Negotiable instruments
FACTS:
Introduction
Historical background of Negotiable instruments law
Application of the Negotiable instruments
Function and importance of Nego Instruments
Characteristics or features of negotiable instruments
The theory of negotiable instruments
Forms of negotiable instruments
Doubt resolved in favor of negotiability
Contracts and negotiable instruments compared
Commercial papers with limited negotiability
Chapter I. Requisites of negotiability
Caltex v CA
Moran v CA
Petitioner : Spouses George and Librada Moran
Respondent: CA, CityTrust Banking Corp.
Ponente: J. Regalado
Sps, Moran are owners of Wack-Wack Petron gasoline station and
regularly purchased bulk fuel from Petrophil corporation on cash on
delivery basis. Orders made by telephone and payments effected
by personal checks upon delivery. The Sps has 3 joint accounts
opened with respondent bank Citytrust Banking Corporation where
the Sps held a privilege of entering into a pre-authorized transfer
agreement with the bank to automatic transfer funds from their
savings acct to their current account anytime funds in the current
account were insufficient to meet withdrawals from said account.
Two checks of the amount 106,666 in total were drawn by Sps
payable to Petrophil Corporation. These checks were dishonored
upon presentment of payment due to insufficiency of funds. This
resulted to the Spouses temporarily stopping their business
operations resulting to loss of earnings.
It was discovered that a customer service officer had committed a
grave error. The Morans sued CityTrust for damages and clearing
of their name.
The complaint was dismissed in the trial court and in the CA.
Petitioners:
ISSUE:
Whether a bank is liable for its refusal to pay a check on account of
insufficient funds, notwithstanding the fact the fact that a deposit was made
later in the day. NO
HELD:
Meaning of Check
CHECKs a bill of exchange drawn on a bank payable on demand.
It is a written order addressed to a bank or persons carrying on the
business of banking, by a party having money in their hands,
requesting them to pay on presentment, to a person named therein
or to bearer or order, a named sum of money.
By virtue of the contract of deposit between the banker and its
depositor, the banker agrees to pay checks drawn by the depositor
provided that said depositor has money in the hands of the bank
 The failure of a bank to pay the check of a merchant or a trader,
when the deposit is sufficient, entitles the drawer to substantial
damages without any proof of actual damages Conversely, a bank
is not liable for its refusal to pay a check on account of
insufficient funds, notwithstanding the fact that a deposit may
be made later in the day.
A check, as distinguished from an ordinary bill of exchange, is
supposed to be drawn against a previous deposit of funds. As
such, a drawer must remember his responsibilities every time he
issues a check.
He must personally keep track of his available balance in the bank
and not rely on the bank to notify him of the necessity to fund the
checks he previously issued. A bank is under no obligation to make
part payment on a check, up to only the amount of the drawers
funds, where the check is drawn for an amount larger than what
the drawer has on deposit. A check is intended not only to transfer
a right to the amount named in it, but to serve the further purpose
of affording evidence for the bank of the payment of such amount
when the check is taken up. Clearly, a bank is not liable for its
refusal to pay a check on account of insufficient funds,
notwithstanding the fact that a deposit may be made later in the
day. Before a bank depositor may maintain a suit to recover a
specific amount from his bank, he must first show that he had on
deposit sufficient funds to meet his demand.
Far East Bank and Trust Company v Querimit (2002)
Petitioner : Far East Bank and Trust Company
Respondent: Estrella Querimit
Ponente: J. Mendoza
FACTS:
Respondent, Querimit opened an account with Far East Bank for
which she was issued 4 certificates of deposit to mature in 60 days
and payable to bearer at an interest per annum. The certificates
The certificates bore the word accrued, which meant that if they
were not presented for encashment or preterminated prior to
maturity, the money deposited with accrued interest would be rolled
over by the bank and annual interest would accumulate
automatically.
The petitioner banks manager assured respondent that the deposit
would be renewed and earn maturity even without surrendering
certificates if they were not indorsed and withdrawn. She kept
dollars in bank so they would earn interest.
When her husband had a medical treatment in US, she used her
savings in the BPI to pay for trip and husbands medical expense.
When her husband died, she went to bank to withdraw deposit but
was told that her husband had withdrawn the money in her time-
deposit.
ISSUE:
Whether the aggregate value both principal and interest earned at
maturity of 4 certificates of deposit was already paid to or withdrawn
at maturity by the late DOminador Querimit (deceased husband)? -
NO
HELD:
Petitioner bank failed to prove that it had already paid Estrella
Querimit, the bearer and lawful holder of the subject certificates of
deposit.
The finding of respondent court which shows that the subject
certificates of deposit are still in the possession of Estrella Querimit
and have not been indorsed or delivered to her.
CERTIFICATE OF DEPOSIT written acknowledgement by a bank
or banker of the receipt of sum of money on deposit which the
bank or banker promises to pay to the depositor, to the order of the
depositor, or some other person or his order.
o Principles governing types of bank deposits are applicable
to certificates of deposit as are the rules governing
promissory notes when they contain an unconditional
promise to pay a sum certain of money absolutely
A bank will be protected in making payment to the holder of a
certificate indorsed by the payee, unless it has notice of the
 invalidity of the indorsement or the holders want of title.
The debtor has the burden of showing with legal certainty that the
obligation has been discharged by payment.
In this case, the certificates of deposit were clearly marked payable
to bearer, which means, to [t]he person in possession of an
instrument, document of title or security payable to bearer or
indorsed in blank.
Petitioner should not have paid respondents husband or any third
party without requiring the surrender of the certificates of deposit.
Petitioner FEBTC thus failed to exercise that degree of diligence
required by the nature of its business. Because the business of
banks is impressed with public interest, the degree of diligence
required of banks is more than that of a good father of the family or
of an ordinary business firm.
City trust Banking Corp. v CA
Petitioner : Citytrust banking copr.
Respondent: CA, William Samara
Ponente: J. Gutierrez
FACTS:
The present case arises from an initial case :
Samara purchased from Citytrust bank draft for $40,000. The payee
being Thai International Airways and the corresponding bank in the
US or the drawee, Marine Midland.
Samara executed a stop-payment order of the bank draft instructing
Citytrust to inform Marine Midland about order which Marine
Midland acknowledged. Citytrust credited back amount due to non-
payment but after several months, Citytrust discovered Marine
Midland already debited Citytrusts own acct for the same amount.
Decision rendered ordered Marine Midland to reimburse Citytrust
and pay the sum of 40,000.
ISSUE:
HELD
The trial court judgment, however, does not alter the fact that the
respective defenses of the codefendants are distinct on trial and
even on appeal. Citytrust and Marine Midland were not in privity
with each other in a transaction involving payment through a bank
draft. A bank draft is a bill of exchange drawn by a bank upon its
correspondent bank, x x x issued at the solicitation of a stranger
who purchases and pays therefor
In the case at bar, Citytrust from which the private respondent
purchased the bank draft, was the drawer of the draft through which
it ordered Marine Midland, the drawee bank, to pay the amount of
US $40,000.00 in favor of Thai International Airways, the payee.
The drawee bank acting as a payor bank is solely liable for
acts not done in accordance with the instructions of the
drawer bank or of the purchaser of the draft.The drawee bank
has the burden of proving that it did not violate.
Meanwhile, the drawer, if sued by the purchaser of the draft is liable
for the act of debiting the customers account despite an instruction
to stop payment. The drawer has the duty to prove that he
complied with the order to inform the drawee.
The Court examines the execution of judgment rendered in favor of private
respondent Samara from a perspective which shows a glaring disparity
between the amounts which each of the two judgment debtors are bound to
pay
despite: (1) their being held jointly and severally liable, and (2) the right of
one of them to be reimbursed for the whole amount of whatever it is
obliged to pay.
A bank draft is a bill of exchange drawn by a bank, x x x issued at the
solicitation of a stranger who purchases and pays therefore. It is also
defined as an order of payment of money.The trial court judgment,
however, does not alter the fact that the respective defenses of the co-
defendants are distinct on trial and even on appeal. Citytrust and Marine
Midland were not in privity with each other in a transaction involving
payment through a bank draft. A bank draft is a bill of exchange drawn by
a bank upon its correspondent bank, x x x issued at the solicitation of a
stranger who purchases and pays therefor. (Kohler v. First National Bank,
289 P 47, 49, 157 Wash. 417 [1930]). It is also defined as an order for
payment of money.

Violago v BA Finance
Petitioner: Sps Violago
Respondent: BA Finance Corp & Avelino Violago
FACTS:
Pres. Violago of Violago Motor Sales Corp offered to sell a car to
his cousin. (petitioner and wife). The spouses and Avelino signed a
promissory note under which they bound themselves to pay jointly
and severally to the order of VMSC.
VMSC through Avelino, endorsed the promissory note to BA
Finance without recourse. VMSC execute Deed of Assignment
of rights and interests under the promissory note and chattel
mortgage in favor of BA Finance.
The spouses were unaware that the same car had already been
sold in 1982 to Esmeraldo Violago, another cousin of Avelino, and
registered in Esmeraldos name by the LTOSan Rafael Branch.
Despite the spouses demand for the car and Avelinos repeated
assurances, there was no delivery of the vehicle. Since VMSC
failed to deliver the car, Pedro did not pay any monthly amortization
to BA Finance
BA Finance filed with RTC complaint, it ruled in favor of BA
Finance and ordered the return of the car from the Violagos.
Violagos and Avelino appealed to CA. Ruled in favor ofBA
Finance also.
ISSUE:
1. Whether the holder of an invalid negotiable promissory note
may be considered a holder in due course? YES
2. Whether BA Finance is a holder in due course? -YES
HELD:
1. The court first determined whether BA Finance is a holder in
due course of the promissory note which is a negotiable
instrument and hence covered by the NIL.
o Promissory note is clearly negotiable.
o
Section 1. Form of Negotiable Instruments.An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable certainty.
Eg.
For value received, I/we, jointly and severally, promise to pay to the order
of VIOLAGO MOTOR SALES CORPORATION, its office, the principal sum
of TWO HUNDRED NINE THOUSAND SIX HUNDRED ONE ONLY Pesos
(P209,601.00), Philippines Currency, with interest at the rate stipulated
herein below, in installments as follows:
Thirty Six (36) successive monthly installments of P5,822.25, the first
installment to be paid on 91683, and the succeeding monthly installments
on the 16th day of each and every succeeding month thereafter until the
account is fully paid, provided that the penalty charge of three (3%) per
cent per month or a fraction thereof shall be added on each unpaid
installment from maturity thereof until fully paid.
xxxx
Notice of demand, presentment, dishonor and protest are hereby waived.
*signatures below*
PAY TO THE ORDER OF BA FINANCE CORPORATION WITHOUT
RECOURSEVIOLAGO MOTOR SALES CORPORATIONBy: (Sgd.)
AVELINO A. VIOLAGO, Pres.
The promissory note satisfies the requirements of a negotiable
instrument under the NIL.
o It is in writing; signed by the Violago spouses;
o has an unconditional promise to pay a certain amount, i.e.,
PhP 209,601, on specific dates in the future which could be
determined from the terms of the note;
o made payable to the order of VMSC; and names the
drawees with certainty.
 o The indorsement by VMSC to BA Finance appears likewise
to be valid and regular.
2. Section 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 had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it.
The law presumes that a holder of a negotiable instrument is a
holder thereof in due course. In this case, the CA is correct in
finding that BA Finance meets all the foregoing requisites:
In the hands of one other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-
negotiable
.A holder in due course, however, holds the instrument free from
any defect of title of prior parties and from defenses available to
prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof.
In Salas, we held that a party holding an instrument may enforce
payment of the instrument for the full amount thereof. As such, the
maker cannot set up the defense of nullity of the contract of sale
WRITTEN FORM & SIGNATURE
Jai-alai Corp of Phil v BPI
Petitioners: Jai-alai
Respondents:BPI
FACTS:
10 checks with a total face value of 8,030.58 were deposited by Jai-alai
Corp in its current account with respondent Bank, BPI. Al the checks
were acquired by Jai-Alai Corp from Antonio Ramirez, a regular bettor
at the jai-alai games and a sale agent of the Inter-Island Gas Service
Inc., the payee of the checks.
X (drawer) got from Antonio Ramirez Jai-Alai BPI (drawee) Inter
Island Gas Service (Payee)
Ramirez resigned from Inter-Island Gas and after the checks had been
submitted to inter-bank clearing, the Inter-Island gas discovered that all
the indorsements made on the checks purportedly by its cashiers were
forgeries.
The Inter-Island Gas advised Jai-Alai Corp, BPI, and the drawees and
the drawee-banks of the said checks about the forgeries and filed a
criminal complaint against Ramirez with the Office of the City Fiscal of
Manila.
The drawers of the checks, having been notified of the forgeries
demanded reimbursement, which in turn demanded from BPI, as the
collecting bank, the return of the amounts they had paid on the account
thereof. Jai-Alai Corp would be debited the value of the checks as
soon as they were returned by the respective drawee-banks. However,
Jai-alai Corp refused to accept.
Later, Jai-alai Corp drew against its current account a check. The check
was dishonored by BPI as its records showed that Jai-alai Corps
balance after netting out the value of the checks with the forged
indorsement was insufficient to cover the value of the check drawn
A complaint was filed by the petitioner in the CFI but the same was
dismissed, as well as by the Court of Appeals, on appeal. Hence the
petitioner seeks for review in the Supreme Court.
ISSUE:
1. Whether BPI has right to debit Jai-alais current account in the
amount corresponding to the value of checks in question after more
 than 3 months had elapsed from the date their value was credited?
- YES
HELD:
BPI acted within the legal bounds when it debited
petitioners account. When Jai-alai deposited the checks
with the respondent, the nature of the relationship created
was one of agency that is the bank was to collect from the
drawees of the checks the corresponding proceeds.
Jai-alai argues that they had already collected the proceeds
of the check proceeds when it debited the Jai-alais account.
Section 23 of the Negotiable Instruments Law (Act 2031)
states that
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.
Based on Sec 23, it would seem that the respondent, as a
collecting bank which indorsed the checks to the drawee-
banks for clearing, should be liable to the latter for
reimbursement, for, as found by the court a quo and by the
appellate court, the indorsements on the checks had been
forged prior to their delivery to the petitioner.
In legal contemplation, therefore, the payments made by
the drawee-banks to the respondent on account of the
said checks were ineffective; and, such being the case,
the relationship of creditor and debtor between the petitioner
and the respondent had not been validly effected, the
checks not having been properly and legitimately converted
into cash.
There was no creditor-debtor relationship created between
parties to preclude respondent from using Jai-alais funds to
make payments not authorized by the latter.
It is the obligation of the collecting bank to reimburse the
drawee-bank the value of the checks subsequently found to
contain the forged indorsement of the payee. The reason is
that the bank with which the check was deposited has no
right to pay the sum stated therein to the forger "or anyone
else upon a forged signature." "It was its duty to know," that
[the payee's] endorsement was genuine before cashing the
check." The petitioner must in turn shoulder the loss of the
amounts which the respondent; as its collecting agent, had
to reimburse to the drawee-banks.
At all events, under Section 67 of the NIL, "Where a person
places his indorsement on an instrument negotiable by
delivery he incurs all the liability of an indorser," and under
Section 66 of the same statute a general indorser warrants
that the instrument "is genuine and in all respects what it
purports to be." Considering that the petitioner indorsed the
said checks when it deposited them with the respondent, the
petitioner as an indorser guaranteed the genuineness of all
prior indorsements thereon. The respondent which relied
upon the petitioner's warranty should not be held liable for
the resulting loss. Under Section 65 of the NIL, "Every
person negotiating an instrument by delivery . . . warrants
(a) That the instrument is genuine and in all respects what it
purports to be." Under that same section this warranty
"extends in favor of no holder other than the immediate
transferee," which, in the case at bar, would be the
respondent.
UNCONDITIONAL PROMISE TO PAY
A. When conditional
Powell & Powell v. Greenleaf & Currier
Petitioner:
Respondent:
FACTS
A contract was entered into whereby respondent is entitled to the use of
Arthur A. Bishop & Cos system of collections and for value received,
promise to pay to said Arthur A. Bishop & Co., or order the sum of $150, in
twelve equal monthly payments. Upon the default on any one payment, the
whole amount remaining then unpaid shall at once become due and
payable, and we hereby acknowledge the receipt of a true copy of this
entire agreement. Thus, this suit is to recover the balance due on two
instruments in writing dated, respectively, July 6, 1922, and June 7, 1923.
The instruments are alike in all respects except the date.
ISSUE : Whether or not these instruments are negotiable
HELD : The instruments are not negotiable because the consideration for
them was an executory contract or promise on the part of the payee.
An instrument to be negotiable must contain, among other things, an
unconditional promise or order to pay a sum certain in money. An
unqualified order or promise to pay is unconditional within the meaning of
the statute, though coupled with a statement of the transaction which gives
rise to the instrument. Whether these instruments are negotiable must be
determined from the language of the instruments themselves, unaided by
an inspection of the extrinsic agreements to which they refer.
It is the general rule that wherever a bill of exchange or promissory note
contains a reference to some extrinsic contract in such a way as to make it
subject to the terms of that contract, the negotiability of the paper is
destroyed. But it is equally well settled that the negotiability of a bill or note
is not affected by a reference which is simply a recital of the consideration
for which the paper was given, or a statement of the origin of the
transaction, or by a statement that it is given in accordance with the terms
of a contract of even date between the same parties. In short, to destroy
negotiability the reference to a collateral contract must show that the
obligation to pay is burdened with the conditions of that contract.
In the case at bar, it is not apparent how the negotiability of these
instruments is affected. The promise to pay is not subject to the extrinsic
agreement, or according to such agreement, or subject to any
contingency, but is absolute and unconditional.
SUM PAYABLE MUST BE CERTAIN
Phil. Engineering Co. v. Green
Petitioner: Philippine Engineering CO.
Respondent: B.A. Green
FACTS
The promissory note matured on July 1, 1923. On October 6, 1923,
Attorneys Araneta and Zaragoza made formal demand on Mr. Green for the
payment of the note. Thereafter, however, the defendant was permitted to
make partial payments aggregating P9,188.46. The last payment on the
debt was made on January 16, 1924. It is further emphasized by the
defendant that while the vice-president and general manager of-the
Philippine Engineering Co. gave the latter until September 30, 1924 to
make remittance in full settlement of the account. However, as appears
from another letter, the previous letter was cancelled.
The plaintiff and the defendant both appeal from a judgment of the Court of
First Instance of Manila which condemned the defendant to pay to the
plaintiff the sum of P23,319.93, together with the back interest, attorneys
fees, and judicial costs.
Issue: Whether or not the action was prematurely brought
It cannot be fairly said that the action was prematurely brought.
An action on a promissory note is not prematurely brought where
the complaint was not filed until fourteen months after the maturity
of the note and not until eight months after the last partial payment.
The delay was more nearly akin to leniency than otherwise.
Further, it is well settled that the time of payment of a bill or note
may be extended by an oral agreement, but that an agreement to
extend the time of payment in order to be valid must be for a
definite time.
Bachrach garage and Taxicab co. v Vicente Golingco
Petitioners: Bachrach Garage and Taxi Co.
Respondent: Vicente Golingco
FACTS
This is a case brought for the recovery of a sum of money. Three
causes of action are alleged.
In the fiirst cause of action, the plaintiff claims the amount 7,582.93
pesos with interests, till the date it is fully paid in addition to the 25%
of the total amount.
In the second cause of action, he claims the amount of 1,059 pesos
with interest thereon until fully paid plus the 25% of the total
amount.
In the third cause of actionm he claims the amount of 1,534.75 with
legal interests thereon.
The defendant in those actions were ordered to pay the amount. On
this appeal, Bachrach garage assigns three errors as having been
committed by the trial judge.
ISSUES
HELD
In an obligation to pay a certain sum of money, the interest is a form
of indemnification for damages. These damages may consist in the
loss of the very thing itself or in the deprivation of the enjoyment
which should have been obtained through its use. In a certain case,
whatever may be the damages that the word interest in its broad
sense may include, it appears clearly that the interest which is the
object of computation according to Act No. 2655 is only that which
represents the enjoyment or gain which is not obtained. We do not
believe that it is the intention of the legislator to extend this
computation to the resultant damages which make up the loss
suffered.
CERTAINTY OF TIME OF PAYMENT
1. When payable on Demand
Pay v Vda de Palanca
Petitioners: In the matter of the intestate etate of justo palanca ,
deceased George Pay
Respondent:
FACTS
Petitioner George Pay is a creditor of the Late Justo Palanca who
died in Manila. The claim of the petitioner is based on a promissory
note where the late Justo Palanca and Rosa Vda de Carlos
PAlanca promised to pay George Pay the amount of 26,900 with
interest at the rate of 12% per annum
George Pay is before the court asking that the surviving spouse of
the late Justo Palanca, be appointed as administratix of a certain
piece of property which is a residential dwelling in the name of
Justo Palanca. With thi arrangement, George Pay as creditor can
file his claim against the administratix.
The surviving spouse of Justo Palanca refused to be appointment
as administratix and that the property sought to be administered no
longer belonged to the debtor and the rights of the creditor had
already prescribed.
Since it was dated January 30, 1952, it was clear that more "than
ten (10) years has already transpired from that time until todate.
The action, therefore, of the creditor has definitely prescribed."4
The result, as above noted, was the dismissal of the petition.
Lower court held that the 10 yr period of limitation of actions did
apply, the note being immediately due and demandable, the creditor
admitting expressly that he was relying on the wording upon
 demand.
ISSUE:
Whether a creditor is barred by prescription in his attempt to collect
on a promissory note executed more than 15 years earlier? - YEs
HELD
From the manner in which the promissory note was executed, it
would appear that petitioner was hopeful that the satisfaction of his
credit could be realized either through the debtor sued receiving
cash payment from the estate of the late Carlos Palanca
presumptively as one of the heirs, or, as expressed therein upon
demand.
The obligation being due and demandable, it would appear that the
filing of the suit after fifteen years was much too late. For again,
according to the Civil Code, which is based on Section 43 of Act
No. 190, the prescriptive period for a written contract is that of ten
years.This is another instance where this Court has consistently
adhered to the express language of the applicable norm
There is no necessity therefore of passing
upon the other two legal questions raised as to whether or not it did
suffice for the petition to fail just because the surviving spouse
refuses to be made administratrix, or just because the estate was
left with no other property. The decision of the lower court cannot
be overturned.
WHEREFORE, the lower court decision of July 24, 1968 is
affirmed. Costs against George Pay.
PONCE DE LEON v RFC
2. Payable at a fixed time
3. Payable at a determinable future time
4. Effect of Accelerating Provisions
CONSOLIDATED PLYWOOD INDUSTRIES INC v IFC LEASING &
ACCEPTANCE
Petitioners: Henry Wee, Rodolfo Vergara of Consolidated Plywood
Industries
Respondent: IFC Leasing and Acceptance Corporation
FACTS
The petitioner is a corporation engaged in the logging business. It
had for its program of logging activities for the year 1978 the
opening of additional roads, and simultaneous logging operations
along the route of said roads, in its logging concession area at
Davao Oriental, they needed 2 additional units of tractors.
Industrial Products Marketing (sellor-assignor), a marketing arm
of the Atlantic Gulf and Pacific Company of Manila, a corporation
dealing in tractors and offered to sell Plywood Industries 2 used
tractors.
After the IFC Leasing inspected the site, the petitioners relied
on the assurance and warranty that the former gave and
agreed to purchase on installment the 2 units of used
tractors and paid down payment of 210,000. After payment,
sellor-assignor delivered the tractors as agreed.
14 days after the delivery, one of the tractors broke down and
another 9 days the other tractor likewise broke down. The sellor-
assignor was quick to respond and sent down their mechanics to
repair the tractors, but the units were no longer serviceable which
delayed the simultaneous logging operations and road building.
The petitioners asked the assignor seller to pull out the units and
have them for sale which the proceeds of the sale would be given
to the respondent and the excess be divided between them.
However, the seller-assignor did nothing with the request and filed
against petitioner recovery of the principal sum of money with
accrued interest.
Petitioners filed their amended answer praying for the dismissal of
the complaint and asking the trial court to order the respondent to
pay the petitioners damages in an amount at the sound discretion
of the court
Trial court ordered Plywood Industries to pay jointly and severally
in their official and personal capacities the principal sum of
 1,093,798.71 with accrued interest of 151,1618.86 and accruing
interest at the rate of 12% per annum.
MR by petitioner was denied by trial court.
Whether the promissory note in question is a
negotiable instrument so as to bar completely all the
available defenses of the petitioner against the
respondent-assignee.
Ruling:
No. 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.
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."
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 seller-assignor,
Industrial Products Marketing.
Even conceding for purposes of discussion that the
promissory note in question is a negotiable instrument,
the respondent cannot be a holder in due course
because the respondent had actual knowledge of the
fact that the seller-assignor's right to collect the
purchase price was not unconditional, and that it was
subject to the condition that the tractors sold were not
defective. The respondent knew that when the tractors
turned out to be defective, it would be subject to the
defense of failure of consideration and cannot recover
the purchase price from the petitioners. The
respondent took the promissory note with actual
knowledge of the foregoing facts so that its action in
taking the instrument amounted to bad faith, and
therefore it is not a holder in due course as provided
under Sections 52 and 56 of the Negotiable
Instruments Law. As such, the respondent is subject to
all defenses which the petitioners may raise against the
seller-assignor.
5. Provisions extending time of payment
F. MUST BE PAYABLE TO ORDER / TO BEARER
GSIS v. Court of Appeals, 170 SCRA 533, (1989)
Mr. And Mrs. Isabelo Racho together with spouses Mr. And Mrs Lagasca
executed a deed of mortgage in favor of the GSIS. A parcel of land was
given as security under the deeds. They also executed a promissory note.
The spouses Lagasca executed an instrument denominated Assuption of
Mortgage under which, they obligated themselves to assume the loan.
Upon failure of the mortgagors to comply with the conditions of the
mortgage, GSIS extrajudicially foreclosed the mortgage and caused the
mortgage be sold at public auction.
Two years after, respondents filed a complaint against petitioner and the
Lagasca spouses asking the court to nullify the foreclosure and to recover
the proeprty. Lagasca spouses contended that they signed the mortgage
contract not a sureties or guarantors for the Lagasca spouses but they
merely gave their common property to said co-owners who were solely
benefited by the loans from GSIS.
The court of appeals declared the foreclosure void and directed GSIS to
reconvey the land, hence this petition. Both parties in this case relied on
the provisions of Section 29 of the NIL which states that an
accommodation party is one who has signed an instrument as maker,
drawer, acceptor of indorser without receiving value therefore, but is held
liable on the instrument to a holder for value although the latter knew him
to be only an accommodation party. Appellant contends that the private
respondents is such accommodation party
Issue: W/N the NIL can be applied in the present case.
No. The promissory note is not payable to order nor to bearer thus, they
are not negotiable instruments. The note is payable only to a specified
party, the GSI. Absent the aforesaid requirement, the provisions of the NIL
would not apply, instead, the provisions of the civil code on special laws on
mortgages.
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 of the property thus, they are liable. However, there was no showing
that the requirement on notice (publication in a newspaper of general
circulation) was not complied with in the foreclosure sale. This, the CA
erred in annulling the mortgage insofar as it affected the share of private
respondents. The decision of CA was reversed.
TRADERS ROYAL BANK v CA
Defendant Filriters is the registered owner of Central Bank Certificate of
Indebtedness No. D891 with a face value of Php 500,000.00, which was
assigned to Philfinance. Philfinance on the other hand entered into a
repurchase agreement with Traders Royal Bank, the former promising to
repurchase the CBCI at Php 519,000.00. Philfinance failed to repurchase
the said CBCI due to insufficient funds. It them executed a detached
assignment in favor of TRB for latter to have complete title over the said
CBCI. Armed with the deed of assignment, TRB sought the transfer and
registration of CBCI No D891 in its name before the Central Bank who in
turn refused to effect the transfer and registration in view of Filriters claim
that the CBCI is not negotiable. Filriters also claim that they cannot be
bound by the assignment since the deed of assignment between Filriters
and Philfinance does not have the authorization from the Board of Filriters.
Issue: W/N the CBCI is a negotiable instrument
Decision: No. The CBCI is not a negotiable instrument and as a certificate
of indebtedness is not payable to bearer. A reading of the subject CBCI
indicates that the same is payable to Filriters Guaranty Assurance
Corporation and to no one else, thus, discounting the petitioners
submission that the same is a negotiable instrument and that it is a holder
in due course of the certificate.
The language of negotiability, which characterizes a negotiable paper as a
credit instrument is its freedom to circulate as 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. This freedom of negotiability of totally absent in a
certificate of indebtedness as it merely acknowledges paying a sum of
money to a specified person.
As held in Caltex Philippines, the negotiability or non-negotiability 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. While the writing may
be read in light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties yet as they have
constituted the writing to be the only outward and visible expression of
their meaning, no other words are to be added or substituted in its stead.
The transfer to TRB was merely an assignment and not governed by NIL.
Moreover, Philfinance acquired the instrument from the Filriters defectively
since: 1) there was no authorization from the board of directors of Filriters.
2) The transfer of CBCI must be registered at the Central Bank office were
the same was issued which was not done in the case at bar. The subject
CBCI was part of the companys legal and capital reserve, thus it cannot be
transferred without registration and authorization from the board.
PHIL NATIONAL BANK v RODRIGUEZ
Spouses Rodriguez maintained a savings and checking accounts with
petitioners Philippines National Bank (PNB). They were engaged in the
informal lending business and had a discounting arrangement with the
Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees, which likewise maintained current and
savings accounts with petitioner bank. PEMSLA regularly granted loans to
its members. Spouses Rodriguez would rediscount the postdated checks
issued to members whenever the association was short of funds. As was
customary, the spouses would replace the postdated checks with their own
checks issued in the name of the members.
It was PEMSLAs policy not to approve applications for loans of members
with outstanding debts. To subvert this policy, some PEMSLA officers
devised a scheme to obtain additional loans despite their outstanding loan
accounts.
Issue: Whether or not PNB can be made liable to pay the amount of
checks which were deposited to the PEMSLA savings account
A bank that regularly processes checks that are neither payable to the
customer nor duly indorsed by the payee is apparently grossly negligent in
its operations. This Court has recognized the unique public interest
possessed by the banking industry and the need for the people to have full
trust and confidence in their banks. For this reason, banks are minded to
treat their customers accounts with utmost care, confidence, and honesty.
In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check strictly in
accordance with the drawers instructions, i.e., to the named payee in the
check. It should charge to the drawers accounts only the payables
authorized by the latter. Otherwise, the drawee will be violating the
instructions of the drawer and it shall be liable for the amount charged to
the drawers account. Rodriguez checks are payable to order since the
bank failed to prove that the named payees therein are fictitious. Hence,
the fictitious-payee rule which will make the instrument payable to bearer
does not apply. PNB accepted the 69 checks for deposit to the PEMSLA
account even without any indorsement from the named payees. It bears
stressing that order instruments can only be negotiated with a valid
indorsement.

The spouses issued 69 checks, in the total amount of P2,345,804.00,

payable to 47 members of PEMSLA. After finding out such fraudulent act,
PNB closed the current account of PEMSLA. As a result, the PEMSLA checks
deposited by the spouses were returned or dishonored for the reason
Account Closed. The corresponding Rodriguez checks, however, were
deposited as usual to the PEMSLA savings account. The amounts were duly
debited from the Rodriguez account. Thus, because the PEMSLA checks
given as payment were returned, spouses Rodriguez incurred losses from
the rediscounting transactions. Spouses Rodriguez sued PEMSLA and PNB.
They contended that because PNB credited the checks to the PEMSLA
account even without indorsements, PNB violated its contractual obligation
to them as depositors. PNB paid the wrong payees, hence, it should bear
the loss. Trial court ruled in favor of spouses and ordered PNB to pay. CA
affirmed the decision. Hence this petition