Quiz No.

6 – Negotiable Instruments Law – Acceptance; Promissory Notes; Checks

I
Ford drew two checks against Citibank to pay percentages taxes, payable to the Commissioner of
Internal Revenue. Both checks were “crossed checks” and contained two diagonal lines on its
upper left corner between which were written the words, “payable to the payee’s account only.”
The checks never reached the payee for which reason the BIR demanded payment of the taxes
from Ford. Instead, the checks were deposited with PCIBank in the name of Reynaldo Reyes, a
fictitious person. PCIB sent them to the Central Clearing with the indorsement at the back, “all
prior indorsements and/or lack of indorsement guaranteed,” and were presented to and paid by
the drawee bank, Citibank. Who can be made liable by Ford, PCIBank as collecting bank or
Citibank, the drawee bank? (10%)

Answer: Quizzer and Reviewer on Negotiable Instruments Law and Related Laws by Hernando
B. Perez, p. 329-330.

PCIBank is liable. Since the questioned checks were deposited with PCIBank, it had the
responsibility to make sure that the check in question is deposited in payee’s account only,
indeed, the crossing of the check with the phrase “Payee’s Account Only” is a warning that the
check should be deposited only in the account of the Commissioner of Internal Revenue. Thus, it
is the duty of the collecting bank, PCI Bank, to ascertain that the check be deposited in payee’s
account only. Therefore, it is the collecting bank, PCI Bank, 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.” 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. (PCIB vs. CA, 350 SCRA 446, 467-
468, citing Banco de Oro Savings and Mortgage Bank vs Equitable Banking Corporation, 157
SCRA 188).

II
Pursuant to a Compromise Agreement, Pio Barreto Realty delivered to Moslares a check in
payment of the interest of the latter in a real property. Moslares never cashed the check nor
questioned the tender done despite the lapsed of three years. Later, Moslares claimed that the
delivery of the check to him did not produce the effect of payment because he never cashed the
check. Was Pio Barreto Realty discharged from its obligation to pay Moslares considering that
the latter did not cash the check delivered to him? (10%)

Answer: Quizzer and Reviewer on Negotiable Instruments Law and Related Laws by Hernando
B. Perez, p. 333-334.

The fact that the check paid by Pio Barreto Realty was never encashed should not be invoked
against the latter. Moslares never questioned the tender of the check to him done three years
earlier. While delivery of a check produces the effect of payment only when it is encashed, the
rule is otherwise if the debtor was prejudiced by the creditor’s unreasonable delay in
presentment. Acceptance of a check implies an undertaking of due diligence in presenting it for
payment. If no such presentation was made, the drawer cannot be held liable irrespective of the
loss or injury sustained by the payee. Payment will be deemed effected and the obligation for
which the check was given as conditional payment will be discharged. (Pio Barreto Realty
Development Corporation vs. CA, 360 SCRA 126).

III
A deposited P100,000 in his current account with B Bank. A then drew a check for P20,000
against his deposit with B Bank, payable to C or order. C presented the check to B Bank but the
latter dishonored the check. May C hold B Bank liable? (10%)

Answer: Quizzer and Reviewer on Negotiable Instruments Law and Related Laws by Hernando
B. Perez, p. 335-336.
C cannot hold B Bank liable even if the drawer had sufficient deposit with the drawee because a
check of itself does not operate as an assignment of any part of the funds to the credit of the
drawer and the drawee is not liable to the holder, unless and until it accepts or certifies the check.
(Section 189; PNB vs. Relativo, G.R. No. L-5298, October 29, 1962; Asked, 1986, and No. X(b),
1999 Bar Exams).

IV
Chiok had been engaged in dollar trading for about 6 to 8 years with Nuguid. The practice
between Chiok and Nuguid was that Chiok pays Nuguid either in cash or manager’s check to be
picked up by the latter or deposited in the latter’s bank account. Nuguid in turn delivers the
dollars purchased either on the same day or on a later date as may be agreed upon by them. On
July 5, 1995, Chiok purchased three Manager’s check from Metropolitan Bank and Global
Business Bank and deposited the same in the Nuguid’s account with the Bank of the Philippine
Islands. Nuguid was supposed to deliver $1,022,288.50, the equivalent of the three checks.
Nuguid failed to deliver the dollar equivalent of the checks. Chiok requested that payment of the
three checks be stopped, and was advised to secure court order within 24-hour clearing period.
He filed a complaint for damages and restraining order/preliminary injunction. Question: Is
payment of the manager’s or cashier’s check subject to the condition that the payee thereof must
comply with his obligations to the purchaser of the checks, or that the payment of the cashier’s or
manager’s check be countermanded? (10%)

Answer: Quizzer and Reviewer on Negotiable Instruments Law and Related Laws by Hernando
B. Perez, p. 339-340.

Long standing and accepted banking practices do not countenance the countermanding of
manager’s and cashier’s checks on the basis of a mere allegation of failure of the payee to
comply with its obligations towards the purchaser. On the contrary, the accepted banking
practice is that such checks are good as cash. (Metropolitan Banking and Trust Company vs,
Wilfred N. Chiok, G.R. No. 172652 and Global Business Bank, Inc. vs. Wilfred N. Chiok, G.R.
No. 175394, November 26, 2014).

V
Mr. Pablo sought to borrow P200, 000 from Mr. Carlos. The latter agreed to loan the amount in
the form of a post-dated check which was crossed (i.e., two parallel lines diagonally drawn on
the top left portion of the check). Before the due date of the check, Mr. Pablo discounted it with
Mr. Noble. On due date, Mr. Noble deposited the check with his bank. The check was
dishonored. Mr. Noble sued Mr. Pablo. The court dismissed Mr. Noble’s complaint. Was the
court’s decision correct? (10%)

Answer: 1991 Bar

The court’s decision was incorrect. Mr. Pablo and Mr. Carlos, being immediate parties to the
instrument, are governed by the rules of privity. Given the factual circumstances of the problem,
Mr. Pablo has no valid excuse from denying liability. Mr. Pablo undoubtedly had benefited in the
transaction. To hold otherwise would also contravene the basic rules of unjust enrichment. Even
in negotiable instruments, the Civil Code and other laws of general application can still apply
suppletorily.

First Alternative Answer:

The dismissal by the court was correct. A check, whether or not post-dated or crossed, is still a
negotiable instrument and unless Mr. Pablo is a general indorser, which is not expressed in the
factual settings, he cannot be held liable for the dishonor of the instrument. In State Investment
House vs. IAC (G.R. No. 72764, 13 July 1989), the court did not go so far as to hold that the fact
of crossing would render the instrument non-negotiable.

Second Alternative Answer:

Third Alternative Answer:

Yes. The check is crossed. It should have forewarned Mr. Noble that it was issued for a specific
purpose. Hence, Mr. Noble could not be a holder in due course. He is subject to the personal
defense of breach of trust/agreement by Mr. Pablo. Such defense is available in favor of Mr.
Carlos against Mr. Noble.

VI
Mr. Lim issued a check drawn against BPI Bank in favor of Mr. Yu as payment for certain shares
of stock which he purchased. On the same day that he issued the check to Mr. Yu, Mr. Lim
ordered BPI to stop payment. Per standard banking practice, Mr. Lim was made to sign a waiver
of BPI’s liability in the event that it should pay Mr. Yu through oversight or inadvertence.
Despite the stop order by Mr. Lim, BPI nevertheless paid Mr. Yu upon presentation of the check.
Mr. Lim sued BPI for paying his order. Decide the case. (10%)

Answer: 1991 Bar

In the event that Mr. Lim, in fact, had sufficient legal reasons to issue the stop payment order, he
may sue BPI for paying against his order. The waiver executed by Mr. Lim did not mean that it
need not exercise due diligence to protect the interest of its account holder. It is not amiss to state
that the drawee, unless the instrument had earlier been accepted by it, is not bound to honor
payment to the holder of the check that thereby excludes it from any liability if it were to comply
with the stop payment order. (See Sec. 61, Negotiable Instruments Law).

Alternative Answer:

BPI would not be liable to Mr. Lim. Mr. Lim and BPI are governed by their own agreement. The
waiver executed by Mr. Lim, neither being one of future fraud or gross negligence, would be
valid. The problem does not indicate the existence of fraud or gross negligence on the part of BPI
so as to warrant liability on its part.

VII
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 fund, the bank honors the check when it is presented
to payment. Apparently, X has conspired with the bank’s 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. (10%)

Answer: 1998 Bar

The bank cannot recover the amount paid to B for the check. When the bank honored the check,
it became an acceptor. As acceptor, the bank became primarily and directly liable to the
payee/holder B.

The recourse of the bank should be against X and its bookkeeper who conspired to make X’s
ledger show that he has sufficient funds.

Alternative Answer:
The bank can recover from B. This is solutio indebiti because there is payment by the bank to B
when such payment is not due. The check issued by X to B as payee had no sufficient funds.

VIII
Gaudencio, a store owner, obtained a P1 M loan from Bathala Financing Corporation (BFC). As
security, Gaudencio executed a “Deed of Assignment of Receivables,” assigning 15 checks
received from various customers who bought merchandise from his store. The checks were duly
indorsed by Gaudencio’s customers.

The Deed of Assignment contains the following stipulation:

“If, for any reason, the receivables or any part thereof cannot be paid by the obligors, the
ASSIGNOR unconditionally and irrevocably agrees to pay the same, assuming the liability to
pay, by way of a penalty, 3% of the total amount unpaid, for the period of delay until the same is
fully paid.”

When the checks became due, BFC deposited them for collection, but the drawee banks
dishonored all the checks for one of the following reasons: “account closed,” “payment stopped,”
“account under garnishment,” or “insufficiency of funds”. BFC wrote Gaudencio notifying him
of the dishonored checks, and demanding payment of the loan. Because Gaudencio did not pay,
BFC filed a collection suit.

In his defense, Gaudencio contended that: (a) BFC did not give timely notice of dishonor of the
checks; and (b) considering that the checks were duly indorsed, BFC should proceed against the
drawers and the indorsers of the checks.

Are Gaudencio’s defenses tenable? Explain. (10%)

Answer: 2009 Bar

No. Gaudencio’s defenses are untenable. The cause of action of BFC was really on the contract
of loan, with the checks merely serving as collateral to secure the payment of the loan. By virtue
of the Deed of Assignment which he signed, Gaudencio undertook to pay for the receivables if
for any reason they cannot be paid by the obligors. (Velasquez vs. Solidbank Corporation, 550
SCRA 119 [2008]).

IX
A criminal complaint for violation of BP22 was filed by Foton Motors, an entity engaged in the
business of car dealership, against Pura Felipe with the office of the City Prosecutor of Quezon
City. The office found probable cause to indict Pura and filed an information before the MeTC of
Quezon City, 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”. Pura issued the check
because her son, Freddie, attracted by a huge discount of P220, 000, purchased a Foton Blizzard
4x2 from Foton. The term of the transaction was Cash-on-Delivery and no down payment 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 BP 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 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. Pura’s 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?
(10%)
Answer: 2014 Bar

Yes. Pura is liable to Foton Motors because it sold a car to her son and was a holder for value of
the check issued in its favor by Pura. Any person criminally liable for felony is also civilly liable.
Thus, her acquittal in the criminal charge does not carry with it extinction of her civil liability
unless the extinction proceeds from a declaration in a final judgment that the fact from which the
civil liability might arise did not exist. (People vs. Maniego, G.R. No. L-30910, February 27,
1987).

More specifically, Pura is liable as an accommodation party. Under Section 29 of the Negotiable
Instruments Law, 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.

Pura’s liability existed although Pura issued the check after the delivery of the car. Under Section
25 of the Negotiable Instruments Law, an antecedent or pre-existing debt constitutes value and is
deemed such whether the instrument is payable on demand or at a future time.

X
Is a manager’s check as good as cash? Why or why not? (10%)

Answer: (2015 Bar)

Yes, the Supreme Court held in various decisions that a manager’s check is good as cash. A
manager’s check is a check drawn by the bank against itself. It is deemed preaccepted by the
bank from the moment of issuance. The check becomes the primary obligation of the bank which
issues it and constitutes its written promise to pay. By issuing it, the bank in effect commits its
total resources, integrity and honor behind the check. (Tan v. CA, 239 SCRA 310; International
Corporate Bank v. Gueco, 351 SCRA 516; Metrobank v. Chiok, GR No. 172652, Nov. 26, 2014)

ALTERNATIVE ANSWER: Manager’s check is not legal tender because under Article 1249 of
the Civil Code, checks do not produce the effect of payment until encashed or through the fault
of the creditor; their value has been impaired. Moreover, under the Central Bank Act, the debtor
cannot compel the creditor to accept checks in payment of a debt whether public or private.
(Article 60 of RA 7653).