212 SCRA 448 Mercantile Law Negotiable Instruments Law Negotiable Instruments

in General Bearer Instrument Certificate of Time Deposit

In 1982, Angel de la Cruz obtained certificates of time deposit (CTDs) from Security
Bank and Trust Company for the formers deposit with the said bank amounting to
P1,120,000.00. The said CTDs are couched in the following manner:
This is to Certify that B E A R E R has deposited in this Bank the sum of _______
Pesos, Philippine Currency, repayable to said depositor _____ days. after date, upon
presentation and surrender of this certificate, with interest at the rate of ___ % per cent
per annum.
Angel de la Cruz subsequently delivered the CTDs to Caltex in connection with the
purchase of fuel products from Caltex.
In March 1982, Angel de la Cruz advised Security Bank that he lost the CTDs. He
executed an affidavit of loss and submitted it to the bank. The bank then issued another
set of CTDs. In the same month, Angel de la Cruz acquired a loan of P875,000.00 and he
used his time deposits as collateral.
In November 1982, a representative from Caltex went to Security Bank to present the
CTDs (delivered by de la Cruz) for verification. Caltex advised Security Bank that de la
Cruz delivered Caltex the CTDs as security for purchases he made with the latter.
Security Bank refused to accept the CTDs and instead required Caltex to present
documents proving the agreement made by de la Cruz with Caltex. Caltex however failed
to produce said documents.
In April 1983, de la Cruz loan with Security bank matured and no payment was made by
de la Cruz. Security Bank eventually set-off the time deposit to pay off the loan.
Caltex sued Security Bank to compel the bank to pay off the CTDs. Security Bank argued
that the CTDs are not negotiable instruments even though the word bearer is written on
their face because the word bearer contained therein refer to depositor and only the
depositor can encash the CTDs and no one else.
ISSUE: Whether or not the certificates of time deposit are negotiable.
HELD: Yes. The CTDs indicate that they are payable to the bearer; that there is an
implication that the depositor is the bearer but as to who the depositor is, no one knows. It
does not say on its face that the depositor is Angel de la Cruz. If it was really the intention
of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility
so expressed that fact in clear and categorical terms in the documents, instead of having
the word BEARER stamped on the space provided for the name of the depositor in
each CTD. On the wordings of the documents, therefore, the amounts deposited are
repayable to whoever may be the bearer thereof.

Thus, de la Cruz is the depositor insofar as the bank is concerned, but obviously other
parties not privy to the transaction between them would not be in a position to know that
the depositor is not the bearer stated in the CTDs.
However, Caltex may not encash the CTDs because although the CTDs are bearer
instruments, a valid negotiation thereof for the true purpose and agreement between
Caltex and De la Cruz, requires both delivery and indorsement. As discerned from the
testimony of Caltex representative, the CTDs were delivered to them by de la Cruz
merely for guarantee or security and not as payment.
Consolidated Plywood Industries, Inc V. IFC Leasing And Acceptance Corp.
G.R. No. 72593 April 30, 1987
Lessons Applicable: Requisites of negotiability to antedated and postdated instruments
(Negotiable Instruments Law)
FACTS: Consolidated (buyer pays promossor note) > IPM (seller-assignor who
violatedwarranty) > IFC (holder in due course or merely an assignee?)
1 Consolidated Plywood Industries, Inc (Consolidated) is a corporation engaged in
the logging business
2
For the purpose of opening of additional roads and simultaneous logging operations
along the route of roads, it needed 2 additional units of tractors
3 Atlantic Gulf & Pacific Company of Manila, through its sister company and
marketing arm, Industrial Products Marketing (IPM) (seller-assignor) offered to sell 2
"Used" Allis Crawler Tractors
4
IPM inspected the job site and assured that the tractors were fit for the job and gave a
90-days performance warranty of the machines and availability of parts.
Consolidated purchased on installment.
1
It paid the down payment of P210,000
5

April 5, 1978: IPM issued the sales invoice and the deed of sale with chattel

mortgage withpromissory note was executed

6
IPM, by means of a deed of assignment, assigned its rights and interest in the
chattelmortgage in favor of IFC Leasing and Acceptance Corp. (IFC)
7 After 14 days, one of the tractors broke down and after another 9 days, the other
tractor too
8 Because of the breaking down of the tractors, the road building and simultaneous
logging operations were delayed
9

Consolidated unilaterally rescinded the contract w/ IPM

10 April 7, 1979: Wee of Consolidated asked IPM to pull out the units and have
them reconditioned, and thereafter to offer them for sale.
11
The proceeds were to be given to IFC and the excess will be divided between:
IPM
1

Consolidated which offered to bear one-half 1/2 of the reconditioning cost

12 IPM didn't do anything

13 IFC filed against Consolidated for the recovery of the principal sum
P1,093,789.71, interest and attorney's fees
14 RTC and CA: favored IFC
15 breach of warranty if any, is not a defense available to Consolidated either to
withdraw from the contract and/or demand a proportionate reduction of the price with
damages in either case
ISSUE: W/N IFC is a holder in due course of the negotiable promissory note so as to bar
completely all the available defenses of the Consolidated against IPM
HELD: CA reversed and set aside
16 Consolidated is a victim of warranrty

17
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty against the hidden defects
which the thing sold may have, should they render it unfit for the use for which it is
intended, or should they diminish its fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have acquired it or would have given a lower
price for it; but said vendor shall not be answerable for patent defects or those which may
be visible, or for those which are not visible if the vendee is an expert who, by reason of
his trade or profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality
or fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to the seller the particular
purpose for which the goods are acquired, and it appears that the buyer relies on the
sellers skill or judge judgment (whether he be the grower or manufacturer or not), there
is an implied warranty that the goods shall be reasonably fit for such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or fitness for a particular
purpose may be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the
thing sold even though he was not aware thereof.
This provision shall not apply if the contrary has been stipulated, and the vendor was not
aware of the hidden faults or defects in the thing sold. (Emphasis supplied).
18 GR: extends to the corporation to whom it assigned its rights and interests
19 EX: assignee is a holder in due course of the promissory note
1
assuming the note is negotiable
1
Consolidated's defenses may not prevail against it.
20 Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation
with the payment of damages in either case. He may also seek rescission, even after he
has chosen fulfillment, if the latter should become impossible.
xxx xxx xxx ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from the contract and demanding a proportionate
reduction of the price, with damages in either case. (Emphasis supplied)
21 Consolidated, having unilaterally and extrajudicially rescinded its contract with
the seller-assignor, can no longer sue IPM except by way of counterclaim if IPM sues
it because of the rescission
22 Considering that paragraph (d), Section 1 of the Negotiable Instruments Law
requires that a promissory note "must be payable to order or bearer" - in this case it is
non-negotiable
1
= expression of consent that the instrument may be transferred
1
consent is indispensable since a maker assumes greater risk under a negotiable
instrument than under a non-negotiable one
23 When instrument is payable to order
24
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. . . .
25 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.
26 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
27 Even conceding for purposes of discussion that the promissory note in question
is a negotiable instrument, the IFC cannot be a holder in due course due to absence of
GF for knowing that the tractors were defective

28
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:
xxx xxx xxx xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any infirmity in the
instrument of deffect in the title of the person negotiating it
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. - 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 amounts to bad
faith. (Emphasis supplied)
29 We believe the finance company is better able to bear the risk of the dealer's
insolvency than the buyer and in a far better position to protect his interests against
unscrupulous and insolvent dealers. . .

Garcia V. Llamas (2003)

G.R. No. 154127 December 8, 2003

Lessons Applicable: Consideration and Accommodation Party (Negotiable Instruments
Law)
FACTS:
1 Romeo Garcia and Eduardo de Jesus borrowed P400K and issued a promissory
note binding themselves solidarily to Dionisio Llamas
2 Llamas filed a complaint for sum of money and damages against Garcia and de
Jesus.
3
Garcia: signed merely as an accommodation party
4

RTC: favored Llamas against de Jesus

CA: no novation

ISSUE: W/N de Jesus is not be liable as an accomodation party because note is nonnegotiable
HELD: YES. CA Affirmed
5 Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor - NOT in this case
6 By its terms, the note was made payable to a specific person rather than to bearer
or to order- a requisite for negotiability under Act 2031, the Negotiable Instruments
Law (NIL). Hence, petitioner cannot avail himself of the NILs provisions on the
liabilities and defenses of an accommodation party.
7 Besides, a non-negotiable note is merely a simple contract in writing and is
evidence of such intangible rights as may have been created by the assent of the
parties
8

The promissory note is thus covered by the general provisions of the Civil Code, not
by the NIL
Even granting arguendo that the NIL was applicable, still,
liable for the promissory note.

petitioner would be

1 Under Article 29 of Act 2031, an accommodation party is liable for the

instrument to a holder for value even if, at the time of its taking, the latter knew the
former to be only an accommodation party.
1 The relation between an accommodation party and the party accommodated is,
in effect, one of principal and surety