a prior bona fide holder.
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.
742 Daniel on Negotiable Instruments, 114; Ingraham v. Gibbs, 2 Dall 134
743 Holdsworth v. Hunter, 10 B & C, 449; Chitty on Bills [155], 178
744 Ibid
745 Lang v. Smyth, 7 Bing, 284, 294; 5 M & P, 7
383
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.
Notes:
A complaint on a note payable to the makers order which fails
to allege indorsement by the maker is defective. (Simon v. Mintz,
51 Misc. Rep. 670, 101 N.Y. Supp. 86; Edelman v. Rams, 58
Misc. Rep. 561, 109 N.Y. Supp. 816, cited in Brannan, page 150)
Illustrative Cases:
An instrument reading Having been cause of a money loss to
my friend X, I have given her three hundred dollars. I hold this
amount in trust for her and one year after date or thereafter, on
demand, I promise to pay to the order of X, her heirs or assigns,
three hundred dollars with interest is a valid promissory note. As
it does not appear upon the fact that there was no consideration
or an invalid consideration, it will be presumed that there was a
valid consideration. In the absence of evidence to the contrary
the court must assume that the money loss referred to was legally
chargeable to the maker. (Hickok v. Bunting, 92 App. Div. 167,
86 N.Y. Supp. 1059, cited in Brannan, page 151)
A stipulation in a promissory note that no extension of time of
payment, with or without our knowledge, by the recipient of
interest or otherwise, shall release us or either of us from the
obligation of payment is an express contract that the time of
payment may be extended to any one or all of the sureties,
guarantors, indorsers, or makers of the note without notice to all
or any one of them and renders the note non-negotiable. (Union
Stockyards Nat. Bank v. Bolan, 14 Idaho 87, 93 Pac. 508, 125
Am. St. Rep. 146, ibid)
384
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.
Notes:
The provision that a check is a bill of exchange is declaratory.
(MLean v. Clydesdale Banking Co., 9 App. Cas. 95, cited in
Brannan, page 152)
An order on a bank to pay provided the receipt form at the
foot hereof is duly signed, stamped, and dated, is not an
unconditional order to pay and is therefore not a check. (Bavins
v. London & S.w. Bank, [1900] 1 Q.B. 270, ibid)
But a check which bore at the foot the words The receipt at
the back hereof must be signed, which signature will be taken as
an indorsement of the check, and on the check of which was a
receipt form, is negotiable, since the order to pay is unconditional,
the words at the foot not being addressed to the bankers and not
affecting the order to them. (Nathan v. Ogdens, 21 T.L.R., 775
(semble), ibid)
Illustrative Case:
A deposit in the A bank by the drawer of a certified check of
the B bank is not the same as a deposit of cash, although the
amount is credited to the depositor, and if the B bank fails the
depositor cannot hold the A bank, no negligence in failing to
present the check for payment being shown.

(Gaden v.
Newfoundland Savings Bank [1899] A.C. 281, Privy Council, ibid)
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.
Notes:
This refers only to delay in the presentment of checks but is
silent on delay in giving notice of dishonor. (Great Asian Sales
Center Corporation vs. Court of Appeals, G.R. No. 105774, April
25, 2002, [Carpio, J.])
385
W here the payee of a check indorsed and deposited it in his
own bank, which credited him with the amount as cash to be
drawn against, the bank became prima facie the owner of the
check and not a mere agent to collect, and in order to charge the
payee as indorser the bank must present the check to the drawee
bank within a reasonable time. (Aebi v. Bank of Evansville, 124
Wis. 73, 102 N.W. 329, 68 L.R.A. 964, 109 Am. St. Rep. 925,
The indorser of a check does not waive delay in presentment
and renew his obligation by procuring and indorsing a duplicate of
a lost check from liability upon which he has been discharged by
such delay. (ibid)
Although under sec. 185 a check is a bill of exchange payable
on demand, it is intended for immediate use and not to circulate
as a promissory note.
Therefore the transfer of a check to
successive holders, where it is drawn and delivered in the place
where the drawee bank is located, does not extend the time for
presentment. If the check is delivered on one day and is not
presented before the close of banking hours the next business
day, the drawer is discharged to the extent of the loss suffered
from the failure to present. (Gordon v. Levine, 194 Mass. 418, 80
N.E. 505, 120 Am. St. Rep. 565; Matlcok v. Scheuerman, 51
Oregon 49, 93 Pac. 823, 17 L.R.A. (N.S.) 747, S.C. secs. 25, 53,
56; Dehoust v. Lewis, 128 App. Div. 131, 112 N.Y. Supp. 559,
ibid)
In an action on a check unpaid because of the payees failure
to present within a reasonable time and until after the closing of
the drawee bank, the burden is on the plaintiff to show that the
drawer has suffered no loss by said delay. (Dehouset v. Lewis,
supra)
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.
Notes:
The holder has no right to demand from the bank anything but
payment of the check. And the bank has no right, as against the
drawer, to do anything else but pay it. Consequently, there is no
such thing as acceptance of checks in the ordinary sense of the
term. For acceptance ordinarily implies that the drawer requests
the drawee to pay the amount at a future day, and the drawee
accepts to do so, thereby becoming the principal debtor, and the
386
drawer being his surety.
But still, by consent of the holder, the
bank may enter into an engagement quite similar to that of
acceptance, by certifying the check to be good instead of paying
746
it.
W here the drawer of a check before delivery to the payee
procuress its certification and the bank fails before presentation
for payment, the bank is not liable on the check of the drawer, but
only to the holder, and therefore the drawer on receiving the
check from the payee cannot set it off against a debt to the bank.
(Schlesinger v. Kurzok, 47 Misc. R. 634, 94 N.Y. Supp. 442, cited
in Brannan, page 154)
Notice to a bank by a depositor that his certified check,
indorsed in blank, had been lost and to stop payment would not
justify the bank in refusing payment to a holder in due course.
(Poess v. Twelfth Ward Bank, 43 Misc. R. 45, 86 N.Y. Supp. 857,
semble, S.C. secs. 16, 51., ibid)
Illustrative Case:
The payee of a check given to him for value transferred it, also
for value, to plaintiff, but without indorsing it. The payee died the
next day, and the drawer, although having no equities against the
check, stopped payment. Plaintiff subsequently sent the check to
the drawee bank, and the teller certified it without asking any
questions. Held, that under sec. 49 N.I.L. the title of the payee
vested in the plaintiff, and that the bank was liable to him upon its
certification. (Meuer v. Phoenix Nat. Bank, 94 App. Div. 331, 88
N.Y. Supp. 83, S.C. sec. 49, ibid)
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.
Notes:
By certifying a check (1) the bank becomes the principal and
only debtor; (2) the holder by taking a certificate of the check from
747
the bank, instead of requiring payment, discharges the drawer;
(3) and the check then circulates as the representative of so much
747 Boyd v. Nasmith, 17 Ont. 42, citing Daniel on Negotiable Instruments, 1601a
387
cash in bank, payable on demand to the holder. Such in brief is
the effect of the certification of a check. It has been said to be,
and obviously is, equivalent to acceptance

748
in respect to the
obligation it creates upon a bank; but it would be confounding
terms to regard it as altogether the same thing in its effect upon
the relations of parties. (Daniel, page 22)
The certification by a bank of an acceptance made payable at
its counter by one of its customers, has the same effect and
imports the same obligation on the part of the bank as the like
749
certification of a check drawn upon it.
It is a short-hand
750
certificate of deposit.
(ibid)
No particular words are essential to a legal certification of a
check it is usual to use the word good

751
it is sufficient if the
name or initials of the proper officer is written on, or across, the
752
fact of the check.
The mere acceptance by the payee of a check certified by the
procurement of the drawer is not a discharge of the drawer, even
though the bank at the time the check was certified transferred
the amount to the credit of the payee, such transfer being without
the knowledge or acquiescence of the payee. (Cullinan v. Union
Surety & Guaranty Co., 79 App. Div. 409, 80 N.Y. Supp. 58, cited
in Brannan, page 105)
But where the holder procures certification of a check, this is
payment to the amount of the check, and where the check
contained a statement on the back that it was to be in full
payment, such procuring of certification is an acceptance of the
check in full payment. (St. Regis Paper Co. v. Tonawanda Co.,
107 App. Div. 90, 94, N.Y. Supp. 946, ibid)
W hen the holder procures certification of a check, the drawer
is discharged and the bank becomes a debtor to the holder and
cannot avoid payment by showing that the holder obtained the
check from the drawer by false pretenses. The certification has
the same effect as if the holder had drawn the money, redeposited it and taken a certificate of deposit of it. (Brannan,
page 155)
Sec. 189. When check operates as an assignment. - A check
of itself does not operate as an assignment of any part of the
748 Merchants Bank v. State Bank 10 Wall. 647
749 Flour City Nat. Bank v. Traders Nat. Bank, 42 Hun, 244
750 Thomas v. Bank of British North America, 82 N.Y. 1; Farmers Bank v. Bank of Allen County (Tenn.), 12 S.W.
545
751 Barnet v. Smith, 10 Fost. 256
752 Morse on Banking, 284
388
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.
Notes:
Before its payment or certification by the bank the drawer of a
check may countermand the order, and payment thereafter to the
payee by the bank is wrongful. (Pease & Dwyer v. State Nat.
Bank, 114 Tenn. 693, 88 S.W. 172, cf. Unaka Bank v. Butler,
supra, sec. 56; Poess v. Twelfth Ward Bank, supra, sec. 187) A
bank is under no legal obligation to the holder of an unaccepted
and uncertified check. Payment is therefore voluntary and cannot
be recovered back from a bona fide holder on the ground that the
drawer had previously countermanded payment of the check.
(National Bank v. Berrall, 70 N.J.L. 757, 58 Atl. 189, 103 Am. St.
Rep. 821, cited in Brannan, page 156)
A drawee bank paid and charged to the account of the drawer
checks indorsed by an agent of the payee who had no authority to
indorse or collect the checks, and who appropriated the money.
Held, that the bank was not liable to the payee in assumptsit for
money had and received. (B & O. Ry. Co. v. Fisr Nat. Bank, 102
Va. 753, 47 S.E. 837, ibid)
A bank being asked to cash a check on another bank,
telephones to the drawee bank and was informed that the check
was good or all right, and thereupon cashed the check, but
before presentment for payment the drawer notified the drawee
bank not to pay the check. Held, the drawee bank was not liable
on the check, because it was not acceptor or certified in writing.
(Van Buskirk v. State Ban, 35 Colo. 142, 83 Pac. 778, 117 Am. St.
Rep. 182, ibid)
Notwithstanding section 189, an action in equity will lie by the
payee of a check to whom an assignment of the fund was also
given, and such assignment will be upheld against subsequent
claimants. (Hope v. Stanhope State Bank, 138 Iowa, 39, 115 N.E.
XVII. GENERAL PROVISIONS
Sec. 190. Short title. - This Act shall be known as the
Negotiable Instruments Law.
389
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"
persons
includes
carrying
any
on
person
the
or
association
business
of
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
body
of
persons,
whether
incorporated or not;
"Value" means valuable consideration;
"Written" includes printed, and "writing" includes
print.
Notes:
BEARER
390
The maker of a note who has obtained possession of it by theft
after it has been indorsed in blank by the payee is the bearer
within the meaning indorsed in bank by the aye is the bearer
within the meaning of the statute. (Mass Nat. Bank. v. Snow, 187
Mass. 159 , 72 N.E, 959, S.C., secs. 9-5, 16, 56, 124, cited in
Brannan, page 158)
INDORSEMENT
The possessor of an undisclosed bill payable to order, who is
not the payee is neither a holder not a bearer.

(Day v.
Longhurst, W.N. (1893), cited in Brannan, page 158)
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.
Note:
An accommodation maker is a person primarily liable even
though he add the word surety to his signature or the fact that he
signed for accommodation is otherwise known to the holder.
(Cited in Brannan, page 159)
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.
391
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.
Enacted: February 3, 1911
CHECKS
Check defined.
A check is a bill of exchange drawn on a bank payable on
demand. (Sec. 185, Negotiable Instruments Law )
A check is (1) a draft or order (2) upon a bank or banking
house, (3) purporting to be drawn upon a deposit of funds (4) for
the payment at all events of a certain sum of money, (5) to a
certain person therein named, or to him or his order, or to bearer,
753
and (6) payable instantly 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.
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.
(Equitable PCI Bank vs. Ong, 502 SCRA 119)
2012 Bar Question:
A check is
A.
A bill of exchange;
B.
The same as a promissory note;
C.
Is drawn by a maker;
D.
A non-negotiable instrument.
Check and Inland Bills of Exchange, distinguished
753 Blair & Hoge v. Wilson, 28 Gratt. 170; Ridgely Bank v. Patton, 109 Ill, 484, cited in Daniel, page 17
392
of
The Supreme Court of the United States, in the leading case
Merchants Bank v. State Bank , says of checks when
contrasted with bills of exchange: Bank checks are not inland
bills of exchange, but have many of the properties of such
commercial paper, and many of the rules of the law merchants
are alike applicable to both. Each is for a specified sum, payable
in money in both cases, there is a drawer, a drawee, and payee.
W ithout acceptance, no action can be maintained by the holder,
upon either, against drawee. The chief points of difference are
that (1) a check is always drawn on a bank or banker; (2) the
drawer
is
not
discharged
by
the
laches
of
the
holder
in
presentment, unless he can show that he has sustained some
injury by the default; (3) it is not due until payment is demanded,
and the statute of limitations runs only from that time; (4) it is, by
its fact, the appropriation of so much money of the drawer, in the
hands of the drawee, to the payment of an admitted liability of the
drawer; (5) it is not necessary that the drawer of a bill should have
funds in the hands of the drawee a check in such case would be
a fraud.
754
A check is a draft or order
A bill is also a draft or order; and it is often said that a check is,
in legal effect, a bill of exchange drawn on a bank or banking
755
house, with some peculiarities.
In some cases it is called a bill
756
payable on demand,
and in others an inland bill, or in the nature
757
of an inland bill, payable on demand;
and the expression that a
check is like a bill has been criticized on the ground that nihil
simile est idem, whereas checks are bills, or rather bill is the
genus, and check is a species,

758
In form a check is a bill on a
banking house, and it is perfectly correct to say that it is a bill with
some peculiarities, or in other words, a species of bill of
exchange. (Daniel, page 18)
Characteristics of a check
A check has the character of negotiability and at the same
time it constitutes an evidence of indebtedness.

By mutual
agreement of the parties, the negotiable character of a check may
be waived and the instrument may be treated simply as proof of
754 Merchants Bank v. State Bank, 10 Wall. 647, cited in Daniel, page 18 (italics supplied)
755 Billgerry v. Branch, 19 Gratt. 418; Cruger v. Armstrong, 3 Johns. Cas. 5; State v. Crawford, 13 La. Ann. 301, ibid
756 Harker v. Anderson, 21 Wend. 372; Edwards on Bills, 396, ibid
757 Merchants Bank v. Spicer, 6 Wend. 445; Purell v. Allemong, 22 Gratt. 742, ibid
758 Matter of Brown, 2 Story, 502, ibid
393
A check is a negotiable instrument that serves as a substitute
for money and as a convenient form of payment in financial
transactions and negotiations. The use of checks as payment
allows commercial and banking transactions to proceed without
the actual handling of money, thus, doing away with the need to
physically count bills and coins whenever payment is made. It
permits commercial and banking transactions to be carried out
quickly and efficiently. But the convenience afforded by checks is
damaged by unfunded checks that adversely affect confidence in
our commercial and banking activities, and ultimately injure public
interest. (Mitra vs. People of the Philippines, G.R. No. 191404,
July 5, 2010)
As a general rule, checks and other papers deposited in a
bank for collection remain the property of the depositor, and the
bank performs the service of collection as his agent, even though
it is authorized to apply the proceeds on a debt of the owner." (7
C. J., sec. 245, pp. 597, 598; Richardson vs. New Orleans Coffee
Co., 102 Fed., 785; Philadelphia vs. Eckles, 98 Fed., 485;
Commercial Nat. Bank vs. Armstrong, 148 U. S., 50; St. Louis,
etc. R. Co. vs. Johnston, 133 U. S., 566; Ward vs. Smith, 19 Law
759
ed., 207; Carpenter vs. National Shawmut Bank, 187 Fed., 1.)
Check as evidence of indebtedness
760
In Pacheco v. Court of Appeals
, this Court has expressly
recognized
that
a
Check
constitutes
an
indebtedness
761
and is a veritable proof of an
Hence, it can be used in lieu of and for the same
promissory note.
763
In fact, in the seminal case
evidence
of
obligation.
762
purpose as a
of Lozano v.
764
Martinez,
W e pointed out that a check functions more than a
promissory note since it not only contains an undertaking to pay
an amount of money but is an order addressed to a bank and
partakes of a representation that the drawer has funds on deposit
agaisnt which the check is drawn, sufficient to ensure payment
upon its presentation to the bank.

765
This Court reiterated this
rule in the relatively recent Lim v. Mindanao Wines and Liquor
Galleria stating that a check, the entries of which are in writing,
could prove a loan transaction.

766
(Pua vs. Spouses Tiong, G.R.
No. 198660, October 23, 2013, [Velasco, J:])
759 Chinese Grocers Association vs. American Apothecaries Co., G.R. No. L-43667, March 31, 1938, [Villa-Real,
J.:]
71 377 Phil. 627 (1999)
72 Id. At 637
73 Id.
74 Id.
75 No. L-63419, December 18, 1986, 146 SCRA 323.
76Id., emphasis supplied
77G.R. No. 175851, July 4, 2012, 675 SCRA 628, citing Gaw v. Chua, 574 Phil. 640, 654 (2008).
394
Is Check considered a legal tender?
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. (Tibajia vs. CA, G.R. No. 100290, June 4, 1993,
[Padilla, J.]) However, in the case of Fortunado vs. Court of
767
Appeals
the Supreme Court stressed that, W e are not, by this
decision, sanctioning the use of a check for the payment of
obligations over the objections of the creditor.
In Cebu International Finance Corporation vs. Courts of
768
Appeals, Vicente Alegre
, the High Court ruled that: [i]n a loan
transaction, the obligation to pay a sum certain in money may be
paid in money, which is the legal tender or, by the use of a check.
A check is not a legal tender, and therefore cannot constitute valid
tender of payment.
In Philippine Airlines, Inc. vs. Court of
769
Appeals
, this Court held that: [s]ince 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 (citation
omitted).
Moreover, the following provisions support the ruling of the
Tibajia case, to wit:
a.
Article 1249 (NCC) The payment of debts in money shall
be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal
tender in the Philippines.
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 may have been impaired.
In the meantime, the action derived from the original obligation
shall be held in abeyance.
b.
Section 1 (R.A. 529) Every provision contained in, or made
with respect to, any obligation which purports to give the
767 G.R. No. 78556, 25 Paril 1991, 196 SCRA 269.
768 G.R. No. 123031, October 12, 1999
769 18 SCRA 557 (1990)
395
obligee the right to require payment in gold or in any particular
kind of coin or currency other than Philippine currency or in an
amount of money of the Philippines measured thereby, shall
be as it is hereby declared against public policy null and void,
and of no effect, and no such provision shall be contained in,
or made with respect to, any obligation thereafter incurred.
Every obligation heretofore and hereafter incurred, whether or
not any such provision as to payment contained therein or
made with respect thereto, shall be discharged upon payment
in any coin or currency which at the time of payment is legal
tender for public and private debts.
c.
Section 63 (R.A. 265, Central Bank Act) Legal Character
Checks representing deposit money 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.
However, noteworthy is the fact that the prohibition in Section
1 of R.A. 529 does not apply when:
a.
Transactions were the funds involved are the proceeds of
loans or investments made directly or indirectly, through bona
fide intermediaries or agents, by foreign governments, their
agencies and instrumentalities, and international financial and
banking institutions so long as the funds are Identifiable, as
having emanated from the sources enumerated above;
b.
Transactions affecting high priority economic projects for
agricultural industrial and power development as may be
determined by the National Economic Council which are
financed by or through foreign funds;
c.
Forward exchange transactions entered into between
banks or between banks and individuals or juridical persons;
d.
Import-export and other international
investment and industrial transactions.
banking
financial
W ith the exception of the cases enumerated in items (a), (b),
(c) and (d) in the foregoing provision, in, which cases the terms of
the parties agreement shall apply, every other domestic obligation
heretofore or hereinafter incurred whether or not any such
provision as to payment is contained therein or made with respect
thereto, shall be discharged upon payment in any coin or currency
396
which at the time of payment is legal tender for public and private
debts: Provided, that if the obligation was incurred prior to the
enactment of this Act and required payment in a particular kind of
coin or currency other than Philippine currency, it shall be
discharged in Philippine currency measured at the prevailing rates
of exchange at the time the obligation was incurred, except in
case of a loan made in foreign currency stipulated to be payable
in the currency in which case the rate of exchange prevailing at
the time of the stipulated date of payment shall prevail. All coins
and currency, including Central Bank notes, heretofore and
hereinafter issued and drawn by the Government of the
Philippines shall be legal tender for all debts, public and private.
(As amended by RA 4100, Section 1, approved June 19, 1964 )
Under the above-quoted provision of Republic Act 529, if the
obligation was incurred prior to the enactment of the Act and
require payment in a particular kind of coin or currency other than
the Philippine currency the same shall be discharged in Philippine
currency measured at the prevailing rate of exchange at the time
the obligation was incurred. As we have adverted to, Republic Act
529 was enacted on June 16, 1950. In the case now before us
the obligation of the appellant to pay the appellee the 20% of $
140,000.00, or the sum of $ 28,000.00, accrued on August 25,
1961, or after the enactment of Republic Act 529. It follows that
the provision of Republic Act 529 which requires payment at the
prevailing rate of exchange when the obligation was incurred
cannot be applied. Republic Act 529 does not provide for the rate
of exchange for the payment of the obligation incurred after the
enactment of said Act. The logical conclusion, therefore, is that
the rate of exchange should be that prevailing at the time of
payment. This view finds support in the ruling of this Court in the
770
case of Engel vs. Velasco & Co.
where this Court held that
even if the obligation assumed by the defendant was to pay the
plaintiff a sum of money expressed in American currency, the
indemnity to be followed should be expressed in Philippine
currency at the rate of exchange at the time of judgment rather
than at the rate of exchange prevailing on the date of defendants
breach. This is also the ruling of American court as follows:
The value of domestic money of a payment made in foreign
money is fixed with respect to the rate of exchange at the time of
payment. (70 CJS p. 228)
770 47 Phil 115, 142.
397
According to the weight of authority the amount of recovery
depends upon the current rate of exchange, and not the par value
of the particular money involved. (48 C.J. 605-606)
The value in domestic money of a payment made in foreign
money is fixed in reference to the rate of exchange at the time of
771
such payment. (48 C.J. 605)
It is to be noted that while an agreement to pay in dollars is
declared as null and void and of no effect, what the law
specifically prohibits is payment in currency other than legal
tender. It does not defeat a creditors claim for payment, as it
specifically
provides
that
every
other
domestic
obligation whether or not any such provision as to payment is
contained therein or made with respect thereto, shall be
discharged upon payment in any coin or currency which at the
time of payment is legal tender for public and private debts. A
contrary rule would allow a person to profit or enrich himself
inequitable at anothers expense. (Ponce vs. Court of Appeals,
G.R. No. L-49494, May 31, 1979, [Melencio-Herrera, J.])
As held in Eastbound Navigation, Ltd. vs. Juan Ysmael & Co.,
Inc., 102 Phil 1 (1957), and Arrieta vs. National Rice & Corn
772
Corp.
, if there is any agreement to pay an obligation in a
currency other than Philippine legal tender, the same is null and
void as contrary to public policy, pursuant to Republic Act No 529,
and the most that could be demanded is to pay said obligation in
Philippine currency. In other words, what is prohibited by RA No.
529 is the payment of an obligation in dollars, meaning that a
creditor cannot oblige the debtor to pay him in dollars, even if the
loan were given in said currency. In such a case, the indemnity to
be allowed should be expressed in Philippine currency on the
773
basis of the current rate of exchange at the time of payment.
(supra)
Exception to the Rule; check not a legal tender.
In the case of Salvacion F. Vda. De Eduque vs. Jose M.
774
Ocampo
, the Supreme Court already upheld that Japanese
military notes were legal tender during Japanese occupation. But
appellant argues, further, that the consignation of a cashiers
check, which is not legal tender, is not binding upon him. This
question, however, has never been raised in the lower court.
Upon the contrary, defendant accepted impliedly in the
771 Kalalao vs. Luz, G.R. No. L-27782, July 31, 1970.
772 10 SCRA 79 (1964)
773 Kalalo vs. Luz, 34 SCRA 337 (1970)
774 G.R. No. L-222, 26 April 1950, penned by Chief Justice Moran
398
consignation of the cashiers check when he himself asked the
court that out of the money thus consigned he be paid the
amount of the second loan of P15,000. It is a rule that a
cashiers check may constitute a sufficient tender where no
objection is made on this ground.

775
If effect, when there is implied acceptance, it thus operates as
a waiver on the part of the person receiving it to later question the
same. He is estopped by virtue his act of implied acceptance.
What is a crossed-check?
This is a check with two parallel lines in the upper left hand
corner. (Bank of America, NT & SA, vs. Associated Citizens Bank,
G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.])
Under usual practice, crossing a check is done by placing two
parallel lines diagonally on the left portion of the check. The
crossing may be special wherein between the two parallel lines is
written the name of a bank or a business institution, in which case
the drawee should pay only with the intervention of that bank or
company, or crossing may be general wherein between two
parallel diagonal lines are written the words and Co. or none at
all as in the case at bar, in which case the drawee should not
encash the same but merely accept the same for deposit. (State
Investment House vs. Intermediate Appellate Court, G.R. No.
72764, July 13, 1989, [Fernan, C.J:])
Illustrative Case:
CHAN WAN vs. TAN KIM and CHEN SO
G.R. No. L-15380, Sept. 30, 1960
BENGZON, J:
This suit to collect eleven checks totaling P4,290.00 is here for
decision because it involves no issue of fact.
Such checks payable to "cash or bearer" and drawn by
defendant Tan Kim (the other defendant is her husband) upon the
Equitable Banking Corporation, were all presented for payment by
Chan W an to the drawee bank, but they "were all dishonored and
775 62 C.J., p. 670; see also 40 Amer. Jur. P. 764 (emphasis supplied)
399
returned to him unpaid due to insufficient funds and/or causes
attributable to the drawer."
At the hearing of the case, in the Manila court of first instance,
the plaintiff did not take the witness stand. His attorney, however,
testified only to identify the checks which are Exhibits A to K
plus the letters of demand upon defendants.
On the other hand, Tan Kim declared without contradiction that
the checks had been issued to two persons named Pinong and
Muy for some shoes the former had promised to make and "were
intended as mere receipts".
In view of such circumstances, the court declined to order
payment for two principal reasons: (a) plaintiff failed to prove he
was a holder in due course, and (b) the checks being crossed
checks should not have been deposited instead with the bank
mentioned in the crossing.
It may be stated in this connection, that defendants asserted a
counterclaim, the court dismissed it for failure of proof, and from
such dismissal they did not appeal.
The only issue is, therefore, the plaintiff's right to collect on the
eleven commercial documents.
The Negotiable Instruments Law regulating the issuance of
negotiable checks, the rights and the liabilities arising therefrom,
does not mention "crossed checks". Art. 541 of the Code of
776
Commerce refers to such instruments.
The bills of Exchange
Act of England of 1882, contains several provisions about them,
777
some of which are quoted in the margin.
In the case of
Philippine National Bank vs. Zulueta, 101 Phil., 1071; 55 Off.
Gaz., 222, we applied some provisions of said Bills of Exchange
Act because the Negotiable Law, originating from England and
776 SEC. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to
certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or
only the words "and company."
The payment made to a person other than the banker or institution shall not exempt the person on whom it is
drawn, if the payment was not correctly made.
777 76. [General and Special Crossing Defined.] (1) Where a check bears across its face an addition of
(a) The words "and company" or any abbreviation thereof between two parallel transverse lines, either with or
without the words "not negotiable;" or
(b) Two parallel transverse lines simply, either with or without the words "not negotiable;" that addition constitutes a
crossing, and the cheque is crossed generally.
(2) Where a cheque bears across its face an addition of the name of a banker, either with or without the words "not
negotiable," that addition constitutes a crossing, and the cheque is crossed specially and to that banker.
79. . . . (2) Where the banker on whom a cheque is drawn which is so crossed nevertheless pays the same, or pays
the same, or pays a cheque crossed generally otherwise than to a banker, or if crossed specially otherwise than to
the banker to whom it is crossed, or his agent for collection being a banker, he is liable to the true owner of the
cheque for any loss he may sustain owing to the cheque having been so paid. (Taken from Brannan's Negotiable
Instruments Law, 60th Ed. 1250-1251.)
400
codified in the United States, permits resort thereto in matters
not covered by it and local legislation.778
Eight of the checks here in question bear across their face two
parallel transverse lines between which these words are written:
non-negotiable China Banking Corporation. These checks
have, therefore, been crossed specially to the China Banking
Corporation, and should have been presented for payment by
779
China Banking, and not by Chan W an.
Inasmuch as Chan W an
did present them for payment himself the Manila court said
there was no proper presentment, and the liability did not attach to
the drawer.
W e agree to the legal premises and conclusion. It must be
remembered, at this point, that the drawer in drawing the check
engaged that "on due presentment, the check would be paid, and
that if it be dishonored . . . he will pay the amount thereof to the
780
holder".
W herefore, in the absence of due presentment, the
drawer did not become liable.
Nevertheless we find, on the backs of the checks,
endorsements which apparently show they had been deposited
with the China Banking Corporation and were, by the latter,
presented to the drawee bank for collection. For instance, on the
back of the check Exhibit A (same as in Exh. B), this
endorsement appears:
For deposit to the account of W hite House Shoe Supply
with the China Banking Corporation and then this:
Cleared through the clearing office of Central
Bank of the Philippines. All prior endorsements
and/or lack of endorsements guaranteed. China
Banking Corporation.
And on the back of Exh. G:
For deposit to the credit of our account. Viuda e
Hijos de Chua Chiong Pio. People's Shoe
Company.
778 Sec. 196, Negotiable Instruments Law.
779 If it is not presented by said Bank for payment, the drawee runs the risk, in case of payment to persons not
entitled thereto. So the practice is for the drawee to refuse when presented by individuals. The check is generally
deposited with the bank mentioned in the crossing, so that the latter may take charge of the collection.
780 Sec. 61. Negotiable Instruments Law.
401
followed by the endorsement of China Banking
Corporation as in Exhibits A and B. All the crossed
checks have the "clearance" endorsement of China
Banking Corporation.
These circumstances would seem to show deposit of the
checks with China Banking Corporation and subsequent
presentation by the latter through the clearing office; but as
drawee had no funds, they were unpaid and returned, some of
them stamped "account closed". How they reached his hands,
plaintiff did not indicate. Most probably, as the trial court surmised,
this is not a finding of fact he got them after they had been thus
returned, because he presented them in court with such "account
closed" stamps, without bothering to explain. Naturally and rightly,
the lower court held him not to be a holder in due course under
the circumstances, since he knew, upon taking them up, that the
781
checks had already been dishonored.
Yet it does not follow as a legal proposition, that simply
because he was not a holder in due course Chan W an could not
recover on the checks. The Negotiable Instruments Law does
782
not provide that a holder
who is not a holder in due course,
may not in any case, recover on the instrument. If B
purchases an overdue negotiable promissory note signed by A, he
783
is not a holder in due course; but he may recover from A,
if the
latter has no valid excuse for refusing payment. The only
disadvantage of holder who is not a holder in due course is
that the negotiable instrument is subject to defense as if it
784
were non- negotiable.
(emphasis supplied)
Now what defense did the defendant Tan Kim prove? The
lower court's decision does not mention any; evidently His Honor
had in mind the defense pleaded in defendant's answer, but
though it [is] unnecessary to specify, because the "crossing" and
presentation incidents sufficed to bar recovery, in his opinion.
Tan Kim admitted on cross-examination either that the checks
had been issued as evidence of debts to Pinong and Muy, and/or
that they had been issued in payment of shoes which Pinong had
promised to make for her.
Seeming to imply that Pinong had to make the shoes, she
asserted Pinong had "promised to pay the checks for me". Yet
she did not complete the idea, perhaps because she was just
781 Sec. 52 (b), Negotiable Instruments Law.
782 He was a holder all right, because he had possession of the checks that were payable to bearer.
783 Sec. 51. Negotiable Instruments Law.
784 SEC. 58 Negotiable Instruments Law.
402
answering cross- questions, her main testimony having referred
merely to their counter-claim.
Needless to say, if it were true that the checks had been
issued in payment for shoes that were never made and delivered,
Tan Kim would have a good defense as against a holder who is
785
not a holder in due course.
Considering the deficiency of important details on which a fair
adjudication of the parties' right depends, we think the record
should be and is hereby returned, in the interest of justice, to the
court below for additional evidence, and such further proceedings
as are not inconsistent with this opinion. W ith the understanding
that, as defendants did not appeal, their counterclaim must be
and is hereby definitely dismissed. So ordered.
Paras, C.J., Padilla, Bautista Angelo, Labrador, Concepcion,
Reyes, J.B.L., Barrera, Gutierrez David, Paredes and Dizon, JJ.,
concur.
What are the effects of crossing a check? (1996 Bar Exam
Question)
It means that it could only be deposited and could not be
converted into cash. Thus, the effect of crossing a check relates
to the mode of payment, meaning that the drawer had intended
the check for deposit only by the rightful person, i.e., the payee
named therein. (Bank of America, NT & SA, vs. Associated
Citizens Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio,
J.])
In Bataan Cigar v. Court of Appeals , the Supreme Court
enumerated the effects of crossing a check as follows:
a.)
The check may not be encashed but only deposited in the
bank;
b.)
The check may be negotiated only once to one who has
an account with a bank; and
c.)
The act of crossing the check serves as a warning to the
holder that the check has been issued for a definite purpose
785 Lack of consideration is a defense. (Sec. 28, Negotiable Instruments Law.)
403
so that he must inquire if he has received the check pursuant
to that purpose; otherwise, he is not a holder in due course.
The effect therefore of crossing a check relates to the mode of
its presentment for payment. Under Section 72 of the Negotiable
Instruments Law, presentment for payment to be sufficient must
be made (a) by the holder, or by some person authorized to
receive payment on his behalf As to who the holder or
authorized person will depend on the instructions stated on the
face of the check. (State Investment House vs. Intermediate
Appellate Court, G.R. No. 72764, July 13, 1989, [Fernan, C.J:])
The act of crossing a check serves as a warning to the holder
that the check has been issued for a definite purpose so that the
holder thereof must inquire if he has received the check pursuant
to that purpose; otherwise, he is not a holder in due course. (Dino
vs. Loot, G.R. No. 170912, April 19, 2010, [Carpio, J.])
2013 Bar Question:
Arnold, representing himself as an agent of Brian for the sale
of Brian's car, approached Dennis who appeared interested
in buying the car. At Arnold's prodding, Dennis issued a
crossed check payable to Brian for P25,000.00 on the
understanding that the check would only be shown to Brian
as evidence of Dennis' good faith and interest in buying the
car. Instead, Arnold used the check to pay for the medical
expenses of his wife in Brian's clinic after Brian, a doctor,
treated her.
Is Brian a holder in due course (HIDC)?
(A) Yes, Brian is a HIDC because he was the payee of the
check and he received it for services rendered.
(B) Yes, Brian is a HIDC because he did not need to go behind
the check that was payable to him.
(C) No, Brian is not a HIDC because Dennis issued the check
only as evidence of good faith and interest in buying the car.
(D) No, Brian is not a HIDC because Brian should have been
placed on notice: the check was crossed in his favor and
Arnold was not the drawer.
(E) No, Brian is not a HIDC because the requisite
consideration to Dennis was not present.
Duty of the collecting bank when dealing with crossed
checks
404
In Philippine Commercial International Bank vs. Court of
786
Appeals and Ford Phils., Inc.,
it was held that: the crossing of
the check with the phrase Payees Account Only, is a warning
that the checks should be deposited only in the account of the
CIR.
Thus, it is the duty of the collecting bank PCIBank to
ascertain that the check be deposited in payees account only.
Therefore, it is the collecting bank (PCIBank) which is bound to
scrutinize the check and to know its depositors before it could
make the clearing indorsement all prior indorsements and/or lack
of indorsement guaranteed.
In Banco de Oro and Mortgage Bank vs. Equitable Banking
787
Corporation,
we ruled:
Anent petitioners liability on said instruments, this court
is in full accord with the ruling of the PCHCs Board of
Directors that:
In presenting the checks for clearing and for payment,
the defendant made an express guarantee on the validity
of all prior endorsements. Thus, stamped at the back of
the checks are the defendants clear warranty: ALL
PRIOR
ENDORSEMENTS
AND/OR
LACK
OF
ENDORSEMENTS GUARANTEED.
W ithout such
warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning
of defendants warranty. As the warranty has proven to
be false and inaccurate, the defendant is liable for any
damage arising out of the falsity of its representation.

788
What may be the ways of crossing a check?
The crossing may be special wherein between the two
parallel lines is written the name of a bank or business institution,
in which case the drawee should pay only with the intervention of
that bank or company.
It may also be general wherein between two parallel diagonal
lines are written the words and Co. or none at all, in which case
the drawee should not encash the same but merely accept the
786 G.R. Nos. 121413, 121479, 128604, January 29, 2011
787 157 SCRA 188 (1988)
788 Id. at 194
405
same for deposit. (Bank of America, NT & SA, vs. Associated
Citizens Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio,
J.])
Liability of depository bank for allowing the deposit of
crossed checks which were issued in favor of and payable to
one person, and without being indorsed by the former, to the
account of another person
Vicente Go vs. Metropolitan Bank and Trust Co.
G.R. No. 168842, August 11, 2010
NACHURA, J.:
FACTS:
Petitioner (Vicente Go) alleged that he was doing
business under the name "Hope Pharmacy" which
sells medicine and other pharmaceutical products
in the City of Cebu. Petitioner had in his employ
Chua as his pharmacist and trustee or caretaker of
the business; Tabaag, on the other hand, took
care of the receipts and invoices and assisted
Chua in making deposits for petitioners accounts
in the business operations of Hope Pharmacy.
Petitioner claimed that there were unauthorized
deposits and encashments made by Chua and
Tabaag in the total amount of One Hundred Nine
Thousand Four Hundred Thirty-three Pesos and
Thirty Centavos (P109,433.30).
Petitioner also averred that there were thirty-two
(32) checks with Hope Pharmacy as payee, for
varying sums, amounting to One Million Four
Hundred Ninety-Two Thousand Five Hundred
Ninety-Five
Pesos
and
Six
Centavos
(P1,492,595.06), that were not endorsed by him but
were deposited under the personal account of
Chua with respondent bank.
Petitioner claimed that the said checks were
crossed checks payable to Hope Pharmacy only;
and that without the participation and connivance of
respondent bank (which was the depository of said
crossed-checks), the checks could not have been
accepted for deposit to any other account, except
petitioners account.
ISSUE:
May the depository bank (Metrobank) be liable for
406
allowing the deposit of crossed checks which were
issued in favor of and payable to herein petitioner
(Vicente Go) and without being indorsed by the
latter, to the account of Maria Teresa Chua (one of
the respondents)?
RULING:
A check is a bill of exchange drawn on a bank
payable on demand. There are different kinds of
checks. In this case, crossed checks are the
subject of the controversy. A crossed check is one
where two parallel lines are drawn across its face
or across the corner thereof. It may be crossed
generally or specially.
A check is crossed specially when the name of a
particular banker or a company is written between
the parallel lines drawn. It is crossed generally
when only the words "and company" are written or
nothing is written at all between the parallel lines,
as in this case. It may be issued so that
presentment can be made only by a bank.
In order to preserve the credit worthiness of
checks,
jurisprudence
has
pronounced
that
crossing of a check has the following effects: (a)
the check may not be encashed but only deposited
in the bank; (b) the check may be negotiated only
once to one who has an account with a bank;
and (c) the act of crossing the check serves as
warning to the holder that the check has been
issued for a definite purpose so that he must
inquire if he has received the check pursuant to
that purpose, otherwise, he is not a holder in due
course.
The Court has taken judicial cognizance of the
practice that a check with two parallel lines in the
upper left hand corner means that it could only be
deposited and not converted into cash. The effect
of crossing a check, thus, relates to the mode of
payment, meaning that the drawer had intended
the check for deposit only by the rightful person,
i.e., the payee named therein. The crossing of a
check is a warning that the check should be
deposited only in the account of the payee. Thus, it
is the duty of the collecting bank to ascertain that
407
the check be deposited to the payees account
only.
In the instant case, there is no dispute that the
subject 32 checks with the total amount of
P1,492,595.06 were crossed checks with petitioner
as the named payee. It is the submission of
petitioner that respondent bank should be held
accountable for the entire amount of the checks
because it accepted the checks for deposit under
Chuas account despite the fact that the checks
were crossed and that the payee named therein
was not Chua.
In its defense, respondent bank countered that
petitioner is not entitled to reimbursement of the
total sum of P1,492,595.06 from either Maria
Teresa Chua or respondent bank because
petitioner was not damaged thereby.
Respondent banks contention is meritorious.
Respondent bank should not be held liable for the
entire amount of the checks considering that, as
found by the RTC and affirmed by the CA, the
checks were actually given to Chua as payments
by petitioner for loans obtained from the parents of
Chua. Furthermore, petitioners non-inclusion of
Chua and Tabaag in the petition before this Court
is, in effect, an admission by the petitioner that
Chua, in representation of her parents, had rightful
claim to the proceeds of the checks, as payments
by petitioner for money he borrowed from the
parents of Chua. Therefore, petitioner suffered no
pecuniary loss in the deposit of the checks to the
account of Chua.
However, we affirm the finding of the RTC that
respondent bank was negligent in permitting the
deposit and encashment of the crossed checks
without the proper indorsement. An indorsement is
necessary for the proper negotiation of checks
specially if the payee named therein or holder
thereof is not the one depositing or encashing it.
Knowing fully well that the subject checks were
crossed, that the payee was not the holder and that
the checks contained no indorsement, respondent
bank should have taken reasonable steps in order
to determine the validity of the representations
408
made by Chua. Respondent bank was amiss in its
duty as an agent of the payee. Prudence dictates
that respondent bank should not have merely relied
on the assurances given by Chua.
xxx xxx
Negligence was committed by respondent bank in
accepting for deposit the crossed checks without
indorsement and in not verifying the authenticity of
the negotiation of the checks. The law imposes a
duty of extraordinary diligence on the collecting
bank to scrutinize checks deposited with it, for the
purpose of determining their genuineness and
regularity.
As a business affected with public
interest and because of the nature of its functions,
the banks are under obligation to treat the accounts
of its depositors with meticulous care, always
having in mind the fiduciary nature of the
relationship. The fact that this arrangement had
been practiced for three years without Mr. Go/Hope
Pharmacy raising any objection does not detract
from the duty of the bank to exercise extraordinary
diligence. Thus, the Decision of the RTC, as
affirmed by the CA, holding respondent bank liable
for moral damages is sufficient to remind it of its
responsibility to exercise extraordinary diligence in
the course of its business which is imbued with
public interest.
W HEREFORE, the Decision dated May 27, 2005
and the Resolution dated August 31, 2005 of the
Court of Appeals in CA-G.R. CV No. 63469 are
hereby AFFIRMED.
Within what time should a check be presented for payment?
A check must be presented for payment within a reasonable
period after its issue or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay. (Sec. 186,
The present banking practice requires that a check must be
issued within six (6) months from the date of issuance, otherwise,
the check becomes stale, and the drawer will be discharged from
liability thereon to the extent of the loss caused by the delay.
409
A stale check is valueless
A stale check is one which has not been presented for
payment within a reasonable time after its issue. It is valueless
and, therefore should not be paid.

Under the negotiable
instruments law, an instrument not payable on demand must be
presented for payment on the day it falls due.

W hen the
instrument is payable on demand, presentment must be made
within a reasonable time after its issue. In the case of a bill of
exchange, presentment is sufficient if made within a reasonable
789
time after the last negotiation thereof.
(International Corporate
Bank vs. Sps. Gueco, G.R. No. 141968, February 12, 2001,
[Kapunan, J.])
790
Moreover, in Crystal vs. Court of Appeals
, it has been held
that, if the check had become stale, it becomes imperative that
the
circumstances
that
caused
its
non-presentment
be
determined.
2012 Bar Question:
A stale check is a check
a.
that cannot anymore be paid although the underlying
obligation still exists.
b.
that cannot anymore be paid and the underlying obligation
under the check is also extinguished.
c.
that can still be negotiated or indorsed so that whoever is
the holder can
d.
which has not been presented for payment within a period
of thirty (30) days.
What constitutes reasonable time?
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. 193, Negotiable Instruments Law)
The test is whether the payee employed such diligence as a
791
prudent man exercises in his own affairs.
This is because the
nature and theory behind the use of a check points to its
immediate use and payability. (International Corporate Bank vs.
789 Section 71, Negotiable Instruments Law
790 71 SCRA 443 (1976)
791 Jeff Bras, Stones vs. McCullough (1934) 188 Ark. 1108, 69 S.W. (2d) 863
410
Sps. Gueco, G.R. No. 141968, February 12, 2001) (emphasis
supplied)
Acceptance
not
required
in
checks;
Acceptance
synonymous with Certification of Checks
A comprehensive discussion was laid down by the Supreme
Court in the case of Philippine National Bank vs. The National
City Bank of New York and Motor Service Company, Inc.,
G.R. No. L-43596, October 31, 1936, wherein it was held that: [a]
check is a bill of exchange payable on demand and only the rules
governing bills of exchange payable on demand are applicable to
it, according to Section 185 of the Negotiable Instruments Law. In
view of the fact that acceptance is a step unnecessary, in so far
as bills of exchange payable on demand are concerned (Sec.
143), it follows that the provisions relative to acceptance are
without application to checks.

Acceptance implies, in effect,
subsequent negotiation of the instrument, which is not true in case
of the payment of a check because from the moment the check is
paid it is withdrawn from circulation. The warranty established by
section 62, is in favor of holders of the instrument after its
acceptance. W hen the drawee bank cashes or pays a check, the
cycle of negotiation is terminated, and it is illogical thereafter to
speak of subsequent holders who can invoke the warranty
provided in section 62 against the drawee. Moreover, according
to section 191, acceptance means an acceptance completed by
delivery or notification and this concept is entirely incompatible
with payment, because when payment is made the check is
retained by the bank, and there is no such thing as delivery or
notification to the party receiving the payment. Checks are not to
be accepted, but presented at once for payment. (1 Bouviers Law
Dictionary, 476) There can be no such thing as acceptance in
the ordinary sense of the term.

A check being payable
immediately and on demand, the bank can fulfill its duty to the
depositor only by paying the amount demanded. The holder has
no right to demand from the bank anything but payment of the
check, and the bank has no right, against the drawer, to do
anything but to pay it. (5 R.C.L., p. 516, par. 38) A check is not an
instrument which in the ordinary course of business calls for
acceptance. The holder can never claim acceptance as his legal
right. He can present for payment, and only for payment. (1
th
Morse on Banks and Banking, 6
ed., pp. 898, 899)
There is, however, nothing in the law or in, business practice
against the presentation of checks for acceptance, before they
are paid, in which case we have a certification equivalent to
411
acceptance according to section 187, which provides that
where a check is certified by the bank on which it is drawn, the
certification is equivalent to an acceptance, and it is then that the
warranty under section 62 exists. This certification or acceptance
consists in the signification by the drawee of his assent to the
order of the drawer, which must not express that the drawee will
perform his promise by any other means than the payment of
money. (Section 132) W hen the holder of a check procures it to
be accepted or certified, the drawer and all indorsers are
discharged from liability thereon (sec. 188), and then the check
operates as an assignment of a part of the funds to the credit of
the drawer with bank. (sec. 189) There is nothing in the nature of
the check which intrinsically precludes its acceptance, in like
manner and with like effect as a bill of exchange or draft may be
accepted. The bank may accept if it chooses; and it is frequently
induced by convenience, by the exigencies of business, or by the
desire to oblige customers, voluntarily to incur the obligation. The
act by which the bank places itself under obligation to pay to the
holder the sum called for by a check must be the expressed
promise or undertaking of the bank signifying its intent to assume
the obligation, or some act from which the law will imperatively
imply such valid promise or undertaking. The most ordinary form
which such an act assumes is the acceptance by the bank of the
check, or, as it is perhaps more often called, the certifying of the
check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R.C.L., p.
520)
No doubt a bank may by an unequivocal promise in writing
make itself liable in any event to pay the check upon demand, but
this is not an acceptance of the check in the true sense of that
term. Although a check does not call of acceptance, and the
holder can present it only for payment, the certification of checks
is a means in constant and extensive use in the business of
banking, and its effects and consequences are regulated by the
law merchant. Checks drawn upon banks or banker, thus marked
or certified, enter largely into the commercial and financial
transactions of the country; they pass from hand to hand, in the
payment of debts, the purchase of property, and in the transfer of
balances from one house and one bank to another. x x x The
check becomes a basis of credit any easy mode of passing
money from hand to hand, and answers the purposes of money.
(5 R.C.L., pp. 516, 517)
What is the effect of a check being certified by the drawee
bank?
412
Where a check is certified by the bank on which it is drawn the
certification is equivalent to an acceptance. (Sec. 187, Negotiable
Instruments Law)
The purpose of procuring a check to be certified is to
impart strength and credit to the paper by obtaining an
acknowledgment from the certifying bank that the drawer
has funds therein sufficient to cover the check and securing
the engagement of the bank that the check will be paid upon
presentation. A certified check has a distinctive character as a
species of commercial paper, and performs important functions in
banking and commercial business. When a check is certified, it
ceases to possess the character, or to perform the functions,
of a check, and represents so much money on deposit,
payable to the holder on demand. (Philippine National Bank vs.
The National City Bank of New York, October 31, 1936)
(emphasis supplied)
In the case of New Pacific Timber & Supply Co., Inc. vs.
792
Seneris
, [s]ince the check had been certified by the drawee
bank, by the certification, the funds represented by the check are
transferred from the credit of the drawer to that of the payee or
holder, and for all intents and purposes, the latter becomes the
depositor of the drawee bank, with rights and duties of one in
such situation. W here a check is certified by the bank on which it
is drawn, the certification is equivalent to acceptance.

Said
certification implies that the check is drawn upon sufficient funds
in the hands of the drawee, that they have been set apart for its
satisfaction, and that they shall be so applied whenever the check
is presented for payment. It is an understanding that the check is
good then, and shall continue good, and this agreement is as
binding on the bank as its notes on circulation, a certificate of
deposit payable to the order of depositor, or any other obligation it
can assume. The object of certifying a check, as regards both
parties, is to enable the holder to use it as money. W hen the
holder procures the check to be certified, the check operates as
an assignment if a part of the funds to the creditors. Hence, the
exception to the rule enunciated under Section 63 of the Central
Bank to the effect that a check which has been cleared and
credited to the account of the creditor shall be equivalent to a
delivery to the creditor in cash in an amount equal to the amount
credited to his account x x x (Equitable PCI Bank vs. Rowena
792 G.R. No. L-41764, 19 December 1980, 101 SCRA 686, 693
413
Ong, G.R.
supplied)
No.
156207
[September
15,
2006])
(emphasis
All the authorities, both English and American, hold that a
check may be accepted, though acceptance is not usual. By the
law merchant, the certificate of the bank that a check is good is
equivalent to acceptance. It implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have been
set apart for its satisfaction, and that they shall be so applied
whenever the check is presented for payment.

It is an
undertaking that the check is good then, and shall continue good,
and this agreement is as binding on the bank as its notes of
circulation, a certificate of deposit payable to the order of the
depositor, or any other obligation it can assume. The object of
certifying a check as regards both parties is to enable the holder
to use it as money.
The transferee takes it with the same
readiness and sense of security that he would take the notes of
the bank. It is available also to him for all purposes of money.
Thus it continues to perform its important functions until in the
course of business it goes back to the bank for redemption, and is
extinguished by payment. It cannot be doubted that the certifying
bank intended these consequences, and it is liable accordingly.
To hold otherwise would render these important securities only a
snare and a delusion. A bank incurs no greater risk in certifying a
check than in giving a certificate of deposit. In well- regulated
banks the practice is at once to charge the check to the account
of the drawer, to credit in a certified check account, and, when the
check is paid, to debit that account in the amount. Nothing can be
simpler or safer than this process. (Merchants Bank vs. States
Bank, 10 Wall., 604, at p. 647; 19 Law. Ed., 1008, 1009, cited in
PNB vs. National City Bank of New York, id.)
Ordinarily the acceptance or certification of a check is
performed and evidenced by some word or mark, usually the
words good, certified or accepted written upon the check by
the banker or bank officer. (1 Morse, Banks and Banking, 915; 1
Bouviers Law Dictionary, 476.) The bank virtually says, that
check is good; we have the money of the drawer here ready to
pay it. W e will pay it now if you receive it. The holder says, No, I
will not take the money; you may certify the check and retain the
money for me until this check is presented. The law will not
permit a check, when due, to be thus presented, and the money
to be left with the bank for the accommodation of the holder
without discharging the drawer. The money being due and the
check presented, it is his own fault if the holder declines to receive
the pay, and for his own convenience has the money appropriated
to that check to its future presentment at any time within the
statute of limitations. (1 Morse on Banks and Banking, p. 920)
414
What happens if the holder of the check procures it to be
certified?
W here the holder of a check procures it to be accepted or
certified, the drawer and all indorsers are discharged from liability
therefrom. (Sec. 188, Negotiable Instruments Law )
Payment and Certification of Checks distinguished
In the PNB case, the Supreme Court laid down a detailed
discussion and held that: [w]ith few exceptions, the weight of
authority is to the effect that payment neither includes nor
implies acceptance.
In National Bank vs. First National Bank ([19101, 141 Mo.
App., 719; 125 S.W., 513), the court asks, if a mere promise to
pay a check is binding on a bank, why should not the absolute
payment of the check should have the same effect? In response,
it is submitted that the two things, --that is acceptance and
payment, --are entirely different. If the drawee accepts the paper
after seeing it, and then permits it to go into circulation as
genuine, on all the principles of estoppel, he ought to be
prevented from setting up forgery to defeat liability to one who has
taken the paper on the faith of the acceptance, or certification.
On the other hand, mere payment of the paper at the termination
of its course does not act as an estoppel. The attempt to state a
general rule covering both acceptance and payment is
responsible for a large part of the conflicting arguments which
have been advanced by the courts with respect to the rule.
(Annotation at 12 A.L.R., 1090 1921])
In First National Bank vs. Brule National Bank ([1917], 12
A.L.R., 1079, 1085), the Court said:
W e are of the opinion that payment is not acceptance.
Acceptance, as defined by Section 131, cannot be confounded
with payment
Acceptance, certification, or payment of a check, by the
express language of the statute, discharges the liability only of
the persons named in the statute, to wit, the drawer and all
indorsers, and the contract of indorsement by the negotiator if
the check is discharged by acceptance, certification, or
payment. But clearly the statute does not say that the contract
415
or warranty of the negotiator, created by Section 65, is
discharged by these acts.
The rule supported by the majority of the cases (14 A.L.R.
764), that payment of a check on a forged or unauthorized
indorsement of the payees name, and charging the same to the
drawers account, do not amount to an acceptance so as to make
the bank liable to the payee, is supported by all of the recent
cases in which the question is considered. (cases cited,
Annotation at 69 A.L.R., 1076, 1077 [1930])
Merely stamping a check paid upon its payment on a forged
or unauthorized indorsement is not an acceptance thereof so as
to render the drawee bank liable to the true payee. (Anderson vs.
Tacoma National Bank [1928], 146 Wash., 520 520; Pac., 8;
Annotation at 69 A.L.R., 1077, [1930])
In State Bank of Chicago vs. Mid-City Trust & Savings Bank
(12 A.L.R., 989; 991, 992), the Court said:
The defendant in error contends that the payment of the check
shows acceptance by the bank, urging that there can be no more
definite act by the bank upon which a check has been drawn,
showing acceptance than the payment of the check. Section 184
of the Negotiable Instruments Act (Sec. 202) provides that the
provisions of the act applicable to bills of exchange apply to a
check, and section 131 (sec. 149), that the acceptance of a bill
must be in writing signed by the drawee. Payment is the final act
which extinguishes a bill. Acceptance is a promise to pay in the
future and continues the life of the bill. It was held in the First
National Bank vs Whitman (94 U.S., 343; 24 L. ed., 229), that
payment of a check upon a forged indorsement did not operate as
an acceptance in favor of the true owner. The contrary was held
in Pickle vs. Muse (Fickle vs. Peoples Nat. Bank, 88 Tenn., 380;
7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S.W., 919), and Seventh
National Bank vs. Cook (73 Pa., 483; 13 Am. Rep. 751) at a time
when the Negotiable Instruments Act was not in force in those
states. The opinion of the Supreme Court of the United States
seems more logical, and the provision of the Negotiable
Instruments Act now require an acceptance to be in writing.
Under this statute the payment of a check on a forged
indorsement, stamping it paid, and charging it to the account of
the drawer, do not constitute an acceptance of the check or
create a liability of the bank to the true holder or the payee. (Elyria
Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio St., 406; L.R.A. 1916
D, 433; 111 N.E., 147; Ann. Cas. 1917 D, 1055; Baltimore & O.R.
Co. vs. First National Bank, 102 Va., 753; 47 S.E., 837; State
416
Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A.L.R., pp.
989, 991, 992)
Before drawees acceptance of check there is no privity of
contract between drawee and payee. Drawees payment of check
on unauthorized indorsement does not constitute acceptance of
check. (Sinclair Refining Co. vs. Moultrie Banking Co., 165 S.E.,
860 [1932])
The great weight of authority is to the effect that the payment
of a check upon a forged or unauthorized indorsement and the
stamping of it paid does not constitute an acceptance. ( Dakota
Radio Apparatus Co. vs. First Nat. Bank of Rapid City, 244 N.W.,
351, 352 [1932].)
Paying of the check, cashing it on presentment is not
acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45,
48, 49; 143 N.E., 816; Blocker, Shepard Co. vs. Granite Trust
Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 III. App.
625, 636, 637 [1908]), the language of the decision was as
follows:
The plaintiffs say that this acceptance was made by the
very unauthorized payments of which they complain. This
suggestion does not seem forceful to us. It is the contention
which was made before the Supreme Court of the United
States in First National Bank vs. Whitman (94 U.S., 343), and
repudiated by that court. The language of the opinion in that
case is so apt in the present case that we quote it:
It is further contended that such an acceptance of a check
as creates a privity between the payee and the bank is
established by the payment of the amount of this check in the
manner described.
This argument is based upon the
erroneous assumption that the bank has paid this check. If
this were true, it would have discharged all of its duty, and
there would be an end to the claim against it. The bank
supposed that it had paid the check, but this was an error.
The money it paid was upon a pretended and not a real
indorsement of the name of the payee W e cannot recognize
the argument that payment of the amount of the check or sight
draft under such circumstances amounts to an acceptance
creating a privity of contract with the real owner.
417
It is difficult to construe a payment as an acceptance
under any circumstances A banker or individual may be
ready to make actual payment of a check or draft when
presented, while unwilling to make a promise to pay than to
meet the promise when required. The difference between the
transactions is essential and inherent.
And in Wharf vs. Seattle National Bank (24 Pac. [2d], 120, 123
[1933]):
It is the rule that payment of a check on unauthorized or
forged indorsement does not operate as an acceptance of the
check so as to authorize an action by the real owner to recover
its amount from the drawee bank. (Michie on Banks and
Banking, vol. 5, sec. 278, p. 521.) (See also, Federal Land
Bank vs. Collings, 156 Miss., 893; 127 So., 570; 69 A.L.R.,
1068.)
In the subsequent case of Federal Land Bank vs. Collins (69
A.L.R., 1068, 1072-1074), this question was discussed at
considerable length. The court said:
In the light of the first of these statutes, counsel for
appellant is forced to stand upon the narrow ledge that the
payment of the check by the two banks will constitute an
acceptance. The drawee bank simply marked it paid and did
not write anything else except the date. The bank first paying
the check, the Commercial National Bank and Trust Company,
simply wrote its name as indorser and passed the check on to
the drawee bank; does this constitute acceptance?

The
precise question has not been presented to this court for
decision. W ithout reference to authorities in other jurisdictions
it would appear that the drawee bank had never written its
name across the paper and therefore, under the strict terms of
the statute, could not be bound as the acceptor, in the second
place, it does not appear to us to be illogical and unsound to
say that the payment of a check by the drawee, and the
stamping of it paid, is equivalent to the same thing as
acceptance of a check; however, there is a variety of opinions
in the various jurisdictions on this question. Counsel correctly
states that the theory upon which numerous courts hold that
the payment of a check creates privity between the holder of
the check and the drawee bank is tantamount to a pro tanto
assignment of that part of the funds.

It is most easily
understood how the payment of the check, when not
authorized to be done by the drawee bank, might under such
circumstances create liability on the part of the drawee to the
drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn,
418
380; 12 S.W., 919; 7 L.R.A., 93; 17 Am. St. Rep., 900),
wherein Judge Lurton held that the acceptance of a check was
necessary order to give the holder thereof a right of action
thereon against the bank, and further held in a case similar to
this, so far as the question is concerned, that the acceptance
of a check by the bank and its subsequent charge of the
amount to the drawer, although it was presented by, and
payment made, an unauthorized person. Judge Lurton cited
the case of National Bank of the Republic vs. Millard (10 Wall.,
152; 19 L.ed., 897), wherein the Supreme Court of the United
States, not having such a case before it, threw out the
suggestion that, if it was shown that a bank had charged the
check on its books against the drawer and made settlement
with the drawee that the holder could recover on account of
money had and received, invoking the rule of justice and
fairness, it might be said there was an implied promise to the
holder to pay it on demand. (See National Bank of the
Republic vs. Millard, 10 Wall. [77 U.S.], 152; 19 L.ed., 899.)
The Tennessee court then argued that it would be inequitable
and unconscionable for the owner and payee of the check to
be limited to an action against an insolvent drawer and might
thereby lose the debt. They recognized the legal principle that
there is no privity between the drawer bank and the holder, or
payee, of the check, and proceeded to hold that no particular
kind of writing was necessary to constitute an acceptance and
that it became a question of fact, and the bank became liable
when it stamped it paid and charged it to the account of the
drawer, and cites, in support of its opinion, Seventh National
Bank vs. Cook (73 Pa., 483; 13 Am. Rep. 751); Saylor vs.
Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs.
Bank (20 Ohio St., 234; 5 Am. Rep., 648.)
This decision was in 1890, prior to the enactment of the
Negotiable Instruments Law by the State of Tennessee.
However, in this case Judge Snodgrass points out that the Millard
Case, supra, was dicta. The Dodoge case, from the Ohio court,
held exactly as the Tennessee court, but subsequently in the case
of Elyria Bank vs. Walker Bin Co. (92 Ohio St., 406; 111 N.E.,
147; L.R.A. 1916 D, 433; Ann. Cas. 1917 D, 1055), the court held
to the contrary, called attention to the fact that the Dodge case
was no longer the law, and proceeded to announce that, whatever
might have been the law before the passage of the Negotiable
Instrument Act in that state, it was no longer the law; and the rule
announced in the Dodge case had been discarded. The court,
in the latter case, expressed its doubts that the courts of
Tennessee and Pennsylvania would adhere to the rule announced
419
in the Pickle case, quoted supra, in the fact of the Negotiable
Instrument Law.
Subsequent to the Millard case, the Supreme
Court of the United States, in the case of First National Bank of
Washington vs. Whitman (94 U.S., 343, 347; 24 L.ed., 229),
where the bank, without any knowledge that the indorsement of
the payee was unauthorized, paid the check, and it was
contended that by the payment the privity of contract existing
between the drawer and drawee was imparted to the payee, said:
It is further contended that such an acceptance of the
check as creates a privity between the payee and the bank is
established by the payment of the amount of this check in the
manner described.
This argument is based upon the
erroneous assumption that the bank has paid this check. If
this were true, it would have discharged all of its duty, and
there would be an end of the claim against it. The bank
supposed that it had paid the check; but this was an error.
The money it paid was upon a pretended and not a real
indorsement of the name of the payee. The real indorsement
of the payee was as necessary to a valid payment as the real
signature of the drawer; and in law the check remains unpaid.
Its pretended payment did not diminish the funds of the drawer
in the bank, or put money in the pocket of the person entitled
to the payment. The state of the account was the same after
the pretended payment as it was before.
W e cannot recognize the argument that a payment of the
amount of a check or sight draft under such circumstances
amounts to an acceptance, creating a privity of contract with
the real owner. It is difficult to construe a payment as an
acceptance under any circumstances. The two things are
essentially different. One is a promise to perform at, the other
an actual performance. A banker or an individual may be
ready to make actual payment of a check or draft when
presented, while unwilling to make a promise to pay than to
meet the promise when required. The difference between the
transactions is essential and inherent.
Nature of a managers check.
A managers check is one drawn by a banks manager upon
the bank itself. It stands on the same footing as a certified check,
which is deemed to have been accepted by the bank that certified
it. As the banks own check, a managers check becomes the
primary obligation of the bank and is accepted in advance by the
act of its issuance. (Security Bank and Trust Company vs. Rizal
Commercial Banking Corporation, G.R. No. 170984, 170987,
January 30, 2009, [Quisumbing, J.])
420
A managers check is an order of the bank to pay, drawn upon
itself, committing in effect its total resources, integrity and honor
behind its issuance, and by its peculiar character and general use
in commerce, a managers check is regarded substantially to be
as good as the money it represents. (Citibank N.A. (Formerly First
National City Bank) vs. Sabeniano, 504 SCRA 378)
793
[It] stands on the same footing as a certified check.
The
effect of certification is found in Section 187, Negotiable
794
Instruments Law.
The effect of issuing a managers check was
incontrovertibly elucidated when [we] it was declared that [a]
managers check is one drawn by the banks manager upon the
bank itself. It is similar to a cashiers check both as to the effect
and use. A cashiers check is a check of the banks cashier on
[his] its own or another check. In effect, it is a bill of exchange
drawn by the cashier of a bank upon the bank itself, and accepted
in advance by the act of its issuance. It is really the banks own
check and may be treated as a promissory note with the bank as
a maker. The check becomes the primary obligation of the bank
which issued it and constitutes its written promise to pay upon
demand. The mere issuance of it is considered an acceptance
795
thereof. x x x.
(Equitable PCI Bank vs. Rowena Ong, G.R. No.
156207, September 15, 2006, [Chico-Nazario, J.])
Given that a check is more than just an instrument of credit
used in commercial transactions for it also serves as a receipt or
evidence for the drawee bank of the cancellation of the said check
due to payment, then, the possession by the drawee bank of the
said Managers Checks (MCs), duly stamped Paid gives rise to
the presumption that the said Managers Checks (MCs) were
already paid out to the intended payee. (supra)
2012 Bar Question:
In payment for his debt in favor of X, Y gave X a
Manager's Check in the amount of Php 100,000.00 dated May
30, 2012. Which phrase best completes the statement - A
Manager's Check:
793 Supra note 21 at 411 [Soler v. Court of Appeals, G.R. No. 123892, 21 May 2011, 358 SCRA 57, 64]
794 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
795 International Corporate Bank vs. Gueco, G.R. No. 141968, 12 February 2001
421
a.
is a check issued by a manager of a bank for his own
account.
b.
is a check issued by a manager of a bank in the name of
the bank against the bank itself for the account of the
bank.
c.
is like any ordinary check that needs to be presented for
payment also.
d.
is better than a cashier's check in terms of use and effect.
Cashiers Check deemed as cash
In the case of New Pacific Timber & Supply Company, Inc. vs.
796
Hon. Alberto Seneris,
the Supreme Court held that:
It is to be emphasized in this connection that the check
deposited by the petitioner in the amount of P50,000.00 is not an
ordinary check but a Cashier's Check of the Equitable Banking
Corporation, a bank of good standing and reputation. As testified
to by the Ex-Officio Sheriff with whom it has been deposited, it is a
797
certified crossed check.
It is a well-known and accepted
practice in the business sector that a Cashier's Check is deemed
as cash. Moreover, since the said check had been certified by the
drawee bank, by the certification, the funds represented by the
check are transferred from the credit of the maker to that of the
payee or holder, and for all intents and purposes, the latter
becomes the depositor of the drawee bank, with rights and duties
798
of one in such situation.
W here a check is certified by the bank
on which it is drawn, the certification is equivalent to
799
acceptance.
Said certification "implies that the check is drawn
upon sufficient funds in the hands of the drawee, that they have
been set apart for its satisfaction, and that they shall be so applied
whenever the check is presented for payment. It is an
understanding that the check is good then, and shall continue
good, and this agreement is as binding on the bank as its notes in
circulation, a certificate of deposit payable to the order of the
depositor, or any other obligation it can assume. The object of
certifying a check, as regards both parties, is to enable the holder
800
to use it as money."
W hen the holder procures the check to be
certified, "the check operates as an assignment of a part of the
801
funds to the creditors."
Hence, the exception to the rule
796 G.R. No. L-41764, December 19, 1980, [Concepcion, Jr., J.:]
797 p. 35, t.s.n., May 24, 1975
798 Gregorio Araneta, Inc. vs. Paz Tuazon de Paterno and Jose Vidal, L-2886, August 22, 1952, 49 O.G. No. 1, p.
59
799 Section 187. Certification of check; effect of. Where a check is certified by the bank on which it is drawn, the
certification is equivalent to acceptance. (Negotiable Instruments Law)
800 PNB vs. Nat. City Bank of New York, 63 Phil. 711, 718-719
801 PNB vs, Nat. City Bank of New York, supra, 711-717; Sec. 189. When check operates as an assignment. A
cheek 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 it. (Negotiable Instruments Law)
[Emphasis supplied]
422
enunciated under Section 63 of the Central Bank Act to the effect
"that a check which has been cleared and credited to the account
of the creditor shall be equivalent to a delivery to the creditor in
cash in an amount equal to the amount credited to his account"
shall apply in this case.
Problem:
X delivered stocks of vegetable oil to Y sometime on March
1993. As payment therefor, Y issued a personal check in the
amount of Php 348, 805.50.
However, when the check was
encashed, it was dishonored by the drawee bank.
Y then
assured X that he would replace the bounced check with a
cashiers check from the Bank of the Philippine Islands (BPI).
Thereafter, BPI cashiers check no. 14428 in the amount of
Php 348, 805.50 was issued, drawn against the account of Y.
The following day, X returned to drawee bank to encash the
check but it was dishonored, the bank then informed X that
Ys account was closed on that date.
X then filed a complaint for collection of sum of money
against BPI.
In its answer, BPI claimed that it issued the
check by mistake in good faith; that its dishonor was due to
lack of consideration; and that Xs remedy was to sue Y who
purchased the check.
a.
Is X a holder in due course despite BPIs contention
that there was lack of consideration?
b.
Is BPI liable to X for the amount of the cashiers
check?
c.
What is the nature of a cashiers check?
ANSWER:
a. YES. X is a holder in due course.
Sec. 52. (NIL) 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;
c.
That he took it in good faith and for value;
423
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.
Value in general terms may be some right, interest,
profit or benefit to the party who makes the contract or
some forbearance, detriment, loan, responsibility, etc.,
on the other side. Here, there is no dispute that X
received Ys cashiers check as payment for the
formers vegetable oil. The fact that it was Y who
purchased the cashiers check from BPI will not affect
Xs status as a holder for value since the check was
delivered to him as payment for the vegetable oil he
sold to Y. (Bank of the Philippine Islands vs. Gregorio
C. Roxas, G.R. No. 157833,

[Sandoval-Gutierrez, J.])
b.
YES.
check.
October
15,
2007
BPI is liable for the amount of the cashiers
A cashiers check is really the banks own check and may
be treated as a promissory note with the bank as a maker.
The check becomes the primary obligation of the bank
which issues it and constitutes a written promise to pay
upon demand. (BPI vs. Roxas)
c.
It is a well known and accepted practice in the business
sector that a cashiers check is deemed as cash. This is
because the mere issuance of a cashiers check is
considered acceptance thereof. (BPI vs. Roxas).
What is a Memorandum check?
A memorandum check is in the form of an ordinary check, with
the word memorandum, or memo or mem written across its
face, signifying that the maker or drawer engages to pay the bona
fide holder absolutely, without any condition concerning its
802
presentment.
(People of the Philippines vs. Hon. David Nitafan,
et al, G.R. No. 75954, October 22, 1992)
Such a check is an evidence of debt against the drawer and
803
although may not be intended to be presented,
has the same
804
effect as an ordinary check,

and if passed to the third person,
805
will be valid in his hands like any other check.
(Ibid)
802 Franklin Bank v. Freeman, 16 Pick 535
803 Cushing v. Gore, 15 Mass. 69.z
804 Dykes v. Leather Manufactures Bank, 11 Page 612
805 Franklin Bank v. Freeman, supra
424
Feature of a Memorandum Check
A memorandum check may carry with it the understanding that
it is not [to] be presented at the bank but will be redeemed by the
maker himself when the loan falls due. This understanding may
be manifested by writing across the check Memorandum,
Memo, or Mem. (People vs. Nitafan, supra)
It presents all the features of other negotiable instruments
when transferred or indorsed to a bona fide holder for value. It is
a contract by which the maker engages to pay the bona fide
holder absolutely, and not upon a condition to pay if the bank
upon which it be drawn should not pay upon presentation at
maturity, and if due notice of the presentation and nonpayment
806
should be given.
Liabilities of a drawee bank
The bank of which a check is drawn, known as the drawee
bank, is under strict liability, based on the contract between the
bank and its customer (drawer), to pay the check only to the
payee or the payees order.

The drawers instructions are
reflected on the face and by the terms of the check.
W hen the drawee bank pays a person other than the payee
named on the check, it does not comply with the terms of the
check and violates its duty to charge the drawers account only for
properly payable items.
Thus, the Supreme Court ruled in Philippine National Bank vs.
Rodriguez, that a drawee should charge to the drawers account
only the payables authorized by the latter; otherwise, the drawee
will be violating the instructions of the drawer and shall be liable
for the amount charged to the drawers account. (Bank of
America, NT & SA, vs. Associated Citizens Bank, G.R. No.
141001, 141018, May 21, 2009, [Carpio, J.])
Liability of an endorser bank under Section 66 of the
Negotiable Instruments Law
In check transactions, 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 acting
of presenting the check for payment to the drawee is an assertion
806 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 407, citations omitted
425
ascertain the genuineness of the endorsements. (Bank of
America, NT & SA, vs. Associated Citizens Bank, G.R. No.
141001, 141018, May 21, 2009, [Carpio, J.])
If a bank refuses to pay a check, can the payee-holder thereof
sue the bank?
No.
If a bank refuses to pay a check (notwithstanding
sufficiency of funds), the payee-holder cannot sue the bank the
payee-holder should instead sue the drawer who might in turn sue
the bank. (Villanueva vs. Nite, 496 SCRA 459 [2006]) . Section
807
189
is sound law based on logic and established legal
principles: no privity of contract between the drawee-bank and the
payee. (supra)
Is there any difference between a Check and a Promissory
Note?
A check is a form of a bill of exchange wherein it is an
unconditional order in writing addressed by one person to another
(usually a bank), 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, whereas, a promissory note is an unconditional promise to
pay made by one person addressed to another, on demand or
also at a fixed or determinable future time, a sum certain in
money to order or to bearer.
A check necessarily involves three individuals, the drawer, the
payee, and the drawee (bank), whereas, a promissory note only
involves two persons, the maker and the payee.
In checks, liability of the drawee bank arises from the moment
the latter accepts the check being presented either for acceptance
or payment, whereas in promissory notes, liability of the maker
attaches from the moment the instrument was delivered to the
payee for the purpose of giving effect thereto.
Question:
Does a collecting bank, over the objections of the depositor,
have
the
authority
to
withdraw
unilaterally
from
such
depositors account the amount it had previously paid upon
807 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. (emphasis ours)
426
certain
unindorsed
order
instruments
deposited
by
the
depositor to another account that she later closed?
This was the query poised by Justice Azcuna in the case of
Bank of the Philippine Islands vs. Court of Appeals, et al,
where it was held that:
The collecting bank, had the right to debit the depositors
account for the value of the checks it previously credited in her
favor.
It is of no moment that the account debited by the
collecting bank was different from the original account to which
the proceeds of the check were credited because both admittedly
808
belonged to depositor.
The right to set-off was explained in Associated Bank vs.
809
Tan.
A bank generally has a right of set-off over the deposits therein
for the payment of any withdrawals on the part of a depositor.
The right of a collecting bank to debit a clients account for the
value of a dishonored check that has previously been credited has
fairly been established by jurisprudence. To begin with, Article
1980 of the Civil Code provides that [f]ixed, savings, and current
deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan.
Hence, the relationship between banks and depositors has
been held to be that of creditor and debtor.

Thus, legal
compensation under Article 1278 of the Civil Code may take place
when all the requisites mentioned in Article 1279 are present.
x x x
W hile, however, it is conceded that petitioner had the right to
set-off the amount it paid to Templonuevo against the deposit of
Salazar, the issue of whether it acted judiciously is an entirely
810
different matter.
As businesses affected with public interest,
and because of the nature of their functions, banks are under
obligation to treat the accounts of their depositors with meticulous
care, always having in mind the fiduciary nature of their
811
relationship.
In this regard, petitioner was clearly remiss in its
duty to private respondent Salazar as its depositor.
808 Bank of the Philippine Islands vs. Court of Appeals, et al, January 25, 2007, G.R. No. 136202
809 G.R. No. 156940, December 14, 2004, 446 SCRA 282 (italics supplied).
810 Id
427
To begin with, the irregularity appeared plainly on the face of
the checks. Despite the obvious lack of indorsement thereon,
petitioner permitted the encashment of these checks three times
on three separate occasions. This negates petitioners claim that
it merely made a mistake in crediting the value of the checks to
Salazrs account and instead bolsters the conclusion of the CA
that petitioner recognized Salazars claim of ownership of the
checks and acted deliberately in paying the same, contrary to
ordinary banking policy and practice. It must be emphasized that
the law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of determining
their genuineness and regularity.

The collecting bank, being
primarily engaged in banking, holds itself out to the public as the
expert on this field, and the law thus holds it to a high standard of
812
conduct.
The taking and collection of a bank without the proper
813
indorsement amount to a conversion of the check by the bank.
In depositing the check under his name, the depositor does
not
automatically
become
the
owner
of
the
amount
deposited.
In Bank of the Philippine Islands vs. Court of Appeals and
814
Benjamin Napiza
: as correctly held by the Court of Appeals, in
depositing the check in his name, private respondent did not
become the outright owner of the amount stated therein. Under
the above rule, by depositing the check with petitioner, private
respondent was, in a way, merely designating petitioner as the
collecting bank.
This is in consonance with the rule that a
negotiable instrument, such as a check, whether a managers
815
check or ordinary check, is not legal tender.
As such, after
receiving the deposit, under its own rules, petitioner shall credit
the amount in private respondents account or infuse value
thereon only after the drawee bank shall have paid the amount of
the check or the check has been cleared for deposit. Again, this
is in accordance with ordinary banking practices and with this
Courts pronouncement 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
811 Prudential Bank v. CA, G.R. No. 125536, March 16, 2000, 328 SCRA 264; Simex International [Manila], Inc. v.
CA, G.R. No.88013, March 19, 1990, 183 SCRA 360; BPI v. IAC, G.R. No. 69162, February 21, 1992, 206 SCRA
408
812 Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp., G.R. No. L-74917, January 20,1988,
157 SCRA 188
813 Associated Bank v. CA, G.R. No. 89802, May 7, 1992, 208 SCRA 465; City Trust Banking Corp. v. IAC, G.R.
No. 84281, May 27, 1994, 232 SCRA 559
814 February 29, 2000
815 Philippine Airlines, Inc. v. Court of Appeals, L-49188, 181 SCRA 557, 568 (1990) citing Sec. 189 of the
Negotiable Instruments Law; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v.
Santos, 9 Phil. 44 and 21 R.C.L. 60, 61
428
ascertain the genuineness of the endorsements.

816
The rule
finds more meaning in this case where the check involved is
drawn on a foreign bank and therefore collection is more difficult
than when the drawee bank is a local one even though the check
817
in question is a managers check.
Distinguish
between Drawn
Against
Insufficient
Funds
(DAIF) and Drawn Against Uncollected Deposit (DAUD).
DAIF
DAUD
Is a condition in which a
depositors balance is
inadequate for the bank to
pay a check.
It means that the account
has, on its face, sufficient
funds but not yet available
to the drawer because the
deposit, usually a check,
had not yet been cleared.
It subjects the depositor to
possible prosecution for
estafa and Bouncing
It does not expose the
depositor the estafa and
BP 22
Checks Law (BP 22)
(Bank of the Philippine Islands vs. Suarez, G.R. No.
167750, March 15, 2010, [Carpio. J.])
Prescriptive Period to bring action
The statute of limitations begins to run when the bank gives
the depositor notice of the payment, which is ordinarily when the
check is returned to the alleged drawer as a voucher with a
818
statement of his account,
and an action upon a check is
ordinarily governed by the statutory period applicable to the
819
instruments in writing.
(Philippine Commercial International
816 Associated Bank v. Court of Appeals, 322 Phil. 677, 699-700 citing Bank of the Philippines Islands v. Court of
Appeals, G.R. No. 102383, 216 SCRA 51, 63 (1992), Banco de Oro v. Equitable Banking Corporation, G.R. 74917,
157 SCRA 188 (1988) and Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking Corporation, 43
Phil. 678
817 A manager's check is like a cashier's check which, in the commercial world, is regarded substantially to be as
good as the money it represents (Tan v. Court of Appeals, G.R. No. 108555, 239 SCRA 310, 322 (1944)
818 Supra note 20 at Section 605, Vda De Bataclan, et al vs. Medina, 102 Phil. 181, 186 (1957)
819 Ibid
429
Bank vs. Court of Appeals and Ford Philippines, Inc., January 29,
2001)
Our laws on the matter provide that the action upon a written
contract must be brought within ten years from the time the right
820
of action accrues.
Hence, the reckoning time for the
prescriptive period begins when the instrument was issued and
the corresponding check was returned by the bank to its depositor
(normally a month thereafter). Applying the same rule, the cause
of action for the recovery of the proceeds of Citibank Check No.
SN 04867 would normally be a month after December 19, 1977,
when Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of
action was filed on January 20, 1984, barely six years had lapsed.
Thus, we conclude that Fords cause of action to recover the
amount of Citibank Check No. SN 04867 was seasonably filed
within the period provided by law. (supra)
PHILIPPINE CLEARING HOUSE ACT
What is the purpose of the creation of the Philippine Clearing
House Corporation?
ANSW ER:
The Philippine Clearing House Corporation was created to
facilitate the clearing of checks among member banks. (Insular
820 Civil Code, Art. 1144
430
Savings Bank vs. Far Eastern Bank and Trust Company, G.R. No.
141818, June 22, 2006, [Ynares-Santiago, J.])
Under its Articles of Incorporation, the PCHC provides an
effective, convenient, efficient, economical and relevant exchange
and facilitate services limited to check processing and sorting by
way of assisting member banks, entities in clearing checks and
other clearing items as defined and existing in future Central Bank
of the Philippines Circulars, memoranda, circular letters rules and
regulations and policies in pursuance of Section 107 of RA 265.
Pursuant to its function involving the clearing of checks and other
clearing items, the PCHC has adopted rules and regulations
designed to provide member banks with a procedure whereby
disputes involving the clearance of checks and other negotiable
instruments undergo a process of arbitration prior to submission
to the courts below. This procedure not only ensures a uniformity
of rulings relating to factual disputes involving checks and other
negotiable instruments but also provides a mechanism for settling
minor disputes among participating and member banks who
would otherwise go directly to the trial courts. W hile the PCHC
Rules and Regulations allow appeal to the Regional Trial Courts
only on questions of fact already decided by the PCHC arbitration
when warranted and appropriate.

821
In Banco de Oro Savings and Mortgage Banks vs. Equitable
822
Banking Corporation
, this Court had the occasion to rule on the
validity of these rules as well as the jurisdiction of the PCHC as a
forum for resolving disputes and controversies involving checks
and other clearing items when it held that the participation of two
banks in the Clearing Operations of the PCHC (was) a
manifestation of its submission to its jurisdiction.

823
What is the extent of the jurisdiction of the Philippine
Clearing House Corporation (PCHC)?
Among the member banks of the PCHC exists a
compromissoire or an arbitration agreement embedded in their
contract wherein they consent that any future dispute or
controversy between its PCHC participants involving any check
would be submitted to the Arbitration Committee for arbitration.
821 Associated Bank vs. Court of Appeals, et al., G.R. No. 107918, June 14, 1994
822 157 SCRA 188 (1988)
823 Ibid., page 196, cited in Assciated Bank vs. Court of Appeals, June 14, 1994
431
The PCHC has its own Rules and Procedure for Arbitration
(PCHC Rules). However, this is governed by Republic Act No.
876, also known as the Arbitration Law and supplemented by the
Rules of Court. (Insular Savings Bank vs. Far Eastern Bank and
Trust Company,
Santiago, J.])
G.R.
No.
141818,
June
22,
2006, [Ynares-
Moreover, take note that, since the PCHC Rules came about
only as a result of an agreement between and among member
banks of PCHC and not by law, it cannot confer jurisdiction to the
RTC. Thus, the portion of the PCHC Rules granting jurisdiction to
the RTC review arbitral awards, only on questions of law, cannot
be given effect. (ibid.)
824
In the case of Associated Bank vs. Court of Appeals, et al.,
it
was held that: [u]nder the rules and regulations of the Philippine
Clearing House Corporation (PCHC), the mere act of participation
of agreement by the parties to abide by its rules and
825
regulations.
And as a consequence of such participation, a
party cannot invoke the jurisdiction of the courts over disputes and
controversies which fall under the PCHC Rules and Regulations
without first going through the arbitration processes laid out by the
body. Since claims relating to the regularity of checks cleared by
banking institutions are among those claims which should first be
submitted for resolution by the PCHCs Arbitration Committee,
petitioner Associate Bank, having voluntarily bound itself to abide
by such rules and regulations, is estopped from seeking relief
from the Regional Trial Court on the coattails of a private claim
and in the guise of a third party complaint without first having
obtained a decision adverse to its claim from the said body. It
cannot bypass the arbitration process on the basis of its averment
that its third party complaint is inextricably linked to the original
complaint in the Regional Trial Court.
The applicable PCHC provisions on the question of jurisdiction
provide:
Sec. 3 AGREEMENT TO THESE RULES
It is the general agreement and understanding,
that any participant in the PCHC MICR clearing
operations, by the mere act of participation,
thereby manifests its agreement to these Rules
and
Regulations,
and
its
subsequent
amendments.
xxx xxx xxx
824 G.R. No. 107918, June 14, 1994, [Kapunan, J.]
825 PCHC Rules and Regulations, Sec. 3 9hereinafter cited as Rules)
432
Sec. 36 ARBITRATIONS
36.1 Any dispute or controversy between two or
more
clearing
participants
involving
any
check/item thru PCHC shall be submitted to the
Arbitration Committee, upon written complaint of
any involved participant by filing the same with
the PCHC serving the same upon the other party
or parties, who shall within fifteen (15) days after
receipt thereof, file with the Arbitration Committee
its written answer to such written complaint and
also within the same period serve the same upon
the complaining participant. This period of fifteen
(15) days may be extended by the Committee not
more than once for another period of fifteen (15)
days, but upon agreement in writing of the
complaining party, said extension may before
such period as the latter may agree to.
Section 36.6 is even more emphatic:
26.6 The fact that a bank participates in the
clearing operations of PCHC shall be deemed it
written and subscribed consent to the binding
effect of this arbitration agreement as if it had
done so in accordance with Section 4 of the
Republic Act No. 876 otherwise known as the
Arbitration Law.
Thus, not only do the parties manifest by mere participation
their consent to these rules, but such participation is deemed
(their) written and subscribed consent to the binding effect of
arbitration agreements under the PCHC rules.

Moreover, a
participant subject to the Clearing House Rules and Regulations
of the PCHC may go on appeal to any Regional Trial
Courts where the head office of any of the parties is located only
after a decision or award has been rendered by the arbitration
826
committee or arbitrator on questions of law.
Clearly therefore, petitioner Associated Bank, by its voluntary
participation and its consent to the arbitration rules cannot go
directly to the Regional Trial Court when it finds it convenient to do
so. The jurisdiction of the PCHC under the rules and regulations
is clear, undeniable and is particularly applicable to all the parties
826 Rules, Sec. 13
433
in the third party complaint under their obligation to first seek
redress of their disputes and grievances with the PCHC before
going to the trial court.
Third-Party Complaints
As a general rule, a trial court that has established jurisdiction
over the main action also acquires jurisdiction over a third-party
complaint, even if it could not have done so had the latter been
filed as an independent action. This rule, however, does not apply
to banks that have agreed to submit their disputes over check
clearings to arbitration under the rules of the Philippine Clearing
House Corporation. In that event, primary recourse should be to
the PCHC Arbitration Committee, without prejudice to an appeal
to the trial courts. In other words, without first resorting to the
PCHC, the third-party complaint would be premature. (Allied
Banking Corporation vs. Court of Appeals and Bank of the
Philippine Islands, Inc., G.R. No. 123871, August 31, 1998,
[Panganiban, J.:])
Illustrative Case:
Allied Banking Corporation vs. Court of Appeals
and Bank of the Philippine Islands, Inc.
G.R. No. 123871, August 31, 1998
PANGANIBAN, J.:
Hyatt Terraces Baguio issued two crossed checks drawn
against Allied Banking Corp. (hereinafter, ALLIED) in favor of
appellee Meszellen Commodities Services, Inc. (hereinafter,
MESZELLEN). Said checks were deposited on August 5, 1980
and August 18, 1980, respectively, with the now defunct
Commercial Bank and Trust Company (hereinafter, COMTRUST).
Upon receipt of the above checks, COMTRUST stamped at the
back thereof the warranty "All prior endorsements and/or lack of
endorsements guaranteed." After the checks were cleared
through the Philippine Clearing House Corporation (hereinafter,
PCHC), ALLIED BANK paid the proceeds of said checks to
COMTRUST as the collecting bank.
On March 17, 1981, the payee, MESZELLEN, sued the
drawee, ALLIED BANK, for damages which it allegedly suffered
when the value[s] of the checks were paid not to it but to some
other person.
Almost ten years later, or on January 10, 1991, before
defendant ALLIED BANK could finish presenting its evidence, it
434
filed a third party complaint against Bank of the Philippine Islands
(hereinafter, BPI, appellee herein) as successor-in-interest of
COMTRUST, for reimbursement in the event that it would be
adjudged liable in the main case to pay plaintiff, MESZELLEN.
The third party complaint was admitted [in] an Order dated May
16, 1991 issued by the Regional Trial Court of Pasig, Branch 162.
On July 16, 1991, BPI filed a motion to dismiss said third party
complaint grounded on the following: 1) that the court ha[d] no
jurisdiction over the nature of the action; and 2) that the cause of
action of the third party plaintiff ha[d] already prescribed.
On September 16, 1991, the trial court issued an order
dismissing the third party complaint. Defendant-third party
plaintiff's motion for reconsideration of

this
order was
827
subsequently denied.
828
Petitioner raises the following issues:
I. The Respondent Honorable Court of Appeals erred in holding
that the cause of action of the third-party complaint ha[d] already
prescribed.
II. The Respondent Honorable Court of Appeals erred in holding
that the filing of the third party complaint should be disallowed as
it would only delay the resolution of the case.
The Court's Ruling
The petition is bereft of merit.
Critical Issue: Mandatory Recourse to PCHC
To buttress its claim, private respondent contends that
petitioner's remedy rests with the PCHC, of which both Allied and
BPI are members, in consonance with the Clearing House Rules
and Regulations which, in part, states:
Sec. 38 Arbitration
Any dispute or controversy between two or more clearing
participants involving any check/item cleared thru PCHC
shall be submitted to the Arbitration Committee, upon
written complaint of any involved participant by filing the
same with the PCHC serving the same upon the other
party or parties, who shall within fifteen (15) days after
827 CA Decision, pp. 1-2; rollo, pp. 24-25
828 Petition, p. 6; rollo, p. 16
435
receipt thereof file with the Arbitration Committee its
written answer to such written complaint and also within
the same period serve the same upon the complaining
participant, . . . .
Private respondent cites Banco de Oro Sayings and Mortgage
829
Bank v. Equitable Banking Corporation
and Associated Bank v.
830
Court of Appeals,
which upheld the right of the PCHC to settle
and adjudicate disputes between member banks. In Banco de
Oro, the Court ruled:
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. Secs.
3 and 36.6 of the PCHC-CHRR clearing rules and
regulations provide:
Sec. 3. AGREEMENT TO THESE RULES. It is
the general agreement and understanding that
any participant in the Philippine Clearing House
Corporation, MICR clearing operations[,] by the
mere fact of their participation, thereby manifests
its agreement to these Rules and Regulations
and its subsequent amendments.
Sec. 36.6. (ARBITRATION) The fact that a
bank participates in the clearing operations of the
PCHC shall be deemed its written and subscribed
consent to the binding effect of this arbitration
agreement as if it had done so in accordance with
section 4 of (the) Republic Act. No. 876,
otherwise known as the Arbitration Law.
Further[,] Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to
the arbitration of one or more arbitrators any
controversy existing between them at the time of
the submission and which may be the subject of
any action, or the parties of any contract may in
such contract agree to settle by arbitration a
controversy thereafter arising between them.
Such submission or contract shall be valid and
irrevocable, save upon grounds as exist at law for
the revocation of any contract.
829 157 SCRA 188, January 20, 1988, per Gancayco, J
830 233 SCRA 137, June 14, 1994, per Kapunan, J
436
Such submission or contract may include
question arising out of valuations, appraisals or
other controversies which may be collateral,
incidental, precedent or subsequent to any issue
between the parties. (Emphasis supplied.)
Associated
Bank
also
disallowed
similar
third-party
complaint, ruling thus:
Under the rules and regulations of the Philippine Clearing
House Corporation (PCHC), the mere act of participation
of the parties concerned in its operations in effect
amounts to a manifestation of agreement by the parties to
abide by its rules and regulations. As a consequence of
such participation, a party cannot invoke the jurisdiction of
the courts over disputes and controversies which fall
under the PCHC Rules and Regulations without first
going through the arbitration processes laid out by the
body. Since claims relating to the regularity of checks
cleared by banking institutions are among those claims
which should first be submitted for resolution by the
PCHC's Arbitration Committee, petitioner Associated
Bank, having voluntarily bound itself to abide by such
rules and regulations, is estopped from seeking relief
from the Regional Trial Court on the coattails of a private
claim and in the guise of a third party complaint without
first having obtained a decision adverse to its claim from
the said body. It cannot bypass the arbitration process on
the basis of its averment that its third party complaint is
inextricably linked to the original complaint in the Regional
Trial Court.
xxx xxx xxx
Clearly therefore, petitioner Associated Bank, by its
voluntary participation and its consent to the arbitration
rules cannot go directly to the Regional Trial Court when it
finds it convenient to do so. The jurisdiction of the PCHC
under the rules and regulations is clear, undeniable and is
particularly applicable to all the parties in the third party
complaint under their obligation to first seek redress of
their disputes and grievances [from] the PCHC before
going to the trial court.
Finally, the contention that the third party complaint
should not have been dismissed for being a necessary
437
and inseparable offshoot of the main case over which the
court a quo had already exercised jurisdiction misses the
fundamental point about such pleading. A third party
complaint is a mere procedural device which under the
Rules of Court is allowed only with the court's permission.
It is an action "actually independent of, separate and
distinct from the plaintiffs' complaint" (s)uch that, were it
not for the Rules of Court, it would be necessary to file the
action separately from the original complaint by the
defendant against the third party. (Emphasis supplied.)
Banco de Oro and Associated Bank are clear and unequivocal:
a third-party complaint of one bank against another involving a
check cleared through the PCHC is unavailing, unless the thirdparty claimant has first exhausted the arbitral authority of the
PCHC Arbitration Committee and obtained a decision from said
body adverse to its claim.
Recognizing the role of the PCHC in the arbitration of disputes
between participating banks, the Court in Associated Bank further
held: "Pursuant to its function involving the clearing of checks and
other clearing items, the PCHC has adopted rules and regulations
designed to provide member banks with a procedure whereby
disputes involving the clearance of checks and other negotiable
instruments undergo a process of arbitration prior to submission
to the courts below. This procedure not only ensures a uniformity
of rulings relating to factual disputes involving checks and other
negotiable instruments but also provides a mechanism for settling
minor disputes among participating and member banks which
would otherwise go directly to the trial courts."
W e defer to the primary authority of PCHC over the present
dispute, because its technical expertise in this field enables it to
better resolve questions of this nature. This is not prejudicial to
the interest of any party, since primary recourse to the PCHC
does not preclude an appeal to the regional trial courts on
questions of law. Section 13 of the PCHC Rules reads:
Sec. 13. The findings of facts of the decision or award
rendered by the Arbitration Committee or by the sole
Arbitrator as the case may be shall be final and
conclusive upon all the parties in said arbitration dispute.
The decision or award of the Arbitration Committee or of
the Sole Arbitrator shall be appealable only on questions
of law to any of the Regional Trial Courts in the National
Capital Judicial Region where the Head Office of any of
the parties is located. The appellant shall perfect his
appeal by filing a notice of appeal to the Arbitration
438
Secretariat and filing a Petition with the Regional Trial
Court of the National Capital Region . . . .
Furthermore, when the error is so patent, gross and prejudicial
as to constitute grave abuse of discretion, courts may address
831
questions of fact already decided by the arbitrator.
W e are not unaware of the rule that a trial court, which has
jurisdiction over the main action, also has jurisdiction over the
third-party complaint, even if the said court would have had no
832
jurisdiction over it had it been filed as an independent action.
However, this doctrine does not apply in the case of banks, which
have given written and subscribed consent to arbitration under the
auspices of the PCHC.
By participating in the clearing operations of the PCHC,
petitioner agreed to submit disputes of this nature to arbitration.
Accordingly, it cannot invoke the jurisdiction of the trial courts
without a prior recourse to the PCHC Arbitration Committee.
Having given its free and voluntary consent to the arbitration
clause, petitioner cannot unilaterally take it back according to its
whim. In the world of commerce, especially in the field of banking,
the promised word is crucial. Once given, it may no longer be
broken.
Upon the other hand, arbitration as an alternative method of
dispute resolution is encouraged by this Court. Aside from
unclogging judicial dockets, it also hastens solutions especially of
commercial disputes.
In view of the foregoing, a discussion of the issues raised by
the petitioners is unnecessary.
W HEREFORE, the petition is DENIED for lack of merit. Costs
against petitioner.
SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.
831 Asia Construction and Development Corporation v. Construction Industry Arbitration Commission, 218 SCRA
529, February 8, 1993; Sime Darby v. Deputy Administrator, 180 SCRA 177, December 15, 1989
832 Regalado, Remedial Law Compendium, Vol. 1, 5th revised ed., p. 95; Republic v. Central Surety and Insurance
Co., 25 SCRA 641, October 26, 1968; Eastern Assurance & Surety Corporation v. Cui, 105 SCRA 622, July 20,
1981; Talisay-Silay Milling Co. Inc. and J. Amado Araneta v. CIR and Central Azucarera del Danao, 18 SCRA 894,
November 29, 1966
439
Does PCHCs jurisdiction extend to non-negotiable checks?
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. x x x 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
833
and the customer is that the money is needed on demand.
(Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation, G.R. No. 74917, January 20, 1988, [Gancayco, J.])
Viewing these provisions (Sec. 3 and 36.6 PCHC-CHRR
clearing rules and regulations; Sec. 2 Arbitration Law; Sec. 21 of
the same rules), the conclusion is clear that the PCHC Rules and
Regulations should not be interpreted to be applicable only to
checks which are negotiable instruments but also to nonnegotiable instruments and that the PCHC has jurisdiction over
this case even as the checks subject of this litigations are
admittedly non-negotiable. (supra)
What may be some of the judicial remedies available to the
losing party in case the Philippine Clearing House
Commission Arbitration Committee denies its motion for
reconsideration?
ANSWER:
a.
It may petition the proper Regional Trial Court to issue an
order vacating the award on the grounds provided for
under Section 24 of the Arbitration Law;
b.
File a petition for review under Rule 43 of the Rules of
Court with the Court of Appeals on questions of fact, of
law, or mixed questions of fact and law; or
c.
File a petition for certiorari under Rule 45 of the Rules of
Court on the ground that the Arbitrator Committee acted
without or in excess of jurisdiction or with grave abuse of
discretion amounting to lack or excess of jurisdiction.
833 Harker v. Anderson, 21 Wend. (N.Y.), 2 Sto. 502, Fed. Case No. 1, 985; Merchants National Bank v. Bank 10
Wall (U.S.) 647,19 L. Ed. 1008; Wood River Bank v. Bank 36 Neb. 744 N.W. 239
440
(Insular Savings Bank vs. Far Eastern Bank and Trust Company,
G.R. No. 141818, June 22, 2006, [Ynares-Santiago, J.])
What are the grounds under Section 24 of the Arbitration Law
for the issuance of the Regional Trial Court of an order to
vacate the award granted by the Philippine Clearing House
Corporation Arbitration Committee?
ANSWER:
SEC. 24. Grounds for vacating award. In any one of the
following cases, the court must make an order vacating
the award upon the petition of any party to the controversy
when such party proves affirmatively that in the arbitration
proceedings:
(a) The award was procured by corruption, fraud
or other undue means; or
(b) That there was evident partiality or corruption
in the arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct
in refusing to postpone the hearing upon
sufficient cause shown, or in refusing to hear
evidence
pertinent
and
material
to
the
controversy; that one or more of the arbitrators
was disqualified to act as such under section nine
hereof, and willfully refrained from disclosing such
disqualification or of any other misbehavior by
which the rights of any party have been materially
prejudiced; or
(d) That the arbitrators exceeded their powers, or
so imperfectly executed them, that a mutual, final
and definite award upon the subject matter
submitted to them was not made.
x x x x
(Insular Savings Bank vs. Far Eastern Bank and
Trust Company, G.R. No. 141818, June 22, 2006,
[Ynares-Santiago, J.])
441
BATAS PAMBANSA BILANG 22
(BOUNCING CHECKS LAW)
Reason for the law
BP 22 or the Bouncing Checks Law was enacted for the
specific purpose of addressing the problem of the continued
issuance and circulation of unfunded checks by irresponsible
persons. To stem the harm caused by these bouncing checks to
the community, BP 22 considers the mere act of issuing an
unfunded check as an offense not only against property but also
834
against public order.
The purpose of BP 22 in declaring the
mere issuance of a bouncing check as malum prohibitum is to
punish the offender in order to deter him and others from
committing the offense, to isolate him from society, to reform and
835
rehabilitate him, and to maintain social order.
The penalty is
834 Lozano v. Martinez, 230 Phil. 406, 428 (1986)
835 Rosario v. Co, G.R. No. 133608, August 26, 2008, 563 SCRA 239, 253
442
stiff. BP 22 imposes the penalty of imprisonment for at least 30
days or a fine of up to double the amount of the check or both
imprisonment and fine. (Mitra vs. People, G.R. No. 191404, July
5, 2010, [Mendoza, J.:])
Elements of violation of Section 1 of Batas Pambansa Bilang
22
a)
The making, drawing, and issuance of any check to
apply for account or for value;
b)
The knowledge of the maker, drawer, or issuer that
at the time of issue he does not have sufficient funds in or
credit with the drawee bank for the payment of the check
in full upon its presentment; and
c)
The subsequent dishonor of the check by the drawee
bank for insufficiency of funds or credit or dishonor for the
same reason had not the drawer, without any valid cause,
ordered the bank to stop payment.
(Ting vs. CA, 398 Phil. 481 (2000); Sycip, Jr. vs. CA, G.R.
No. 125059, March 17, 2000, 328 SCRA 447. See Batas
Pambansa Bilang 22 (1979), Section 1, cited in Lunaria
vs. People of the Philippines, G.R. No. 160127,
November 11, 2008)
Illustrative Case:
Eumelia Mitra vs. People of the Philippines and Felicisimo
Tarcelo
G.R. No. 191404, July 5, 2010
MENDOZA, J.:
FACTS:
Petitioner
Eumelia
R.
Mitra
(Mitra)
was
the
Treasurer, and Florencio L. Cabrera, Jr. (now
deceased) was the President, of Lucky Nine
Credit
Corporation
(LNCC),
a
corporation
engaged in money lending activities.
Between 1996 and 1999, private respondent
Felicisimo S. Tarcelo (Tarcelo) invested money in
LNCC. As the usual practice in money placement
transactions,
Tarcelo
was
issued
checks
443
equivalent to the amounts he invested plus the
interest on his investments.
W hen Tarcelo presented these checks for
payment, they were dishonored for the reason
"account closed." Tarcelo made several oral
demands on LNCC for the payment of these
checks but he was frustrated. Constrained, in
2002, he caused the filing of seven informations
for violation of Batas Pambansa Blg. 22 (BP 22) in
the total amount of P925,000.00 with the MTCC in
Batangas City.
ISSUES:
W hether or not the elements of violation of Batas
Pambansa Bilang 22 must be proved beyond
reasonable doubt as against the corporation who
owns the current account where the subject
checks were drawn before liability attaches to the
signatories?
RULING:
A check is a negotiable instrument that serves as
a substitute for money and as a convenient form
of
payment
in
financial
transactions
and
obligations. The use of checks as payment allows
commercial and banking transactions to proceed
without the actual handling of money, thus, doing
away with the need to physically count bills and
coins whenever payment is made. It permits
commercial and banking transactions to be
carried out quickly and efficiently. But the
convenience afforded by checks is damaged by
unfunded checks that adversely affect confidence
in our commercial and banking activities, and
ultimately injure public interest.
BP 22 or the Bouncing Checks Law was enacted
for the specific purpose of addressing the problem
of the continued issuance and circulation of
unfunded checks by irresponsible persons. To
stem the harm caused by these bouncing checks
to the community, BP 22 considers the mere act
of issuing an unfunded check as an offense not
only against property but also against public order.
The purpose of BP 22 in declaring the mere
issuance of a bouncing check as malum
prohibitum is to punish the offender in order to
deter him and others from committing the offense,
to isolate him from society, to reform and
444
rehabilitate him, and to maintain social order. The
penalty is stiff. BP 22 imposes the penalty of
imprisonment for at least 30 days or a fine of up to
double the amount of the check or both
imprisonment and fine.
Mitra posits in this petition that before the
signatory to a bouncing corporate check can be
held liable, all the elements of the crime of
violation of BP 22 must first be proven against the
corporation. The corporation must first be
declared to have committed the violation before
the liability attaches to the signatories of the
checks.
The Court finds itself unable to agree with Mitra's
posture. The third paragraph of Section 1 of BP 22
reads: "W here the check is drawn by a
corporation, company or entity, the person or
persons who actually signed the check in behalf of
such drawer shall be liable under this Act." This
provision recognizes the reality that a corporation
can only act through its officers. Hence, its
wording is unequivocal and mandatory - that the
person who actually signed the corporate check
shall be held liable for a violation of BP 22. This
provision
does
not
contain
any condition,
qualification or limitation.
836
In the case of Llamado v. Court of Appeals ,
the
Court ruled that the accused was liable on the
unfunded corporate check which he signed as
treasurer of the corporation. He could not invoke
his lack of involvement in the negotiation for the
transaction as a defense because BP 22 punishes
the mere issuance of a bouncing check, not the
purpose for which the check was issued or in
consideration of the terms and conditions relating
to its issuance. In this case, Mitra signed the
LNCC checks as treasurer. Following Llamado,
she must then be held liable for violating BP 22.
Another essential element of a violation of BP 22
is the drawer's knowledge that he has insufficient
funds or credit with the drawee bank to cover his
836 337 Phil. 153, 160 (1997)
445
check. Because this involves a state of mind that
is difficult to establish, BP 22 creates the prima
facie presumption that once the check is
dishonored, the drawer of the check gains
knowledge of the insufficiency, unless within five
banking days from receipt of the notice of
dishonor, the drawer pays the holder of the check
or makes arrangements with the drawee bank for
the payment of the check. The service of the
notice of dishonor gives the drawer the opportunity
to make good the check within those five days to
avert his prosecution for violating BP 22.
Mitra alleges that there was no proper service on
her of the notice of dishonor and, so, an essential
element of the offense is missing. This contention
raises a factual issue that is not proper for review.
It is not the function of the Court to re-examine the
finding of facts of the Court of Appeals. Our review
is limited to errors of law and cannot touch errors
of facts unless the petitioner shows that the trial
court overlooked facts or circumstances that
warrant a different disposition of the case or that
the findings of fact have no basis on record.
Hence, with respect to the issue of the propriety of
service on Mitra of the notice of dishonor, the
Court gives full faith and credit to the consistent
findings of the MTCC, the RTC and the CA.
The defense postulated that there was no demand
served upon the accused, said denial deserves
scant consideration. Positive allegation of the
prosecution that a demand letter was served
upon the accused prevails over the denial
made by the accused. Though, having denied
that there was no demand letter served on April
10, 2000, however, the prosecution positively
alleged and proved that the questioned demand
letter was served upon the accused on April 10,
2000, that was at the time they were attending
Court hearing before Branch I of this Court. In
fact, the prosecution had submitted a Certification
issued by the other Branch of this Court certifying
the fact that the accused were present during the
April 10, 2010 hearing. W ith such straightforward
and categorical testimony of the witness, the Court
believes that the prosecution has achieved what
was dismally lacking in the three (3) cases of
446
Betty King, Victor Ting and Caras - evidence of
the receipt by the accused of the demand letter
sent to her. The Court accepts the prosecution's
narrative that the accused refused to sign the
same to evidence their receipt thereof. To require
the prosecution to produce the signature of
the accused on said demand letter would be
imposing an undue hardship on it. As well,
actual receipt acknowledgment is not and has
never been required of the prosecution either by
law or jurisprudence. [emphasis supplied]
W ith the notice of dishonor duly served and
disregarded, there arose the presumption that
Mitra and Cabrera knew that there were
insufficient funds to cover the checks upon their
presentment for payment. In fact, the account was
already closed.
To reiterate the elements of a violation of BP 22
as contained in the above-quoted provision, a
violation exists where:
1. a person makes or draws and issues a check to
apply on account or for value;
2. the person who makes or draws and issues the
check knows at the time of issue that he does not
have sufficient funds in or credit with the drawee
bank for the full payment of the check upon its
presentment; and
3. the check is subsequently dishonored by the
drawee bank for insufficiency of funds or credit, or
would have been dishonored for the same reason
had not the drawer, without any valid reason,
ordered the bank to stop payment.
There is no dispute that Mitra signed the checks
and that the bank dishonored the checks because
the account had been closed. Notice of dishonor
was properly given, but Mitra failed to pay the
checks or make arrangements for their payment
within five days from notice. W ith all the above
elements duly proven, Mitra cannot escape the
civil and criminal liabilities that BP 22 imposes for
447
its breach.
Ways of violating B.P. Blg. 22
There are two (2) ways of violating B.P. Blg. 22: (1) by making
or drawing and issuing a check to apply on account or for value
knowing at the time of issue that the check is not sufficiently
funded; and (2) by having sufficient funds in or credit with the
drawee bank at the time of issue but failing to keep sufficient
funds therein or credit with said bank to cover the full amount of
the check when presented to the drawee bank within a period of
837
ninety (90) days.
(Wong vs. Court of Appeals, G.R. No. 117857,
February 2, 2001)
Failure of the drawer to maintain funds in his bank to cover
the check for 90 days
Nowhere in the said provision does the law require a maker to
maintain funds in his bank account for only 90 days. Rather, the
clear import of the law is to establish a prima facie presumption of
knowledge of such insufficiency of funds under the following
conditions (1) presentment within 90 days from date of the check,
and (2) the dishonor of the check and failure of the maker to
make arrangements for payment in full within 5 banking days after
notice thereof. That the check must be deposited within ninety
(90) days is simply one of the conditions for the prima facie
presumption of knowledge of lack of funds to arise. It is not an
element of the offense. Neither does it discharge petitioner from
his duty to maintain sufficient funds in the account within a
reasonable time thereof. (Wong vs. Court of Appeals, G.R. No.
117857, February 2, 2001)
Lack of criminal intent irrelevant; gravamen of the offense
It bears repeating that the lack of criminal intent of the part of
838
the accused is irrelevant.
The law has made the mere act of
issuing a worthless check a malum prohibitum, an act proscribed
by legislature for being deemed pernicious and inimical to public
839
welfare.
In fact, even in cases where there had been payment,
through compensation or some other means, there could still be
prosecution for violation of B.P. 22. The gravamen of the
837 Section 1, B.P. Blg. 22
838 People v. Lo Ho Wing, G.R. No. 88017, 21 January 1991, 193 SCRA 122, 130. See Macalalag v. People, G.R.
No. 164358, December 20, 2006, 511 SCRA 400; Tan v. Mendez, 432 Phil. 760 (2002); People v. Laggui, G.R. Nos.
76262-63, March 16, 1989, 171 SCRA 305, 311; People v. Manzanilla, G.R. Nos. L-66003-04, 11 December 1987,
156 SCRA 279, 283
839 Macalalag v. People, G.R. No. 164358, December 20, 2006, 511 SCRA 400; Tan v. Mendez, 432 Phil. 760
(2002); People v. Laggui, G.R. Nos. 76262-63, March 16, 1989, 171 SCRA 305, 311; People v. Manzanilla, G.R.
Nos. L-66003-04, December 11, 1987, 156 SCRA 279, 283
448
offense under this law is the act of issuing a worthless
check that is dishonored upon its presentment for payment,
840
not the nonpayment of the obligation.
(Lunaria vs. People of the
Philippines, G.R. No. 160127, November 11, 2008) (emphasis
supplied)
Congress, in the exercise of police power, enacted BP 22 in
841
order to maintain public confidence in commercial transactions.
(Spouses Yap vs. First e-Bank Corporation, G.R. No. 169889,
September 29, 2009, [Corona, J.], citing Lozano vs. Martinez)
Intention
of
immaterial;
the
parties
criminal
in
intent
the
of
issuance
the
issuer
of
the
check
of
the
check
immaterial
842
In Abarquez vs. Court of Appeals
, it was held that: [t]he fact
that petitioner issued the subject checks knowing the inadequacy
of his funds in the bank to cover said checks makes him liable
843
under B.P. 22. As elaborated in Meriz vs. People
The Court has consistently declared that the cause or
reason for the issuance of the check is inconsequential in
determining criminal culpability under B.P. 22. The Court
has since said that a check issued as an evidence of a
debt, although not intended for encashment, has the
same effect like any other check and must thus be held to
be within the contemplation of B.P. 22. Once a check is
presented for payment, the drawee bank gives it the usual
course whether issued in payment of an obligation or just
as a guaranty of an obligation. B.P. 22 does not concern
itself with what might actually be envisioned by the
parties, its primordial intention being instead to ensure the
840 Macalalag v. People, G.R. No. 164358; December 20, 2006, 511 SCRA 400; Tan v. Mendez, 432 Phil. 760
(2002); Lozano v. Martinez, G.R. No. L-63419, December 18, 1986, 146 SCRA 323, 338
841 The gravamen of the offense punishable by BP 22 is the act of making and issuing a worthless check or a check
that is dishonored upon its presentation for payment. It is not the nonpayment of an obligation which the law
punishes. The law is not intended or designed to coerce a debtor to pay his debt. The thrust of the law is to prohibit,
under the pain of penal sanctions, the making of worthless checks and putting them in circulation. Because of its
deleterious effects on the public interest, the practice is proscribed by law. The law punishes the act not as offense
against property, but an offense against public order. Lozano v. Martinez, G.R. No. L-63419, 18 December 1986,
146 SCRA 323, 338. (emphasis supplied)
842 G.R. No. 148557, August 7, 2003
843 Pp. 531-532
449
stability and commercial value of checks as being virtual
substitutes for currency. It is a policy that can easily be
eroded if one has yet to determine the reason for which
checks are issued, or the terms and conditions for their
issuance, before an appropriate application of legislative
enactment can be made. The gravamen of the offense
under B.P. 22 is the act of making or issuing a worthless
check or a check that is dishonored upon presentment for
payment. The act effectively declares the offense to be
one of malum prohibitum. The only valid query then is
whether the law has been breached, i.e., by the mere act
of issuing a bad check, without so much regard as to the
criminal intent of the issuer.
844
More so, in the case of Cruz vs. Court of Appeals,
where it
was held that:
W hen a check is presented for payment, the drawee bank
will generally accept the same regardless of whether it
was issued in payment of an obligation or merely to
guarantee the said obligation. W hat the law punishes is
845
the issuance of a bouncing check
not the purpose for
which it was issued nor the term and conditions relating to
its issuance. The mere act of issuing a worthless check is
846
malum prohibitum.
This point has been made clear by
this Court, thus:
It is now settled that Batas Pambansa Bilang 22
applies even in cases where dishonored checks
are issued merely in the form of a deposit or a
guarantee. The enactment in question does not
make any distinction as to whether the checks
within its contemplation are issued in payment of
an obligation or merely to guarantee the said
obligation. In accordance with the pertinent rule of
statutory construction, inasmuch as the law has
not made any distinction in this regard, no such
distinction
can
be
made
by
means
of
interpretation or application. Furthermore, the
history of the enactment of subject statute
evinces the definite legislative intent to make the
prohibition all-embracing, without making any
exception from the operation thereof in favor of a
guarantee. This intent may be gathered from the
statement of the sponsor of the bill (Cabinet Bill
844 G.R. No. 108738, June 17, 1994, [Kapunan, J.:]
845 Lozano vs. Martinez, 146 SCRA 523; People vs. Veridiano II, 132 SCRA 523
846 Que vs. People, 154 SCRA 160
450
No. 9) which was enacted later into Batas
Pambansa Bilang 22, when it was introduced
before the Batasan Pambansa, that the bill was
introduced to discourage the issuance of
bouncing checks, to prevent checks from
becoming "useless scraps of paper" and to
restore respectability to checks, all without
distinction as to the purpose of the issuance of
the checks,. The legislative intent as above said
is made all the more clear when it is considered
that while the original text of Cabinet Bill No. 9,
supra, had contained a proviso excluding from
the coverage of the law a check issued as a mere
guarantee, the final version of the bill as
approved and enacted by the Committee on the
Revision of Laws in the Batasan deleted the
abovementioned qualifying proviso deliberately
for the purpose of making the enforcement of the
act more effective (Batasan Record, First Regular
Session, December 4, 1978, Volume II, pp.10351036).
Consequently, what are important are the facts
that the accused had deliberately issued the
checks in question to cover accounts and that the
checks in question to cover accounts and that the
checks were dishonored upon presentment
regardless of whether or not the accused merely
issued the checks as a guarantee. (pp. 4-5, Dec.
847
IAC) [pp. 37-38, Rollo].
The importance of arresting the proliferation of worthless
checks need not be underscored. The mischief created
by unfunded checks in circulation is injurious not only to
the payee or holder, but to the public as well. This harmful
practice "can very well pollute the channels of trade and
commerce, injure the banking system and eventually hurt
848
the welfare of society and the public interest."
Knowledge of the payee of the insufficiency or lack of funds
of the drawer immaterial
847 Id., pp. 164-165
848 Lozano vs. Martinez, supra, p. 340
451
The knowledge of the payee of the insufficiency or lack of
material funds of the drawer with the drawee bank is immaterial
as deceit is not an essential element of an offense penalized
by B.P. 22. The gravamen of the offense is the issuance of a bad
check, hence, malice and intent in the issuance thereof is
849
inconsequential.
(Ty vs. People of the Philippines, G.R. No.
149275, September 27, 2004) (emphasis supplied)
An essential element of the offense is knowledge on the part
of the maker or drawer of the check of the insufficiency of his
funds in or credit with the bank to cover the check upon its
presentment.
Since this involves a state of mind difficult to
establish, the statute itself creates a prima facie presumption of
such knowledge where payment of the check is refused by the
drawee because of insufficient funds in or credit with such bank
when presented within ninety (90) days from the date of the
check. To mitigate the harshness of the law in its application, the
statute provides that such presumption shall not arise if within five
(5) banking days from receipt of the notice of dishonor, the maker
or drawer makes arrangements for payment of the check by the
850
bank or pays the holder the amount of the check.
(Wong vs.
Court of Appeals, G.R. No. 117857, February 2, 2001)
No independent civil action
There is no independent civil action to recover civil liability
arising from the issuance of an unfunded check prohibited and
punished under Batas Pambansa Bilang 22 (BP 22). (Heirs of
Eduardo Simon vs. Chan and Court of Appeals, G.R. No. 157547,
February 23, 2011, [Bersamin, J.])
The Supreme Court has settled the issue of whether or not a
violation of BP 22 can give rise to civil liability in Banal v. Judge
851
Tadeo, Jr.,
holding:
x x x
Article 20 of the New Civil Code provides:
Every person, who contrary to law, willfully or negligently
causes damage to another, shall indemnify the latter for
the same.
Regardless, therefore, of whether or not a special law so
provides, indemnification of the offended party may be
849 Cruz v. Court of Appeals, G.R. No. 108738, 17 June 1994, 233 SCRA 301
850 Lozano vs. Martinez, 146 SCRA 323, 330-331 (1986)
851 G.R. No. L-78911, December 11, 1987, 156 SCRA 325
452
had on account of the damage, loss or injury directly
suffered as a consequence of the wrongful act of another.
The indemnity which a person is sentenced to pay forms
an integral part of the penalty imposed by law for the
commission of a crime (Quemel v. Court of Appeals, 22
SCRA 44, citing Bagtas v. Director of Prisons, 84 Phil.
692). Every crime gives rise to a penal or criminal action
for the punishment of the guilty party, and also to civil
action for the restitution of the thing, repair of the
damage, and indemnification for the losses (United States
v. Bernardo, 19 Phil. 625)
x x x
Civil liability to the offended party cannot thus be denied. The
payee of the check is entitled to receive the payment of money for
which the worthless check was issued. Having been caused the
damage, she is entitled to recompense.
Surely, it could not have been the intendment of the framer of
Batas Pambansa Blg. 22 to leave the offended party defrauded
and empty-handed by excluding the civil liability of the offender,
giving her only the remedy, which in many cases results in a
Pyrhic Victory, of having to file a separate civil suit. To do so may
leave the offended party unable to recover even the face value of
the check due her, thereby unjustly enriching the errant drawer at
the expense of the payee. The protection which the law seeks to
provide would, therefore, be brought to naught. (supra)
Nissan Gallery-Ortigas vs. Purificacion Felipe
G.R. No. 199067, November 11, 2013
MENDOZA, J.:
This case stemmed from a criminal complaint for violation or
Batas Pambansa Blg. 22 (BP 22) filed by petitioner Nissan GalleryOrtigas Nissan), an entity engaged in the business or car
dealership,
against
respondent
Purificacion
F.
Felipe
(Purificacion) with the Office of the City Prosecutor of Quezon
City. The said office found probable cause to indict Purificacion
and filed an Information before the Metropolitan Trial Court,
(raffled to Branch 41), Quezon City (MeTC), for her issuance of a
postdated check in the amount of P1,020,000.00, which was
subsequently dishonored upon presentment due to "STOP
PAYMENT."
453
Purificacion issued the said check because her son, Frederick
Felipe (Frederick), attracted by a huge discount of P220,000.00,
purchased a Nissan Terrano 4x4 sports and utility vehicle (SUV)
from Nissan. The term of the transaction was Cash-on-Delivery
and no downpayment was required. The SUV was delivered on
May 14, 1997, but Frederick failed to pay upon delivery. Despite
non-payment, Frederick took possession of the vehicle.
Since then, Frederick had used and enjoyed the SUV for more
than four (4) months without paying even a single centavo of the
purchase price. This constrained Nissan to send him two (2)
demand letters, on different dates, but he still refused to pay.
Nissan, through its retained counsel, was prompted to send a final
demand letter. Reacting to the final demand, Frederick went to
Nissans office and asked for a grace period until October 30,
1997 within which to pay his full outstanding obligation amounting
to P1,026,750.00. Through further negotiation, the amount was
eventually reduced to P1,020,000.00.
Frederick reneged on his promise and again failed to pay. On
November 25, 1997, he asked his mother, Purificacion, to issue
the subject check as payment for his obligation. Purificacion
acceded to his request. Frederick then tendered her postdated
check in the amount of P1,020,000.00. The check, however, was
dishonored upon presentment due to "STOP PAYMENT."
A demand letter was served upon Purificacion, through
Frederick, who lived with her. The letter informed her of the
dishonor of the check and gave her five (5) days from receipt
within which to replace it with cash or managers check. Despite
receipt of the demand letter, Purificacion refused to replace the
check giving the reason that she was not the one who purchased
the vehicle. On January 6, 1998, Nissan filed a criminal case for
violation of BP 22 against her.
During the preliminary investigation before the Assistant City
Prosecutor, Purificacion gave P200,000.00 as partial payment to
amicably settle the civil aspect of the case. Thereafter, however,
no additional payment had been made.
After trial, the MeTC rendered its judgment acquitting
Purificacion of the charge, but holding her civilly liable to Nissan.
The dispositive portion of the judgment states that:
W HEREFORE, judgment is hereby rendered ACQUITTING
accused PURIFICACION FELIPE of the crime of Violation of
Batas Pambansa 22. However, accused PURIFICACION FELIPE
is ordered to pay private complainant Nissan Gallery Ortigas the
454
amount of SIX HUNDRED SEVENTY FIVE THOUSAND PESOS
(P675,000.00) with legal interest per annum, from the filing of the
information until the finality of this decision.
SO ORDERED.
Purificacion appealed to the Regional Trial Court (RTC).
Branch 105 thereof affirmed the MeTC decision on December 22,
2008. The RTC ruled that Purificacion was estopped from denying
that she issued the check as a "show check" to boost the credit
standing of Frederick and that Nissan agreed not to deposit the
same. Further, the RTC considered Purificacion to be an
accommodation party who was "liable on the instrument to a
holder for value even though the holder at the time of taking the
instrument knew him or her to be merely an accommodation
party."
Purificacion moved for a reconsideration, but her motion was
denied.
The CA, before whom the case was elevated via a petition for
review, granted the petition on May 20, 2009. In so deciding, the
CA reasoned out that there was no privity of contract between
Nissan and Purificacion. No civil liability could be adjudged
against her because of her acquittal from the criminal charge. It
was Frederick who was civilly liable to Nissan.
It added that Purificacion could not be an accommodation
party either because she only came in after Frederick failed to pay
the purchase price, or six (6) months after the execution of the
contract between Nissan and Frederick. Her liability was limited to
her act of issuing a worthless check but by her acquittal in the
criminal charge, there was no more basis for her to be held civilly
liable to Nissan. Purificacions act of issuing the subject check did
not, by itself, assume the civil obligation of Frederick to Nissan or
automatically made her a party to the contract. Thus, the decretal
portion of the judgment reads:
W HEREFORE, finding merit therefrom, the instant petition is
GIVEN DUE COURSE and is hereby GRANTED. The Decision
and Order dated December 22, 2008 and May 20, 2009,
respectively, of the Regional Trial Court (RTC), Branch 105,
Quezon City, in Crim. Case No. Q-08-151734, affirming the
Judgment of the Metropolitan Trial Court (MeTC), Branch 41,
Quezon City, for Violation of B.P. 22, acquitting petitioner of the
crime charged but ordering the latter to pay respondent the
amount of Six Hundred Seventy Five Thousand Pesos
455
(P675,000.00) with 12% legal interest, is SET ASIDE and
petitioner is EXONERATED from any civil liability by reason of her
issuance of the subject check.
x x x
SO ORDERED.
Nissan filed a motion for reconsideration, but it was later denied.
Hence, this petition, with Nissan presenting the following
GROUNDS
A.
BOTH THE METROPOLITAN TRIAL COURT AND THE
REGIONAL TRIAL COURT CONCURRED THAT THE
ISSUANCE BY RESPONDENT PURIFICACION OF THE
SUBJECT BOUNCED CHECK W AS FOR AND IN PAYMENT OF
HER SONS OUTSTANDING OBLIGATION TO NISSAN
GALLERY ORIGINATING FROM HIS PURCHASE OF THE
SUBJECT MOTOR VEHICLE, NOT MERELY AS A "SHOW
CHECK", HENCE, EVEN IF PURIFICACION IS NOT A PARTY
TO THE SALES TRANSACTION BETW EEN NISSAN GALLERY,
AS SELLER, AND FREDERICK, AS BUYER, PURIFICACION,
AS THE ONE W HO DREW THE BOUNCED CHECK AS AND IN
PAYMENT OF THE LONG-UNPAID MOTOR VEHICLE
PURCHASED BY HER SON, COULD NOT ESCAPE LIABILITY
ON THE CIVIL ASPECT OF THE CASE.
B.
W HILE IT MAY BE TRUE THAT RESPONDENT PURIFICACION
MAY BE ACQUITTED OF THE CRIME CHARGED (VIOLATION
OF B.P. 22), ONLY BECAUSE THE PROSECUTION FAILED TO
PROVE THAT RESPONDENT PURIFICACION W AS
PROPERLY NOTIFIED OF THE DISHONOR OF THE SUBJECT
BOUNCED CHECK, IT IS NOT CORRECT TO EXONERATE
HER FROM THE CIVIL ASPECT OF THE CASE.
Ultimately, the question presented before the Court is whether
or not Purificacion is civilly liable for the issuance of a worthless
check despite her acquittal from the criminal charge.
Ruling of the Court
The Court rules in the affirmative.
W ell-settled is the rule that a civil action is deemed instituted
upon the filing of a criminal action, subject to certain exceptions.
Section 1, Rule 111 of the Rules of Court specifically provides
that:
456
SECTION 1. Institution of criminal and civil actions. (a)
W hen a criminal action is instituted, the civil action for the
recovery of civil liability arising from the offense charged shall be
deemed instituted with the criminal action unless the offended
party waives the civil action, reserves the right to institute it
separately or institutes the civil action prior to the criminal action
(unless the offended party waives the civil action, reserves the
right to institute it separately or institutes the civil action prior to
the criminal action).
x x x x.
(b) The criminal action for violation of Batas Pambansa Blg. 22
shall be deemed to include the corresponding civil action. No
reservation to file such civil action separately shall be allowed.
x x x x.
As can be gleaned from the foregoing, with respect to criminal
actions for violation of BP 22, it is explicitly clear that the
corresponding civil action is deemed included and that a
reservation to file such separately is not allowed.
The rule is that every act or omission punishable by law has its
accompanying civil liability. The civil aspect of every criminal case
is based on the principle that every person criminally liable is also
civilly liable. If the accused, however, is not found to be criminally
liable, it does not necessarily mean that he will not likewise be
held civilly liable because extinction of the penal action does not
carry with it the extinction of the civil action. This rule more
specifically applies when (a) the acquittal is based on reasonable
doubt as only preponderance of evidence is required; (b) the court
declares that the liability of the accused is only civil; and (c) the
civil liability of the accused does not arise from or is not based
upon the crime of which the accused was acquitted. The civil
action based on the delict is extinguished if there is a finding in
the final judgment in the criminal action that the act or omission
from which the civil liability may arise did not exist or where the
accused did not commit the acts or omission imputed to him.
It can, therefore, be concluded that if the judgment is
conviction of the accused, then the necessary penalties and civil
liabilities arising from the offense or crime shall be imposed. On
the contrary, if the judgment is of acquittal, then the imposition of
457
the civil liability will depend on whether or not the act or omission
from which it might arise exists.
Purificacion was charged with violation of BP 22 for allegedly
issuing a worthless check. The essential elements of the offense
of violation of BP 22 are the following:
(1) The making, drawing, and issuance of any check to apply
for account or for value; (2) The knowledge of the maker, drawer,
or issuer that at the time of issue there were no sufficient funds in
or credit with the drawee bank for the payment of such check in
full upon its presentment; and (3) The dishonor of the check by
the drawee bank for insufficiency of funds or credit or the dishonor
for the same reason had not the drawer, without any valid cause,
ordered the drawee bank to stop payment.
Here, the first and third elements were duly proven in the trial.
Purificacion, however, was acquitted from criminal liability
because of the failure of the prosecution to prove the fact of
notice of dishonor. Of the three (3) elements, the second element
is the hardest to prove as it involves a state of mind. Thus,
Section 2 of BP 22 creates a presumption of knowledge of
insufficiency of funds which, however, arises only after it is proved
that the issuer had received a written notice of dishonor and that
within five (5) days from receipt thereof, he failed to pay the
amount of the check or to make arrangements for its payment.
Purificacion was acquitted because the element of notice of
dishonor was not sufficiently established. Nevertheless, the act or
omission from which her civil liability arose, which was the making
or the issuing of the subject worthless check, clearly existed. Her
acquittal from the criminal charge of BP 22 was based on
reasonable doubt and it did not relieve her of the corresponding
civil liability. The Court cannot agree more when the MeTC ruled
that:
A person acquitted of a criminal charge, however, is not
necessarily civilly free because the quantum of proof required in
criminal prosecution (proof beyond reasonable doubt) is greater
than that required for civil liability (mere preponderance of
evidence). In order to be completely free from civil liability, a
persons acquittal must be based on the fact he did not commit
the offense. If the acquittal is based merely on reasonable doubt,
the accused may still be held civilly liable since this does not
mean he did not commit the act complained of. It may only be that
the facts proved did not constitute the offense charged.
The Court is also one with the CA when it stated that the
liability of Purificacion was limited to her act of issuing a worthless
458
check. The Court, however, does not agree with the CA when it
went to state further that by her acquittal in the criminal charge,
there was no more basis for her to be held civilly liable to Nissan.
The acquittal was just based on reasonable doubt and it did not
change the fact that she issued the subject check which was
subsequently dishonored upon its presentment.
Purificacion herself admitted having issued the subject check
in the amount of P1,020,000.00 after Frederick asked her to do it
as payment for his obligation with Nissan. Her claim that she
issued the check as a mere "show check" to boost Fredericks
credit standing was not convincing because there was no credit
standing to boost as her son had already defaulted in his
obligation to Nissan. Had it been issued prior to the sale of the
vehicle, the "show check" claim could be given credence. It was
not, however, the case here. It was clear that she assumed her
sons obligation with Nissan and issued the check to pay it. The
argument that it was a mere "show check" after her son was
already in default its simply ludicrous.
The Court shall not be belabored with the issue of whether or
not Purificacion was an accommodation party because she was
not. Granting that she was, it is with more reason that she cannot
escape any civil liability because Section 29 of the Negotiable
Instruments Law specifically bounds her to the instrument. The
crux of the controversy pertains to the civil liability of an accused
despite acquittal of a criminal charge. Such issue is no longer
novel. In cases like violation of BP 22, a special law, the intent in
issuing a check is immaterial. The law has made the mere act of
issuing a bad check malum prohibitum, an act prescribed by the
legislature for being deemed pernicious and inimical to public
welfare. Considering the rule in mala prohibita cases, the only
inquiry is whether the law has been breached. The lower courts
were unanimous in finding that, indeed. Purificacion issued the
bouncing check. Thus, regardless of her intent, she remains civilly
liable because the act or omission, the making and issuing of the
subject check, from which her civil liability arises, evidently exists.
W HEREFORE, the petition is GRANTED. The June 30, 2011
Decision and the October 21, 2011 Resolution of the Court of
Appeals are hereby SET ASIDE. The Decision of the Regional
Trial Court, Branch 105, Quezon City, in Criminal Case No. Q-08151734, dated December 22, 2008, affirming the Judgment of the
Metropolitan Trial Court, Branch 41, Quezon City, for Violation of
B.P. 22 is REINSTATED with MODIFICATION with respect to the
459
legal interest which shall be reduced to 6% per annum from
finality of this judgment until its satisfaction.
SO ORDERED.
2014 Bar Question:
A criminal complaint for violation of B.P. 22 was filed by
Foton Motors (Foton), an entity engaged in the business of
car dealership, against Pura Felipe (Pura) with the Office of
the
City Prosecutor
of
Quezon
City.
The
Office
found
probable cause to indict Pura and filed an information before
the Metropolitan Trial Court (MeTC) of Quezon City, for her
issuance
of
postdated
check
in
the
amount
of
P1,020,000.00 which was subsequently dishonored upon
presentment due to "Stop Payment."
Pura issued the check because her son, Freddie, attracted
by a huge discount of P220,000.00, purchased a Foton
Blizzard 4x2 from Foton. The term of the transaction was
Cash-on-Delivery and no downpayment was required. The
car was delivered on May 14, 1997, but Freddie failed to pay
upon
delivery.
Despite
non-payment,
Freddie
took
possession of the vehicle.
Pura was eventually acquitted of the charge of violating
B.P. 22 but was found civilly liable for the amount of the
check plus legal interest. Pura appealed the decision as
regards the civil liability, claiming that there was no privity of
contract between Foton and Pura. No civil liability could be
adjudged against her because of her acquittal from the
criminal charge. It was Freddie who was civilly liable to
Foton, Pura claimed. Pura added that she could not be an
accommodation party either because she only came in after
Freddie failed to pay the purchase price, or six (6) months
after the execution of the contract between Foton and
Freddie. Her liability was limited to her act of issuing a
worthless check, but by her acquittal in the criminal charge,
there was no more basis for her to be held civilly liable to
Foton. Puras act of issuing the subject check did not, by
itself,
assume
the
obligation
of
Freddie
to
Foton
or
automatically make her a party to the contract. Is Pura liable?
ANSWER:
Yes, Pura is liable.
460
A person acquitted of a criminal charge, however, is not
necessarily civilly free because the quantum of proof required in
criminal prosecution (proof beyond reasonable doubt) is greater
than that required for civil liability (mere preponderance of
evidence). In order to be completely free from civil liability, a
persons acquittal must be based on the fact he did not commit
the offense.
Pura issued the bouncing check. Thus, regardless of her
intent, she remains civilly liable because the act or omission, the
making and issuing of the subject check, from which her civil
liability arises, evidently exists. (Nissan Gallery-Ortigas vs.
Purificacion Felipe, G.R. No. 199067, November 11, 2013)
Notice of dishonor essential
Both the spirit and letter of the Bouncing Checks Law require,
for the act to be punished under said law, not only that the
accused issued a check that was dishonored, but that
likewise the accused was actually notified in writing of the
fact of dishonor. The consistent rule is that penal statutes have
to be construed strictly against the State and liberally in favor of
852
the accused.
(Abarquez vs. Court of Appeals, G.R. No. 148557,
August 7, 2003, published in The New Philippine Law Report, Vol.
XXXI, No. 8, August 2003, page 21) (emphasis supplied)
Proof of receipt of the notice of dishonor of drawer must be
clearly established
853
In James Svendsen vs. People of the Philippines,
citing
854
Rico v. People of the Philippines,
this Court held:
x x x [I]f x x x notice of non-payment by the drawee bank
is not sent to the maker or drawer of the bum check, or if
there is no proof as to when such notice was received by
the drawer, then the presumption of knowledge as
provided in Section 2 of B.P. 22 cannot arise, since there
would simply be no way of reckoning the crucial five-day
period.
852 Domagasang vs. CA, G.R. No. 139292, 5 December 2000, 347 SCRA 75, 83
853 G.R. No. 175381, February 26, 2008
854 440 Phil. 540 (2002)
461
x x x In recent cases, we had the occasion to emphasize
that not only must there be a written notice of dishonor or
demand actually received by the drawer of a dishonored
check, but there must also be proof of receipt thereof that
is properly authenticated, and not mere registered receipt
and/or return receipt.
Thus, as held in Domagsang vs. Court of Appeals, while
Section 2 of B.P. 22 indeed does not state that the notice
of dishonor be in writing, this must be taken in conjunction
with Section 3 of the law, i.e., that where there is no
sufficient funds in or credit with such drawee bank, such
fact shall always be explicitly stated in the notice of
dishonor or refusal. A mere oral notice or demand to pay
would appear to be insufficient for conviction under the
law. In our view, both the spirit and letter of the Bouncing
Checks Law require for the act to be punished thereunder
not only that the accused issued a check that is
dishonored, but also that the accused has actually been
notified in writing of the fact of dishonor.

This is
consistent with the rule that penal statutes must be
construed strictly against the state and liberally in favor of
the accused. x x x
In fine, the failure of the prosecution to prove the
existence and receipt by petitioner of the requisite written
notice of dishonor and that he was given at least five
banking days within which to settle his account constitutes
855
sufficient ground for his acquittal.
(Italics in the original;
underscoring and emphasis omitted)
The evidence for the prosecution failed to prove the second
856
element. W hile the registry receipt,
which is said to cover the
letter-notice of dishonor and of demand sent to petitioner, was
presented, there is no proof that he or a duly authorized agent
received the same. Receipts for registered letters including return
receipts do not themselves prove receipt; they must be properly
857
authenticated to serve as proof of receipt of the letters.
Thus in
858
Ting v. Court of Appeals,

this Court observed:
x x x All that we have on record is an illegible signature on
the registry receipt as evidence that someone received
the letter. As to whether this signature is that of one of
the petitioners or of their authorized agent remains a
mystery. From the registry receipt alone, it is possible
855 Id. At 554-555
856 MeTC records, p. 49
857 Supra note 440 Phil. 540 (2002) at 540-555
858 398 Phil. 481 (2000)
462
that petitioners or their authorized agent did not receive
the demand letter. Possibilities, however, cannot replace
proof beyond reasonable doubt.859
However, apparently, a contrary ruling was laid down in the
subsequent case of Eumelia Mitra vs. People of the Philippines
(G.R. No. 191404, July 5, 2010), wherein it was held that:
positive allegation of the prosecution that a demand letter was
served upon the accused prevails over the denial made by the
accused. x x x The court accepts the prosecutions narrative that
the accused refused to sign to evidence their receipt thereof. To
require the prosecution to produce the signature of the accused
on said demand letter would be imposing an undue hardship on it.
x x x As well, actual receipt acknowledgment is not and has never
been required of the prosecution either by law or jurisprudence.
As the rule now stands, the Mitra case is controlling.
Payment as a matter of defense in B.P. 22 cases
In the Abarquez case, the Supreme Court laid down the
following doctrines:
The prima facie presumption that the drawer has knowledge of
the insufficiency of funds or credit at the time of the issuance, or
on the payment for presentment, of the check may be rebutted by
payment of the value of the check either by the drawer or by the
drawee bank within five banking days from notice of the dishonor
given by the drawer. The payment thus becomes a complete
defense regardless of the strength of the evidence offered by the
prosecution.
It must be presupposed, then, that the issuer
received a notice of dishonor and that, within five days from
receipt thereof, he failed to pay the amount of the check or to
860
make arrangement for its payment.
861
In Caras vs. Court of Appeals
, we note that the law provides
for a prima facie rule of evidence. Knowledge of insufficiency of
funds in or credit with the bank is presumed from the act of
making, drawing, and issuing a check payment of which is
refused by the drawee bank for insufficiency of funds when
859 Id. At 494
860 Meriz vs. People, p. 533
861 G.R. No. 129900, 2 October 2001, 366 SCRA 371, 380
463
presented within 90 days from the date of issue. However, this
presumption is rebutted when it is shown that the maker or drawer
pays or makes arrangements for the payment of the check within
five banking days after receiving notice that such check had been
dishonored. Thus, it is essential for the maker or drawer to be
notified of the dishonor of her check, so he could pay the value
thereof or make arrangements for its payment within the period
prescribed by law.
862
In Griffith vs. Court of Appeals
, we held that:
W hile we agree with the private respondent that the gravamen
of violation of B.P. 22 is the issuance of worthless checks that are
dishonored upon their presentment for payment, we should not
apply penal laws mechanically. W e must find if the application of
the law is consistent with the purpose and the reason for the law.
Ratione cessat lex, et cessat lex (W hen the reason for the law
ceases, the law ceases.) It is not the letter alone but the spirit of
the law also that give it life. This is especially so in this case
where a debtors criminalization would not serve the ends of
justice but in fact subvert it. The creditor having collected already
more than a sufficient amount to cover the value of the checks for
payment of rentals, via auction sale, we find that holding the
debtors president to answer for a criminal offense under B.P. 22
two years after said collection, is no longer tenable nor justified by
law or equitable consideration.
Effect of Novation on the Criminal Liability
Novation is not a mode of extinguishing criminal liability. As
astutely opined by the CA, novation may only prevent the rise of
criminal liability if it occurs prior to the filing of the Information in
court.
In other words, novation does not extinguish criminal
863
liability but may only prevent its rise.
The gravamen of the offense punished by B.P. 22 is the act of
making and issuing a worthless check or a check that is
dishonored upon its presentement for payment. It is not the nonpayment of an obligation which the law punishes. The law is not
intended or designed to coerce a debtor to pay his debt. The
thrust of the law is to prohibit, under paid of penal sanctions, the
making of worthless checks and putting them in circulation.
Because of its deleterious effects on the public interest, the
practice is proscribed by law. The law punishes the act not as an
862 G.R. No. 129764, 12 March 2002
841 Diongzon v. Court of Appeals, 378 Phil 1090, 1097 (1999)
842 Lozano v. Martinez, 230 Phil 406, 421 (1986).
464
offense against property, but an offense agaisnt public order.864
(Medalla vs. Laxa, G.R. No. 193362, Jan. 18, 2012 )
Matters to be proved by the prosecution in BP 22 cases
Under Batas Pambansa Bilang 22 (BP 22), the prosecution
must prove not only that the accused issued a check that was
subsequently dishonored. It must also [be] established that the
accused was actually notified that the check was dishonored, and
that he or she failed, within five banking days from receipt of
notice, to pay the holder of the check the amount due therein or to
make arrangement for its payment.

Absent proof that the
accused received such notice, a prosecution for violation of the
Bouncing Check Law cannot prosper. (Betty King vs. People of
the Philippines, G.R.

[Panganiban, J.])
No.
131540,
465
December
2,
1999,
LETTERS OF CREDIT
In commercial transactions, a letter of credit is a financial
device developed by merchants as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control
865
of the goods before paying.
The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the
purchase price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they serve to
reduce the risk of nonperformance. Generally, credits in the non866
sale settings have come to be known as standby credits.
(Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al.,
G.R. No. 146717, November 22, 2004, [Tinga])
Definition and Nature of Letter of Credit
By definition, a letter of credit

the writer requests or authorizes
deliver goods to a third person
payment of debt therefor to
is a written instrument whereby
the addressee to pay money or
and assumes responsibility for
867
the addressee.
(Transfield
Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No.
146717, November 22, 2004, [Tinga])
In Metropolitan Waterworks and Sewerage System vs.
868
Daway
, we have also defined a letter of credit as an
engagement by a bank or other person made at the request of a
customer that the issuer shall honor drafts or other demands of
payment upon compliance with the conditions specified in the
869
credit.
The letter of credit evolved as a mercantile specialty, and the
only way to understand all its facets is to recognize that it is an
entity unto itself. The relationship between the beneficiary and the
issuer of a letter of credit is not strictly contractual, because both
privity and a meeting of the minds are lacking, yet strict
865
Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA 357 citing William S.
Shaterian, Export-Import Banking: The Instruments and Operations Utilized by American Exporters and Importers
and Their Banks in Financing Foreign Trade, 284-374 (1947)
866
E&H Partners v. Broadway Nat'l Bank, 39 F. Supp. 2d 275, (United States Circuit Court, S.D. New York) No. 96
Civ. 7098 (RLC), 19 October 1998 <http://www.westlaw.com>
867
24 A Words and Phrases 590, Permanent Edition
868
G.R. No. 160732, June 21, 2004 [Azcuna
869
Prudential Bank v. Intermediate Appellate Court, 216 SCRA 257 (1992)
466
compliance with its terms is an enforceable right. Nor is it a thirdparty beneficiary contract, because the issuer must honor drafts
drawn against a letter regardless of problems subsequently
arising in the underlying contract. Since the bank's customer
cannot draw on the letter, it does not function as an assignment
by the customer to the beneficiary. Nor, if properly used, is it a
contract of suretyship or guarantee, because it entails a primary
liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is
generally conditional, yet the draft presented under it is often
870
negotiable.
(supra)
Letters of credit were developed for the purpose of insuring to
a seller payment of a definite amount upon the presentation of
871
documents
and is thus a commitment by the issuer that the
party in whose favor it is issued and who can collect upon it will
have his credit against the applicant of the letter, duly paid in the
872
amount specified in the letter.
They are in effect absolute
undertakings to pay the money advanced or the amount for which
credit is given on the faith of the instrument. They are primary
obligations and not accessory contracts and while they are
security arrangements, they are not converted thereby into
873
contracts of guaranty.
W hat distinguishes letters of credit from
other accessory contracts, is the engagement of the issuing bank
to pay the seller once the draft and other required shipping
874
documents are presented to it.
They are definite undertakings
to pay at sight once the documents stipulated therein are
presented. (Metropolitan Waterworks and Sewerage System vs.
Daway, G.R. No. 160732, June 21, 2004 [Azcuna])
Parties to a Letter of Credit; Rights and Obligations of the
Parties
Letters of credit are employed by the parties desiring to enter
into commercial transactions, not for the benefit of the issuing
bank but mainly for the benefit of the parties to the original
transactions. W ith the letter of credit from the issuing bank, the
870
Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 Banking Law Journal 850-851
[1977] cited in M. Kurkela, Letters of Credit under International Trade Law, 321 (1985)
871
Ibid, p. 270
872
Isidro Climaco v. Central Bank of the Philippines, 63 O.G. No. 6, p. 1348
873
Insular Bank of Asia & America v. Intermediate Appellate Court, 167 SCRA 450 (1988)
874
Bank of America, NT & SA v. Court of Appeals, 228 SCRA 357 (1993)
467
party who applied for and obtained it may confidently present the
letter of credit to the beneficiary as a security to convince the
beneficiary to enter into the business transaction. On the other
hand, the other party to the business transaction, i.e., the
beneficiary of the letter of credit, can be rest assured of being
empowered to call on the letter of credit as a security in case the
commercial transaction does not push through, or the applicant
fails to perform his part of the transaction. It is for this reason that
the party who is entitled to the proceeds of the letter of credit is
appropriately called "beneficiary." (Transfield Philippines, Inc. vs.
Luzon Hydro Corporation, et al., G.R. No. 146717, November 22,
2004, [Tinga])
In commercial transactions involving letters of credit, the
functions assumed by a correspondent bank are classified
according to the obligations taken up by it. The correspondent
bank may be called a notifying bank, a negotiating bank, or a
confirming bank. (Feati Bank & Trust Company vs. CA, G.R. No.
94209, April 30, 1991, [Gutierrez, Jr.])
In case of a notifying bank, the correspondent bank assumes
no liability except to notify and/or transmit to the beneficiary the
existence of the letter of credit. (Kronman and Co., Inc. v. Public
National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian,
Export-Import Banking, p. 292, cited in Agbayani, Commercial
Laws of the Philippines, Vol. 1, p. 76). A negotiating bank, on the
other hand, is a correspondent bank which buys or discounts a
draft under the letter of credit. Its liability is dependent upon the
stage of the negotiation. If before negotiation, it has no liability
with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the
seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 567
[1928]; Shaterian, Export-Import Banking, p. 293, cited in
Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank
assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the
letter of credit. (Shaterian, Export-Import Banking, p. 294, cited in
Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)
A notifying bank is not a privy to the contract of sale between
the buyer and the seller, its relationship is only with that of the
issuing bank and not with the beneficiary to whom he assumes no
liability. It follows therefore that when the petitioner refused to
negotiate with the private respondent, the latter has no cause of
action against the petitioner for the enforcement of his rights
468
under the letter. (See Kronman and Co., Inc. v. Public National
Bank of New York, supra)
As earlier stated, there must have been an absolute assurance
on the part of the petitioner that it will undertake the issuing bank's
obligation as its own. Verily, the loan agreement it entered into
cannot be categorized as an emphatic assurance that it will carry
out the issuing bank's obligation as its own. ( supra)
The
case
of
Scanlon
v.
First
National
Bank
(supra)
perspicuously explained the relationship between the seller and
the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it
must be true that it owes no contractual duty toward the
person for whose benefit the letter is written to discount or
purchase any draft drawn against the credit. No
relationship of agent and principal, or of trustee and
cestui, between the receiving bank and the beneficiary of
the letter is established. (P.568)
W hether therefore the petitioner is a notifying bank or a
negotiating bank, it cannot be held liable. Absent any definitive
proof that it has confirmed the letter of credit or has actually
negotiated with the private respondent, the refusal by the
petitioner to accept the tender of the private respondent is
justified. (supra)
The relationship between the issuing bank and the notifying
bank, on the contrary, is more similar to that of an agency and not
that of a guarantee. It may be observed that the notifying bank is
merely to follow the instructions of the issuing bank which is to
notify or to transmit the letter of credit to the beneficiary. (See
Kronman v. Public National Bank of New York, supra). Its
commitment is only to notify the beneficiary. It does not undertake
any assurance that the issuing bank will perform what has been
mandated to or expected of it. As an agent of the issuing bank, it
has only to follow the instructions of the issuing bank and to it
alone is it obligated and not to buyer with whom it has no
contractual relationship.
In fact the notifying bank, even if the seller tenders all the
documents required under the letter of credit, may refuse to
negotiate or accept the drafts drawn thereunder and it will still not
be held liable for its only engagement is to notify and/or transmit
to the seller the letter of credit.
469
Finally, even if we assume that the petitioner is a confirming
bank, the petitioner cannot be forced to pay the amount under the
letter. As we have previously explained, there was a failure on the
part of the private respondent to comply with the terms of the
letter of credit. (Feati Bank & Trust Company vs. CA, G.R. No.
94209, April 30, 1991, [Gutierrez, Jr.])
Basic Principles of Letters of Credit
1. Doctrine of Independence
Under this principle, banks assume no liability or responsibility
for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed thereon,
nor do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing, delivery,
value or existence of the goods represented by any documents, or
for the good faith or acts and/or omissions, solvency, performance
or standing of the consignor, the carriers, or the insurers of the
875
goods, or any other person whomsoever.
(Transfield
Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No.
146717, November 22, 2004, [Tinga])
The so-called "independence principle" assures the seller or
the beneficiary of prompt payment independent of any breach of
the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or
not. (supra)
The independent nature of the letter of credit may be: (a)
independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the
underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a
commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying
agreement. In both cases the payment may be enjoined if in the
light of the purpose of the credit the payment of the credit would
876
constitute fraudulent abuse of the credit.
(supra)
As discussed above, in a letter of credit transaction, such as in
this case, where the credit is stipulated as irrevocable, there is a
875
Article 15, UCP
876
Kurkela, Letters of Credit Under International Trade Law, 286-287 (1985)
470
definite undertaking by the issuing bank to pay the beneficiary
provided that the stipulated documents are presented and the
conditions of the credit are complied with.877

Precisely, the
independence principle liberates the issuing bank from the duty of
ascertaining compliance by the parties in the main contract. As
the principle's nomenclature clearly suggests, the obligation under
the letter of credit is independent of the related and originating
contract. In brief, the letter of credit is separate and distinct from
the underlying transaction.
Given the nature of letters of credit, petitioner's argument
that it is only the issuing bank that may invoke the independence
principle on letters of credit does not impress this Court. To say
that the independence principle may only be invoked by the
issuing banks would render nugatory the purpose for which the
letters of credit are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the issuing
bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter
into commercial transactions, not for the benefit of the issuing
bank but mainly for the benefit of the parties to the original
transactions. W ith the letter of credit from the issuing bank, the
party who applied for and obtained it may confidently present the
letter of credit to the beneficiary as a security to convince the
beneficiary to enter into the business transaction. On the other
hand, the other party to the business transaction, i.e., the
beneficiary of the letter of credit, can be rest assured of being
empowered to call on the letter of credit as a security in case the
commercial transaction does not push through, or the applicant
fails to perform his part of the transaction. It is for this reason that
the party who is entitled to the proceeds of the letter of credit is
appropriately called "beneficiary." (supra)
2. Fraud Exception Principle
Most writers agree that fraud is an exception to the independence
principle. Professor Dolan opines that the untruthfulness of a
certificate accompanying a demand for payment under a standby
credit may qualify as fraud sufficient to support an injunction
877
Art. 10, UCP
878
Supra note 32 at 2-63
471
against payment.878
(Transfield Philippines, Inc. vs. Luzon Hydro
Corporation, et al., G.R. No. 146717, November 22, 2004, [Tinga])
2010 Bar Question:
The Supreme Court has held that fraud is an exception to
the "independence principle" governing letters of credit.
Explain this principle and give an example of how fraud can
be an exception. (3%)
Under this principle, banks assume no liability or responsibility
for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed thereon,
nor do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing, delivery,
value or existence of the goods represented by any documents, or
for the good faith or acts and/or omissions, solvency, performance
or standing of the consignor, the carriers, or the insurers of the
goods, or any other person whomsoever.
The untruthfulness of a certificate accompanying a demand for
payment under a standby credit may qualify as fraud sufficient to
support an injunction against payment. (Transfield Philippines,
Inc. vs. Luzon Hydro Corporation, et al., G.R. No. 146717,
November 22, 2004, [Tinga])
3. Doctrine of Strict Compliance
What is the rule of strict conformity in a letter of credit
transaction?
ANS. it means that the documents tendered by the seller or
beneficiary must strictly conform to the terms of the letter of credit,
they must include all documents required by the letter of credit.
Thus, a correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a faulty
tender, acts on its own risk and may not thereafter be able to
recover from the buyer or the issuing bank, as the case may be,
the money thus paid to the beneficiary. (Feati Bank vs. CA
[1991]).
-o0o-
878
Supra note 32 at 2-63
472
473

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CONCEPTUAL FRAMEWORK

II. Life (sec. 30-69)

Holder in due course

ACT NO. 2031

THE NEGOTIABLE INSTRUMENTS LAW

History and Development

The term commercial paper refers to written promises or

instruments as drafts, promissory notes, checks and trade

acceptances. (The most common instruments are checks and

However, the term commercial paper in its

broadest sense may refer to either negotiable or non-negotiable

During the early part of the Middle Ages, merchants and

purchased at the various international fairs.

precious metals were continually subject to loss or theft through

the perils of travel.

To eliminate the dangers of this sort, merchants began to

by giving the seller a written order addressed to the bank, telling it

to deliver part of the gold or silver to the seller. These orders,

called bills of exchange, were thus substitutes for money. Today,

demand serve this same basic purpose.

3 Ibid. (italics supplied)

The second major purpose of commercial paper is to serve as

credit device; this came about as a logical extension of the initial

use of commercial paper. Soon after bills of exchange became

established as substitutes for money, merchants who wished to

purchase goods on credit discovered that sellers were sometimes

willing to accept bills of exchange that were not payable until a

seller was satisfied as to the commercial reputation of the bills

drawer (the purchaser), he would take such an instrument (called

this way the seller/payee extended credit to the buyer/drawer.

Soon thereafter ways were devised by which payees could sell

these instruments to third parties, usually banks, and receive

immediate cash in return. Since the banks would then have to

effect, that the purchasing banks were charging the sellers

interest in advance as compensation for their role in the

Today, because of the widespread use of time notes and

drafts, the credit aspect of commercial paper is as important to

the business community as its substitute for money aspect.

a negotiable instrument to operate practically as either a

substitute for cash or a credit device, or both, it is essential that

the instrument be easily transferable without danger of being

The negotiability of bills of exchange and promissory notes

originated in the customs of merchants. The statute of Anne,

which is declaratory of the common law, established the

negotiability of promissory notes.

Negotiable Instrument; definition

A negotiable instrument is a special contract which on its face

is signed by the maker or drawer, making an unqualified promise

or order to pay on demand or at a fixed or determinable future

4 Ibid, pages 401-402.

8 Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 1

Basic Principles and Jurisprudence on the Negotiable Instruments Law

2nd Edition (2015), M.P.Piad

time, a sum certain in money, to order or bearer, and when it is

addressed to a drawee, the latter must be named or otherwise

indicated therein with reasonable certainty.

Or simply stated: It is a special contract which complies with

the requirements laid down under Section 1 of the Negotiable