Name: Katraena Moralde

Subject: Negotiable Instruments Law

Topic: Concept of Negotiable Instruments
Title of the case: Government Service Insurance System v. Court of Appeals
170 SCRA 533,
February 23, 1989

Facts:
Spouses Racho, together with the Spouses Lagasca, executed a deed of mortgage in favor of petitioner
Government Service Insurance System (GSIS) in connection with two loans granted by the latter for in the
sums of P11,500 and P3,000 where a parcel of land co-owned by Sps. Racho wa given as a security for the
said mortgages.
The Lagasca spouses executed an instrument denominated "Assumption of Mortgage" under which they
obligated themselves to assume the aforesaid obligation to the GSIS and to secure the release of the mortgage
covering that portion of the land belonging to herein private respondents and which was mortgaged to the
GSIS, said undertaking was not fulfilled.
Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment of the
amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the mortgaged property to be sold
at public auction.
More than two years thereafter, herein private respondents, Sps Racho filed a complaint against the petitioner
GSIS and the Lagasca spouses in a petition to declare that the said foreclosure be declared as null and void;
they prayed that they be allowed to recover the property from GSIS and/or be ordered the latter to pay them the
value of the said land, or they be allowed to repurchase the same; they alleged that they signed the mortgage
contracts not as sureties or guarantors for the Sps. Lagasca but they merely gave their common property to the
said co-owners who were solely benefited by the loans from the GSIS.
The Trial Court rendered judgment dismissing the complaint for failure to establish a cause of action.
Court of Appeals reversed the decision of the Trial Court, holding the extra-judicial foreclosure was void
since Sps. Racho was not notified as required either as to their delinquency in the payment of amortization or
as to the subsequent foreclosure of the mortgage by reason of any default in such payment; that the notice
should be published in the newspaper, and posted pursuant to Sec 3 of Act 3135 is not the notice to which the
mortgagor is entitled upon the application being made for an extrajudicial foreclosure.

ISSUE:
Whether or not the extrajudicial foreclosure is valid.

SC RULING:
Yes.
Both parties relied on the provisions of Section 29 of Act No. 2031, otherwise known as the Negotiable
Instruments Law, which provide that an accommodation party is one who has signed an instrument as maker,
drawer, acceptor of indorser without receiving value therefor, but is held liable on the instrument to a holder for
value although the latter knew him to be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance misplaced. The promissory note
hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly not negotiable
instruments. These documents do not comply with the fourth requisite to be considered as such under
Section 1 of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable
to a specified party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply;
governance shall be afforded, instead, by the provisions of the Civil Code and special laws on mortgages.
The factual findings of respondent court are that private respondents signed the documents "only to give their
consent to the mortgage as required by GSIS", with the latter having full knowledge that the loans secured
thereby were solely for the benefit of the Lagasca spouses. This appears to be duly supported by sufficient
evidence on record. Indeed, it would be unusual for the GSIS to arrange for and deduct the monthly
amortizations on the loans from the salary as an army officer of Flaviano Lagasca without likewise affecting
deductions from the salary of Isabelo Racho who was also an army sergeant. Then there is also the undisputed
fact, as already stated, that the Lagasca spouses executed a so-called "Assumption of Mortgage" promising to
exclude private respondents and their share of the mortgaged property from liability to the mortgagee. There is
no intimation that the former executed such instrument for a consideration, thus confirming that they did so
pursuant to their original agreement.
So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca spouses
would not invalidate the mortgage with respect to private respondents' share in the property. In consenting
thereto, even assuming that private respondents may not be assuming personal liability for the debt, their share
in the property shall nevertheless secure and respond for the performance of the principal obligation. The
parties to the mortgage could not have intended that the same would apply only to the aliquot portion of
the Lagasca spouses in the property, otherwise the consent of the private respondents would not have been
required. The extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of respondent court
that lack of notice to the private respondents of the extrajudicial foreclosure sale impairs the validity thereof.

Topic: Treasury Warrants

Metropolitan Bank and Trust Company vs CA
269 SCRA 15
Facts:
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even
abroad. Golden Savings and Loan Association was, at the time these events happened, operating in Calapan,
Mindoro, with the other private respondents as its principal officers.
Eduardo Gomez opened an account with Golden Savings and deposited 38 treasury warrants. All warrants
were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings
account in Metrobank branch in Calapan, Mindoro. They were sent for clearance.
More than two weeks after the deposit, Gloria asked several time whether the warrants have been cleared,
however, “exasperated” over Glorias repeated inquiries and also as an accommodation for a “valued”
client, Metrobank decided to allow Golden Savings to withdraw from proceeds of the warrants. In turn, Golden
Savings subsequently allowed Gomez to make withdrawals from his own account.
Subsequently, Metrobank was informed by the Bureau of Treasury that 32 of the warrants were
dishonored. Metrobank immediately informed Golden Savings and demanded the refund by Golden Savings of
the amount it had previously withdrawn, to make up the deficit in its account. The demand was rejected.
Metrobank then sued Golden Savings.

Issue:
1. Whether or not treasury warrants are negotiable instruments
2. Whether or not Metrobank can demand refund against Golden Savings with regard to the amount withdraws
to make up with the deficit as a result of the dishonored treasury warrants.
SC Ruling:
1. No.
The treasury warrants are not negotiable instruments. Clearly stamped on their face is the word: non
negotiable.” Moreover, and this is equal significance, it is indicated that they are payable from a
particular fund, to wit, Fund 501. An instrument to be negotiable instrument must contain an
unconditional promise or orders to pay a sum certain in money. As provided by Sec 3 of NIL an
unqualified order or promise to pay is unconditional though coupled with: 1st, 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
2nd, a statement of the transaction which give rise to the instrument. But an order to promise to pay out of
particular fund is not unconditional. The indication of Fund 501 as the source of the payment to be made
on the treasury warrants makes the order or promise to pay “not conditional” and the warrants
themselves non-negotiable. There should be no question that the exception on Section 3 of NIL is
applicable in the case at bar.
2. No
Metrobank was indeed negligent in giving Golden Savings the impression that the treasury warrants had
been cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from
his account with it. Without such assurance, Golden Savings would not have allowed the withdrawals;
 with such assurance, there was no reason not to allow the withdrawal. Indeed, Golden Savings might
even have incurred liability for its refusal to return the money that to all appearances belonged to the
depositor, who could therefore withdraw it any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its
account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to
determine the validity of the warrants through its own services. The proceeds of the warrants were
withheld from Gomez until Metrobankallowed Golden Savings itself to withdraw them from its own
deposit.
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they
were genuine and in all respects what they purport to be,” in accordance with Sec. 66 of NIL. The simple
reason that NIL is not applicable to non negotiable instruments, treasury warrants.

Topic: Postal Money Orders

Philippine Education Co. vs Soriano
39 SCRA 587

Facts:
Enrique Montinola sought to purchase from Manila Post Office ten money orders of 200php each payable to E.
P. Montinola. Montinola offered to pay with the money orders with a private check. Private check were not
generally accepted in payment of money orders, the teller advised him to see the Chief of the Money Order
Division, but instead of doing so, Montinolamanaged to leave the building without the knowledge of the teller.
Upon the disappearance of the unpaid money order, an urgent message was sent to all postmasters, and the
following day notice was likewise served upon all banks, instructing them not to pay anyone of the money
orders aforesaid if presented for payment. The Bank of America received a copy of said notice three days later.
Subsequently, appellant Philippine Education Co. received one of the money orders that are missing as part of
its sales receipts. It then deposited to the Bank of America which the later cleared it with Bureau of Post and
received its face value of P200.00.
Appelle Mauricio Soriano, Chief of the Money Order Division notified the Bank of America that the money order
deposited had been found to have been irregularly issued and that, the amount it represented had been
deducted from the bank’s clearing account. The Bank of America debited appellant’s account with the same
account and give notice by mean of debit memo.
In connection with the events set forth above, Montinola was charged with theft but after trial he was acquitted
on the ground of reasonable doubt.
Issue:
WON the postal money order is a negotiable instrument.
SC Ruling:
No
Philippine postal statutes were patterned after similar statutes in force in the United States. For this reason,
Philippine postal statutes are generally construed in accordance with the construction given in the United
States 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, 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. 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

Topic: Crossed Check

Bataan Cigar v Court of Appeals
230 SCRA 643

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 (George King), to deliver 2,000 bales of tobacco
leaf starting; issued crossed checks post dated sometime in March 1979 in the total amount of P820,000.00.
Petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver
in accordance with their earlier agreement. In consideration thereof, it issued another post dated crossed
checks in the total amount of P1,100,000.00, payable sometime in September 1979.
During these times, George King was simultaneously dealing with private respondent SIHI.
July 19, 1978: George sold to SIHI at a discount check amounting to P164K, post dated March 31, 1979,
drawn by BCCFI w/ George as payee.
December 19 and 26, 1978: George sold 2 checks both in the amount of P100K, post datedSeptember 15 &
30, 1979 respectively, drawn by BCCFI w/ George as payee.
BCCFI issued a stop payment order on all checks payable to George King, Subsequently, stop payment was
also ordered on checks, 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.
Issue:
WON SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to be able to collect from
the drawer, BCCFI..
SC Ruling:
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:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the
title of the person negotiating it.
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 holder in due course.
A check is defined by law as a bill of exchange 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 "crossed checks," although Article 541 of the Code of
Commerce refers to such instruments.
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 the parallel lines.
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 is not a holder in due 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 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 to defenses as if it
were
non-negotiable. Hence, respondent can collect from the immediate indorser, in this case, George King.
Topic: Formal Requisites of Negotiability; It must be in writing
Caltex (Phils.) Inc. V. CA And Security Bank And Trust Co. (1992)

G.R. No. 97753 August 10, 1992

Facts:

Security Bank and Trust Company (Security Bank), a commercial banking institution, through its SucatBranch
issued 280 certificates of time deposit (CTDs) in favor of Angel dela Cruz who deposited with Security Bank the
total amount of P1,120,000. Angel delivered the CTDs to Caltex for his purchase of fuel products.

On March 18, 1982, Angel informed Mr. Tiangco, the Sucat Branch Manager that he lost all CTDs, submitted
the required Affidavit of Loss and received the replacement.

March 25, 1982: Angel dela Cruz negotiated and obtained a loan from Security Bank in the amount of
P875,000 and executed a notarized Deed of Assignment of Time Deposit.

On November, 1982: Mr. Aranas, Credit Manager of Caltex went to the Sucat branch to verify the CTDs
declared lost by Angel

November 26, 1982: Security Bank received a letter from Caltex formally informing it of its possession of the
CTDs in question and of its decision to pre-terminate the same.

December 8, 1982: Caltex was requested by Security Bank to furnish:

o a copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz

o the details of Mr. Angel's obligation against which Caltex proposed to apply the time deposits

Security Bank rejected Caltex demand for payment bec. it failed to furnish a copy of its agreement w/ Angel.

April 1983, the loan of Angel dela Cruz with Security Bank matured.

August 5, 1983: CTD were set-off w/ the matured loan.

Caltex filed a complaint praying the bank to pay 1,120,000 plus 16% interest.

CA affirmed RTC to dismiss complaint.

ISSUE:

1. Whether or not the CTDs are negotiable

2. Whether or not Caltex as holder in due course can rightfully recover on the CTDs.

HELD: Petition is Denied and appealed decision is affirmed.

1. YES.
Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an
instrument to become negotiable, viz:

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

(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and -check
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
• The documents provide that the amounts deposited shall be repayable to the depositor

o depositor = bearer

▪ If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with
facility so expressed that fact in clear and categorical terms in the documents, instead of having the word
"BEARER" stamped on the space provided for the name of the depositor in each CTD

• negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the
instrument itself

2. NO.
• although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement
between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement

o CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products

o There was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which
situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed.

• Where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the
extent of his lien.

o As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects
thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code
provisions on pledge of incorporeal rights:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, may also be pledged. The instrument
proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date
of the pledge do not appear in a public instrument.
Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it
appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment
involves real property.